PACIFIC WEBWORKS INC – 10-K/A – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

Pacific WebWorks enjoyed dramatic growth during 2009 and this growth was related largely to the upgrading of our marketing channels and the migration of our marketing towards a greater emphasis on the viability of our software products as a revenue generating tool, including the ability to use our tools in connection with the major retail sites. However, this growth led to some abuses in our affiliate marketing system and management took actions to curtail these abuses in early 2010. In November 2010 management announced that we would no longer expose the Company to the risks associated with using the affiliate system to market our products. This has, and will continue to result in a significant decline in our revenues. Consistent with this reduction in revenues, management has taken steps to reduce our overhead expense.

The fourth quarter of 2010 was primarily devoted to addressing items related to our ongoing legal issues as well as initiating discussions with a number of parties concerning merger, acquisition, joint venture or partnerships to pursue a wide variety of options for the future. As announced earlier in 2010 the Company is seeking alternative means to market our Visual WebTools™ product while at the same time examining other avenues through which the Company might profitably employ our existing resources.

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During the interim period from December 3, 2010 through October 2011 we trimmed our staffing significantly and identified and hired the personnel necessary to implement our new business model. Our goal is to find synergistic opportunities, but we will not limit ourselves if other areas of interest develop. We formed and activated World Commerce Network LLC and funded these subsidiaries for the purpose of seeking out investment opportunities in other businesses. As of August 2011 the Company has invested an aggregate of $1,400,000 in other businesses directly or through our subsidiaries (See "Liquidity and Capital Resources," below).

The Company continues to expend time and money to defend itself in the legal actions brought against the Company during the past two years. We anticipate that the legal actions will continue through 2011 and possibly beyond. In an effort to end the litigation, motions to dismiss the legal actions in the various jurisdictions have been filed (See Part I, Item 3, above).

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 appetites for technology products. These challenges could pose a threat to our success.

Liquidity and Capital Resources

We have relied primarily on revenues to fund operations for the past two years.

We expect to continue to generate positive cash flows through further development of our business and distribution channels and investments in other businesses. We plan to address only the liabilities of our operating subsidiaries with our current cash balances and cash inflows. Of course cash outflows can exceed monthly cash inflows based on timing differences between marketing campaigns and sales and returns on investment.

Our net revenues for 2010 decreased significantly as compared to 2009 due to the change in our marketing strategy. However, our cash and cash equivalents increased at December 31, 2010 due to proceeds from loans and expense management. In January 2010 we obtained a loan of $1,000,000 to supplement our cash resources. The $1,000,000 promissory note is discussed in more detail below (See "Commitments and Contingent Liabilities"). To conserve our cash, in August 2010 we issued an aggregate of 3,440,000 shares of common stock to pay for services valued at $411,560. We intend to use our cash for operating capital and we believe that we will be able to fund our operations with our revenues and available cash for the next twelve months.

Maintaining sufficient merchant account processing capabilities will continue to be a factor in our overall performance. We work diligently with our existing merchant account providers and continually search for new merchant account providers in order to manage this risk.

During 2010 we relied on equity offerings to pay for additional services and funding and we anticipate that we will likely use private placements of our common stock in the future. However, we currently have only 286,105 common shares remaining and we will need to increase our authorized common stock to conduct any future offerings. Accordingly, management anticipates that the Company will conduct a stockholder's meeting within the next twelve months to amend the Company's articles of incorporation to increase the authorized common stock. In any future offering, the purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We likely will rely on exemptions from the registration requirements provided by federal and state securities laws. 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.

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We believe that we will be able to sustain our operations with existing cash and future cash flows during the next twelve to twenty-four months and possibly beyond. Should we need to raise money in the future we believe funding may be obtained through additional debt arrangements in addition to our 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.

   2011 Investments   

Subsequent to the year ended December 31, 2010, in addition to our web site business the Company has invested in other businesses directly or through our subsidiaries. The Company expects to see returns on these investments within the next six to twelve months.

On April 21, 2011, the Company invested $250,000 in common units of Middlebury Ventures II, LLC. The funds are to be used by Middlebury Ventures II, LLC for the acquisition of Fisker Holdings, Inc. Series C-1 Shares pursuant to the Fisker Series C-1 transaction documents. We believe this investment holds the possibility of significant return in the future as Fisker produces high quality environment friendly vehicles and competes well in the luxury hybrid-electric vehicle market.

On August 2, 2011, the Company acquired Thrifty Seeker, LLC, a Utah limited liability company, for $18,000. Thrifty Seeker, LLC competes in the daily deals space. We foresee opportunity in the daily deals space and believe that Thrifty Seeker can be grown into a strong competitor by leveraging our connections and experience in Internet marketing, without incurring the risks previously experienced in Internet marketing.

On July 28, 2011, Headlamp Ventures established a revolving line of credit facility and issued an initial $400,000 promissory note to Bsquare Red, LLC to be used as working capital in its internet marketing business. The note carries a 15% effective annual rate of interest. On October 3, 2011, the revolving line of credit and promissory note was amended to increase the amount to $500,000.

(See Item 13, below.) We are pleased with the rate of return on this financial instrument and have also ensured that there are satisfactory provisions securing the note.

On August 15, 2011, Headlamp Ventures established a revolving line of credit facility and issued an initial $400,000 promissory note to Grupo Zapata Arce, a division of Metales y Minerales S.A. De C.V., a corporation organized under the laws of Mexico, for use in its iron ore exporting business. Interest shall be charged on amounts outstanding in the form of a fee of $3.00 per metric ton of iron ore purchased with proceeds of the note. On September 20, 2011, Grupo Zapata Arce Division Metales y Minerals S.A. de C.V., LLC was added as a party to the revolving line of credit and promissory note originally established on August 15, 2011 for Grupo Zapata Arce.Grupo Zapata Arce is positioned in an industry experiencing consistently strong demand that is especially driven by emerging markets around the world. We believe that as the company continues to establish its operations it will produce strong revenue growth and income.

On August 3, 2011, World Commerce Network issued a promissory note in the amount of $250,000 to Bryan Development, LLC for use as working capital in its business investment activities. The note carries a 5% annual interest rate and can be converted, in whole or in part at the election of the Company, into common stock shares owned or held by Bryan Development, LLC. We are optimistic about the conversion possibilities associated with this note and continue to work with the borrower to identify promising investment opportunities.

On October 19, 2011, the Company's Board of Directors resolved to authorize the investment of up to $1,200,000 in Rsignia, Inc.Rsignia, Inc. is a leading provider of cyber security solutions and services including detection, mitigation, countermeasures and forensics.

On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $100,000 in Payroll Innovations, LLC, a payroll debit card provider servicing small to mid-sized employers. For value received, the Company holds a 25% ownership position in Payroll Innovations, LLC.

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On November 11, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $150,000 in PickYourPayday.com, LLC, an online payroll advance business servicing small to mid-sized employers. For value received, the Company holds a 25% ownership position in PickYourPayday.com, LLC.

On December 2, 2011, the Company, through its Headlamp Ventures, LLC subsidiary, invested $10,000 in Asher, LLC, a business specializing in design and production of gloves and apparel sold in the athletics industry. For value received, Headlamp Ventures holds a 51% ownership position in Asher, LLC.

The Company is currently in discussions on two additional promising investment opportunities.

Commitments and Contingencies

Current Liabilities: Our total current liabilities at December 31, 2010 included accounts payable and accrued liabilities. Accounts payable of $142,359 was related to operating costs such as marketing and advertising expenses and professional fees. Our accrued liabilities of $215,970 were primarily the result of payroll related liabilities and income tax payable, offset by estimated refunds and receivables.

The Company is involved in several legal actions, but as of December 31, 2010, management has not recorded any contingent liability because management believes that we will be successful in those litigations.

For the years ended December 31, 2009 and 2010, we recorded current liabilities from discontinued operations of $101,799 related to World Commerce's customer leases. The operations of World Commerce were ceased and discontinued in 2002 and there has been no active discussion with the leasing company since that time.

Promissory Note: Our long term liabilities include a promissory note in the amount of $1,000,000. On January 27, 2010, Pacific WebWorks, executed a Promissory Note Secured by a Deed of Trust with Assignment of Rents in the principal amount of $1,000,000 (the "Note"). The holder of the Note, Principal Development LLC, a Nevada limited liability company (the "Holder"), is entitled to receive the entire principal amount with all accrued interest, at 7% interest per annum, on or before January 27, 2012. The Note is secured by a deed of trust with assignment of rents on our principal office building and a second commercial building we own in Salt Lake City, Utah. Also, the Holder is entitled to collect rents and lease amounts, if any, from the buildings upon any default and may at its option elect to foreclose on the properties.

The Note also provides that we may make payments prior to the due date and that any payment will be applied first to the reduction of interest and the remaining balance to the outstanding principal. In the event we fail to pay any amount when due, then the amount owing will become immediately due and a default interest rate of 15% shall apply to the principal amount.

Results of Operations

The following discussions are based on the consolidated financial statements of Pacific WebWorks, Intellipay, TradeWorks Marketing, FundWorks, World Commerce, Promontory Marketing and a majority owned subsidiary, PWI, LLC. 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 II, Item 8, below.

On September 12, 2011 the Chief Financial Officer of Pacific WebWorks, Inc. concluded that the previously issued consolidated financial statements for the fiscal years ended December 31, 2009 and the interim periods for 2010 should no longer be relied upon because the consolidated financial statements for the year ended December 31, 2009 required a series of material adjustments. In the course of the audit of our consolidated financial statements by our new independent registered public accounting firm, a series of adjustments were identified for the year ended December 31, 2009 (See Note 11 to the financial statements). Accordingly, these adjustments resulted in material changes to our consolidated financial statements for that year and the subsequent interim periods related primarily to the misstatement of accounts receivable and payable, prepaid expenses, deferred revenue and related revenue, expenses and the erroneous recognition of impairment in 2009.

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                                              Year ended December 31,               SUMMARY OF BALANCE SHEET         2009           2010                                             (Restated)               Cash and cash equivalents    $  1,490,769   $  3,199,560               Total current assets            3,201,824      5,630,114               Total assets                   10,618,508     11,320,152               Total current liabilities       1,571,171        627,500               Total liabilities               1,571,171      1,627,500               Accumulated deficit           (8,473,588)    (8,426,777)               Total stockholders' equity   $  9,047,337    $ 9,692,652   

Total assets increased at December 31, 2010 as compared to December 31, 2009 primarily as a result of an increase in cash and cash equivalents and increases in receivables related to merchant account reserve holdings.

At December 31, 2010 total current liabilities decreased compared to 2009 primarily as a result of decreased accounts payable that were converted into equity in August of 2010 and non-recognition of the discontinued operations of World Commerce. Long-term liabilities increased due to notes payable related to the promissory note for $1,000,000. Our accumulated deficit decreased at December 31, 2010 as a result of posting a profit for the year.

                                                      Year ended December 31, SUMMARY OF OPERATING RESULTS                        2009              2010                                                  (Restated) Revenues, net                                   $  29,459,136      $  8,568,635 Cost of sales                                         221,043           352,508 Gross profit                                       29,238,093         8,216,127 Total operating expenses                           25,846,117         7,711,522

Income from continuing operations                   3,391,976           504,605 Total other income (expense)                          420,110          (49,418) Income tax provision (benefit)                    (1,244,502)           395,000 Net income                                      $   4,954,676       $    46,811

Basic net income per share from continuing $ 0.11 $ 0.00 operations

We recognize revenue from hosting, gateway, and maintenance fees, software, access and licensing fees, the sale of merchant accounts and custom website design work. Revenues from up-front fees from customers are

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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.

Our net revenues decreased significantly for 2010 as a result of our shift in marketing practice. During 2009 we relied upon an affiliate marketing approach, but due to abuses in that system we decided to no longer expose our operations to the risks associated with affiliate marketing and we are focusing on developing alternative means of marketing. Management anticipates that revenues will continue to decline at a slower rate as we employ lower risk methods for marketing our products and work toward returns on the Company's acquisitions and investments.

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. Cost of sales increased in 2010 as compared to 2009 because of the costs related to new marketing strategies used to replace the affiliate marketing strategy. Cost of sales was 4.11% of net revenues for 2010 as compared to 0.75% of net revenues for 2009. Management anticipates that cost of sales will remain higher in the short term as we continue our new marketing strategies.

Total operating expenses decreased for 2010 compared to 2009 primarily due to decreases in selling expenses. Selling expenses include advertising expense, commissions and personnel expenses for sales and marketing and these expenses were significantly higher in 2009 due to higher sales and commissions related to the affiliate marketing approach.

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 decreased for 2010 compared to 2009 because the number of customer accounts were higher in 2009 and consistent with the higher number of customer accounts we relied on more staff to provide services for the new customers. In 2010 we have reduced our staff from 24 to 7 persons and this resulted in lower general and administrative expense.

Other expense of $49,418 recorded in 2010 was primarily related to interest expense. Other income of $420,110 recorded in 2009 was primarily related to the sale of customer portfolios to support cash flow requirements.

Net income before income taxes for 2010 was $455,187. Income tax provision for 2010 was $395,000 resulting in net income of $46,811.

Off-balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources and would be considered material to investors.

   Critical Accounting Policies   

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 trade receivables and collections, goodwill, contingent liabilities, and valuing stock option compensation.

Trade receivables and collections - We apply a range of collection techniques to manage delinquent accounts.

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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.

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.

We receive revenue for hosting, gateway, and maintenance fees, software access and licensing fees. Revenues from up-front fees are deferred and recognized over the period in which services are performed, ranging from one month 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.

Goodwill - Goodwill related to Intellipay is assessed annually for impairment by comparing the fair value 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 an impairment loss is recognized equal to the excess of book value to estimated fair value. These assessments for 2009 resulted in recognition of impairment of $446,939. However, as a result of additional assessments conducted in 2010, management determined that the impairment recognized in 2009 was in error. The prior 2009 assessment was conducted by applying the full intended annual discount rate to projected cash flows on a monthly basis, rather than an annual discount rate factored into a monthly discount rate. When the appropriate monthly discount rate is applied to projected cash flows on a monthly basis, the estimated fair value of Intellipay exceeds the book value of goodwill and impairment is not required. The impairment test for 2010 also resulted in an estimated fair value in excess of the book value of goodwill and no impairment was required.

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.

Contingent liabilities - Material estimates for contingent liabilities include approximately $0 for our operating companies. From a liquidity standpoint, any settlement or judgment received by the Company from pending or threatened litigation may have a direct effect on our cash balances at December 31, 2010.

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 FASB ASC 480-10, which requires the Company to use the Black-Scholes pricing model to

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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).