Photoworks 8-K PhotoWorks’ 1st Quarter Digital Sales Surge 76% to $2.3M

For Immediate Release

PhotoWorks’ 1^st Quarter Digital Sales Surge 76% to $2.3M

SEATTLE, WA (February 6, 2006) – PhotoWorks^®, Inc. (OTCBB: PHTW), an Internet based digital photo-publishing company, today reported results for the first quarter of fiscal year 2006 ended December 24, 2005.

• Digital sales increased 76% over same period last year to $2.3 Million

• 35 mm processing and other traditional revenue declined 43% to $1.6 Million

• Gross Margin jumped to 43.7% compared to 32.9% same period last year

“PhotoWorks is beginning to show results from its investment in digital photography,” said Philippe Sanchez, Chairman and CEO of PhotoWorks. “We are pleased with the performance of our digital products and services over the holiday period, and we expect this trend to continue.”

For the 1^st quarter for 2006:

Digital revenue totaled $2.323 Million, an increase of 76% from $1.322 Million in the 1^st quarter of 2005. Traditional revenue totaled $1,641 Million, a 43% decline from $2.897 Million. Total net revenue totaled $3,964 Million, a 6% decline.

Gross margin as a percentage of net revenues increased to 43.7% compared to 32.9% in the 1^st quarter of fiscal year 2005. The increase of gross margin is the result of higher margin sales and the streamlining of operations.

The Company reported a net loss of $328,000 compared to a net loss of $991,000 in the 1^st quarter of fiscal year 2005, a 67% improvement.

About PhotoWorks, Inc.

PhotoWorks^®, Inc. is an Internet based digital photo-publishing company. The company’s web based services allow PC and Mac users to create hard bound photo books, customized greeting cards, calendars, prints and other photography sourced products straight from their computers. Formerly known as Seattle Film Works, PhotoWorks has a 30-year national heritage of helping photographers share and preserve their memories with innovative and inspiring products and services. More information on the Company is available at www.photoworks.com or by e-mailing customercare@photoworks.com.

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For More Information, contact:

Press: Lisa Amore for PhotoWorks, tel.: 206.322.4658, lisa@amorepr.com

PhotoWorks® is a trademark of PhotoWorks, Inc.

PHOTOWORKS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

					December 24,		September 24,
					2005		2005
A S S E T S					(Unaudited)
	CURRENT ASSETS
		Cash and cash equivalents		$	1,792	$	1,872
		Current portion of vendor receivable			463		249
		Inventories			299		80
		Prepaid expenses			150		60
			TOTAL CURRENT ASSETS		2,704		2,261
	PROPERTY AND EQUIPMENT, NET				495		483
	OTHER ASSETS
		Long-term vendor receivable			81		175
		Lease deposits			33		33
			TOTAL OTHER ASSETS		114		208
		TOTAL ASSETS		$	3,313	$	2,952
L I A B I L I T I E S
	CURRENT LIABILITIES
		Accounts payable		$	1,949	$	953
		Accrued compensation			343		463
		Other accrued expenses			475		713
		ITC penalty, current portion			256		252
		Current portion of capital lease obligations			11		6
		Deferred revenues			404		408
		Current portion of subordinated debentures			65		65
			TOTAL CURRENT LIABILITIES		3,503		2,860
	LONG-TERM LIABILITIES
		ITC penalty, non-current portion			276		274
		Capital lease obligations, net of current portion			-		7
			TOTAL LONG-TERM LIABILITIES		276		281
		TOTAL LIABILITIES			3,779		3,141
STOCKHOLDERS' DEFICIT
		Common stock			198		198
		Additional paid-in capital			24,112		24,061
		Accumulated deficit			(24,776)		(24,448)
			TOTAL STOCKHOLDERS' DEFICIT		(466)		(189)
			TOTAL LIABILITIES	$	3,313	$	2,952

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PHOTOWORKS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

				Period Ended		Period Ended
				December 24,		December 25,
				2005		2004
				(Unaudited)		(Unaudited)
REVENUES			$	3,964	$	4,219
COST OF GOODS AND SERVICES				2,231		2,828
GROSS PROFIT				1,733		1,391
OPERATING EXPENSES
	Customer service			159		149
	Marketing			1,064		734
	Research and development			450		892
	General and administrative			441		566
		TOTAL OPERATING EXPENSES		2,114		2,341
LOSS FROM OPERATIONS				(381)		(950)
OTHER INCOME (EXPENSE)
	Interest expense			-		(55)
	Interest income			3		-
	Other income, net			50		14
		TOTAL OTHER INCOME (EXPENSE)		53		(41)
	LOSS BEFORE INCOME TAXES			(328)		(991)
	INCOME TAX BENEFIT			-		-
	NET LOSS		$	(328)	$	(991)
	BASIC AND DILUTED NET LOSS PER COMMON SHARE		$	(0.02)	$	(0.28)
	WEIGHTED AVERAGE NUMBER OF
		COMMON STOCK SHARES OUTSTANDING,
		BASIC AND DILUTED		19,794,672		3,549,800

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