UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549  FORM 10-KSB  [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2006   [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934  Commission file number:  000-26731  PACIFIC WEBWORKS, INC. (Exact name of registrant as specified in its charter) Nevada
(State of incorporation)87-0627910
(I.R.S. Employer  Identification No.)180 South 300 West, Suite 400, Salt Lake City, Utah
(Address of principal executive offices)84101
(Zip Code)  Issuer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  Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [   ]  The issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes [X] No [  ]  Disclosure of delinquent filers in response to item 405 of Regulation S-B is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [  ]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ]   No [X]  State issuers revenue for its most recent fiscal year:   $5,043,226  As of March 7, 2007, the registrant had 35,776,895 shares of common stock outstanding.  The aggregate market value of the shares of voting stock held by non-affiliates as of that date was approximately $1,387,193.  Documents incorporated by reference:  None  Transitional Small Business Disclosure Format: Yes [   ] No [X]    TABLE OF CONTENTS  PART I Item 1.  Description of Business 3 Item 2.  Description of Property 9 Item 3.  Legal Proceedings 9 Item 4.  Submission of Matters to a Vote of Security Holders 9  PART II  Item 5.  Market for Common Equity and Related Stockholder Matters 9 Item 6.  Managements Discussion and Analysis or Plan of Operation 11 Item 7.  Financial Statements 20 Item 8.  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 39 Item 8A. Controls and Procedures 39 Item 8B. Other Information 39  PART III  Item 9.   Directors, Executive Officers, Promoters and Control Persons, Compliance with Section 16(a) of the Exchange Act 39 Item 10.  Executive Compensation 40 Item 11.  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 42 Item 12.  Certain Relationships and Related Transactions, and Director Independence 44 Item 13.  Exhibits 45 Item 14.  Principal Accountant Fees and Services 45 Signatures 46     In this annual report references to Pacific WebWorks, we, us, and our refer to Pacific WebWorks, Inc. and its subsidiaries.  FORWARD LOOKING STATEMENTS  The Securities and Exchange Commission (SEC) encourages companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions.  This report contains these types of statements.  Words such as may, will, expect, believe, anticipate, estimate, project, or continue or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements.  You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.    2    PART I  ITEM 1.  DESCRIPTION OF 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 has four wholly-owned subsidiaries, Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc, which are Delaware corporations, and World Commerce Network, LLC.  Intellipay specializes in providing online, secure and real-time payment processing services for businesses of all sizes.  TradeWorks Marketing was incorporated in Delaware on July 17, 2003, to mass market our products and services.  FundWorks, Inc. was incorporated on August 5, 2003, to provide operating lease arrangements for certain TradeWorks customers.  World Commerce Network, LLC is a non-operating, discontinued operation.  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.  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.  Products  Even though small business, including small office/home office, typically understands how traditional brick and 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, the Intellipay payment systems, education and hosting services.  We provide a comprehensive one-stop solution that incorporates our integrated suite of e-commerce software tools, plus hosting, site management, web design services, and education.  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.  Visual WebTools 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.  $ WebWizardis 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.  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.  Changes can be uploaded to our servers within minutes 24 hours a day, 7 days a week from any Internet-connected Microsoft Windows® computer.      3    $ 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 website, 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.  $ WebStats enables our customers to analyze visitor activities on their websites 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 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.  They 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 used by all major commerce sites, industry standard security components and methods, and 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 - 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.        4     $ 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 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)  IntelliPay Desktop Terminal 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.         5    $ IntelliPay Wireless Terminal (IWT) IntelliPay is now submitting 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.  Education Services - We provide more than our software, we also assist our customers with education and site design services.  We believe this information helps our clients understand how to use the Internet more effectively.  $ Coaching Services are personalized electronic/telephonic instruction on the use of our product technologies.  These services are directed towards assisting clients in making their virtual operations successful. We recommend eight to twelve, one-half hour training sessions for our new customers.  $ Retreats are workshops that are held one to two times per year for certain TradeWorks customers for informative direction on Internet marketing strategies.  Rent-a-Pro offers custom web site design services to clients who elect to hire Pacific WebWorks to build their web site for them rather than building it themselves.  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.  Sales and Marketing  In July 2003 we incorporated TradeWorks Marketing to conduct marketing events in locations throughout the United States. TradeWorks Marketing’s product offerings include Intellipay Virtual Terminal Software, Pacific WebWorks Visual WebTools Web site manager and builder, including integration with ebayTM.com., TradeWorks Product Club and coaching and training.  TradeWorks Marketing also has entered into factoring arrangements with an outside leasing company with recourse for certain sales of e-commerce software and merchant accounts.  In August 2003 we incorporated FundWorks, Inc. to provide operating lease arrangements for certain TradeWorks customers.  The operating lease agreements are for the purchase of e-commerce software and merchant accounts over 24 to 36 months for the price of $59.95 per month.  The customers relying on these operating lease agreements have a higher credit risk.  In July 2006 we discontinued our nationwide sales events to avoid the excessive costs and risks associated with that type of sales campaign.  We have since initiated an aggressive online marketing strategy that has resulted in the addition of significantly greater numbers of customers and a significant increase in our recurring revenues.  This has been accomplished at considerably less risk and without the excessive costs associated with the nationwide marketing events.  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.  We now market and sell our products primarily through a variety of online marketing programs. Additionally we rely on reseller channels, including our wholly-owned reseller, TradeWorks Marketing, our own internal sales force     6     and strategic partnerships.  We sell our products to our partners at wholesale.  The partners then mark the products up and sell them at retail.  We also sell our products through resellers who are paid a commission for each merchant who purchases our products and subsequent services.  Each merchant must sign a purchase agreement with the reseller, which the reseller must in turn provide to us. We then provide software to the resellers customers, allowing them to create Internet web sites and/or complete e-business solutions. We provide the initial reseller with training in the use of the software.  We believe we may be able to develop a substantial presence in our target market through a combination of broad channels of distribution, marketing strategy, unique proprietary technology, technical expertise, and training and education in the use of our products.  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.  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.  A number of companies are now providing Internet services to small businesses.  They include organizations like Microsoft, Yahoo!, Bigstep, Zyweb, Register.com, GoDaddy, Bizfinity, MeZine.com and many others.  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 “Yahoo! Store” is our most significant competitor, with its brand name recognition and significantly greater financial, technical, marketing, and managerial resources. Yahoo! Store has significantly higher sales and customers than we do and has entered into a significantly higher number of license agreements with third parties.  We believe that our product provides a comparable service for a lower price than that provided by Yahoo! Store.  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 the generality of the Yahoo! Store may be inadequately addressing potential customer needs and that we will be better able to address their 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; and, $ our ability to recruit resellers who can market and sell our products and services in significant volumes to the market.  We believe that we will need to make significant expenditures for research and development and marketing in the future to compete effectively.       7     Major Customers  Our client base includes in excess of 10,000 active paying customer accounts.  We rely on the efforts of our internal marketing staff and on third party resellers, including our wholly-owned reseller, TradeWorks Marketing, to add accounts to our customer base.  A significant portion of our past 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 primarily dependent upon our internal marketing staff, including TradeWorks Marketing, 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 October 25, 2002 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 through October 29, 2006.  The mark has been renewed for 10 years through October 29, 2016.  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, 2006, we recorded research and development expense of $250,224 primarily related to the maintenance and certification of our existing technologies and the development of additional eBay analysis tools and product club expansion.  For the year ended December 31, 2005 we recorded research and development expense of $264,829 primarily related to the further development of the Intellipay products, our online auction tool and maintenance of our core products.  Material Contracts  We initially entered into an informal agreement with Electric Lightwave, Inc. for telecommunications and Internet      8     access in January 1998.  We formalized the agreement in February 1998 and negotiated an extension in November 2001, which terminated in January 2004.  As of the date of this filing, this contract is on a month-to-month basis.  The extension agreement requires that we pay approximately $3,500 per month for a dedicated DS3 Internet and telephone connection, and a redundant T-1.  Employees As of the date of this filing we have 19 employees in Pacific WebWorks.  We have six employees in administration, two in sales and marketing, six in operations and five development engineers.  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 2.  DESCRIPTION OF PROPERTY  Our principal offices are located in the Westgate Business Center, which is located in Salt Lake City, Utah.  This property serves as our main office and data center.  We lease approximately 8,000 square feet of commercial office space and pay approximately $8,400 per month.  Since December 2006 we have been on a month-to-month lease and expect to remain month-to-month until later this year when we plan to relocate our operations.  ITEM 3.  LEGAL PROCEEDINGS  On December 29, 2006 Jeffrey Robinson filed a complaint against TradeWorks Marketing, Inc. in the Superior Court of the State of California, County of Los Angeles.  Mr. Robinson alleges that Tradeworks Marketing violated the Americans with Disabilities Act of 1990, the Unruh Civil Rights Act and the California Disabled Persons Act.  The complaint alleges that TradeWorks Marketing failed to provide an American Sign Language Interpreter for Mr. Robinson at a seminar.  Mr. Robinson seeks injunctive relief compelling TradeWorks Marketing to comply with the Americans with Disabilities Act of 1990 and the Unruh Civil Rights Act.  He is seeking damages either under the Americans with Disabilities Act of 1990 or the Unruh Civil Rights Act and will make an election at trial.  He is also seeking costs and attorneys fees.  Our legal counsel has answered the complaint and a trail conference is set for May 2007.  We are involved in various disputes and legal 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.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  We have not submitted a matter to a vote of our shareholders during the fourth quarter of the 2006 fiscal year.   PART II  ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS  Market Information  The principal market for our common stock is the NASD OTC Bulletin Board and our common shares trade under the symbol PWEB.  The following table presents the range of the high and low bid 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.           9     YearQuarter EndedHigh BidLow Bid2005March 31
June 30
September 30
December 31$ 0.095
0.095
0.19
0.1475$ 0.06
0.051
0.061
.092006March 31
June 30
September 30
December 31$ 0.139
0.132
0.079
0.075$ 0.09
0.06
0.03
0.035  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.  The rule provides that any equity security is considered to be a penny stock unless that security is: $ registered and traded on a national securities exchange meeting specified criteria set by the SEC; $ issued by a registered investment company; $ excluded from the definition on the basis of price (at least $5.00 per share) or the issuers net tangible assets.  Trading in the penny stocks is subject to additional sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors.  Accredited investors, in general, include certain institutional investors and individuals with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse.  For transactions covered by these rules, broker-dealers must make a special suitability determination for the purchase of our securities and must have received the purchasers written consent to the transaction prior to the purchase.  Additionally, for any transaction involving a penny stock, the rules require the delivery, prior to the first transaction, of a risk disclosure document relating to the penny stock.  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 the purchaser disclosing recent price information for the penny stocks.  Consequently, 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.  Holders  As of March 7, 2007 we had 412 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  On October 9, 2006 we granted options to purchase 1,245,000 shares of common stock to seventeen employees under our 2001 Equity Incentive Plan.  The options have an exercise price of $0.048 and for each grant one-half of the options vest after six months and the other half vest after twelve months.  The options expire October 1, 2011.  We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) of the Securities Act.        10     On February 27, 2007 we issued 350,000 restricted common shares to Donald R. Mayer, President of Universal Business Insurance, Inc. in consideration for insurance premiums valued at $17,500.  We relied on an exemption from registration for a private transaction not involving a public distribution provided by Section 4(2) of the Securities Act.  Issuer Purchase of Securities   None.  ITEM 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION  Executive Overview  During the second quarter of 2006 we determined that the high cost and excessive risk involved in conducting nationwide sales events made that mode of marketing our products unacceptable.  As a result, in July of 2006 we discontinued that means of marketing and began the process of implementing an aggressive and comprehensive online marketing program.  The results have been gratifying.  While it took 90 to 120 days to fully implement the program, since November of 2006 we have seen a steady and dramatic increase in the volume of new customers added each month.  Recurring revenues are increasing and net cash flows are improving.  These improved results, more fully realized during the first quarter of 2007, have been achieved while at the same time significantly reducing the risk involved in our marketing strategies.  We are still in the early stages of implementation of these strategies, but we are encouraged by the initial results and look forward to expanding this program in 2007.  Our subsidiary, Intellipay, Inc. has added 25 new Caselle municipality clients during 2006 and transaction processing overall has increased.  Despite this progress a thorough review of our operations coupled with an evaluation of the market value of gateways at large have led to our decision to impair the carrying value of Intellipay by $1 million in our financial statements.  While this will add to our net loss for the year ended 2006, it has no effect on cash flows or liquidity.  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  At December 31, 2006 we had cash and cash equivalents of $392,633 and we recorded net revenues of $5,043,226. We have historically relied upon revenues, loans, and equity transactions to fund our operations.  During the year ended December 31, 2006 we relied on our revenues to fund operations.  During the year ended December 31, 2005 we relied on net revenues of $5,914,346, proceeds from notes payable of $300,000 and proceeds from the sale of our common stock of $500,000 to fund our operations.  We expect to generate positive cash flows through further development of our business and distribution channels and we plan to address only the liabilities of our operating subsidiaries with our current cash balances and cash inflows.  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.  Our monthly cash outflows are primarily related to selling expenses which totaled $2,323,267 in 2006 and general and administrative expenses that totaled  $2,008,586 for 2006.  For 2005 selling expenses were $2,362,694 and general and administrative were $1,842,262. These cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales.      11     A portion of our revenues are comprised of deferred revenue that we recognized over the year.  We carried deferred revenue of $27,834 on our books as a current liability as of December 31, 2006 and for 2005 we carried deferred revenue of $579,206.  Deferred revenue includes up-front fees received for license fees, software services and education not yet performed or delivered.  The 2006 deferred revenues will be recognized over the next eight to twelve months.  It should be noted that this liability does not require a specific cash outlay, but only that we remain a going concern.  During 2006 we experienced a decrease in revenue and our recurring monthly billing portfolios.  These decreases are a result of the discontinuation of our nationwide sales events and the transition to our new online marketing strategies.  It is important to note that the majority of trade accounts receivables and bad debt relate to our monthly recurring revenue categories and are not a representation of our overall business.  As our recurring portfolio increases, we recognize an increase in bad debt due to the nature of our business and the makeup of our clients.  Therefore, as our recurring customer base increases the accounts receivable and bad debt will show increases as the overall revenue and customer base grow.  We are working with our independent accountants to determine if there is a better manner in which to treat these accounts.  Certain customers of TradeWorks Marketing entered into operating leases to purchase e-commerce software and merchant account agreements that were assigned by TradeWorks Marketing to FundWorks.  The customers pay $59.95 per month for the operating lease agreement and the agreements have terms over 24 to 36 months and are non-cancelable.  Related revenues are recorded monthly as earned.  The future annual minimum lease receipts for FundWorks operating leases as of December 31, 2006 were approximately $242,438 through December 31, 2007 and $22,901through December 31, 2008.  Collectability of future minimum lease receipts cannot be assured because the customers placed in these operating leases have a higher credit risk.  We believe that we may need an additional $1 to $2 million during the next twelve months to continue to keep up with technological improvements and further our business development strategies.  We believe funding may be obtained through additional debt arrangements or equity offerings.  However, if we are unable to obtain additional funds on acceptable terms, then we might be forced to delay or abandon some or all of our product development, marketing or business plans, and growth could be slowed, which may result in declines in our operating results and common stock market price.  If we rely on equity offerings for funding or services, then we will likely use private placements of our common stock pursuant to exemptions from the registration requirements provided by federal and state securities laws.  The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions.  We also note that if we issue more shares of our common stock our stockholders may experience dilution in the value per share of their common stock.  Commitments and Contingent Liabilities  Our operating commitments consist of our operating lease for our Salt Lake City office that approximates $8,500 per month.  As of December 31, 2006 we had an accrued liability of approximately $91,500 related to the Intellipays operating lease default.  Intellipay defaulted on its operating lease in May 2002 after we closed Intellipays physical office, located in Fremont, California, and moved its technological infrastructure and operations to Salt Lake City, Utah in February 2002.  The Intellipay lease required approximately $6,000 per month, plus late fees and interest, through December 2003.  The accrued liability has been reduced for time that the property was leased to a third party by the property manager.  Our total current liabilities at December 31, 2006 included accounts payable of $92,468 related to operating costs such as advertising expenses, professional fees and seminar expenses.  We had a promissory note payable of $100,000, with 8% interest per annum, which is due in full on April 30, 2007.  This note is collateralized by our business assets and we have not made any payments on this loan as of December 31, 2006.  Our accrued liabilities of $123,822 were primarily the result of the operating lease default for the Intellipay office space, contingent reseller commissions, payroll liabilities, and estimated refunds and factoring obligations.  Deferred revenues of $27,834      12     included up-front fees received for license fees, software services and education not yet performed or delivered.  Current liabilities from discontinued operations were $235,274 and are related to World Commerce Network, LLC.  The operations of World Commerce Network, LLC, our subsidiary, are ceased and discontinued.  Management is attempting to negotiate settlements of World Commerce Networks accrued liabilities.  As of December 31, 2006 World Commerce Networks accrued liabilities totaled $171,264 and included estimated contingent recourse obligations and attorneys fees approximating $95,000 and approximately $56,000 for estimated customer refunds.  In addition, World Commerce Network had a contingent liability of approximately $65,000 plus interest related to an alleged default of application for credit and personal guaranty made by a former officer of Pacific WebWorks.  We continue to work through various matters related to these liabilities and management believes the recorded liabilities are sufficient to cover any resulting liability.  There has been no activity on any of these accounts for nearly three years.  In late December 2006 a legal complaint was filed against our wholly-owned subsidiary, TradeWorks Marketing (See Part I Item 3, above).  We have recorded a $20,000 accrued liability for this matter and management believes this amount will be sufficient to cover the resulting liability from this action.  Off-balance Sheet Arrangements  None.  Critical Accounting Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Estimates of particular significance in our financial statements include deferred revenue calculations, goodwill and the annual tests for impairment of goodwill, contingent liabilities, and valuing stock option compensation.  Deferred revenue calculations materially affect our financial results.  In this area cash revenues received for certain product sales, such as revenues from up-front fees, are recognized over the period services are performed.  This requires deferring the immediate recognition of those revenues from eight months to one year and creating a deferred revenue liability account.  Goodwill related to Intellipay is assessed annually for impairment by comparing the fair values of Intellipay to its carrying amount, including goodwill.  In testing for a potential impairment of goodwill, the estimated fair value of  Intellipay is compared with book value, including goodwill.  If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.  If, however, the fair value of Intellipay is less than book value, then the carrying amount of the goodwill is compared with its implied fair value.  The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks.  If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.  The fair value of Intellipay is estimated using both cash flow information from internal budgets and multiples of revenue.  In the event that an impairment indicator arises prior to our annual impairment test of goodwill, we will provide a full test relative to the indicator in the period that the indicator is present.  We performed a goodwill impairment test during 2006 and concluded there was an impairment indicator of goodwill for Intellipay.  Based upon an analysis of current and forecast cash flows related to our Intellipay operation coupled with a review of valuation multiples in the market we have determined that a $1 million impairment of our goodwill related to Intellipay is appropriate.  In addition to deferred revenue and goodwill impairment, our consolidated financial statements include estimates for contingent liabilities that are carried on out books.  Material estimates for contingent liabilities include      13     approximately $74,000 for our operating companies and approximately $151,000 in net current liabilities of our discontinued operations. From a liquidity standpoint, any settlement or judgment received by us from pending or threatened litigation may have a direct affect on our cash balances at December 31, 2006.  Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not have a direct affect on our assets as management does not intend to satisfy such claims with the assets of our operating companies.  Management believes that all amounts estimated and recorded as contingent liabilities approximate the amount of liabilities that could be owed to parties in the form of settlement or in a judgment.  We have had no communication with any of the parties related to these contingent liabilities for over three years.   Any settlements that might occur below amounts accrued would result in a favorable impact to our earnings and working capital. As permitted by Statement of Financial Accounting Standards No. 148, we continue to account for stock options under APB Opinion No. 25, under which no compensation has been recognized.  The fair value of the options we have granted is estimated at the date of grant using the Black-Scholes American option-pricing model.  Option pricing models require the input of highly sensitive assumptions, including expected stock volatility.  Also, our stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and that the resulting option values are reasonable.  Results of Operations  The following discussions are based on the consolidated financial statements for the year ended December 31, 2006 and 2005 for Pacific WebWorks, Intellipay, TradeWorks Marketing, Fundworks and the discontinued operations of World Commerce Network, LLC, a non-operating company.  The following chart is a summary of our financial statements for the years ended December 31, 2006 and 2005 and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part II, Item 7, below.   Comparison of 2005 and 2006 Fiscal Year Operations20052006Revenues, net$ 5,914,346$ 5,043,226Cost of sales1,771,725512,594Gross profit4,142,6204,530,631Total operating expenses4,499,5804,611,481Net loss from operations(356,960)(80,850)Total other income (expense)61,087(945,583)Income taxesNet earnings (loss)(295,873)(1,026,433)Net earnings (loss) per share$        (0.01)$        (0.03)   We recognize revenue from hosting, gateway, and maintenance fees, software access and licensing fees, training and education and the sale of merchant accounts, as well as custom website design work.  Revenues from up-front fees 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.        14      Our net revenues decreased in 2006 when compared to 2005 as we shifted our business approach from nationwide sales events to online marketing strategies.  Management expects revenues to increase during 2007 as a result of our continued marketing activities.  Further, management expects future revenue increases to come largely from recurring residual income rather than from one time upfront fees.  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 for 2005 was primarily related to our new marketing strategy and related increases in reseller fees and commissions.  The cost of sales decreased in 2006 due to the shift away from nationwide sales campaigns.  Management anticipates that cost of sales will remain lower in 2007 as we continue our new marketing strategy.  Total operating expenses increased for 2006 compared to 2005.  Selling expenses remained relatively the same for 2005 and 2006.  Selling expenses include advertising expenses, seminar expenses, commissions and personnel expenses for sales and marketing.  During 2005 and most of 2006 we expended significant amounts on sales and marketing, including direct mail, radio, and print advertising.  Starting in November 2006 we shifted our focus to online marketing strategies rather than nationwide sales events and we anticipate that selling expenses will decrease as a percentage of revenues in 2007.  Research and development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department.  Research and development expenses decreased slightly in 2006 compared to 2005 and management anticipates that these expenses will increase somewhat over the next year.  General and administrative expenses include personnel expenses for executive, finance, and internal support personnel.  In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs. General and administrative expenses increased in 2006 largely due to increased personnel expense and bad debt expense related to our expanded operations.  Management expects to see continued increases in general and administrative expenses consistent with the significant increase in customer accounts expected during 2007.  Total other expense for 2006 was primarily the result of a $1,000,000 impairment to goodwill for our subsidiary, Intellipay.  Total other income for 2005 was primarily related to interest income earned on certificates of deposit and the recovery of a previously booked expense.  As a result of the above items, we recorded a net loss and net loss per share for both 2005 and 2006.  We recorded a net loss of $1,026,433 for 2006; however $1 million of that loss is comprised of a non-cash charge incurred in the impairment of the value of our wholly-owned subsidiary, Intellipay, Inc.  Exclusive of that charge our net loss for 2006 was $26,433, a decrease of nearly $330,527 from the 2005 net loss.  Balance Sheet - the following chart is a summary of our balance sheet.  Comparison of 2005 and 2006 Fiscal Year Balance Sheet20052006Cash and cash equivalents$         744,500$ 392,633Total current assets1,166,814584,217Total assets4,368,0832,746,390Total current liabilities1,133,812579,398Total liabilities1,233,812579,398Accumulated deficit(13,022,900)(14,049,333)Total stockholders equity3,134,2712,166,992    15      Total assets decreased in 2006 primarily as a result of a $1 million reduction in goodwill related to the impairment of Intellipay.  Total liabilities also decreased in 2006 primarily as a result of decreases in deferred revenue resulting from the recognition of income from up-front fees and services.  Factors Affecting Future Performance  We have a history of losses and anticipate future losses.  We are unable to fund our day-to-day operations from revenues alone.  For the year ended December 31, 2006, we incurred a net loss of $1,026,433 compared to a net loss of $295,873 for the year ended December 31, 2005.  We anticipate revenue from operations and equity transactions will fund our operations for the next twelve months; however, we cannot assure you that we will be able to attain or maintain profitability.  We may need additional external capital and may be unable to raise it.  Based on our current growth plan we believe we may require $1 to $2 million additional financing within the next twelve months to remain competitive in our market.  If we fail to obtain funds on acceptable terms, then we might be forced to delay or abandon some or all of our business plans.  Our success will depend upon our ability to access equity capital markets and borrow on terms that are financially advantageous to us.  Also, we may not be able to obtain additional funds on acceptable terms.  If we are unable to obtain additional capital, then we may not have sufficient working capital to develop products, finance acquisitions, or pursue business opportunities.  If we borrow funds, then we could be forced to use a large portion of our cash reserves to repay principal and interest on those funds.  If we issue our securities for capital, then the interests of investors and shareholders could be diluted.  We are subject to intense competition from large and small companies that limits our ability to obtain market share and may force our prices down.  We face competition in the overall Internet software market, as well as in the web site building market.  Our ability to earn significant revenues from our Visual WebToolsTM or IntelliPay payment system will depend in part on their acceptance by a substantial number of online businesses.  Broad acceptance of our products and services and their use in large numbers is critical to our success because a large portion of our revenues are derived from one-time and recurring fees we charge to customers buying our products and services.  Our success in obtaining market share will depend upon our ability to build name brand recognition and to provide cost-effective products and services to our customers.  We have developed our products to meet the needs of small businesses and we believe the generality of our competitors services may be inadequately addressing the small business owners needs. We expect competition 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.         16      We depend upon our proprietary rights, none of which can be completely safeguarded against infringement.  Our ability to compete effectively will depend, in part, upon our ability to protect our proprietary source codes for Visual WebToolsTM and the IntelliPay payment system through a combination of licenses and trade secrets.  These agreements and procedures may not effectively prevent disclosure of our confidential information and may not provide us with an adequate remedy in the event of unauthorized disclosure of such information.  Intellectual property rights, by their nature, are uncertain and involve complex legal and factual questions.  We rely upon trade secrets with respect to our source code and functionalities and other unpatented proprietary information in our product development activities.  We seek to protect trade secrets and proprietary knowledge in part through confidentiality agreements with our employees, resellers, and collaborators.  If employees or collaborators develop products independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those products or services.  Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights.  It would be impossible to predict whether litigation might be successful.  We rely in part on third party technology licenses which we cannot guarantee will be available to us in the future.  We rely on certain technology which we license from third parties, including software which is integrated with internally developed software and used in our software to perform key functions.  Our inability to maintain any of these technology licenses could result in delays in distribution of our services or increased costs of our products and services.  We cannot assure you that third party technology licenses will continue to be available to us on commercially reasonable terms, or at all.  We must update our products and services and may experience increased costs and delays which could reduce operating profit.  The electronic commerce, web hosting and merchant processing markets in which we compete are characterized by technological change, new product introductions, evolving industry standards and changing customer needs.  In order to remain competitive, we may be required to engage in a number of research and development projects, which carries the risks associated with any research and development effort, including cost overruns, delays in delivery and performance problems.  Any delay in the delivery of new products or services could render them less desirable by our customers, or possibly even obsolete.  Any performance problem with a new product or service may require significant funds to correct the problem.  As a result of these factors, our research and development efforts could result in increased costs that could reduce our operating profit, a loss of revenue if promised new products are not timely delivered to our customers, or a loss of revenue or possible claims for damages if new products and services do not perform as anticipated.  We may experience software defects which may damage customer relations.  Despite rigorous testing, our software may nevertheless contain undetected bugs, errors or experience failures when introduced, or when the volume of services provided increases.  Any material errors could damage the reputation of our service or software, as well as damage our customer relations. We have detected errors, defects, and bugs in the past and have corrected them as quickly as possible.  Correcting any defects or bugs we may discover in the future may require us to make significant expenditures of capital and other resources.  We believe that we follow industry-standard practices relating to the identification and resolution of errors, defects, or bugs encountered in the development of new software and in the enhancement of existing features in our products.  As of the date of this filing we have not experienced any material adverse effect by reason of an error, defect, or bug.  We may experience breakdowns in our hosting services, infrastructure or payment processing systems, which may expose us to liabilities and cause customers to abandon our products and services.  We would be unable to deliver our payment processing services or hosting services if our system infrastructures break down or are otherwise interrupted.  Events that could cause system interruptions are: C fire, C earthquake, C power loss, C terrorist attacks,  17    C harmful software programs, C telecommunications failure, and C unauthorized entry or other events.  Although we regularly back up data from operations, and take other measures to protect against loss of data, there is still some risk of such losses.  Despite the security measures we maintain, our infrastructure may be vulnerable to computer viruses, hackers, rouge employees or similar sources of disruption.  Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers from using our services.  We attempt to limit this sort of liability through back-up systems, contractual provisions, insurance, and other security measures.  However, we cannot assure you that these contractual limitations on liability would be enforceable, or that our insurance coverage would be adequate to cover any liabilities we might sustain.  Also, a breach of our e-commerce security measures could reduce demand for our services.  The e-commerce industry is intensely focused on the need for Internet security, particularly with respect to the transmission and storage of confidential personal and financial data.  Any compromise or elimination of our security could erode customer confidence in our systems and could result in lower demand for our services or possible litigation.  We are dependent upon license renewal which cannot be assured to occur.  We derive revenues from user licenses and license renewals on a month to month arrangement.  We also intend to increase the brand recognition of our productsamong users through these types of relationships.  If a substantial number of our customers were to decline to renew their contracts for any reason, then we could experience a substantial drop in revenues. Our success in establishing our products as a recognized brand name and achieving their acceptance in the market will depend in part on our ability to continually engineer and deliver new product technologies and superior customer service, so that customers renew their licenses month to month.  We may pursue acquisitions of complementary service product lines, technologies or business which may interfere with our operations and negatively affect our financial position.  From time to time, we evaluate potential acquisitions of businesses, services, products, or technologies.  These acquisitions may result in a potentially dilutive issuance of equity securities, the incurrence of debt and contingent liabilities, and amortization of expenses related to goodwill and other intangible assets.  In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services, and products of the acquired companies; the diversion of managements attention from other business concerns; risks of entering markets in which we have no or limited direct prior experience; and, the potential loss of key employees of the acquired company.  As of the date of this filing, we have no present commitment or agreement with respect to any material acquisition of other businesses, services, products, or technologies.  Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss of investor confidence in our reported financial information.  Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-KSB for the fiscal year ending December 31, 2007, we will be required to furnish a report by our management on our internal control over financial reporting.  If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.  In order to achieve compliance with Section 404 of the Act within the prescribed period, we will need to engage in a process to document and evaluate our internal control over financial reporting, which will be both costly and challenging.  In this regard, management will need to dedicate internal resources, engage outside consultants and adopt a detailed work plan to:         18      $ assess and document the adequacy of internal control over financial reporting, $ take steps to improve control processes where appropriate, $ validate through testing that controls are functioning as documented, and $ implement a continuous reporting and improvement process for internal control over financial reporting. We can not assure you as to our, or our independent auditors, conclusions at December 31, 2007 with respect to the effectiveness of our internal control over financial reporting.  There is a risk that neither we nor our independent auditors will be able to conclude at December 31, 2007 that our internal controls over financial reporting are effective as required by Section 404 of the Act.  During the course of our testing we may identify deficiencies which we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act.  Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.  We may not be able to adapt as the Internet market changes.  Our failure to respond in a timely manner to changing market conditions or client requirements could have a material adverse effect on our business, prospects, financial condition, and results of operations.  The Internet is characterized by: $ rapid technological change; $ changes in advertiser and user requirements and preferences; $ frequent new product and service introductions embodying new technologies; and $ the emergence of new industry standards and practices that could render our existing service offerings, technology, and hardware and software infrastructure obsolete.  In order to compete successfully in the future, we must $ enhance our existing products and develop new services and technology that address the increasingly sophisticated and varied needs of our prospective or current customers; $ license, develop or acquire technologies useful in our business on a timely basis; and $ respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.  Our future success depends on continued growth in the use of the Internet and Internet-based services for small business.  Because the Internet is a rapidly evolving industry, the ultimate demand and market acceptance for our products will be subject to a high level of uncertainty.  Significant issues concerning the commercial use of the Internet and online service technologies, including security, reliability, cost, ease of use, and quality of service, remain unresolved and may inhibit the growth of Internet business solutions that use these technologies.  In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation.  Regulation of the Internet and Internet-based services may decrease the demand for our services and/or increase our cost of doing business.  Due to the increasing popularity and use of the Internet and online services, federal, state, local, and foreign governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet and other online services.  These laws and regulations may affect issues such as user privacy, pricing, content, taxation, copyrights, distribution, and quality of products and services.  Any new legislation could hinder the growth in use of the Internet generally or in our industry and could impose additional burdens on companies conducting business online, which could, in turn, decrease the demand for our services, increase our cost of doing business.  The      19     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.  ITEM 7: FINANCIAL STATEMENTS      Pacific WebWorks, Inc.  CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006      CONTENTS  Report of Independent Registered Public Accounting Firm 21  Consolidated Balance Sheets 22  Consolidated Statements of Operations 23  Consolidated Statements of Stockholders Equity 24  Consolidated Statements of Cash Flows 25  Notes to the Consolidated Financial Statements 26  20     Chisholm
Bierwolf &
Nilson, LLCCertified Public AccountantsTodd D. Chisholm, Audit Partner
Nephi J. Bierwolf, Tax Partner
Troy F. Nilson, Audit Partner
Shauna S. Howe, Audit Partner  533 West 2600 South, Suite 25   Bountiful, Utah 84010   Phone:  (801) 292-8756   Fax: (801) 292-8809  www.cbncpa.com    REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM  To the Board of Directors and Stockholders of Pacific Webworks, Inc.  We have audited the accompanying consolidated balance sheets of Pacific Webworks, Inc. and Subsidiariesas of December 31, 2006 and 2005 and the related consolidated statements of operations, stockholders equity and cash flows for the years then ended.  These financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these consolidated financial statements based on our audits.  We conducted our audits in accordance with the standards of the PCAOB (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.  Accordingly, we express no such opinion.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.  In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Webworks, Inc. and Subsidiaries as of December 31, 2006 and 2005 and the results of its operations and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.  /s/ Chisholm, Bierwolf & Nilson, LLC Chisholm, Bierwolf & Nilson, LLC Bountiful, UT February 9, 2007  Member of AICPA, UACPA & Registered with PCAOB              21     Pacific WebWorks, Inc.CONSOLIDATED BALANCE SHEETSASSETSDecember 31,20052006CURRENT ASSETSCash and cash equivalents$       744,520392,633ReceivablesTrade, less allowancefor doubtful receivables of$97,592 in 2005 and$30,000 in 2006269,002149,584Prepaid expenses153,29142,000Total current assets1,166,814584,217PROPERTY AND EQUIPMENT, NETAT COST81,03990,683RESTRICTED CASH (Note 1)163,472111,765GOODWILL (Note 1)2,946,2531,946,253OTHER ASSETS, NET10,50513,472$    4,368,083$    2,746,390LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable94,05392,468Notes payable - Current (Note 6)-100,000Accrued liabilities125,280123,822Deferred revenue (Note 1)679,20627,834Current liabilities from discontinued operations (Note 8)235,274235,274Total current liabilities1,133,812579,398Commitments--Notes payable - Long Term100,000-Total liabilities1,233,812579,398STOCKHOLDERS' EQUITYCommon stock - par value $0.001; authorized50,000,000; issued and outstanding 35,426,895 sharesin 2005 and  35,426,895 shares in 200635,42735,427Additional paid-in capital16,121,74416,180,898Accumulated deficit(13,022,900)(14,049,333)Total stockholders' equity3,134,2712,166,992$    4,368,083$    2,746,390  The accompanying notes are an integral part of these consolidated financial statements.     22     Pacific WebWorks, Inc.CONSOLIDATED STATEMENTS OF OPERATIONSYear EndedDecember 31,20052006RevenuesSoftware, access and license fees$   1,392,093$    1,234,923Hosting, gateway and maintenance fees1,814,5501,787,854Training and education1,219,2311,222,409Merchant accounts, design and other1,488,471798,0405,914,3465,043,226Cost of sales1,771,725512,594Gross profit4,142,6204,530,631Selling expenses2,362,6942,323,267Research and development264,829250,224General and administrative1,842,2622,008,586Depreciation and amortization29,79529,404Total operating expenses4,499,5804,611,481Net loss from operations(356,960)(80,850)Other income (expense)Interest income11,81730,862Interest Expense-(8,000)Impairment of Goodwill-(1,000,000)Other income (expense), net49,27031,555Total other Income (Expense)61,087(945,583)Net income (loss) from continuing operationsbefore income taxes(295,873)(1,026,433)Income Taxes--NET LOSS$    (295,873)$   (1,026,433)Loss per share amount$          (0.01)$           (0.03)Weighted-average common shares outstanding31,497,71835,426,125  The accompanying notes are an integral part of these consolidated financial statements.       23     Pacific WebWorks, Inc.CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITYFrom January 1, 2005 to December 31, 2006AdditionalCommon StockPaid-inAccumulatedSharesAmountCapitalDeficitTotalsBalances at January 1, 200528,517,622$  28,518$  15,560,971$   (12,727,027)$    2,862,462Issuance of stock for insurance policies639,27363955,211-55,850Issuance of stock for portfolio20,000201,980-2,000Issuance of common stock for cash6,250,0006,250493,750-500,000Compensation for Issuance of Warrantsto Investor Relations Firm--9,832--Net loss 2005---(295,873)(295,873)Balances at December 31, 200535,426,89535,42716,121,744(13,022,900)3,134,271Valuation of stock options--59,154-59,154Net loss for year ended December 31, 2006---(1,026,433)(1,026,433)Balances at December 31, 200635,426,895$  35,427$  16,180,898$   (14,049,333)$    2,166,992  The accompanying notes are an integral part of these consolidated financial statements.                              24     Pacific WebWorks, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWSFor the year endedDecember 31,20052006Increase (decrease) in cash and cash equivalentsCash flows from operating activitiesNet earnings (loss)$   (295,873)$   (1,026,433)Adjustments to reconcile net earnings (loss)to net cash used in operating activitiesDepreciation & amortization29,79529,404Stock Options9,832.0059,154Bad debt expense828,437936,045Impairment of Goodwill-1,000,000Changes in assets and liabilitiesReceivables(1,001,180)(816,627)Prepaid expenses and other assets(8,756)108,324Accounts payable and accrued liabilities(50,940)(3,041)Deferred revenue247,628(651,372)Total adjustments54,816661,887Net cash provided by continuing operating activities(241,057)(364,546)Cash flows from investing activitiesPurchases of property and equipment(40,453)(39,048)Cash on reserve with bank (Restricted Cash)(26,953)51,707Net cash provided by (used in) investing activities67,406)12,659Cash flows from financing activitiesProceeds from notes payable100,000-Proceeds from convertible notes payable200,000-Payments on convertible notes payable(200,000)-Proceeds from issuance of common stock and warrants250,000-Proceeds from exercise of warrants250,000-Net cash used in financing activities--Net cash provided by financing activities600,000-Net increase/(decrease) in cash and cash equivalents291,537(351,887)Cash and cash equivalents at beginning of period452,983744,520Cash and cash equivalents at end of period$       44,520$       392,633Supplemental disclosures of cash flow information:Cash Paid for Interest$               -$                 -Cash paid for income taxes800Non-cash financing activities:Stock issued for prepaid insurance policies55,849-  The accompanying notes are an integral part of these consolidated financial statements            25     Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  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., and World Commerce Network, LLC.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The operations of World Commerce Network, LLC have been discontinued.  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.  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 Companies merchant bank in connection with the Companies acceptance of credit card payment for its services.  GoodwillThe Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, in 2002. Under SFAS No. 142, goodwill is no longer amortized, but is tested for impairment at a reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more       26     Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED  likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances which could trigger an impairment review include a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, a loss of key personnel, significant changes in the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or projected future results of operations. For purposes of financial reporting and impairment testing in accordance with SFAS No. 142, the Companys Intellipay business unit operates in one principal business segment, a provider of online credit card gateway services. In testing for a potential impairment of goodwill, the estimated fair value of the business unit is compared with book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the Company is less than book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks. If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess. In accordance with SFAS No. 142, the Company performed a goodwill impairment test during 2006 and concluded that the carrying amount of goodwill exceeds the implied fair value of the goodwill, accordingly an impairment loss was recognized in December 2006 of $1,000,000. Fair value of financial instruments The fair value of the Companys cash and cash equivalents, receivables, accounts payable, accrued liabilities and capital lease obligations approximate carrying value based on their effective interest rates compared to current market prices.  Revenue Recognition The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements and its revisions in SAB No. 104.  SAB 101 and 104 clarify application of generally accepted accounting principles related to revenue transactions. In the third quarter 2003, the company adopted EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF Issue No. 00-21").  We receive revenue for hosting, gateway, and maintenance fees, software access and licensing fees, training and education and the sale of merchant accounts as well as custom website design work.  Revenues from up-front fees are deferred and recognized over the period services are performed ranging from eight months to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services are completed (which is generally two months).  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned. Operating lease revenues for merchant accounts and software are recorded as they become due from customers.         27     Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED  The Company recognizes revenues when all of the following criteria are met: (1) persuasive evidence of an arrangement exists, (2) delivery of products and services has occurred, (3) the fee is fixed or determinable and (4) collectibility is reasonably assured.  In an arrangement with multiple deliverables, the delivered item(s) is considered a separate unit of accounting if all of the following criteria are met: (1) the delivered item(s) has value to the customer on a standalone basis, (2) there is objective and reliable evidence of the fair value of the undelivered item(s), and (3) if the arrangement includes a general right of return, delivery or performance of the undelivered item(s) is considered probable and substantially in the control of the vendor. If all the conditions above are met and there is objective and reliable evidence of fair value for all units of accounting in an arrangement, the arrangement consideration is allocated to the separate units of accounting based on their relative fair values.  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 recieveable and the correcsponding allowance for doubtful accounts are reviewed for collectiblitly by management quarterly and uncollectible accounts receivable are written off. Cost of salesCost of sales includes costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs. Sales and marketing costsSales and marketing expenses include advertising expenses, seminar expenses, commissions and personnel expenses for sales and marketing. The Company has expended significant amounts on sales and marketing, including national television, radio, print, and Internet marketing. Marketing and advertising costs to promote the Company's products and services are expensed in the period incurred. Research and development costsProduct development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department.  Costs incurred by the Company to develop, enhance, manage, monitor and operate the Company's technology services are generally expensed as incurred.  Total research and development costs for December 31, 2006 and 2005 was $250,224 and $264,829 respectively. General and administrative costsGeneral and administrative expenses include personnel expenses for executive, finance, and internal support personnel. In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.     28    Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED  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.  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED  Stock Options The Company has stock option plans that provide for stock-based employee compensation, including the granting of stock options, to certain key employees. Prior to January 1, 2006, the Company applied APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations in accounting for awards made under the Companys stock-based compensation plans.  Under this method, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price.  During the periods presented in the accompanying financial statements, the Company has granted options under its 2001 Equity Incentive Plan. The Company has adopted the provisions of SFAS No. 123R using the modified-prospective transition method and the disclosures that follow are based on applying SFAS No. 123R.  Under this transition method, compensation expense recognized during the year ended December 31, 2006:  (a) compensation expense for all share-based awards granted prior to, but not yet vested as of January 1, 2006, and (b) compensation expense for all share-based awards granted on or after January 1, 2006.  Accordingly, compensation cost of $58,975 and $4,256 has been recognized for grants of options to employees and directors in the accompanying statements of operations with an associated recognized tax benefit of $0 and $0 of which $0 and $0 was capitalized as an asset year ended December 31, 2005.  In accordance with the modified-prospective transition method, the Companys financial statements for the prior year have not been restated to reflect, and do not include, the impact of SFAS 123R.  Had compensation cost for the Company's stock option plans and agreements been determined based on the fair value at the grant date for awards in 2006 consistent with the provisions of SFAS No. 123R, the Company's net loss and basic net loss per common share would have been increased to the pro forma amounts indicated below: For the Year
Ended December 31,
2005Net income (loss), as reported$(295,873)Plus stock-based employee compensation expense included in reported net loss, net of related tax effects-Less stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects(36,844)Pro forma net earnings (loss)$(332,717)Basic and diluted net loss per common share, as reported$(0.01)Basic net loss per share, pro forma$(0.01)Diluted net loss per share, pro forma$(0.01)  29        Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED  Earnings (loss) 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.  Potentially issuable common shares totaling 7,822,651 related to options and 3,083,335 related to warrants were excluded from the calculation of diluted loss per share for the year ended December 31, 2006 because their effects were anti-dilutive.  The following is the calculation for weighted average common shares used in basic and dilutive net earnings (loss) per share: Year ended December 31,20052006Income (loss) (numerator)($295,873)($1,026,433)Weighted average shares outstanding (denominator)31,497,71835,426,895Per share amount($0.01)($0.03)  NOTE 2   PROPERTY AND EQUIPMENT  Property and equipment includes the following:   December 31,Estimated useful20052006life (years)Computer Equipment$  350,338$365,9083-5Equipment141,306158,2222-10Software98,847102,7111-3Furniture and Fixtures87,78789,5673-10Leasehold Improvements4,9805,897Life of lease683,258722,306Less Accumulated Depreciation(602,219)(631,623)$    81,039$ 90,683  Depreciation expense for the years ended December 31, 2006 and 2005 was $29,404 and $29,795, respectively.  NOTE 3  OTHER ASSETS  Other assets include the following: December 31,20052006Purchased customer portfolio$        280,309$                  -Deposits9,67213,472289,98113,472Accumulated amortization(279,476)-$         10,505$         13,472  Amortization expense for the years ended December 31, 2006 and 2005 was $0 and $0, respectively.  30    Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 4  ACCRUED AND OTHER LIABILITIES  Accrued liabilities consist of the following:    December 31,20052006Payroll related liabilities$         46,054$          49,560Sales contractor commissions2,3461,419Contingent reseller commissions--Operating lease in default91,52291,522Refunds and factor(16,282)(20,019)Income tax payable900900Other440440$       124,980$         123,822   NOTE 5  OPERATING LEASE REVENUES  During the year ended December 31, 2006, certain customers of TradeWorks, a subsidiary of the Company, entered into operating lease agreements that were assigned to FundWorks to purchase e-commerce software and merchant accounts over 24 to 36 months for $59.95 per month.  The leases are non-cancelable and related revenue is recorded monthly as earned.  Future annual minimum lease receipts for FundWorks operating leases as of December 31, 2006  are as follows: Through December 31, 2007 $242,438 2008 22,901 2009 - Thereafter -_ $265,339  Collectability of future minimum lease receipts cannot be assured as the customers placed in operating leases are of a higher credit risk.  TradeWorks also enters into factoring arrangements for certain sales of e-commerce software and merchant accounts to an outside leasing company with recourse.  Estimated recourse amounts are reduced from the amount funded to the company and netted against sales for reporting purposes as they are not considered realizable.  Accrued interest at December 31, 2006 is $8,000.  NOTE 6  NOTES PAYABLE  / CONVERTIBLE NOTES PAYABLE  On December 27, 2005, the Company entered into a Promissory Note agreement for $100,000.  The note interest was at 8% per annum, and is due in full including principal and interest on April 30, 2007.  The note is collateralized by the Companys business assets.  No payments have been made on such loan as of December 31, 2006.         31    Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 7  STOCK HOLDERS EQUITY  Stock Issuance On July 1, 2005, the Company entered into a Unit Purchase Agreement with investors for up-to 4,500,000 units at $0.06 per unit.  A unit consists of one share of the Companys common stock and one warrant for the purchase of an additional share at a specified exercise price. One half of the warrants have an exercise price of $0.12 per share and one half have an exercise price of $0.17 per share.   Warrants are immediately exercisable and will expire one year from the effective date of a registration statement to be filed covering the shares.  During July 2005, 4,166,667 units were purchased resulting in the issuance of 4,166,667 shares of the Companys common stock for total funding of $250,000.  Also in July 2005, investors exercised warrants at $0.12 per share for 2,083,333 shares of the Companys common stock for $250,000 in cash.  Immediately following these transactions warrants representing 2,083,333 shares of the Companys common stock were outstanding at an exercise price of $0.17 per share.  During May and October 2005, the Company issued 230,000 and 408,500 shares of its common stock for payment of $15,000 and $40,850 related to insurance premiums.  During February 2005, the Company issued 20,000 shares of its common stock to purchase a portfolio of recurring service customers and related technology valued at $2,000.  Equity Incentive Plan On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of awards in the form of stock options, stock appreciation rights or restricted shares to employees, independent directors and certain consultants. The 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, 2006.                         32     Pacific WebWorks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 7  STOCK HOLDERS EQUITY  - CONTINUED  Information with respect to the Companys stock options follows: Weighted-average Stock options Exercise price exercise price Outstanding at January 1, 2003 4,696,302 $0.14-$2.00 $0.54 Granted 1,400,000 0.07 0.07 Exercised - - - Forfeited 761,878  0.14-2.00 0.82 Outstanding at December 31, 2004 5,334,424 $0.07 - $1.75 $0.37 Granted 1,935,000 0.12 0.12 Exercised - - - Forfeited 471,773  $0.07 - $1.75 $0.48 Outstanding at December 31, 2005 6,797,651 $0.07 - $0.87 $0.28 Granted 1,230,000 0.048 0.048 Exercised - - - Forfeited 205,000  $0.07 - $0.23 $0.08 Outstanding at December 31, 2006 7,822,651 $0.048 - $0.87 $0.25   Options outstanding Weighted- Number Weighted-average average remaining Exercise price outstanding exercise price contractual life (years) 0.87 40,151 0.87 4 0.75 1,577,500 0.75 3.75 0.23 1,200,000 0.23 .5 0.14 370,000 0.14 1.75 0.12 1,855,000 0.12 3.75 0.07 1,550,000 0.07 2.75 0.048 1,245,000 0.048 4.75 7,837,651  Options exercisable Weighted- Number Weighted-average average remaining Exercise price exercisable exercise price contractual life (years) 0.87 40,151 0.87 4 0.75 1,577,500 0.75 3.75 0.23 1,200,000 0.87 0.5 0.14 370,000 0.14 1.75 0.12 1,855,000 0.12 3.75 0.07 1,550,000 0.07 2.75 6,592,651             33    Pacific WebWorks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 7  STOCK HOLDERS EQUITY  - CONTINUED  During the years ended December31, 2006 and 2005, the Company received $0 upon the exercise of awards.  The options were valued using the Black-Scholes model which approximates fair value.  At December 31, 2006 and 2005, expense recognized for the valuation of stock options was $59,154 and $0, respectively.  Issuance of Warrants During July 2005, the Company issued warrants to purchase 1,000,000 shares of its common stock to an investor relations firm.  The warrants are immediately exercisable for 500,000 shares at $0.10 and 500,000 shares at $0.15 and expire in July 2008.  The fair value of this transaction totals $9,832 which has been estimated using the Black Scholes option-pricing model and recorded as a general and administrative expense.  As discussed above, during July 2005, the Company issued warrants to purchase 2,083,333 shares of its common stock at $0.12 per share and warrants to purchase 2,083,333 shares of its common stock at $0.17 per share.  The warrants were issued in conjunction with a common stock transaction.  A total of 2,083,333 warrants were exercised in July 2005 for $250,000 in cash.  As of December 31, 2005, warrants to purchase a total of 1,000,000 shares of the Companys common stock are outstanding and exercisable at a price of $0.17 per share  In October 2006, the warrants were cancelled at the request of the warrant holders.  No warrants were outstanding at December 31, 2006.   NOTE 8  DISCONTINUED OPERATIONS  The following includes the net current liabilities for the Companys discontinued operations as of December 31, 2005 & 2006:  20052006WorldWorldCommerceCommerceNetwork, LLCNetwork, LLCASSETSCurrent assets$                                -$                             -Long-term assets--Total assets$                                -$                            -LIABILITIESPayables past due64,01064,010Accrued liabilities171,264171,264Total current liabilities$                     235,274$                 235,274Net current liabilities$                     235,274$                 235,274          34       Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006   NOTE 8  DISCONTINUED OPERATIONS _ CONTINUED  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 LLC 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, 2005 and December 31, 2006 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, 2005 and  December 31, 2006 representing its estimated liability for this matter.  Management believes that the amount recorded is sufficient to cover the resulting liability from this complaint.  Operating lease in default In June 2002, in conjunction with the migration of the Intellipay operations to our Salt Lake City facilities, Intellipay, Inc., a subsidiary of the Company, defaulted on its operating lease for office space in Fremont, California.  The lease agreement required payment of approximately $6,000 per month plus applicable late fees and interest through December 2003 when the lease expired.  As of December 31, 2006, Intellipay, Inc. has recorded an accrued liability of approximately $91,500 related to the months of office lease under default, less months re-leased by the property manager to others, including estimated interest and late fees.  The Company is not aware of any legal proceedings related to this lease and does not anticipate any legal action to be taken.   NOTE 9 - LITIGATION  On December 29, 2006 Jeffrey Robinson filed a complaint against TradeWorks Marketing, Inc., a subsidiary of the Company, in the Superior Court of the State of California, County of Los Angeles.  Mr. Robinson alleges that Tradeworks Marketing violated the Americans with Disabilities Act of 1990, the Unruh Civil Rights Act and the California Disabled Persons Act.  The complaint alleges that TradeWorks Marketing failed to provide an American Sign Language Interpreter for Mr. Robinson at a seminar.  Mr. Robinson seeks injunctive relief compelling TradeWorks Marketing to  35    Pacific WebWorks, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 9  LITIGATION - CONTINUED  comply with the Americans with Disabilities Act of 1990 and the Unruh Civil Rights Act.  He is seeking damages either under the Americans with Disabilities Act of 1990 or the Unruh Civil Rights Act and will make an election at trial.  He is also seeking costs and attorneys fees.  Our legal counsel has answered the complaint and a trail conference is set for May 2007.  Other matters The Company is involved in other various disputes and legal claims in the normal course of business.  It is not possible to state the ultimate liability, if any, in these matters.  In the opinion of management, any resulting litigation will have no material effect on the financial position and results of operations of the Company in excess of amounts recorded.  NOTE 10 - INCOME TAXES   The company has sustained losses as of December 31, 2005 and 2006.  Consequently, there is no income tax provision or benefit for the periods presented.  Reconciliation of income taxes computed at the federal statutory rate and income tax expense are as follows:  12/31/200512/31/2006Federal income taxes at statutory rate$        (100,597)(348,987)State income taxes net of federal benefit$            (9,704)$            (813)Change in the Valuation allowance$           89,671$        (89,330)Non-deductible Goodwill Impairment$       340,000Other (Including expiration or state net operating losses)$           20,630$         99,130Total$                  (0)$                (0)Deferred taxes consist of the following:Deferred Tax AssetsAllowance for doubtfull accounts$           36,402$         11,190Net operating loss carryforwards$      3,536,767$    3,484,005Excess book depreciation and amortization$           61,557$         52,784Capital loss Carryforwards$         209,530$       219,530Deferred expenses$           31,506$         28,923$      3,885,762$    3,796,432Less Valuation Allowance$     (3,885,762)$   (3,796,432)Net Tax Assets$                   -$                  -  The Company has sustained net operating losses in all periods presented.  There were no deferred tax assets or income tax benefits recorded in the financial statements for net deductible temporary differences or net operating loss carryforwards because the likelihood of realization of the related tax         36     Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006  NOTE 10 - INCOME TAXES - CONTINUED  benefits cannot be established as of December 31, 2006.  Accordingly, a valuation allowance has been recorded to reduce the net deferred tax asset to zero.  The decrease in the valuation allowance was $89,330 for the year ended December 31, 2005 and 2006 respecitvely.  As of December 31, 2006, the Company had federal and state net operating loss carryforwards for tax reporting purposes of approximately $9,800,000 and $4,700,000 respectively, expiring through 2026.  As of December 31, 2006 the Company had a federal capital loss carryforward for tax reporting purposes of approximately $650,000 expiring in 2008.  NOTE 11 - SEGMENT REPORTING  Although the Company operates in one business segment, the production and distribution of business e-commerce software, management reports by individual business unit.   Segment reporting by business unit follows:  Year ended Pacific Trade Fund- Discontinued December 31, 2005a WebWorks Intellipay Works Works Operationsb  Revenues, net  $ 1,385,647 $542,899 $3,746,691 $239,108 $ -  Net income (loss) $   (176,702)  $  97,269 $ (319,736) $103,526 $       - ___________________________________________________  aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation. bIncludes World Commerce Network, LLC. a non-operating, discontinued subsidiary.  Year ended Pacific Trade- Fund- Discontinued December 31, 2006a WebWorks Intellipay Works Works Operationsb  Revenues, net $  1,414,728 $ 533,577 $2,754,769 $ 340,117 $          -  Net income (loss) $(1,303,472) $ 141,927 $   143,232 $   (3,563) $          - ___________________________________________________ aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation. bIncludes World Commerce Network, LLC. a non-operating, discontinued subsidiary.            37        Pacific WebWorks, Inc.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  December 31, 2006   NOTE 12  SUBSEQUENT EVENTS  On February 27, 2007, the Company issued 350,000 shares of the Companys common stock for payment of $17,500 related to insurance premiums.  NOTE 14   NEW TECHNICAL PRONOUNCEMENTS  In February 2006, the FASB issued SFAS No. 155 ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS AND AMENDMENT OF FASB STATEMENTS NO. 133 AND 140. This statement amends FASB Statements No. 133, accounting for Derivative Instruments and Hedging Activities, and No. 140 Accounting for Transfers and Servicing of Financial Assets and Extinguishments Issues No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. The adoption of SFAS No. 155 did not have an impact on the Companys consolidated financial statements.  In March 2006, the FASB issued SFAS No. 156 ACCOUNTING FOR SERVICING OF FINANCIAL ASSETS AN AMEDMENT OF FASB STATEMENT No. 140. This statement amends FASB Statement No. 140. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognizing servicing assets and servicing Liabilities.  The adoption of SFAS No. 156 did not have an impact on the Companys consolidated financial statements.  In September 2006, the FASB issued SFAS No. 157 FAIR VALUE MEASURMENTS. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SAFS 157 did not have an impact on the Companys consolidated financial statements.  In September 2006, the FASB issued SFAS No. 158 EMPLOYERS ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS AN AMENDEMENT OF FASB STAEMENTS NO. 87, 88,106 AND 132(R). This statement improves financial reporting by requiring and employer to recognize the overfunded or underfunded status of a defines benefit postretirement plan (other that a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of not-for-profit organization. The adoption of SFAS No. 158 did not have an impact on the Companys consolidated financial statements.    38     ITEM 8.  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 last two fiscal years.  ITEM 8A.  CONTROLS AND PROCEDURES  We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC.  This information is accumulated and communicated to our executive officers to allow timely decisions regarding required disclosure.  Our Chief Executive Officer, who also acts in the capacity of our principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, he concluded that our disclosure controls and procedures were effective.  Also, he determined that there were no changes made in our internal controls over financial reporting during the fourth quarter of 2006 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.  ITEM 8B.  OTHER INFORMATION None.   PART III  ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT  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.  NameAgePosition HeldDirector Term of OfficeChristian R. Larsen32President and DirectorApril 1999 until next annual meeting.Kenneth W. Bell57Chairman of the Board, Chief Executive Officer, Treasurer, and DirectorJanuary 2001 until next annual meeting.R. Brett Bell31Secretary and Controller  Christian R. Larsen -Mr. Larsen currently serves as our President and 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 nine years experience providing computer consulting and business management services.  Kenneth W. Bell - On April 14, 2004, our board of directors appointed Kenneth W. Bell as Chairman of the Board.  On July 15, 2004, our board of directors appointed him to serve in the capacity of Treasurer.  He has served as our Chief Executive Officer since January 2001.  Prior to that time Mr. Bell was President and Chief Executive Officer       39     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 Bachelors degree from Brigham Young University in 1972.  R. Brett Bell - On April 14, 2004 our board of directors appointed Robert Brett Bell as Secretary of the company.  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. from 1998 to 2001.  He studied Economics and Finance at the University of Utah.  Audit Committee  We do not currently have an audit committee and, accordingly, we do not have an audit committee financial expert serving on an audit committee.  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 review of the copies of such forms furnished to us during the fiscal year ended December 31, 2006, and representations that Forms 5 were not required, we believe Kenneth W. Bell filed late one Form 4 related to one option grant, Christian R. Larsen filed late one Form 4 related to one option grant, and R. Brett Bell filed late one Form 4 related to one option grant.  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.  ITEM 10.  EXECUTIVE COMPENSATION  Executive Officer Compensation  The following table shows the compensation paid to our named executive officers in all capacities during the year ended December 31, 2006.  SUMMARY COMPENSATION TABLEName and Principal PositionYearSalaryBonusOption AwardsTotalKenneth W. Bell
CEO2006$     100,625$     6,250$     9,600$ 116,475Christian R. Larsen
President200677,0415,7508,40091,191R. Brett Bell
Secretary200667,0415,2507,20079,491           40      Employment Contracts  On April 1, 2006 we entered into employment agreements with Kenneth W. Bell, Christian R. Larsen and R. Brett Bell.  Kenneth Bell was employed as the Chief Executive Officer of Pacific WebWorks with a salary of $105,000 a year and will devote 80% of his working time to the business of the company.  Mr. Larsen was employed as the President of Pacific WebWorks with a salary of $80,000 per year and will devote 100% of his working time to the business of the company.  R. Brett Bell was employed as the Vice-President of Finance of Pacific WebWorks with a salary of $70,000 per year and will devote 100% of his working time to the business of the company.  The employment agreements terminate on March 31, 2008.  The remaining material terms of the employment agreements are identical as described below.  Each year the salary for each executive officer shall be increased annually at a rate determined by the board of directors or in the amount of 6%.  Each executive is entitled to yearly cash bonuses as determined by the board of directors, along with vacation time, health and medical insurance, participation in retirement, pension, profit sharing or other plans approved by the board.  Each executive agreed not to disclose company confidential information to third parties.  If the executive officer resigns his position, he will be entitled to only compensation for services rendered.  The company may terminate his employment for cause; but if his employment is terminated other than for cause, then he will receive a lump sum payment of his salary and incentive compensation within 30 days of the termination.  Upon termination each executive shall have continued coverage under the insured employee benefit plan.  Each executive promised to not release any proprietary information about the company for a period of two years after his termination of employment.  In the event the executive officers employment is terminated due to a change in control of the company, as defined in the agreement, then he will receive two times the average sum of amounts paid to him for salary, bonus and profit sharing for the five fiscal years immediately preceding the date of change in control.  If the executive suffers disability for a period of more than nine consecutive months while employed, then he is entitled to one-half of his salary for an 18 month period.  If the disability continues for an 18 month consecutive period, then the company may terminate the employment agreement.  If the executive officer dies during his employment, then the company will pay one years salary and incentives to his estate.  Each executive is entitled to request by written notice that any shares he holds be registered, subject to itemized limitations in the employment agreement, when the company files certain registration statements.  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.  During the year ended December 31, 2006 none of our executive officers elected to contribute to a plan.  We have described above the agreements we have entered into 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, 2006.  41     OUTSTANDING EQUITY AWARDS AT FISCAL YEAR ENDOption AwardsNameNumber of Securities Underlying Unexercised Options ExercisableNumber of Securities Underlying Unexercised Options
UnexercisableEquity Incentive Plan Awards:
Number of Securities Underlying Unexercised
Unearned OptionsOption Exercise PriceOption Expiration DateKenneth W. Bell37,878
600,000
50,000
300,000
250,000
275,000
0
0
0
0
0
0
200,000200,000$ 0.87
0.75
0.14
0.225
0.07
0.12
0.0481/31/2011
4/4/2011
7/23/2007
10/2/2008
10/20/2009
10/7/2010
10/9/2011Christian R. Larsen325,000
50,000
275,000
250,000
250,000
0
0
0
0
0
175,000175,000$ 0.75
0.14
0.225
0.07
0.12
0.0484/4/2011
7/23/2007
10/2/2008
10/20/2009
10/7/2010
10/9/2011R. Brett Bell2,273
35,000
35,000
100,000
175,000
225,000
0
0
0
0
0
0
150,000150,000$ 0.87
0.75
0.14
0.225
0.07
0.12
0.0481/31/2011
4/4/2011
7/23/2007
10/2/2008
10/20/2009
10/7/2010
10/9/2011  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 11.  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, 2006.         42     EQUITY COMPENSATION PLAN INFORMATIONPlan categoryNumber of securities to be issued upon exercise of outstanding options, warrants and rights
(a)Weighted-average exercise price ofoutstanding 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 holders0$  0.000Equity compensation plans
not approved by security holders7,822,6510.252,177,349Total7,822,651$  0.252,177,349  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 in 2006 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 twenty-one 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 9, 2006 we issued options to purchase 1,245,000 shares of common stock pursuant to our 2001 Equity Incentive Plan.  The stock options have an exercise price of $0.048 per share and expire five years from the date of issuance.  One half of the options vested six months from the date of grant and the other half vest twelve months from the date grant.  As of December 31, 2006, the board of directors has granted under the plan options to acquire an aggregate of 7,822,651 shares of common stock with exercise prices ranging from $0.048 to $0.87 per share.  The options vest periodically through October 2010 and expire through October 2011.  The plan continues in effect until March 8, 2011, unless terminated by the board of directors.         43    Beneficial Ownership  The following table lists the beneficial ownership of our outstanding common stock by our management.  We are unaware of a person or group who beneficially owns more than 5% of our outstanding common 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 35,776,895 shares of common stock outstanding as of March 7, 2007, plus any shares which each of the following persons may acquire within 60 days by the exercise of rights, warrants and/or options.   MANAGEMENTName and address of
beneficial ownersAmount and nature
of beneficial ownerPercent
of classChristian R. Larsen
180 South 300 West, Suite 400
Salt Lake City, Utah 841012,115,500 (1)5.7Kenneth W.  Bell
180 South 300 West, Suite 400
Salt Lake City, Utah 841011,830,189 (2)4.9R. Brett Bell
180 South 300 West, Suite 400
Salt Lake City, Utah 84101649,031 (3)1.8All executive officers and
directors as a group4,594,72011.7  (1) Represents 878,000 shares held by Net Strategic Investments LLC of which Mr. Larsen is an affiliate and options to purchase 1,237,500 shares. (2) Represents 217,311 shares and options to purchase 1,612,878 shares. (3) Represents 1,758 shares and options to purchase 647,273 shares.  ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE  Related Transactions  We have not engaged in any transactions during the past fiscal year involving our executive officers, directors, 5% or more stockholders or immediate family members of such persons.  Director Independence  We do not have any independent directors serving on our board of directors.               44    ITEM 13.  EXHIBITS  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.) 4.1 Pacific WebWorks, Inc. 2001 Equity Incentive Plan (Incorporated by reference to exhibit 4.1 to Form S-8, effective May 26, 2006) 10.1 Master Service Agreement between Electric Lightwave, Inc., and Utah WebWorks, Inc., dated February 2, 1998  (Incorporated by reference to exhibit No. 10.1 for Form 10, as amended, file No. 0-26731, filed July 16, 1999.) 10.2 Internet Access Agreement, Addendum to Master Service Agreement between Electric Lightwave, Inc., and Pacific WebWorks, Inc., dated January 1, 2002 (Incorporated by reference to exhibit No. 10.2 for Form 10-K, filed March 26, 2002) 10.3 Lease Agreement between Pacific WebWorks, Inc. and Westgate Business Center, dated November 20, 2003 (Incorporated by reference to exhibit 10.3 for Form 10-KSB, filed March 22, 2004) 10.4 Form of employment agreement for executive officers, dated April 1, 2006 21.1 Subsidiaries of Pacific WebWorks (Incorporated by reference to exhibit 21.1 for Form 10-QSB, filed November 13, 2003) 31.1 Chief Executive Officer Certification 31.2 Principal Financial Officer Certification 32.1 Section 1350 Certification  ITEM 14. PRINCIPAL ACCOUNTANT 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, LC, Certified Public Accountants, in connection with the audit of our financial statements and other professional services rendered by that firm.  20052006Audit fees$ 7,834$ 11,148Audit-related fees2,1000Tax fees4,2754,044All other fees00  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 an 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 auditor before the auditor renders audit and non-audit services.  We do not rely on pre-approval policies and procedures.  45    SIGNATURES  In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.  Pacific WebWorks, Inc.    Date: March 29, 2007 By:/s/ Christian R. Larsen Christian R. Larsen, President   In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.     Date: March 29, 2007 /s/ Christian R. Larsen Christian R. Larsen President and Director      Date: March 29, 2007  /s/ Kenneth W.  Bell Kenneth W.  Bell Chairman of the Board, Chief Executive Officer, Principal Financial and Accounting Officer and Treasurer     Date: March 29, 2007 /s/ R. Brett Bell R. Brett Bell Secretary and Controller  46