UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-KSB/A Amendment No. 3  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005   [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934  Commission file number:  000-26731  PACIFIC WEBWORKS, INC. (Exact name of registrant as specified in its charter)  Nevada                                         87-0627910 (State of incorporation)               (I.R.S. Employer Identification No.)  180 South 300 West, Suite 400, Salt Lake City, Utah 84101 (Address of principal executive offices) (Zip code)  Issuers telephone number, including area code: (801) 578-9020  Securities registered under Section 12(b) of the Exchange Act:  None  Securities registered under Section 12(g) of the Exchange Act:  Common Stock  Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [   ]  The issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [  ]  Disclosure of delinquent filers in response to item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of 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. [  ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [X]  State issuers revenue for its most recent fiscal year:   $4,299,681  As of September 10, 2007, the registrant had 36,026,895 shares of common stock outstanding.  The aggregate market value of the shares of voting stock held by non-affiliates as of that date was approximately $2,305,369.  Documents incorporated by reference:  None  Transitional Small Business Disclosure Format: Yes [   ] No [X]   1    EXPLANATORY NOTE  In July 2005 the Securities and Exchange Commission (SEC) conducted a review of our annual report on Form 10-KSB for the year ended December 31, 2005.  As a result of that review, in this amendment we have restated our financial statements for the years ended December 31, 2005 and 2004.  See Note 14 to the financial statements included in this report for an explanation of the restatement.  The non-financial disclosures in this report are as of the original filing date of March 30, 2006, and do not include subsequent events.   TABLE OF CONTENTS  PART II  Item 6.  Managements Discussion and Analysis or Plan of Operation 2  Item 7.  Financial Statements 14  Item 8A.  Controls and Procedures 37  PART III Item 13.  Exhibits 37  Signatures 38    In this annual report references to Pacific WebWorks, we, us, and our refer to Pacific WebWorks, Inc. and its subsidiaries.  FORWARD LOOKING STATEMENTS  The Securities and Exchange Commission (SEC) encourages companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions.  This report contains these types of statements.  Words such as may, will, expect, believe, anticipate, estimate, project, or continue or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements.  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.   PART II  ITEM 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  Executive Overview  During the past year management has continued to focus on the marketing and distribution channels, which, while costly, are believed to be the most effective solution to increase our sales.  Our management took steps to intensify our marketing and distribution strategy between several of our product offerings in 2003 and those actions have led to revenue growth for 2005.  We continued to refine and expand our marketing efforts throughout the year.  These refinements resulted in significantly increased registrations, attendance and product purchases at our nationwide sales and training events.     2    Our net revenues for the year ended December 31, 2004 (2004") were $3,617,486 compared to $5,258,908 for the year ended December 31, 2005 (2005").  This represented growth of 63.5% year over year.  This growth was primarily related to the sales and training events in locations throughout the United States conducted through our subsidiary, TradeWorks Marketing, Inc.  These events focus on the sale of Pacific WebWorks and Intellipay products and the training necessary to properly utilize these products.  Intellipay, Inc., a wholly owned subsidiary, made considerable progress in the marketing of its Municipal Bill Pay solution during the 2005 year. This product represents the only solution that is fully integrated into the Caselle municipal accounting system used by hundreds of municipalities nationwide.  Intellipay added seventeen (17) new users to the system over the final six months of 2005 and is in negotiations with many others.  Progress was also made in the marketing of two new Intellipay products introduced to the market during 2004.  The Intellipay Desktop Terminal which brings all of the functionality of a Virtual Terminal application to your desktop computer, reducing costs and allowing the merchant to receive a qualified discount rate, and the Intellipay Wireless Terminal which allows customers to process remote wireless transactions through a Nextel Cell phone, a must for all mobile merchants.  Also, the addition of check processing capabilities as a compliment to our credit card processing has significantly enhanced the markets reception of the Intellipay product package.  As is always the case, our greatest challenges are: $ increased and intense competition, $ the identification and implementation of new distribution channels and sales and marketing techniques, and $ the need to stay ahead of the curve in the development of our technologies.  Couple these operational hurdles with the constant need for more capital and greater resources and the need for more and better communication with our shareholders and prospective shareholders and you have a picture of the challenges Pacific WebWorks will face in the coming year.  Pacific WebWorks and IntelliPay have great potential in the marketplace.  However, hurdles exist, such as identifying and implementing effective product distribution channels, economic changes generally, gaining marketplace acceptance and addressing shifting public attitudes for technology products that could pose a threat to our success.  Liquidity and Capital Resources  While our revenues have increased in 2005, we have recorded net losses for the past two years.  We rely on revenues, loans, and equity transactions to fund our operations.  We are dependent on the efforts of our resellers, including our wholly-owned subsidiary, TradeWorks Marketing, independent sales representatives and our in-house sales personnel to increase our revenues, while we continue to work to control expenses.  Our monthly cash outflows are primarily related to our marketing and operating expenses.  These cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales.  Net cash used in continuing operations for 2004 was $190,196 compared to net cash used in continuing operations of $241,057 for 2005.  Net cash used by operations for 2004 was primarily the result of increased advertising expense and commissions paid to obtain revenues for our products and services and the related timing differences in recognition of those deferred revenues, along with non-recurring expenditures for enhancement of our data center and security features related to our online credit card transaction processing product.  Net cash used by operations for 2005 was primarily the result of continued increases in marketing and advertising and administrative expenses.  For the 2004 and 2005 years we experienced a significant increase in revenue and our recurring monthly billing portfolios.  Net cash used in operations was adjusted by accounts receivable and bad debt expense related to this growth.  The majority of our accounts receivable relate to uncollected recurring monthly fees because fees for monthly services are billed in arrears for monthly services provided over the past 30 days.  At December 31,  2005 we had roughly $80,000 to $90,000 in accounts receivable on sales that had been made and cash that had been collected by our merchant provider, but this amount was currently in a pending status based on customer disputes.    3    The receivable was removed as cash was submitted to us by our merchant providers through the first quarter of 2006 as the customer disputes where resolved.  It is important to note that the majority of trade accounts receivables and bad debt relate to our monthly recurring revenue categories and are not a representation of our overall business.  As our recurring portfolio increases, we recognize an increase in bad debt due to the nature of our business and the makeup of our clients.  The majority of our revenue comes from cash sales; these do not reside in accounts receivable as cash is collected at the completion of the sale.  Therefore, as our recurring customer base increases the accounts receivable and bad debt will show increases as the overall revenue and customer base grow.  For the 2004 year, net cash used by investing activities was $107,534 compared to net cash used in investing activities of $67,405 for the 2005 year.  Investing activities for the 2004 year were primarily related to cash placed on reserve with a financial institution related to TradeWorks Marketings merchant account.  Investing activities for the 2005 year consisted primarily of purchases of property and equipment and the increase in cash placed on reserve with a financial institution related to TradeWorks Marketings merchant account.  We expect to generate positive cash flows through further development of our business and distribution channels and we plan to address only the liabilities of our operating subsidiaries with our current cash balances and inflows.  It should be noted that 46% of our current liabilities are made up of deferred revenues that will be recognized over the next eight to twelve months and this liability does not require a specific cash outlay, but only that we remain a going concern.  In 2004 we covered our cash shortfalls by selling our common stock for an aggregate $250,000.  In 2005 we have relied on loans and equity financing to cover cash shortfalls.  In June 2005 we entered into promissory note agreements with two different lenders for an aggregate $200,000, at 8% interest.  The promissory notes were executed on June 28 and 30, 2005 with two different lenders.  Each note had a principle amount of $100,000 and each note is due and payable on December 31, 2006.  The notes are collateralized by our business assets and are convertible into our common stock at $0.06 per share.  We paid off these notes in the third quarter of 2005.  Net cash provided by financing activities for 2005 was $600,000 and was the result of proceeds from convertible notes, sales of our common stock and the exercise of warrants.  On July 1, 2005 we negotiated a Unit Purchase Agreement with three accredited investors.  Under this agreement we issued 4,166,667 units at a unit price of $0.06 for net proceeds of $250,000.  Each unit consisted of one share of common stock and one warrant to purchase one additional share of common stock at a specified price.  One half of the warrants had an exercise price of $0.12 per share and one half had an exercise price of $0.17 per share.  The warrants were immediately exercisable and expire October 26, 2006, one year from the effective date of a registration statement filed to register the unit shares.  Warrants granted under this agreement were exercised for the purchase of an additional 2,083,334 shares at $0.12 for net proceeds of $250,000.  We received a total of $500,000 from this agreement and the remaining $350,000 from the equity financing is in the form of warrants that are exercisable at $0.17 per share at some future date.  We used $200,000 of these monies to repay the promissory notes discussed above and used the balance for operations.  We registered the shares and the underlying shares of the warrants issued under this agreement on a Form SB-2 that was declared effective by the SEC on October 26, 2005.  On October 30, 2005 we entered into a promissory note agreement for $100,000.  The note interest is 8% per annum and is due in full on April 30, 2007.  This note is collateralized by our business assets.  We also issue common stock to pay for services that we require, whenever prudent, in an effort to conserve our cash for working capital and to support growth.  On July 1, 2005, we granted warrants to purchase 1,000,000 shares of common stock to Chesapeake Group, Inc.  The warrants were granted in consideration for consulting services and were valued at $9,832, using the Black-Scholes option pricing model.  Warrants to purchase 500,000 shares have an exercise price of $0.10 and warrants to purchase 500,000 shares have an exercise price of $0.15.  The warrants have an exercise term of three years, expiring in July 1, 2008.  We also granted registration rights to the underlying shares of the warrants.  We registered the shares and the underlying shares of the warrants issued under this agreement on a Form SB-2 that was declared effective by the SEC on October 26, 2005.   4    During 2005 we also issued shares of common stock to purchase insurance policies.  In May 2005 we issued 230,000 shares for insurance policies valued at $15,000 and in December 2005, we issued 408,500 shares of common stock to Universal Business Insurance for a director/officer liability insurance premium valued at $40,850.  We operate in a very competitive industry in which large amounts of capital are required in order to continually develop and promote products.  Many of our competitors have significantly greater capital resources than we have.  We believe that we may need an additional $1 to 2 million during the next twelve months to continue to keep up with technological improvements and further our business development strategies.  We believe funding may be obtained through additional debt arrangements or equity offerings.  However, if we are unable to obtain additional funds on acceptable terms, then we might be forced to delay or abandon some or all of our product development, marketing or business plans, and growth could be slowed, which may result in declines in our operating results and common stock market price.  If we rely on equity offerings for funding or services, then we will likely use private placements of our common stock pursuant to exemptions from the registration requirements provided by federal and state securities laws.  The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions.  We also note that if we issue more shares of our common stock our stockholders may experience dilution in the value per share of their common stock.  Commitments and Contingent Liabilities  Our operating commitments consist of our operating lease for our Salt Lake City office that approximates $8,400 per month.  Future minimum lease payments under this lease are $101,760 through 2006.  As of December 31, 2005, we had an accrued liability of approximately $91,522 related to the Intellipays operating lease default.  Intellipay defaulted on its operating lease in May 2002 after we closed Intellipays physical office, located in Fremont, California, and moved its technological infrastructure and operations to Salt Lake City, Utah in February 2002.  The Intellipay lease required approximately $6,000 per month, plus late fees and interest, through December 2003.  The accrued liability has been reduced for time that the property was leased to a third party by the property manager.  Our total current liabilities at December 31, 2005, were comprised of accounts payable, accrued liabilities, deferred revenue, net current liabilities from discontinued operations, and convertible notes payable.  Accounts payable totaled $94,053 and were related to operating costs such as advertising expenses, professional fees and seminar expenses.  Our accrued liabilities of $125,280 were primarily the result of the operating lease default for the Intellipay office space, contingent reseller commissions, payroll liabilities, and estimated refunds and factoring obligations.  Deferred revenues included up-front fees received for license fees, software services and education not yet performed or delivered and totaled $679,206 at December 31, 2005.  Current liabilities from discontinued operations were $235,274 and are related to World Commerce Network, LLC.  The operations of World Commerce Network, LLC, our subsidiary, are ceased and discontinued.  Management is attempting to negotiate settlements of World Commerce Networks accrued liabilities.  As of December 31, 2005, World Commerce Networks accrued liabilities totaled $171,264 and included estimated contingent recourse obligations and attorneys fees approximating $95,000 and approximately $56,000 for estimated customer refunds.  In addition, World Commerce Network had a contingent liability of approximately $65,000 plus interest related to an alleged default of application for credit and personal guaranty made by a former officer of Pacific WebWorks.  We continue to work through various matters related to these liabilities and management believes the recorded liabilities are sufficient to cover any resulting liability.  There has been no activity on any of these accounts for over two years.  Certain customers of TradeWorks Marketing entered into operating leases to purchase e-commerce software and merchant account agreements that were assigned by TradeWorks Marketing to FundWorks.  The customers pay $59.95 per month for the operating lease agreement and the agreements have terms over 24 to 36 months and are non-cancelable.  Related revenues are recorded monthly as earned.  The future annual minimum lease receipts for FundWorks operating leases as of December 31, 2005 were approximately $321,392 through December 31, 2006 and $199,094 through December 31, 2007.  Collectability of future minimum lease receipts cannot be assured because the customers placed in these operating leases have a higher credit risk.  5     Off-balance Sheet Arrangements  None.   Revenue Recognition Policy  In a regulatory review of our annual report for the period ended December 31, 2005, the SEC determined that our   revenue recognition policy was not consistent with GAAP accounting principles.  The SEC noted that we would record bad debt expense shortly after billing upon learning that payments had been rejected by credit card companies or banks for insufficient funds.  This policy resulted in recording revenue for the gross amounts billed to a customer despite knowing in a short time period that the amount recorded was not collectible.  The SEC also stated that because we did not perform any evaluation of collectibility beyond ensuring that a signed agreement and valid credit card existed, that we could not conclude that collection was reasonably assured upon billing.  The SEC indicated that absent any additional evaluation procedures, approval from the financial institutions or a subsequent cash receipt appeared to have been our first and only verifiable evidence suggesting that collection was reasonably assured.  The SEC took the position that even if additional procedures had been performed in support of collectibility, that it was inappropriate under GAAP accounting principles that we recognized revenue upon billing given the short time period between billing and rejection and the frequency in which these fees were not collected.  Based on these factors, at the SECs request we have restated our financials for the year ended December 31, 2005.  Critical Accounting Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Estimates of particular significance in our financial statements include deferred revenue calculations, goodwill and the annual tests for impairment of goodwill, contingent liabilities, and valuing stock option compensation.  Deferred revenue calculations materially affect our financial results.  In this area cash revenues received for certain product sales, such as  revenues from up-front fees, are recognized over the period services are performed.  This requires deferring the immediate recognition of those revenues from eight months to one year and creating a deferred revenue liability account.  Goodwill related to Intellipay is assessed annually for impairment by comparing the fair values of Intellipay to its carrying amount, including goodwill.  In testing for a potential impairment of goodwill, the estimated fair value of  Intellipay is compared with book value, including goodwill.  If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.  If, however, the fair value of Intellipay is less than book value, then the carrying amount of the goodwill is compared with its implied fair value.  The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks.  If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.  The fair value of Intellipay is estimated using both cash flow information from internal budgets and multiples of revenue.  In the event that an impairment indicator arises prior to our annual impairment test of goodwill, we will provide a full test relative to the indicator in the period that the indicator is present.  Our ability to avoid impairment of the goodwill related to Intellipay is largely dependent on Intellipays ability to further generate revenues and cash flows in accordance with budgeted amounts.  We currently do not expect impairment to occur for the Intellipay business unit in the near term; however, if an impairment occurs it would have a material effect on our financial condition by resulting in a net decrease in our consolidated assets and consolidated net earnings.  We performed a goodwill impairment test during 2005 and concluded there was no impairment of goodwill.  6        We evaluated the net present value of projected cash flows based on current growth rates of 6% annually.  We estimated the net present value at $3,029,261 based upon recurring revenue and set up fees over three years.  This value is compared to the Intellipays goodwill value of $2,946,253.  Over the past two years our projections have been consistent with the growth rates and revenues projected in our current growth rate model. This suggests that our goodwill value is supported by the three year present value analysis of combined recurring revenue and set up fees. As a result, managements estimates have been accurate, little variation has occurred and management believes these estimates are not reasonably likely to change in the future.  As our goal over the next 3 to 5 years is to reduce the reliance on set up fees and continue to increase the value of our recurring monthly hosting portfolio, we also value Intellipay based on our current projections for hosting growth only.  Our estimates of projected cash flows based on recurring revenue only over 5 years results in an estimated value of $2,154,462.  At the more aggressive growth rates ranging from 9% to 36% the value increases to $2,435,580.  In addition to deferred revenue and goodwill impairment, our consolidated financial statements include estimates for contingent liabilities that are considered probable.  Material estimates for contingent liabilities include approximately $74,000 for our operating companies and approximately $151,000 in net current liabilities of our discontinued operations.  From a liquidity standpoint, any settlement or judgment received by us from pending or threatened litigation may have a direct affect on our cash balances at December 31, 2005.  Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not have a direct affect on our assets as management does not intend to satisfy such claims with the assets of our operating companies.  Management believes that all amounts estimated and recorded as contingent liabilities approximate the amount of liabilities that could be owed to parties in the form of settlement or in a judgment.  Any settlements that might occur below amounts accrued would result in a favorable impact to our earnings and working capital.  As permitted by Statement of Financial Accounting Standards No. 148, we continue to account for stock options under APB Opinion No. 25, under which no compensation has been recognized.  The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model.  Option pricing models require the input of highly sensitive assumptions, including expected stock volatility.  Also, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable.  Results of Operations  The following discussions are based on the consolidated financial statements for the year ended December 31, 2004 and 2005 for Pacific WebWorks, Intellipay, TradeWorks Marketing, Fundworks and the discontinued operations of World Commerce Network, LLC, a non-operating company.  The following chart is a summary of our financial statements for 2004 and 2005 and should be read in conjunction with the financial statements, and notes thereto, included with this report at Item II, Part 7, below.  Comparison of 2004 and 2005 Fiscal Year Operations  20042005Revenues, net$  3,617,486$ 5,258,908Cost of sales1,071,2411,771,725Gross profit2,546,2453,487,183Total operating expenses3,036,6403,844,144  7     Net loss from operations(490,395)(356,960)Other income and (expense), net2,06861,087Income taxes300-Net earnings (loss)(488,627)(295,873)Net earnings (loss) per share$         (0.02)$        (0.01)   We recognize hosting, maintenance, transaction and processing fees in the period in which fees are fixed or determinable and the related products or services are provided to the user.  Revenues from up-front fees from customers are recorded on the balance sheets as deferred revenues and are recognized over the period services are performed.  Fees for the set-up of merchant accounts are deferred and recognized as services are delivered, which is generally two months.  Training and design revenues are recognized as the related services are performed.  As discussed above in our Executive Overview, new marketing plans and strategies implemented over the past two years have resulted in increased revenues.  Even with the deferral of a significant amount of our 2005 sales, our sales increased 45.4% for 2005 compared to 2004.  Management expects revenues to continue to increase as a result of our continued marketing activities.  Cost of sales include fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs.  Cost of sales for 2004 and 2005 was primarily related to our new marketing strategy and related increases in reseller fees and commissions.  The cost of sales increased 45.4% in 2005 compared to 2004.  Management anticipates that cost of sales will increase over the next year due to our continued marketing efforts.  Total operating expenses increased 26.6% from 2004 to 2005.  Selling expenses for 2005 increased 55.8% compared to 2004.  Selling expenses include advertising expenses, seminar expenses, commissions and personnel expenses for sales and marketing.  We have expended significant amounts on sales and marketing, including direct mail, radio, and print advertising.  Research and development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department.  Research and development expenses increased 9.4% in 2005 compared to 2004 and management anticipates that these expenses will increase at approximately the same rate over the next year.  General and administrative expenses include personnel expenses for executive, finance, and internal support personnel.  In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs. General and administrative expenses increased 3.4% largely due to increased personnel expense related to our expanded operations.  Net other income for 2004 was primarily related to interest income earned on certificates of deposit.  Net other income for 2005 was primarily related to interest income earned on certificates of deposit and the recovery of a previously booked expense.  As a result of the above items, we recorded a net loss and net loss per share for both 2004 and 2005, but our net loss decreased 39.4% in 2005 compared to 2004.  Balance Sheet - the following chart is a summary of our balance sheet.  8     Comparison of 2004 and 2005 Fiscal Year Balance Sheet  20042005Cash and cash equivalents$         452,983$      744,521Total current assets623,4451,166,814Total assets3,799,5884,368,083Total current liabilities937,1251,133,812Total liabilities937,1251,233,812Accumulated deficit(12,727,027)(13,022,900)Total stockholders equity$      2,862,462$   3,134,271    Total current assets increased in 2005 primarily as a result of increased prepaid expenses, receivables from our marketing efforts, and increased cash balances.  Total liabilities also increased in 2005 as a result of increases in deferred revenue and notes payable of $100,000.   Factors Affecting Future Performance  We have a history of losses and anticipate future losses.  We are unable to fund our day-to-day operations from revenues alone.  For the year ended December 31, 2005, we incurred a net loss of $295,873 compared to a net loss of $488,627 for the year ended December 31, 2004.  We anticipate revenue from operations and equity transactions will fund our operations for the next twelve months; however, we cannot assure you that we will be able to attain or maintain profitability.  We may need additional external capital and may be unable to raise it.  Based on our current growth plan we believe we may require $1 to $2 million additional financing within the next twelve months to remain competitive in our market.  If we fail to obtain funds on acceptable terms, then we might be forced to delay or abandon some or all of our business plans.  Our success will depend upon our ability to access equity capital markets and borrow on terms that are financially advantageous to us.  Also, we may not be able to obtain additional funds on acceptable terms.  If we are unable to obtain additional capital, then we may not have sufficient working capital to develop products, finance acquisitions, or pursue business opportunities.  If we borrow funds, then we could be forced to use a large portion of our cash reserves to repay principal and interest on those funds.  If we issue our securities for capital, then the interests of investors and shareholders could be diluted.  We are subject to intense competition from large and small companies that limits our ability to obtain market share and may force our prices down.  We face competition in the overall Internet software market, as well as in the web site building market.  Our ability to earn significant revenues from our Visual WebToolsTM or IntelliPay payment system will depend in part on their acceptance by a substantial number of online businesses.  Broad acceptance of our products and services and their use in large numbers is critical to our success because a large portion of our revenues are derived from one-time and recurring fees we charge to customers buying our products and services.  Our success in obtaining market share will depend upon our ability to build name brand recognition and to provide cost-effective products and services to our customers.  We have developed our products to meet the needs of small businesses and we believe the generality of our competitors services may be inadequately addressing the small business owners needs. We expect competition  9    to persist, increase, and intensify in the future as the markets for our products and services continue to develop and as additional competitors enter our market.  In addition, many of our current or potential competitors have broad distribution channels that they may use to bundle competing products directly to end-users or purchasers.  If these competitors were to bundle competing products for their customers, it could adversely affect our ability to obtain market share and may force our prices down.  We may be unable to achieve market acceptance because technological standards for payment processing are not established.  One obstacle to widespread market acceptance for the IntelliPay payment system is that widely adopted technological standards for accepting and processing payments over the Internet have not yet emerged.  As a result, merchants and financial institutions have been slow to select which service to use.  Until one or more dominant standards emerge, we must design, develop, test, introduce and support new services to meet changing customer needs and respond to other technological developments.  To be successful, we must obtain widespread acceptance of our technologies, or modify our products and services to meet whatever industry standards do ultimately develop.  It is not certain that we will be able to do either.  We depend upon our proprietary rights, none of which can be completely safeguarded against infringement.  Our ability to compete effectively will depend, in part, upon our ability to protect our proprietary source codes for Visual WebToolsTM and the IntelliPay payment system through a combination of licenses and trade secrets.  These agreements and procedures may not effectively prevent disclosure of our confidential information and may not provide us with an adequate remedy in the event of unauthorized disclosure of such information.  Intellectual property rights, by their nature, are uncertain and involve complex legal and factual questions.  We rely upon trade secrets with respect to our source code and functionalities and other unpatented proprietary information in our product development activities.  We seek to protect trade secrets and proprietary knowledge in part through confidentiality agreements with our employees, resellers, and collaborators.  If employees or collaborators develop products independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those products or services.  Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights.  It would be impossible to predict whether litigation might be successful.  We rely in part on third party technology licenses which we cannot guarantee will be available to us in the future.  We rely on certain technology which we license from third parties, including software which is integrated with internally developed software and used in our software to perform key functions.  Our inability to maintain any of these technology licenses could result in delays in distribution of our services or increased costs of our products and services.  We cannot assure you that third party technology licenses will continue to be available to us on commercially reasonable terms, or at all.  We must update our products and services and may experience increased costs and delays which could reduce operating profit.  The electronic commerce, web hosting and merchant processing markets in which we compete are characterized by technological change, new product introductions, evolving industry standards and changing customer needs.  In order to remain competitive, we may be required to engage in a number of research and development projects, which carries the risks associated with any research and development effort, including cost overruns, delays in delivery and performance problems.  Any delay in the delivery of new products or services could render them less desirable by our customers, or possibly even obsolete.  Any performance problem with a new product or service may require significant funds to correct the problem.  As a result of these factors, our research and development efforts could result in increased costs that could reduce our operating profit, a loss of revenue if promised new products are not timely delivered to our customers, or a loss of revenue or possible claims for damages if new products and services do not perform as anticipated.    10    We may experience software defects which may damage customer relations.  Despite rigorous testing, our software may nevertheless contain undetected bugs, errors or experience failures when introduced, or when the volume of services provided increases.  Any material errors could damage the reputation of our service or software, as well as damage our customer relations. We have detected errors, defects, and bugs in the past and have corrected them as quickly as possible.  Correcting any defects or bugs we may discover in the future may require us to make significant expenditures of capital and other resources.  We believe that we follow industry-standard practices relating to the identification and resolution of errors, defects, or bugs encountered in the development of new software and in the enhancement of existing features in our products.  As of the date of this filing we have not experienced any material adverse effect by reason of an error, defect, or bug.  We may experience breakdowns in our hosting services, infrastructure or payment processing systems, which may expose us to liabilities and cause customers to abandon our products and services.  We would be unable to deliver our payment processing services or hosting services if our system infrastructures break down or are otherwise interrupted.  Events that could cause system interruptions are: C fire, C earthquake, C power loss, C terrorist attacks, C harmful software programs, C telecommunications failure, and C unauthorized entry or other events.  Although we regularly back up data from operations, and take other measures to protect against loss of data, there is still some risk of such losses.  Despite the security measures we maintain, our infrastructure may be vulnerable to computer viruses, hackers, rouge employees or similar sources of disruption.  Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers from using our services.  We attempt to limit this sort of liability through back-up systems, contractual provisions, insurance, and other security measures.  However, we cannot assure you that these contractual limitations on liability would be enforceable, or that our insurance coverage would be adequate to cover any liabilities we might sustain.  Also, a breach of our e-commerce security measures could reduce demand for our services.  The e-commerce industry is intensely focused on the need for Internet security, particularly with respect to the transmission and storage of confidential personal and financial data.  Any compromise or elimination of our security could erode customer confidence in our systems and could result in lower demand for our services or possible litigation.  We are dependent upon license renewal which cannot be assured to occur.  We derive revenues from user licenses and license renewals on a month to month arrangement.  We also intend to increase the brand recognition of our productsamong users through these types of relationships.  If a substantial number of our customers were to decline to renew their contracts for any reason, then we could experience a substantial drop in revenues. Our success in establishing our products as a recognized brand name and achieving their acceptance in the market will depend in part on our ability to continually engineer and deliver new product technologies and superior customer service, so that customers renew their licenses month to month.  We may pursue acquisitions of complementary service product lines, technologies or business which may interfere with our operations and negatively affect our financial position.  From time to time, we evaluate potential acquisitions of businesses, services, products, or technologies.  These acquisitions may result in a potentially dilutive issuance of equity securities, the incurrence of debt and contingent liabilities, and amortization of expenses related to goodwill and other intangible assets.  In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services, and products of the acquired companies; the diversion of managements attention from other business concerns; risks of  11    entering markets in which we have no or limited direct prior experience; and, the potential loss of key employees of the acquired company.  As of the date of this filing, we have no present commitment or agreement with respect to any material acquisition of other businesses, services, products, or technologies.  Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss of investor confidence in our reported financial information.  Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-KSB for the fiscal year ending December 31, 2007, we will be required to furnish a report by our management on our internal control over financial reporting.  If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.  In order to achieve compliance with Section 404 of the Act within the prescribed period, we will need to engage in a process to document and evaluate our internal control over financial reporting, which will be both costly and challenging.  In this regard, management will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan to: $ assess and document the adequacy of internal control over financial reporting, $ take steps to improve control processes where appropriate, $ validate through testing that controls are functioning as documented, and $ implement a continuous reporting and improvement process for internal control over financial reporting. We can not assure you as to our, or our independent auditors, conclusions at December 31, 2007 with respect to the effectiveness of our internal control over financial reporting.  There is a risk that neither we nor our independent auditors will be able to conclude at December 31, 2007 that our internal controls over financial reporting are effective as required by Section 404 of the Act.  During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.  Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.  We may not be able to adapt as the Internet market changes.  Our failure to respond in a timely manner to changing market conditions or client requirements could have a material adverse effect on our business, prospects, financial condition, and results of operations.  The Internet is characterized by: $ rapid technological change; $ changes in advertiser and user requirements and preferences; $ frequent new product and service introductions embodying new technologies; and $ the emergence of new industry standards and practices that could render our existing service offerings, technology, and hardware and software infrastructure obsolete.  In order to compete successfully in the future, we must $ enhance our existing products and develop new services and technology that address the increasingly sophisticated and varied needs of our prospective or current customers; $ license, develop or acquire technologies useful in our business on a timely basis; and $ respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.       12    Our future success depends on continued growth in the use of the Internet and Internet-based services for small business.  Because the Internet is a rapidly evolving industry, the ultimate demand and market acceptance for our products will be subject to a high level of uncertainty.  Significant issues concerning the commercial use of the Internet and online service technologies, including security, reliability, cost, ease of use, and quality of service, remain unresolved and may inhibit the growth of Internet business solutions that use these technologies.  In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation.  Regulation of the Internet and Internet-based services may decrease the demand for our services and/or increase our cost of doing business.  Due to the increasing popularity and use of the Internet and online services, federal, state, local, and foreign governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet and other online services.  These laws and regulations may affect issues such as user privacy, pricing, content, taxation, copyrights, distribution, and quality of products and services.  Any new legislation could hinder the growth in use of the Internet generally or in our industry and could impose additional burdens on companies conducting business online, which could, in turn, decrease the demand for our services, increase our cost of doing business.  The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted.  It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, and taxation, apply to the Internet.  In addition, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business via the Internet.    13      ITEM 7: FINANCIAL STATEMENTS    Pacific WebWorks, Inc. and Subsidiaries  CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005     Report of Independent Registered Public Accounting Firm 15 Consolidated Balance Sheets, December 31, 2005 and December 31, 2004 16 Consolidated Statements of Operations for the years ended December 31, 2005 and 2004 17 Consolidated Statements of Stockholders Equity for the years ended December 31, 2005 and 2004 18 Consolidated Statements of Cash Flows for the years ended December 31, 2005 and 2004 19 Notes to the Consolidated Financial Statements 20  14


Chisholm
Bierwolf &
Nilson, LLC Certified Public AccountantsTodd D. Chisholm, Audit Partner
Nephi J. Bierwolf, Tax Partner
Troy F. Nilson, Audit Partner
Shauna S. Howe, Audit Partner  533 West 2600 South, Suite 25   Bountiful, Utah 84010   Phone:  (801) 292-8756   Fax: (801) 292-8809  www.cbncpa.com  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of Pacific Webworks, Inc.  We have audited the accompanying consolidated balance sheets of Pacific Webworks, Inc. and Subsidiariesas of December 31, 2005 and 2004 and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended. These financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with the standards of the PCAOB (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Webworks, Inc. and Subsidiaries as of December 31, 2005 and 2004 and the results of its operations and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.  As discussed in Note 14 to the consolidated financial statements, management discovered errors in the reporting of the Companys revenue recognition and corresponding bad debt expense as of December 31, 2005. Accordingly, the consolidated financial statements for the year ended December 31, 2005 have been restated to correct the errors.  /s/ Chisholm, Bierwolf & Nilson, LLC Chisholm, Bierwolf & Nilson, LLC Bountiful, UT February 3, 2006 except for Note 14 dated August 23, 2007   Member of AICPA, UACPA & Registered with PCAOB


15     Pacific WebWorks, Inc. and SubsidiariesCONSOLIDATED BALANCE SHEETSASSETSDecember 31,20042005CURRENT ASSETSCash and cash equivalents$    452,983$     744,521ReceivablesTrade, less allowancefor doubtful receivables of$127,421 in 2004 and$97,592 in 200596,260269,002Prepaid expenses74,202153,291Total current assets623,4451,166,814PROPERTY AND EQUIPMENT, NETAT COST70,38281,039RESTRICTED CASH136,519163,472GOODWILL2,946,2532,946,253OTHER ASSETS, NET22,98910,505$ 3,799,588$ 4,368,083LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable$      89,164$      94,053Accrued liabilities181,109125,280Deferred revenue431,578679,206Current liabilities from discontinued operations235,274235,274Total current liabilities937,1251,133,812Notes payable-100,000Total liabilities937,1251,233,812STOCKHOLDERS' EQUITYCommon stock - par value $0.001; authorized50,000,000; issued and outstanding  28,517,622 sharesin 2004 and  35,426,895 shares in 200528,51835,427Additional paid-in capital15,560,97116,121,744Accumulated deficit(12,727,027)(13,022,900)Total stockholders' equity2,862,4623,134,271$ 3,799,587$ 4,368,083The accompanying notes are an integral part of these statements.    16     Pacific WebWorks, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONSYear ended
December 31,20042005(Restated)Revenues, netSoftware, access and license fees$    655,440$1,392,093Hosting, gateway and maintenance fees1,430,3281,159,113Training and education817,1971,219,231Merchant accounts, design and other714,5211,488,4713,617,4865,258,908Cost of sales1,071,2411,771,725Gross profit2,546,2453,487,183Selling expenses1,516,5672,362,694Research and development242,012264,829General and administrative1,228,3241,186,826Depreciation and amortization49,73629,795Total operating expenses3,036,6403,844,144Net loss from operations(490,395)(356,960)Other income (expense)Interest income3,05411,817Other income (expense), net(986)49,2702,06861,087Net income (loss) from continuing operationsbefore income taxes(488,327)(295,873)Income Taxes300-Net income (loss) from continuing operations(488,627)(295,873)Discontinued operationsGain (loss) from operations (net of income tax)--Gain on disposal (net of income tax)--Total gain (loss) from discontinued operations--NET LOSS$(488,627)$(295,873)Net loss per common share - basic and dilutiveNet income loss from continuing operations$      (0.02)$     (0.01)Gain from discontinued operations--Net earnings (loss)$      (0.02)$     (0.01)Weighted-average number of shares outstandingBasic24,853,96431,497,718Dilutive25,165,07532,656,228The accompanying notes are an integral part of these statements.  17     Pacific WebWorks, Inc. and SubsidiariesCONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITYYears ended December 31, 2004 and 2005PriceAdditionalperCommon StockPaid-inAccumulatedshareSharesAmountCapitalDeficitTotalsBalances at January 1, 2004$       -24,587,622$24,588$15,288,181$(12,238,400)$3,074,369Issuance of stock for insurance policies0.09300,00030026,420-26,720Issuance of common stock for cash0.073,630,0003,630246,370-250,000Net loss 2004----(488,627)(488,627)Balances at December 31, 2004-28,517,62228,51815,560,971(12,727,027)2,862,462Issuance of stock for insurance policies0.01639,27363855,211-55,849Issuance of stock for portfolio0.1020,000201,980-2,000Issuance of common stock for cash0.126,250,0006,250493,750-500,000Compensation for Issuance of Warrantsto Investor Relations Firm--9,832-9,832Net loss 2005----(295,873)(295,873)Balances at December 31, 200535,426,895$35,426$16,121,744$(13,022,900)$3,134,270The accompanying notes are an integral part of this financial statement    18     Pacific WebWorks, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWSFor the year endedDecember 31,20042005Increase (decrease) in cash and cash equivalents(Restated)Cash flows from operating activitiesNet earnings (loss)$     (488,627)$  (295,873)Adjustments to reconcile net earnings (loss)to net cash used in operating activitiesDepreciation & amortization49,73629,795Issuance of  options and warrants for compensation-9,832Bad debt expense512,914173,000Changes in assets and liabilitiesReceivables(579,525)(345,742)Prepaid expenses and other assets65,827(8,756)Accounts payable and accrued liabilities23,502(50,940)Deferred revenue225,977247,628Total adjustments298,43154,816Net cash provided by continuing operating activities(190,196)(241,057)Cash flows from investing activitiesPurchases of property and equipment(21,966)(40,452)Cash on reserve with bank(85,568)(26,953)Net cash provided by (used in) investing activities(107,534)(67,405)Cash flows from financing activitiesProceeds from notes payable-100,000Proceeds from convertible notes payable-200,000Payments on convertible notes payable-(200,000)Proceeds on issuance of stock250,000250,000Proceeds on exercise of warrants-250,000Net cash used in financing activities250,000600,000Net increase in cash and cash equivalents(47,730)$    291,538Cash and cash equivalents at beginning of period500,713452,983Cash and cash equivalents at end of period$        452,983744,521Supplemental disclosures of cash flow information:Cash paid for interest$                 -$              -Cash paid for income taxes800800Non-cash financing activities:Issuance of stock for prepaid insurance policies26,72055,849Reseller note settlement--The accompanying notes are an integral part of these statements.      19    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION  The Company Pacific WebWorks, Inc. and its subsidiaries, engage in the development and distribution of web tools software, electronic business storefront hosting, and Internet payment systems for individuals and small to mid-sized businesses.  The company also provides website development and training for its customers.  The Company was organized under the laws of the state of Nevada on May 18, 1987 as Asphalt Associates, Inc.  On December 31, 1998, the board of directors changed the name of the Company to Pacific WebWorks, Inc.  On January 11, 1999, the Company merged with Utah Webworks, Inc., a Utah corporation organized April 10, 1997.  The share exchange with Utah Webworks was accounted for as a reverse merger; therefore, all financial information prior to January 11, 1999 is that of the accounting survivor, Utah Webworks.  TradeWorks Marketing, Inc. and FundWorks, Inc. were organized in the state of Delaware in July and August of 2003, respectfully.  TradeWorks began operations in August 2003 and engages in the marketing and sales of Pacific WebWorks and Intellipay products.  FundWorks began operations in December 2003 and provides operating leases for customers with higher credit risk.  Basis of Presentation The accompanying condensed consolidated financial statements include the accounts of Pacific WebWorks, Inc. and its wholly owned subsidiaries, Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc., and World Commerce Network, LLC.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The operations of World Commerce Network, LLC have been discontinued. All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain prior period balances have been reclassified to conform with current period presentation.  Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Management believes that the estimates used in preparing the financial statements are reasonable and prudent; however, actual results could differ from these estimates.  Significant estimates include the allowance for doubtful accounts, impairment assessments of goodwill, and certain accrued liabilities such as contingent liabilities.  Cash Equivalents The Company considers all highly liquid instruments maturing in three months or less when purchased to be cash equivalents.   20    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION  CONTINUED  Depreciation and amortization Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the assets.  Accelerated methods of depreciation of property and equipment are used for income tax purposes.  GoodwillThe Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, in 2002. Under SFAS No. 142, goodwill is no longer amortized, but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or projected future results of operations. For purposes of financial reporting and impairment testing in accordance with SFAS No. 142, the Companys Intellipay business unit operates in one principal business segment, a provider of online credit card gateway services. In testing for a potential impairment of goodwill, the estimated fair value of the business unit is compared with book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the Company is less than book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks. If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess. In accordance with SFAS No. 142, the Company performed a goodwill impairment test during 2005 and concluded there was no impairment of goodwill.  Fair value of financial instruments The fair value of the Companys cash and cash equivalents, receivables, accounts payable, accrued liabilities and capital lease obligations approximate carrying value based on their effective interest rates compared to current market prices.  Revenue Recognition The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements and its revisions in SAB No. 104.  SAB 101 and 104 clarify application of generally accepted accounting principles related to revenue transactions.  In the third quarter 2003, the Company adopted EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF Issue No. 00-21").    21    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION  CONTINUED  Revenue Recognition  Continued  We receive revenue for hosting, gateway, and maintenance fees, software access and licensing fees, training and education and the sale of merchant accounts as well as custom website design work.  Revenues from up-front fees are deferred and recognized over the period services are performed ranging from eight months to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services are completed (which is generally two months).  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned. Operating lease revenues for merchant accounts and software are recorded as they become due from customers.  The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectibility is reasonably assured.  In an arrangement with multiple deliverables, the delivered item(s) is considered a separate unit of accounting if all of the following criteria are met: (1) the delivered item(s) has value to the customer on a standalone basis, (2) there is objective and reliable evidence of the fair value of the undelivered item(s), and (3) if the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor. If all the conditions above are met and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values.  Cost of salesCost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs. Sales and marketing costsSales and marketing expenses include advertising expenses, seminar expenses, commissions and personnel expenses for sales and marketing. The Company has expended significant amounts on sales and marketing, including national television, radio, and print advertising. Marketing and advertising costs to promote the Company's products and services are expensed in the period incurred. Research and development costsProduct development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department.  Costs incurred by the Company to develop, enhance, manage, monitor and operate the Company's technology services are generally expensed as incurred.  22    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION  CONTINUED  General and administrative costsGeneral and administrative expenses include personnel expenses for executive, finance, and internal support personnel. In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.  Income taxes The Company utilizes the liability method of accounting for income taxes.  Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statement and tax bases of assets and liabilities measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse.  Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.  Stock Based Compensation The Company has applied the disclosure provisions of Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure  An amendment of FASB Statement No. 123, for the years ended December 31, 2004 and 2003.  This Statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation.  In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both interim and annual financial statements about the method of accounting for stock-based compensation and the effect of the method on reported results.  As permitted by SFAS No. 148, the Company continues to account for stock options under APB Opinion No. 25, under which no compensation has been recognized.  The following table illustrates the effect on net losses and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS 148 to stock-based compensation:  Year Ended December 31, 2004 2005 Net loss From continuing operations As reported $  (488,327) (295,873) Pro forma (809,358) (507,332)  Net earnings (loss) As reported $  (488,327) (295,873) Pro forma (809,358) (507,332)  Net earnings (loss) per common share from continuing operations basic and fully diluted As reported $    (0.02) $ (0.00)  Pro forma (0.03) (0.01)  Net earnings (loss) per common share  As reported $   (0.02) $ (0.00)  Pro forma (0.03) (0.01)  23    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION  CONTINUED  Stock Based Compensation - Continued The fair value of these options was estimated at the date of grant using the Black-Scholes American option-pricing model with the following weighted-average assumptions for options granted in 2004 and 2005: expected volatility of 101 percent and 174 percent, respectively; risk-free interest rate of 4.00 percent and 4.23 percent, respectively; ­­­and expected life of 3.5 and 5 years, respectively.  The weighted-average fair value of options granted was $0.05 and $0.11 in 2004 and 2005, respectively.  Option pricing models require the input of highly sensitive assumptions, including expected stock volatility.  Also, the Company's stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable.  Earnings (loss) Per Share The computation of net loss per share of common stock is based on the weighted average number of shares outstanding during each period presented. The Company utilizes the treasury stock method to calculate loss per share.  Potentially issuable common shares totaling 5,334,424 related to options were excluded from the calculation of diluted loss per share because their effects were anti-dilutive for the year ended December 31, 2004.  Potentially issuable common shares totaling 6,802,151 related to options and 1,000,000 related to warrants were excluded from the calculation of diluted loss per share because their effects were anti-dilutive for the year ended December 31, 2005.  The following is the calculation for weighted average common shares used in basic and dilutive net earnings (loss) per share:   Year ended December 31,20042005Common shares outstanding during the period24,587,62228,517,622Weighted average common shares issued266,3422,980,096Weighted average common shares usedin basic earnings (loss) per share24,853,96431,497,718Dilutive effects of potentially issuablecommon shares (warrants)311,1111,158,510Weighted average number of common sharesand dilutive potential common stock usedin diluted earnings (loss) per share25,165,07532,656,228  Recent Accounting Pronouncements In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment.  This Statement revises SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.  SFAS No. 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial  24    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION  CONTINUED  Recent Accounting Pronouncements - Continued statements.  The cost will be measured based on the fair value of the instruments issued.  The Company will be required to apply SFAS No. 123(R) as of the first interim reporting period that begins after June 15, 2005.  Accordingly, the Company will adopt SFAS No. 123(R) in the third quarter of 2005.  Management is currently evaluating the impact SFAS No. 123(R) will have on the Companys results of operations as a result of adopting this new Standard.  NOTE 2   PROPERTY AND EQUIPMENT  Property and equipment includes the following:  December 31,  Estimateduseful20042005life (years)Computer Equipment$              340,760$          350,3383-5Equipment116,710141,3062-10Software93,95898,8471-3Furniture and Fixtures86,78087,7873-10Leasehold Improvements4,5984,980Life of lease642,806683,258Less Accumulated Depreciation(572,424)(602,219)$               70,382$            81,039  NOTE 3  OTHER ASSETS  Other assets include the following: December 31,20042005Purchased customer portfolio$         278,309$       280,309Deposits9,6729,672287,981289,981Accumulated amortization(264,992)(279,476)$           22,989$         10,505   Pacific WebWorks, Inc. has entered into agreements with resellers for the purchase of residual interests in customer hosting and terminal portfolios.  These definite-life intangible assets are being amortized over the period of expected future cash flows these charges are included in cost of sales.  25    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 4  ACCRUED AND OTHER LIABILITIES  Accrued liabilities consist of the following:  December 31, 2004 2005.  Payroll related liabilities $      38,130                $    46,054 Sales contractor commissions 6,766 2,346 Contingent reseller commissions 39,790 - Operating lease in default 90,357 91,522 Refunds and factor 4,426 (16,282) Income tax payable 1,200 900 Other 440               440  $    181,109 $   181,109  NOTE 5  OPERATING LEASE REVENUES  During years ended December 31, 2004 and 2005, certain customers of TradeWorks entered into operating lease agreements that were assigned to FundWorks to purchase e-commerce software and merchant accounts over 24 to 36 months for $59.95 per month.  The leases are non-cancelable and related revenue is recorded monthly as earned.  Future annual minimum lease receipts for FundWorks operating leases as of December 31, 2005 are as follows: Through December 31, 2006 $  321,392 2007 199,094 2008 - Thereafter -. $  520,486  Collectability of future minimum lease receipts cannot be assured as the customers placed in operating leases are of a higher credit risk.  TradeWorks also enters into factoring arrangements for certain sales of e-commerce software and merchant accounts to an outside leasing company with recourse.  Estimated recourse amounts are reduced from the amount funded to the company and netted against sales for reporting purposes as they are not considered realizable.  Additional amounts due under the factoring arrangements are estimated and recorded as an accrued liability (Note 4).  NOTE 6  NOTES PAYABLE / CONVERTIBLE NOTES PAYABLE  During June 2005, the Company entered into Promissory Note agreements with limited liability companies for $200,000.  The notes interest was at 8% per annum, and was due in full including principal and interest on December 31, 2006.  The notes were collateralized by the Companys business assets.   The notes were paid in full during the third quarter 2005.   26    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 6  NOTES PAYABLE  / CONVERTIBLE NOTES PAYABLE - CONTINUED  On October 30, 2005, the Company entered into Promissory Note agreement for $100,000.  The note interest was at 8% per annum, and is due in full including principal and interest on April 30, 2007.  The note is collateralized by the Companys business assets.  NOTE 7 - STOCKHOLDERS EQUITY  Stock Issuance On July 1, 2005, the Company entered into a Unit Purchase Agreement with investors for up-to 4,500,000 units at $0.06 per unit.  A unit consists of one share of the Companys common stock and one warrant for the purchase of an additional share at a specified exercise price. One half of the warrants have an exercise price of $0.12 per share and one half have an exercise price of $0.17 per share.   Warrants are immediately exercisable and will expire one year from the effective date of a registration statement to be filed covering the shares.  During July 2005, 4,166,667 units were purchased resulting in the issuance of 4,166,667 shares of the Companys common stock for total funding of $250,000.  Also in July 2005, investors exercised warrants at $0.12 per share for 2,083,333 shares of the Companys common stock for $250,000 in cash.  Immediately following these transactions warrants representing 2,083,333 shares of the Companys common stock were outstanding at an exercise price of $0.17 per share.  During May and October 2005, the Company issued 230,000 and 408,500 shares of its common stock for payment of $15,000 and $40,850 related to insurance premiums.  During February 2005, the Company issued 20,000 shares of its common stock to purchase a portfolio of recurring service customers and related technology valued at $2,000.  Equity Incentive Plan On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of awards in the form of stock options, stock appreciation rights or restricted shares to employees, independent directors and certain consultants. The Company may grant awards representing up to 7,500,000 shares of the Company's common stock under the Plan.  The Plan has not been approved by the Companys shareholders as of December 31, 2005.  Directors, officers, and employees have been granted options to acquire 6,802,151 shares of the company's common stock and 5,834,651 of the options are exercisable as of December 31, 2005. The options were granted at exercise prices ranging from $0.07 - $2.00 per share.  The options vest periodically through April 2006 and expire through April 2011.       27    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005   NOTE 7 - STOCKHOLDERS EQUITY  - CONTINUED  Equity Incentive Plan - Continued Options to purchase 50,000 shares of the Companys common stock were granted in April 2005 at an exercise price of $0.10 per share. These options vest through October 2005 and expire in April 2010.  Information with respect to the Companys stock options follows: Weighted-average Stock options Exercise price exercise price Outstanding at January 1, 2003 4,696,302 $0.14-$2.00 $0.54 Granted 1,400,000 0.07 0.07 Exercised - - - Forfeited 761,878  0.14-2.00 0.82 Outstanding at December 31, 2004 5,334,424 $0.07 - $1.75 $0.37 Granted 1,935,000 0.12 0.12 Exercised - - - Forfeited 471,773  $0.07 - $1.75 $0.48 Outstanding at December 31, 2005 6,797,651 $0.07 - $0.87 $0.28  Options outstanding Weighted- Number Weighted-average average remaining Exercise price outstanding exercise price contractual life (years) 0.87 40,151 0.87 5 0.75 1,582,500 0.75 4.75 0.23 1,230,000 0.23 1.5 0.14 385,000 0.14 2.75 0.12 1,935,000 0.12 4.75 0.07 1,625,000 0.07 3.75 6,802,151   Options exercisable Weighted- Number Weighted-average average remaining Exercise price exercisable exercise price contractual life (years) 0.87 40,151 0.87 5 0.75 1,582,500 0.75 4.75 0.23 1,230,000 0.87 1.5 0.14 385,000 0.14 2.75 0.12 967,500 0.12 4.75 0.07 1,625,000 0.07 3.75 5,834,651    28    Pacific WebWorks, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 7 - STOCKHOLDERS EQUITY  - CONTINUED  Issuance of Warrants During July 2005, the Company issued warrants to purchase 1,000,000 shares of its common stock to an investor relations firm.  The warrants are immediately exercisable for 500,000 shares at $0.10 and 500,000 shares at $0.15 and expire in July 2008.  The fair value of this transaction totals $9,832 which has been estimated using the Black Scholes option-pricing model and recorded as a general and administrative expense.  As discussed above, during July 2005, the Company issued warrants to purchase 2,083,333 shares of its common stock at $0.12 per share and warrants to purchase 2,083,333 shares of its common stock at $0.17 per share.  The warrants were issued in conjunction with a common stock transaction.  A total of 2,083,333 warrants were exercised in July 2005 for $250,000 in cash.  As of December 31, 2005, warrants to purchase a total of 1,000,000 shares of the Companys common stock are outstanding and exercisable at a price of $0.17 per share.  NOTE 8  DISCONTINUED OPERATIONS  The following includes the net current liabilities for the Companys discontinued operations as of December 31, 2004 and December 31, 2005: WorldCommerceNetwork, LLCASSETSCurrent assets$                    -Long-term assets-Total assets$                   -LIABILITIESPayables past due64,010Accrued liabilities171,264Total current liabilities$        235,274Net current liabilities$        235,274  Discontinued subsidiary  World Commerce Network, LLC In July 2002, the Board of Directors of Pacific WebWorks, Inc. resolved to discontinue World Commerce Network, LLC and set forth a formal plan of disposal.  Negotiations and settlements of World Commerce liabilities are currently underway as the LLC is phasing out its related operations.  World Commerce Network became a consolidated entity with the Company in March 2000.  Other current liabilities Other current liabilities of World Commerce Network, LLC consist of estimated customer refunds approximating $56,000 and estimated contingent liabilities from the legal matter noted below approximating $95,000 as of December 31, 2005.   29    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 8 DISCONTINUED OPERATIONS - CONTINUED  Pending litigation In September 2002, World Commerce Network, LLC received a complaint from a leasing company for recourse obligations funded for customer leases during 2000 for seminar related activities.  The agreement between World Commerce Network and the leasing company provides for recourse on leases in which customers have not made first payment.  Estimated recourse obligations for World Commerce Network approximate $95,000 at December 31, 2005 and December 31, 2004 and have been recorded as an accrued liability.  Management believes that the recorded liability for this matter is sufficient to cover any resulting judgment from this claim.  In April 2001, one of World Commerce Networks former vendors filed a complaint alleging default under a certain application for credit and personal guaranty made by a former officer of the Company.  The vendor seeks approximately $65,000 plus interest.  The Company is defending the claim and believes the amount should be reduced based upon the vendors performance and other disputes.  The Company has filed an answer to the complaint and further litigation is pending.   The Company has recorded amounts in the consolidated financial statements representing its estimated liability for this matter.  Management believes that the amount recorded is sufficient to cover the resulting liability from this complaint.  NOTE 9  OPERATING COMMITMENTS  Operating lease in default In June 2002, in conjunction with the migration of the Intellipay operations to our Salt Lake City facilities, Intellipay, Inc. defaulted on its operating lease for office space in Fremont, California.  The lease agreement required payment of approximately $6,000 per month plus applicable late fees and interest through December 2003 when the lease expired.  As of December 31, 2005, Intellipay, Inc. has recorded an accrued liability of approximately $91,522 related to the months of office lease under default, less months re-leased by the property manager to others, including estimated interest and late fees. The Company is not aware of any legal proceedings related to this lease and does not anticipate any legal action to be taken.  Operating leases The Company has entered into a lease agreement for the lease of office space for its operations in Salt Lake City, Utah.  The lease requires $8,400 per month from January 2005 through expiration in December 2006.  Rent expense for the Salt Lake offices for the years ended December 31, 2004 and 2005 approximates and $100,000 and $100,000 respectively.  The following is a schedule of future minimum lease payments under the operating lease:  Year ended Lease December 31, Commitment 2006 $  101,760 Thereafter - $  101,760  30    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 9  OPERATING COMMITMENTS - CONTINUED  Other matters The Company is involved in other various disputes and legal claims in the normal course of business.  It is not possible to state the ultimate liability, if any, in these matters.  In the opinion of management, any resulting litigation will have no material effect on the financial position and results of operations of the Company in excess of amounts recorded.  NOTE 10 - INCOME TAXES  The company has sustained losses in all periods presented. Consequently, there is no income tax provision or benefit for the periods presented. Reconciliation of income taxes computed at the federal statutory rate and income tax expense are as follows:   12/31/2005Federal income taxes at statutory rate$            (100,597)State income taxes net of federal benefit$                (9,704)Change in the Valuation Allowance$               89,671$                         -Other$               20,630Total$                       (0)Deferred taxes consist of the following:Deferred Tax Assets:Allowance for doubtfull accounts$               36,402Net operating loss carryforwards$          3,536,767Excess book depreciation and amortization$               61,557Capital loss Carryforwards$             219,530Deferred expenses$               31,506$          3,885,762Less valuation Allowance$         (3,885,762)Net Tax Assets$                         -     31    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 10 - INCOME TAXES - CONTINUED  The Company has sustained net operating losses in all periods presented.  There were no deferred tax assets or income tax benefits recorded in the financial statements for net deductible temporary differences or net operating loss carryforwards because the likelihood of realization of the related tax benefits cannot be established. Accordingly, a valuation allowance has been recorded to reduce the net deferred tax asset to zero. The increase in the valuation allowance was $89,671 for the year ended December 31, 2005.  As of December  31, 2005, the Company had net operating loss carryforwards for tax reporting purposes of approximately $9,700,000 expiring through 2025. As of December 31, 2005 the Company had a federal capital loss carryforward for tax reporting purposes of approximately $650,000 expiring in 2008.  NOTE 11 - SEGMENT REPORTING  Although the Company operates in one business segment, the production and distribution of business e-commerce software, management reports by individual business unit.  Segment reporting by business unit follows:  Year endedPacificTradeFund-December 31, 2004aWebWorksIntellipayWorksWorksTotalRevenues, net$1,081,089$ 484,339$1,936,246$  115,812$3,617,486Income (loss) from continuingoperations before income tax(173,418)75,635(402,077)11,233(488,627)Net income (loss)$ (174,547)$ 75,565$(401,951)$ 12,306$(488,327)Assets$3,548,859$39,191$ 193,755$17,783$3,799,588  aAmounts exclude all intercompany receivables, payables, revenues and expenses. The Company does not allocate assets or expenses in between individual business units.             32    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005   NOTE 11 - SEGMENT REPORTING  CONTINUED  Year endedPacificTradeFund-December 31, 2005aWebWorksIntellipayWorksWorksTotalRevenues, net$1,385,647$542,899$3,746,691$239,109$5,914,346Income (loss) from continuingOperations before income tax(177,939)97,555(319,015)103,526(295,873)Net income (loss$(176,702)$ 97,269$(319,966)$103,526$ (295,873)Assets$ 3,846,604$20,627$386,842$114,010$ 4,368,083     ____________________________________________________ aAmounts exclude all intercompany receivables, payables, revenues and expenses. The Company does not allocate assets or expenses in between individual business units.  NOTE 12 - MARKET RISK  We rely on the efforts of third party resellers to add accounts to our customer base.  A significant portion of our customer accounts were provided by previous Pacific WebWorks and Intellipay resellers who no longer resell our products and services.  While we continue to add additional resellers, including the Companys TradeWorks Marketing subsidiary, we are primarily dependent upon further addition of reseller distribution channels for future sales growth.  NOTE 13  SUBSEQUENT EVENTS  No significant subsequent events have taken place since December 31, 2005.  NOTE 14   RESTATEMENT  We have restated our financial statements for the years ended December 31, 2005 to reflect certain issues identified in connection with a regulatory review by the Securities and Exchange Commission (SEC) of our Form 10-KSB for the year ended December 31, 2005. Our management and our board of directors have concluded that these restatements are necessary to reflect the changes described below.  v During the year ended December 31, 2005, we recognized revenue from customers based upon a face-to-face discussion with the customer, a signed contract, the direct receipt of credit card information or ACH data to facilitate collection.  We delivered our service to the customer for a period of thirty (30) days and we recognized revenue and created a receivable on billing.  At the time of the billing we had no way of knowing exactly which customers or how many customers would not pay us.  After a customer did not pay, we allowed the customer an additional thirty (30) days before discontinuing their service and writing-off their receivable.  33    Pacific WebWorks, Inc. and Subsidiaries  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2005  NOTE 14  RESTATEMENT - continued  v During a regulatory review of our annual report on form 10KSB, it was brought to the Companys attention that absent any additional evaluation procedures, approval from the financial institutions or a subsequent cash receipt appeared to have been our first and only verifiable evidence suggesting that collection was reasonably assured.   Upon further review, management determined that it was not proper, under GAAP, to recognize revenue upon billing, given the short time period between billing and rejection and the frequency in which these fees were not collected.  v In order to properly state the Companys revenue we have corrected the error in accounting for revenue and the subsequent write-off of bad debt.  The effect of this correction is a reduction of the Companys revenue and bad debt expense by $655,437.  The correction of the error will have no affect on the Companys net loss for the period ended December 31, 2005. Accordingly, our financial statements have been restated as follows (restatement amount in change column):   34     Pacific WebWorks, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF OPERATIONSYear Ended December 31, 2005AsOriginally ReportedAs RestatedChangeRevenues, netSoftware, access and license fees$1,392,093$1,392,093-Hosting, gateway and maintenance fees1,814,5501,159,113(655,437)(a)Training and education1,219,2311,219,231-Merchant accounts, design and other1,488,4711,488,471-5,914,3465,258,908(655,437)Cost of sales1,771,7251,771,725-Gross profit4,142,6203,487,183(655,437)Selling expenses2,362,6942,362,694-Research and development264,829264,829-General and administrative1,842,2621,186,826(655,437)(b)Depreciation and amortization29,79529,795-Total operating expenses4,499,5803,844,144(655,437)Net loss from operations(356,960)(356,960)-Other income (expense)Interest income11,81711,817-Other income (expense), net49,27049,270-61,08761,087-Net income (loss) from continuing operationsbefore income taxes(295,873)(295,873)-Income Taxes---Net income (loss) from continuing operations(295,873)(295,873)---Discontinued operations--Gain (loss) from operations (net of income tax)---Gain on disposal (net of income tax)---Total gain (loss) from discontinued operations-NET LOSS$(295,873)$(295,873)-Net loss per common share - basic and dilutiveNet income loss from continuing operations$     (0.01)$    (0.01)-Gain from discontinued operations---Net earnings (loss)$     (0.01)$     (0.01)-Weighted-average number of shares outstandingBasic31,497,71831,497,718-Dilutive32,656,22832,656,228-(a) Decrease in sales from reclassification of bad debt(b) Decrease in expenses from reclassification of bad debt   35     Pacific WebWorks, Inc. and SubsidiariesCONSOLIDATED STATEMENTS OF CASH FLOWSYear Ended December 31, 2005As OriginallyReportedAs RestatedChangeIncrease (decrease) in cash and cash equivalentsCash flows from operating activitiesNet earnings (loss)$     (295,873)$  (295,873)-Adjustments to reconcile net earnings (loss)to net cash used in operating activitiesDepreciation & amortization29,79529,795-Issuance of  options and warrants for compensation9,8329,832-Bad debt expense828,437173,000(655,437)(a)Changes in assets and liabilitiesReceivables(1,001,180)(345,742)655,437(b)Prepaid expenses and other assets(8,756)(8,756)-Accounts payable and accrued liabilities(50,940)(50,940)-Deferred revenue247,628247,628-Total adjustments54,81654,817-Net cash provided by continuing operating activities(241,056)(241,056)-Cash flows from investing activitiesPurchases of property and equipment(40,452)(40,452)-Cash on reserve with bank(26,953)(26,953)-Net cash provided by (used in) investing activities(67,405)(67,405)-Cash flows from financing activitiesProceeds from notes payable100,000100,000-Proceeds from convertible notes payable200,000200,000-Payments on convertible notes payable(200,000)(200,000)-Proceeds on issuance of stock250,000250,000-Proceeds on exercise of warrants250,000250,000-Net cash used in financing activities600,000600,000-Net increase in cash and cash equivalents291,539$      291,539-Cash and cash equivalents at beginning of period452,983452,983-Cash and cash equivalents at end of period$       744,522744,522-Supplemental disclosures of cash flow information:Cash paid for interest$                 -$              --Cash paid for income taxes800800-Non-cash financing activities:-Issuance of stock for prepaid insurance policies55,84955,849-Reseller note settlement---(a)  Decrease from reclassification of bad debt(b)  Increase from reclassification of bad debt  36       ITEM 8A.  CONTROLS AND PROCEDURES  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC.  This information is accumulated and communicated to our executive officers to allow timely decisions regarding required disclosure.  Our Chief Executive Officer, who also acts in the capacity of our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, he concluded that our disclosure controls and procedures were effective.  As the result of an SEC regulatory review, our Chief Financial Officer determined that we change our revenue recognition policy for the year ended December 31, 2005, which resulted in a restatement of our financial statements for that year.  Other than this change in revenue recognition policy, there were no other changes made in our internal controls over financial reporting during the fourth quarter of 2005 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.   PART III  ITEM 13.  EXHIBITS  No. Description 3.1 Articles of Incorporation, as amended (Incorporated by reference to exhibit No. 3.1 for Form 10-Q filed November 13, 2001) 3.2 Amended and Restated Bylaws of Pacific WebWorks, Inc. (Incorporated by reference to exhibit No. 3.2 for Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 4.1 Unit Purchase Agreement between Pacific WebWorks and Investors, dated July 1, 2005 (Incorporated by reference to exhibit 4.1 to Form 10-QSB, filed August 12, 2005) 4.2 Form of Unit Warrants, dated July 1, 2005 (Incorporated by reference to exhibit 4.2 to Form 10-QSB, filed August 12, 2005) 10.1 Master Service Agreement between Electric Lightwave, Inc., and Utah WebWorks, Inc., dated February 2, 1998  (Incorporated by reference to exhibit No. 10.1 for Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 10.2 Internet Access Agreement, Addendum to Master Service Agreement between Electric Lightwave, Inc., and Pacific WebWorks, Inc., dated January 1, 2002 (Incorporated by reference to exhibit No. 10.2 for Form 10-K, filed March 26, 2002) 10.3 Lease Agreement between Pacific WebWorks, Inc. and Westgate Business Center, dated November 20, 2003 (Incorporated by reference to exhibit 10.3 for Form 10-KSB, filed March 22, 2004) 10.4 Form of employment agreement for executive officers, dated April 1, 2004 (Incorporated by reference to exhibit 10.5 for Form 10-KSB, filed March 31, 2005) 10.5 Consulting agreement between Pacific WebWorks and Chesapeake Group, Inc., dated July 1, 2005 (Incorporated by reference to exhibit 10.5 to Form 10-QSB, filed August 12, 2005) 10.6 Registration Rights Agreement between Pacific WebWorks and Unit Investors, dated July 1, 2005 (Incorporated by reference to exhibit 10.6 to Form 10-QSB, filed August 12, 2005) 21.1 Subsidiaries of Pacific WebWorks (Incorporated by reference to exhibit 21.1 for Form 10-QSB, filed November 13, 2003) 31.1 Chief Executive Officer Certification 31.2 Principal Financial Officer Certification 32.1 Section 1350 Certification      37    SIGNATURES  In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  Date: September 24, 2007Pacific WebWorks, Inc.



By: /s/ Christian R. Larsen
Christian R. Larsen, President    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.  Date: September 24, 2007/s/ Christian R. Larsen
Christian R. Larsen
President and DirectorDate: September 24, 2007/s/ Kenneth W. Bell
Kenneth W.  Bell
Chairman of the Board, Chief Executive Officer,
Principal Financial and Accounting Officer and TreasurerDate: September 24, 2007/s/ R. Brett Bell
R. Brett Bell
Secretary and Controller   38