UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

[X]   

[X]
ANNUAL REPORT PURSUANT TOUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended December 31, 2001

2007

[  ]
TRANSITION REPORT PURSUANT TOUNDER SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For transition period ___ to ____

Commission file number: 000-26731

PACIFIC WEBWORKS, INC.
      (Exact
(Exact name of registrant as specified in its charter)

        NEVADA                                            87-0627910
- ----------------------------------------  -----------------------------------
(State or other jurisdiction of          (I.R.S. Employer Identification No.)
incorporation or organization)

Nevada
(State or other jurisdiction of
incorporation or organization)
87-0627910
(I.R.S. Employer  Identification No.)
230 West 400 South, Salt Lake City, Utah
(Address of principal executive offices)
84111
(Zip Code)

Registrant’s telephone number:  (801) 578-9020

180 South 300 West, Suite 400, Salt Lake City, Utah 84101
- ----------------------------------------------------           ---------
(Address of principal executive offices)                      (Zip code)

Issuer's telephone number, including area code: (801) 578-9020

(Former address)

Securities registered pursuant tounder Section 12(b) of the Exchange Act:  None.
None

Securities registered pursuant tounder Section 12(g) of the Exchange Act:  Common Stock

The

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

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

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  
Yes [X]   No [  ]

Disclosure

Indicate by check mark if disclosure of delinquent filers in responsepursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company:
Large accelerated filer   [  ]
Non-accelerated filer     [  ]
Accelerated filed   [  ]
Smaller reporting company   [X]



1





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes [  ]   As of February 20, 2002 the registrant had 23,076,688 shares of common stock
outstanding.  No [X]

The aggregate market value of the voting stockand non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on June 29, 2007 was approximately $1,596,193.

The number of shares outstanding of the registrant’s common stock as of that dateMarch 11, 2008 was approximately $5,056,705.

41,001,895.

Documents incorporated by reference:  None


TABLE OF CONTENTS

PART I
Item 1.    Business...........................................................3
Business
3
Item 1A  Risk Factors
9
Item 2.    Properties........................................................ 9
Properties
13
Item 3.    Legal Proceedings..................................................9
Proceedings
13
Item 4.    Submission of Matters to a Vote of Security Holders................9

                             Holders
13

PART II

Item 5.     Market Forfor Registrant’s Common Equity, and Related Stockholder Matters..........10
Matters
                and Issuer Purchases of Equity Securities
13
Item 6.     Selected Financial Data 13
15
Item 7.     Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations....14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........21
Operation
16
Item 8.     Financial Statements and Supplementary Data ......................21
Item 9.
20
Item9.      Changes in and Disagreements Withwith Accountants on Accounting and Financial Disclosure......................... 48

                             Disclosure
40
Item 9A.  Controls and Procedures
40
Item 9B.  Other Information
40

PART III

Item 10.  Directors, and Executive Officers of Pacific WebWorks..............48
and Corporate Governance
40
Item 11.  Executive Compensation 49
42
Item 12.  Security Ownership of Certain Beneficial Owners and Management....52
Management
               and Related Stockholder Matters
44
Item 13.  Certain Relationships and Related Transactions, 53

                             and Director Independence
46
Item 14.  Principal Accountant Fees and Services
46

PART IV

Item 14.15.  Exhibits, Financial Statement Schedules and Reports on Form 8-K...53






                    FORWARD LOOKING STATEMENTS

     
47
Signatures
48



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In this annual report references to "Pacific“Pacific WebWorks," "we," "us,"” “we,” “us,” and "our"“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 annual report contains certain forward-looking statements within the
meaningthese types of the Private Securities Litigation Reform Act of 1995.  For this
purpose any statements contained in this Form 10-K that are not statements of
historical fact may be deemed to be forward-looking statements.  Without
limiting the foregoing, wordsWords such as "may," "will," "expect," "believe,"
"anticipate," "estimate"“may,” “will,” “expect,” “believe,” “anticipate,” “estimate,” “project,” or "continue"“continue” or comparable terminology are intended
toused in connection with any discussion of future operating results or financial performance identify forward-looking statements.  TheseYou are cautioned not to place undue reliance on the forward-looking statements, by their nature
involve substantial riskswhich 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 andthat could cause actual results mayto differ materially depending on a variety of factors, many of which are not within
Pacific WebWorks' control.  These factors include but are not limited to
economic conditions generally andfrom those described in the industries in which Pacific WebWorks
may participate; competition within Pacific WebWorks' chosen industry,
including competition from much larger competitors; technological advances and
failure by Pacific WebWorks to successfully develop business relationships.


                                2
forward-looking state ments.


PART I

ITEM 1.  BUSINESS

Historical Development During 2001

     Our 2001 fiscal year began with the acquisition of Logio, Inc. as our
wholly owned subsidiary

The company was incorporated in February of 2001. On October 31, 2000, Pacific
WebWorks and Logio entered into an Agreement and Plan of Reorganization in
which Pacific WebWorks agreed to acquire Logio as a wholly-owned subsidiary
through a stock-for-stock exchange.  The acquisition was contingent upon the
approval of the stockholders of Logio and registration of the shares under the
Securities Act of 1933.  The registration statement on Form S-4 was declared
effective on December 20, 2000, without review by the SEC, and Logio
stockholder approval was obtained in January 2001.  We finalized the
acquisition on February 8, 2001 when we filed Articles of Exchange with the state of Nevada.

     Logio, formerly WordCruncher Internet Technologies,Nevada on May 18, 1987, as Asphalt Associates, Inc., is and changed its name to Pacific WebWorks, Inc. in January 1999.  On July 31, 2007 we formed Pacific WebWorks International, LTD, a development stage company historically engagedUnited Kingdom limited company.  We are in the development and
marketingprocess of  a focused Internet directory and search engine which serves the
needs of the business professional.  Logio launched its web site, logio.com,
on March 19, 2000.  The web site was designed to provide a broad spectrum of
the information and services that are required by business people in their
daily work activities.  In June 2000, Logio shifted its business model towards
the generation of revenues from set-up and maintenance fees from the sale of
its directory in private label form to certain Internet sites and corporate
Intranets.  Subsequently, Logio discontinued the web site, and currently does
not conduct development and marketing activities nor does it have operations.
Our management is evaluating the potential applications for the Logio
technology in our products.

Ourforming Pacific WebWorks GmbH, an Austrian company.

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 merchants.and other technologies.  We specialize in turn-keyturnkey applications allowing small to medium-sized business ownersmedium sized businesses to expand their business ontoover the Internet.  Our product family provides tools for web site creation, management and maintenance;maintenance, electronic business storefront hosting and Internet payment systems for the small to medium-sizedmedium sized business niche.

     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 merchants“brick and mortar” entities, in addition to our virtual merchants. We plan to expand our software family to
include features that integrate the physical store information systems with
the Internet store information systems.  This expansion may include features
such as Cashier/ POS (point of sale) management, receiving, ordering, tender,
store operations, human resources, POS peripherals management, inventory and
accounting.  At the same time we expect our virtual software will be expanded
to include featured items and benefits, catalog management, order development,
advanced 1-to-1 marketing methods, sophisticated item comparison and
selection, and pre-sales qualification.  This information is expected to give the merchantthese 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 the merchant.

Our Market

     Based uponthem.

We have four wholly-owned operating subsidiaries, Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc, which are Delaware corporations, Pacific WebWorks International, LTD, a United Kingdom limited company and are currently forming Pacific WebWorks GmbH, an informal review ofAustrian company.  Pacific WebWorks International, LTD and Pacific WebWorks GmbH will market our industry, we believe small business
spendingproducts and services in the United States on Internet service applications is forecasted
to grow from $197 millionEurope.  Intellipay specializes in 2000 to $1.5 billion in 2004, or about 200%
calculated average growth rate.  This is about halfproviding online, secure and real-time payment processing services for businesses of all small business
application service provider spending,sizes.  TradeWorks Marketing was incorporated to mass market our products and represents one of the last large
Internet business marketplaces with no established leader in place.  The other
half of small business application service provider includes Internet
applications like e-mail.

     Our informal reviewservices.  FundWorks, Inc. was incorporated to provide operating lease arrangements for certain TradeWorks’ customers.  We also indicated total United States spending by all
size companies to be forecasted to

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grow from $960 million in 2000 to $4.25 billion in 2004.  Small companies,
with fewer than 100 employees, but not home-based businesses, represent about
70% of all forecasted application service provider spending.  We believe there
are two million small businesses in the United States, with five million using
the Internet. The number of small businesses on the Internet is expected to
grow to 20 million by 2005.

hold a non-operating, discontinued operation, World Commerce Network, LLC.

Products

Even though small business, including small office/home office, typically understands how traditional brick and mortar businesses operate, we believe they don't necessarily know howneed assistance in order to replicate business processes effectively and economically onusing the Internet.  Pacific WebWorks assists small businesses in succeeding online through our Visual WebTools™ software, tools, Visual WebTools(TM), IntelliPayincluding our eBay submission tool, the Intellipay payment systems, education and education.

     hosting services.


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We provide a comprehensive one-stop solution that includes anincorporates 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, Pacific WebWorks brings economywe 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") software.  A- 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.

 .    WebContacts

WebWizard is an easy-to-use web page design program that possesses a simple user interface and templates for the novice, yet it has a very powerful additional functionality for web design professionals.  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.

ClipOn Commerce™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.

Contacts is a contact management program.  OurCompanies that use our system can utilize WebContacts to organize information about all the entities they do business with, including customers, can maintain
     a list ofsuppliers, distributors, potential customers, etc.  WebContacts will also enable them to capture information about people who visit their web sitewebsite, if those visitors ifelect to supply contact information at the visitor elects to leave behind
     contact information.site.  This allowsdatabase functionality enables our customers to usebe more effective when using the Internet to
     market to their customers.  The program can also be usedweb as a database to
     store customer information that our customers acquire from their
     customers.  We believe our customers have potential to increase sales if
     they can continue to communicate with their customers.

 .    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 subscribers.

 .    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 toolis 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. WebThe web profiling tool includes a catalog of pre-madepre-designed questions, or the client can create their own.  For example a
     client could add support for online subscription services, such as weekly
     newsletters, coupons and special deals.

 .    education level, hobbies, satisfaction level, etc.  The profiling forms may also be custom created by our customers.

WebStatsenables our clientscustomers to watch what visitorsanalyze visitor activities on their websites in order to their web site are
     doing.track pages viewed, hits, time of access, etc.  WebStats is a statistics program that provides detailed reports on web siteand graphs related to referring pages, geographic location of visitors, including the path their customers take throughout
     the web site.  This allows our customers to learn what 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 sales trends and the effectiveness of the clients'clients’ sites.

 .   WebWizard.  WebWizard 






4




Auction Connectionis an easy-to-use Web page design programa module that allows Visual WebTools users to list inventory items with eBay at the click of a button.

Increase My Marginis simple enough for the novice, yet powerful enough for Web design
     professionals.  It incorporates sophisticated site components like
     tables, frames and multimedia files in a straightforward, menu driven
     process.  No complicated programming is required.  WebWizardtool that allows our
     customerseBay users to quickly and easily create, update, modify,effectively analyze information and enhance their
     web sites.  Changes can be made 24 hoursdata related to the sale of thousands of products sold on eBay over a day, 7 days a week from any
     Internet-connected Windows PC.  Changes are updated automatically and
     placed online within minutes.  Our customers can manipulate their site's
     layout, colors, content, tables, and graphics easily.  WebWizard includes
     a libraryperiod of hundreds of graphics which are freely accessible by our
     clients.

                                4


 .    ClipOn Commerce(TM)is an e-storefront and product management system,
     complete with shopping cart tecnology.  ClipOn Commerce allows our
     clients 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 has support to
     include a merchant account and is integrated with our IntelliPay
     transaction gateway, which allows our clients to accept all major credit
     cards.  ClipOn Commerce also has support for QuickBooks  accounting
     software.

IntelliPay Transaction Gateway.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 stores.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 fax or storefront.at the physical point of sale.  The IntelliPayIntellipay products use industry standard security components
and methods, 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, IntelliPayIntellipay quickly processes the transaction in real-time (2 - 5 seconds) and returns the customer back to the business site.  IntelliPayIntellipay also provides methods for enterprise-level businesses to link IntelliPayIntellipay products, services and features into their ecommerce web sites and port-live-data streams intotransmit transactional data for use in back-office systems.  .    Intellipay is entirely compliant with PCI 2.0, which is a combined security regulation for VISA and Mastercard.

ePayment System. IntelliPaySystem  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"“force” allowing a transaction authorized offline (possibly a voice authorization) to be settled, credits for refunds and IntelliPayIntellipay’s innovative address verification system "AVS Only", allowingallows merchants to retrieve an AVSa score and verify the account validity.

          In the first quarter of 2001, we released the duplicate payment
     request detection and management system which enables online businesses
     to configure the detection of and management of duplicate transaction
     requests from their ecommerce web site. Duplicate transaction requests
     can be the result of an online shopper mistakenly submitting the same
     purchase twice, but it can also be a source of online fraud attempts in
     some cases.

          

This IntelliPayIntellipay product allows our customers to control transaction level behavior depending on AVS scores, duplicate transaction attempt detection, and more.  IntelliPayIntellipay 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'scustomer’s costs by settling within the 24-hour window mandated by most merchant accounts.  The IntelliPayIntellipay system is fully transportable meaning that a customer can switch web site hosting companies, switchmove between most e-commerce software programs or switchchange to or from almost anymany merchant account provider.providers.  Our systemproducts can followgrow and change with our customer at little or no additional charges and with minimal technology issues.

 .    ExpertLink(TM). ExpertLink

ExpertLink™ is IntelliPay'sIntellipay'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.

 .    LinkSmart(TM). LinkSmart

LinkSmart™  gives our online customers the ePayment features with minimizedminimal 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. Using


                                5


     SmartPages(TM) technology, which was released during the first quarter
     2001, our client can upgrade and control the entire look and feel of the
     IntelliPay hosted payment pages.

 .    

Smart Terminal(TM).  Smart TerminalTerminal™ allows our customers to securely log into their IntelliPayIntellipay account from any Internet browser and authorize manual transactions and orders they have received through email, voice,
     fax or other offline methods.  Smart Terminal supports industry-standard transactions including normal authorizations, authorization-only for delayed settlement, settlement for non-IntelliPaynon-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 standalonestand alone product.

 .    

Secure Account Management System ("SAMS"(“SAMS”). IntelliPay allows Intellipay customers canto securely log into IntelliPay'sIntellipay's Secure Account Management System from any web browser to configure and control various IntelliPayIntellipay 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


5




contents, target returning live data streams, configure Visa-required invoice numbering, and more.  Education Services  We provide more than our software, weCustomers can also assist our
customers with educationview transaction histories for any day in the past 180 day period.

IntelliPay Desktop Terminal (“IDT”) brings all of the functionality of a Virtual Terminal application to your desktop while supporting hardware such as a card reader and site design services.  We believe this
information helps our clients understand howreceipt printer.  This allows merchants to use the Internet more
effectively.

 .    E-Camp isreceive a three-day training program designedqualified 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 teach aspects of doing
     business on the Internet.

 .    Idea Center is our online Idea Center which promotes our customers'
     success by providing them with current information relatedprint to the Internetsame receipt printer, reducing the amount of hardware they need to purchase.

IntelliPay Wireless Terminal (“IWT”) submits wireless transactions with retail qualifications using Nextel data service.  This allows a merchant to accept either swiped or keyed transactions using a Nextel Cellular / Data phone using a card reader. The merchant has all of the benefits of retail rates with the added value of visual batch management and what other successful business owners are doing online.

settlement process.  IntelliPay Wireless Terminal is the perfect solution for all mobile merchants that also use a cellular phone.

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 Supportis offered via online chat or e-mail from 78 a.m. to 87 p.m. (MST), or by phone from 8 a.m. to 5 p.m. (MST).

Hosting Infrastructureallows us to host our customers'customers’ web sites, on behalf of
our clients, therefore eliminating the cost of ownershiphardware investment and maintenance for our clients.

Place-to-Vacation is a marketing tool that helps our users attract Internet
traffic to their web site by giving away a chance to win a free vacation.

them.

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

“.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 ebay™.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 smallsmall- 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 whichthat can facilitate a successful Internet experience for them.   





6





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 and strategic partnerships.  We sell our products to our partners at wholesale, whowholesale.  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.products and subsequent services.  Each merchant must sign a purchase agreement with the reseller, which the reseller must in turn provide 6
to us. We then provide software to the resellers' own merchants which allows
these usersresellers’ 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.  The
reseller is an independent contractor and is obligated to pay the amounts due
under the agreement even if payments from the merchant are not received.

     

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 early entry
intotraining and education in the use of our target market.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"“web professionals” to do so.  We believe our products allow small businesses at a
relatively small cost, to participate in Internet commerce by creating and managing their own Internet web sites and storefronts.

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 WebTools™ 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;
$
our ability to carve out “niche” markets in combination with our technologies;
$
our ability to recruit resellers who can market and sell our products and services in significant volumes to the market;
$
our ability to maintain satisfactory relationships with our online marketing partners; and
$
our ability to manage and maintain our merchant accounts.  



7




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

Major Customers

Our client base includes nearly 40,000 active 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.  In th past a significant portion of our customer accounts were provided by previous Pacific WebWorks and Intellipay resellers who no longer resell our products and services.  While we continue to add resellers, we are now primarily dependent upon our internal marketing staff, including TradeWorks Marketing, for our product sales.

Trademark, Licenses and Intellectual Property

     On October 9, 1998, Utah WebWorks filed a trademark application

We own trademarks for Visual WebTools(TM) whichWebTools™ (United States Patent and Trademark Office Serial No. 567,136) that we acquired and became responsible for upon our merger with Utah WebWorks.  In Decemberaddition we have trademarks for Pacific WebWorks™ and ClipOn Commerce™.  

On August 2, 2007 we received notice of 1998acceptance and acknowledgment from the United StatesU.S. Department of Commerce Patent and Trademark Office assigned Serial No. 567,136 to this mark.  The trademark is
currently pending.  In 1999, we filedvalidating our registration of a trademark application for MainStreetSquare.com(TM), Cyberhaggle(TM),“Intellipay.”  The mark has been renewed for 10 years subject to constructive notice by July 24, 2013 of our claim to exclusive ownership.

On August 30, 2007 we received notice of acceptance and Pricehunter(TM), all featuresacknowledgment from the U.S. Department of the online mall.  Likewise, in 1999 we filedCommerce Patent and Trademark Office validating our registration of a trademark for trademarks on Pacific
WebWorks(TM), ClipOn Commerce(TM), FreeSiteNow(TM), V4(TM), Overnet
Express(TM) and IDDS(TM).  We did not file any trademark applications during
fiscal year 2000 or 2001.

     “Increase My Margin.”  The mark has been registered for 10 years subject to constructive notice of our claim to exclusive ownership by August 13, 2013.

Our success will depend, in part, on our ability to obtain and protect our trademark and trade secrets and operate without infringing upon the proprietary rights of others in the United States and other countries.  If we were to become involved in a dispute regarding our intellectual property, it couldmay 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 andor by the engineers of Utah WebWorks.  TheWebWorks and Intellipay.  Other than Internet connectivity and other information technology infrastructure, the performance of our products does not primarilysignificantly 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 relationshipsrelationship 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.

Major Customerspro perty.

Research and Development

We continue to improve our existing products and release new related products.  During the year ended December 31, 2007 we recorded research and development expense of $307,490 primarily related toto the maintenance of our technologies and the development of our new offerings.  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


8




technologies and the development of additional eBay analysis tools and product club expansion.

Material Contracts

During 2006 and 2007 we relied on Electric Lightwave, Inc. for telecommunications and Internet access.  This agreement was on a month-to-month basis and required that we pay approximately $3,500 per month for a dedicated DS3 Internet and telephone connection, and a redundant T-1.   This agreement was discontinued in March 2008 and was replaced with a telecommunications and Internet access agreement with Verizon Business Services, Inc. (“Verizon”).  The Verizon agreement, accepted on October 9, 2007, provides local and long distance telephone service and Internet service to 10MB burstable to 45 MB.

Employees

As of the date of this filing we have 25 employees in Pacific WebWorks.  We have six employees in administration, three in sales and marketing, two in operations, four development engineers and ten customer service personnel.  Our client baseemployees are not presently covered by any collective bargaining agreement.  We have not experienced any work stoppages and believe that our relations with our employees are good.



ITEM 1A.  RISK FACTORS

Factors Affecting Future Performance

We have a history of losses and could incur future losses.

In the past we have been unable to fund our day-to-day operations from revenues alone.  However, for the 2001year ended December 31, 2007, we incurred a net income of $876,228 and 2000$276,228 of this net income came from continuing operations and $600,000 of the net income was from a one-time recognition of a tax benefit, but we have had net losses in prior fiscal year included several
thousand customers, but two major resellers accountedyears.  We anticipate revenue from operations and equity transactions will fund our growth and operations for approximately 12.2%the next twelve months; however, we cannot assure you that we will be able to maintain profitability.

We may need additional external capital and 10.7%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 net revenues.  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 dependent upon these resellerssubject to intense competition from large and if we
lose onesmall 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 WebTools™ or both of them then our operations would be adversely affected.


                                7



     During the 2000 fiscal year, three major resellers accounted for 40%, 20%
and 17% of the totalIntelliPay payment system will depend in part on their acceptance by a substantial number of our hosting customer base.

     During fiscal year 1999, we increased our client base to several hundred
with twoonline businesses.  Broad acceptance of our sales channels providing 41%products and services and their use in large numbers is critical to our success because a large portion of our revenue.  Lauman
Enterprise, a reseller, accounted for approximately $60,000, or 20%,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 total
revenues in 1999.  US Merchant Systems, Inc. supplied us with marketing
expertisesmall businesses and merchant accounts for our customers and accounted for
approximately $65,000, or 21%,we believe the generality of our revenue for 1999.  We entered into a
joint venture with US Merchant Systems in December of 1999 to create World
Commerce Network, LLC.  World Commerce Network becamecompetitors’ services may be inadequately addressing the seminar marketing
operations for sales of Pacific WebWorks technologies in early 2000, and these
operations ceased in June 2000.

Competition

     Our market is relatively new, very competitive and subject to rapid
technological change.small business owner’s needs. We expect competition to persist, increase, and intensify in the futuref uture as the markets for our products and services continue to develop and


9




as additional companiescompetitors enter our markets.  A numbermarket.  In addition, many of companiesour 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 now providingnot 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 small businesses.  They
include organizations like Microsoft, vJungle, Bigstep.com, Websitepros,
Agillion, Bizfinity, Vista.com, an HostPro.

     At the present time,meet changing customer needs and respond to other technological developments.  To be successful, we havemust obtain widespread acceptance of our technologies, or modify our products and services to meet whatever industry standards do ultimately develop.  It is not identified any other companiescertain that are
using the same approach as Pacific WebWorks.  Nonetheless, there is always the
potential that other, larger interestswe 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 do either.

We depend upon our proprietary rights, none of which can be completely safeguarded against infringement.

Our ability to compete effectively will depend, in part, upon our ability to protect our proprietary source codes for Visual WebTools™ 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 currentan adequate remedy in the event of unauthorized disclosure of such information.  Intellectual property rights, by their nature, are uncertain and future competitors.

Product Developmentinvolve complex legal and factual questions.  We continuerely upon trade secrets with respect to improve uponour 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 releaseservices.  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 products relatedproduct introductions, evolving industry standards and changing customer needs.  In order to other existing products.  Asremain competitive, we may be required to engage in a number of December 31, 2001, we recorded research and development expenses of $449,323 primarily related to development of Visual
WebTools V4.1 and updating of core products.  In 2000 we expended $1,044,842
forprojects, which carries the risks associated with any research and development for completioneffort, 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 V4 versioncustomers, 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 Visual
WebTools(TM).   In 1999, we recorded $320,479 for engineering costs, includingthese factors, our research and development expenses.

Material Contracts

     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 claim s for damages if new products and services do not perform as anticipated.





10




We are a partymay 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 following material contracts:

     We initially entered into an agreement with Electric Lightwave, Inc. for
telecommunicationsidentification and Internet accessresolution of errors, defects, or bugs encountered in January 1998.  We formalized the agreementdevelopment of new software and in February 1998 and negotiated an extensionthe enhancement of existing features in November 2001.  The
extension agreement is dated January 1, 2002, requires that we pay
approximately $3,250 per month for a dedicated DS3 Internet connection and the
extension terminates in January 2004.

     In February of 1999, we entered into an agreement with U.S. Merchant
Systems, Inc. located in Newark, California.  U.S. Merchant Systems provides
merchant accounts to our clients.  We integrated a merchant account and
transaction processing which allows purchasers of Visual WebTools(TM) to
accept all major credit cards and personal checks at point-of-sale from their
web sites.  The term of this agreement is one year from the date of execution
and shall automatically renew each successive year thereafter, unless canceled
in writing.

Employeesproducts.  As of the date of this filing we have 20 employees.  We have seven
employees in administration, four in sales/marketing, five in operations and
four engineers.  Our employees are not presently covered by any collective
bargaining agreement.  We believe that our relations with our employees are
good, and we have not experienced any work stoppages.

                                8
material adverse effect by reason of an error, defect, or bug.

We may experience breakdowns in our hosting services, infrastructure or payment processing systems, which may expose us to liabilities and cause customers to abandon our products and services.

We would be unable to deliver our payment processing services or hosting services if our system infrastructures break down or are otherwise interrupted.  Events that could cause system interruptions are:
$
fire,
$
earthquake,
$
power loss,
$
terrorist attacks,
$
harmful software programs,
$
telecommunications failure, and
$
unauthorized entry or other events.

Although we regularly back up data from operations, and take other measures to protect against loss of data, there is still some risk of such losses.

Despite the security measures we maintain, our infrastructure may be vulnerable to computer viruses, hackers, rouge employees or similar sources of disruption.  Any problem of this nature could result in significant liability to customers or financial institutions and also may deter potential customers from using our services.  We attempt to limit this sort of liability through back-up systems, contractual provisions, insurance, and other security measures.  However, we cannot assure you that these contractual limitations on liability would be enforceable, or that our insurance coverage would be adequate to cover any liabilities we might sustain.

Also, a breach of our e-commerce security measures could reduce demand for our services.  The e-commerce industry is intensely focused on the need for Internet security, particularly with respect to the transmission and storage of confidential personal and financial data.  Any compromise or elimination of our security could erode customer confidence in our systems and could result in lower demand for our services or possible litigation.

We are dependent upon license renewal which cannot be assured to occur.

We derive revenues from user licenses and license renewals on a month to month arrangement.  We also intend to increase the brand recognition of our products among users through these types of relationships.  If a substantial number of our customers were to decline to renew their contracts for any reason, then we could experience a substantial drop in revenues. Our success in establishing our products as a recognized brand name and achieving their acceptance in the market will depend in part on our ability to continually engineer and deliver new product technologies and superior customer service, so that customers renew their licenses month to month.











11




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 this annual report we are 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 have engaged in a process to document and evaluate our internal control over financial reporting, which has been challenging.  We can not assure you as to our independent auditors’, conclusions at December 31, 2009 with respect to the effectiveness of our internal control over financial reporting.  There is a risk that our independent auditors will not be able to conclude at December 31, 2009 that our internal controls over fi nancial reporting are effective as required by Section 404 of the Act.

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


12




may inhibit the growth of Internet business solutions that use these technologies.  In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation.

Regulation of the Internet and Internet-based services may decrease the demand for our services and/or increase our cost of doing business.

Due to the increasing popularity and use of the Internet and online services, federal, state, local, and foreign governments may adopt laws and regulations, or amend existing laws and regulations, with respect to the Internet and other online services.  These laws and regulations may affect issues such as user privacy, pricing, content, taxation, copyrights, distribution, and quality of products and services.  Any new legislation could hinder the growth in use of the Internet generally or in our industry and could impose additional burdens on companies conducting business online, which could, in turn, decrease the demand for our services, increase our cost of doing business.  The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted.  It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, and taxation, apply to the Internet.  In addition, the gr owth 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 2.  PROPERTIES

Our principal offices, are located in the Westgate Business Center, which
has over 200,000 square feet of floor spaceincluding our main office and isdata center, are located in Salt Lake City, Utah.  This property serves as our main office and production facility.  We
believe this property will be adequateOn February 1, 2008 we entered a monthly lease agreement for our future needs.  We negotiated a
new lease with Westgate Business Center in November 2001, which terminates
December 30, 2003. We lease approximately 4,5008700 square feet of commercial
office space andwith Development Specialties, Inc.  Under the lease agreement we pay approximately $5,200$10,500 per month underfor the first year with annual rent increases each year for the term of the lease.  Either
party may terminateThe lease agreement provides for a five year term, expiring on February 1, 2013 and we have the lease with 30-day written notice prioroption to buy out the expiration date, but ifremaining term of the lease is not terminatedless after the expiration date,
it continues on a month-to-month basis.


                    three years for approximately $70,000.


ITEM 3.  LEGAL PROCEEDINGS

     On February 12, 2001, Pacific WebWorks received notice of Charge No.
A1-0184 filed with the State of Utah Labor Commission regarding an allegation
of racial discrimination charged by Andrew Renfro, a former employee.  Mr.
Renfro claims that he was forced to resign as our sales manager due to
demotions and pay cuts based on differential treatment based on his race and
color.  We responded to the request for information from the Labor Commission
and stated that we believe Mr. Renfro was treated fairly while he was employed
by Pacific WebWorks.  Mr. Renfro did not identify the remedy he was seeking.
An informational hearing was conducted on January 18, 2002 and an Order was
issued on February 26, 2002 dismissing the charge of discrimination.

     Sunrise International Leasing Corporation, a Minnesota corporation and
assignee of Sun Microsystems Finance, filed a complaint in the Fourth District
Court, County of Hennepin, of the State of Minnesota related to the default
under the equipment lease agreement between Logio and Sun Microsystems.
Sunrise International sought damages of $444,589.40 and costs and reasonable
attorney fees.  On September 24, 2001, this matter was dismissed without
prejudice in the State of Minnesota.

     On April 16, 2001, One Source, a corporation, filed a complaint in the
Third District Court, Sandy Department, State of Utah, naming World Commerce
Network, LLC and Mat Dastrup, our former CFO, as defendants.  One Source
alleged default under a certain Application for Credit and personal Guaranty
and One Source sought the sum of $64,353.57 with 18% interest from November
15, 2000.  No further action has been taken in this case.

     Although no formal proceedings were instituted, we were aware of a
threatened copyright infringement claim by Business Software Alliance.  We
settled this potential claim for $5,000 and granted the right to audit our
software to Business Software Alliance.

     

We are involved in various disputes and legal claims arising in the normal course of our business.  Except for those discussed above, inIn 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 20012007 fiscal year.



PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, AND RELATED STOCKHOLDER MATTERS 9
AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

The principal market for our common stock is the NASD OTC Bulletin Board and our common shares are traded over the countertrade under the symbol "PWEB."  On
March 12, 2001, our common stock was listed on the Berlin Exchange under the
symbol "PWB".  The Berlin Exchange lists more than 10,000 companies from 60
different countries.  There has been no trading volume in our stock on this
exchange as of the filing date of this report.“PWEB.”  The following table presents the range of the high and low bid prices of our common stock for each quarter for the past two years, as reported by the Nasdaq Trading and Market services.  SuchOTC Bulletin Board.  These quotations represent prices between dealers and may not include retail markups, markdowns, or commissions and may not necessarily represent actual transactions.

     Year     Quarter Ended     High Bid     Low Bid
     ----     -------------     --------     -------
     2000       March 31         $ 6.13       $ 2.31
                June 30            4.75         2.13
                September 30       3.50         1.63
                December 31        3.34         0.59

     2001       March 31         $ 1.45       $ 0.69
                June 30            0.92         0.26
                September 30       0.46         0.23
                December 31        0.78         0.20

      




13





 
2007
 
2006
Fiscal Quarter Ended
High 
Low 
 
High 
Low 
March 31
$         0.06 
$     0.036 
 
$         0.139 
$        0.09 
June 30
0.05 
0.035 
 
   0.132 
   0.06 
September 30
0.0805 
   0.04 
 
   0.079 
   0.03 
December
0.15 
0.051 
 
0.075 
0.03 

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"“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; authorized for quotation from the NASDAQ stock
market; 
$
issued by a registered investment company;
$
excluded from the definition on the basis of price at(at least $5.00 per shareshare) or the issuer'sissuer’s net tangible assets.  If our shares are deemed to be a penny stock, trading

Trading in the shares will bepenny 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'spurchaser’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.  

Holders   

As of February 20, 2002March 11, 2008 we have approximately 317had 415 stockholders of record of our common stock.

     Dividends.   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.  For the foreseeable future,Instead, we expectintend to retain any earnings to finance the operation and expansion of our business.  However,
payment of future dividends will be determined from time to time by our board
of directors, based upon our future earnings, financial condition, capital
requirements and other factors.  We are not presently subject to any restriction on our present or future liabilityability to pay any dividends.

Compensation Plans

     dividends, but the payment of any cash dividends on our common stock is unlikely.

Recent Sales of Unregistered Securities

On March 8, 2001 our Board adopted the Pacific WebWorks, Inc. 2001 Equity
Incentive Plan.  Under this


                                10


planNovember 9, 2007 we may grant stock options, stock appreciation rights or restricted
shares to employees, independent directors and certain consultants.  The Board
reserved 5,000,000 shares for this plan; however, the plan has not been
approved by our shareholders as of the 2001 year end.  The Board has granted
options to acquire 3,640,485issued 1,000,000 shares of common stock with exercise prices ranging from $0.75 to $3.53 per share.
The options vest periodically through October 2003 and expire through April
2011.

Recent Sales of Unregistered Securities

     The following discussion describes all securities sold by Pacific
WebWorks without registration during the past three years

     On August 28, 2001 we issued 200,000 sharesCapital Communications, Inc. in consideration for investor relations consulting services valued at $70,000 to
Universal Business Insurance in consideration liability insurance, intrusion
technology insurance and directors and officers liability insurance.$50,000.  We relied on an exemption from registration under the Securities Act provided by
Section 4(2) asfor a private transaction not involving a public distribution.

     distribution provided by Section 4(2) of the Securities Act.

On May 30, 2001November 9, 2007 we agreedsold 1,500,000 shares to issue 4,000,000 unitsBroad Investment Partners and 2,000,000 shares to Maestro Investments LLC, accredited investors, AMCAN Services, Inc., Pacific First National, Inc., State
Management Associates L.C., and TST Corporation, for $1,600,000.  Each
investor purchased 1,000,000 units for $400,000.  A unit consists of one
common share and a warrant, which expires on May 30, 2003, to purchase one
common share at an exercise price of $0.80.$175,000.  These shares were granted piggy back registration rights.  We relied on an exemption from registration under the Securities Act provided by Section 4(2) asfor a private transaction not involving a public distribution.  Thesedistribution provided by Section 4(2) of the Securities Act.




14




On January 28, 2008, we issued 400,000 shares and the shares
underlying the warrants were later registered as partto Donald Mayer for payment of a secondary offering
under a Form SB-2 registration statement declared effective July 16, 2001.

     On April 25, 2001 we granted warrants to purchase an aggregateinsurance premiums of 1,000,000 common shares, valued at approximately  $170,000, to Columbia
Financial Group in consideration for investor relations services. One warrant
provides for the purchase of 500,000 common shares at an exercise price of
$0.50 and another warrant allows the purchase of 500,000 common shares at an
exercise price of $0.75.  The warrants may be exercised through April 2006.$32,585.  We relied on an exemption from registration under the Securities Act provided
by Section 4(2) asfor a private transaction not involving a public distribution.
These shares and the shares underlying the warrants were later registered as
part of a secondary offering under a Form SB-2 registration statement declared
effective July 16, 2001.

     On April 16, 2001 we issued an aggregate of 289,166 common shares in
consideration for services rendered.  We issued 130,000 common shares to
Mutual Ventures Corporation for business services valued at $65,000; we issued
20,000 shares to Daniel W. Jackson, an attorney, for legal services valued at
$10,000; and 139,166 common shares to Universal Business Insurance for
insurance products and services valued at $83,000.  We relied on an exemption
from registration under the Securities Actdistribution provided by Section 4(2) as a
private transaction not involving a public distribution.

     During January 2001 we issued an aggregate of 537,200 common shares
valued at $268,600 to Principal Property Management LLC in consideration for a
security deposit and monthly rent for our corporate office lease.  We relied
on an exemption from registration under the Securities Act provided by Section
4(2) as a private transaction not involving a public distribution.
On September 20, 2000 we issued 600,000 shares valued at $600,000 to Mutual
Ventures Corporation  to satisfy a note payable.  We relied on an exemption
from registration under the Securities Act provided by Section 4(2) as a
private transaction not involving a public distribution.

     On August 21, 2000 we issued 18,000 shares valued at approximately
$26,000 to Don Mayer, President of Universal Business Insurance, Inc. for
directors and officers insurance purchased from Universal Business Insurance.
We relied on an exemption from registration under the Securities Act provided
by Section 4(2) as a private transaction not involving a public distribution.

     On June 30, 2000 we issued 415,000 shares valued at $415,000 to Capital
Communications, Inc. to satisfy

                                11


a note payable.  We relied on an exemption from registration under the
Securities Act provided by Section 4(2) as a private transaction not involving
a public distribution.

     On June 29, 2000 we issued 625,000 shares valued at $625,000 to TAD
Ventures, LLC to satisfy a note payable.  We relied on an exemption from
registration under the Securities Act provided by Section 4(2) as a private
transaction not involving a public distribution.

     On April 4, 2000 we agreed to issued 2,400,000 common shares valued at
$4,320,000 in consideration for the outstanding shares of IntelliPay, Inc.  We
relied on an exemption from registration under the Securities Act provided by
Section 4(2) as a private transaction not involving a public distribution.

     In January 2000 we issued 4,663 common shares, valued at $9,180, to World
Commerce Network, L.L.C. in consideration for an additional 1% interest in
that entity. We relied on an exemption from registration under the Securities
Act provided by Section 4(2) as a private transaction not involving a public
distribution.

     On February 22, 2000 we agreed to sell an aggregate of 400,000 units for
an aggregate price of $1 million.  Condiv Investments, Inc. and Midwest First
National, Inc. each agreed to buy 200,000 common shares, an  "A" Warrant for
200,000 common shares and a "B" Warrant for 100,000 common shares.  We relied
on an exemption from registration under the Securities Act provided by Section
4(2) as a private transaction not involving a public distribution.  These
shares and the shares underlying the warrants were later registered in a
secondary offering under a Form S-1 registration statement declared effective
June 12, 2000.

     On December 28, 1999 we issued 381,679 common shares valued at $500,000,
or approximately $1.31 per share, to SGS Holdings, Inc., as assignee, to
convert a portion of notes payable to Capital Communications, Inc.  We relied
on an exemption from registration under the Securities Act provided by Section
4(2) as a private transaction not involving a public distribution.

     On September 9,1999 we issued 14,000 common shares valued at $20,000, to
Universal Business, an insurance agent, in exchange for directors and
officers' liability insurance policy in the amount of $1,000,000.  We relied
on an exemption from registration under the Securities Act provided by Section
4(2) as a private transaction not involving a public distribution.

     On January 26, 1999 we issued warrants to Columbia Financial Group to
purchase 400,000 shares of our common stock at an initial aggregate exercise
price of $1,475,000 in consideration for their services as our investor
relations firm.  Using a Black Scholes model the value of the warrants will
change with the changes in our stock price until the measurement date of the
warrants is met.  We relied on an exemption from registration under the
Securities Act provided by Section 4(2) as a private transaction not involving
a public distribution.

     On January 11, 1999 Asphalt Associates, Inc., our predecessor, agreed to
issue 5,000,000 shares valued at $1 million to the shareholders of Utah
WebWorks, Inc.  We relied on an exemption from registration under the
Securities Act provided by Section 4(2) as a private transaction not involving
a public distribution.

     In connection with each of these isolated issuance's of our securities,
we believe that each purchaser was aware that the securities had not been
registered under federal securities laws; acquired the securities for his/its
own account for investment purposes and not with a view to or for resale in
connection with any distribution for purposes of the federal securities laws;
understood that the securities would need to be indefinitely held unless
registered or an exemption from registration applied to a proposed
disposition; and was aware that the certificate representing the securities
would bear a legend restricting their transfer.

     We believe that, in light of the foregoing, the sale of our securities to
the respective acquirers did not constitute the sale of an unregistered
security in violation of the federal securities laws and regulations by reason
of the exemptions provided under  3(b) and 4(2) of the Securities and the
rules and regulations promulgated thereunder.

                                12
Act.

Issuer Purchase of Securities

None.

ITEM 6.  SELECTED FINANCIAL DATA

The following selected financial information set forth below with respect to ourdata is based on the consolidated financial statements of Pacific WebWorks, Intellipay, TradeWorks Marketing, Fundworks and the discontinued operations of World Commerce Network, LLC, a non-operating company for each of the five years ended December 31, 2001, 2000, 1999,
19982007 and 1997 and with respect to2006.  The following chart is a summary of our balance sheets at December 31, 2001,
2000, 1999, 1998 and 1997 is derived from financial statements that have been
audited by our independent certified public accountants,for those periods and is qualified by
reference to their reports and notes related thereto.  Our accounting
predecessor, Utah WebWorks, Inc., had an inception date of April 10, 1997 and
Utah WebWorks merged with Pacific WebWorks (then Asphalt Associates, Inc.) on
January 11, 1999. The 2000 fiscal year includes consolidation of our wholly
owned subsidiary, IntelliPay, Inc. and includes the consolidation of our
former 51% interest in World Commerce Network.  The 2001 fiscal year includes
consolidation of IntelliPay, our 100% interest in World Commerce and Logio,
Inc.  The following selected financial data should be read in conjunction with ourthe financial statements, and notes attached tothereto, included with this report and the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations,"at Part II, Item 8, below.





Statement of Operations Data                             Year ended December 31,
- -----------------------------                            -----------------------
                                      2001         2000           1999          1998          1997
                                 ------------- ------------- ------------- ------------- -------------

Net Revenues:                    $  3,099,179  $  4,954,384  $    305,628  $    172,395  $     94,014
Cost of sales                         543,021       811,506        42,874       188,974       107,332
                                 ------------- ------------- ------------- ------------- -------------
Gross profit (loss)                 2,555,558     4,142,878       262,754       (16,579)      (13,318)
                                 ------------- ------------- ------------- ------------- -------------
Operating expenses:
  Selling expenses                    592,780     4,802,397       406,917        30,180        13,987
  Research and development            449,323     1,044,842       320,479        11,949         5,523
  General and administrative        1,571,481     2,375,252       786,740        67,845        36,179
  Depreciation and amortization     1,903,091     1,095,261        30,572        13,151             -
  Compensation expense for
    options and warrants              232,549        28,366     1,242,584             -             -
  Impairment loss-good will and
    other long-lived assets         2,688,300             -             -             -             -
                                 ------------- ------------- ------------- ------------- -------------

  Total operating expenses          7,437,524     9,346,118     2,787,292       123,125        55,689
                                 ------------- ------------- ------------- ------------- -------------

  Loss from operations             (4,881,966)   (5,203,240)   (2,524,538)     (139,704)      (69,007)
                                 ------------- ------------- ------------- ------------- -------------
Other income and (expenses)
  Loss on sale or abandonment
     of assets                        (69,319)            -             -             -             -
  Interest expense                   (119,627)      (70,440)      (19,243)      (10,761)       (3,500)
  Interest income                       8,042        13,989         1,246             -         3,775
  Other net                            17,671             -       (25,000)            -             -
                                 ------------- ------------- ------------- ------------- -------------

                                     (163,227)      (56,451)      (42,997)      (10,761)          255
                                 ------------- ------------- ------------- ------------- -------------

  Net Loss                       $ (5,045,193) $ (5,259,691) $ (2,567,535) $   (150,465) $    (68,752)
                                 ============= ============= ============= ============= =============
Net loss per-share basic
 and diluted                     $      (0.24) $      (0.40) $      (0.27) $      (0.03) $      (0.01)
                                 ============= ============= ============= ============= =============
Shares used in computing
  per share amounts                20,694,550    13,140,360     9,652,500     5,000,000     5,000,000
                                 ============= ============= ============= ============= =============


                                     13


                                                              December 31,
                                                         -----------------------
Balance sheet data:                   2001         2000           1999          1998          1997
- -------------------              ------------- ------------- ------------- ------------- -------------

  Cash and cash equivalents      $    249,813  $    163,801  $    153,989  $      9,306  $      5,440
  Total current assets                541,096       698,784       449,084        20,534        34,551
  Total assets                      3,768,578     5,405,022       630,559        55,970        61,092
  Total current liabilities         1,878,986     3,282,184       644,727       265,187             -
  Accumulated deficit             (13,091,636)   (8,046,443)   (2,786,752)     (219,217)      (68,752)
  Stockholders' equity (deficit)    1,889,592     2,122,168       (14,168)     (209,217)      (58,752)


  See notes to Financial Statements for information concerning the computation of per share amounts.


 
Year ended December 31

2007
2006
SUMMARY OF BALANCE SHEET
 
 
Cash and cash equivalents
$                   891,062
$             392,633
Total current assets
1,421,689
584,217
Total assets
4,465,572
2,746,390
Total current liabilities
1,125,973
579,398
Total liabilities
1,125,973
579,398
Accumulated deficit
(13,173,104)
(14,049,333)
Total stockholders’ equity
$                3,339,599
$         2,166,992






















 
 


15







SUMMARY OF OPERATING RESULTS
 
 
Revenues, net
$            10,711,770 
$        4,299,681 
Cost of sales
364,482 
512,594 
Gross profit
10,347,288 
3,787,086 
Total operating expenses
10,208,397 
3,867,936 
Net income (loss) from continuing operations
138,891 
(80,850)
Total other income (expense)
137,338 
(945,583)
Income tax provision (benefit)
(600,000)
– 
Net income (loss)
$                 876,228 
$        (1,026,433)
Net earnings (loss) per share from continuing operations
$                       0.01 
 $                 (0.03)
Net earnings (loss) per share
$                       0.02 
$                 (0.03)


ITEM 7.  MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONSOPERATION

Executive Overview

     Beginning in the second quarter of 2000, and continuing throughout the
year ended December 31, 2001, management took several steps to restructure our
operations with the intent to generate profits.  These steps included
integration of the operations of 

Pacific WebWorks, and its related companies,
reductionInc. enjoyed a record year in the number2007.  Revenues of employees, and continued development of our sales
and marketing channels.  At the date of this filing we are able to support our
recurring day-to-day cash operation expenses with recurring cash inflows;
however, we are dependent on a few significant resellers for our revenues.
Certain capital leases are in default in one of our development stage
subsidiaries.  Also, we have negative working capital of $1,337,890 and are
unable to satisfy our current liabilities with cash on hand and must negotiate
with our creditors.

Acquisition Treatment

     On April 4, 2000 we completed the acquisition of IntelliPay, Inc., a
Delaware corporation, as a wholly owned subsidiary.  In an arms length
transaction, Pacific WebWorks issued 2,400,000 common shares, valued at
$4,320,000, in a stock-for-stock exchange for 1,000 shares of IntelliPay.  The
acquisition was accounted for under the purchase method of accounting.
Accordingly, IntelliPay's results of operation have been included with Pacific
WebWorks from the closing date in April 2000 and its consolidated assets and
liabilities have been recorded at their fair values on the same date.

     Pacific WebWorks and U.S. Merchant Systems, Inc., a major customer during
fiscal year 1999, formed World Commerce Network, LLC, in December of 1999 as a
joint venture.  Originally, we held a 50% interest in World Commerce, which
was held on the equity method of accounting.  In March 2000 we acquired an
additional 1% interest in World Commerce for 4,663 shares of Pacific WebWorks
common stock valued at $9,180, which then gave us a 51% total interest.  In
the third quarter of 2000, we determined that we would acquire the remaining
49% of World Commerce.  We and U.S. Merchant Systems agreed to complete our
scheduled seminars and then we would assume the outstanding ownership of World
Commerce held by US Merchant Systems and continue forward with World Commerce
operations.  As a result we acquired the remaining 49% interest for $100 in
August 2000.  The operations of World Commerce are consolidated with our
financials statements as a wholly owned subsidiary of Pacific WebWorks.  World
Commerce ceased seminar operations in June 2000.

      In February 2001 we completed the acquisition of Logio, Inc., a Nevada
corporation.  We acquired Logio in an arms length transaction by issuing
approximately 2.8 million shares of our common stock for 18,425,830 shares of
Logio common stock.  This transaction was valued at approximately $2,450,000.
Goodwill of $1,855,388 was amortized over three years in 2001.  The
acquisition was accounted for under the purchase method of

                                14


accounting using generally accepted accounting principles.  Logio's results of
operations are included with ours from the closing date  and its consolidated
assets and liabilities are recorded at their fair values at the same date.
Logio has ceased development of its products due to funding and market
constraints.

Results of Operations

     The results of operations for the three years ended December 31, 2001,
2000, and 1999 include the accounts of Pacific WebWorks and its wholly owned
subsidiaries, IntelliPay, Inc., World Commerce Network, LLC and Logio, Inc.
During the fiscal year ended December 31, 2001 World Commerce and Logio were
non-operating companies.  Pacific WebWorks and its subsidiaries operate in one
business segment, the production and distribution of business e-commerce
software and services.

     Comparison of 2001 and 2000 Year End Periods.  Following is a comparison
of our operating results$10,711,770 for the year ended December 31, 2001 with the year
ended December 31, 2000:

     Net revenues.  We receive2007 (“2007") amounted to 250% of revenues primarily from the sale of access to
our software technology and continuing monthly service and hosting fees.
Additionally, we derive revenues for services provided related to web site
design, training, education and consulting.  Revenues are recognized when
persuasive evidence of an agreement exists, delivery has occurred and services
have been rendered, the price is fixed or determined and collectability is
reasonably assured.  Up-front fees are non-refundable and are deferred and
recognized systematically over the period the product is delivered and
services are performed, which is generally one year.  Monthly fees for our
services are recognized as services are performed.

     Net revenues decreased $1,855,205$4,299,681 for the year ended December 31, 2001,
compared to the 2000 fiscal year.  The decrease2006 (“2006") and represented a record for annual revenues for the 2001 year was
primarilycompany.  Additionally, the resultcompany generated record net income of discontinued seminar marketing$876,228 for 2007 due in late 2000, which
resulted inlarge part to a decrease in sales of software, access and license fees.  We
expect the sales for software, access and license fees to continue to decrease
through 2002 as compared to 2001 as a result of our new sales and distribution
plan, which emphasizes the growth of recurring hosting and IntelliPay
transaction gateway revenues

     Cost of sales and gross profits.  These include costs of merchant
accounts and fulfillment costs, support, reseller fees and other third party
products and services.  Cost of sales decreased $267,885 for the 2001 year
compared to the 2000 year.  The cost of sales decrease in the 2001 year was
primarily related to personnel reductions, from as many as 13 in 2000 to as
few as five during 2001, and streamlined operations.  Gross profits decreased
$1,587,320 for the 2001 year compared to the 2000 year due to decreased
revenues in 2001 from the initial sales of our software, access and license
fees which had lower costs of sales and larger selling expenses in 2000.

     Total operating expenses.  Total operating expenses decreased $1,908,594
in the 2001 year compared to the 2000 year.  The decrease was primarily the
result of decreases in selling expenses, research and development and general
and administrative expenses.  Management reduced these expenses through
personnel reductions, pay cuts, the elimination of costly seminars and the
relocation of our offices.  However, the decrease in operating expenses was
offset by compensation expense attributed to options and warrants earned by
employees, directors and consultants, along with impairment losses, which are
discussed below.

     Selling expenses.   Selling expenses consist of both sales and marketing
expenses, including department salaries and benefits, advertising, seminar
costs, and commissions.  Our selling expenses decreased $4,209,617 for the
year ended December 31, 2001 compared to the 2000 year.  The decrease in
selling expenses occurred due to discontinuing our seminar marketing program,
management in this department taking pay cuts of approximately 37.5% and a
reduction in personnel in this department from as many as 15 in 2000 to as few
as five employees in 2001.  The cessation of the seminar marketing program
eliminated printing and mailing costs, travel expenses, show crew costs, hotel
ballroom rental and other costs associated with the seminars.  Our sales
efforts since the fourth quarter of 2000 have been primarily focused on
business development and strategic alliance with large distributors of our
products and services.

                                15


     Research and development expenses.  Research and development consists
primarily of personnel expenses related to product design, programming, and
quality control.  Research and development expenses decreased $595,519
compared to the 2000 year.  The decrease resulted primarily from personnel
reductions from as many as 17 engineers in 2000 to as few as three engineers
in 2001.

     General and administrative expense.  General and administrative expenses
consist of all finance and administrative and finance salaries and benefits,
rental of office space, professional fees and other general office expenses.
General and administrative expenses decreased $803,771 for the 2001 year
compared to the 2000 year.  The decreases were due to management taking pay
cuts of approximately 12.5% in the 2001 nine month period, implementationone-time $600,000 recognition of a temporary raise freeze, reduction in personneltax benefit.  Earnings from as many as nine in the
2000 year compared to as few as six in 2001, limits placed on travel,
automationcontinued operations of certain administrative and financial processes and moving our
offices to a less expensive office building.

     Depreciation and amortization.  These expenses include depreciation of
property and equipment and amortization of goodwill and other assets. These
expenses increased $807,830 in the 2001 year compared to the 2000 year due to
the property and equipment increases from the consolidation of Logio's
operations beginning in February 2000.  Additional increases were caused from
the amortization of Logio goodwill from February 2001 to June 2001 when the
asset was impaired.

     Compensation expense for options and warrants. These expenses relate to
stock options earned by employees, directors and consultants.  We granted
options to employees in September 2000 and the strike price of these options
was less than the fair value on the date of grant, creating intrinsic value.
We recognized the expense of these options over the one-year vesting period
and recorded $38,700 for the 2001 year.  Included in the 2001 year is the
recognition of $116,715 of compensation expense related to the fair value over
the period earned of one million warrants granted to a consultant and $77,134
of expense related to the fair value of warrants issued in conjunction with
completion of our Unit Purchase Agreement with investors in July 2001.

     Impairment loss.  As a result of certain events and management's
assessment of impaired assets, we recorded $911,532 in losses related to
impairment of long-lived assets in Logio and $1,776,768  in losses related to
impairment of goodwill for Logio and World Commerce for the year ended
December 31, 2001.  (See, "Liquidity and Capital Resources," below, for
details of the impairment losses.)

     Total other income (expense).  Total other expenses increased $163,227
for the 2001 year compared to the 2000 year.  Interest expense related to $1.2
million in notes payable and losses on the sale or abandonment of assets
related to Logio were the primary reasons for the$276,228 also represented an earnings record.  The increase in 2001.

     Net Loss.  Our net loss decreased $214,498 in the 2001 year compared to
the 2000 year.  The net loss decrease is primarily the result of management's
steps to shift our business model awayincome was an improvement from costly seminar activities to a
focus on client acquisition for monthly hosting and maintenance fee revenues.
However, the impairment losses during 2001 reduced the overall effects of the
cost reductions on the income statement.  The reduction for 2001 is partially
offset by  the large reduction in sales recognized from software and access
and license fees due to our shift in the sales and distribution model to a
model that emphasizes growth in our monthly hositing and IntelliPay
transaction revenues.  We expect similar results in 2002.  We recorded a net
loss per common share of $0.24 for the year ended December 31,2001 compared to
$0.40 for the year ended December 31, 2000.

     Comparison of 2000 and 1999 Year End Periods.  Following is a comparison
of our operating results for the year ended December 31, 2000 with the year
ended December 31, 1999:

      Net Revenues:  Pacific WebWorks generated $4,954,384 in net revenues, an
increase of $4,648,756, as compared to $305,628 for 1999.  A total of 70.7% of
the 2000 net revenues were raised from seminar related activities held in
2000.  A total of 16.8% of the net revenues were related to IntelliPay monthly
gateway service fees and set-up fees on ePayment Systems and 12.4% were
related to product sales and licensing fees for our software

                                16


technology and from web site design services and training.

     Selling Expenses:   Our selling expenses increased $4,395,480 in 2000
compared to 1999.  These expenses related primarily to seminar related
activities, including outsourced seminar presentation talent, postage and
printing of mailers, travel, trade shows, meeting room facilities, and
internal sales employees.

     Research and Development Expenses:  Research and development expenses
increased $724,363 in 2000 from 1999.  The increase was primarily due our
research and development efforts and completion of IntelliPay's ePayment
System and related products.  These expenses were primarily comprised of
employee related charges for up to thirteen engineering personnel and
consulting services related to development.

     Compensation Expense for Options and Warrants for Consulting Services.
We grant options from time to time as approved by the board of directors.  We
granted options to employees in September 2000 and the strike price of these
options was less than the fair value on the date of grant, creating intrinsic
value.  We are recognizing the expense of these options over the one-year
vesting period and have recorded $15,150 during 2000.

     We issued warrants to purchase 400,000 common shares to our investor
relations firm for services during 1999.  The warrants were exercisable over a
period of time and we recognized the $1,255,800 value of the warrants,
determined on the Black-Scholes model, over the period earned.  We recorded
$13,216 in 2000 and $1,242,584 in 1999.

     General and Administrative Expense:  General and administrative expenses
increased $1,588,512 from 1999 to 2000.  The increase is primarily due to our
growth in 2000 and the resulting increases in finance and administrative
employees, telephone expenses, bank and merchant discount fees, insurance
costs and the renting of the new data center, approximating $30,000 per month
beginning in October of 2000.

     Total Operating Expenses:  The $6,558,826 increase in total consolidated
operating expenses from 1999 to 2000 was due primarily to our seminar related
activities and the development of our software tools and ePayment product.  We
completed development of our core products in 2000 and continually work to
improve and maintain them.  In second quarter 2000, we began shifting our
sales and marketing model from seminar presentations to strategic business
development and reseller distribution channels.  This shift caused a reduction
in selling expenses in late 2000.

     Net Loss.  Our consolidated net loss for 2000 was $5,259,691 compared to a net loss of $2,567,535$1,026,433 for 1999, an increasethe previous year ended.  Earnings per share for 2007 increased to $0.02 per share, up from a loss per share of $2,692,156.$0.03 for 2006.  Cash provided by operating activities increased by in excess of $1.1 million for 2007 over 2006.  

Pacific WebWorks introduced several new product offerings during the year and will release additional new offerings throughout 2008. We have further developed our marketing system and are actively seeking to expand the marketing of our technologies and products complimentary to our technologies.

In February of 2008 we moved into new offices at 230 West 400 South, Salt Lake City, Utah.  These offices will facilitate our growth over the next several years and have enabled us to better functionalize our operations.

Challenges continue to revolve around dealing with our rapid growth, in particular as it relates to retaining sufficient credit card processing capabilities.  We are negotiating several new processing options that we believe will relieve that strain.  In addition, conventional merchant accounts are unreasonably confining and may affect our progress.  The net loss
increase in 2000 was primarily dueindustry is beginning to increased operating expenses,recognize the problems related to seminar sales activity,conventional merchant accounts and increaseswe expect to see modified options develop in employeesthe marketplace.

We expect to see continued growth through 2008 and administrative costs,beyond.  We have established excellent relationships with online media firms throughout the United States and researchanticipate working closely with them to continue these results.  Our most immediate challenge is that of managing this explosive growth and development efforts.

     Comparison of 1999 and 1998 Year End Periods.  Following is a comparison
ofcommunicating our operating resultsprogress to the financial markets.  







16





Competition throughout the Internet software industry continues to intensify.  In particular, competition for the year ended December 31, 1999small 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 year
ended December 31, 1998:

     Revenues.marketplace, but we constantly need more capital and greater resources.  We generated $305,628 in revenues fromalso have the challenge of identifying and effectively implementing our products into new product salesdistribution channels, responding to economic changes generally, continuing to gain marketplace acceptance and licensing feeswe must address shifting public attitudes for our software technology during fiscal 1999 compared to
$172,395 for 1998.  The increase was primarily attributable to the development
of sales of our software technology by us or through our resellers.

     Sales Expenses.  Sales expenses increased $376,737 from 1998 compared to
1999.  Sales expenses for 1999 increased over the previous years due to the
development of an inside sales force, which included experienced Internet
sales people.

     Research and Development Expenses.  Research and development expenses
recorded an increase of $308,530 from 1998 to 1999.  The increase was
primarily due to continued development of our software technologies and
addition of development employees.


                                17


     Warrants for Consulting Services.  During 1999 we issued warrants to
purchase 400,000 common sharesproducts.  These challenges could pose a threat to our investors relations firm for services
valued at $1,255,800.  The warrants were exercisable over a period of time and
for the 1999 period we recognized $1,242,584 of the value, as determined on
the Black-Scholes model.

     General and Administrative Expenses.  These costs increased $718,895 from
1998 compared to 1999.  The increase is primarily due to the growth in the
number of administrative employees and general office expenses.
Total Operating Expenses. The $2,664,167 increase in total operating expenses
from 1998 to 1999 was due to the change in the nature of our operations from
selling services to selling software products.  Our expenses increased
primarily due to the expense related to execution of our new development plan.

     Net Loss.  Our net loss for 1999 was $2,567,535 compared to a net loss of
$150,465 for 1998.  The net loss increase of $2,417,070 in 1999 was primarily
due to increased operating expenses related to research and development
efforts, improvement of sales channels, and the amortized expense for the
warrants issued for services.

success.  

Liquidity and Capital Resources

     At December 31, 2001,

Historically we had $249,813 cashhave relied upon revenues, loans, and cash equivalents with
total current assets of $541,096 comparedequity transactions to $163,801 cash on hand with total
current assets of $698,784 at December 31, 2000.  Total current liabilities
were  $1,878,986 at the 2001 year end compared to $3,282,184 at the 2000 year
end.  Capital leases in default, past due payablesfund our operations, but for 2007 we relied mainly upon revenues and bank overdraft
accounted for $759,934, or 40.0%, of total current liabilities as of December
31, 2001.  Deferred revenue, which has been deferred in accordance with SAB101
and recognized on a ratable basis over the period the service revenues are
earned, represented $109,668, or 5.8%, of total current liabilities as of
December 31, 2001 compared to 55.2% as of December 31, 2000.  Our accumulated
deficit totaled $13,091,636 at the 2001 year end and we had negative working
capital totaling $1,337,890 compared to $2,583,400 at the 2000 year end.

     Net cash used in operating activities for the year ended December 31,
2001 was $1,150,272.  Net cash used in investing activities for 2001 was
$60,671, which was primarily used for the purchase of operational equipment.
Net cash provided by financing activities was $1,296,955, with $900,000 from
the issuance of notes payable and $416,001 net proceeds from the issuancesale of stock.  These transactions are discussed in more detail below.

     During the 2001 fiscal year, we have taken stepsWe expect to reduce our burn rate
in order to meet our monthly cash requirements from operations.  This has been
accomplished through a reduction in personnel, relocation to lower- cost
office facilities and other expense reduction activities.  In addition, in
February 2002 we closed IntelliPay's physical office in Fremont, California,
to achieve operational efficiencies.  We are in the process of moving
IntelliPay's technological infrastructure to Salt Lake City, Utah and
management anticipates that this move will provide savings of approximately
$40,000 by eliminating duplicative operation expenses.  We expectcontinue to generate positive cash flows through continued reduction in expenses and further development of our business and sales.

     Asdistribution 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.  For 2007 our monthly cash outflows were primarily related to selling expenses which totaled $7,151,288 for the year ended December 31, 2000, management decidedand general and administrative expenses that totaled $2,718,961.  These cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales.  

A small portion of our revenues are comprised of deferred revenue that we recognized over the year.  We carried deferred revenue of $10,494 on our books as a cost
saving measure to discontinue the seminar marketing activities of World
Commerce.  Prior to our acquisition of Logio, its management had temporarily
ceased its corporate development and operations of its Internet products. Our
management intended to revisit the operations of these subsidiaries, but due
to market forces and cash flow shortages decided it was in our best interest
to focus our  immediate attention on our core business of Pacific WebWorks and
IntelliPay.  As a result, Logio was unable to satisfy its obligations under
certain notes payable and capital leases.  Accordingly, we have recorded
impairment losses for the 2001 nine month period of $911,532  related to
Logio's return of hardware to a vendor in May 2001, cash down payments made by
Logio under agreements which are in default and other losses related to
equipment and software.  In addition, $1,776,768 in losses were related to
impairment to goodwill for Logio and World Commerce.

     During fiscal year 2000 we entered into agreements with the holders of a
majority of our debt to convert those debts into equity.  In June 2000 we
converted notes payable with interest of $2,037,536 into 1,440,000 common
shares of which 400,000 common shares were converted for $1,000,000 along with
warrants for the

                                18


purchase of an additional 600,000 common shares at strike prices ranging from
$5.00 to $7.50 per share.  Then in September 2000 we converted a $600,000 note
payable to 600,000 common shares.  As of December 31, 2000, we had notes
payable of $250,000, including principal and interest.  During the first and
second quarter of 2001, we borrowed additional funds resulting in $950,000 of
principal and interest resulting in $1.2 million of outstanding debt with
accrued interest, which was due and payable to various parties.

     In May 2001 we agreed to sell 4,000,000 units at $0.40 per unit for
$1,600,000 to four accredited investors.  Each unit consisted of one common
share and a warrant to purchase one common share.  Pursuant to the agreement,
the shares were issued in a private placement into escrow and the $1.6 million
was also placed in escrow.  Three of the investors assumed our $1.2 million of
outstanding debt taking new notes payable with 15% interest and payable on the
earlier of September 20, 2001, or at such time as we received up to $1 million
in equity financing.  These notes payable were also placed in the escrow.
Subsequently, in July 2001, $1.6 million was released from the escrow which
paid in full $1,214,000 of notes payable with interest, $10,000 was paid to
the escrow agent and the remaining $376,000 was funded to Pacific WebWorks.

     Our commitments consist primarily of operating leases for our Salt Lake
City office and our office located in Fremont, California, which total $11,500
per monthcurrent liability as of December 31, 2001.  Our total current liabilities reflect
primarily accounts payable, accrued liabilities, payables past due2007.  Deferred revenue includes up-front fees received for license fees, software services and capitaleducation not yet performed or delivered.  These 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.

We also record monthly revenues from operating leases.  Certain customers of TradeWorks Marketing entered into operating leases in default.  At the 2001 year end we had $301,928 accrued liabilities
primarily related to payroll liabilities, interest payables,purchase e-commerce software and reseller
commissions.  Payroll liabilities of $85,000merchant account agreements that were recognized which primarily
relateassigned by TradeWorks Marketing to estimated tax, penalties and interest past due from IntelliPayFundWorks.  The customers pay $59.95 per month for the period prior to and immediately after its acquisition by Pacific WebWorks.
Other current liabilities consist of estimated returns and charge backs from a
leasing company that funded customer purchases and placed them on a payment
plan during 2000.  We are responsible for recourse on leases where the
customer has not made the first payment.  These charge backs, returns and
refunds are estimated at $222,000 at the 2001 year end.

     We are working through various matters related to liabilities and
disputes with vendors and other creditors which may affect our cash position.
As a result of Logio ceasing its development, it was unable to make payment on
some of its capitaloperating lease obligations.  It defaulted on a licensing agreement
with Oracle Corporation and capital lease agreements with Sun Microsystems
Finance.  The default on the capital lease agreements totaled $440,000
resulting in a impairment loss of $122,685 and $788,847 in equipment under
capital leases and related software and equipment, respectively, for the 2001
year end.   Also, Logio has a $24,000 bank overdraft and approximately
$244,000 in payables and accrued liabilities.  World Commerce owes an
estimated $157,000 to a financing company for recourse on lease funding for
customers who fell into default and has approximately $524,000 in other
payables and payables past due.  Management intends to negotiate resolutions
for these liabilities and disputes.

      Financing activities during the 2001 year included proceeds from
issuance of notes payable and sales of our common stock.  As of January 31,
2001, we had notes payable of $250,000, including principal and interest.
During the first and second quarter of 2001, we borrowed additional funds
resulting in $950,000 of principal and interest.  Subsequently, in June 2001
the $1.2 million of outstanding debt with accrued interest, which was due and
payable to various parties, was assumed by three investors: AMCAN Services,
Inc., State Management Associates, LC and TAD Ventures, LC.  The notes payable
carried 15% interest and were payable upon the earlier of September 20, 2001,
or at such time as we received up to $1 million in equity financing.  As part
of a unit purchase agreement discussed below, these notes payable totaling
$1,214,000 were paid in full in July 2001.

     We have sold units for cash and granted warrants to purchase shares,
which may provide an additional source of funding.  In April 2001 we agreed to
issue warrants to Columbia Financial Group to purchase 1,000,000 shares of our
common stock at an aggregate exercise price of $625,000 in exchange for their
services to us for one year.  Portions of the warrants vest on a predetermined
time schedule and the warrants expire in April 2006.  In July 2001 we
completed a unit purchase agreementagreements 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 4,000,0000 units for $1,600,000, which
represents a $0.40 per unit sales price.  Each unit consisted of one share of
common stock and a warrant to purchase one additional share at an exercise
price of $0.80 per share which expires May 30, 2003.  As a result of this
offering, notes payable with interest of $1,214,000 were paid in full, $10,000
was paid for escrow agent services and the remaining $376,000

                                19


was funded to Pacific WebWorks.  As a result of these and previous
transactions,FundWorks’ operating leases as of December 31, 2001, we had outstanding warrants to purchase
5,600,000 common shares which may result in maximum proceeds2007 were approximately $22,841 through December 31, 2008.  Collectability of $7,325,000.
However, the holders of the warrants have total discretion whether or not to
exercise the warrants and we cannot assure that all of the warrants will be
exercised before their expiration through April 2006.

     Despite converting debt during fiscal year 2000, our shift in business
strategy initially resulted in decreased cash inflow throughout fiscal 2001.
As of the first quarter 2002 we are meeting our operational and cash flow
goals; however, we must address our liabilities through further negotiation
and payments.  As a result of our marketing and sales strategies shifting away
from costly seminars to business development during the fourth quarter 2000,
our monthly cash inflow decreased substantially.  Our monthly cash outflows
have also experienced a similar decrease during the 2001 year as a direct
result of this shift and other cost saving actions.  We have payables past due
and accrued liabilities that, cumulatively,future minimum lease receipts cannot be paid with cash on hand
or with recurring monthly cash flows.  Thus,assured because the customers placed in these operating leases have a higher credit risk.  

We believe that we may require additional funding
sources to meet the requirements on our existing liabilities and the
liabilities of our subsidiaries.

     We continue to fund our operations with loans and the sale of
unregistered stock where cash flows fall short of requirements.  While we have
taken steps to reduce our monthly burn rate and to become cash flow positive,
we believe we will need an additional $1 to $2 million during the next twelve to $3 million into 2002twenty-four months to continue to keep up with technological improvements and further our business development strategies during the next twelve months.strategies.  We operatebelieve funding may be obtained through additional debt arrangements or equity offerings in a very
competitive industry in which large amounts of capitaladdition to internally generated cash flows.  However, if we are required in orderunable to continually develop and promote products.  Manyobtain additional funds on acceptable terms, then we might be forced to delay or abandon some or all of our competitors have
significantly greater capital resources thanproduct 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 do.  We believerely on equity offerings for funding or services, then we will need
to continue to raise additional capital, both internally and externally, in
order to successfully compete.

     While we may be able to fund a portion of our operations through our
revenues for the short term, we currently anticipate usinglikely use private placements of our common stock to fund operations and expansion over time.  We intend to
issue such 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.

Factors Affecting Future Performance

 .

Results of Operations

Our net revenues increased in 2007 compared to 2006 as a result of our continued marketing activities.  Management expects future revenue increases to come largely from recurring residual income rather than from one time upfront fees.  We recognize revenue from hosting, gateway, and maintenance fees, software access and licensing fees, 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


17




recognized over the period services are performed, ranging from eight months to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services are completed, which is generally two months.  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned.  Operating lease revenues for merchant accounts and software are recorded as they become due from customers.

Cost of sales include costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs.  The cost of sales decreased for 2007 compared to 2006 due to the elimination of seminar related expenses incurred under our old marketing methods.  Management anticipates that cost of sales will remain lower in the short term as we continue our new marketing strategies.

Total operating expenses increased for 2007 compared to 2006 primarily due to increases in selling expenses.  Selling expenses include advertising expenses, seminar expenses, commissions and personnel expenses for sales and marketing.  Starting in November 2006 we shifted our focus from nationwide sales events to online marketing strategies and we anticipated that selling expenses would decrease as a percentage of revenues in the short term.  However, selling expenses increased due to increased costs related to our online marketing programs.  While selling expense increase the long term recurring value of the revenues received, versus the one-time upfront sale, more than justifies the increase.

General and administrative expenses include personnel expenses for executive, finance, and internal support personnel.  In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.  General and administrative expenses increased for 2007 compared to 2006 largely due to an increase in staff and related expenses necessary to facilitate our rapid growth.  Management expects to see increases in general and administrative expenses in the short term consistent with continued increases in customer accounts expected in 2008.

Research and development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department.  Research and development expenses increased for 2007 compared to 2006 due to the increased expense related to the development of our new product offers.

Total other income for 2007 included interest income earned on certificates of deposit that was offset by interest expense related to a loan payable and the recovery of a previously booked expense.  Other income for 2006 included interest income earned on certificates of deposit and the recovery of a previously booked expense offset by impairment of goodwill related to Intellipay and interest expense related to a loan payable.

Having attained profitability for the year ended December 31, 2007 we booked a one-time estimated tax benefit based upon projected future earnings.  Based upon our accumulated net operating losses, a $600,000 deferred tax asset and related income tax benefit was recorded at year end.  

Due to a successful 2007 year showing marked improvement in revenues we recorded net income and income per share for 2007 compared to a net loss and loss per share for 2006.  In addition our net income increased due to a one-time recognition of an income tax benefit of $600,000.

Off-balance Sheet Arrangements

None.

Commitments and Contingent Liabilities

Our operating commitments include our operating lease for our Salt Lake City office that approximates $10,500 per month.  Our total current liabilities at December 31, 2007, included accounts payable of $828,792 related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $71,413 were primarily the result of payroll related liabilities, contract seller commissions offset by estimated refunds and factoring obligations.  Deferred revenues of $10,494 included up-front fees received for license fees, software


18




services and education not yet performed or delivered.  Current liabilities from discontinued operations were $215,274 and are related to World Commerce Network, LLC.

At the year ended December 31, 2006, we had a promissory note payable of $100,000, with 8% interest per annum, which was due in full on April 30, 2007.  This note was collateralized by our business assets.  In November 2007 we paid the note in full including principal and interest.

The operations of World Commerce Network, LLC, our subsidiary, are ceased and discontinued.  Management continues to  attempt to negotiate settlements of World Commerce Network’s accrued liabilities.  As of December 31, 2007, World Commerce Network’s accrued liabilities totaled $59,764 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.


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

Deferred revenue - In the past 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.

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

Goodwill -  Goodwill related to Intellipay is assessed annually for impairment by comparing the fair values of Intellipay to its carrying amount, including goodwill.  In testing for a potential impairment of goodwill, the estimated fair value of  Intellipay is compared with book value, including goodwill.  If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary.  If, however, the fair value of Intellipay is less than book value, then the carrying amount of the goodwill is compared with its implied fair value.

The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks.  If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.  The fair value of Intellipay is estimated using both cash flow information from internal budgets and multiples of revenue.  In the event that an impairment indicator arises prior to our annual impairment test of goodwill, we will provide a full test relative to the indicator in the period that the indicator is present.

We performed a goodwill impairment test during 2007 and concluded that was no impairment indicators of good will.  However, 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 determined that a $1 million


19




impairment of our goodwill related to Intellipay was appropriate and the impairment was recorded at the 2006 year end.  

Contingent liabilities - Material estimates for contingent liabilities include approximately $74,000 for our operating companies and approximately $151,000 in net current liabilities of our discontinued operations. From a liquidity standpoint, any settlement or judgment received by us from pending or threatened litigation may have a direct affect on our cash balances at December 31, 2007.  Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not be ablehave a direct affect on our assets as management does not intend to obtain additional funds on acceptable terms.  If we
     fail to obtain funds on acceptable terms, we might be forced to delay or
     abandon some or allsatisfy such claims with the assets of our business plans, whichoperating 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 a material
     adverse effect on us.

 .    Wide scale implementationhad no communication for over three years with any of a new technology or payment method, such as
     stored-value cards, electronic cash equivalents or wireless
     communications, could force usthe parties related to modify our payment services or software
     to remain competitive, and could potentially render one or morethe contingent liabilities of our services or products obsolete

 .    We currently are unable to satisfy certain of our obligations through our
     generated revenues.  Our revenues and operating results have varied
     significantly from period to period.  Although our earnings are becoming
     more predictable as the market for our services and products begins to
     mature, our revenues and operating results can be expected to fluctuate
     somewhat for a variety of reasons beyond our control which may result in
     our quarterly operating results from time to time beingdiscontinued operatio ns.   Any settlements that might occur below the
     expectations of public market analysts and investors.  In that case, we
     expect that the price of our common stock would be materially and
     adversely affected.

 .    We face intense competition that may slow our growth and force our prices
     down.  We expect this competition to intensify in the future, with new
     competitors, and competitive services and products regularly entering the
     market.  If these competitors were to bundle competing products for their
     customers, it could adversely affect our ability to market our services.

                                20


 .    We may experience software defects and development delays, damaging
     customer relations.  Or we may experience breakdowns or unauthorized
     entry into our hosting services, infrastructure or payment processing
     system, harming our business.  We would be unable to deliver our payment
     processing services or hosting services if our system infrastructures
     break down or are otherwise interrupted.

 .    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.

 .    We depend upon our proprietary rights, none of which can be completely
     safeguarded against infringement.  Intellectual property rights, by their
     nature, are uncertain and involve complex legal and factual questions. We
     may unknowingly infringe upon the proprietary rights of others, thereby
     exposing us to significant liability and/or damages.  To the extent we
     rely upon confidential information to maintain our competitive position,
     other parties may independently develop the same or similar information.

 .    We are dependent on the efforts of resellers who may leave us at any
     time.  The loss of these resellers, without immediate replacement,amounts accrued would result in a decreasefavorable impact to our earnings and working capital.

Valuing stock options - 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 our growth at its current ratethe subjective input assumptions can materially affect the fair value estimate.  Management believes the best input assumptions available were used to value the options and collections
     may be adversely affected.

 .    Wethat the resulting option values are dependent upon key personnel who provide the development and
     maintenance of our software and services.  We do not enter into
     employment agreements with our employees and these individuals could
     leave us at anytime.


reasonable.



ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Not applicable.


       ITEM 8:8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA













                                21






                           CHISHOLM & ASSOCIATES
A Professional           Certified




Pacific WebWorks, Inc.

CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007



CONTENTS

Report of Registered Independent Public Accountants    OfficeAccounting 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, LLC Certified Public Accountants



Todd D. Chisholm, Audit Partner
Nephi J. Bierwolf, Tax Partner
Troy F. Nilson, Audit Partner

533 West 2600 South, Suite 25  • Bountiful, Utah 84010  • Phone:  (801)292-8756  Corporation                    P.O. Box 540216              Fax• Fax: (801)292-8809 North Salt Lake, Utah 84054
_____________________________________________________________________________• www.cbncpa.com


REPORT OF INDEPENDENT AUDITOR'S REPORT




REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
of Pacific WebWroks,Webworks, Inc.
Salt Lake City, UT

Utah

We have audited the accompanying consolidated balance sheets ofPacific WebWorks,Webworks, Inc. and Subsidiariesas of December 31, 20012007 and 20002006 and the related consolidated statements of operations, stockholders'stockholders’ equity and cash flows for the years then ended.  These financial statements are the responsibility of the Company'sCompany’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 generally accepted auditingthe standards inof the United States of America.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 significantsi gnificant 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,Webworks, Inc. and Subsidiaries as of December 31, 20012007 and 20002006 and the consolidated results of theirits operations and cash flows for the years then ended in conformity with U.S. generally accepted accounting principles in the
United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern.  As discussed in Note B to
the consolidated financial statements, the Company has had recurring operating
losses and is dependent upon financing to continue operations.  These factors
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note B.
The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.principles.

  /s/ Chisholm, Bierwolf & Associates

Nilson, LLC
Chisholm, Bierwolf & Associates
North Salt Lake, Utah
January 31, 2002

                               F-1
 22




             Pacific WebWorks, Inc. and Subsidiaries

                   CONSOLIDATED BALANCE SHEETS



                              ASSETS
                                                    December 31,  December 31,
                                                        2001         2000
                                                   ------------- -------------

CURRENT ASSETS
  Cash and cash equivalents                        $    249,813  $    163,801
  Receivables
    Trade, less allowance for doubtful receivablesNilson, LLC
Bountiful, UT
February 29, 2008

Member of $53,107 in 2001 and $88,487 in 2000           149,742       257,492
    Employee                                                768         2,469
  Prepaid expenses                                      140,773       275,022
                                                   ------------- -------------

      Total current assets                              541,096       698,784
                                                   ------------- -------------

PROPERTY AND EQUIPMENT, NET AT COST                     262,828       374,259

OTHER ASSETS                                          2,964,654     4,331,979
                                                   ------------- -------------

                                                   $  3,768,578  $  5,405,022
                                                   ============= =============

               LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
  Current portion of long- term capital leases     $        460  $      2,425
  Capital leases in default                             438,373             -
  Payables past due                                     290,795             -
  Overdraft in bank                                      23,766             -
  Accounts payable                                      275,368       611,950
  Accrued liabilities                                   301,928       193,161
  Other current liabilities                             222,048       197,048
  Deferred revenue                                      109,668     1,811,020
  Notes payable                                         216,580       216,580
  Notes payable - related parties                             -       250,000
                                                   ------------- -------------

      Total current liabilities                       1,878,986     3,282,184

  Long-term capital lease obligations                         -           670

STOCKHOLDERS' EQUITY
  Common stock - par value $0.001; authorized
    50,000,000; issued and outstanding 23,076,688
    in 2001 and 15,008,000 in 2000                       23,077        15,008
  Additional paid-in capital                         14,998,151    10,153,603
  Stock subscription receivable                         (40,000)            -
  Accumulated deficit                               (13,091,636)   (8,046,443)
                                                   ------------- -------------

      Total stockholders' equity                      1,889,592     2,122,168
                                                   ------------- -------------

                                                   $  3,768,578  $  5,405,022
                                                   ============= =============





 AICPA, UACPA & Registered with PCAOB











21







Pacific WebWorks, Inc.
CONSOLIDATED BALANCE SHEETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31,
 
December 31,
 
 
 
 
 
 
 
 
2006
 
2007
ASSETS
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
 
 
 $            392,633 
 
$           891,062 
 
Receivables
 
 
 
 
 
 
 
 
Trade, less allowance for doubtful receivables of
 
 
 
 
 
 
$30,000 in 2006 and $45,975 in 2007
            149,584 
 
279,402 
 
Prepaid expenses and other current assets
              42,000 
 
166,446 
 
Deferred tax asset
 
                  - 
 
84,778 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Current Assets
 
 
            584,217 
 
         1,421,689 
 
 
 
 
 
 
 
 
 
 
 
PROPERTY AND EQUIPMENT, NET AT COST
              90,683 
 
             83,464 
 
 
 
 
 
 
 
 
 
 
 
RESTRICTED CASH
 
 
            111,765 
 
           487,473 
GOODWILL
 
 
 
         1,946,253 
 
         1,946,253 
DEFERRED TAX ASSET
 
 
                 - 
 
           515,222 
DEPOSITS
 
 
              13,472 
 
             11,472 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Assets
 
 
 $          2,746,390 
 
 $        4,465,572 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
Accounts payable
 
 
 $               92,468 
 
 $           828,792 
 
Notes payable – current
 
 
            100,000 
 
                    - 
 
Accrued liabilities
 
 
            123,822 
 
             71,413 
 
Deferred revenue
 
 
              27,834 
 
             10,494 
 
Current liabilities from discontinued operations
            235,274 
 
           215,274 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Current Liabilities
 
 
            579,398 
 
         1,125,973 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Liabilities
 
 
 
            579,398 
 
         1,125,973 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commitments
 
 
 
                    - 
 
                    - 
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
Common stock - par value $0.001; authorized 50,000,000;
 
 
 
 
 
issued and outstanding 35,426,895 shares in 2006
 
 
 
 
 
and 40,526,895 shares in 2007
 
              35,427 
 
             40,527 
 
Additional paid-in capital
 
 
       16,180,898 
 
       16,472,175 
 
Accumulated deficit
 
 
      (14,049,333)
 
(13,173,104)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Stockholders' Equity
 
         2,166,992 
 
         3,339,599 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Liabilities and Stockholders' Equity
 
 $         2,746,390 
 
 $       4,465,572 
 
 
 
 
 
 
 
 
 
 
 


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

                               F-2



22







Pacific WebWorks, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
Year Ended
 
 
 
 
 
 
 
 
 
December 31,
 
 
 
 
 
 
 
 
 
2006
 
2007
Revenues
 
 
 
 
 
 
 
 
 
 
Software, access and license fees
 
 
 $           1,234,923 
 
 $          1,250,366 
 
Hosting, gateway and maintenance fees
 
 
         1,044,309 
 
         8,968,344 
 
Training and education
 
 
 
         1,222,409 
 
           196,556 
 
Merchant accounts, design and other
 
 
           798,040 
 
           296,505 
 
 
 
 
 
 
 
 
 
4,299,681 
 
10,711,770 
 
 
 
 
 
 
 
 
 
Cost of sales
 
 
 
 
 
           512,594 
 
           364,482 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Profit
 
 
 
 
         3,787,086 
 
       10,347,288 
 
 
 
 
 
 
 
 
 
 
 
 
Selling expenses
 
 
 
 
         2,323,267 
 
         7,151,288 
Research and development
 
 
 
 
           250,224 
 
           307,490 
General and administrative
 
 
 
 
         1,265,041 
 
         2,718,961 
Depreciation and amortization
 
 
 
             29,404 
 
             30,657 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Operating Expenses
 
 
 
         3,867,936 
 
       10,208,397 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss) From Operations
 
 
            (80,850)
 
           138,891 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense)
 
 
 
 
 
 
 
 
Interest income
 
 
 
 
             30,862 
 
             18,608 
 
Interest Expense
 
 
 
 
              (8,000)
 
            (15,534)
 
Impairment of Goodwill
 
 
 
        (1,000,000)
 
- 
 
Other income (expense), net
 
 
 
             31,555 
 
           134,264 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Other Income (Expense)
 
 
 
          (945,583)
 
           137,338 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) from continuing operations
 
 
 
 
 
 
before income taxes
 
 
 
        (1,026,433)
 
           276,228 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax provision/(benefit)
 
 
 
                    - 
 
          (600,000)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS)
 
 
 
 $          (1,026,433)
 
 $           876,228 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
 
 
 
 
 
Basic
 
 
 
 
 $                   (0.03)
 
 $                 0.01 
 
Fully Diluted
 
 
 
 
 $                   (0.03)
 
 $                 0.01 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per share
 
 
 
 
 
 
 
Basic
 
 
 
 
 $                   (0.03)
 
 $                 0.02 
 
Fully Diluted
 
 
 
 
 $                    0.03 
 
 $                 0.02 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 
 
 
 
 
Basic
 
 
 
 
 
       35,426,125 
 
       40,526,895 
 
Fully Diluted
 
 
 
 
       35,426,125 
 
       49,079,546 






23



             Pacific WebWorks, Inc. and Subsidiaries

              CONSOLIDATED STATEMENTS OF OPERATIONS


                                                      For the
                                                    Years ended
                                                    December 31,
                                         2001           2000         1999
                                     ------------- ------------- -------------
Revenues, net
  Software, access and license fees  $  1,778,055  $  4,242,476  $          -
  Hosting, gateway and
    maintenance fees                    1,196,847       615,705             -
  Training, design and other              124,277        96,203       305,628
                                     ------------- ------------- -------------
                                        3,099,179     4,954,384       305,628

Cost of sales                             543,621       811,506        42,874
                                     ------------- ------------- -------------

     Gross profit                       2,555,558     4,142,878       262,754

Selling expenses                          592,780     4,802,397       406,917
Research and development                  449,323     1,044,842       320,479
General and administrative              1,571,481     2,375,252       786,740
Depreciation and amortization           1,903,091     1,095,261        30,572
Compensation expense for options
  and warrants                            232,549        28,366     1,242,584
Impairment loss - goodwill and other
  long-lived assets                     2,688,300             -             -
                                     ------------- ------------- -------------

     Total operating expenses           7,437,524     9,346,118     2,787,292
                                     ------------- ------------- -------------

     Loss from operations              (4,881,966)   (5,203,240)   (2,524,538)
                                     ------------- ------------- -------------

Other income (expense)
  Loss on sale or abandonment
    of assets                             (69,319)            -             -
  Interest income                           8,042        13,989         1,246
  Interest expense                       (119,627)      (70,440)      (19,243)
  Other, net                               17,677             -       (25,000)
                                     ------------- ------------- -------------

                                         (163,227)      (56,451)      (42,997)
                                     ------------- ------------- -------------

     NET LOSS                        $ (5,045,193) $ (5,259,691) $ (2,567,535)
                                     ============= ============= =============
Net loss per common share - basic
  and diluted                        $      (0.24) $      (0.40) $      (0.27)
                                     ============= ============= =============
Weighted-average number of shares
  outstanding - basic and diluted      20,694,550    13,140,360     9,632,500
                                     ============= ============= =============



 




The accompanying notes are an integral part of these statements.

                               F-3
consolidated financial statements

Pacific WebWorks, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the period January 1, 2006 through December 31, 2007
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
 Paid-in
 
Accumulated
 
 
 
 
 
 
 
 
 
 
 Shares
 
 Amount
 
 Capital
 
Deficit
 
 Totals
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at January 1, 2006
 
 
 
 
 
  35,426,895 
 
 $    35,427 
 
 $16,121,744 
 
 $(13,022,900)
 
 $3,134,271 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Valuation of Stock Options
 
 
 
 
 
- 
 
- 
 
        59,154 
 
- 
 
     59,154 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss for the year ended December 31, 2006
 
 
                - 
 
              - 
 
               - 
 
     (1,026,433)
 
 (1,026,433)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2006
 
 
 
 
 
 35,426,895 
 
      35,427 
 
    16,180,898 
 
     (4,049,333)
 
  2,166,992 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock for insurance policies
 
 
 
 
      600,000 
 
          600 
 
        28,694 
 
             - 
 
       29,473 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of common stock for cash
 
 
 
 
 
   3,500,000 
 
       3,500 
 
  171,500 
 
               - 
 
    175,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Issuance of stock for consulting services
 
 
 
 
   1,000,000 
 
      1,000 
 
      49,000 
 
- 
 
     50,000 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Valuation of stock options
 
 
 
 
 
               - 
 
              - 
 
      42,083 
 
              - 
 
      42,083 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income for year ended December 31, 2007
 
 
 
 
               - 
 
              - 
 
            - 
 
        876,228 
 
    876,228 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances at December 31, 2007
 
 
 
 
 
  40,526,895 
 
 $   40,527 
 
 $16,472,175 
 
 $(13,173,105)
 
 $3,339,599 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 























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






24






                Pacific WebWorks, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                     For the
                                                                   years ended
                                                                   December 31,
                                                        2001           2000          1999
                                                    ------------- ------------- -------------

Increase (decrease) in cash and cash equivalents
 Cash flows from operating activities
   Net loss                                         $ (5,045,193) $ (5,259,691) $ (2,567,535)
   Adjustments to reconcile net loss
    to net cash used in operating activities
      Depreciation & amortization                      1,903,091     1,095,261        30,572
      Issuance of  options and warrants
        for compensation                                 232,549        28,366     1,255,800
      Impairment loss                                  2,688,300             -             -
      Bad debt expense                                   144,376       111,731             -
      Loss on sale or abandonment of property
        and equipment                                     69,319             -             -
      Loss on investment                                       -             -        25,000
      Other adjustments                                   34,661        25,945        20,000
   Changes in assets and liabilities
   (Net of effects of acquisitions)
      Receivables                                        (31,756)     (143,225)     (101,579)
      Prepaid expenses and other assets                  652,872      (258,689)      (29,549)
      Accounts payable and accrued liabilities           (97,139)      478,775       121,064
      Deferred revenue                                (1,701,352)    1,821,378             -
                                                    ------------- ------------- -------------

        Total adjustments                              3,894,921     3,159,542     1,321,308

        Net cash used in operating activities         (1,150,272)   (2,100,149)   (1,246,227)
                                                    ------------- ------------- -------------

Cash flows from investing activities
  Purchases of property and equipment                    (80,141)     (250,373)     (148,135)
  Proceeds from sale of property and equipment            14,412             -             -
  Cash paid for deposits                                       -       (12,000)            -
  Cash paid for investment                                     -             -       (25,000)
  Cash from escrow                                             -             -       750,000
  Cash paid to related party                                   -             -      (166,046)
  Cash acquired in acquisitions                            5,058         9,718             -
                                                    ------------- ------------- -------------

        Net cash used in investing activities            (60,671)     (252,655)      410,819
                                                    ------------- ------------- -------------

Cash flows from financing activities
  Overdraft in bank                                       23,766             -             -
  Proceeds from issuance of notes payable                900,000     2,006,580       980,000
  Cash received for contributed capital                    1,475             -             -
  Net proceeds from issuance of stock                    416,001       375,000             -
  Principal payments of long-term obligations            (44,287)      (18,873)            -
                                                    ------------- ------------- -------------

        Net cash provided by financing activities      1,296,955     2,362,707       980,000
                                                    ------------- ------------- -------------

        Net increase decrease in cash and
         cash equivalents                                 86,012         9,903       144,592

Cash and cash equivalents at beginning of period         163,801       153,898         9,306
                                                    ------------- ------------- -------------

Cash and cash equivalents at end of period          $    249,813  $    163,801  $    153,898
                                                    ============= ============= =============

Supplemental disclosures of cash flow information:
  Cash paid for interest                            $     65,879  $     29,213  $      1,400
  Cash paid for income taxes                                   -             -             -

  Non-cash financing activities:
   Issuance of common stock for prepaid
      services, deposit and rent                    $    488,600  $          -  $          -
   Purchase of Logio subsidiary for stock              2,450,000             -             -
   Retired debt through escrow                         1,214,000             -             -
   Prepaid insurance for stock                            70,000        25,945        20,000
   Payment of debt for common stock                            -     2,637,536       500,000
   Loss in joint venture                                       -             -        25,000



    The accompanying notes are an integral part of these statements.

                                  F-4





Pacific WebWorks, Inc.
Consolidated Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the year ended
 
 
 
 
 
 
 
December 31,
 
 
 
 
 
 
 
2006
 
2007
 
 
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities
 
 
 
 
Net earnings (loss)
 
 
 
 $        (1,026,433)
 
 $          876,228 
 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net earnings (loss)
 
 
 
 
  to net cash used in operating activities
 
 
 
 
 
 
Depreciation & amortization
 
 
              29,404 
 
             30,657 
 
Stock issued for services
 
 
 
- 
 
            79,473 
 
Valuation of stock options
 
 
 
                 59,154 
 
             42,083 
 
Bad debt expense
 
 
 
              192,500 
 
           201,269 
 
Impairment of Goodwill
 
 
 
           1,000,000 
 
- 
Changes in assets and liabilities
 
 
 
 
 
 
Deferred tax asset
 
 
 
- 
 
          (600,000)
 
Receivables
 
 
 
 
              (73,082)
 
         (321,793)
 
Prepaid expenses and other assets
 
 
              108,324
 
         (122,446)
 
Accounts payable and accrued liabilities
 
                (3,041)
 
           654,442 
 
Deferred revenue
 
 
 
             (651,372)
 
            (17,340)
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided (used) by operating activities
           (364,546)
 
           822,574 
 
 
 
 
 
 
 
 
 
 
Cash Flows from Investing Activities
 
 
 
 
Purchases of property and equipment
 
 
               (39,048)
 
            (23,438)
Cash on reserve with bank (Restricted Cash)
 
                   51,707 
 
          (375,708)
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided (used) by investing activities
 
                 12,659 
 
            (399,145)
 
 
 
 
 
 
 
 
 
 
Cash Flows from Financing Activities
 
 
 
 
Payment of note payable
 
 
 
                           - 
 
       (100,000)
Proceeds on issuance of stock
 
 
                           - 
 
          175,000 
 
 
 
 
 
 
 
                          - 
 
                       - 
 
 
Net cash provided by financing activities
 
                          - 
 
            75,000 
 
 
 
 
 
 
 
 
 
 
 
 
Net increase/(decrease) in cash and cash equivalents
               (351,887)
 
           498,429 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at beginning of period
 
                744,520 
 
            392,633 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents at end of period
 
 $            392,633 
 
 $          891,062 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid for interest
 
 
 
 $                        - 
 
 $                      - 
 
Cash paid for income taxes
 
 
 
                      - 
 
               1,200 
Non-cash financing activities:
 
 
 
                      - 
 
                       - 
 
Stock issued for services
 
 
 
                      - 
 
              50,000 
 
Stock issued for insurance
 
 
 
                      - 
 
              29,473 
 
 
 
 
 
 
 
 
 
 


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



25


                     Pacific WebWorks, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 2001, 2000, and 1999


                                                                    Additional   Stock
                             Price per          Common Stock        Paid-in      Subscriptions Accumulated
                             share           Shares       Amount    Capital      Receivable    Deficit      Totals
                             ------------ ------------ ------------ ------------ ------------  ------------ ------------

Balances at January 1, 1999                 5,000,000        5,000        5,000            -      (219,217)    (209,217)

Reverse acquisition and
reorganization adjustment    $        -     5,000,000        5,000      995,000            -             -    1,000,000

Issuance of stock for
insurance policy                   1.43        14,000           14       19,986            -             -       20,000

Issuance of stock for
 debt conversion                   1.31       381,679          381      499,618            -             -      499,999

Consulting compensation
 recognized for warrants
 issued                               -             -            -    1,242,584            -             -    1,242,584

Net loss December 31, 1999            -             -            -            -            -    (2,567,535)  (2,567,535)
                                          ------------ ------------ ------------ ------------  ------------ ------------
Balances at
 December 31, 1999                    -    10,395,679       10,395    2,762,188            -    (2,786,752)     (14,169)

Issuance of stock for
 equity  in World Commerce
 Network, LLC                      1.97         4,663            5        9,176            -             -        9,181

Issuance of stock for
 acquisition of
 Intellipay, Inc.                  1.80     2,400,000        2,400    4,317,601            -             -    4,320,001

Issuance of stock for
 debt conversion                   2.50       400,000          400      999,600            -             -    1,000,000

Issuance of stock for
 debt conversion                   1.00     1,040,000        1,040    1,036,496            -             -    1,037,536

Issuance of stock for
 insurance policy                  1.44        18,000           18       25,926            -             -       25,944

Issuance of stock for
 debt conversion                   1.00       600,000          600      599,400            -             -      600,000

Issuance of stock for cash         2.50       150,000          150      374,850            -             -      375,000

Consulting compensation
 recognized for warrants
 granted                              -             -            -       13,216            -             -       13,216

Compensation recognized for
 stock options granted                -             -            -       15,150            -             -       15,150

Net loss December 31, 2000            -             -            -            -            -    (5,259,691)  (5,259,691)
                                          ------------ ------------ ------------ ------------  ------------ ------------

Balances at December 31, 2000         -    15,008,342       15,008  10,153,6030            -    (8,046,443)   2,122,168


                                   (Continued)


                                       F-5
 26





                     Pacific WebWorks, Inc. and Subsidiaries

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                  Years ended December 31, 2001, 2000, and 1999


                                                                    Additional   Stock
                             Price per          Common Stock        Paid-in      Subscriptions Accumulated
                             share           Shares       Amount    Capital      Receivable    Deficit      Totals
                             ------------ ------------ ------------ ------------ ------------  ------------ ------------

Issuance of stock for
 deposit and rent                   0.50      537,200          537     268,0630            -             -      268,600

Issuance of stock for
 acquisition of Logio, Inc.            -    5,791,980        2,792    2,447,199            -             -    2,449,991

Issuance of stock for
 prepaid legal and
 investment banking
 services                           0.52      289,166          289      149,711            -             -      150,000

Cash received for other
 contributed capital                   -            -            -        1,475            -             -        1,475

Units issued for cash and
debt conversion:
  Stock                             0.32    4,000,000        4,000    1,276,000            -             -    1,280,000
  Warrants (4,000,000 granted)      0.08            -            -      320,000            -             -      320,000
  Additional expense recognized
   for excess fair value of
   warrants over cash and
   conversion value                 0.02            -            -       77,134            -             -       77,134

Issuance of stock for
 insurance policies                 0.35      200,000          200       69,800            -             -       70,000

Issuance of stock for
 warrants exercised                 0.32      250,000          250       79,750      (40,000)            -       40,000

Consulting compensation
 recognized for warrants
 granted                               -            -            -      116,712            -             -      116,712

Compensation recognized for
 stock options granted                 -            -            -       38,703            -             -       38,703

Net loss December 31, 2001             -            -            -            -            -    (5,045,193)  (5,045,193)
                                          ------------ ------------ ------------ ------------ ------------- ------------

                                          $26,076,688  $    23,076  $14,998,150  $   (40,000) $(13,091,636) $ 1,889,590
                                          ============ ============ ============ ============ ============= ============







     The accompanying notes are an integral part of this financial statement

                                       F-6
 27

             




Pacific WebWorks, Inc. and Subsidiaries

            

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001

2007

NOTE A1 - SUMMARYTHE COMPANY AND BASIS OF SIGNIFICANT ACCOUNTING POLICIES

A summary of significant accounting policies consistently applied in the
presentation of the accompanying consolidated financial statements follows.

1. PRESENTATION

The Company
Pacific WebWorks, Inc. and its subsidiaries, (Company), engage in the development and distribution of web tools software, electronic business storefront hosting, and Internet payment systems for individuals and small to mid-sized businesses.  The Company was organized under the laws ofincorporated in the state of Nevada on May 18, 1987, as Asphalt Associates, Inc. On December 31, 1998, the board of directorsand changed theits name of the Company to Pacific WebWorks, Inc. in January 1999.  On January 11,
1999,July 31, 2007 the Company merged with Utah Webworks, Inc.,formed Pacific WebWorks International, LTD, a Utah corporation
organized April 10, 1997.  The share exchange with Utah Webworks was accounted
for as a reverse merger, therefore, all financial information prior to January
11, 1999 is thatUnited Kingdom limited company.  

Basis of the accounting survivor, Utah Webworks.

2. Principles of Consolidation

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. (a non-operating company), and
Logio, Inc. (a non-operating, development company).  All significant intercompany accounts and transactions have been eliminated in consolidation.  Certain prior period balancesThe operations of World Commerce Network, LLC have been reclassified to conform with current
period presentation.

3. discontinued. On July 31, 2007 the Company formed Pacific WebWorks International, LTD, a United Kingdom limited company.  We are in the process of forming Pacific WebWorks GmbH, an Austrian company. Neither of these companies are currently operating.

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 accrued penalties, interest for taxes
and contingent liabilities.

4. 

Cash Equivalents
The Company considers all highly liquid debt instruments with maturity ofmaturing in three months or less when purchased to be cash equivalents.

                               F-7
 28

             Pacific WebWorks, Inc.

Concentrations
Financial instruments that potentially subject the Company to concentrations of credit risks consist of cash and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001

NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

5.  cash equivalents, accounts receivable and accounts payable.  The Company places its cash and cash equivalents at well known quality financial institutions.  At times, such cash and investments may be in excess of the FDIC insurance limit.

Depreciation and amortization
Depreciation of property and equipment is provided on the straight-line method over the estimated useful lives of the assets.  Accelerated methods of depreciation of property and equipment are used for income tax purposes.

Depreciation expense

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 the years ended it’s services.
Goodwill
The 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, 2001, 20002007

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 1999
totals $458,155, $126,708 and $28,572, respectively.

Goodwill and other intangible assets are amortized overimpairment testing in accordance with SFAS No. 142, the periodsCompany’s Intellipay business unit operates in one principal business segment, a provider of expected future benefit atonline credit card gateway services.
 In testing for a potential impairment of goodwill, the estimated fair value of the business unit level,is compared with book value, including goodwill. If the estimated at threefair value exceeds book value, goodwill is considered not to five
years.

6.  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 go odwill 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'sCompany’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.

7.  

Revenue Recognition
The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, "Revenue“Revenue Recognition in Financial Statements."Statements” and its revisions in SAB No. 104.  SAB 101 clarifiesand 104 clarify application of generally accepted accounting principles related to revenue transactions. The Company also follows SOP
97-2.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 one year)two months).  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned. 8.  Impairment of Long-LivedOperating lease revenues for merchant accounts and Intangible Assets

The Company has adopted Statement of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which requires that impairment losses be recognized
on such assets when indicators of impairmentsoftware are discovered and estimated
undiscounted future cash flows to be generatedrecorded as they become due from those assets are less than
their carrying value.  As of June 30, 2001, and as a result of certain events
and management's assessment of impaired assets, the Company recorded $911,532
in losses relating to the impairment of certain long-lived assets in Logio,
Inc. and $1,776,768 in losses relating to the impairment of goodwill for
Logio, Inc. and World Commerce Network.


                               F-8
 29

             customers.


27




Pacific WebWorks, Inc. and Subsidiaries

            

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001

2007

NOTE A1 - SUMMARYTHE COMPANY AND BASIS OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

9.  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 sales
Cost 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 costs
Sales 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 costs
Product development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department.  Costs incurred by the Company to develop, enhance, manage, monitor and operate the Company's technology services are generally expensed as incurred.  Total research and development costs for December 31, 2007 and 2006 was $307,490 and $250,224 respectively.  
General and administrative costs
General and administrative expenses include personnel expenses for executive, finance, and internal support personnel. In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.






28




Pacific WebWorks, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

Income Taxes

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.

10.  Net Loss

Capital Structure
The Company has 50,000,000 shares authorized of voting common stock with 40,526,895 issued and outstanding.

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-prospecti ve 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, 2005
Net 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, 2007

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

Earnings (loss) Per Share
The computation of net lossearnings (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 9,240,4857,822,651 related to options were excluded from the calculation of diluted loss per share for the period ended December 31, 2006 because their effects were anti-dilutive.  11.  Recently Issued Accounting Pronouncements

In June 2001,Potentially issuable common shares totaling 8,552,651 related to options were included in the Financial Accounting Standards Board (FASB) issued
Statementscalculation of Financial Accounting Standards No. 141 (SFAS 141), "Business
Combinations" and No. 142 (SFAS 142), "Goodwill and Other Intangible Assets",
which establishes new standardsdiluted earnings per share for the treatment of goodwill and other
intangible assets.  SFAS 142 is effective for fiscal years beginning afterperiod ended December 31, 2001.  SFAS 142 prescribes that amortization of goodwill will
cease as of2007.

The following is the adoption date.

Additionally,calculation for weighted average common shares used in basic earnings (loss) from continuing operations per share:

 
Year ended December 31,
 
2006 
     2007 
 
 
 
Income (loss) (numerator)
$       (1,026,433)
$         76,228 
Weighted average shares outstanding (denominator)
35,426,125 
40,526,895 
Per share amount
$                (0.03)
 $             0.01 


The following is the Company will be required to perform an impairment test on
goodwill and other intangible assets as ofcalculation for weighted average common shares used in basic net earnings (loss) per share:

 
Year ended December 31,
 
2006 
     2007 
 
 
 
Income (loss) (numerator)
$       (1,026,433)
 $       876,228 
Weighted average shares outstanding (denominator)
35,426,125 
40,526,895 
Per share amount
$                (0.03)
 $             0.02 

The following is the adoption date, annually
thereafter, and whenever events and circumstances occur that might affectcalculation for weighted average common shares used in the carrying value of such assets.  The Company estimates that the effect of
ceasing the amortization of goodwill related to SFAS 142 will be material to
the company's financial statements subsequent to the adoption date.  The
Company amortizes approximately $906,000 annually of goodwill for its
Intellipay subsidiary.  The Company has not yet determined what effect, if
any, the impairment test of goodwill and other intangible assets will have on
the Company's results offully diluted earnings (loss) from continuing operations and financial position.  The Company does
not believe that SFAS 141 will have a material impact on its financial
position and results of operations.

In October 2001, the FASB issued Statement of Financial Accounting Standard
No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived
Assets".  SFAS replaces Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of".  SFAS 144
prescribes, among other things, an accounting model for long-lived assets to
be disposed of including sales and discontinued operations. The Company is
evaluating the impact of this pronouncement on its financial position and
results of operations in future filings.

                               F-9
per share:

 
Year ended December 31,
 
2006 
     2007 
 
 
 
Income (loss) (numerator)
$       (1,026,433)
 $       276,228 
Weighted average shares outstanding including shares
     related to options (denominator)
35,426,125 
49,079,546 
Per share amount
$                (0.03)
 $             0.01 





30




Pacific WebWorks, Inc. and Subsidiaries

            

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001

2007

NOTE B1 - MANAGEMENT'S PLANSTHE COMPANY AND ISSUES AFFECTING LIQUIDITY

BASIS OF PRESENTATION - CONTINUED

The Company's financial statements have been prepared assuming thatfollowing is the Company will continue as a going concern.  The Company has a limited operating
historycalculation for weighted average common shares used in the fully diluted net earnings (loss) per share:

 
Year ended December 31,
 
2006 
     2007 
 
 
 
Income (loss) (numerator)
$       (1,026,433)
 $           876,228 
Weighted average shares outstanding including shares
       related to options (denominator)
35,426,125 
49,079,546 
Per share amount
$                (0.03)
 $                 0.02 


NOTE 2 – PROPERTY AND EQUIPMENT

Property and has sustained losses since inception.  In additionequipment includes the Company had
negative cash flows from operations of $1,150,272, $2,100,149 and $1,246,227
duringfollowing:

 
                 December 31,
Estimated Useful
 
2006 
2007 
Life (years)
 
 
 
 
Computer Equipment
$           365,908 
$          368,285 
3-5
Equipment
158,222 
170,401 
2-10
Software
102,711 
111,976 
1-3
Furniture and Fixtures
89,567 
89,567 
3-10
Leasehold Improvements
5,897 
5,514 
Lesser of Lease
or Useful Life
 
722,305 
745,744 
 
Less Accumulated Depreciation
(631,623)
(662,280)
 
 
$              90,683 
$            83,464 
 

Depreciation expense for the yearyears ended December 2001, 200031, 2007 and 1999,2006 was $30,657 and $29,404, respectively.  The
company had negative working capital

NOTE 3 – ACCRUED AND OTHER LIABILITIES

Accrued liabilities consist of $1,337,890, and $2,583,400 at December
31, 2001, and 2000, respectively.  As a result, the Company has relied
significantly upon equity and debt funding to support certain of its
operations.

The Company and its subsidiaries are working through various matters related
to liabilities and disputes with vendors and other creditors which may impact
its cash position.  Such liabilities include: approximately $440,000 of
capital leases in default (see Note G), approximately $244,000 in payables
past due and accrued liabilities (see Note G), and approximately $24,000 in a
bank overdraft related to Logio, Inc., an inactive subsidiary; approximately
$157,000 in estimated monies owed to a financing company for recourse on lease
funding for customers that fell into default and other estimated refunds(see
Note F), and approximately $524,000 in other payables and payables past due
(see Note G) related to the World Commerce Network, LLC subsidiary, which is
inactive; approximately $85,000 in payroll taxes past due to the Federal
government related to the Intellipay, Inc. subsidiary; and approximately
$380,000 in other trade payables and accrued liabilities related to following

:
December 31,
 
2006 
2007 
Payroll related liabilities
$            49,560 
$           85,329 
Sales contractor commissions
1,419 
3,564 
Contingent reseller commissions
- 
 
Operating lease in default
91,522 
- 
Refunds and factor
(20,019)
(20,019)
Income tax payable
900 
2,100 
Other
440 
440 
 
$         123,822 
$           71,413 


31








Pacific WebWorks, Inc. and Intellipay, Inc. in the normal course of business.

Based on the liabilities discussed above related to inactive, non-revenue
producing companies, Logio, Inc. and World Commerce Network, LLC may be
required to seek bankruptcy protection.

The Company is reliant on significant resellers for the distribution of its
products (see Note M).


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

NOTE 4 – OPERATING LEASE REVENUES

During the year ended December 31, 2001,2006, certain customers of TradeWorks, a subsidiary of the Company, has taken steps to reduce
its burn rate in order to meet its monthly cash requirements from operations
with its reoccurring monthly cash revenues.  This has been accomplished
through a reduction in personnel, relocation to lower-cost office facilities
and other expense reduction activities.  The Company has also focused its
immediate attention to the operations and growth of its core business units:
Pacific WebWorks, Inc. and Intellipay, Inc.  In the course of these
activities, the Logio, Inc. subsidiary, which had temporarily ceased
development and operations of its Internet products, became unable to make
payment on its payables and certain of its capitalentered 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 to
hardware and infrastructure.  As a resultrevenue is recorded monthly as earned.

Future annual minimum lease receipts for FundWorks operating leases as of these defaults, Logio's most
significant creditor obtained possession of the equipment under its lease
agreements in May of 2001.  These events have caused impairments related to
the loss of the equipment under capital leases, other long-lived assets
related to the equipment and the goodwill of the subsidiary to be recorded
during 2001(see Notes D, E and G).  Impairment losses recorded for these
events and the assessment of impairment of goodwill related to the World
Commerce Network subsidiary resulted in $2,688,300 of impairment losses for
the year ended December 31, 2001


                               F-10
 31


             Pacific WebWorks, Inc. and Subsidiaries2007 are as follows:

Through December 31,
 
2008
$      22,841 
2009
- 
2010
- 
Thereafter
- 
 
$      22,841 

Collectability of future minimum lease receipts cannot be assured as the customers placed in operating leases are of a higher credit risk.  

NOTE 5 – NOTES TO CONSOLIDATED FINANCIAL STATEMENTSPAYABLE / CONVERTIBLE NOTES PAYABLE

On December 31, 2001

NOTE B - MANAGEMENT'S PLANS AND ISSUES AFFECTING LIQUIDITY - CONTINUED

In February 2002, the Company closed the physical office of its Intellipay
subsidiary in Fremont, California and is in the process of moving its
technological infrastructure to Salt Lake City, Utah to achieve certain
operational efficiencies.  Management estimates that, once the move is
complete in  May 2002, it will generate up to $40,000 monthly in additional
cash flows related to the elimination
of duplicative operating expenses.  Management also anticipates that this move
will allow for improved integration of Intellipay products into Pacific
WebWorks products which could increase consolidated sales and market share.

In May of 2001,27, 2005, the Company entered into a stock purchasePromissory Note agreement with
certainfor $100,000.  The note interest was at 8% per annum, and is due in full including principal and interest on April 30, 2008.  The note is collateralized by the Company’s business assets.  The Company paid the note in full including principal and interest in November 2007.

NOTE 6 – STOCK HOLDERS’ EQUITY

Stock Issuance
In November 2007, the company issued a total of its existing shareholders and other entities pursuant to the sale
of 4,000,0003,500,000 shares of its common stock and warrantsto two separate companies for $1,600,000 (see Note
H).  The funding was used to retire certain debt and is being used to support
operations.

The Company expects to generate positive$175,000 in cash flows from operations through
continued burn rate reduction and our business development and sales
activities as early as first quarter 2002.  The

Company's cash requirements in excess of monthly cash inflows until this point
will be funded primarily by the net cash received from our May offering (see
Note H).  Further equity placements and debt issuance may be required to
support the growth and expansion of operations and to pay existing liabilities
of the active subsidiaries of the Company.

There is substantial doubt about the Company's ability to continue as a going
concern.  The financial statements do not include any adjustments to reflectprivate offering.

During February and June 2007, the possible effects on the recoverabilityCompany issued 350,000 and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.

NOTE C - ACQUISITIONS

1.  Acquisition of Logio, Inc.

On February 8, 2001, Pacific WebWorks completed its acquisition of Logio,
Inc., a development stage company, in a stock-for-stock exchange.  Pacific
WebWorks exchanged approximately 2,800,000250,000 shares of its common stock for 18,425,830 sharespayment of Logio, Inc. common stock.  This transaction was accounted
for on the purchase method of accounting using generally accepted accounting
principles$17,500 and valued at approximately $2,450,000 representing the fair value
of the Pacific WebWorks shares on the date of exchange.  Goodwill totaling
$1,855,388 began to be amortized over three years in 2001 and approximately
$242,967 was amortized for the period from acquisition to December 31, 2001.
The Company's remaining goodwill$11,973 related to the acquisition of Logio has been
impaired in second quarter 2001 totaling $1,612,420 (Note E).  Logio's results
of operations are included in the Pacific WebWorks, Inc. consolidated results
of operations from the acquisition date to December 31, 2001 and it's the fair
values of its assets and liabilities have also been recorded on the
acquisition date and are included in the Pacific WebWorks, Inc. consolidated
balance sheet.  Logio, Inc. is currently a non-operating Internet development
company.


                               F-11
 32

             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001


NOTE C - ACQUISITIONS - CONTINUED

2.  Acquisition of Intellipay, Inc.

On April 4, 2000,insurance premiums.

During November 2007, the Company completed the Agreement and Plan of
Reorganization with Intellipay, Inc., a private Delaware corporation.  The
Company issued 2,400,000 shares of common stock valued at approximately
$4,320,000 for all of the outstanding shares of Intellipay.  As such,
Intellipay became a wholly owned subsidiary of the Company.  This transaction
was accounted for on the purchase method of accounting using generally
accepted accounting principles.  Goodwill totaling $4,532,713 is being
amortized over three years.  Intellipay's results of operations are included
in the Pacific WebWorks, Inc. consolidated results of operations for the year
ended December 31, 2001 and from the acquisition date to December 31, 2000 and
it's the fair values of its assets and liabilities have also been recorded
on the acquisition date and are included in the Pacific WebWorks, Inc.
consolidated balance sheet.  Intellipay historically operated in the San Jose,
California area.

Amortization expenses related to the goodwill for the Intellipay business unit
total $906,547 and $679,916 for the years ended December 31, 2001 and 2000
with no amortization in 1999.

3.  Acquisition of World Commerce Network, LLC

In June 2000, the Company paid $100 for 49% of the outstanding shares of World
Commerce Network LLC, completing its 100% membership interest in the entity.
Previously, effective January 1, 2000, the Company had issued 4,6631,000,000 shares of its common stock to U.S. Merchant Systems, Inc. for 1%payment of the outstanding
stock of World Commerce Network, Inc.  The shares were valued at $9,180.  The
January 1, 2000 issuance increased the Company's membership investment in
World Commerce Network to 51% and it became a consolidated entity with Pacific
WebWorks, Inc. at that time.  Prior to the additional 1% purchase, the Company
owned 50% of the World Commerce Network Joint Venture and recorded its
investment using the equity method of accounting.

World Commerce Network is currently a non-operating marketing company.
Goodwill totaling $240,541 began to be amortized over three years in 2001 and
approximately $24,060 and $52,123  was amortized for the years ended December
31, 2001 and 2000, respectively.  All remaining goodwill amounts associated to
this business unit have been recorded as an impairment in 2001 totaling
$164,348 (Note E).

                               F-12
 33



             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001

NOTE D - PROPERTY AND EQUIPMENT

Property and equipment includes the following:



                                              December 31,       Estimated
                                          2001         2000      useful lives
                                     ------------- ------------- -------------
     Computer Equipment              $    421,770  $    332,714    3-5
     Equipment                             83,961        96,833    3-7
     Software                              83,971        74,342    3-5
     Furniture and Fixtures                95,112        72,090    5-8
     Leasehold Improvements                     -         6,667  Life of lease
                                     ------------- -------------
                                          684,814       582,646
     Less Accumulated Depreciation       (421,986)     (208,387)
                                     ------------- -------------
                                     $    262,828  $    374,259
                                     ============= =============

Impairment charges totaling $911,532 were recorded in Logio, Inc. during the
year ended December 31, 2001 representing equipment under capital lease
agreements which were in default, primarily returned to hardware vendors, cash
down payments and$50,000 related equipment and software.  Loss on sale or abandonment
of property and equipment totals $69,319 for the nine months ended December
31, 2001.


NOTE E - OTHER ASSETS

Other assets include the following:           December 31,
                                           2001         2000
                                      ------------- -------------
     Goodwill                         $  6,628,642  $  4,773,255
     Acquired technology                   824,480       824,480
     Other                                  19,250        20,258
                                      ------------- -------------
                                         7,472,372     5,617,993
                                      ------------- -------------

     Accumulated amortization           (2,730,950)   (1,286,014)
     Impairment losses                  (1,776,768)            -
                                      ------------- -------------
                                      $  2,964,654  $  4,331,979
                                      ============= =============

The Company has focused its immediate attention to the operations and growth
of its core business units: Pacific WebWorks, Inc. and Intellipay, Inc.  In
the course of these activities, the Logio, Inc. subsidiary, which had
temporarily ceased development and operations of its Internet products, became
unable to make payment on its payables and certain of its capital lease
agreements related to hardware and infrastructure.  As a result of these
defaults, Logio's most significant creditor obtained possession of the
equipment under its lease agreements in May of 2001.  These events have caused
impairment to the goodwill related to Logio to be recorded during 2001.
Impairment losses recorded for these events and the assessment of impairment
in the World Commerce Network subsidiary resulted in $1,776,768 of impairment
losses for the year ended December 31, 2001.

                               F-13
 34

             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001

NOTE E - OTHER ASSETS - CONTINUED

The remaining goodwill recorded as other assets as of December 31, 2001
relates to the Intellipay, Inc. business unit and approximates $4,533,000 with
approximately $1,586,500 in accumulated amortization as of December 31, 2001.

Acquired technology has been fully amortized as of December 31, 2001 and
represents the core Intellipay product technology.


NOTE F - ACCRUED AND OTHER LIABILITIES

Accrued liabilities consist of the following:             December 31,
                                                      2001         2000
                                                   ------------- -------------

     Payroll related liabilities                   $    147,162  $    139,096
     Interest payable                                    58,894        14,192
     Reseller commissions                                65,690        39,400
     Contingent liabilities                              30,000             -
     Other                                                  182           473
                                                   ------------- -------------
                                                   $    301,928  $    193,161
                                                   ============= =============

Payroll related liabilities totaling $147,162 at September 30, 2001 include
approximately $85,000 in estimated taxes, penalties and interest past due from
Intellipay, Inc. to the Internal Revenue Service for periods prior to and
immediately after its acquisition by Pacific WebWorks, Inc.

Other current liabilities consist of estimated returns and chargebacks from a
leasing company that funded customer purchases and placed them on a payment
plan during 2000.  The Company is responsible for recourse on leases on which
customers have not made first payment.  Estimated chargebacks and other
estimated returns and refunds approximate $222,000 at December 31, 2001 and
$197,000 at December 31, 2000 for all companies under consolidation.  The
Company makes an effort to further collect all amounts that have fallen under
recourse with the leasing company.

NOTE G - PAYABLES AND CAPITAL LEASES IN DEFAULT

In March 2001, Logio, Inc., a subsidiary of Pacific WebWorks, Inc., was unable
to make payment on some of its capital lease obligations.  Logio, Inc.
transferred the equipment back to the vendor in May of 2001.  The default on
these and other capital lease obligations, approximating $440,000 at December
31, results in impairment losses of $122,685, representing cash down payments
by Logio at the beginning of the leases that were being amortized over the
life of the leases and $788,847 in equipment under capital leases and related
software and equipment (Note D).  The leases expire through December 2002.

                               F-14
 35

             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001


NOTE G - PAYABLES AND CAPITAL LEASES IN DEFAULT - CONTINUED

During 2000, the Company received cash of $216,580 from a corporation.  The
note is due on demand and non-collateralized.  Accrued interest on this note
totals $36,876 at December 31, 2001.

Other payables past due for Logio and World Commerce Network represent trade
liabilities to vendors totaling $290,795, including approximately $120,000
past due to a software corporation.  Many of the liabilities past due are in
dispute by Logio and World Commerce Network.


NOTE H - RELATED PARTY TRANSACTIONS

Unit Purchase Agreement
- -----------------------

On May 30, 2001, the Company entered into a unit purchase agreement with three
entities for the purchase of 4,000,000 units, each of which includes one share
of the company's common stock and one warrant for the purchase of one common
share at an exercise price of $0.80 per share.    The shares were issued in a
private placement into escrow and funding was also placed in escrow in
accordance with the agreement.  The shares and monies were to be released to
each party provided that a registration statement was filed with the
Securities and Exchange Commission on or before July 25, 2001 to register the
sale of the shares and warrants and provided that the registration statement
was declared effective by the Securities and Exchange Commission on or before
September 28, 2001.  The Company would have been responsible for liquidated
damages for failure to meet the above requirements totaling five percent of
the purchase price of the then outstanding securities for every 30 calendar
day period until the registration statement was filed or made effective.

In mid July, the Securities and Exchange Commission notified the Company that
its registration statement (Form SB-2, as amended) would become effective.
Pursuant to the unit purchase agreement, a total of $1,600,000, representing a
$0.40 per unit sales price, was released from escrow as follows:  a total of
$1,214,000 of notes payable and interest to shareholders was paid in full as
held in escrow, $10,000 was paid to the escrow agent for services rendered and
the remaining $376,000 was funded to the Company.  The fair value of the
common stock component of each unit was $0.32 and the warrant component of
each unit was valued at $0.10 each using the Black Scholes valuation model.
The remaining $0.02 in value given per unit in excess of value received has
been recorded in the operating statement under compensation for warrants
totaling $77,134 during 2001.


In February 2000, the Company entered into a unit purchase agreement with two
accredited investors for the purchase of 400,000 units for $1,000,000.  Each
unit consisted of one share of the Company's common stock, and two warrants.
One warrant grants the investor the right to purchase one additional share of
the Company's common stock at an exercise price of $5.00 and one warrant
grants the investor the right to purchase 1/2 of one additional share at an
exercise price of $7.50.


                               F-15
 36


             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001

NOTE I - STOCKHOLDERS' EQUITY

1.  relations consulting services.

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 mayon March 15, 2007, to allow for grant awards representing up to 5,000,00010,000,000 shares of the Company's common stock under the Plan.  The Plan has not been approved by the Company'sCompany’s shareholders as of December 31, 2001

Directors, officers, employees and certain consultants have been granted2007.   


32




Pacific WebWorks, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

NOTE 6 – STOCK HOLDERS’ EQUITY - CONTINUED

Information with respect to the Company’s stock options to acquire 3,640,485 shares of the company's common stock.  The
options were granted at exercise prices ranging from $0.75 - $3.53 per share.
The options vest periodically through October 2003 and expire through April
2011.

Fair market value of options granted

follows:

 
 
 
Weighted-average
 
Stock options
Exercise price
exercise price  
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
Granted
1,540,000
$.061
$.061
Exercised
-
-
-
Forfeited
810,000
$0.048-$.087
$0.22
Outstanding at December 31, 2007
8,552,651
$0.048-$0.87
$0.23

The Company has adopted only the disclosure provisionselected to measure and record compensation cost relative to performance stock option costs in accordance with Statement of Financial Accounting StandardStandards No. 123, "Accounting for Stock-Based Compensation" (FAS 123).
Therefore,,which requires the Company accounts for stock based compensation under Accounting
Principles Board Opinion No. 25, under which approximately $38,700, $15,018
and $0 has been recognized into use the years ended December 2001, 2000 and 1999,
respectively for compensation earned relatedBlack-Scholes pricing model to options issued at exercise
prices that were less than the fair market value of the Company's stock on the
date of grant.  Had compensation cost for the stock based compensation been
determined based uponestimate the fair value of the options at the option date grant, date
consistent with methodology set forth by FAS 123,$59,154 and $42,083 was recognized for the Company's net loss and
loss per share would have increased to the following proforma amounts:

                                              Year Endedyear ended December 31, 2001          2000         1999
                                   ------------- ------------- -------------
Net Loss             As Reported   $ (5,045,193) $ (5,259,691) $ (2,567,535)
                     Pro forma       (5,926,731)   (6,140,291)   (2,572,861)

Net loss per common
  share - basic2006 and fully diluted      As Reported          (0.24)        (0.40)        (0.27)
                     Pro forma            (0.26)        (0.47)        (0.27)




                               F-16
 37


             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001


NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)

1.  Equity Incentive Plan  - Continued

Fair market value of options granted - Continued2007 respectively.  The fair value of these optionsthe option grant was estimatedestablished at the date of grant using the Black-Scholes American option-pricingoption pricing model with the following weighted-average assumptions for 2001, 2000assumptions:

 
2006
2007
Five Year Risk Free Interest Rate
4.85%
3.90%
Dividend Yield
0%
0%
Volatility
120%
135%
Average Expected Term (Years to Exercise)
5
5
 
 
 




















33




Pacific WebWorks, Inc. and 1999: expected volatility of
125 percent, 201 percent and 168 percent, respectively; risk-free interest
rate of 6.25 percent 6.5 percent and 6.75 percent, respectively; and expected
life of 3.5 years.  The weighted-average fair value of options granted was
$0.56, $1.75 and $2.38 in 2001, 2000 and 1999, respectively.

Option pricing models require the input of highly sensitive assumptions,
including expected stock volatility.  Also, the Company'sSubsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2007

NOTE 6 - STOCKHOLDERS’ EQUITY  - CONTINUED

Employee stock options have
characteristics significantly different from those of traded options,outstanding 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.

Information with respect to the Company's stock optionsexercisable under this plan as of December 31, 2001:

                                                             Weighted-average
                                Stock2007 are:

Options outstanding
 
 
 
Weighted-
 
Number
Weighted-average
average remaining
 
Exercise price 
Outstanding
exercise price
contractual life (years)
 
0.87 
40,151
0.87
3
 
0.75 
1,562,500
0.75
3.25
 
0.23 
1,120,000
0.23
.75
 
0.14 
320,000
0.14
.50
 
0.12 
1,620,000
0.12
2.50
 
0.07 
1,360,000
0.07
1.50
 
0.048 
1,045,000
0.048
3
 
0.061 
1,485,000
0.061
4.75
 
 
8,552,651
 
 
Options exercisable
 
 
 
 
 
 
 
Weighted-
 
 
Number
Weighted-average
average remaining
 
Exercise price 
Exercisable
exercise price
contractual life (years)
 
0.87 
40,151
0.87
3
 
0.75 
1,562,500
0.75
3.25
 
0.23 
1,120,000
0.87
0.75
 
0.14 
320,000
0.14
.50
 
0.12 
1,620,000
0.12
2.50
 
0.07 
1,360,000
0.07
1.50
 
.048 
1,045,000
.048
3
 
0.061 
742,500
0.061
4.75
 
 
7,810,151
 
 

The Company had 1,230,000 non-vested options Exercise price  exercise price
                                ------------- -------------- ---------------
Outstanding at January 1, 1999            -   $           -  $            -
   Granted                           797,474      2.00-3.53            2.38
   Exercised                               -              -               -
   Forfeited                               -              -               -
                                ------------- -------------- ---------------
Outstanding atthe beginning of the period with a weighted average grant date fair value of $0.048.  At December 31, 1999     797,474      2.00-3.53            2.38
   Granted                           281,700      1.06-1.75            1.75
   Exercised-                              -              -               -
   Forfeited                         371,568      1.06-3.44            2.39
                                ------------- -------------- ---------------
Outstanding at December 31, 2000     707,606      1.06-3.53            2.21
   Granted                         3,250,251      0.75-0.87            0.76
   Exercised                               -              -               -
   Forfeited                         317,372      0.75-2.63            1.44
                                ------------- -------------- ---------------
Outstanding at December 31, 2001   3,640,485   $  0.75-3.53  $         0.97
                                ============= ============== ===============



                               F-17
 38

             2007 the Company had 742,500 non vested options.









34




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001


2007

NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)

1.  Equity Incentive Plan- Continued

Additional information7 – DISCONTINUED OPERATIONS

The following includes the net current liabilities for the Company’s discontinued operations as of December 31, 2006 and December 31, 2007:
 
December 31, 
December 31, 
 
2006 
2007 
 
World 
World 
 
Commerce 
Commerce 
 
Network, LLC 
Network, LLC 
ASSETS
 
 
Current assets
$                     - 
$                      - 
Long-term assets
- 
- 
Total assets
$                     - 
$                      - 
 
 
 
LIABILITIES
 
 
Payables past due
64,010 
64,010 
Accrued liabilities
           171,264 
           151,264 
        Total current liabilities
$         235,274 
$          215,274 
 
 
 
Net current liabilities
$         235,274 
$          215,274 

Discontinued subsidiary – World Commerce Network, LLC
In July 2002, the Board of Directors of Pacific WebWorks, Inc. resolved to discontinue World Commerce Network, LLC.  Negotiations and settlements of World Commerce liabilities are currently underway as the LLC is phasing out its related to stock options outstandingoperations.  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 exercisedthe 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, 2001:


Options outstanding

                                                      Weighted-
                       Number       Weighted-average  average remaining
    Exercise price     outstanding  exercise price    contractual life (years)
    ----------------   -----------  ----------------  -----------------------
    $3.53-$3.44           87,879         $3.50            3
       2.63               44,779          2.63            3
       2.00              255,000          2.00            3
       1.75              125,000          1.75            4.7
       1.06               50,000          1.06            5
       0.87              150,327          0.87            9.25
       0.75            2,927,500          0.75            9.25
                      -----------
                       3,640,485
                      ===========


Options exercisable


                             Number         Weighted-average
     Exercise price       exercisable       exercise price
     -----------------   ---------------   ------------------
      $3.53-$3.44           58,586             $3.49
        2.63                29,853              2.63
        2.00               100,000              2.00
        1.75               125,000              1.75
        1.06                50,000              1.06
        0.87               150,327              0.87
        0.75               975,833              0.75

2.  Warrants for common stock

As of2006 and December 31, 2000, warrants2007 and have been recorded as an accrued liability.  Management believes that the recorded liability for the purchase of 5,600,000 shares of the
Company's common stock were outstanding and exercisable.  The warrants
outstanding and exercisable have exercise prices rangingthis matter is sufficient to cover any resulting judgment from $5.00 to $7.50
per share.  Warrants expire through April 2006.

As discussed in Note H, warrants to purchase 4,000,000 shares, valued at $0.10
each were granted in an equity offering at an exercise price of $0.80 per
share.


                               F-18
 39



             this claim.









35




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001


2007

NOTE I7 – DISCONTINUED OPERATIONS - STOCKHOLDERS' EQUITY (CONTINUED)

2.  Warrants for common stock - Continued

On April 25, 2001, the Company entered into an agreement with a consultant to
provide investor relations, public relations, and fulfillment services related
to financing in exchange for warrants.  A total of 500,000 warrants were
issued at an exercise price of $0.50 per share under the terms of
the agreement and 500,000 were issued at an exercise price of $0.75 per share
for a total of
1,000,000 warrants granted under this agreement.  The warrants are fully
vested as of December 31, 2001.  Deferred consulting charges related to this
agreement approximate $175,000 and represent the fair value of the warrants
using the Black Scholes valuation model. The services under this contract will
be performed through April 25, 2002 and the fair value of the warrants are
recognized ratably over the service period.  Total compensation expense from
the issuance of these warrants totaled $116,715 for the year ended December
31, 2001.  The agreement terminates in April of 2002 when the services are
completed and the options expire in April 2006.

In February 2000, warrants to purchase 600,000 shares, were granted in
conjunction with an equity offering at exercise prices of ranging from $5.00
to $7.50 per share.  These warrants expire in February 2005.

In January 1999, the Company issued warrants to purchase up to 400,000 shares
of the Company's common stock to its investor relations firm for consulting
services received through February 2000.  Compensation expense as calculated
using the Black Scholes model totaled $1,242,584. A total of  $13,216 and
$1,242,584 of the related charges were recognized during the years ended
December 31, 2000 and 1999 respectively.  All of these warrants have been
exercised as of December 31, 2001.

3.  Issuance of stock

In December 2001, the Company issued 250,000 shares of its common stock for
the exercise of warrants at $0.32 per share for $40,000 in cash and a $40,000
stock subscription receivable.

In August 2001, the Company issued a total of 200,000 shares of its common
stock as a prepayment for certain insurance services totaling $70,000.  The
services will be provided and related expenses will be recognized over the
one-year period in which the services are to be received by the Company.

As discussed in Note H, common stock totaling 4,000,000 shares, valued at
$0.32 each, were issued in the May 2001 equity offering.

In April 2001, the Company issued a total of 289,166 shares of its common
stock as a prepayment for legal, investment banker, and insurance services
totaling $150,000.


                               F-19
 40



             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001

NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)

3.  Issuance of stock - Continued

The related expenses will be recognized over the periods in which the services
are received.

As discussed in Note C, common stock totaling 2,791,980 shares were
effectively issued to Logio, Inc. shareholders in a stock-for-stock exchange
in order to acquire Logio as a wholly owned subsidiary.

During January 2001 the Company issued a total of 537,200 shares of common
stock to a related party for $268,600 related to a rental deposit and three
months of rental for the temporary use of an operations center in Salt Lake
City, Utah.

During October 2000, the Company issued 150,000 shares of its common stock for
the exercise of warrants at $2.50 per share for cash of $375,000.

During September 2000, the Company issued 600,000 shares of its common stock
at $1.00 per share for payment on notes payable of $600,000.

During August 2000, the Company issued 18,000 shares of its common stock at
$1.44 per share for an insurance policy valued at $25,945.

During June 2000, the Company issued 1,040,000 shares of its common stock at
$1.00 per share for payment on notes payable and accrued interest of
$1,037,536.

During June 2000, the Company issued 400,000 shares of its common stock at
$2.50 per share for payment on notes payable of $1,000,000.

During April 2000, the Company issued 2,400,000 shares of its common stock at
$1.80 per share for all outstanding stock of Intellipay, Inc.

During January 2000, the Company issued 4,663 shares of its common stock at
$2.00 per share for 1% of the outstanding stock of World Commerce Network,
LLC.

During December 1999, the Company issued 381,679 shares of its common stock at
$2.62 per share for payment on notes payable of $500,000.

During September 1999, the Company issued 14,000 shares of its common stock at
$1.43 per share for an insurance policy valued at $20,000.

During January 1999, Pacific WebWorks, Inc. (a public company) entered into an
agreement and Plan of Reorganization with Utah Webworks, Inc. (a private
company).  The agreement provides for the merger of the Company into Utah
Webworks to be treated as a reverse merger, thus making Utah Webworks the
accounting survivor.



                               F-20
 41


             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001

NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)

3.  Issuance of stock - Continued

Pursuant to the agreement the Company issued 5,000,000 shares of the Company's
common stock to the shareholders of Utah Webworks for all of their shares in
that company.  Because the historical financial information prior to the
reorganization date (January 11, 1999) was that of Utah Webworks, the
accounting survivor, a 5,000 to 1 forward stock split was retroactively
applied to the shares of Utah Webworks to show the effects of the reverse
merger.  The 5,000,000 share reorganization adjustment represents the shares
held by the shareholders of the public company.

NOTE J - COMMITMENTS AND CONTINGENCIES

1. Threatened litigation

In February 2001, the Company received notice from the State of Utah Labor
Commission regarding an allegation of racial discrimination charged by a
former employee.  The former employee claims that he was forced to resign as
our sales manager due to demotions and pay cuts related to alleged prejudicial
treatment based on his race and color.  We have responded to the request for
information from the Labor Commission and have stated that we believe the
former employee was treated fairly while employed by the Company.  At this
time, the former employee has not identified any specific remedy and we are
awaiting further action.

CONTINUED

In April 2001, one of the World Commerce Network'sNetwork’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'svendor’s performance and other disputes.  The Company has filed an answer to the complaint and further litigation is pending.   The Company has recorded amounts$20,000 to accrued liabilities in the consolidated financial statements in December 31, 2006 and December 31, 2007 representing its estimated liability for this matter.  Management believes that the amount recorded is sufficient to cover the resulting liability from this complaint, if any.

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 mentioned in Notes B and Gof December 31, 2006, Intellipay, Inc. has recorded an accrued liability of approximately $91,500 related to the financial statements,months of office lease under default, less months re-leased by the Logio,property manager to others, including estimated interest and late fees.  

The Company is not aware of any legal proceedings related to this lease and believes there is only a very remote chance of any action being taken.  Accordingly, during December 2007 the Company recovered this $91,500 to other income

NOTE 8 – COMMITMENTS

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 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.  

This matter was settled on May 21, 2007 for the negotiated amount of $18,000, which has been recorded as an expense during the period ended June 30, 2007.

Operating Leases
The Company had a month to month lease in default2007 for 8,080 square feet of certain of its capital leasescommercial business office space at $8,080 per month plus parking.  Rent expense in 2006 and payables.

2007 was $133,762 and $105,185 respectively.

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.



                               F-21
 42




             


36




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001


2007

NOTE J9 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

2. Operating leasesINCOME TAXES

The Companies utilize the liability method of accounting for income taxes for earnings of the Company. Income taxes (benefit) for the Company consist of the following:

 
12/31/2006 
12/31/2007 
Current
 
 
     Federal
$                            - 
$                           - 
     State
$                            - 
$                           - 
Deferred
 
 
     Change in deferred tax asset
$                 (89,330)
$                (83,858)
     Change in valuation allowance
$                  89,330 
$              (516,142)
Income tax expense/(benefit)
$                            - 
$              (600,000)

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

 
12/31/2006 
12/31/2007 
Federal income taxes at statutory rate
$              (348,987)
$                93,918 
State income taxes net of federal benefit
$                     (813)
$                  9,182 
Change in the Valuation Allowance
$                (89,330)
$             (516,143)
Non-deductible Goodwill Impairment
$               340,000 
$                          - 
Net Operating Loss Carryforward
$                 99,130 
$       ��     (186,956)
Total
$                           - 
$             (600,000)
 
 
 
Deferred taxes consist of the following:
 
 
 
 
 
Current
 
 
    Allowance for doubtfull accounts
$                11,190 
$               11,190 
    Deferred expenses
$                28,923 
$                (1,011)
    Net operating loss carryforwards
$                          - 
$               74,600 
    Total Current
$                40,113 
$               84,779 
 
 
 
Long Term
 
 
    Net operating loss carryforwards
$           3,484,005 
$          3,525,420 
    Capital loss carryforwards
$              219,530 
$             219,530 
    Excess book depreciation and amortization
$                52,784 
$               50,560 
    Total Long-Term
$3,756,319 
$          3,795,510 
 
 
 
    Less Valuation Allowance
$          (3,796,432)
$         (3,280,290)
 
 
 
    Net Tax Assets
$                          - 
 $             600,000 

During the current year the Company incurred net income. The Company leases office space for its operationsrecorded a net deferred tax asset and income tax benefit in Salt Lake City, Utah and
in Freemont, California.  Combined monthly charges under the two lease
agreements approximate $11,500 asfinancial statements due to the net deductible temporary differences or net operating loss carryforwards because the likelihood of December 31, 2001 andrealization of the related tax benefits was established. Prior to 2007, since inception of the Company, rented
a data center for four months in 2001 and four months in 2000 for
approximately $26,000 each month.  Total rent expense for all rented office
and data center space approximated $242,000, $242,000 and $97,090 for the
years ended December 31, 2001, 2000 and 1999, respectively.  The following is
a schedule of future minimum lease payments under the operating leases:

                  Year ended     Lease
                 December 31,  Commitment
                 ------------  ----------
                     2002       $130,416
                     2003        134,856
                 Thereafter        -
                               ----------
                                $265,272
                               ==========
3. Other

In June 2001,management was unable to project when the Company received notice from a leasing company that funded
customer purchases and placed them on a payment plan during 2000 that leases
for any known customer lease documentation issued to the customer incomplete
would be charged backin a position to the Company.  Lease documentation was processed by
third parties for World Commerce Network andutilize its net operating loss carryforwards.  Having now attained profitability the Company is unable to estimate
the extent of incomplete documentation, if any, as of September 30, 2001.



                               F-22
 43



             has


37




Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2001


2007

NOTE K9 - INCOME TAXES The- CONTINUED

booked an estimated tax effectsbenefit based on projected future earnings.  Based on an analysis of temporary differences giving rise tothe Company’s net operating losses, a $600,000 deferred tax assetsasset and liabilities are as follows:

                                          2001          2000          1999
                                     ------------- ------------- -------------

Deferredrelated income tax assets
  Allowance for doubtful accounts    $     14,716  $      1,649  $          -
  Net operating loss carryforwards      3,602,073     2,663,609     1,054,384
  Excess book depreciation and
    amortization                        1,172,078        87,670             -
  Other, net                                  398           398           398
                                     ------------- ------------- -------------
                                        4,789,265     2,753,326     1,054,782

Less valuation allowance               (4,719,441)   (2,713,310)     (839,949)
                                     ------------- ------------- -------------
                                           69,824        40,016       214,833
Deferred tax liabilities
  Excess tax depreciation
    and amortization                            -             -      (214,833)
  Other, net                              (69,824)      (40,016)            -
                                     ------------- ------------- -------------
      Net tax assets                 $          -  $          -  $          -
                                     ============= ============= =============


As of December 31, 2001, the Company has net operating loss carryforwards for
tax reporting purposes of approximately $9,000,000 which expire from 2019
through the year 2021.  Utilization of the net operating loss is dependent on
the future profitable operation of the Company and each of its subsidiaries.benefit was recorded. Accordingly, a valuation allowance has been recorded to reduce the net deferred tax asset to zero.

                               F-23

 44

             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS$600,000. The decrease in the valuation allowance was $516,143 for the year ended December 31, 2001

2007.

As of December 31, 2007, the Company had federal and state net operating loss carryforwards for tax reporting purposes of approximately $9,600,000 and $10,200,000 respectively, expiring through 2027. As of
December 31, 2007 the Company had a federal capital loss carryforward for tax reporting purposes of approximately $650,000 expiring in 2008 related to goodwill from the sale of a subsidiary company in 2003.

NOTE L10 - SEGMENT REPORTING

Although the Company operates in one business segment, the production and distribution of business e-commerce software, during 2001 management reporting
commencedreports by individual business unit.


Segment reporting by business unit follows:

Year ended                 Pacific
December 31, 2001(a)       WebWorks     Intellipay   WCN          Logio(b)
- -------------------------  ------------ ------------ ------------ ------------

Current assets             $   418,364  $    84,318  $    38,414  $         -
     .
Total assets                 5,669,336      190,720       38,414       91,791

Current liabilities            401,170      198,631      463,960      708,306

Total liabilities              401,170    1,598,858    1,366,282      844,018

Revenues, net              $ 1,111,416  $   923,416  $ 1,071,506  $         -

Income (loss) from
  operations                (4,116,516)    (352,281)     901,311   (1,313,939)

Net income (loss)          $(4,069,600) $  (483,182) $   854,427  $(1,345,611)


____________________________________________________
(a) 

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.
(b) 
bIncludes Logio, Inc. from the date of acquisition February 8, 2001 to
    December 31, 2001.




                               F-24
 45





             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001



NOTE L - SEGMENT REPORTING (CONTINUED)


Pacific
Year ended December 31, 2000(c)        WebWorks    Intellipay(d)     WCN
- ------------------------------------ ------------- ------------- -------------
Current assets                       $    365,856  $    136,516  $    253,321

Total assets                            6,362,755       585,447       282,014

Current liabilities                     1,152,958       425,889     1,544,336

Total liabilities                       1,152,958     1,490,780     2,464,310

Revenues, net                        $  1,393,960  $    833,007  $  3,502,387

Income (loss) from operations          (2,499,807)     (755,813)   (1,947,623)

Net income (loss)                    $ (2,491,176) $   (817,559) $ (1,950,954)




_________________________________________________
(c)World Commerce Network, LLC. a non-operating, discontinued subsidiary.

Year ended
Pacific 
 
Trade 
Fund- 
Discontinued 
December 31, 2007a
WebWorks 
Intellipay 
Works 
Works 
Operationsb 
 
 
 
 
 
 
Revenues, net
$    9,483,517 
$    566,527 
$      541,466 
$    120,260 
$                 - 
 
 
 
 
 
 
Net income (loss)
$    1,829,594 
$    203,168 
$  (1,811,727 
$      35,193 
$       20,000 

aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation.
(d)
bIncludes Intellipay,World Commerce Network, LLC. a non-operating, discontinued subsidiary.


38




Pacific WebWorks, Inc. from the date of acquisition April 4, 2000 to
   and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2000.


There2007

NOTE 11 – SUBSEQUENT EVENTS

On January 28, 2008, the Company issued 400,000 shares of the Company’s common stock for payment of $32,585 related to insurance premiums.

On January 1, 2008 we entered into employment agreements with Kenneth W. Bell, Christian R. Larsen and R. Brett Bell.  Kenneth Bell was no segmentemployed as the Chief Executive Officer of Pacific WebWorks with a salary of $120,000 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 $96,000 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 $85,000 per year and will devote 100% of his working time to the business of the company.  The employment agreements terminate on December 31, 2



39




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

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

ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed with the SEC pursuant to the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC.  This information is accumulated and communicated to our executive officers to allow timely decisions regarding required disclosure.  Our Chief Executive Officer, who also acts in the capacity of 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.

Management’s Annual Report on Internal Control over Financial Reporting

Our Chief Executive Officer, who also acts in the capacity of principal financial officer, is responsible to design or supervise a process to be effected by our board of directors that provides reasonable assurance regarding the reliability of financial reporting dataand the preparation of financial statements for external purposes in accordance  with generally accepted accounting principles.  The policies and procedures include:
$
maintenance of records in reasonable detail to accurately and fairly reflect the transactions and dispositions of  assets,
$
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with  generally accepted accounting principles, and that receipts and expenditures are being made only in accordance with authorizations of management and directors, and
$
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on our financial statements.

For the year ended December 31, 1999.



                               F-25

 46

             Pacific WebWorks, Inc. and Subsidiaries

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 2001


NOTE M - MARKET RISK

The Company distributes its products and services primarily through its active
third party resellers.  During 2001 approximately $146,000 and $51,000 of
total net sales derived from monthly hosting and gateway services represents
customer portfolios acquired through the company's two largest active
resellers' efforts, respectively.  Customer acquisition from these two active
reseller channels accounts for approximately 12.2% and 10.7% of total hosting
related sales for the year ended December 31, 2001.

The Company's sales plan is currently centered2007, our management has relied on the accumulationCommittee of a
monthly hosting and gateway services portfolio of customers.

During the 2000 fiscal year, three major resellers accounted for 40%, 20% and
17%Sponsoring Organizations of the total numberTreadway Commission (COSO), “Internal Control - Integrated Framework,” issued in 1992, to evaluate the effectiveness of our hosting customer base, respectively.

Duringinternal control over financial reporting and based upon that framework management has determined that our internal control over financial reporting is effective.

Our management has also determined that there were no changes made in our internal controls over financial reporting during the 1999 fiscal year, two major resellers accounted for 20% and 21%fourth quarter of 2007 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

This annual report does not include an attestation report of our software, access and license fee revenue, respectively.

NOTE N - SUBSEQUENT EVENT

On January 18, 2002, an informational hearingregistered public accounting firm regarding internal control over financial reporting.  Our management’s report was conducted withnot subject to attestation by our registered public accounting firm pursuant to temporary rules of the State of
Utah Labor Commission regarding an allegation of racial discrimination charged
by a former employee.  On February 28, 2002,SEC that permit the company to provide only management’s report in a letter from the State of
Utah Labor Commission, the Company was dismissed of all charges related to the
threatened litigation described in Note J to the financial statements.

                               F-26

 47

      this annual report.

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

     As previously reported, Chisholm & Associates, CPA's, replaced Crouch,
Bierwolf & Chisholm, C.P.A.s, as our independent auditor on August 3, 2000.


                             9B.  OTHER INFORMATION

None.

PART III

ITEM 10:10.  DIRECTORS, AND EXECUTIVE OFFICERS OF PACIFIC WEBWORKS

AND CORPORATE GOVERNANCE

Directors and Executive Officers


40




The directors and executive officers and key employees of Pacific WebWorks corporation are listed below.  Theirbelow, with their respective ages, positions and positions
are listed, as well as, biographical information for each of these persons is
presented below.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.  There are no family relationships
between or among anyR. Brett Bell is the son of our directors, executive officers, and key employees.
On February 11, 2002 Tom Hill resigned as our director to devote his attention
to other matters.

Name                       Age      Position Held
- -------------------------- -------- -----------------------------------------
Kenneth W. Bell.

Name
Age
Position Held
Director Term of Office
Christian R. Larsen
33
President and Director
April 1999 until next annual meeting.
Kenneth W. Bell
58
Chairman of the Board, Chief Executive Officer, Treasurer, and Director
January 2001 until next annual meeting.
R. Brett Bell
32
Secretary and Controller

Christian R. Larsen 27-Mr. Larsen currently serves as our President and Director
Kenneth W. Bell             52      Chief Executive Officer and Director
Thomas R. Eldredge          33      Secretary/Treasurer and Chief Financial
                                       Officer
Allan E. Oepping            27      Director
Benjamin A. Black           29      Director

     Christian R. Larsen: Mr. Larsen serves as President and a director of
Pacific WebWorks, Inc. and has done so since April 1999.  From April 1999
through January 2001 he served as our Chief Executive Officer.  For the two
years priorOfficer from April 1999 through January 2001.  Prior to April 1999 he served as Chief Operating Officer forof Pacific WebWorks and as a consultant for Utah WebWorks.  In July 1993, he started
Innovative Research and Animated Design, Inc. ("IRAD") which developed custom
and commercial software for animation and special effects.  He served as
President of IRAD from October 1993 until  February 1997.  IRAD grew to a
Company employing 28 individuals. He has sevenover ten years experience providing computer consulting and business management services.  Mr. Larsen filed a
Chapter 7 voluntary bankruptcy petition in May

Kenneth W. Bell - On April 14, 2004, our board of 1997directors appointed Kenneth W. Bell as Chairman of the Board.  On July 15, 2004, our board of directors appointed him to serve in the Districtcapacity of Utah
Central Division of the United States Bankruptcy Court, which was discharged
in September of 1997.

     Kenneth W. Bell: Mr. Bell was appointedTreasurer.  He has served as our Chief Executive Officer and interim Director onsince January 5, 2001.  He isPrior to that time Mr. Bell was President and a DirectorChief Executive Officer of Logio, Inc. and has served in various offices for Logio since February 1997.
From April 1990 to December 1996, he, 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 area for fifteen
yearsindustry in Utah and California.  Mr. Bell received a bachelorsBachelors degree from Brigham Young University in 1972.

     Thomas 

R. Eldredge:Brett Bell - On January 5, 2001April 14, 2004 our Boardboard of Directorsdirectors appointed Mr. EldredgeRobert Brett Bell as our Secretary/TreasurerSecretary 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 Chief Financial Officer.  He also
serves as Secretary/Treasurer and an interim director forAccounting with Logio, Inc. from 1998 to 2001.  He studied Economics and has
served in several offices for Logio since April 2000.  Mr. Eldredge is a CPA
and has over eleven years of experience in accounting, audit and information
technology.  He spent over six years with Grant Thornton LLP, one of the
nation's ten largest public accounting firms.  Most recently he was a manager
in the assurance department at Grant Thornton.  Mr. Eldredge is an adjunct
professorFinance at the University of Utah in the accounting and information
technology departments at the graduate and undergraduate levels and has
instructed students for over four years at the University, Grant Thornton's
National training center and Utah Valley State

                                48



College.  He received both his Bachelor of Science and Master of Professional
Accountancy from the University of Utah. Mr. Eldredge has served as the
President of the Utah Association of Certified Public Accountants'   Southern
Chapter. In February 2001, our Board of Directors appointed Mr. Eldredge as
Corporate Secretary.

     Allan E. Oepping: Mr. Oepping serves as a Director and as our Vice
President of Engineering. He is a Microsoft Certified Professional (MCP) and
has over nine years professional experience working with computer hardware and
software.  He started with Utah WebWorks in November of 1997 as an independent
consultant, then became its Technical Director in August of 1998.  He was the
head programmer for IRAD for five years.  While at IRAD, Mr. Oepping developed
several new technologies, including a spatial division/isolation technique
which speeds up renderings from 200% to 700%.  He attended Salt Lake Community
College in Salt Lake City, Utah during 1994.  Mr. Oepping filed a Chapter 7
voluntary bankruptcy petition on March 2, 1998, in the District of Utah,
Central Division of the United States Bankruptcy Court.  The petition was
discharged on June 12, 1998.

     Benjamin A. Black: Mr. Black serves as a Director.  He has over eight
years of professional experience in software development programming.  He has
worked as Senior Programmer for Pacific WebWorks since April of 1997.  He was
lead programmer at IRAD from 1994 through 1997.  In 1995 he received his
Associate of Science degree in electronics technology from Salt Lake Community
College in Salt Lake City, Utah.  He is a Microsoft Certified Professional
(MCP) and is experienced in advanced programming languages including C, C++,
and Perl.


Compliance with Section 16(a) of the Exchange Act

     

Section 16(a) of the Securities Exchange Act of 1934 requires our directors, executive officers and person who own more than ten percent of a
registered classor more of our equity securities,common stock to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock.stock with the SEC.  Officers, directors and greater than 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, 20012007, and representations from these reporting persons that no Forms 5 were not required, we believe such forms were filed in a timely manner.

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.

Committees

We are a smaller reporting company with a small number of directors and officers who have active roles in our operations.   As a result, we do not have a standing nominating committee for directors, nor do we have an audit committee with an audit committee financial expert serving on that committee.  Our entire board of directors, Messrs. Kenneth W. Bell Thomas R. Eldredge and Allan E. Oepping each
filed late one Form 3 disclosing one transaction.  We believe that Christian R. Larsen, failed to file a Form 4 disclosing one transaction.


                 acts as our nominating and audit committee.


41





ITEM 11:11.  EXECUTIVE COMPENSATION

Executive Officer Compensation

The following table shows the compensation paid to our named executive officers in all capacities during the pastyears ended December 31, 2007 and 2006.

 
 
 
 
 
 
Name and
 
 
 
Option
 
Principal Position
Year
Salary ($)
Bonus ($)
Awards (1) ($)
Total ($)
 
 
 
 
 
 
Kenneth W. Bell
2007
116,583
74,834
16,775
208,192
CEO
2006
100,625
6,250
9,600
116,475
 
 
 
 
 
 
Christian R. Larsen
2007
91,583
70,666
15,250
177,499
President
2006
77,041
5,750
8,400
91,191
 
 
 
 
 
 
R. Brett Bell
2007
80,698
66,500
13,725
160,923
Secretary
2006
67,041
5,250
7,200
79,491

(1)
Value of options granted (See “Outstanding Equity Awards” below) are computed in accordance with FAS 123R.

Employment Contracts

On January 1, 2008 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 $120,000 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 $96,000 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 $85,000 per year and will devote 100% of his working time to the business of the company.  The employment agreements terminate on December  31, 2009.  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 three times 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 three times the average sum of amounts paid to him for salary, bonus and profit sharing for the five fiscal years.  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.


42





Retirement Benefits or Other Arrangements

We do not have
formal written agreements withoffer a SIMPLE IRA plan to our full time employees, including our executive officers.  SUMMARY COMPENSATION TABLE

                       Annual Compensation
                      ---------------------
Name and principal                                           Other annual
position                  Year   Salary ($)    Bonus ($)     compensation ($)
- -------------------      -----  -----------   ----------    -----------------

Christian R. Larsen       2001   $55,750       $ 0            $0
President                 2000    60,000         0             0
                          1999    60,000         0             0

Kenneth W. Bell           2001    67,125*        0             0
CEO                       2000         0         0             0
                          1999         0         0             0



                                49



Thomas R. Eldredge        2001    67,292*        0             0
Secretary/Treasurer       2000         0         0             0
CFO                       1999         0         0             0

Allan E. Oepping          2001    50,000         0             0
Director                  2000    50,000         0             0
                          1999    50,000         0             0

Benjamin A. Black         2001    50,000         0             0
Director                  2000    50,000         0             0
                          1999    50,000         0             0

Tom J. Hill               2001    90,250         0             0
Former Director           2000    84,118         0             0
                          1999         0         0             0


* DoesThis plan provides that each employee may elect to contribute to an individual retirement plan through salary reduction contributions.  During the year ended December 31, 2007 the company did not include salaries paid by Logiocontribute to these persons prior to Pacific
  WebWorks acquisitiona retirement plan for an executive officer.

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 Logio.

                      Long Term Compensation
                     -----------------------


                                     Awards                  Payouts
                                     ------                  -------
                              Restricted  Securities      LTIP     All
Name and principal            stock       underlying      payouts  other
position                Year  award(s)($) Options/SARs(#) ($)      Comp.($)
- ----------------------  ----- ----------- --------------- -------- ---------

Christian R.  Larsen    2001    $ 0        325,000         $ 0      $ 0
President               2000      0              0           0        0
                        1999      0              0           0        0

Kenneth W.  Bell        2001      0        637,878           0        0
CEO                     2000      0              0           0        0
                        1999      0              0           0        0

Thomas R. Eldredge      2001      0        327,273           0        0
Secretary/Treasurer     2000      0              0           0        0
CEO                     1999      0              0           0        0

Allan E. Oepping        2001      0        325,000           0        0
Director                2000      0              0           0        0
                        1999      0              0           0        0

Benjamin A. Black       2001      0        250,000           0        0
Director                2000      0              0           0        0
                        1999      0              0           0        0

Tom J. Hill             2001      0        300,000           0        0
Former Director         2000      0              0           0        0
                        1999      0              0           0        0



                                50




              OPTION/SAR GRANTS IN LAST FISCAL YEAR

                        Individual Grants
                        -----------------

                                    Percent of
                     Number of      total
                     securities     options/SARs
                     underlying     granted to     Exercise or
                     Options/SAR's  employees in   base price  Expiration
     Name            granted(#)     fiscal year      ($/sh)    date
- -------------------  -------------  -------------- ----------- ------------

Christian R. Larsen   325,000           11%          $ 0.75     4/4/2011

Kenneth W. Bell        37,878           19%            0.87    1/31/2011
                      600,000           20%            0.75     4/4/2011

Thomas R. Eldredge     27,273           14%            0.87    1/31/2011
                      300,000           10%            0.75     4/4/2011

Allan E. Oepping      325,000           11%            0.75     4/4/2011

Benjamin A. Black     250,000            8%            0.75     4/4/2011

Tom Hill              300,000           10%            0.75     4/4/2011





                        Potential realizable valueour named executive officers at assumed annual rates of       Alternative to
                        stock price appreciation for     (f) and (g):
                                option term              grant date value

                                                         Grant date present
Name                      5% ($)          10% ($)        value $
- -------------------   --------------  -----------------  --------------------

Christian R. Larsen   $ 121,875       $ 243,758          $ 182,000

Kenneth W. Bell          16,477          32,954             24,261
                        225,000         450,000            336,000

Thomas R. Eldredge       11,864          23,728             17,727
                        112,500         225,000            168,000

Allan E. Oepping        121,875         243,750            182,000

Benjamin A. Black        93,750         187,500            140,000

Tom Hill                112,500         225,000             84,000


   Options granted on 1/31/2001 vest upon grant
   Options granted on 4/4/2001: 1/6th vests on grant
     and remainder vests 1/6th every six months

December 31, 2007.

OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
Option Awards







Name



Number of Securities Underlying Unexercised Options Exercisable



Number of Securities Underlying Unexercised Options
Unexercisable
Equity Incentive Plan Awards:
Number of Securities Underlying Unexercised
Unearned Options






Option Exercise Price






Option Expiration Date
Kenneth W. Bell
37,878
600,000
50,000
300,000
250,000
275,000
200,000
137,500
–
 –
 –
–
–
–
–
–
–
137,500
–
–
–
–
–
–
–
–
137,500
$ 0.87
0.75
0.14
0.225
0.07
0.12
0.048
0.061
0.061
1/31/2011
4/4/2011
7/23/2007
10/2/2008
10/20/2009
10/7/2010
10/9/2011
10/12/2012
10/12/2012
Christian R. Larsen
325,000
50,000
275,000
250,000
250,000
175,000
125,000
–
–
–
–
–
–
–
–
125,000
–
–
–
–
–
–
–
125,000
$ 0.75
0.14
0.225
0.07
0.12
0.048
0.061
0.061
4/4/2011
7/23/2007
10/2/2008
10/20/2009
10/7/2010
10/9/2011
10/12/2012
10/12/2012





43







R. Brett Bell
2,273
35,000
35,000
100,000
175,000
225,000
150,000
112,500
–
–
–
–
–
–
–
–
–
112,500
–
–
–
–
–
–
–
–
112,500
$ 0.87
0.75
0.14
0.225
0.07
0.12
0.048
0.061
0.061
1/31/2011
4/4/2011
7/23/2007
10/2/2008
10/20/2009
10/7/2010
10/9/2011
10/12/2012
10/12/2012



Compensation of Directors.

                                51
Directors

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


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

Securities Authorized Under Equity Compensation Plans

The following table sets forthlists 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, 2007.


EQUITY COMPENSATION PLAN INFORMATION







Plan category



Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)



Weighted-average exercise price of outstanding options,
warrants and rights
(b)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
Equity compensation plans approved by security holders
0
$  0.00
0
Equity compensation plans
not approved by security holders
8,552,651
$ 0.23
1,447,349
Total
8,552,651
$0.23
1,447,349








44







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 12, 2007 we issued options to purchase 1,540,000 shares of common stock pursuant under our 2001 Equity Incentive Plan.  The stock options have an exercise price of $0.061 per share and expire five years from the date of issuance.  One half of the options vested upon grant and the other half vest six months from the date grant.  

As of December 31, 2007, the board of directors has granted under the plan options to acquire an aggregate of 8,552,651 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 2012.  This plan continues in effect until March 8, 2011, unless terminated by the board of directors.

Beneficial Ownership

The following table lists the beneficial ownership of Pacific
WebWorksour outstanding common stock by our management.  We are unaware of eacha person or group known by us to ownwho beneficially owns more than 5% of our outstanding common stock; each of our
executive officers; each of our directors; and all executive officers and
directors as a group.stock.  Beneficial ownership is determined according toin 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 allthe shares of common stock shown as beneficially owned by them.  The inclusion of
any shares as beneficially owned does not constitute an admission of
beneficial ownership of those shares.  The percentage of beneficial ownership is based on 23,441,840 shares representing 23,076,688 outstanding41,001,895 shares of common stock outstanding as of February 20, 2002March 11, 2008, plus any shares which each of the following persons may acquire within 60 days by the exercise of rights, warrants and/or options.









45







MANAGEMENT
Name and address of
beneficial owners
Amount and nature
of beneficial owner
Percent
of class
Christian R. Larsen
230 West 400 South 1st Floor
Salt Lake City, Utah 84101
2,365,500 (1)
5.76
Kenneth W.  Bell
230 West 400 South 1st Floor
Salt Lake City, Utah 84101
2,205,189 (2)
4.90
R. Brett Bell
230 West 400 South 1st Floor
Salt Lake City, Utah 84101
874,031 (3)
2.26
All executive officers and  
directors as a group
5,344,720
12.32
(1)
Represents 878,000 shares held by Net Strategic Investments LLC of which Mr. Larsen is an affiliate and
               options to purchase 1,575,000 shares.
(2)
Represents 217,311 shares and options to purchase 365,152 common1,987,878 shares.
(3)
Represents 1,758 shares which may be exercised by the following persons within the next 60
days.


                      DIRECTORS AND OFFICERS

                                    Common Stock Beneficially Owned
                                    -------------------------------
Name and Address of        Number of Shares of                    Percentage
Beneficial Owners          Common Stock            Options (1)    of Class
- -------------------------  --------------------- -------------- ------------

Christian R. Larsen               878,000            162,500        4.5%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101

Kenneth W.  Bell                  217,311 (2)        337,878        2.4%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101

Benjamin A. Black                 500,000            125,000        2.7%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101

Thomas R. Eldredge                       0           177,273     Less than 1%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101

Allan E. Oepping                  697,500            162,500        3.7%
180 South 300 West,
Suite 400
Salt Lake City, Utah 84101

All executive officers and      2,296,811            965,151       13.6%
directors as a group

(1) Represents options exercisable within the next 60 days (April 4, 2002).
(2) Includes 80,309 shares held by Mr. Bell and 137,002 shares owned jointly
    with his spouse.

                                52
to purchase 947,273 shares.

ITEM 13:13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,

    The following information summarizes transactions we
AND DIRECTOR INDEPENDENCE
Related Transactions

We have eithernot engaged in any transactions since the beginning of our pastlast fiscal year or propose to engage in involving our executive officers, directors, 5% or more than 5% stockholders or immediate family members of such persons:

     In March 2001persons.

Director Independence

We do not have any independent directors serving on our Board approvedboard of directors.

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

Accountant Fees

The following table presents the conversionaggregate fees billed for each of options previously
grantedthe last two fiscal years by Logio, Inc. to   Kenneth W. Bellour independent registered public accounting firm, Chisholm, Bierwolf & Nilson, LC, Certified Public Accountants, in connection with the audit of our financial statements and Thomas R. Eldredge, our
director and officers.  Logio options granted to Mr. Bell were converted into
options to purchase 37,879 Pacific WebWork shares.  Mr. Eldredge's Logio
options were converted into options to purchase 27,273 Pacific WebWorks
shares.  The Logio options were converted at a one to 6.6 ratioother professional services rendered by that firm.  

 
  2007
   2006
Audit fees
$       10,983
$       11,148
Audit-related fees
 0
 0
Tax fees
4,046
4,044
All other fees
$                0
$                0

Audit fees represent the professional services rendered for the numberaudit of shares grantedour annual financial statements and the new optionsreview 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.  


46





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

Pre-approval Policies

We do not have a standing audit committee currently serving and as a result our board of directors performs the duties of an exercise pricesaudit committee.  Our board of $0.875.

                             directors will evaluate and approve in advance, the scope and cost of the engagement of an accounting firm before the accounting firm renders audit and non-audit services.  We do not rely on pre-approval policies and procedures.


PART IV

ITEM 14:15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K


Exhibits

Exhibit
Number       

No.
Description
- -------- -----------------------------------------------------------------
2.1      Agreement and Plan of Reorganization between Pacific WebWorks and
         IntelliPay, Inc., dated April 4, 2000 (Incorporated by reference to
         exhibit No. 2.1for Pacific WebWork's Form 8-K, filed April 19, 2000.)

2.2      Agreement and Plan of Reorganization between Pacific WebWorks and
         Logio, dated  October 31, 2000 (Incorporated by reference to exhibit
         No. 2.1 for Pacific WebWork's Form 8-K, filed November 14, 2000.)

3.1
Articles of Incorporation, as amended (Incorporated by reference to exhibit No. 3.1 for Form 10-Q filed November 13, 2001)
3.2
Amended and Restated Bylaws of Pacific WebWorks, Inc. (Incorporated by reference to exhibit No. 3.2 for Form10, as amended, file No.
         0-26731, filed July 16, 1999.)

10.1     Master Service Agreement between Electric Lightware, Inc., and Utah
         WebWorks, Inc., dated 2002.  (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
4.1
Pacific WebWorks, Inc. 2001 Equity Incentive Plan (Incorporated by reference to Master exhibit 4.1 to Form S-8, effective May 26, 2006)
10.1
Service Agreement between Electric Lightwave, Inc.,Pacific WebWorks and Pacific WebWorks,Verizon Business Network Services, Inc., dated January 1, 2002

10.3     September 30, 2007
10.2
Lease Agreement between Pacific WebWorks, Inc. and Westgate Business
         Center,Development Specialties, Inc., dated November 11, 2001

10.4     Strategic Reseller Agreement with U.S. Merchant SystemsFebruary 1, 2008
10.3
Form of employment agreement for executive officers, dated January 1, 2008 (Incorporated by reference to exhibit No. 10.910.4 for Form 10, as amended, file No.
         0-26731,10-KSB, filed July 16, 1999)

10.5     Purchase Agreement between Pacific WebWorks and U.S. Merchant
         Systems, Inc., dated February 22,1999 (Incorporated by reference to
         exhibit No. 2.3 for Form 10-K, filed March 10, 2000)

10.6     Registration Rights Agreement between Pacific WebWorks and Midwest
         First National, Inc. and Condiv Investments, Inc. and Columbia
         Financial Group, dated February 22, 2000 (Incorporated by reference
         to exhibit No. 10.11 for Form S-1 Registration Statement, File No.
         333-38026, effective June 12, 2000.)

10.7     Registration Rights Agreement between Pacific WebWorks and the
         Investors, dated May 30, 2001 (Incorporated by reference to exhibit
         10.14 to Form SB-2,as amended, File No. 333-64104, effective July 16,
         2001)

April 2, 2007)
21.1
Subsidiaries of Pacific WebWorks (Incorporated by reference to exhibit No. 21.1 to Form 10-K,10-QSB, filed April 2, 2001)

Reports on Form 8/K

     We filed a current report on Form 8-K, dated July 16, 2001, under Item 5
announcingAugust 14, 2007)
31.1
Chief Executive Officer Certification
31.2
Principal Financial Officer Certification
32.1
Section 1350 Certification



47




SIGNATURES

Pursuant to the effective daterequirements of our SB-2 registration statement filed June
28, 2001 (File No. 333-64104)

                                53


                            SIGNATURES

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

                                Pacific WebWorks, Inc.




         3/22/02authorized

PACIFIC WEBWORKS, INC.



By:    /s/ Christian R. Larsen                 Date:__________________________ By:_____________________________________
                                    
Christian R. Larsen, President and Director

     

Date:  March 27, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934.
This1934, this report has been signed below by the following persons on behalf of the Registrantregistrant and in the capacities and on the dates indicated.



         3/22/02



By:/s/  Christian R. Larsen                    
Christian R. Larsen
President and Director

Date:  March 27, 2008



By:   /s/ Kenneth W. Bell                                           Date:__________________________ By:_____________________________________
                                    
Kenneth W. Bell
Chief Executive Officer, Treasurer,
Principal Financial and Director



         3/22/02Accounting Officer,
and Chairman of the Board

Date:  March 27, 2008




By:   /s/ Thomas R. Eldredge
Date:__________________________ By:_____________________________________
                                   Thomas Brett Bell                                            
R. Eldredge
                                   Secretary/TreasurerBrett Bell
Secretary and Chief Financial
                                   Officer



         3/22/02                    /s/ Allan E. Oepping
Controller

Date:  _________________________ By: ____________________________________
                                    Allan E. Oepping
                                    Director


         3/22/02                    /s/ Benjamin A. Black
Date: _________________________ By: ____________________________________
                                    Benjamin A. Black
                                    Director



                                54