The accompanying unaudited consolidated financial statements of PASW, INC. ("PASW", or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of only normal recurring accruals) considered necessary for a fair presentation of the Company’s financial position at June 30, 2002, the results of operations for the three months and six months ended June 30, 2002 and June 30, 2001, and the cash flows for the six months ended June 30, 2002 and June 30, 2001 are included. Operating results for the three-month and six month periods ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

The information contained in this Form 10-QSB should be read in conjunction with audited financial statements and related notes for the year ended December 31, 2001 which are contained in the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission (the "SEC") on March 26 2002 and the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on July 29, 1999 (File 333-75137).

The Company adopted SFAS No. 128, "Earnings Per Share", during 1998. SFAS No. 128 requires presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts, such as stock options, to issue common stock were exercised or converted into common stock. All prior period weighted average and per share information has been restated in accordance with SFAS No. 128.

Except for historical information contained herein, the statements in this report (including without limitation, statements indicating that the Company "expects," "estimates," anticipates," or "believes" and all other statements concerning future financial results, product offerings, proposed acquisitions or combinations or other events that have not yet occurred) are forward-looking statements that are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended.

Forward-looking statements involve known and unknown factors, risks and uncertainties, which may cause the Company’s actual results in future periods to differ materially from forecasted results. Those factors, risks and uncertainties include, but are not limited to; the consummation of possible acquisitions or combinations; and the Company’s ability to integrate acquired or combined operations with its existing business and otherwise manage growth; and the Company’s ability to generate or obtain additional capital resources to fund its operations and growth.

Additional information on these and other risk factors are included in the "Factors That May Affect Future Results" section in the Company’s Annual Report on Form 10-KSB filed with the SEC on March 26, 2002, Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s analysis, judgement, belief and expectations only as of the date hereof. PASW undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof.

PASW, Inc., formerly Pacific Softworks, Inc., incorporated in California in November 1992, has historically developed and licensed Internet and Web related software and software development tools that enable communications, based on a set of rules known as protocols. The Company’s products were embedded into systems and developed or manufactured by others. In August 2000, the Company sold all of the assets of its Internet and Web operations. Since that time, the Company’s operations, consisting of sales of software and licenses, have been conducted principally through an administrative office in Northern California and a sales office in Japan.

The Company operates in one business segment. The Company’s fiscal year ends on December 31

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The following table sets forth, for the periods indicated, the percentage relationship to net revenue of certain items in the consolidated statements of operations and comprehensive income

The following table sets forth, for the periods indicated, the percentage of net revenue by principal geographic area to total revenue:

For the three months ended June 30, 2002 revenues decreased 71% to $84,087 from $288,289 for the three months ended June 30, 2001. Sales of licenses decreased 83% for the three months ended June 30, 2002 due the cessation of all revenue producing activities in the Company except sales activity in Japan which accounted for 100% of license and royalty sales.

The cost of revenue for the three months ended June 30, 2002 was $21,429 or 25% of sales compared to $187,583 or 65% of sales for the three months ended June 30, 2001. The decrease in cost of sales reflects the impact of the mix of higher royalty fees versus license income in our Japanese subsidiary.

Selling, general and administrative expense was $72,298 for the three months ended June 30, 2002 compared to $144,855 for the three months ended June 30, 2001. The decrease in 2002 reflects the closure of principally all operations except those associated with our Japanese subsidiary and seeking a reverse merger or other financial transactions for the Company.

.Depreciation and amortization

Depreciation and amortization was $800 in the three months ended June 30, 2002 compared to $0 for the three months ended June 30, 2001 principally created by the continuing operations of our Japanese subsidiary.

During the three months ended June 30, 2002 the Company had $0 other income and expenses compared to a loss on sale of securities of $6,725 and a cancellation of debt of $4,500 in the three months ended June 30, 2001.

For the six months ended June 30, 2002 revenues decreased 44% to $242,993 from $436,662 for the six months ended June 30, 2001. License sales for the six months ended June 30, 2002 decreased 55% and royalty income increased 16% due to lower license sales in the weak Japanese economy..

The cost of revenue for the six months ended June 30, 2002 was $84,664 or 35% of sales compared to $246,150 or 56% of sales for the six months ended June 30, 2001. The decrease in cost of sales reflects change in higher royalty fees versus license sales during the period.

Selling, general and administrative expense was $179,753 for the six months ended June 30, 2002 compared to $139,676 for the six months ended June 30, 2001. The level of expenses in both years reflects the closure of all operations in the Company except continuing operations of our Japanese subsidiary and those expenses associated with seeking a reverse merger or other financial transactions for the Company.

Depreciation and amortization was $1,600 in the six months ended June 30, 2002 compared to $0 for the six months ended June 30, 2001 principally in our Japanese subsidiary and after reflecting the sale of assets to another company and the write down of the Company's remaining operating assets at the end of December 2000.

During the six months ended June 30, 2002 the Company had $0 other income and expenses. During the six months ended June 30, 2001 the company had a net loss on the sale of marketable securities of $31,333 and income of $4,500 through the cancellation of certain debts.

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At June 30, 2002 and December 31, 2001 the Company had working capital of $3,733 and $39,100 and cash and cash equivalents of $120,723 and $152,148.

The Company used $17,482 in cash flow from operating activities in the six months ended June 30, 2002 compared to using $334,448 in the six months ended June 30, 2001. The decrease in use of cash of $316,899 was the result of an decrease of $87,856 in accounts receivable, a decrease in accounts payable and accrued expenses of $513,005, a decrease of $30,506 in prepaid expenses and a decrease of $31,333 on losses on marketable securities. Cash generated or used in operating activities principally reflects the gain or loss from operations and the related changes in working capital components.

The Company had no investing activities in the six months ended June 30, 2002. In the six months ended June 30, 2001 the Company recorded the disposition of fixed assets of $699, the sale of certain marketable securities for $300,500 and the purchase of other securities for $136,500.

The Company had no financing activities for the six months ended June 30, 2002 and the six months ended June 30, 2001.

This report, including Management’s Discussion and Analysis or Plan of Operation, contains forward-looking statements and other prospective information relating to future events. These forward-looking statements and other information are subject to certain risks and uncertainties that could cause results to differ materially from historical or anticipated results, including the following:

We have received a Going Concern opinion from our auditors on our financial statements for the years ended December 31, 2001 and December 31, 2000. Those statements indicate that we have reported losses for our last two years and if we do not become profitable our business could be adversely affected.

We reported losses of $2,613,101 and $1,306,954 for the years ending December 31, 2000 and 2001. We also have an accumulated deficit of $ 6,365,670 and stockholders' equity of $50,590 as of December 31, 2001. We can provide no assurance that we will be profitable in the future and if we do not become profitable our business could be adversely affected.

We have limited resources available to continue operations unless a successful transaction is completed with a merger partner or that additional funding can be obtained from outside sources.

At the present time we have limited resources available to continue operations other than maintaining day-to-day activities without any capabilities for expansion. The revenue received from our NRCJ subsidiary is sufficient to handle only maintenance administrative operations for the Company. While efforts are in process to seek a merger partner or other means of financing there is no assurance that any means can be obtained to permit the Company to resume any form of operations which could expand the business.

Because our operating subsidiary depends on a small number of large orders, the loss or deferral of orders may have a negative impact on revenue.

NRCJ is our only operating subsidiary and as such provides the majority of the funds required to operate the Company. Although none of its customers has accounted for 10% or more of total revenue in any fiscal year, a significant portion of software license revenue in each quarter is derived from a small number of relatively large orders. While we believe that the loss of any particular customer is not likely to have a material adverse effect on our business, our operating results could be materially adversely affected if our operating subsidiaries were unable to complete one or more substantial license sales in any future period.

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Our future results depend heavily on continued market acceptance of our operating subsidiary's products in existing and new markets. Our NRCJ subsidiary is a distributor for products supplied by Net Silicon, Inc. Revenue from licenses of the suite of Internet and Web products and sales of services accounted for substantially all of its revenue in the years ended December 31, 2000 and 2001. There is no assurance that Net Silicon will continue to fund the research required to keep our subsidiary supplied with state of the art products, that Net Silicon will continue the Distribution Agreement with NRCJ beyond its current termination date or that our subsidiary will have sufficient funds to properly advertise and market their product lines as an independent distributor. Any of these factors could have a material effect on our continued operations and financial results.

Our officers, directors and independently the majority stockholder beneficially own approximately 60% of our outstanding common stock. These parties will be able to exercise control over all matters requiring stockholder approval and other investors will have minimal influence over the election of directors or other stockholder actions. As a result, our officers, directors and independently the majority stockholder could approve or cause the Company to take actions of which you disapprove or that are contrary to your interests.

Issuance of our authorized preferred stock could discourage a change in control, could reduce the market price of our common stock and could result in the holders of preferred stock being granted voting rights that are superior to those of the holders of common stock.

The Company is authorized to issue preferred stock without obtaining the consent or approval of stockholders. The issuance of preferred stock could have the effect of delaying, deferring, or preventing a change in control. Management also has the right to grant superior voting rights to the holders of preferred stock. Any issuance of preferred stock could materially and adversely affect the market price of the common stock and the voting rights of the holders of common stock. The issuance of preferred stock may also result in the loss of the voting control of holders of common stock to the holders of preferred stock.

You may experience dilution if we are compelled to litigate or arbitrate claims that have been asserted by Golenberg & Co. for the right to purchase 10% of the Company.

In April 1999 we were notified that a merchant banker, Golenberg & Co., has asserted rights under a June 1998 letter agreement to purchase 10% of our then outstanding common stock for $400,000. In June 1999 counsel for Golenberg & Co. reiterated this demand and advised us that these claims were being evaluated for possible legal action. Investors could be significantly diluted if Golenberg & Co. successfully brings a lawsuit against us.

Trading in our common stock and warrants may be limited and could negatively affect the ability to sell your securities.

A public market for our common stock and our warrants has only existed since July 29, 1999, the date of our initial public offering. We do not know how liquid the market for our stock and warrants will remain and if the market becomes illiquid, it may negatively affect your ability to resell your securities.

In April 1999 the Company was notified that a merchant banker, Golenberg & Co., had asserted rights under a June 1998 letter agreement to purchase 10% of the then outstanding common stock of the Company for $400,000. In June 1999 counsel for Golenberg & Co. reiterated this demand and advised the Company that these claims were being evaluated for possible legal action. To date no action has been taken by Golenberg & Co.

The Company is not currently involved in any litigation that is expected to have a material adverse effect on the Company's business or financial position. There can be no assurance, however, that third parties will not assert infringement or other claims against the Company in the future which, regardless of the outcome, could have an adverse impact on the Company as a result of defense costs, diversion of management resources and other factors.

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.