**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-K**

**[X]**

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

For the fiscal year ended December 31, 2009

OR

**[  ]**

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

For transition period ___ to ____

Commission file number: 000-26731

**PACIFIC WEBWORKS, INC.**

(Exact name of registrant as specified in its charter)

| Nevada                                                                                    

(State or other jurisdiction of incorporation or organization)

87-0627910                                       

(I.R.S. Employer Identification No.)

 230 West 400 South, Salt Lake City, Utah 

(Address of principal executive offices)

84111         

(Zip Code)

Registrant’s telephone number:  (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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes [   ]   No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.         Yes [   ]   No [X]

Indicate by check mark whether the registrant (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 [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  [  ]   No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K 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-K or any amendment to this Form 10-K.   [   ]

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer [  ]

Non-accelerated filer [  ]

Accelerated filed [  ]

Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [  ]   No [X]

The aggregate market value of the 41,663,895 shares of voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on June 30, 2009, was approximately $5,578,076.

The number of shares outstanding of the registrant’s common stock as of March 15, 2009, was 45,123,895.

Documents incorporated by reference:  None

**TABLE OF CONTENTS**

PART I

Item 1.  Business

3

Item 1A.  Risk Factors

9

Item 2.  Properties

13

Item 3.  Legal Proceedings

13

Item 4.  [Reserved]

14

PART II

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters 

and Issuer Purchases of Equity Securities

14

Item 6.  Selected Financial Data

15

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations         15

Item 8.  Financial Statements and Supplementary Data

21

Item9.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40

Item 9A(T).  Controls and Procedures 

40

Item 9B.  Other Information

40

PART III

Item 10.  Directors, Executive Officers and Corporate Governance

41

Item 11.  Executive Compensation

42

Item 12.  Security Ownership of Certain Beneficial Owners and Management

and Related Stockholder Matters

44

Item 13.  Certain Relationships and Related Transactions, and Director Independence

46

Item 14.  Principal Accounting Fees and Services

47

PART IV

Item 15.  Exhibits, Financial Statement Schedules

48

Signatures

49

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*In this annual report references to “Pacific WebWorks,” “we,” “us,” “our,” and “the Company” 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,”  “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 I**

**ITEM 1.  BUSINESS**

***Historical Development***

The company was incorporated in the state of Nevada on May 18, 1987, as Asphalt Associates, Inc. and changed its name to Pacific WebWorks, Inc. in January 1999.  

***Pacific WebWorks’ Business*** 

Pacific WebWorks is an application service provider and software development firm that develops business software technologies and services for business merchants and organizations using Internet and other technologies.  We specialize in turnkey applications allowing small to medium sized businesses to expand over the Internet.  Our product family provides tools for web site creation, management and maintenance, electronic business storefront hosting and Internet payment systems for the small to medium sized business and organization.  Additionally, we have integrated our product with many of the popular online auction/sales portals enabling our customers to easily sell their products at these portals using our Visual WebTools product.

We initially focused entirely on virtual retailing software solutions, meaning merchants that do not have a physical store location and would exist only on the Internet.  Due to requests in the marketplace, we expanded our technologies to include features for small to medium-sized physical “brick and mortar” entities, in addition to our virtual merchants. This is expected to give these businesses and other organizations a complete solution for all physical store and Internet concerns and at the same time reduce the costs of operations and introduce new profit centers for them. 

We have four wholly-owned subsidiaries:  Intellipay, Inc., TradeWorks Marketing, Inc., and FundWorks, Inc, which are all Delaware corporations, and Pacific WebWorks International, LTD, a United Kingdom limited company.  Intellipay specializes in providing online, secure and real-time payment processing services for businesses of all sizes.  TradeWorks Marketing was incorporated to mass market our products and services.  FundWorks, Inc. is dormant, but previously provided operating lease arrangements for certain TradeWorks’ customers.  In July of 2007 we formed Pacific WebWorks International, LTD to market our products and services in Europe and also provide a vehicle for the establishment of offshore credit card processing capabilities.  To date we have not initiated any of these activities offshore.  We also hold a non-operating, discontinued operation, World Commerce Network, LLC.

***Our Products***

Even though small business, including small office/home office, typically understands how traditional brick and 

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mortar businesses operate, we believe they need assistance in order to replicate business processes effectively and economically using the Internet.  Pacific WebWorks assists small businesses in succeeding online through our Visual WebToolsTM software; including our eBay submission tool, the Intellipay payment systems and our hosting services.

We provide a comprehensive one-stop solution that incorporates our integrated suite of e-commerce software tools, plus hosting, site management, and web design services.  By leveraging a shared commerce platform across many customers, we bring economies of scale to our customers.  We believe this structure allows our customers to focus on their business instead of technology, enabling them to achieve a much faster return on investments made in technology and to experience more success on the Internet.

***Pacific WebWorks Product Characteristics***

*Visual WebToolsTM Version 4.1 (“V4.1") -*V4.1 is a suite of software programs that fit together to perform the basic business functions we believe are the most effective on the Internet.  The following products are included as part of this suite.

*WebWizard* is an easy-to-use web page design program that possesses a simple user interface and templates for the novice, yet it has a very powerful additional functionality for web design professionals.  In February 2010 we released WebWizard 5 and it incorporates sophisticated site components like tables, frames, flash and other multimedia capabilities in a straightforward, menu driven process.  No complicated programming skills are required to use the WebWizard tool.  Our customers can manage their sites’ layout, colors, contents, tables, and graphics easily. WebWizard includes a library of hundreds of graphics that are freely accessible by our customers.  WebWizard allows our customers to quickly and easily create, update, modify, and enhance their web sites and it integrates with social media outlets such as Twitter, Facebook and MySpace.  Changes can be uploaded to our servers within minutes 24 hours a day, 7 days a week from any Internet-connected Microsoft Windows® computer. 

*ClipOn CommerceTM*is an e-storefront and product management system, complete with shopping cart technology.  ClipOn Commerce allows our customers to build an Internet storefront.  They can create a complete product catalog, organize and search products by unlimited categories and import/export to and from their database.  ClipOn Commerce is designed to function with a third party merchant account and is integrated with our Intellipay payment system, which allows our clients to accept all major credit cards online.  ClipOn Commerce has support for QuickBooks® accounting software enabling our customers to update between their accounting records and Internet storefront.  ClipOn Commerce also features UPS shipping integration.

*WebContacts*is a contact management program.  Companies that use our system can utilize WebContacts to organize information about all the entities they do business with, including customers, suppliers, distributors, potential customers, etc.  WebContacts will also enable them to capture information about people who visit their web site, if those visitors elect to supply contact information at the site.  This database functionality enables our customers to be more effective when using the web as a marketing and communications tool. 

*WebChannels* is an e-mail distribution program that enables our customers to send customized e-mails in either plaintext or HTML format to their WebContacts database of visitors.  Since email is the most popular activity on the web, and one of the most effective forms of Internet marketing, WebChannels provides our customers with a practical tool with which to promote their businesses.  For example, by using WebChannels, a client could easily send out a weekly newsletter, coupons or special offers to an entire customer base, certain visitor types or to a segment of their customers 

*Web Profiling Tool*is a form and survey creation tool that helps capture feedback and valuable demographic information from customers and web site visitors.  Our clients can create customizable forms, surveys and interactive questionnaires. The web profiling tool includes a catalog of pre-designed questions, such as education level, hobbies, satisfaction level, etc.  The profiling forms may also be custom created by our customers.

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*WebStats*enables our customers to analyze visitor activities on their web sites in order to track pages viewed, hits, time of access, etc.  WebStats is a statistics program that provides detailed reports and graphs related to referring pages, geographic location of visitors, browsers and the operating systems web site visitors are using, what web pages generate hits, and what pages are the most popular.  WebStats can produce reports of business information, including year-long trends and the effectiveness of the clients’ sites.

*Auction Connection*is a module that allows Visual WebTools users to list inventory items with eBay at the click of a button.

*Increase My Margin*is a tool that allows eBay users to quickly and effectively analyze information and data related to the sale of thousands of products sold on eBay over a period of time.  

***Intellipay Product Characteristics***

*IntellipayTM Payment System -* This group of products offers payment technologies for business-to-business and business-to-customer uses on the Internet and in physical store locations.  These products allow our customers to accept real time credit card payments from their web site, Internet appliances, kiosks or at remote locations through their Nextel cell phone or at the physical point of sale.  The Intellipay products use the same standards as all major commerce sites, including industry standard security components and methods and it has been tested under strict banking network procedures.  Point-of-sale professionals provide technical support and ePayment professionals can even help the business locate an Internet-approved merchant account if needed.  Once customers enter the necessary data in a secure form, Intellipay quickly processes the transaction in real-time (2 to 5 seconds) and returns the customer back to the business site.  Intellipay also provides methods for enterprise-level businesses to link Intellipay products, services and features into their ecommerce web sites and transmit transactional data for use in back-office systems.  Intellipay is entirely compliant with PCI 2.0, which is a combined security regulation for VISA and Mastercard.

*ePayment System*supports all major card types including Visa, MasterCard, American Express, Discover, Diners Club and JCB.  Also, support is provided for Visa and MasterCard debit (check) cards and Level Two corporate/commercial cards through various bank networks.  Transaction types include industry standard transactions such as normal authorizations, pre-authorizations intended for delayed settlement, the so-called “force” allowing a transaction authorized offline (possibly a voice authorization) to be settled, credits for refunds and Intellipay’s innovative address verification system allows merchants to retrieve a score and verify the account validity.

This Intellipay product allows our customers to control transaction level behavior depending on AVS scores, duplicate transaction attempt detection, and more.  Intellipay also automatically settles merchant batches nightly so our customers are freed from forcing settlement via manual or programmatic methods, which also helps reduce our customer’s costs by settling within the 24-hour window mandated by most merchant accounts.  The Intellipay system is fully transportable meaning that a customer can switch web site hosting companies, move between most e-commerce software programs or change to or from many merchant account providers.  Our products can grow and change with our customer at little or no additional charges and with minimal technology issues.

*ExpertLinkTM*is Intellipay's proprietary connection protocol for high-volume Internet businesses requiring reliable, high velocity real-time transaction authorizations linked to their own secure web site and/or back office systems. ExpertLink is a standards-based secure communications method allowing web developers and application developers to build in the ePayment processing and various features, including batch management commands, duplicate transaction detection and management, and more.  Our customers usually purchase ExpertLink or LinkSmart, and both come with Smart Terminal and the Secure Account Management System.

*LinkSmartTM* gives our online customers the ePayment features with minimal technical installation on their side. With LinkSmart, our customer does not need to pay for installation and maintenance of expensive secure servers since LinkSmart serves the secure, customizable payment pages for them.  LinkSmart offloads many 

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expensive mission-critical e-commerce tasks from the merchant. 

*Smart TerminalTM*allows our customers to securely log into their Intellipay account from any Internet browser and authorize manual transactions and orders they have received through offline methods.  Smart Terminal supports industry-standard transactions including normal authorizations, authorization-only for delayed settlement, settlement for non-Intellipay authorized transactions, credits, partial credits and more. Most clients receive Smart Terminal along with LinkSmart or ExpertLink, but Smart Terminal can also be purchased as a stand-alone product.

*Secure Account Management System (“SAMS”)*allows Intellipay customers to securely log into Intellipay's Secure Account Management System from any web browser to configure and control various Intellipay components and behaviors. They can manage today's authorized transaction batches, control passwords, enforce transaction data components, control various features such as our new duplicate transaction detection and management system, control email transaction receipts, access Smart Terminal, control LinkSmart payment page contents, target returning live data streams, configure Visa-required invoice numbering, and more.  Customers can also view transaction histories for any day in the past 180 day period.

*IntelliPay Desktop Terminal (“IDT”)*brings all of the functionality of a Virtual Terminal application to your desktop while supporting hardware such as a card reader and receipt printer.  This allows merchants to receive a qualified discount rate on their transactions and save hundreds of dollars in equipment and processing fees.  They can also take advantage of sharing printers on their network allowing several terminals to print to the same receipt printer, reducing the amount of hardware they need to purchase.

*IntelliPay Wireless Terminal (“IWT”)* submits wireless transactions with retail qualifications using Nextel data service.  This allows a merchant to accept either swiped or keyed transactions using a Nextel Cellular / Data phone using a card reader. The merchant has all of the benefits of retail rates with the added value of visual batch management and settlement process.  IntelliPay Wireless Terminal is the perfect solution for all mobile merchants that also use a cellular phone.

***Other Services and Products***

Technical Support is offered via online chat or e-mail from 8 a.m. to 7 p.m. (MST), or by phone from 8 a.m. to 5 p.m. (MST).

Hosting Infrastructure allows us to host our customers’ web sites, therefore eliminating the cost of hardware investment and maintenance for them.

Domain Names are offered to customers online at retail prices.  These include “.com,” “.org,” “.biz,” “.net,” “.us” and “.info.”

Additionally, during 2008 and 2009 we launched several new product offers including:

·

Amazing WebStores – allows users to set up a store to sell Amazon products directly from their web site.

·

 “eSuccess2U.com” – our revolutionary new proprietary e-mail marketing system. 

·

“Forex GTG.com.” –  a state of the art foreign exchange offer which teaches people how to trade in the foreign exchange markets.

These products have received an enthusiastic reception in the marketplace and have been a positive addition to our portfolio of virtual products. 

***Sales and Marketing***

We market and sell our products primarily through a variety of online marketing partners and programs. We believe we are developing a substantial presence in our target market through a combination of broad channels of 

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distribution, marketing strategy, unique proprietary technology, technical expertise, and full service hosting and web site maintenance.  It is our opinion that in the past businesses which have attempted to maintain interactive web sites and conduct business on the Internet have either developed technical expertise themselves, paid employees to create and maintain their web sites, or retained contract “web professionals” to do so.  We believe our products allow small businesses to participate in Internet commerce by creating and managing their own Internet web sites and storefronts at a reasonable cost. 

We do not believe that our competitors are effectively targeting our market niche: A totally Internet based, end-to-end business solution for small- and medium-sized businesses.  We believe that our products will allow businesses to generate leads, sell products, run sales promotions, capture demographic information about web site visitors, communicate with web site visitors, and obtain intelligent information about who is visiting their web sites and what they are doing while they are there.  Our products allow our customers to stay in complete control of their web sites and provide tools that can facilitate a successful Internet experience for them.   

***Competition***

Our market is quickly evolving, is very competitive and subject to rapid technological change.  We expect competition to persist, increase, and intensify in the future as the markets for our products and services continue to develop and as additional companies enter our markets.  Many companies are now providing Internet services to small businesses.  Our success in our target market will depend upon our ability to establish successful ongoing marketing programs, build name brand recognition and to provide quality, cost-effective products and services to our customers.  

At the present time, we have not identified any other companies that are using an identical approach to ours.  Nonetheless, it is probable that larger interests will choose to enter the market we are developing or that a new market may emerge.  Although we feel the market is vast and should accommodate many technology providers, we may not be able to compete effectively with current and future competitors. 

In our estimation, few major competitors currently offer products comparable to the Visual WebToolsTM product family.  We believe that our product provides a comparable service for a lower price than that provided by our competitors.  In addition, because we have focused our efforts on small businesses, including providing Internet tools which allow businesses to develop their own web sites, we believe that we will be better able to address our customer’s site development needs. 

Our Intellipay payment system competes with AuthorizeNet products and certain VeriSign products, along with other companies that provide e-commerce solutions.  Our ability to successfully compete will depend upon a number of factors, including:

•

our ability to successfully maintain and sell existing products; 

•

our ability to conceive, develop, improve, and market new products;

•

our ability to identify and take advantage of emerging technological trends within our target markets;

•

our ability to respond effectively to technological changes or new product announcements by competitors;

•

our ability to carve out “niche” markets in combination with our technologies;

•

our ability to recruit resellers who can market and sell our products and services in significant volumes to the market;

•

our ability to maintain satisfactory relationships with our online marketing partners; and

•

our ability to manage and maintain our merchant accounts.  

We believe that we will need to make significant expenditures for research and development and marketing in the future to compete effectively. 

***Major Customers***

Our client base includes approximately 30,000 active customer accounts.  We rely on the efforts of our internal 

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marketing staff and on third party resellers, including our wholly-owned reseller, TradeWorks Marketing, to add accounts to our customer base.  In the past 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 resellers, we are now primarily dependent upon our internal marketing staff and our online marketing partners for our product sales. 

***Trademark, Licenses and Intellectual Property***

We own trademarks for Visual WebToolsTM (United States Patent and Trademark Office Serial No. 567,136) that we acquired and became responsible for upon our merger with Utah WebWorks.  In addition we have trademarks for Pacific WebWorksTM and ClipOn CommerceTM.  

On August 2, 2007 we received notice of acceptance and acknowledgment from the U.S. Department of Commerce Patent and Trademark Office validating our registration of a trademark for “Intellipay.”  The mark has been renewed for 10 years subject to constructive notice by July 24, 2013 of our claim to exclusive ownership. 

On August 30, 2007 we received notice of acceptance and acknowledgment from the U.S. Department of Commerce Patent and Trademark Office validating our registration of a trademark for “Increase My Margin.”  The mark has been registered for 10 years subject to constructive notice of our claim to exclusive ownership by August 13, 2013.

Our success will depend, in part, on our ability to obtain and protect our trademark and trade secrets and operate without infringing upon the proprietary rights of others in the United States and other countries.  If we were to become involved in a dispute regarding our intellectual property, it may become necessary for us to participate in interference proceedings before the United States Patent and Trademark Office to determine whether we have a valid claim to the rights involved.  We could also be forced to seek a judicial determination concerning the rights in question.  These proceedings could be costly and time consuming, even if we were to eventually prevail.  Should we not prevail, we could be forced to pay significant damages, obtain a license to the technology in question, or stop marketing one or more of our products.  

All of our core technology was developed internally by either our engineers or by the engineers of Utah WebWorks and Intellipay.  Other than Internet connectivity and other information technology infrastructure, the performance of our products does not significantly rely on any third party technology, although we continue to support as many third party technologies as possible.

We also rely upon trade secrets, proprietary know-how, and confidentiality provisions in agreements with employees, consultants, and resellers to protect our intellectual property rights.  There are risks that these other parties may not comply with the terms of their agreements with us, and that we may not be able to adequately enforce our rights against these parties.  We have adopted a policy of requiring our employees and resellers to execute confidentiality agreements when they commence employment with us or resell our products.  These agreements generally provide that all confidential information developed or made known to the employees or resellers during the course of their relationship with us is to be kept confidential and not disclosed to third parties, except under certain specific circumstances.  In the case of employees, the agreements also provide that all inventions conceived by the employees in the course of their employment will be our exclusive property.

***Research and Development*  **

We continue to improve our existing products and release new related products.  During the year ended December 31, 2009, we recorded research and development expense of $422,829 primarily related to the maintenance of our technologies and the development of our new offerings.  During the year ended December 31, 2008 we recorded research and development expense of $303,502.

 

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***Material Contracts*  **

In March 2007 we entered into a telecommunications and Internet access agreement with Verizon Business Services, Inc. (“Verizon”).  The Verizon agreement, accepted on October 9, 2007, provides local and long distance telephone service and Internet service from 10MB burstable to 45MB to our principle offices. 

On September 21, 2009 we entered into an agreement with XO Communications to install new fiber optics and electronics into our principle offices.  This new connection will provide four times the bandwidth we had relied upon during 2008 and 2009.  Construction is expected to commence in April 2010 and will be followed by a two year contract. 

***Employees*  **

As of the date of this filing Pacific Webworks has 24 employees in Pacific WebWorks.  We have five employees in administration, three in sales, marketing and design, two in operations, three development engineers and eleven customer service personnel.  Our employees are not presently covered by any collective bargaining agreement.  We have not experienced any work stoppages and believe that our relations with our employees are good. 

**ITEM 1A.  RISK FACTORS**

***Factors Affecting Future Performance***

We may experience difficulty maintaining sufficient credit card processing capabilities to keep up with our growth.

We rely upon our credit card merchant accounts to collect our monthly hosting payments and many of the limitations imposed upon us by the credit card associations, in the opinion of management, are unreasonable and unnecessarily confining.  In the past, these merchant account limitations have forced management to restrict our business growth and this restriction of growth continues to impact our earnings in a negative manner.   To address this issue we sold a portion of our hosting portfolio that was in excess of merchant account limitations to a related party and may be required to take this action in the future.

We may need additional external capital and may be unable to raise it.

Based on our current growth plan we believe we will be able to support our operations from existing cash balances and future cash flows for at least the next twelve to twenty-four months.  Our success will depend upon our ability to generate future cash flows and, if needed in the future, the 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 business opportunity 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 

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needs. We expect competition 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 

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products and services do not perform as anticipated.

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: 

*

fire

*

earthquake,

*

power loss,

*

terrorist attacks,

*

harmful software programs,

*

telecommunications failure, and

*

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 products among 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 

11

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 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. 

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.

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. 

Our industry is experiencing increased legal actions related to Internet marketing strategies and our financial condition may be at risk due to such legal actions.

We have experienced increased legal actions during 2009 related to marketing strategies and these legal actions have required our cash flows to be directed to our defense.  Our marketing strategies rely upon resellers and affiliate marketers and these third parties may lack sufficient knowledge regarding proper marketing activities.  As a result, we have been included in litigation alleging violations of consumer protection and federal RICO laws, fraud and use of deceptive trade practices.  These contingent liabilities may increase our cost of doing business.  

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 

12

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. 

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.

If we fail to achieve and maintain the adequacy of our internal control over financial reporting, 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 (“Section 404").   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.  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.  

Pursuant to Section 404, in our annual report for the year ended December 31, 2010 we will be required to provide an attestation from our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting.  We cannot assure you as to our independent registered public accounting firm’s conclusions at December 31, 2010 with respect to the effectiveness of our internal control over financial reporting and there is a risk that our independent registered public accounting firm will not be able to conclude at that time that our internal controls over financial reporting are effective as required by Section 404. 

**ITEM 2.  PROPERTIES**

Our principal offices, including our main office and data center, are located in Salt Lake City, Utah.  In October 2009 we offered to purchase the office building that currently houses our principal offices and a second commercial building for $1.85 million.  We closed this transaction on December 29, 2009.  Both buildings sit on approximately 0.82 acres of land located in the “central business district” of Salt Lake City, Utah.  We currently occupy one-half of the available 16,000 square feet of our office building located at 230 West 400 South.  The second commercial building adjoins the property located at 244 West 400 South. This 3,000 square foot retail commercial building, which is currently unoccupied, may provide additional space for our future growth.

**ITEM 3.  LEGAL PROCEEDINGS**

***Class Action Lawsuits***

During November 2009 three lawsuits were filed against Pacific WebWorks in various jurisdictions.  The legal actions allege similar claims related to procedures we use to sell our products in our ordinary course of business.  On November 9, 2009, Barbara Ford filed an action in the Circuit Court of Cook County, Illinois, Chancery Division.  A second action was filed on November 12, 2009, by Deanna Pelletier in the Superior Court of the State of California, County of Solano.  A third action was filed by Lisa Rasmussen on November 20, 2009, in the Superior Court of Washington, Snohomish County.  

All plaintiffs in these cases are being represented by the same legal firm and each complaint seeks class action certification.  The complaints allege that Pacific WebWorks violated consumer protection and federal RICO laws, committed fraud and used deceptive trade practices in relation to the manner in which Pacific WebWorks charges 

13

for purchases of its products.  Each action seeks compensatory and punitive damages, plus reasonable costs and attorney fees.  In response to these actions, Pacific WebWorks retained the law firm of Snell and Wilmer as legal counsel to vigorously defend the Company in these lawsuits.  Discovery is beginning on the class certification phase in the Illinois, Washington and California lawsuits.  Our legal counsel intends to oppose class certification and move to dismiss all claims.

On January 5, 2010 another similar lawsuit was filed by Song Que Hahn, a California resident, in the United States District Court for the District of Utah.  On February 8, 2010, our legal counsel filed a motion to strike the class allegations and a motion to dismiss all claims, except the breach of contract claims.  On March 9, 2010 Hahn filed an opposition to our motions and counsel intends to refute the arguments presented in the oppositions.  

***Google Litigation***

On December 7, 2009, Google, Inc. filed a legal action against Pacific WebWorks in the United States District Court of Utah, Central Division.  Google alleged trademark infringement and unfair competition under state and federal law.  On December16, 2009, Google and Pacific WebWorks executed a Memorandum of Understanding under the terms of which  Pacific WebWorks agreed to fully cooperate with Google’s discovery and investigation and cease marketing any products using or violating Google’s trademark.  Discovery in this case is currently ongoing.  Pacific WebWorks expects to be released from this lawsuit by mid-year 2010.   

***Other***

We are involved in various other disputes and claims arising in the normal course of our business.  In the opinion of management, any resulting litigation from these disputes and claims will not have a material effect on our financial position and results of operations. 

**ITEM 4.  [Reserved]**

**PART II**

**ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

***Market Information***

Our common stock is listed to trade on the OTC Bulletin Board under the symbol “PWEB.”  The following table presents the range of the high and low bid prices of our common stock for each quarter for the past two years as reported by the OTC Bulletin Board.  These quotations represent prices between dealers and may not include retail markups, markdowns, or commissions and may not necessarily represent actual transactions.

 

2008

 

2009

Fiscal Quarter Ended

High

Low

 

High

Low

March 31

June 30

September 30

December 31

$  0.13

0.10

0.08

0.06

$ 0.07

0.07

0.05

0.01

 

$  0.06

0.14

0.37

0.55

$  0.02

0.03

0.10

0.02

Our shares are subject to Section 15(g) and Rule 15g-9 of the Securities and Exchange Act, commonly referred to as the “penny stock” rule.  The rule defines penny stock to be any equity security that has a market price less than $5.00 per share, subject to certain exceptions.  These rules may restrict the ability of broker-dealers to trade or maintain a market in our common stock and may affect the ability of shareholders to sell their shares.  Broker-dealers who sell penny stocks to persons other than established customers and accredited investors must make a special suitability determination for the purchase of the security.  Accredited investors, in general, include 

14

individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse, and certain institutional investors.  The rules require the broker-dealer to receive the purchaser’s written consent to the transaction prior to the purchase and require the broker-dealer to deliver a risk disclosure document relating to the penny stock prior to the first transaction.  A broker-dealer also must disclose the commissions payable to both the broker-dealer and the registered representative, and current quotations for the security.  Finally, monthly statements must be sent to customers disclosing recent price information for the penny stocks. 

***Holders   ***

As of March 15, 2009 we had 422 stockholders of record of our common stock, which does not include shareholders who hold shares in “street accounts” of securities brokers. 

***Dividends***   

We have not paid cash or stock dividends and have no present plan to pay any dividends.  Instead, we intend to retain any earnings to finance the operation and expansion of our business.  We are not presently subject to any restriction on our present or future ability to pay any dividends, but the payment of any cash dividends on our common stock is unlikely.

***Recent Sales of Unregistered Securities***

None.

***Issuer Purchase of Securities***

None.

**ITEM 6.  SELECTED FINANCIAL DATA**

Not applicable to smaller reporting companies.

**ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

***Executive Overview*****

Pacific WebWorks has enjoyed dramatic growth throughout 2009.  This growth has related largely to the continued upgrading of our marketing channels and the migration of our marketing towards a greater emphasis on the viability of our software products as a revenue generating tool, including the ability to use our tool in connection with the major retail sites.

Revenues for the fourth quarter ended December 31, 2009 amounted to $8,192,663, a decrease of approximately 15% from the third quarter revenue of $9,688,955.  This decrease was anticipated and relates to the fact that we did not market during the month of December 2009 while we retooled some of our marketing strategies.  Revenues for the fourth quarter of 2009, however, amounted to an increase of 438% of revenues for the fourth quarter of 2008.  Given the scrutiny that our industry is currently undergoing and our commitment to curtailing the kind of abuses the Company experienced in 2009 using the affiliate market system, we expect revenues for 2010 to be significantly less than those achieved in 2009 but with continued profitability.  We anticipate future growth moving forward from 2010 to be in the range of 10% to 20% per annum rather than the extreme growth we experienced in 2009. 

15

Our profitability in the fourth quarter of 2009 was outstanding, amounting to $2,244,480 before adjustment for tax loss carry forwards.  This represents a record quarter for the Company and relates to the leveling off of growth enabling the Company to convert more dollars to the bottom line rather than plowing the money back into growth.  We anticipate generating continued attractive profits with some variation quarter over quarter. 

We were presented with several new challenges in the fourth quarter of 2009, including a lawsuit filed by Google, Inc. alleging violations of their trademark by Pacific WebWorks.  We have executed a Memorandum of Understanding with Google and expect to be released from this lawsuit by mid-year 2010.   Additionally, we are defending what we believe to be four frivolous class action suits that have been filed in Utah, Illinois, Washington and California. We intend to vigorously defend these suits and we deny any wrongdoing. 

Competition throughout the Internet software industry continues to intensify.  In particular, competition for the small office/home office business is intensifying with greater attention being directed to this market from a larger variety of product and service providers using new and more aggressive means to market to this industry.  We believe Pacific WebWorks has great potential in the marketplace, but we constantly need more capital and greater resources.  We also have the challenge of identifying and effectively implementing our products into new product distribution channels, responding to economic changes generally, continuing to gain marketplace acceptance and we must address shifting public attitudes for technology products.  These challenges could pose a threat to our success.  

***Liquidity and Capital Resources***

During 2009 and 2008 we relied primarily on revenues to fund operations.  Our revenues increased significantly in 2009 and our total current assets also increased, including cash, restricted cash, prepaid expense and other current assets. Prepaid expense increased significantly largely related to monies placed in escrow with our outside legal counsel.  Our property and equipment increased as a result of purchasing our office building and an adjacent commercial building.  We expect to continue 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 cash inflows.  

Our revenues are primarily from hosting, gateway and maintenance fees and we are dependent upon the efforts of our internal marketing staff and on third party resellers, including our wholly-owned reseller, TradeWorks Marketing, to increase our revenues.  We expect our revenues to decrease in 2010 and begin growing from a reduced basis thereafter, but at a more moderate rate than we experienced in 2009.  Also, cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales.

At December 31, 2009 we had cash of $1,490,769 on reserve with a bank which we intend to use for operating capital.

Management believes that we will continue to experience limited merchant account processing capabilities which could create a situation where we can not satisfy payables to marketing partners.  To generate needed cash in the 2009 second quarter and early third quarter we sold a portion of our hosting portfolio that was in excess of merchant account limitations to The Quad Group, LLC, a related party (the “Quad Group”) for a total of $418,196 (See Item 13, below).  We may periodically be required to enter into similar sale transactions with other entities to properly manage our merchant account processing requirements. 

During 2009 we issued common stock for services to avoid using our cash.  In July 2009 we issued an aggregate of 2,420,000 shares for investor relations services valued at $363,000.   We also converted debt of $108,000 into 720,000 shares and issued 190,000 shares for officers and director liability insurance.  In the event that we decide to rely on equity offerings for additional 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 

16

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.

In January 2010 we borrowed approximately $1,000,000 pursuant to a promissory note secured by a deed of trust with assignment of rents on our principal office building and a second commercial building that we purchased in December 2009.  The promissory note is discussed in more detail, below, see “Commitments and Contingent Liabilities.”

We believe that we will be able to sustain our operations with existing cash and future cash flows during the next twelve to twenty-four months and possibly beyond.  Should we need to raise money in the future we believe funding may be obtained through additional debt arrangements or equity offerings in addition to our internally generated cash flows.  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.  

***Results of Operations***

The following selected financial data for the years ended December 31, 2009 and 2008 includes Pacific WebWorks and its wholly-owned subsidiaries, Intellipay, TradeWorks Marketing, Fundworks, Pacific WebWorks International, LTD, and the discontinued operations of World Commerce Network, LLC and include a majority owned subsidiary, PWI, LLC.  The following chart is a summary of our financial statements for those periods and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part II, Item 8, below.

 

 

Year ended December 31

SUMMARY OF BALANCE SHEET

 

2008

 

2009

Cash and cash equivalents

 

$

377,743 

 

$

1,490,769 

Total current assets

 

1,252,886 

 

4,328,041 

Total assets

 

4,482,215 

 

9,974,058 

Total current liabilities

 

526,316 

 

463,447 

Total liabilities

 

526,316 

 

463,447 

Accumulated deficit

 

(12,682,239)

 

(7,864,775)

Total stockholders’ equity

 

$

3,955,899 

 

$

9,510,611 

17

 

 

Year ended December 31

SUMMARY OF OPERATING RESULTS

 

2008

 

2009

Revenues, net

 

$

9,220,583

 

$

29,817,086 

Cost of sales

 

230,621

 

302,471 

Gross profit

 

8,989,962

 

29,514,615 

Total operating expenses

 

8,648,876

 

25,823,835 

Net income from continuing operations

 

341,086

 

3,655,343 

Total other income (expense)

 

36,304

 

(35,437)

Income tax provision (benefit)

 

– 

 

(1,162,521)

Net income

 

$

490,865

 

$

4,817,464 

Basic net income per share from continuing operations

 

$

0.01

 

$

0.11 

Our net revenues increased significantly for 2009 compared to 2008 as a result of our online marketing program.  Management expects revenues to decrease in 2010 but commence growing again, but from a reduced basis and at a lower growth rate in 2011.   Future revenues are expected to come largely from recurring residual income rather than from one-time upfront fees.  We recognize revenue from hosting, gateway, and maintenance fees, software, access and licensing fees, the sale of merchant accounts and custom website design work.  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, 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. 

 

Cost of sales include costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs.  Cost of sales increased in 2009 but was only1.0% of net revenues as compared to 2.5% of net revenues for 2008.  Management anticipates that cost of sales will remain lower in the short term as we continue our new marketing strategies.

Total operating expenses increased for 2009 compared to the 2008 periods primarily due to increases in selling expenses and general and administrative expenses.  Selling expenses include advertising expenses, commissions and personnel expenses for sales and marketing and these expenses increased in 2009 due to increased sales.  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 for 2009 as compared to 2008 consistent with continued increases in customer accounts and the need to increase our staff to provide services for the new customer accounts.  During 2009 we augmented our local customer service staff with over 50 customer services agents located in the Philippines.

Total other expense for 2009 included a one-time $446,939 impairment of goodwill for IntelliPay based upon an impairment test that concluded that the carrying amount of our goodwill exceeded the implied fair value of the goodwill.  Other income for 2009 was primarily related to the income related to the hosting portfolio sale to Quad Group.  

Total other income for 2008 represented interest income earned on certificates of deposit and other income from an 

18

insurance recovery on a stolen piece of equipment.  

During 2009 we recorded net income and during 2008 we recorded a net deferred tax asset and income tax benefit due to the net deductible temporary differences or net operating loss carryforwards because the likelihood of realization of the related tax benefits was established.  Based on an analysis of our net operating losses, a $1,162,521 deferred tax asset and related income tax benefit was recorded in 2009.  

Our net income for the 2009 periods reflects our increased revenues and the leveling off of growth related expenses incurred to address the increased revenues.  Management anticipates that net income will increase at a slower rate in the coming year.   In addition, because of marked improvement in net income from operations we recorded net income and income per share for both 2008 and 2009. 

***Off-balance Sheet Arrangements***

None.

***Commitments and Contingent Liabilities***

*Current Liabilities:* Our total current liabilities at December 31, 2009, included accounts payable, accrued liabilities and current liabilities from discontinued operations.   Accounts payable of $305,336 related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $56,311 were primarily the result of payroll related liabilities and income tax payable, offset by estimated refunds and factoring obligations.   

Current liabilities from discontinued operations were $101,799 and were related to World Commerce Network, LLC.  The operations of World Commerce Network, LLC, our subsidiary, are ceased and discontinued.  These liabilities decreased from $215,274 in 2007 to $101,799 as a result of a recovery of previously recognized expenses related to the defunct World Commerce Network operations.  Management continues to attempt to negotiate settlements of World Commerce Network’s accrued liabilities.  As of December 31, 2009, World Commerce Network’s accrued liabilities totaled $101,799.  Management believes the recorded liabilities are sufficient to cover any resulting liability.  There has been no activity on any of these accounts for nearly three years.

*Promissory Note:*  On January 27, 2010, Pacific WebWorks, executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000 (the “Note”).  The holder of the Note, Principal Development LLC, a Nevada limited liability company (the “Holder”), is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, on or before January 27, 2012.  The Note is secured by a deed of trust with assignment of rents on our principal office building and a second commercial building we own in Salt Lake City, Utah.  Also, the Holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties.  

The Note also provides that we may make payments prior to the due date and that any payment will be applied first to the reduction of interest and the remaining balance to the outstanding principal.  In the event we fail to pay any amount when due, then the amount owing will become immediately due and a default interest rate of 15% shall apply to the principal amount.  

***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 trade receivables and collections, goodwill and the annual tests for impairment of goodwill, contingent liabilities, and valuing stock option compensation. 

19

*Trade receivables and collections:*  We apply a range of collection techniques to manage delinquent accounts.  Management reviews accounts receivable monthly and records an estimate of receivables determined to be uncollectible due to allowance for doubtful accounts and bad debt.  Accounts receivable and the corresponding allowance for doubtful accounts are reviewed for collectability by management quarterly and uncollectible accounts receivable are written off.

*Goodwill:*  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.  We performed a goodwill impairment test during 2009 and concluded that an impairment of goodwill in the amount of $446,939 was appropriate. 

*Contingent liabilities:*  Material estimates for contingent liabilities include approximately $0 for our operating companies and approximately $101,799 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 effect on our cash balances at December 31, 2009.  Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not have a direct effect 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.  We have had no communication for over three years with any of the parties related to the contingent liabilities of our discontinued operations.  Any settlements that might occur below amounts accrued would result in a favorable impact to our earnings and working capital. 

*Valuing stock options:*  In September 2009, the FASB issued Accounting Standards Codification (ASC) Topic 718, Stock Compensation (formerly, FASB Statement No. 123R Revised 2004), “Share-Based Payment” (“SFAS No.123R”).   Under FASB ASC Topic 718, all share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense in operations over the requisite service period.  We measure and record compensation cost relative to performance stock options which requires the Company to use the Black-Scholes pricing model to estimate the fair value of options at the option date of grant.  The fair value of the option grant is established at the date of grant using the Black-Scholes option pricing model based on assumptions related to the five year risk free interest rate, dividend yield, volatility, and average expected term (years to exercise).

20

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**PACIFIC WEBWORKS, INC.**

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009 and 2008

INDEX

Report of Registered Independent Public Accounting Firm

22

Consolidated Balance Sheets

23

Consolidated Statements of Operations 

24

Consolidated Statements of Stockholders’ Equity

25

Consolidated Statements of Cash Flows

26

Notes to the Consolidated Financial Statements

27

21

LOGO

**CHISHOLM, BIERWOLF, NILSON & MORRILL, LLC**

Certified Public Accountants

Phone (801) 292-8756  • Fax (801) 292-8809  • www.cbnmcpa.com

Todd D. Chisholm

Nephi J. Bierwolf

Troy F. Nilson

Douglas W. Morrill

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders

Pacific Webworks, Inc. and Subsidiaries

Salt Lake City, UT 

We have audited the accompanying balance sheets of Pacific Webworks, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the related statements of operations, stockholders' deficit, 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 financial statements based on our audits.

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

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pacific Webworks, Inc. and Subsidiaries as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

*/s/ Chisholm, Bierwolf, Nilson & Morrill*

Chisholm, Bierwolf, Nilson & Morrill, LLC

Bountiful, UT 

March 31, 2010

PCAOB Registered, Members of AICPA, CPCAF and UACPA

533 West 2600 South, Suite 25  • Bountiful, Utah 84010 

             12 South Main, Suite 208, Layton, Utah 84041

22

 

 

 

**Pacific WebWorks, Inc.**

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

December 31,

 

 

 

 

 

 

 

 

 

2008

 

2009

**ASSETS**

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

377,743 

 

$

1,490,769 

 

Receivables

 

 

 

 

 

 

 

 

 

Trade, less allowance for doubtful receivables of

 

 

 

 

 

 

 

 

$0 in 2008 and $0 in 2009

 

 

 

 

518,709 

 

221,788 

 

Prepaid expenses and other current assets

 

142,823 

 

1,068,065 

 

Inventory

 

 

 

 

139,423 

 

33,880 

 

Deferred tax asset

 

 

 

74,188 

 

1,513,539 

 

 

Total current assets

 

 

 

1,252,886 

 

4,328,041 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment, net at cost

 

 

96,665 

 

1,944,053 

Restricted cash 

 

 

 

649,899 

 

2,086,670 

Goodwill 

 

 

 

 

1,946,253 

 

1,499,314 

Deferred tax asset

 

 

 

 

525,813 

 

115,980 

Deposits

 

 

 

 

10,699 

 

- 

        Total Assets

 

 

 

 

$

4,482,215 

 

$

9,974,058 

 

 

 

 

 

 

 

 

 

 

 

 

**LIABILITIES AND STOCKHOLDERS' EQUITY**

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

Accounts payable

 

 

 

 

$         382,014 

 

$      305,336 

 

Accrued liabilities

 

 

 

 

39,311 

 

56,312 

 

Deferred revenue 

 

 

 

 

3,192 

 

- 

 

Current liabilities from discontinued operations 

 

101,799 

 

101,799 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

 

 

526,316 

 

463,447 

 

 

Total liabilities

 

 

 

 

526,316 

 

463,447 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commitments

 

 

 

 

- 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY 

 

 

 

 

 

 

 

Common stock - par value $0.001; authorized

 

 

 

 

 

 

50,000,000; issued and outstanding 44,663,895 

 

 

 

 

 

shares in 2008 and  45,123,895 shares in 2009

 

41,664 

 

45,124 

 

Additional paid-in capital

 

 

 

16,596,474 

 

17,590,515 

 

Prepaid equity expenses

 

 

 

 

-

 

(260,253)

 

Accumulated deficit

 

 

 

(12,682,239)

 

(7,864,775)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

 

 

3,955,899 

 

9,510,611 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders' Equity

 

$

4,482,215 

 

$

9,974,058 

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

23

**Pacific WebWorks, Inc.**

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

 

2008

 

2009

Revenues

 

 

 

 

 

 

 

 

 

Software, access and license fees

 

 

$

474,015

 

$

460,050 

 

Hosting, gateway and maintenance fees

 

8,741,545

 

29,347,262 

 

Merchant accounts, design and other

 

 

5,023

 

9,774 

 

 

 

 

 

 

 

 

 

9,220,583

 

29,817,086 

Cost of sales

 

 

 

 

230,621

 

302,471 

 

Gross profit

 

 

 

 

8,989,962

 

29,514,615 

Selling expenses

 

 

 

 

5,949,458

 

17,929,580 

Research and development

 

 

 

303,502

 

422,829 

General and administrative

 

 

 

2,361,847

 

7,433,690 

Depreciation and amortization 

 

 

 

34,069

 

37,736 

 

Total operating expenses

 

 

 

8,648,876

 

25,823,835 

 

Net income from operations

 

 

341,086

 

3,690,780 

Other income (expense)

 

 

 

 

 

 

 

Interest income

 

 

 

 

7,192

 

5 

 

Impairment of goodwill

 

 

 

-

 

(446,939)

 

Other income (expense), net

 

 

29,112

 

411,497 

 

Total other Income (Expense)

 

 

36,304

 

(35,437)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income from continuing operations before income taxes

 

 

377,390

 

3,655,343 

 

 

 

 

 

 

 

Income Tax Provision/(Benefit)

 

 

 

-

 

(1,162,521)

Income Tax Expense

 

 

 

-

 

400 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

377,390

 

$

4,817,464 

 

 

 

 

 

 

 

 

 

 

 

 

Discontinued operations

 

 

 

 

 

 

    Income from operations of discontinued World Commerce Network, 

 

 

 

 

 

 

         LLC (including income on disposal of $20,000, net of tax)

 

 

 

$

113,475

 

$

-

 

NET INCOME

 

 

 

$

490,865

 

$

4,817,464 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER SHARE

 

 

 

 

 

 

Basic

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

0.01

 

$

0.11 

 

Income from discontinued operations, net of tax

 

 

0.00

 

                - 

 

Net income

 

 

 

 

$

0.01

 

$

0.11 

Diluted

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

0.01

 

$

0.11 

 

Income tax expense

 

 

 

0.00

 

- 

 

Net income

 

 

 

 

$

0.01

 

$

0.11 

Weighted-average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

 

 

 

41,663,895

 

43,271,662 

 

Fully Diluted

 

 

 

 

45,225,756

 

45,225,756 

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

24

**Pacific WebWorks, Inc.**

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

For the period January 1, 2008 through December 31, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prepaid

 

 Additional 

 

 

 

 

 

 

 

 

 

 

 

 

 Common Stock 

 

Equity

 

 Paid-in 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 Shares 

 

 Amount 

 

Expenses

 

 Capital 

 

Deficit

 

 Totals 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 1, 2008

 

 

 

 

 

40,526,895

 

$

40,527

 

$              - 

 

$

16,472,175

 

$

(13,173,104)

 

$

3,339,598 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock for insurance policies

 

 

 

 

1,062,000

 

1,062

 

- 

 

64,622

 

$

- 

 

65,684 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common for exercised options

 

 

 

 

75,000

 

75

 

- 

 

4,625

 

- 

 

4,700 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation of Stock Options

 

 

 

 

 

-

 

-

 

- 

 

55,052

 

- 

 

55,052 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended December 31, 2008

 

 

-

 

-

 

- 

 

-

 

490,865 

 

490,865 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2008

 

 

 

 

 

41,663,895

 

41,664

 

                   -

 

16,596,474

 

(12,682,239)

 

3,955,899 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock for insurance policies

 

 

 

 

190,000

 

190

 

(37,130)

 

36,940

 

- 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common for exercised options

 

 

 

 

130,000

 

130

 

- 

 

5,270

 

- 

 

5,400 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of stock for consulting services and debt

 

 

 

 

3,140,000

 

3,140

 

(471,000)

 

467,860

 

- 

 

- 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of prepaid expense

 

 

 

 

 

                   -

 

             -

 

247,877 

 

                    -

 

- 

 

247,877 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expense of extension of stock options

 

 

 

 

-

 

-

 

-

 

203,027

 

- 

 

203,027 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation of stock options

 

 

 

 

 

-

 

-

 

-

 

280,944

 

- 

 

280,944 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income for year ended December 31, 2009

 

 

-

 

-

 

-

 

-

 

4,817,464 

 

4,817,464 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2009

 

 

 

 

 

45,123,895

 

$

45,124

 

$

(260,253)

 

$

17,590,515

 

$

(7,864,775)

 

$

9,510,611 

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

25

**Pacific WebWorks, Inc.**

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

 

 

 

2008

 

2009

**Cash Flows From Operating Activities**

 

 

 

 

 

 

Net income

 

 

 

 

$

490,865 

 

$

4,817,464 

 

Adjustments to reconcile net income

 

 

 

 

 

  to net cash provided (used) in operating activities

 

 

 

 

 

 

Depreciation & amortization

 

 

34,069 

 

37,736 

 

 

Stock issued for expense

 

 

 

65,685 

 

508,130 

 

 

Valuation of stock options 

 

 

55,052 

 

77,293 

 

 

Non-cash expense for extension of options

 

- 

 

203,027 

 

 

Impairment of goodwill

 

 

 

- 

 

446,939 

 

Changes in assets and liabilities 

 

 

 

 

 

 

 

Deferred tax asset 

 

 

 

- 

 

(1,029,518)

 

 

Receivables

 

 

 

(238,535)

 

296,922 

 

 

Prepaid expenses and other assets

 

(46,796)

 

 (971,145)

 

 

Inventory

 

 

 

(69,004)

 

105,543

 

 

Accounts payable and accrued liabilities

 

(478,881)

 

(59,678)

 

 

Current liabilities from discontinued operations

(113,475)

 

- 

 

 

Deferred revenue

 

 

 

(7,302)

 

(3,192)

 

 

 

Net cash provided (used) by operating activities

(308,322)

 

4,429,521 

**Cash flows from investing activities**

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(47,270)

 

(1,885,124)

 

Cash on reserve with bank (restricted cash)

 

(162,427)

 

(1,436,771)

 

 

 

Net cash used by  investing activities

 

(209,697)

 

(3,321,895)

**Cash flows from financing activities**

 

 

 

 

 

 

 

      Proceeds on issuance of stock from exercise of options

4,700 

 

5,400 

 

 

 

Net cash provided by financing activities

 

4,700 

 

5,400 

 

 

 

Net increase/(decrease) in cash and cash equivalents

(513,319)

 

1,113,026 

 

Cash and cash equivalents at beginning of period

891,062 

 

377,743 

 

Cash and cash equivalents at end of period

 

$

377,743 

 

$

1,490,769 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

Cash paid for interest

 

 

 

$

-

 

$

- 

 

 

Cash paid for income taxes

 

 

$

1,200

 

$

1,200 

 

Non-cash financing activities:

 

 

 

 

 

Stock issued for expenses

 

 

$

-

 

$

508,130 

 

 

 

 

 

 

 

 

 

 

 

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

26

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

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.

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., PWI, LLC and World Commerce Network, LLC and Pacific WebWorks International, LTD, a United Kingdom limited company which is currently non operating. All significant intercompany accounts and transactions have been eliminated in consolidation.  The operations of World Commerce Network, LLC have been discontinued. 

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.

Concentrations

Financial instruments that potentially subject the Company to concentrations of credit risks consist of cash and cash equivalents, accounts receivable and accounts payable.  The Company places its cash and cash equivalents at well known quality financial institutions.  At times, such cash and investments may be in excess of the FDIC insurance limit.

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.

Restricted Cash

Restricted cash includes cash maintained in a reserve account with the Company’s merchant bank in connection with the Company’s acceptance of credit card payment for its services.

Goodwill

The Company adopted FASB ASC 350-10 (prior authoritative literature SFAS No. 142, Goodwill and Other Intangible Assets) in 2002. Under FASB ASC 350-10 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 additional 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 FASB ASC 350-10, the Company’s Intellipay business unit operates in one principal business segment, a provider of online credit card gateway services. 

27

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

Goodwill – continued

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 FASB ASC 350-20, the Company performed a goodwill impairment test during 2009 and concluded that the carrying amount of goodwill exceeds the implied fair value of the goodwill, accordingly an impairment loss was recognized in December 2009 of $446,939.  

Fair Value of Financial Instruments

On January 1, 2008, the Company adopted FASB ASC 820-10-50, “*Fair Value Measurements.*This guidance defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures. The three levels are defined as follows:

• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 inputs to valuation methodology are unobservable and significant to the fair measurement.

The carrying amounts reported in the balance sheets for the cash and cash equivalents, receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of fair value because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. 

Revenue Recognition

The Company recognizes revenue in accordance with FASB ASC 605-10 regarding Revenue Recognition for application of generally accepted accounting principles related to revenue transactions.  In the third quarter 2003, the company adopted FASB ASC 605-25 as it relates to revenue arrangements with multiple deliverables.

We receive revenue for hosting, gateway, and maintenance fees, software access and licensing fees. Revenues from up-front fees are deferred and recognized over the period services are performed ranging from one month 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.

28

 **Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

Revenue Recognition-continued

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.

Trade Receivables and Collections

The Company applies a range of collection techniques to manage deliquent accounts.  Management reviews accounts receivable monthly and records an estimate of receivables determined to be uncollectible to allowance for doubtful accounts and bad debt. Accounts recievable and the corresponding allowance for doubtful accounts are reviewed for collectiblitly by management quarterly and uncollectible accounts receivable are written off.  The Company had bad debt expense of $0 and $0 for the period ended December 31, 2009 and 2008.

Cost of Sales

Cost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, service personnel, telecommunications and data center costs.

Sales and Marketing Costs

Sales and marketing expenses include advertising expenses, commissions and personnel expenses for sales and marketing. The Company has expended significant amounts on sales and marketing. Marketing and advertising costs to promote the Company's products and services are expensed in the period incurred. 

Research and Development Costs

Product 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.  Total research and development costs for the year ended December 31, 2008 and 2009 was $303,502 and $422,829 respectively.  

General and Administrative Costs

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. 

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.

Capital Structure

The Company has 50,000,000 shares authorized of voting common stock with 45,123,895 issued and outstanding.

29

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

Inventories

Inventories are stated at the lower of average cost or market value.  When there is evidence that the inventories value is less than original cost, the inventory is reduced to market value.  Inventories consisting of golf equipment, sports apparel, health supplements, and electronics totaling $139,423 and $33,880 at December 31, 2008 and 2009, respectively.  The allowance for obsolete inventory is $0 and $130,027 at December 31, 2008 and 2009.

Reclassifications

Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the current year presentation. These reclassifications had no material effect on our consolidated financial statements.

Earnings per share:

The computation of net earnings (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 diluted earnings (loss) per share, which considers potentially issuable shares on common stock equivalents.  In accordance with FASB ASC 260-10 (prior authoritative literature SFAS  No. 128, *"Earnings per Share")* common stock options have a dilutive effect when the average market price of the common stock during the period exceeds the exercise price of the options.  The average market price of the Company's common stock during the years ended December 31, 2008 and 2009 was $0.10 and $0.13, respectively.  Potentially issuable common shares totaling 3,561,861 and 1,954,094 related to options were included in the calculation of diluted earnings per share for the periods ended December 31, 2008 and 2009, respectively.

**Statement of Operations Summary Information**:

Year ended

December 31,

2008

2009

 

 

 

 

Numerator:

Income from continuing operations

$ 377,390

$ 4,817,464

 

Income from discontinued operations, net of tax

$ 113,475

$         0.00

 

Net income 

$ 490,865

$ 4,817,464

 

 

 

 

Denominator::

Weighted-average common shares outstanding

 

 

 

Basic

      41,663,895

43,271,662

 

Diluted

45,225,756

45,225,756

EARNINGS PER SHARE:

 

 

 

Basic

 

 

 

  Income from continuing operations

$ 0.01

$ 0.11

 

  Income from discontinued operations, net of tax

$ 0.00

$ 0.00

 

   Net income

$ 0.01

$0.11

 

Diluted

 

 

 

  Income from continuing operations

$ 0.01

$ 0.11

 

  Income from discontinued operations, net of tax

$ 0.00

 0.00

 

   Net income

$ 0.01

$ 0.11

30

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION – CONTINUED

Subsequent Events

The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and has determined that except for the events described in Note 9, below, there are no other events that would have a material impact on the financial statements.

NOTE 2 –  PROPERTY AND EQUIPMENT

Property and equipment includes the following:

December 31,

Estimated useful

life (years)

 

2008

2009

 

Real Property

$

- 

$

1,850,000 

30

Computer Equipment

371,713 

209,932 

3-5

Equipment

194,822 

422,219 

2-10

Software

111,976 

73,400 

1-3

Furniture and Fixtures

99,040 

105,055 

3-10

Leasehold Improvements

15,409 

17,532 

Lesser of Lease or Useful  Life

 

792,960 

2,678,138 

 

Less Accumulated Depreciation

(696,295)

(734,085)

 

 

$

96,665 

$

1,944,053 

 

Depreciation expense for the years ended December 31, 2008 and 2009 was $34,069 and $37,736, respectively.

NOTE 3 – ACCRUED AND OTHER LIABILITIES

Accrued liabilities consist of the following:

December 31,

 

2008

2009

Payroll related liabilities

$

49,405 

$

66,156 

Sales commissions

- 

- 

Refunds and factor

(12,384)

(12,384)

Income tax payable

2,100 

2,100 

Other

190 

440 

 

$

39,311 

$

56,312 

NOTE 4 - STOCKHOLDERS’ EQUITY 

Stock Issuance

During September 2009, the Company issued 190,000 shares of its common stock for payment of $37,130 related to insurance premiums.  The term of the policy coverage is August 2008 through August 2009.  The Company recognized expenses of $12,377 for the period between August 2009 and December 31, 2009.  The remaining amount will recognized over the term of the policy on a straight-line basis.  

During July 2009, the Company issued an aggregate of 2,420,000 shares of its common stock to three separate companies for payment of $363,000 in prepaid services related to investor relations, consulting and public relations.  The services will be provided through the period of July 2009 through July 2010.  The Company recognized expenses of $181,500 for the period between July 2009 and December 31, 2009.  The remaining amount will be recognized over the period of service on a straight-line basis.

31

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 4 - STOCKHOLDERS’ EQUITY – CONTINUED

Stock Issuance - continued

During July 2009, the Company issued an aggregate of 720,000 shares of its common stock for payment of $108,000 in prepaid consulting services and costs related to investor relations, consulting and public relations.  The services will be provided through the period of July 2009 through July 2010.  The Company recognized expenses of $54,000 for the period between July 2009 and December 31, 2009.  The remaining amount will be recognized over the period of service on a straight-line basis.

During September and November 2009, four employee of the Company exercised vested options.  The Company issued 130,000 shares of its common stock for payment of $5,400.

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 Plan was amended by the Company on March 15, 2007, to allow for grant awards representing up to 10,000,000 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, 2009.   

During 2008, the Company granted a total of 1,765,000 common stock options to employees as part of the plan.  The options vest 1/2 upon grant and 1/2 over the next six months.  The options can be exercised at a price of $0.04 any time after vesting for a period of five years from the date of grant.  During 2009, the Company granted a total of 2,300,000 common stock options to employees as part of the plan.  The options vest 1/2 upon grant and 1/2 over the next six months.  The options can be exercised at a price of $0.021 any time after vesting for a period of five years from the date of grant.

During 2009, the Company extended the expiration date of 1,235,000 options that had previously been granted and are fully vested.  These options originally expired on October 20, 2009 and the expiration date was extended until October 20, 2014.  The Company recognized $203,027 in expense upon extension.

A summary of our common stock options as of December 31, 2008 and 2009, and the changes during 2008 and 2009 are presented below:

 

Stock options

Exercise price

Weighted-average

    exercise price  

Outstanding at January 1, 2008

8,552,651

$ 0.048 - $ 0.87

$ 0.24

   Granted

1,765,000

$ 0.04

$ 0.04

   Exercised

(75,000)

$ 0.048 - $ 0.07

$ 0.06

   Forfeited

(1,840,000)

$ 0.048 - $ 0.07

$ 0.23

Outstanding at December 31, 2008

8,402,651

$ 0.048 - $ 0.87

 0.24

   Granted

2,300,000

$ 0.21

$ 0.21

   Exercised

(130,000)

$ 0.048 - $ 00.48

$ 0.044

   Forfeited

(0)

$ 0.00

$ 0.00

Outstanding at December 31, 2009

10,572,651

$ 0.048 - $0.87

$ 0.24

 

Effective January 1, 2006, we adopted the fair value recognition provisions of FASB ASC 480-10 using the modified-prospective-transition method.  Under this method, total compensation cost for 2006 and 2007 includes compensation costs for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value, and compensation costs for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value in accordance with FASB ASC 480-10.  As a result $55,052 and $280,944 were recognized for the years ended December 31, 2008 and 2009, respectively.  

32

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 4 - STOCKHOLDERS’ EQUITY  - CONTINUED

The fair value of the option grant was established at the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

2008

2009

Five Year Risk Free Interest Rate

2.90%

2.28%

Dividend Yield

0%

0%

Volatility

81%

103%

Average Expected Term (Years to Exercise)

5

5

Employee stock options outstanding and exercisable under this plan as December 31, 2009 are:

*Options outstanding*

 

Number

outstanding

Weighted-average

exercise price ($)

Weighted-

average

remaining

contractual life years)

 

Exercise price ($)

 

0.87

40,151

0.87

1.25

 

0.75

1,562,500

0.75

1.25

 

0.12

1,435,000

0.12

.50

 

0.07

1,235,000

0.07

4.75

 

0.048

935,000

0.048

1.00

 

0.061

1,405,000

0.061

2.75

 

.21

2,300,000

.21

4.75

 

0.04

1,660,000

0.04

3.75

 

 

10,572,651

 

 

*Options exercisable*

 

 

 

Exercise price ($)

Number

outstanding

Weighted-average

exercise price

Weighted-

average

remaining

contractual life (years)

 

0.87

40,151

0.87

1.25

 

0.75

1,562,500

0.75

1.25

 

0.12

1,435,000

0.12

.50

 

0.07

1,235,000

0.07

4.75

 

.048

935,000

.048

1.00

 

0.061

1,405,000

0.061

2.75

 

.21

1,150,000

.21

4.75

 

0.04

1,660,000

0.04

3.75

 

 

9,422,651

 

 

33

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 5 – DISCONTINUED OPERATIONS

The following includes the net current liabilities for the Company’s discontinued operations as of December 31, 2008 and December 31, 2009:  

 

December 31, 2008

World Commerce

Network, LLC

December 31, 2008

World Commerce

Network, LLC

ASSETS

 

 

Current assets

$

-

$

-

Long-term assets

-

-

Total assets

$

-

$

-

 

 

 

LIABILITIES

 

 

Payables past due

-

-

Accrued liabilities

101,799

101,799

  Total current liabilities

$

101,799

$

101,799

 

 

 

Net current liabilities

$

101,799

$

101,799

Discontinued subsidiary – World Commerce Network, LLC

In July 2002, the Board of Directors of Pacific WebWorks, Inc. resolved to discontinue World Commerce Network, LLC.  Negotiations and settlements of World Commerce liabilities are currently underway as the limited liability company is phasing out its related operations.  World Commerce Network became a consolidated entity with the Company in March 2000.  

*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, 2008 and December 31, 2009 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 $20,000 to accrued liabilities in the consolidated financial statements in December 31, 2007 representing its estimated liability for this matter.  Legal counsel asserts that an unfavorable outcome is unlikely and, therefore, the Company has recovered these amounts as income from discontinued operations at December 31, 2008 per the provisions of FASB ASC 450-20.

34

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 6 – COMMITMENTS

Litigation 

*Class Action Lawsuits*

During November 2009 three lawsuits were filed against Pacific WebWorks in various jurisdictions.  The legal actions allege similar claims related to procedures we use to sell our products in our ordinary course of business.  On November 9, 2009, Barbara Ford filed an action in the Circuit Court of Cook County, Illinois, Chancery Division.  A second action was filed on November 12, 2009, by Deanna Pelletier in the Superior Court of the State of California, County of Solano.  A third action was filed by Lisa Rasmussen on November 20, 2009, in the Superior Court of Washington, Snohomish County.  

All plaintiffs in these cases are being represented by the same legal firm and each complaint seeks class action certification.  The complaints allege that Pacific WebWorks violated consumer protection and federal RICO laws, committed fraud and used deceptive trade practices in relation to the manner in which Pacific WebWorks charges for purchases of its products.  Each action seeks compensatory and punitive damages, plus reasonable costs and attorney fees.  In response to these actions, Pacific WebWorks retained the law firm of Snell and Wilmer as legal counsel to vigorously defend the Company in these lawsuits.  Discovery is beginning on the class certification phase in the Illinois, Washington and California lawsuits.  Our legal counsel intends to oppose class certification and move to dismiss all claims.

On January 5, 2010 another similar lawsuit was filed by Song Que Hahn, a California resident, in the United States District Court for the District of Utah.  On February 8, 2010, our legal counsel filed a motion to strike the class allegations and a motion to dismiss all claims, except the breach of contract claims.  On March 9, 2010 Hahn filed an opposition to our motions and counsel intends to refute the arguments presented in the oppositions.  

*Google Litigation*

On December 7, 2009, Google, Inc. filed a legal action against Pacific WebWorks in the United States District Court of Utah, Central Division.  Google alleged trademark infringement and unfair competition under state and federal law.  On December16, 2009, Google and Pacific WebWorks executed a Memorandum of Understanding under the terms of which  Pacific WebWorks agreed to fully cooperate with Google’s discovery and investigation and cease marketing any products using or violating Google’s trademark.  Discovery in this case is currently ongoing.  Pacific WebWorks expects to be released from this lawsuit by mid-year 2010.   

*Other*

We are involved in various other disputes and claims arising in the normal course of our business.  In the opinion of management, any resulting litigation from these disputes and claims will not have a material effect on our financial position and results of operations. 

35

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 7 - INCOME TAXES

The Companies utilize the liability method of accounting for income taxes for earnings of the Company

Income taxes (benefit) for the Company consist of the following:

Current

$

1,200

Deferred

$

(1,162,521)

Total

$

(1,161,321)

Reconciliation of income taxes computed at the federal statutory rate and income tax expense are as follows:

 

12/31/2009

Federal income taxes at statutory rate

$

1,241,394

State income taxes net of federal benefit

 

135,920

Change in the Valuation Allowance

 

(1,666,429)

Other

 

166,930

Total

$

(122,184)

 

 

 

Deferred taxes consist of the following:

 

 

 

 

 

Current

 

 

 

Allowance for Obsolete Inventory

$

25,835

 

Deferred expenses

 

(4,295)

 

Net operating loss carryforwards

 

1,492,000

 

Total Current

$

1,513,540

Long Term

 

 

 

Net operating loss carryforwards

$

207,121

 

Book impairment of Investments

 

1,131,466

 

Excess book depreciation and amortization

 

42,260

 

Total Long-Term

$

1,380,846

 

 

 

 

 

Less Valuation Allowance

$

(1,131,466)

 

 

 

 

 

Net Tax Assets

$

1,762,920

During the current year the Company incurred net income.  During the prior year the Company recorded a  net deferred tax asset and income tax benefit in the financial statements due to the net deductible temporary differences or net operating loss carryforwards because the likelihood of realization of the related tax benefits was established.  Based on an analysis of the Company net operating losses, a $1,762,919 deferred tax asset and related income tax benefit was recorded in 2009.  A valuation allowance has been recorded against the Book impairment of investments for $1,131,466.

As of December 31, 2008, the Company had federal and state net operating loss carryforwards for tax reporting purposes of approximately $4,500,000 and $5,100,000 respectively, expiring through 2026.

36

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 8 - SEGMENT REPORTING 

Segment reporting by business unit follows:

The year ended 

Dec. 31, 2008**a**

Pacific 

WebWorks

IntelliPay

TradeWorks

FundWorks

PWI, LLC

Discontinued 

Operations**b**

Total

Revenues, net

$

8,707,710

$

479,959

$

16,788 

$

13,888 

2,238

$

-

$

9,220,583

Net income(loss)

$

1,740,298

$

99,538

$

(1,449,065)

$

(15,871)

$

2,490

$

113,475

$

490,865

**a**Amounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation.

**b**Includes World Commerce Network, LLC. a non-operating, discontinued subsidiary.

The year ended

 Dec. 31, 2009**a**

Pacific 

WebWorks

IntelliPay

TradeWorks

FundWorks

PWI,

 LLC

Discontinued 

Operations**b**

Total

Revenues, net

$

29,744,873

$

473,557

$

5,742 

$

- 

4,417 

$

-

$

30,228,589

Net ncome(loss)

$

6,103,762

$

132,470

$

(1,339,253)

$

(39,351)

$

(40,164)

$

-

$

4,817,464

**a**Amounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation.

**b**Includes World Commerce Network, LLC. a non-operating, discontinued subsidiary.

NOTE 9 – SUBSEQUENT EVENTS 

On January 27, 2010, the Company executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000 (the “Note”).  The holder of the Note is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, on or before January 27, 2012.  

The Note provides that the Company may make payments prior to the due date and that any payment will be applied first to the reduction of interest and the balance to the outstanding principal.   In the event the Company fails to pay any amount when due, then the amount owing will become immediately due and a default interest rate of 15% shall apply to the principal amount.  

The Note is secured by a deed of trust with assignment of rents on the Company’s principal office building and a second commercial building we own in Salt Lake City, Utah.  Also, the holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties.  

NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the FASB issued FASB ASC 815-10 (Prior authoritative literature: SFAS No. 161, “*Disclosures about Derivative Instruments and Hedging Activities*”), which is effective January 1, 2009. FASB ASC 815-10 requires enhanced disclosures about derivative instruments and hedging activities to allow for a better understanding of their effects on an entity’s financial position, financial performance, and cash flows. Among other things, this standard requires disclosures of the fair values of derivative instruments and associated gains and losses in a tabular formant. This standard is not currently applicable to the Company since we do not have derivative instruments or engage in hedging activity.

37

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

**December 31, 2009**

NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED

In May 2008, the FASB issued FASB ASC 944 (Prior authoritative literature: SFAS No. 163, *"Accounting for Financial Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60"). FASB ASC 944* interprets Statement 60 and amends existing accounting pronouncements to clarify their application to the financial guarantee insurance contracts included within the scope of that Statement.  This standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years.   As such, the Company is required to adopt these provisions at the beginning of the fiscal year ended March 31, 2009.  The Company does not believe this standard will have any impact on the financial statements.

In April, 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature: SFAS No. 164, *“Not-for-Profit Entities: Mergers and Acquisitions”) *which governs the information that a not-for-profit entity should provide in its financial reports about a combination with one or more other not-for-profit entities, businesses or nonprofit activities and sets out the principles and requirements for how a not-for-profit entity should determine whether a combination is in fact a merger or an acquisition. This standard is effective for mergers occurring on or after Dec. 15, 2009 and for acquisitions where the acquisition date is on or after the beginning of the first annual reporting period, beginning on or after Dec. 15, 2009. This standard does not apply to the Company since the Company is considered a for-profit entity

 In May 2009, FASB issued FASB ASC 855-10 (Prior authoritative literature:  SFAS No. 165, *"Subsequent Events").* FASB ASC 855-10 establishes principles and requirements for the reporting of events or transactions that occur after the balance sheet date, but before financial statements are issued or are available to be issued. FASB ASC 855-10 is effective for financial statements issued for fiscal years and interim periods ending after June 15, 2009. As such, the Company adopted these provisions at the beginning of the interim period ended June 30, 2009. Adoption of FASB ASC 855-10 did not have a material effect on our financial statements.

In June 2009, the FASB ASC 860-10 (Prior authoritative literature: issued SFAS No. 166, “*Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140*”), which eliminates the concept of a qualifying special-purpose entity (“QSPE”), clarifies and amends the de-recognition criteria for a transfer to be accounted for as a sale, amends and clarifies the unit of account eligible for sale accounting and requires that a transferor initially measure at fair value and recognize all assets obtained and liabilities incurred as a result of a transfer of an entire financial asset or group of financial assets accounted for as a sale. This standard is effective for fiscal years beginning after November 15, 2009. The Company is currently evaluating the potential impact of this standard on its financial statements, but does not expect it to have a material effect.

In June 2009, the FASB issued FASB ASC 810-10-65 (Prior authoritative literature:  SFAS No. 167, “*Amendments to FASB Interpretation No. 46(R)*”) which amends the consolidation guidance applicable to a variable interest entity (“VIE”). This standard also amends the guidance governing the determination of whether an enterprise is the primary beneficiary of a VIE, and is therefore required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. Previously, the standard required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. This standard is effective for fiscal years beginning after November 15, 2009, and for interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the potential impact of the adoption of this standard on its financial statements, but does not expect it to have a material effect.

38

**Pacific WebWorks, Inc. and Subsidiaries**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2009

NOTE 10 – RECENT ACCOUNTING PRONOUNCEMENTS - CONTINUED

In June 2009, FASB issued ASC 105-10 (Prior authoritative literature:  SFAS No. 168, *"The FASB Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162"*).FASB ASC 105-10 establishes the FASB Accounting Standards Codification TM (Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP.  FASB ASC 105-10 is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. As such, the Company is required to adopt these provisions at the beginning of the fiscal year ending September 30, 2009.  Adoption of FASB ASC 105-10 did not have a material effect on the Company’s financial statements.

39

**ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

We have not had a change or disagreement with our independent registered public accounting firm during the past two fiscal years.

**ITEM 9A(T).  CONTROLS AND PROCEDURES**

***Disclosure Controls and Procedures***

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the SEC pursuant to 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 management to allow timely decisions regarding required disclosure.  Our Chief Executive Officer and Chief 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, they concluded that our disclosure controls and procedures were effective.

***Management’s Annual Report on Internal Control over Financial Reporting***

Our management is responsible to establish and maintain adequate internal control over financial reporting.   Our Chief Executive Officer and Chief Financial Officer are responsible to design or supervise a process that provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  The policies and procedures include:

•

maintenance of records in reasonable detail to accurately and fairly reflect the transactions and dispositions of  assets,

•

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with  generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors, and

•

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

For the year ended December 31, 2009, our management has relied on the Committee of Sponsoring Organizations of the Treadway Commission (COSO), “Internal Control - Integrated Framework,” to evaluate the effectiveness of our internal control over financial reporting and based upon that framework management has determined that our internal control over financial reporting is effective.

Our management has also determined that there were no changes made in our internal controls over financial reporting during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. 

This annual report does not include an attestation report of our registered public accounting firm regarding management’s report on internal control over financial reporting.  The management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only the management’s report in this annual report.

**ITEM 9B.  OTHER INFORMATION**

None.

40

**PART III**

**ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

***Directors and Executive Officers***

The directors and executive officers of Pacific WebWorks are listed below, with their respective ages, positions and biographical information.  Our articles of incorporation provide for a board of directors consisting of at least three, but no more than nine persons.  As of the date of this report we have one vacancy on our board of directors.  Our directors serve until our next annual meeting or until each is succeeded by a qualified director.  Our executive officers are chosen by our board of directors and serve at its discretion.  R. Brett Bell is the son of Kenneth W. Bell.

Name

Age

Position Held

Director Term of Office

Kenneth W. Bell

60

Chairman of the Board 

Chief Executive Officer 

Treasurer

January 2001 until next annual meeting.

Christian R. Larsen

35

Director

President

April 1999 until next annual meeting.

R. Brett Bell

34

Chief Financial Officer

Secretary

 

*Kenneth W. Bell:*   Kenneth Bell has served as Chairman of the Board since April 2004 and has served as Treasurer since July 2004.  He has served as our Chief Executive Officer since January 2001.  Prior to that time, he was President and Chief Executive Officer of Logio, Inc., our former subsidiary.  He formerly served as President and Chief Financial Officer of Kelmarc Corporation, a financial and management advisory company.  He has over thirty years experience in a variety of finance and management positions, including employment for fifteen years in the commercial banking industry in Utah and California.  Mr. Bell received a Bachelor’s degree from Brigham Young University.  He has not been involved in any legal proceedings during the past ten years that are material to an evaluation of his ability or integrity.

*Christian R. Larsen:** *Mr. Larsen has served as our President since April 1999.  He served as our Chief Executive Officer from April 1999 through January 2001.  Prior to 1999 he served as Chief Operating Officer of Pacific WebWorks and as a consultant for Utah WebWorks.  He has over fifteen years experience providing computer consulting and business management services.  He has not been involved in any legal proceedings during the past ten years that are material to an evaluation of his ability or integrity.

*R. Brett Bell:*   Brett Bell was appointed Chief Financial Officer of Pacific WebWorks on January 1, 2009.  He has served as corporate Secretary since April 2004 and he served as Vice President of Finance from January 2008 through December 2008.  He has been employed as a controller for Pacific WebWorks since 2001.  Prior to becoming a controller for Pacific WebWorks, he held positions in Investor Relations and Accounting with Logio, Inc.  He studied Economics and Finance at the University of Utah.  He has not been involved in any legal proceedings during the past ten years that are material to an evaluation of his ability or integrity.

***Compliance with Section 16(a)***

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and person who own ten percent or more of our common stock to file initial reports of ownership and reports of changes in ownership of our common stock with the SEC.  Officers, directors and ten-percent beneficial owners are required by SEC regulations to furnish Pacific WebWorks with copies of all Section 16(a) reports they file.  Based upon 

41

review of the copies of such forms furnished to us during the fiscal year ended December 31, 2009, and representations that Forms 5 were not required, we believe during 2009 Kenneth Bell, Christian Larsen and Brett Bell each failed to timely file one Form 4 related to the acquisition of options. 

***Code of Ethics***

We have not adopted a code of ethics for our principal executive and financial officers.  However, our management intends to promote honest and ethical conduct, full and fair disclosure in our reports to the SEC, and compliance with applicable governmental laws and regulations.

***Committee***s

We are a smaller reporting company with a small number of directors and officers who have active roles in our operations.   As a result, we do not have a standing nominating committee for directors, nor do we have an audit committee with an audit committee financial expert serving on that committee.  Our entire board of directors, including Kenneth Bell and Christian Larsen, acts as our nominating and audit committee. 

**ITEM 11.  EXECUTIVE COMPENSATION**

***Executive Officer Compensation***

The following table shows the compensation paid to our named executive officers in all capacities during the past two years.

**SUMMARY COMPENSATION TABLE**

Name and Principal Position

Year

Salary

($)

Bonus

($)

Option

Awards(1)

($)

All Other Compen-sation

($)

Total

($)

Kenneth W. Bell

CEO

2009

148,750

226,500

84,000

7,400 (3)

461,650

2008

125,791

79,500

13,000

1,914 (2)

220,205

Christian R. Larsen

President

2009

125,208

221,500

73,500

1,728 (2)

421,936

2008

102,250

78,500

12,000

1,622 (2)

194,372

R. Brett Bell

CFO

2009

118,750

211,500

73,500

2,988 (4)

404,830

2008

 91,364

76,500

11,000

1,080 (2)

179,944

(1)   Value of options granted (See “Outstanding Equity Awards” below) are computed in accordance with FASB ASC Topic 718.

(2)   Represents contribution to SIMPLE IRA by the Company.

(3)   Represents $2,400 contributed to SIMPLE IRA and $5,000 contributed by the Company for country club membership dues.

(4)   Represents $1,080 contributed to SIMPLE IRA and $1,908 contributed by the Company for country club membership dues.

***Employment Contracts***

During the years ended December 31, 2008 and 2009, the Company had employment agreements with 

42

Kenneth W. Bell, Christian R. Larsen and R. Brett Bell; however, the employment agreements with these executive officers expired on December 31, 2009.  

***Retirement Benefits or Other Arrangements***

We offer a SIMPLE IRA plan to our full time employees, including our executive officers.  This plan provides that each employee may elect to contribute to an individual retirement plan through salary reduction contributions.   The Company contributes between 1% to 3% of the employee’s W-2 earnings or an amount equal to the employee’s annual contribution to the program, whichever is less.

As of the date of this report, we do not have any agreements with our named executive officers regarding resignation, retirement or other termination following a change in control.

***Outstanding Equity Awards***

The following table shows the outstanding equity awards of our named executive officers at December 31, 2009.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

Name

Option Awards

Number of Securities Underlying Unexercised Options Exercisable

Number of Securities Underlying Unexercised Options

Unexercisable

Equity Incentive Plan Awards:

Number of Securities Underlying Unexercised

Unearned Options

Option Exercise Price

Option Expiration Date

Kenneth W. Bell

Total

250,000

275,000

200,000

275,000

325,000

200,000 

--

--

–

–

–

–

–

–

--

–

–

–

–

–

200,000

  $  0.07

0.12

0.048

0.061

0.04

0.21

$   0.21

10/20/2011

10/7/2010

10/9/2011

10/12/2012

10/15/2013

10/13/2014

10/13/2014

1,525,000

–

200,000

 

 

Christian R. Larsen

Total

250,000

250,000

175,000

250,000

300,000

175,000

– 

–

–

–

–

–

–

–

–

–

–

–

–

–

175,000

$   0.07

0.12

0.048

0.061

0.04

0.21

$   0.21

10/20/2011

10/7/2010

10/9/2011

10/12/2012

10/15/2013

10/13/2014

10/13/2014

1,400,000

–

175,000

 

 

43

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END - Continued

Name

Option Awards

Number of Securities Underlying Unexercised Options Exercisable

Number of Securities Underlying Unexercised Options

Unexercisable

Equity Incentive Plan Awards:

Number of Securities Underlying Unexercised

Unearned Options

Option Exercise Price

Option Expiration Date

R. Brett Bell

Total

175,000

225,000

150,000

225,000

275,000

175,000

– 

–

–

–

–

–

–

–

–

–

–

–

–

–

175,000

$  0.07

0.12

0.048

0.061

0.04

0.21

$  0.21

10/20/2011

10/7/2010

10/9/2011

10/12/2012

10/15/2013

10/13/2014

10/13/2014

1,225,000

–

175,000

 

 

***Compensation of Directors*  **

We do not have any standard arrangement for compensation of our directors for any services provided as director, including services for committee participation or for special assignments.  Under our 2001 Equity Incentive Plan, an independent director is eligible to receive 5,000 shares of our common stock or options to acquire our common stock each year in which they serve as a member of our board of directors and 10,000 options upon joining our board of directors.  At this time we do not have any independent directors. 

**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

***Securities Authorized Under Equity Compensation Plans***

The following table lists the securities authorized for issuance under any equity compensation plans approved by our shareholders and any equity compensation plans not approved by our shareholders as of December 31, 2009. 

44

EQUITY COMPENSATION PLAN INFORMATION

Plan category

Number of securities

 to be issued upon 

exercise of

 outstanding options,

 warrants and rights

(a)

Weighted-average

 exercise price of 

outstanding 

options,

warrants and 

rights

(b)

Number of securities

remaining available

for future issuance

under equity

compensation plans

(excluding

securities reflected

in column (a))

(c)

Equity compensation plans approved by security holders

0

$  0.00

0

Equity compensation plans

not approved by security holders

10,572,651

$ 0.24

0

Total

10,572,651

$ 0.24

0

*2001 Equity Incentive Plan*:   On March 8, 2001, Pacific WebWorks’ board of directors adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan.  Under this plan we may grant stock options, stock appreciation rights or restricted shares to employees, independent directors and certain consultants.  The board of directors amended the plan to reserve 10,000,000 shares for this plan, subject to periodic adjustments for changes in the outstanding common stock occasioned by stock splits, stock dividends, recapitalizations or other similar changes.  In the event of a merger, consolidation or plan of exchange to which we are a party or a sale of all, or substantially all, of our assets the committee may continue, assume, substitute, accelerate or settle the outstanding awards.  The board of directors may suspend or terminate the plan at any time. 

All of Pacific WebWorks and our subsidiaries’ employees are eligible for incentive stock options.  Employees, independent directors and consultants are eligible for restricted shares, non-qualified stock options and stock appreciation rights.  We currently have 24 employees, officers and directors eligible to participate in the plan.  An independent director is eligible to receive 5,000 shares of our common stock or options to acquire our common stock each year in which he or she serves as a member of our board of directors and 10,000 options upon joining our board of directors.  As of the date of this filing, we do not have any independent directors.

The plan is administered by a committee which is responsible for determining the type, amount and terms of any consideration awarded to a recipient.  Under the plan any options granted to a recipient are exercisable in accordance with the terms of the agreement governing the grant.  If the option is an incentive stock option, those terms must be consistent with the requirements of the Internal Revenue Code, as amended, and applicable regulations, including the requirement that the option price not be less than the fair market value of the common stock on the date of the grant.  If the option is not an incentive stock option, the option price may be any price determined by the committee.

On October 13, 2009 we granted options to purchase 2,295,000 shares of common stock to 28 employees pursuant to the Pacific WebWorks, Inc. 2001 Equity Incentive Plan.  Under the grants, one-half of the options vested upon grant and the remaining one-half will vest on April 13, 2010.  The options have an exercise price of $0.21 per share and expire on October 13, 2014.   

As of December 31, 2009, the board of directors has granted options under the plan to acquire an aggregate of 10,572,651 shares of common stock with exercise prices ranging from $0.04 to $0.87 per share.  Of the options outstanding, 9,422,651 are exercisable and the remainder vest periodically through October 2014.  This plan 

45

continues in effect until March 8, 2011, unless terminated by the board of directors. 

***Beneficial Ownership***

The following table lists the beneficial ownership of our outstanding common stock by our management and any person or group who beneficially owns more than 5% of our voting stock.  Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Based on these rules, two or more persons may be deemed to be the beneficial owners of the same securities.  Except as indicated by footnote, the persons named in the table below have sole voting power and investment power with respect to the shares of common stock shown as beneficially owned by them.  The percentage of beneficial ownership is based on 45,123,895 shares of common stock outstanding as of March 15, 2009, plus any shares which each of the following persons may acquire within 60 days by the exercise of rights, warrants and/or options. 

CERTAIN BENEFICIAL OWNERS

Name and address of beneficial owner

Amount and nature

of beneficial ownership

Percent

of class

Compass Equity Partners

369 East 900 South

Salt Lake City, UT 84111

2,333,333

5.17

MANAGEMENT

Name of beneficial owner

Amount and nature

of beneficial ownership

Percent

of class

Kenneth W. Bell

1,942,311 (1)

4.15

Christian L. Larsen

2,453,000 (2)

5.25

R. Brett Bell

1,400,758 (3)

3.01

All executive officers and directors as a group    

5,796,069

11.63

(1)

Represents 217,311 shares and options to purchase 1,725,000 shares within the next 60 days. 

(2)

Represents 878,000 shares held by Net Strategic Investments LLC of which Mr. Larsen is an affiliate and options to purchase 1,575,000 shares within the next 60 days.

(3)

Represents 758 shares and options to purchase 1,400,000 shares within the next 60 days. 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR**

**INDEPENDENCE**

***Related Transactions***

The following information summarizes transactions we have either engaged during the past two fiscal years or currently proposed transaction involving our executive officers, directors, more than 5% stockholders, or immediate family members of these persons.  These transactions were negotiated between related parties without “arms length” bargaining and, as a result, the terms of these transactions may be different than transactions negotiated between unrelated persons.

46

In June and July of 2009 we experienced limited merchant account processing capabilities which created a situation where we could not satisfy payables to marketing partners.  To generate needed cash in the 2009 second quarter and early third quarter we sold a portion of our hosting portfolio that was in excess of merchant account limitations to The Quad Group, LLC, a related party (the “Quad Group”) for a total of $418,196.  Quad Group is owned and managed by Nova, LLC.   Kenneth W. Bell, our director and CEO, holds a 1% membership interest in Quad Group.  Christian Larsen, our director and President, holds a 1% membership interest in Quad Group.  Brett Bell, our CFO, holds a 1% membership interest in Quad Group and our employee, Marc Bell holds a 1% interest in the Quad Group.  

***Director Independence***

None of our directors are independent directors as defined by NASDAQ Stock Market Rule 4200(a)(15).  This rule defines persons as “independent” who are neither officers nor employees of the company and have no relationships that, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out their responsibilities as directors.  

**ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES**

***Accountant Fees***

The following table presents the aggregate fees billed for each of the last two fiscal years by our independent registered public accounting firm, Chisholm, Bierwolf, Nilson & Morrill, LLC, Certified Public Accountants, in connection with the audit of our financial statements and other professional services rendered by that firm.  

 

2008

 

2009

Audit fees

$ 25,750

 

$ 49,628

Audit-related fees

 9,090

 

0

Tax fees

3,400

 

6,381

All other fees

$           0

 

$          0

Audit fees represent the professional services rendered for the audit of our annual financial statements and the review of our financial statements included in quarterly reports, along with services normally provided by the accounting firm in connection with statutory and regulatory filings or engagements.  Audit-related fees represent professional services rendered for assurance and related services by the accounting firm that are reasonably related to the performance of the audit or review of our financial statements that are not reported under audit fees.  

Tax fees represent professional services rendered by the accounting firm for tax compliance, tax advice, and tax planning.  All other fees represent fees billed for products and services provided by the accounting firm, other than the services reported for the other categories. 

***Pre-approval Policies***

We do not have a standing audit committee currently serving and as a result our board of directors performs the duties of an audit committee.  Our board of directors will evaluate and approve in advance, the scope and cost of the engagement of an accounting firm before the accounting firm renders audit and non-audit services.  We do not rely on pre-approval policies and procedures.

47

**PART IV**

**ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

***(a)(1)***

***Financial Statements***

The audited financial statements of Pacific WebWorks, Inc. are included in this report under Item 8 on pages 21 through 39.

***(a)(2) Financial Statement Schedules***

All financial statement schedules are included in the footnotes to the financial statements or are inapplicable or not required.

***(a)(3)***

***Exhibits***

The following documents have been filed as part of this report.

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 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.)

10.1

Service Agreement between Pacific WebWorks and Verizon Business Network Services, Inc., dated September 30, 2007 (Incorporated by reference to exhibit 10.1 for Form 10-K filed March 31, 2008)

10.2

Promissory Note between Pacific WebWorks and Principal Development LLC, dated January 27, 2010 (Incorporated by reference to exhibit 10.1 to Form 8-K filed February 19, 2010)

21.1

Subsidiaries of Pacific WebWorks, Inc.

31.1

Chief Executive Officer Certification

31.2

Chief Financial Officer Certification

32.1

Section 1350 Certification

48

**SIGNATURES**

Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

PACIFIC WEBWORKS, INC.

By:    */s/ Christian R. Larsen*

Christian R. Larsen, President

Date:  March 31, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:    /*s/ Kenneth W. Bell*

Kenneth W. Bell

Chairman of the Board

Chief Executive Officer

Treasurer

Date:  March  31, 2010

By:    /*s/ Christian R. Larsen*

Christian R. Larsen 

Director

President

Date:  March  31, 2010

By:   /*s/ R. Brett Bell*

R. Brett Bell

Chief Financial Officer 

Secretary

Date:  March  31, 2010

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