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, 2003, the results of operations for the three months and six months ended June 30, 2003 and June 30, 2002, and the cash flows for the six months ended June 30, 2003 and June 30, 2002 are included. Operating results for the three-month and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

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, 2002 which are contained in the Company’s Annual Report on Form 10-KSB filed with the Securities and Exchange Commission (the "SEC") on March 31, 2003, 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 reflect 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.

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 the major portion of its revenue in the year ended December 31, 2002. In July 2002 Net Silicon, Inc. ceased producing products used by NRCJ. During the remainder of 2002 the sales of licenses of the subsidiary decreased to a point where operations became unprofitable. On January 31, 2003 the Company sold the operating assets and certain liabilities of the NRCJ distribution business to Network Technology, Inc., a new company formed by the former employees of NRCJ, for 1.0 million Japanese Yen (US $8,400). NRCJ will continue to receive royalty income from former NRCJ customers. The Company is accounting for this transaction as a discontinued operation in 2003.

The Company has used the services of Merdinger, Fruchter, Rosen & Co. ("MFRC") as its independent accountant since 1996. In January 2003 the Company was informed by MRFC that it was exiting the business of auditing publicly traded companies. The Company has selected Skeehan and Company as its new auditor effective February 27, 2003. The Company’s Board of Directors recommended and approved the change in the Company’s certifying accountants.

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 31, 2003, 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.

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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

Net revenue by principal geographic area was 100% attributable to Japan and Asia for the three and six  months ended June 30, 2003 and 2002.

For the three months ended June 30, 2003 royalty revenues increased 27% to $50,714 from $39,998 for the three months ended June 30, 2002. Revenue for the three months ended June 30, 2003 consists exclusively of royalty revenue since the distribution portion of the business was sold in January 2003.

There is no cost associated with receipt of the royalty revenue in either the three months ended June 30, 2003 or the three months ended June 30, 2002.

Selling, general and administrative expense was $39,370 for the three months ended June 30, 2003 compared to $7,969 for the three months ended June 30, 2002. The amounts in both periods reflect the continuing expenses of a corporate office, which is associated with seeking a reverse merger or other financial transaction for the Company and expenses for legal and accounting fees in processing the royalty receipts in Japan.

Depreciation and amortization was $0 in the three months ended June 30, 2003 and $800 for the three months ended June 30, 2002 principally related to fixed assets in our Japanese office which was sold in January 2003.

The Company had no other income or expense items in either the three months ended June 30, 2003 or the three months ended June 30, 2002.

Commencing in 1995 the Company elected to be treated as a subchapter S corporation. Through 1998 all federal tax liabilities were recognized at the individual stockholder level. In February 1999 the Company terminated the S election and became subject to taxation at the corporate level. Had the Company been subject to taxation as a C corporation in 1998, it would have received a pro forma tax benefit of $1,099. For the three months ended June 30, 2003 the Company had no income tax liability.

For the six months ended June 30, 2003 royalty revenues increased 28% to $97,558 from $76,468 for the six months ended June 30, 2002. Revenue for the six months ended June 30, 2003 consists exclusively of royalty revenue since the distribution portion of the business was sold in January 2003 and is being classified as a discontinued operation.

There is no cost associated with receipt of the royalty revenue in either the six months ended June 30, 2003 or the six months ended June 30, 2002.

Selling, general and administrative expense was $80,354 for the six months ended June 30, 2003 compared to $61,901 for the six months ended June 30, 2002. The amounts in both periods reflect the continuing expenses of a corporate office, which is associated with seeking a reverse merger or other financial transaction for the Company and expenses for legal and accounting fees in processing the royalty receipts in Japan.

Depreciation and amortization was $0 in the six months ended June 30, 2003 and $1,600 for the six months ended June 30, 2002 principally related to fixed assets in our Japanese office which was sold in January 2003.

During the six months ended June 30, 2003 the Company had $4,627 in other income, net of depreciation of $449, representing the gain on sale of assets in the closing of the Japanese office. The Company had no activity in the six months ended June 30, 2002.

Commencing in 1995 the Company elected to be treated as a subchapter S corporation. Through 1998 all federal tax liabilities were recognized at the individual stockholder level. In February 1999 the Company terminated the S election and became subject to taxation at the corporate level. Had the Company been subject to taxation as a C corporation in 1998, it would have received a pro forma tax benefit of $1,099. For the six months ended June 30, 2003 the Company had no income tax liability.

At June 30, 2003 and December 31, 2002 the Company had working capital of $12,629 and $(9,191) and cash and cash equivalents of $106,611 and $98,901.

The Company generated $14,872 in cash flow from operating activities in the six months ended June 30, 2003 compared to $(36,819) in the six months ended June 30, 2002. The principal reasons for the decrease in use of cash of $51,691 was the result of an decrease of $17,356 in accounts receivable, a write off of fixed assets of $4,242, a recovery of a security deposit of 6,116, a decrease of $14,769 in accounts payable and a decrease of $36,656 primarily associated with the operation of the Japanese distribution activities which was sold in January 2003 and is classified as a discontinued operation. Cash generated or used in operating activities principally reflects the gain or loss from operations and the related changes in working capital components.

There were no investing or financing activities in either the six months ended June 30, 2003. or the six months ended June 30, 2002.

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 received a Going Concern opinion from our auditors on our financial statements for the years ended December 31, 2002 and December 31, 2001. 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 $1,306,954 and $37,093 for 2001 and 2002. We also have an accumulated deficit of $6,402,763 and a stockholders' equity of $1,167 as of December 31, 2002. We can provide no assurance we will be profitable in the future and if we do not become profitable our business could be adversely affected.

The NASDAQ National/Small Cap Market delisted our stock at the opening of business on October 9, 2001. The securities were removed from NASDAQ and subsequent to that date the PASW Common Stock traded on the OTC Bulletin Board Market (OTCBB) as were the Warrants (PASWW) until their expiration on November 30, 2002. While we still have market makers for our securities there can be no assurance we can continue to rely on our current market makers and that the price and trading volume of our securities could not be materially affected.

Our NRCJ subsidiary is a distributor for products supplied by NetSilicon, 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, 2002 and 2001. In July 2002 Net Silicon, Inc. ceased producing products used by NRCJ. During the remainder of 2002 the sales of licenses of the subsidiary decreased to a point where operations became unprofitable. The operations were sold in January 2003. There is no assurance that the remaining royalty income is sufficient to allow the Company to continue operations.

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 royalties of 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.

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.

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

A public market for our common stock 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.

Within the 90 days prior to the date of this report, PASW carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in its periodic Securities and Exchange Commission ("SEC") filings is recorded, processed and reported within the time periods specified in the SEC’s rules and forms. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic SEC filings.

Changes in Internal Controls

There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation

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.