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

When used in this Quarterly Report on Form 10-Q, the words "expects," "anticipates," "believes," "plans," "will" and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include, but are not limited to, statements regarding our critical accounting policies, our operating expenses, our strategic opportunities, adequacy of capital resources, our ability to increase our professional services contracts and the related benefits, demand for software and professional services, demand for our solutions, expectations regarding cash flow, revenues, and sources of revenue, benefits of our relationship with an MSP, and our agreement with the U.S. Federal Government, benefits of our restructuring, statements regarding our growth and profitability, investments in marketing and promotion, and operating infrastructure, fluctuations in our operating results, our need for future financing, concentration of and dependence on customers, our ability to defend against the assertions and demands made by the Investors (as defined below), our dependence on our strategic partners, our dependence on personnel, our disclosure controls and procedures, our ability to respond to rapid technological change, statements regarding future acquisitions or investments, expansion of our technologies and products and our legal proceedings. Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those discussed below, as well as risks related to our ability to develop and timely introduce products that address market demand, the impact of alternative technological advances and competitive products, market fluctuations, our ability to obtain future financing, our ability to continue to comply with other continued listing standards of AMEX and our ability to effect a reverse stock split, and the risks set forth below under "Factors That May Affect Our Results." These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

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

MICRworkstm, Clearingworks®, Returnworkstm, Remitworkstm, and Clearinghouse Least Cost Routing/Best Fit Clearing sm , are trademarks of US Dataworks. Other trademarks referenced herein are the property of their respective owners.

Critical Accounting Policies

The following discussion and analysis of our unaudited condensed 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 unaudited condensed 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 associated with our software products in accordance with the provisions of the American Institute of Certified Public Accountants' Statement of Position (SOP) 97-2, "Software Revenue Recognition". We license our software products under nonexclusive, nontransferable 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 these services have been provided.

In certain instances, the Company will recognize revenue on a percent of completion basis for the portion of professional services related to customized customer projects that have been completed but are not yet deliverable to customer.

For license agreements that include a separately identifiable fee for contracted maintenance services, such license 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.

Goodwill

The goodwill recorded on our books is from the acquisition of US Dataworks, Inc. in fiscal year 2001, which remains our single reporting unit. Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets," requires goodwill for each reporting unit of an entity to be tested for impairment by comparing the fair value of each reporting unit with its carrying value. Fair value is determined using a combination of the discounted cash flow, market multiple and market capitalization valuation approaches. Significant estimates used in the methodologies include estimates of future cash flows, future short-term and long-term growth rates, weighted average cost of capital and estimates of market multiples for each reportable unit. On an ongoing basis, absent any impairment indicators, we perform impairment tests annually during the fourth quarter.

SFAS No. 142 requires goodwill to be tested annually, typically performed during the fourth quarter, and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the reportable unit below its carrying amount. We recorded an impairment of goodwill of $10,112,931 for the year ended March 31, 2008 and does not have an impairment of goodwill to record for the year to date ended September 30, 2008.

Estimates

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

Concentrations of Credit Risk

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

Two of our customers accounted for 51% and 20%, respectively, of our net revenues for the three months ended September 30, 2008. Two customers accounted for 51% and 20%, respectively, of net revenue for the six months ended September 30, 2008. Three customers accounted for 27%, 27% and 11% of net revenues for the three months ended September 30, 2007. Four customers accounted for 26%, 26%, 11% and 10%, respectively, of net revenue for the six months ended September 30, 2007.

At September 30, 2008, amounts due from significant customers accounted for 71% of accounts receivable

Results of Operations

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

Revenues

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

                             Three Months Ended September 30             Six Months Ended September 30
                                      (in thousands)                             (in thousands)
                            2008            2007          Change        2008           2007        Change
Software licensing
revenues                $          -    $         37          -100 % $        30    $       107       -71.9 %
Software
transactional
revenues                         523             390          34.1 %       1,060            779        36.1 %
Software maintenance
revenues                         220             234          -6.1 %         448            425         5.5 %
Professional service
revenues                       1,288             705          82.6 %       2,561          1,284        99.5 %
Total revenues          $      2,031    $      1,366          48.7 % $     4,099    $     2,595        58.0 %

Revenues increased for the three months and six months ended September 30, 2008 by 48.7% and 58.0% respectively as compared to the same periods ended September 30, 2007. For the three months ended September 30, 2008, transactional and professional services revenues increased by 34.1%, and 82.6%, respectively, offset by a decrease in license and maintenance revenues by 100.0% and 6.1% respectively as compared to the same periods ended September 30, 2007. For the six months ended September 30, 2008, transactional, maintenance and professional services revenue increased by 36.1%, 5.5% and 99.5% respectively, offset by a 71.9% decrease in licensing revenue as compared to the same periods ended September 30, 2007.

The decrease in licensing revenues for the three and six months ended September 30, 2008, compared to the same periods last year, was primarily due to the significant license revenue recorded in the first quarter of fiscal 2007 associated with the resale of third party software to a significant customer as compared to the reduction of software resale in the current year period.

The increase in transactional revenues for the three and six months ended September 30, 2008, compared to the same periods last year, was principally due to an increase in the number of customers subject to transactional pricing combined with an increase in transactions processed by our current customers.

The decrease in maintenance revenues for the three months ended September 30, 2008, compared to the same period last year, was primarily attributable to fewer customers renewing their annual maintenance agreement in the current period. However, the increase in maintenance revenues for the six months ended September 30, 2008 as compared to the prior year period was due to the annual maintenance renewal related to the integrated license, maintenance and services agreement we entered into with a significant customer in the first fiscal quarter of 2007. This annual maintenance agreement renews in May of every year. We do not anticipate significant on going growth in annual maintenance fees.

The increase in professional service revenues for the three and six months ended September 30, 2007, compared to the same periods last year, was primarily due to our professional services contract with American Express.

Cost of Sales

Costs of sales principally include personnel costs associated with our software maintenance, support, training and installation services as well as the cost of the Accuity EPICWare™ software and other third party software frequently resold in conjunction with licenses of our software.

Cost of sales decreased by $3,357, or 1%, from $509,123 for the three months ended September 30, 2007 to $505,766 for the three months ended September 30, 2008, which was primarily the result of a reduction in the cost of third party software resales as compared to the prior period. Cost of sales increased by $148,178 or 16% from $895,082 for the six months ended September 30, 2007 to $1,043,260 for the six months ended September 30, 2008. The increase for the six month period was primarily due an increase in labor costs associated with work related to our professional services contract with American Express.

Operating Expenses

Total operating expenses decreased by $326,138, or 19%, from $1,688,407 for the three months ended September 30, 2007 to $1,362,269 for the three months ended September 30, 2008. This decrease is principally attributable to a $276,000 decrease in personnel expenses associated with our restructuring in staff, a $104,000 decrease in stock based compensation expense, a $35,000 reduction in accounts receivable factor expense, and a $25,000 reduction in rent expense associated with our new office space, offset by a $105,000 increase in legal expenses associated with general corporate matters, a $34,000 increase in outside consulting services and a $25,000 increase in marketing expense associated with our attendance at various trade shows.

Total operating expenses decreased by $581,914, or 17%, from $3,368,590 for the six months ended September 30, 2007 to $2,786,676 for the six months ended September 30, 2008. This decrease is attributable to a decrease in salary expense and related employee benefits of $456,000, a $56,000 reduction in stock based compensation expense, a $108,000 decrease in the use of outside consultants, a reduction of accounts receivable factor expense of $43,000, a $36,000 decrease in marketing expense, and a $97,000 reduction in other areas of our operations, including reductions in rent, insurance, and development fees, offset by an increase of $197,000 in legal and accounting fees and $10,000 increase in travel expense. All of the above mentioned expense reductions are a byproduct of our recent staff restructuring and the numerous cost reducing measures we put into effect in the first quarter of the current fiscal year. We believe these savings, although perhaps not as large, will continue going forward.

Our headcount at September 30, 2008 was 34, as compared to 46 at September 30, 2007.

Other Income (Expenses)

Other income (expenses), including interest expense and financing costs, decreased $1,990,085 or 13,906%, to $(2,004,397) for the three months ended September 30, 2008 from $(14,312) for the three months ended September 30, 2007. This decrease is primarily related to the convertible promissory notes (Notes) and the manner in which they are required to be reported under FASB No. 133.

At the initial recording of the Notes on to our books, a value must be determined for each portion of the Notes, the compounded embedded derivatives and the warrants. Once determined, this value is netted against the total value of the Notes and the remaining amount is identified as a Discount on Note Payable, and is amortized over the life of the loan utilizing an effective interest method calculation for determining the value of the units each quarter. This discount is written off to interest expense after the effective interest method calculation is performed each quarter. At inception of the Notes in November 2007 the Discount on Note Payable was $2,240,263. This discount would have been $0.00 if the note was held until November 2010, and all interest expense would have been amortized over that time period.

The Notes were paid in full on August 13, 2008, resulting in an accounting treatment consistent with FASB No. 133 guidelines. At the time the Notes are paid off the derivatives no longer have value associated with the Notes, and the Discount on Note Payable must be immediately expensed. At the time the Notes were paid in August 2008, $1,747,791 remained on the Discount on Note Payable. This amount was charged to interest expense in the quarter ended September 30, 2008 and accounts for the bulk of the decrease in other income for the three months ended September 30, 2008 as compared to the same time period last year.

For the six month period ending September 30, 2008, the decrease in other income of $2,174,523 or 4,676.1% to $(2,221,026) as compared to $(46,503) for the same period last year, is primarily due to the interest expense of $1,747,791 and financing costs and interest expense related to our new financing of August 2008 in the amount of $408,521.

Net Income (Loss)

Net income (loss) decreased by $995,937, or 117%, to a net loss of ($1,841,695) for three month ended September 30, 2008 from a net income (loss) of $(845,758) for the three months ended September 30, 2007. For details related to the increase in our net loss see the preceding discussions related to revenues, cost of sales, operating expenses and other income sections above.

Net income (loss) decreased by $236,157, or 14%, to a net loss of ($1,951,176) for the six months ended September 30, 2008 from a net income (loss) of $(1,715,019) for the six months ended September 30, 2007. For details related to the increase in our net loss see the preceding discussions related to revenues cost of sales, operating expenses and other income sections above.

Liquidity and Capital Resources

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

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

· We believe that the demand for our software and professional services will continue to expand as the United States market adopts the new payment processing opportunities available under changing regulations such as the Check Clearing Act for the 21 st Century, and NACHA's back office conversion, which allows the conversion of paper checks in the back offices of retail merchants and government. Increased demand for our solutions, including our recently introduced Clearingworks product, has led to increased cash flows from up-front license fees, transaction-based contract fees and increases in professional services revenues. We expect demand for its product and services to continue to increase in the coming year.

· We have entered into a strategic alliance with one of the largest merchant service providers (MSP), which will allow this MSP to sell Clearingworks as part of its ARC and back office conversion services. Though no exact dollar amounts have been forecast at the time, we expect that this alliance will positively affect our profitability.

· We have undertaken a staff restructuring that we expect will significantly reduce our salary and benefit expense in the coming year while still maintaining our customer service levels.

· We have renewed our professional service contract with a major credit card company and with an arm of the federal government for an additional year that, in aggregate, could provide up to $3,000,000 in revenue in the coming fiscal year.

· We have entered into an agreement with a major business process outsourcer (BPO), which will enable us to significantly increase our transactional revenues in the coming fiscal year as more billers outsource their work to BPO's.

· We have entered into an agreement with a major U.S. Federal Government entity to standardize its payment systems on Clearingworks 3.0, to process all of its paper and electronic checks and to provide additional professional services. We expect this alliance to positively affect our profitability.

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

Cash and cash equivalents decreased by $580,415 to $322,978 at September 30, 2008 from $903,393 at March 31, 2008. Cash used for operating activities was $174,274 in the six months ended September 30, 2008 compared to $191,799 in the same period in the prior year.

Cash used for investing activities of $7,889 and $96,430 in the six months ended September 30, 2008 and September 30, 2007, respectively, was due to equipment purchases.

Cash used by financing activities for the six months ended September 30, 2008 was $746,799 compared to cash provided in financing activities of $266,000 for the six months ended September 30, 2007. Financing activities in the current six month period included: proceeds of 3,703,500 from related party loan, payment of $4,000,000 on convertible promissory notes, $432,659 of deferred financing costs and payments of $17,640 on equipment note payable.

As a result of our increased level of transactional revenues achieved in fiscal 2008, and the expected increase in revenues from recently received and contemplated contracts, we believe we currently have adequate capital resources to fund our anticipated cash needs through June 30, 2009. 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.