10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]

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

For the quarterly period ended June 30, 2009

[ ]

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

For the transition period from ___ to ___

Commission file number: 000-26731

PACIFIC WEBWORKS, INC.

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of incorporation or organization)

87-0627910

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

230 West 400 South, Salt Lake City, Utah

(Address of principal executive offices)

84111

(Zip Code)

(801) 578-9020

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

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

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

Large accelerated filer [ ]

Non-accelerated filer [ ]

Accelerated filer [ ]

Smaller reporting company [X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

The number of shares outstanding of the registrant’s common stock as of July 27, 2009 was 41,663,895.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Cash Flows

Notes to the Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Item 4T. Controls and Procedures

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 6. Exhibits

Signatures

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The financial information set forth below with respect to our balance sheets as of June 30, 2009 and our statements of operations for the three and six month periods ended June 30, 2009 and 2008 is unaudited. This financial information, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of such data. The results of operations for the six month period ended June 30, 2009 are not necessarily indicative of results to be expected for any subsequent period.

PACIFIC WEBWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009

(Unaudited)


Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS

				December 31,		June 30,
				2008		2009
ASSETS						(Unaudited)
CURRENT ASSETS
	Cash and cash equivalents		$	377,743	$	907,566
	Receivables
		Trade, less allowance
		for doubtful receivables of $0 in 2008 and$0 in 2009		518,709		2,180,059
	Prepaid expenses and other current assets			142,824		136,621
	Inventory			139,423		134,921
	Deferred tax asset			74,187		-

		Total Current Assets		1,252,886		3,359,167

PROPERTY AND EQUIPMENT, NET AT COST				96,665		109,147

Restricted cash				649,899		784,605
Goodwill				1,946,253		1,946,252
Deferred tax asset				525,813		467,472
Deposits				10,699		10,699

Total Assets			$	4,482,215	$	6,677,342

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
	Accounts payable		$	382,014	$	2,215,979
	Accrued liabilities			39,311		69,197
	Deferred revenue			3,192		-
	Current liabilities from discontinued operations			101,799		101,799

		Total Current Liabilities		526,316		2,386,975

		Total Liabilities		526,316		2,386,975

		Commitments		-		-

STOCKHOLDERS' EQUITY
	Common stock - par value $0.001; authorized 50,000,000; issued and
		outstanding 41,663,895 shares in 2008 and 41,663,895 shares in 2009		41,664		41,664
	Additional paid-in capital			16,596,474		16,608,139
	Accumulated deficit			(12,682,239)		(12,359,436)

		Total Stockholders’ Equity		3,955,899		4,290,367

		Total Liabilities and Stockholders’ Equity	$	4,482,215	$	6,677,342

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

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

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2009
(Unaudited)

NOTE 1 -BASIS OF FINANCIAL STATEMENT PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed consolidated financial statements includes normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim consolidated financial statements be read in conjunction with the Company’s audited financial statements and notes thereto included in its December 31, 2008 Annual Report on Form 10-K. Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the year ending December 31, 2009.

In this report references to “Pacific WebWorks,” “we,” “us,” and “our” refer to Pacific WebWorks, Inc. and its subsidiaries.

FORWARD LOOKING STATEMENTS

The Securities and Exchange Commission (“SEC”) encourages companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions. This report contains these types of statements. Words such as “may,” “expect,” “believe,” “anticipate,” “estimate,” “project,” or “continue” or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

The company consists of the operations of Pacific WebWorks and its four operating subsidiaries: Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc. and Pacific WebWorks International LTD. We also have a non-operating, discontinued operations subsidiary, World Commerce Network, LLC. Our revenues are primarily from the sale of access to our software technology, financial services and continuing monthly service and hosting fees.

Pacific WebWorks is an application service provider and software development firm that develops business software technologies and services for business merchants and organizations using Internet and other technologies. We specialize in turn-key applications allowing small- to medium-sized businesses to expand their business over the Internet. Our product family provides tools for web site creation, management and maintenance, electronic business storefront hosting, and Internet payment systems for the small- to medium-sized business and organization. Pacific WebWorks assists small businesses in succeeding online through our Visual WebTools™ software, the Intellipay payment systems, education and hosting services.

Our subsidiary, Intellipay Inc., specializes in providing online, secure and real-time payment processing services for businesses of all sizes. Our TradeWorks Marketing, Inc. subsidiary mass markets Pacific WebWorks and Intellipay products. FundWorks, Inc. provides operating lease arrangements for certain TradeWorks customers. On July 31, 2007, we formed Pacific WebWorks International LTD, a United Kingdom limited company.

The current economic climate has increased the number of small businesses seeking ways to generate additional cash flows and, as a result, has been beneficial for our business. During the second quarter of 2009 we experienced record revenues of $8,697,551, an increase of 169% over the first quarter of 2009, and a 255% increase over the comparable period in 2008. As is often the case where growth occurs rapidly the upfront expenses related to such growth has had a negative effect on second quarter earnings. However, management believes that the expenses incurred will contribute to greater profitability over the remaining quarters of 2009 and into the future.

During the second quarter of 2009 we accomplished the following:

Installation of a new IT based phone system.

Upgrading an automated accounting system to better handle billing and reporting.

Programming integration with several key banks.

Automating and staffing a larger customer service department.

Solidifying additional merchant account relationships.

We continue to enjoy great demand for our product via our online marketing efforts. As a result, maintaining sufficient merchant account capabilities continues to be a major challenge. To help alleviate this strain and to address resulting cash flow issues, we have arranged to sell portions of our hosting portfolio to a related company, as needed. In addition, we have and will form international companies to obtain further merchant account processing capability.

Our overall financial condition and liquidity continue to improve and we expect revenues and earnings will continue to grow. Our biggest challenge continues to be in the area of maintaining sufficient credit card processing capabilities to keep up with our growth. In July 2009 the pressure from limited merchant account processing led management to curtail new business generation for a thirty-day period to relieve cash shortfalls. While conventional merchant accounts are unreasonably confining and may affect our progress, the industry is beginning to recognize the problems related to conventional merchant accounts and we expect to see modified options develop in the marketplace.

We expect to see continued growth through 2009 and beyond. We have established excellent relationships with online media firms throughout the United States and anticipate working closely with them to expand our business. Our most immediate challenge is that of managing this explosive growth and communicating our progress to the financial markets.

Our market continues to be highly competitive. We believe our product offerings and marketing strategies are among the strongest in the industry. During the upcoming year we intend to focus on these areas along with a commitment to increasing customer retention through improved customer service and more targeted marketing.

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

Liquidity and Capital Resources

During 2008 and the six month period ended June 30, 2009 (the “2009 six month period”) we have relied primarily on revenues to fund our operations. The majority of our revenues are from hosting, gateway and maintenance fees and we are dependent upon the efforts of our internal marketing staff and on third party resellers, including our wholly-owned reseller, TradeWorks Marketing, to increase our revenues. We expect to continue to generate positive cash flows through further development of our business and distribution channels and we plan to address only the liabilities of our operating subsidiaries with our current cash balances and cash inflows.

For the 2009 six month period our revenues have increased significantly, but selling expenses related to those revenues have also increased. These cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales.

In June 2009 we experienced limited merchant account processing capabilities which created a situation where we could not satisfy payables to marketing partners. To generate needed cash in the 2009 second quarter we sold a portion of our hosting portfolio that was in excess of merchant account limitations to The Quad Group, LLC, a related party (the “Quad Group”) for $157,786. Quad Group is owned and managed by current directors, officers and an employee of Pacific WebWorks. We may periodically be required to enter into sale transactions with Quad Group to properly manage our merchant account processing requirements.

We believe that we may need an additional $1 to $2 million during the next twelve to twenty-four months to continue to keep up with technological improvements and further our business development strategies. We believe funding may be obtained through additional debt arrangements or equity offerings in addition to internally generated cash flows. However, if we are unable to obtain additional funds on acceptable terms, then we might be forced to delay or abandon some or all of our product development, marketing or business plans, and growth could be slowed, which may result in declines in our operating results and common stock market price.

In the event that we decide to rely on equity offerings for additional funding or services, then we will likely use private placements of our common stock pursuant to exemptions from the registration requirements provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock our stockholders may experience dilution in the value per share of their common stock.

Commitments and Contingent Liabilities

Our operating commitments include our operating lease for our Salt Lake City office that approximates $10,875 per month as of February 2009. Our total current liabilities at June 30, 2009 included accounts payable of $2,215,979 related to operating costs such as marketing and advertising expenses and professional fees. Our accrued liabilities of $69,197 were primarily the result of payroll related liabilities and sales commission, offset by estimated refunds and factoring obligations.

Current liabilities from discontinued operations were $101,799 and were related to World Commerce Network, LLC. The operations of World Commerce Network, LLC, our subsidiary, are ceased and discontinued. These liabilities decreased from $215,274 in 2007 to $101,799 for the 2009 six month period as a result of a recovery of previously recognized expenses related to the defunct World Commerce Network operations. 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.

Results of Operations

The following discussions are 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 the three and six month periods ended June 30, 2008 and 2009. The following charts are a summary of our financial statements for those periods and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part I, Item 1, above.


SUMMARY BALANCE SHEET COMPARISON
	Year ended Dec. 31, 2008	Six month period ended June 30, 2009
Cash and cash equivalents	$ 377,743	$ 907,566
Total current assets	1,252,886	3,359,167
Total assets	4,482,215	6,677,342
Total current liabilities	526,316	2,386,975
Total liabilities	526,316	2,386,975
Accumulated deficit	(12,682,239)	(12,359,436)
Total stockholders’ equity	$ 3,955,899	$ 4,290,367

Total assets increased at June 30, 2009 as compared to December 31, 2008 primarily as a result of an increase in receivables related to our increased sales. At June 30, 2009 total liabilities increased compared to the 2008 year end primarily as a result of increases in accounts payable related to our online marketing budget. Our accumulated deficit continued to decrease at June 30, 2009 as a result of posting net income for the 2009 six month period.


SUMMARY COMPARISON OF OPERATING RESULTS
	Three month period ended June 30,		Six month period ended June 30,
	2008	2009	2008	2009
Revenues, net	$ 2,450,681	$ 8,697,551	$ 5,576,715	$ 11,935,470
Cost of sales	65,620	84,893	99,991	135,486
Gross profit	2,385,061	8,612,658	5,476,725	11,797,984
Total operating expenses	2,023,253	8,750,584	5,077,816	11,470,543
Net income (loss) from operations	361,809	(137,926)	398,909	329,441
Total other income (expense)	2,489	157,786	22,350	159,654
Income tax expense	123,861	6,752	143,228	166,292
Net income	240,437	13,108	278,031	322,803
Net income per share - basic	$ 0.01	$ 0.00	$ 0.01	$ 0.01

Our net revenues increased significantly for the 2009 second quarter and six month period compared to the same periods in 2008 as a result of our online marketing program. 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 recognized over the period services are performed, ranging from eight months to one year. Fees for the set-up of merchant accounts are deferred and recognized as services are completed, which is generally two months. Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned. Operating lease revenues for merchant accounts and software are recorded as they become due from customers.

Cost of sales include costs related to fulfillment, customer service, certain royalties and commissions, amortization of purchased customer portfolios, service personnel, telecommunications and data center costs. Cost of sales remained relatively constant at 1% to 2% of revenues for all periods.

Total operating expenses increased for the three month period ended June 30, 2009 (the “2009 second quarter”) and the 2009 six month period compared to the 2008 comparable periods primarily due to increases in selling expenses and general and administrative expenses. Selling expenses include advertising expenses, commissions and personnel expenses for sales and marketing and these expenses increased in the 2009 periods due to increased sales. General and administrative expenses include personnel expenses for executive, finance, and internal support personnel. In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs. General and administrative expenses increased for the 2009 second quarter and six month period compared to the 2008

periods consistent with continued increases in customer accounts and increased staff to provide services for the new customer accounts.

Total other income for the 2009 second quarter and six month period included other income related to cash on reserve with the bank and the income related to the hosting portfolio sale to Quad Group. Total other income for the 2008 second quarter and six month period represented interest income earned on certificates of deposit and the recovery of a previously booked expense offset by impairment of goodwill related to Intellipay.

While we recorded improved revenues in the 2009 second quarter and six month period, our net income for the 2009 six month period increased only slightly as compared to the 2008 six month period. However, our net income for the 2009 second quarter decreased when compared to net income for the 2008 second quarter primarily due to a significant increase in marketing costs directly associated with new customer acquisitions, as well as a one-time infrastructure expense required to support growth. Management anticipates that these sales will result in increased profitability in the short term.

Off-balance Sheet Arrangements

None.

Critical Accounting Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Estimates of particular significance in our financial statements include deferred revenue calculations, trade receivables and collections, goodwill and the annual tests for impairment of goodwill, contingent liabilities, and valuing stock option compensation.

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

Contingent liabilities - Material estimates for contingent liabilities include approximately $0 for our operating companies and approximately $101,799 in net current liabilities of our discontinued operations. From a liquidity standpoint, any settlement or judgment received by us from pending or threatened litigation may have a direct effect on our cash balances at June 30, 2009. Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not have a direct effect on our assets as management does not intend to satisfy such claims with the assets of our operating companies. Management believes that all amounts estimated and recorded as contingent liabilities approximate the amount of liabilities that could be owed to parties in the form of settlement or in a judgment. We have had no communication for over three years with any of the parties related to the contingent liabilities of our discontinued operations. Any settlements that might occur below amounts accrued would result in a favorable impact to our earnings and working capital.

Valuing stock options - We measure and record compensation cost relative to performance stock option costs in accordance with Statement of Financial Accounting Standards No. 123R, "Accounting for Stock-Based Compensation", which requires the Company to use the Black-Scholes pricing model to estimate the fair value of options at the option date of grant. The fair value of the option grant is established at the date of grant using the Black-Scholes option pricing model based on assumptions related to the five year risk free interest rate, dividend yield, volatility, and average expected term (years to exercise).

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4T. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, they concluded that our disclosure controls and procedures were effective.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Management conducted an evaluation of the effectiveness of our internal control over financial reporting and determined that there were no changes made in our internal control over financial reporting during the second quarter of our 2009 fiscal year that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Agami Media LLC (“Agami”) filed a complaint against Pacific WebWorks, Inc. in the Superior Court of California County of San Francisco on September 29, 2008. The complaint alleges that Pacific WebWorks breached its contract with Agami and that Pacific WebWorks owes approximately $70,000 to Agami for advertising. We dispute the amount of the fees allegedly owed to Agami and we intend to vigorously defend our position. In May 2009 we filed an answer to the complaint and filed a cross complaint seeking damages. The parties have reached verbal agreement on a settlement of these claims at a fraction of the initial claim; however, the settlement is still in the process and a formal written document has not been signed.

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

ITEM 1A. RISK FACTORS

Factors Affecting Future Performance

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

We rely upon our credit card merchant accounts to collect our monthly hosting payments and many of the limitations imposed upon us by the credit card associations, in the opinion of management, are unreasonable and unnecessarily confining. These merchant account limitations have forced us to restrict our business growth in the second quarter of 2009 and this restriction of growth impacts our earnings in a negative manner.

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

Based on our current growth plan we believe we may require $1 to $2 million additional financing within the next twelve to twenty-four months to remain competitive in our market and to capitalize on growth opportunities. If we fail to obtain funds on acceptable terms, then we might be forced to delay or abandon some or all of our business plans. Our success will depend upon our ability to access equity capital markets and borrow on terms that are financially advantageous to us. Also, we may not be able to obtain additional funds on acceptable terms. If we are unable to obtain additional capital, then we may not have sufficient working capital to develop products, finance acquisitions, or pursue business opportunities. If we borrow funds, then we could be forced to use a large portion of our cash reserves to repay principal and interest on those funds. If we issue our securities for capital, then the interests of investors and shareholders could be diluted.

We are subject to intense competition from large and small companies that limits our ability to obtain market share and may force our prices down.

We face competition in the overall Internet software market, as well as in the web site building market. Our ability to earn significant revenues from our Visual WebTools™ or IntelliPay payment system will depend in part on their acceptance by a substantial number of online businesses. Broad acceptance of our products and services and their use in large numbers is critical to our success because a large portion of our revenues are derived from one-time and recurring fees we charge to customers buying our products and services. Our success in obtaining market share will depend upon our ability to build name brand recognition and to provide cost-effective products and services to our customers. We have developed our products to meet the needs of small businesses and we believe the generality of our competitors’ services may be inadequately addressing the small business owner’s needs. We expect competition to persist, increase, and intensify in the future as the markets for our products and services continue to develop and as additional competitors enter our market. In addition, many of our current or potential competitors have broad distribution channels that they may use to bundle competing products directly to end-users or purchasers. If these competitors were to bundle competing products for their customers, it could adversely affect our ability to obtain market share and may force our prices down.

We may be unable to achieve market acceptance because technological standards for payment processing are not established.

One obstacle to widespread market acceptance for the IntelliPay payment system is that widely adopted technological standards for accepting and processing payments over the Internet have not yet emerged. As a result, merchants and financial institutions have been slow to select which service to use. Until one or more dominant standards emerge, we must design, develop, test, introduce and support new services to meet changing customer needs and respond to other technological developments. To be successful, we must obtain widespread acceptance of our technologies, or modify our products and services to meet whatever industry standards do ultimately develop. It is not certain that we will be able to do either.

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 an adequate remedy in the event of unauthorized disclosure of such information. Intellectual property rights, by their nature, are uncertain and involve complex legal and factual questions. We rely upon trade secrets with respect to our source code and functionalities and other unpatented proprietary information in our product development activities. We seek to protect trade secrets and proprietary knowledge in part through confidentiality agreements with our employees, resellers, and collaborators.

If employees or collaborators develop products independently that may be applicable to our products under development, disputes may arise about ownership of proprietary rights to those products or services. Protracted and costly litigation could be necessary to enforce and determine the scope of our proprietary rights. It would be impossible to predict whether litigation might be successful.

We rely in part on third party technology licenses which we cannot guarantee will be available to us in the future.

We rely on certain technology which we license from third parties, including software which is integrated with internally developed software and used in our software to perform key functions. Our inability to maintain any of these technology licenses could result in delays in distribution of our services or increased costs of our products and services. We cannot assure you that third party technology licenses will continue to be available to us on commercially reasonable terms, or at all.

We must update our products and services and may experience increased costs and delays which could reduce operating profit.

The electronic commerce, web hosting and merchant processing markets in which we compete are characterized by technological change, new product introductions, evolving industry standards and changing customer needs. In order to remain competitive, we may be required to engage in a number of research and development projects, which carries the risks associated with any research and development effort, including cost overruns, delays in delivery and performance problems. Any delay in the delivery of new products or services could render them less desirable by our customers, or possibly even obsolete. Any performance problem with a new product or service may require significant funds to correct the problem. As a result of these factors, our research and development efforts could result in increased costs that could reduce our operating profit, a loss of revenue if promised new products are not timely delivered to our customers, or a loss of revenue or possible claims for damages if new products and services do not perform as anticipated.

We may experience software defects which may damage customer relations.

Despite rigorous testing, our software may nevertheless contain undetected bugs, errors or experience failures when introduced, or when the volume of services provided increases. Any material errors could damage the reputation of our service or software, as well as damage our customer relations. We have detected errors, defects, and bugs in the past and have corrected them as quickly as possible. Correcting any defects or bugs we may discover in the future may require us to make significant expenditures of capital and other resources. We believe that we follow industry-standard practices relating to the identification and resolution of errors, defects, or bugs encountered in the development of new software and in the enhancement of existing features in our products. As of the date of this filing we have not experienced any material adverse effect by reason of an error, defect, or bug.

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

We would be unable to deliver our payment processing services or hosting services if our system infrastructures break down or are otherwise interrupted. Events that could cause system interruptions are:

Fire

earthquake,

power loss,

terrorist attacks,

harmful software programs,

telecommunications failure, and

unauthorized entry or other events.

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

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

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

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

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

We may pursue acquisitions of complementary service product lines, technologies or business which may interfere with our operations and negatively affect our financial position.

From time to time, we evaluate potential acquisitions of businesses, services, products, or technologies. These acquisitions may result in a potentially dilutive issuance of equity securities, the incurrence of debt and contingent liabilities, and amortization of expenses related to goodwill and other intangible assets. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, services, and products of the acquired companies; the diversion of management’s attention from other business concerns; risks of entering markets in which we have no or limited direct prior experience; and, the potential loss of key employees of the acquired company. As of the date of this filing, we have no present commitment or agreement with respect to any material acquisition of other businesses, services, products, or technologies.

We may not be able to adapt as the Internet market changes.

Our failure to respond in a timely manner to changing market conditions or client requirements could have a material adverse effect on our business, prospects, financial condition, and results of operations. The Internet is characterized by:

rapid technological change;

changes in advertiser and user requirements and preferences;

frequent new product and service introductions embodying new technologies; and

the emergence of new industry standards and practices that could render our existing service offerings, technology, and hardware and software infrastructure obsolete.

In order to compete successfully in the future, we must:

enhance our existing products and develop new services and technology that address the increasingly sophisticated and varied needs of our prospective or current customers;

license, develop or acquire technologies useful in our business on a timely basis; and

respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

Our future success depends on continued growth in the use of the Internet and Internet-based services for small business.

Because the Internet is a rapidly evolving industry, the ultimate demand and market acceptance for our products will be subject to a high level of uncertainty. Significant issues concerning the commercial use of the Internet and online service technologies, including security, reliability, cost, ease of use, and quality of service, remain unresolved and may inhibit the growth of Internet business solutions that use these technologies. In addition, the Internet or other online services could lose their viability due to delays in the development or adoption of new standards and protocols required to handle increased levels of Internet activity, or due to increased governmental regulation.

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

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

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 cannot 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 financial 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.

ITEM 6. EXHIBITS

Part I Exhibits

No.

Description

31.1

Chief Executive Officer Certification

31.2

Principal Financial Officer Certification

32.1

Section 1350 Certification

Part II Exhibits

No.

Description

3.1

Articles of Incorporation as amended (Incorporated by reference to exhibit 3.1 for Form 10-Q filed November 13, 2001)

3.2

Amended Bylaws of Pacific WebWorks, Inc. (Incorporated by reference to exhibit 3.2 for Form 10, as amended, file No. 0-26731, filed July 16, 1999.)

10.1

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

10.2

Lease Agreement between Pacific WebWorks, Inc. and Development Specialties, Inc., dated February 1, 2008 (Incorporated by reference to exhibit 10.2 for Form 10-K filed March 31, 2008)

10.3

Form of employment agreement for executive officers, dated January 1, 2008 (Incorporated by reference to exhibit 10.4 for Form 10-KSB, filed April 2, 2008)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

PACIFIC WEBWORKS, INC.

By: / s/ Christian R. Larsen

Christian R. Larsen

President and Director

Date: August 13, 2009

By: /s/ Kenneth W. Bell

Kenneth W. Bell

Chief Executive Officer, Treasurer,

Principal Financial Officer and Chairman of the Board

Date: August 13, 2009

By: /s/ R. Brett Bell

R. Brett Bell

Chief Financial Officer and Secretary

Date: August 13, 2009


Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited))
				Six months ended				Three months ended
				June 30,				June 30,
				2008		2009		2008		2009
Revenues
	Software, access and license fees		$	317,500	$	883,928	$	89,613	$	817,058
	Hosting, gateway and maintenance fees			5,244,844		11,045,627		2,357,450		7,880,493
	Merchant accounts, design and other			14,371		5,915		3,617		-
				5,576,715		11,935,470		2,450,681		8,697,551
Cost of Sales				99,991		135,486		65,620		84,893
		Gross Profit		5,476,725		11,799,984		2,385,061		8,612,658
Selling expenses				3,588,138		8,904,993		1,309,775		6,938,574
Research and development				147,725		180,165		67,096		98,366
General and administrative				1,325,703		2,363,582		638,221		1,700,051
Depreciation and amortization				16,249		21,803		8,161		13,593
		Total Operating Expenses		5,077,816		11,470,543		2,023,253		8,750,584
		Net Income from Operations		398,909		329,441		361,809		(137,926)
Other Income (Expense)
	Interest income			4,855		-		-		(1,868)
	Interest expense			-		-		-		-
	Other income (expense), net			17,495		159,654		2,489		159,654
		Total Other Income (Expense)		22,350		159,654		2,489		157,786
	Net Income (Loss) from Continuing Operations Before Income Taxes			421,259		489,095		364,298		19,860
Income Tax Expense				143,228		166,292		123,861		6,752
Income from Continuing Operations			$	278,031	$	322,803	$	240,437	$	13,108

Discontinued Operations
	Income from operations of discontinued World
		Commerce Network, LLC (including income
		on disposal of $20,000, net of tax)	$	-	$	-	$	-	$	-

		NET INCOME	$	278,031	$	322,803	$	240,437	$	13,108

EARNINGS PER SHARE
Basic
		Income from continuing operations	$	0.01	$	0.01	$	0.01	$	0.00
		Income from discontinued operations, net of tax		-		-		-		-
		Net income	$	0.01	$	0.01	$	0.01	$	0.00
Diluted
		Income from continuing operations	$	0.01	$	0.01	$	0.00	$	0.00
		Income tax expense		-		-		-		-
		Net income	$	0.01	$	0.01	$	0.00	$	0.00

Weighted-average common shares outstanding
	Basic			41,001,895		41,663,895		41,001,895		41,663,895
	Fully Diluted			49,479,546		41,663,895		49,479,546		41,663,895


Pacific WebWorks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
			For the six months ended
			June 31,
			2008		2009

Cash Flows From Operating Activities
Net Income		$	278,031	$	322,803
Adjustments to reconcile net income to net cash used in operating activities
	Depreciation & amortization		16,249		21,803
	Valuation of stock options		-		11,665
Changes in assets and liabilities
	Deferred tax asset		143,228		132,528
	Receivables		(280,707)		(1,661,349)
	Prepaid expenses and other assets		8,887		6,203
	Inventory		-		4,502
	Accounts payable and accrued liabilities		(170,028)		1,863,851
	Deferred revenue		3,989		(3,192)

	Net cash provided (used) by operating activities		(351)		698,814

Cash Flows From Investing Activities
Purchases of property and equipment			(21,174)		(34,285)
Cash on reserve with bank (restricted cash)			(159,807)		(134,706)

	Net cash provided (used) by investing activities		(180,982)		(168,991)

Cash Flows From Financing Activities
Proceeds on issuance of stock from exercise of options			4,700		-

	Net cash provided by financing activities		4,700		-

	Net increase/(decrease) in cash and cash equivalents		(176,632)		529,823

Cash and cash equivalents at beginning of period			891,062		377,743

Cash and cash equivalents at end of period		$	714,430	$	907,566

Supplemental disclosures of cash flow information:
	Cash Paid for Interest	$	-	$	-
	Cash paid for income taxes	$	1,200	$	1,200