Heyu Biological Technology Corp - Quarter Report: 2008 June (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X]

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

For the quarterly period ended June 30, 2008

[  ]

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: 0-26731

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)

The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 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]

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 31, 2008 was 41,001,895.

1

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

2

  Consolidated Balance Sheets

3

  Consolidated Statements of Operations

4

  Consolidated Statements of Cash Flows

5

  Notes to the Consolidated Financial Statements

6

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

14

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

19

Item 4T.  Controls and Procedures

19

PART II – OTHER INFORMATION

Item 1A.  Risk Factors

19

Item 6.  Exhibits

23

Signatures

24

PART I – FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

The financial information set forth below with respect to our balance sheet as of June 30, 2008 and our statements of operations for the three and six month periods ended June 30, 2008 and 2007 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, 2008, are not necessarily indicative of results to be expected for any subsequent period.  

Pacific WebWorks, Inc. and Subsidiaries

CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

2

Pacific WebWorks, Inc.
CONSOLIDATED BALANCE SHEETS
													December 31,		June 30,
													2007		2008
								ASSETS							(Unaudited)
CURRENT ASSETS
	Cash and cash equivalents												$                 891,062		$                 714,430
	Receivables
		Trade, less allowance
					for doubtful receivables of$45,975 in 2007
					and$0 in 2008								279,402		568,055
	Prepaid expenses and other current assets												166,446		166,426
	Deferred Tax Asset												84,778		-
				Total current assets									1,421,689		1,448,911
PROPERTY AND EQUIPMENT, NET AT COST													83,464		88,389
RESTRICTED CASH													487,473		647,280
GOODWILL													1,946,253		1,946,253
DEFERRED TAX ASSET													515,222		456,772
DEPOSITS													11,472		2,605
Total Assets													$              4,465,572		$              4,590,210
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
	Accounts payable												828,792		655,398
	Notes payable - Current												-		-
	Accrued liabilities												71,413		74,779
	Deferred revenue												10,494		14,483
	Current liabilities from discontinued operations												215,274		215,274
		Total current liabilities											1,125,973		959,934
		Total liabilities											1,125,973		959,934
		Commitments											-		-
STOCKHOLDERS' EQUITY
	Common stock - par value $0.001; authorized
		50,000,000; issued and outstanding  40,526,895 shares
		in 2007 and  41,001,895 shares in 2008											40,527		41,002
	Additional paid-in capital												16,472,175		16,508,786
	Prepaid Expenses														(24,439)
	Accumulated deficit												(13,173,104)		(12,895,073)
			Total stockholders' equity										3,339,599		3,630,276
													$              4,465,572		$              4,590,210

The accompanying notes are an integral part of these financial statements

3

Pacific WebWorks, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
											Six months ended				Three months ended
											June 30,				June 30,
											2007		2008		2007		2008
Revenues
	Software, access and license fees										$              649,805		$             317,500		$               430,946		$              89,613
	Hosting, gateway and maintenance fees										3,765,292		5,244,844		2,661,222		2,357,450
	Training and education										154,064		-		90,569		-
	Merchant accounts, design and other										241,578		14,371		120,247		3,617
											4,810,739		5,576,715		3,302,984		2,450,681
Cost of sales											253,292		99,991		115,225		65,620
	Gross profit										4,557,447		5,476,725		3,187,759		2,385,061
Selling expenses											3,393,553		3,588,138		2,415,522		1,309,775
Research and development											148,623		147,725		81,011		67,096
General and administrative											1,014,515		1,325,703		574,505		638,221
Depreciation and amortization											14,807		16,249		7,428		8,161
	Total operating expenses										4,571,499		5,077,816		3,078,466		2,023,253
	Net income (loss) from operations										(14,052)		398,909		109,293		361,809
Other income (expense)
	Interest income										8,658		4,855		4,186		-
	Interest Expense										(12,000)		-		(10,000)		-
	Other income (expense), net										28,543		17,495		20,785		2,489
																	-
	Total other Income (Expense)										25,201		22,350		14,971		2,489
	Net income (loss) from continuing
	operations before income taxes										11,150		421,259		124,264		364,298
Income Tax Expense											-		143,228		-		123,861
	NET INCOME (LOSS)										$                11,150		$             278,031		$              124,264		$            240,437
	Income (Loss) from continuing operations
		Basic									$                           -		$                   0.01		$                            -		$                   0.01
		Fully Diluted									$                           -		$                   0.01		$                            -		$                   0.01
	Net Income (Loss) per share
		Basic									$                            -		$                   0.01		$                           -		$                   0.01
		Fully Diluted									$                            -		$                   0.01		$                           -		$                          -
Weighted-average common shares outstanding
	Basic										36,026,895		41,001,895		36,026,895		41,001,895
	Fully Diluted										36,026,895		49,479,546		36,026,895		49,479,546

The accompanying notes are an integral part of these financial statements

4

Pacific WebWorks, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
										For the six months ended
										June 30,
										2007		2008
Cash Flows From Operating Activities
	Net earnings (loss)									$           11,150		$          278,031
	Adjustments to reconcile net earnings (loss)
	to net cash used in operating activities
		Depreciation & amortization								14,807		16,249
		Stock issued for services										-
		Valuation of Stock Options								-		-
		Bad debt expense								152,126		-
	Changes in assets and liabilities
		Deferred tax asset										143,228
		Receivables								(241,931)		(280,707)
		Prepaid expenses and other assets								16,038		8,887
		Accounts payable and accrued liabilities								933,129		(170,028)
		Deferred revenue								3,065		3,989
				Net cash provided (used) by operating activities						888,384		(351)
Cash Flows From Investing Activities
	Purchases of property and equipment									(7,336)		(21,174)
	Cash on reserve with bank (Restricted Cash)									(505,605)		(159,807)
				Net cash (used) by investing activities						(512,941)		(180,982)
Cash Flows From Financing Activities
	Proceeds on issuance of stock									-		4,700
				Net cash provided by financing activities						-		4,700
				Net increase/(decrease) in cash and cash equivalents						375,443		(176,632)
	Cash and cash equivalents at beginning of period									392,633		891,062
	Cash and cash equivalents at end of period									$         768,076		$           714,430
	Supplemental disclosures of cash flow information:
			Cash Paid for Interest							$                    -		$                      -
			Cash paid for income taxes							$                    -		$               1,200
	Non-cash financing activities:									$                    -		$                      -
			Stock issued for insurance							$            29,473		$                      -

5

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION

The Company

Pacific WebWorks, Inc. and its subsidiaries, engage in the development and distribution of web tools software, electronic business storefront hosting, and Internet payment systems for individuals and small to mid-sized businesses.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Pacific WebWorks, Inc. and its wholly owned subsidiaries, Intellipay, Inc., TradeWorks Marketing, Inc., FundWorks, Inc., and World Commerce Network, LLC.  All significant intercompany accounts and transactions have been eliminated in consolidation.  The operations of World Commerce Network, LLC have been discontinued. 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 contingent liabilities.

Cash Equivalents

The Company considers all highly liquid instruments maturing in three months or less when purchased to be cash equivalents.

Concentrations

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

Depreciation and amortization

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

Restricted Cash

Restricted cash includes cash maintained in a reserve account with the Companies merchant bank in connection with the Companies acceptance of credit card payment for its 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 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

6

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

 

the manner of our use of the acquired assets or the strategy for our overall business, significant negative industry or economic trends or projected future results of operations.  For purposes of financial reporting and impairment testing in accordance with SFAS No. 142, the Company’s Intellipay business unit operates in one principal business segment, a provider of online credit card gateway services.

 In testing for a potential impairment of goodwill, the estimated fair value of the business unit is compared with book value, including goodwill. If the estimated fair value exceeds book value, goodwill is considered not to be impaired and no additional steps are necessary. If, however, the fair value of the Company is less than book value, then the carrying amount of the goodwill is compared with its implied fair value. The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks. If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess. In accordance with SFAS No. 142, the Company performed a goodwill impairment test during 2006 and concluded that the carrying amount of goodwill exceeds the implied fair value of the goodwill, accordingly an impairment loss was recognized in December 2006 of $1,000,000.  At June 30, 2008, the company determined that there was no impairment to goodwill.

Fair value of financial instruments

The fair value of the Company’s cash and cash equivalents, receivables, accounts payable, accrued liabilities and capital lease obligations approximate carrying value based on their effective interest rates compared to current market prices.

Revenue Recognition

The Company recognizes revenue in accordance with the Securities and Exchange Commission, Staff Accounting Bulletin (SAB) No. 101, “Revenue Recognition in Financial Statements” and its revisions in SAB No. 104.  SAB 101 and 104 clarify application of generally accepted accounting principles related to revenue transactions. In the third quarter 2003, the company adopted EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables ("EITF Issue No. 00-21").

We receive revenue for hosting, gateway, and maintenance fees, software access and licensing fees, training and education and the sale of merchant accounts as well as custom website design work.  Revenues from up-front fees are deferred and recognized over the period services are performed ranging from eight months to one year.  Fees for the set-up of merchant accounts are deferred and recognized as services are completed (which is generally two months).  Revenues from monthly hosting, maintenance, transaction and processing fees are recorded when earned. Operating lease revenues for merchant accounts and software are recorded as they become due from customers.

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.

7

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

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

Research and development costs

Product development expenses include expenses for the maintenance of existing software and the development of new or improved software and technology, including personnel expenses for the product engineering department.  Costs incurred by the Company to develop, enhance, manage, monitor and operate the Company's technology services are generally expensed as incurred.  Total research and development costs for the six months ended June 30, 2007 and 2008 was $148,623 and $147,725 respectively.  

General and administrative costs

General and administrative expenses include personnel expenses for executive, finance, and internal support personnel. In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.

Income Taxes

The Company utilizes the liability method of accounting for income taxes.  Under the liability method, deferred income tax assets and liabilities are provided based on the difference between the financial statement and tax bases of assets and liabilities measured by the currently enacted tax rates in effect for the years in which these differences are expected to reverse.  Deferred tax expense or benefit is the result of changes in deferred tax assets and liabilities.

Capital Structure

The Company has 50,000,000 shares authorized of voting common stock with 41,001,895 issued and outstanding.

Earnings (loss) Per Share

The computation of net earnings (loss) per share of common stock is based on the weighted average number of shares outstanding during each period presented. The Company utilizes the treasury stock  method to calculate diluted earnings (loss) per share. Potentially issuable common shares totaling 8,477,651and 7,882,651 related to options were included in the calculation of diluted earnings per share for the period ended June 30, 2008 and June 30, 2007 respectively.

8

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION - CONTINUED

The following is the calculation for weighted average common shares used in basic net earnings (loss) per share:

The following is the calculation for weighted average common shares used in the fully diluted net earnings (loss) per share:

NOTE 2 - STOCKHOLDERS’ EQUITY

Stock Issuance

During January 2008, the Company issued 400,000 shares of its common stock for payment of $32,585 related to insurance premiums.  The term of the policy coverage is August 2007 thru August 2008.  The Company will be recognizing the expense over the term of the policy on a straight-line basis.

During January 2008, a former employee of the Company exercised vested options.  The Company issued 75,000 shares of its common stock for payment of $4,700.

Equity Incentive Plan

On March 8, 2001, the Board of Directors adopted the Pacific WebWorks, Inc. 2001 Equity Incentive Plan (the Plan). The Plan allows for the granting of awards in the form of stock options, stock appreciation rights or restricted shares to employees, independent directors and certain consultants. The Plan was amended by the Company on March 15, 2007, to allow for grant awards representing up to 10,000,000 shares of the Company's common stock under the Plan.  The Plan has not been approved by the Company’s shareholders as of June 30, 2008.   

9

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 2 - STOCKHOLDERS’ EQUITY - CONTINUED

Information with respect to the Company’s stock options follows:

Employee stock options outstanding and exercisable under this plan as June 30, 2008 are:

10

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 2 - STOCKHOLDERS’ EQUITY - CONTINUED

The Company had 742,500 non vested options at the beginning of the period with a weighted average grant date fair value of $0.061.  At June 30, 2008 the Company had 742,500 non vested options.

During the six month period ended June 30, 2007 and 2008, the Company received $0 and $4,700 upon the exercise of awards.  The Company realized no tax benefit due to the exercise of options as the Company has historical net operating loss carry forwards.

NOTE 3 – DISCONTINUED OPERATIONS

The following includes the net current liabilities for the Company’s discontinued operations as of December 31, 2007 and June 30, 2008:  

	December 31, 2007 World Commerce Network, LLC	June 30, 2008 World Commerce Network, LLC
ASSETS
Current assets	$                              -	$                          -
Long-term assets	-	-
Total assets	$                              -	$                          -
LIABILITIES
Payables past due	64,010	64,010
Accrued liabilities	151,264	151,264
Total current liabilities	$                  215,274	$              215,274
Net current liabilities	$                  215,274	$              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 operations.  World Commerce Network became a consolidated entity with the Company in March 2000.  

Pending litigation

In September 2002, World Commerce Network, LLC received a complaint from a leasing company for recourse obligations funded for customer leases during 2000 for seminar related activities.  The agreement between World Commerce Network and the leasing company provides for recourse on leases in which customers have not made first payment.  Estimated recourse obligations for World Commerce Network approximate $95,000 at December 31, 2007 and June 30, 2008 and have been recorded as an accrued liability.  Management believes that the recorded liability for this matter is sufficient to cover any resulting judgment from this claim.

In April 2001, one of World Commerce Network’s former vendors filed a complaint alleging default under a certain application for credit and personal guaranty made by a former officer of the Company.  The vendor seeks approximately $65,000 plus interest.  The Company is defending the claim and believes the amount should be reduced based upon the vendor’s performance and other disputes.  The Company has filed an answer to the complaint and further litigation is pending.   The Company has recorded $20,000 to accrued liabilities in the consolidated financial statements in December 31, 2007 and June 30, 2008 representing its

11

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 3 – DISCONTINUED OPERATIONS - CONTINUED

estimated liability for this matter.  Management believes that the amount recorded is sufficient to cover the resulting liability from this complaint.

NOTE 4 – COMMITMENTS

Operating Leases

The Company has entered into a 5 year lease in 2008 for approximately 8,000 square feet of commercial business office space at $10,500  per month in the first year, escalating by approximately $350-$375 monthly at the beginning of each new lease year.  The following is a schedule of future minimum lease payments under the operating lease agreement:

Year	Lease Commitment
2009	$108,387
2010	$130,500
2011	$135,000
2012	$139,200
2013	$143,400

The Company records rent on a straight line basis over the life of the lease in accordance with FTB 85-3.

Rent expense for the six months ending June 30, 2008 and June 30, 2007 was $62,007 and $52,380, 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.

NOTE 5 - SEGMENT REPORTING

Segment reporting by business unit follows:

____________________

^aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation.

^bIncludes World Commerce Network, LLC. a non-operating, discontinued subsidiary.

12

Pacific WebWorks, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2008

(Unaudited)

NOTE 5 - SEGMENT REPORTING - CONTINUED

^{-____________________________}

^aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation.

^bIncludes World Commerce Network, LLC. a non-operating, discontinued subsidiary.

Segment reporting by business unit follows:

__________________________

^aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation.

^bIncludes World Commerce Network, LLC. a non-operating, discontinued subsidiary.

_____________

^aAmounts include all intercompany receivables, payables, revenues and expenses prior to elimination for consolidation.

^bIncludes World Commerce Network, LLC. a non-operating, discontinued subsidiary.

13

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.  We also derive limited revenues for services related to web site design, training, education and consulting.  

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.  We formed this company to help facilitate our international sales and merchant account requirements.

During the second quarter of 2008 we made dramatic strides in securing our long term ability to collect and process recurring credit card based revenues.  We initiated processing our collections through a reseller agreement with Digital River and its affiliates entered into in October of 2007.  The agreement became effective once certain engineering was completed during the second quarter of 2008.

Additionally, we made significant progress in our efforts to curtail the massive amount of Internet fraud being perpetuated upon online producers and marketers such as Pacific WebWorks.  Our technical team has developed a series of analytical tools which coupled with direct calls by our fraud department has reduced our incidence of fraud and the related costs.

We recorded decreased revenues for the second quarter of 2008 primarily related to the transition of our credit card processing, the elimination of misleading revenues related to Internet fraud (more than offset by a reduction in related expenses) and the overall downturn in the economy. We expect to see revenues recover and profits continue with the release of several new offers before the end of the year.

Challenges continue to revolve around dealing with our rapid growth, in particular as it relates to retaining sufficient credit card processing capabilities and the unreasonable and unrealistic requirements of credit card associations in respect to Internet related transactions.  We are in the process of implementing a long term solution that will ease these difficulties.

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We expect to see continued growth through 2008 and beyond.  We have established excellent relationships with online media firms throughout the United States and anticipate working closely with them to continue these results.  Our most immediate challenge is that of managing this explosive growth and communicating our progress to the financial markets.  

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

Historically we have relied upon revenues, loans, and equity transactions to fund our operations, but since the second quarter of 2007 and for the six month period ended June 30, 2008 we relied mainly upon our revenues for our cash requirements.  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.  

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 the six month period ended June 30, 2008 (the “2008 six month period”) our monthly cash outflows were primarily related to selling expenses which totaled $3,588,138 and general and administrative expenses that totaled $1,325,703.  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 recognize over the year.  We carried deferred revenue of $14,483 on our books as a current liability as of June 30, 2008.  Deferred revenue includes up-front fees received for license fees, software services and education 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 believe that we can finance our growth internally, however, we are constantly reviewing our overall capital requirements to determine in advance the need for external capital to continue to keep up with necessary technological improvements and further our business development strategies.  If needed, 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.  

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

Contractual Obligations 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 June 30, 2008, included accounts payable of $655,398 related to operating costs such as marketing and advertising expenses and professional fees.  Our accrued liabilities of $74,779 were primarily the result of payroll related liabilities, contract seller commissions offset by estimated refunds and factoring obligations.  Deferred revenues of $14,483 included up-front fees received for license fees, software services and education not yet performed or delivered.  Current liabilities from discontinued operations were $215,274 and are related to World Commerce Network, LLC.

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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 June 30, 2008, World Commerce Network’s accrued liabilities totaled $151,264 and included estimated contingent recourse obligations and attorneys fees approximating $95,000 and approximately $56,000 for estimated customer refunds.  In addition, World Commerce Network had a contingent liability of approximately $64,000 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 over 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 2007.  The following chart is a summary of our financial statements for those periods and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part I, Item 1, above.

Our net revenues increased for the 2008 six month period as compared to the six month period ended June 30, 2007 (the “2007 six month period”) as a result of our continued marketing activities.   However, net revenues decreased for the three month period ended June 30, 2008 (the “2008 second quarter”) compared to the three month period ended June 30, 2007 (the “2007 second quarter”).  As discussed above, the decrease in revenues is primarily due to the transition of our credit card processing from mid-April to mid-May of 2008, the elimination of misleading revenues related to Internet fraud perpetuated against us and the overall downturn in the economy.   Management expects revenues to recover during the next twelve months as a result of the release of several new offers before the end of the year.

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.

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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 the 2008 interim periods compared to 2007 interim periods due to the reclassification of certain costs as selling expense.  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 2008 six month period compared to 2007 six month period primarily due to increases in selling expenses and general and administrative expense.  However, total operating expense decreased in the 2008 second quarter when compared to the 2007 second quarter due to decreases in selling expenses.  Selling expenses include advertising expenses, seminar expenses, commissions and personnel expenses for sales and marketing.  Selling expenses increased for the 2008 six month period primarily due to increased costs related to our online marketing programs.  Selling expenses decreased in the 2008 second quarter compared to the 2007 second quarter primarily due to decreased marketing efforts during the transition of our credit card processing.

General and administrative expenses include personnel expenses for executive, finance, and internal support personnel.  In addition, general and administrative expenses include fees for bad debt costs, professional legal and accounting services, insurance, office space, banking and merchant fees, and other overhead-related costs.  General and administrative expenses increased in the 2008 interim periods when compared to the 2007 interim periods.  These increases were 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 the next twelve months.

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 remained relatively stable for the 2008 and 2007 six month periods, but decreased slightly for the 2008 second quarter compared to the 2007 second quarter.  

Total other income for the 2008 six month period included interest income earned on certificates of deposit and miscellaneous income.  Whereas, total other income for the 2008 second quarter was only from other miscellaneous income including interest on a money market account which replaced our certificates of deposit.  Total other income for the 2007 six month period and second quarter included interest income earned on certificates of deposit and the recovery of a previously booked expense; offset by interest expense related to a loan payable.

Due to increases in revenues we recorded net income for both the 2008 and 2007 interim periods.

Balance Sheet - the following chart is a summary of our balance sheet.

SUMMARY BALANCE SHEET COMPARISON
	Six month period ended		Year ended
	June 30, 2008		Dec. 31, 2007
Cash and cash equivalents	$            714,430		$            891,062
Total current assets	1,448,911		1,421,689
Total assets	4,590,210		4,465,572
Total current liabilities	959,934		1,125,973
Total liabilities	959,934		1,125,973
Accumulated deficit	(12,895,073)		(13,173,104)
Total stockholders’ equity	$        3,630,276		$        3,339,599

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Total assets increased slightly at June 30, 2008 as compared to December 31, 2007 primarily as a result of an increase in receivables.  At June 30, 2008 total liabilities decreased compared to the 2007 year end primarily as a result of decreases in accounts payable related to our online marketing budget.  Our accumulated deficit decreased at June 30, 2008 as a result of posting net income for the 2008 six month period.

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.

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 receivable and the corresponding allowance for doubtful accounts are reviewed for collectability by management quarterly and uncollectible accounts receivable are written off.

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

The estimate of implied fair value of goodwill may require independent valuations of certain internally generated and unrecognized intangible assets such as our paying monthly gateway portfolio, software and technology and trademarks.  If the carrying amount of our goodwill exceeds the implied fair value of that goodwill, an impairment loss would be recognized in an amount equal to the excess.  The fair value of Intellipay is estimated using both cash flow information from internal budgets and multiples of revenue.  In the event that an impairment indicator arises prior to our annual impairment test of goodwill, we will provide a full test relative to the indicator in the period that the indicator is present.  We performed a goodwill impairment test during 2007 and concluded that was no impairment indicators of good will.

Contingent liabilities - Material estimates for contingent liabilities include 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 June 30, 2008.  Any judgments that may be received by us for pending or threatened litigation related to discontinued operations may not have a direct affect on our assets as management does not intend to satisfy such claims with the assets of our operating companies.  Management believes that all amounts estimated and recorded as contingent liabilities approximate the amount of liabilities that could be owed to parties in the form of settlement or in a judgment.  We have had no communication 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.

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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 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.

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, 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 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 based on the criteria set forth in “Internal Control - Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  Management determined that there were no changes made in our internal control over financial reporting during the second quarter of our 2008 fiscal year that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1A.  RISK FACTORS

We may be unable to maintain profitability and could incur future losses.

We recorded net income from continuing operations for the 2008 six month period and the year ended December 31, 2007, We anticipate revenue from operations and, if needed, equity transactions will fund our growth and operations for the next twelve months; however, we cannot assure you that we will be able to maintain profitability.  The downturn in the United States economy may lead to future losses.

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

Based on our current growth plan we believe we can provide financing from internally generated sources necessary to remain competitive in our market.  However, we may need to raise external capital and 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 could be affected by 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.

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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.

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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.

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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

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in use of the Internet generally or in our industry and could impose additional burdens on companies conducting business online, which could, in turn, decrease the demand for our services, increase our cost of doing business.  The laws governing the Internet remain largely unsettled, even in areas where legislation has been enacted.  It may take years to determine whether and how existing laws, such as those governing intellectual property, privacy, libel, and taxation, apply to the Internet.  In addition, the growth and development of the market for electronic commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad, that may impose additional burdens on companies conducting business via the Internet.

Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could lead to loss of investor confidence in our reported financial information.

If we fail to achieve and maintain the adequacy of our internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act (“Section 404").   Effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud.  If we cannot provide reliable financial reports or prevent fraud, then our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.  

Pursuant to Section 404, our annual report for the year ended December 31, 2007 required a report by our management on the effectiveness of our internal control over financial reporting.  In our annual report for the year ended December 31, 2009 we will be required to provide an attestation from our independent registered public accounting firm as to the effectiveness of our internal control over financial reporting.  We cannot assure you as to our independent registered public accounting firm’s conclusions at December 31, 2009 with respect to the effectiveness of our internal control over financial reporting and there is a risk that our independent registered public accounting firm will not be able to conclude at December 31, 2009 that our internal controls over financial reporting are effective as required by Section 404.

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 No. 3.1 for Form 10-Q filed

November 13, 2001)

3.2

Amended Bylaws of Pacific WebWorks, Inc. (Incorporated by reference to exhibit No. 3.2 for Form 10, as

amended, file No. 0-26731, filed July 16, 1999.)

10.1

Service Agreement between Pacific WebWorks and Verizon Business Network Services, Inc., dated

September 30, 2007 (Incorporated by reference to exhibit 10.1 for Form 10-K filed March 31, 2008)

10.2

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)

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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, 2008
By: /s/ Kenneth W. Bell        Kenneth W. Bell        Chief Executive Officer, Treasurer,        Principal Financial Officer,        and Chairman of the Board	Date: August 13, 2008
By: /s/ R. Brett Bell         R. Brett Bell         Secretary and Controller	Date: August 13, 2008

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