UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549       

FORM 10-QSB

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

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

Commission file number 333-75137

PASW, INC.

(Exact name of registrant as specified in its charter)

California	77-0390628
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

9453 Alcosta Boulevard San Ramon, California	94583
(Address of principal executive offices)	(Zip Code)

(925) 828-0934

Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant   is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes (  ) No (X)                 

There were 4,997,400 shares outstanding of the registrant’s Common Stock, par value $.001 per share, as of July 10, 2006.

Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No       

PASW, INC.

	INDEX	Page No.
	PART I – FINANCIAL INFORMATION
Item l. Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets at June 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2006 and 2005	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2. Management’s Discussion and Analysis of Financial Condition and Plan of Operations		13
Item 3. Quantitative and Qualitative Disclosures About Market Risk		16
Item 4. Controls and Procedures		18
	PART II – OTHER INFORMATION
Item 1. Legal Proceedings		20
Item 2. Changes in Securities and Use of Proceeds		20
Item 3. Defaults Upon Senior Securities		20
Item 4. Submission of Matters to a Vote of Security Holders		20
Item 5. Other Information		20
Item 6. Exhibits and Reports on Form 8-K		20
Signatures		21

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PASW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2006 (unaudited)	December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$ 293,614	$ 268,271
Accounts receivable, net of allowance of $0 and $0	30,940	17,501
Total current assets	324,554	285,772
Property and equipment,   less accumulated depreciation of $1,121 and $703	2,060	1,826
Other assets	3,063	3,063
Total assets	$329,677	$290,661

See accompanying notes to condensed consolidated financial statements.

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PASW, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30, 2006 (unaudited)	December 31, 2005
LIABILITIES AND STOCKHOLDERS’EQUITY
Current liabilities:
Accounts payable and accrued expenses	$ 52,211	$ 72,311
Total current liabilities	52,211	72,311
Commitments and contingencies
Stockholders’ equity:
Preferred stock, par value $.01 per share, 10,000,000 shares authorized; no shares outstanding	-	-
Common stock, par value $.001 per share, 50,000,000 shares authorized; 4,997,400 and 4,997,400 shares issued and outstanding	4,998	4,998
Additional paid-in capital	6,398,754	6,398,754
Accumulated deficit	(6,089,506)	(6,147,083)
Cumulative adjustment for currency translation	(36,780)	(38,319)
Total stockholders’ equity	277,466	218,350
	$ 329,677	$ 290,661

See accompanying notes to condensed consolidated financial statements.

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PASW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended
	June 30, 2006	June 30, 2005
Revenue - Royalties	$ 75,968	$ 72,267
Expenses - Selling, general and administrative	33,124	42,493
Income  from operations	42,844	29,774
Income taxes	0	0
Net income	$ 42,844	$ 29,774
Net income  per common share: Basic and Diluted	$ 0.01	$ 0.00
Weighted average common stock shares outstanding Basic and Diluted	4,997,400	4,997,400

See accompanying notes to condensed consolidated financial statements.

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PASW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Three Months Ended
	June 30, 2006	June 30, 2005
Net income	$ 42,844	$ 29,774
Other comprehensive income:
Foreign currency translation adjustment	1,016	2,968
Comprehensive income	$ 43,860	$ 29,601

See accompanying notes to condensed consolidated financial statements.

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PASW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Six Months Ended
	June 30, 2006	June 30, 2005
Revenue - Royalties	$ 121,017	$ 108,979
Expenses - Selling, general and administrative	63,440	60,920
Income  from operations	57,577	48,059
Income taxes	0	0
Net income	$ 57,577	$ 48,059
Net income  per common share: Basic and Diluted	$ 0.01	$ 0.01
Weighted average common stock shares outstanding Basic and Diluted	4,997,400	4,997,400

See accompanying notes to condensed consolidated financial statements.

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PASW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

	For the Six Months Ended
	June 30, 2006	June 30, 2005
Net income	$ 57,577	$ 48,059
Other comprehensive income:
Foreign currency translation adjustment	1,278	(39,082)
Comprehensive income	$ 58,855	$ 8,977

See accompanying notes to condensed consolidated financial statements.

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PASW, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended
	June 30,  2006	June 30, 2005
Cash flows from operating activities:
Net income Depreciation	$ 57,577 418	$ 48,059 -
Adjustments to reconcile net loss to net cash used in operating activities:
(Increase) decrease in assets:
Accounts receivable	(13,439)	(9,495)
Prepaid expenses		5,463
Increase (decrease) in liabilities:
Accounts payable and accrued expenses	( 20,100)	9,337
Net cash used in operating activities	24,456	53,364
Cash flows from investing activities -  Purchase of fixed assets	(652)	-
Cash flows from financing activities	-	-
Effect of exchange rate changes on cash	1,539	(32,841
Net increase (decrease) in cash	25,343	20,523
Cash – Beginning	268,271	190,048
Cash – Ending	$ 293,614	$ 210,571
Supplemental non-cash financing activities: None See accompanying notes to condensed consolidated financial statements

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PASW, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

General

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. Results of operations for the interim periods presented are not necessarily indicative of results which may be expected for any other interim period or for the year as a whole. The information contained in this Form 10-QSB should be read in conjunction with audited financial statements and related notes for the year ended 2005 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, 2006, 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 accompanying unaudited interim financial statements include all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented.

Nature of Operations

PASW, Inc., formerly Pacific Softworks, Inc. ("We", "Ours" or "the Company"), was incorporated in California in November 1992. We developed and licensed Internet and Web related software and software development tools that enable communications, based on a set of rules known as protocols. Our products were embedded into systems and developed or manufactured by others. In August 2000, we sold all the assets of our Internet and Web operations. From January 2001 our operations, consisting of sales of software and licenses, were conducted principally through an administrative office in Northern California and a sales office of our subsidiary, National Research Corporation – Japan ("NRCJ"). In January 2003 the sales office was closed however NRCJ will continue to receive royalty income from a former NRCJ customer.

Use of Estimates

Preparing financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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Revenue Recognition

We are a licensor of software and generate revenue primarily from the one-time sales of licensed software. Generally, revenue is recognized upon shipment of the licensed software. For multiple element license arrangements, the license fee is allocated to the various elements based on fair value. When a multiple element arrangement includes rights to a post-contract customer support, the portion of the license fee allocated to each function is recognized ratably over the term of the arrangement. 

Translation of Foreign Currency

We translate foreign currency financial statements of NRCJ in accordance with SFAS 52, "Foreign Currency Translation." Assets and liabilities are translated at current exchange rates and related revenues and expenses are translated at average exchange rates in effect during the period. Resulting translation adjustments are recorded as a separate component in stockholders’ equity. Foreign currency transaction gains and losses are included in determining net income.

Stock-Based Compensation

The Company has adopted Statement of Financial Accounting Standard 123R, “Share Based Payment” (SFAS 123R) as of January 1, 2006.  SFAS 123R requires all share based compensation, including grants of stock options, to be recognized in the statement of operations as an operating expense, based on fair values.  Prior to adoption of SFAS 123R, the Company accounted  for stock-based compensation for employees in accordance with Accounting Principles Board Opinion ("APB") No. 25, “Accounting for Stock Issued to Employees” The Company has adopted the prospective method in adopting 123R, so there is no restatement of prior periods.

The Company valued the 1,202,674 warrants issued in 2001 using the Black Sholes option pricing model with the following assumptions: interest rate of 4.5%, life of 5 years, volatility of 145% and expected dividend yield of -0-%. The per warrant fair value is $0.10 and a total expense of $124,781 was recorded during 2001.

The following is a summary of stock options and warrants as of June 30, 2006:

	Average Exercise
	Shares	Price	Expires
Outstanding December 31, 2005	1,202,674	$0.25	9/20/06
Granted	-	-	-
Exercised	-	-	-
Canceled or expired	-	-	-
Outstanding, June 30, 2006	1,202,674	$0.25	9/20/06

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Earnings Per Share

SFAS No. 128, "Earnings Per Share" requires presentation of basic earnings per share ("Basic EPS") and diluted earnings per share ("Diluted EPS"). Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of outstanding common shares during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period. The computation of diluted EPS does not assume conversion, exercise or contingent exercise of securities that would have an anti-dilutive effect on losses.  The exercise of the options at a price greater than the current market would have an anti-dilutive effect.

Computation of Weighted Average Common Shares Outstanding

	Total Number of Shares	Three Months Ended June 30, 2006	Six Months Ended June 30, 2006
Outstanding shares as of January 1, 2005	4,997,400	4,997,400	4,997,400
Options available as Common Stock	1,202,674	1,202,674	1,202,674
Total potential weighted average shares outstanding Since the option strike price is greater than the current market price, actual conversion would have an anti dilutive effect	6,200,074	6,200,074	6,200,074
Net income		$42,844	$57,577
Net income per common share basic and diluted		$0.01	$0.01

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

General

Since the closure of our US development and sales facilities in 2000 and our Japanese office in January 2003 we receive royalties from former customers of our NRCJ subsidiary which serves as our principal source of revenue. We operate an office in San Ramon, California in which we perform all administrative functions necessary to keep the Company in compliance with regulatory requirements. Since the closing of sales and licensing activities in the United States we have sought, and continue to seek, potential merger opportunities.

We operate in one business segment and our fiscal year ends on December 31.

Results of Operations

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

	Unaudited		Unaudited
	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2006	2005	2006	2005
Net revenue	100.00%	100.00%	100.00%	100.00%
Cost of revenue	0.00	0.00	0.00	0.00
Gross profit	100.00	100.00	100.00	100.00
Selling, general and administrative	43.60	58.80	52.42	55.90
	0.00	0.00	0.00	0.00
Income from  operations	56.40	41.20	47.57	44.10
Income taxes	0.00	0.00	0.00	0.00
Net income	56.40%	41.20%	47.57%	44.10%

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

	Unaudited		Unaudited
	For the Three Months Ended June 30,		For the Six Months Ended June 30,
	2006	2005	2006	2005
United States	0%	0%	0%	0%
United Kingdom and Europe	0%	0%	0%	0%
Japan and Asia	100%	100%	100%	100%
Other	0%	0%	0%	0%
Total	100%	100%	100%	100%

Three months ended June 30, 2006 and 2005.

Net revenue

For the three months ended June 30, 2006 our royalty revenues increased 5% to $75,968 from $72,267 for the three months ended June 30, 2005. Our revenue for both 2006 and 2005 is derived from a single customer in Japan. While sales of products of that customer that contain our software have been increasing over the last two years the licensing agreement renews annually and the unit fee has been reduced over the past two years. The higher unit sales have not been sufficient to offset the decrease in the unit fees and it is anticipated that this trend will continue in future periods.

Cost of revenue

There is no cost associated with receipt of the royalty revenue in either the three months ended June 30, 2006 or 2005.

Selling, general and administrative    

Our selling, general and administrative expense was $33,124, including $209 for depreciation, for the three months ended June 30, 2006 compared to $42,493 and $0 for depreciation for the three months ended June 30, 2005. The general and administrative expenses consist of processing royalty fees and paying taxes by an outside accounting firm in Japan and the continuing expenses of our corporate office, which is focusing on seeking a reverse merger or other financial transaction for the Company.

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Other income and expenses

We had no other income or expense items in the three months ended June 30, 2006 or 2005.

Provision for taxes

Commencing in 1995 we 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 we 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. Since we have a Net Operating Loss Carryforward we had no US income tax liability for the three months ended June 30, 2006.

Six months ended June 30, 2006 and 2005.

Net revenue

For the six months ended June 30, 2006 our royalty revenues increased 11% to $121,017 from $108,979 for the six months ended June 30, 2005. Our revenue for both 2006 and 2005 is derived from a single customer in Japan. While sales of products of that customer that contain our software have been increasing over the last two years the licensing agreement renews annually and the unit fee has been reduced over the past two years. The higher unit sales have not been sufficient to offset the decrease in the unit fees and it is anticipated that this trend will continue in future periods.

Cost of revenue

There is no cost associated with receipt of the royalty revenue in either the six months ended June 30, 2006 or 2005.

Selling, general and administrative    

Our selling, general and administrative expense was $63,440, including $418 for depreciation, for the six months ended June 30, 2006 compared to $60,920 and $0 for depreciation for the six months ended June 30, 2005. The general and administrative expenses consist of processing royalty fees and paying taxes by an outside accounting firm in Japan and the continuing expenses of our corporate office, which is focusing on seeking a reverse merger or other financial transaction for the Company.

Other income and expenses

We had no other income or expense items in the six months ended June 30, 2006 or 2005.

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Provision for taxes

Commencing in 1995 we 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 we 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. Since we have a Net Operating Loss Carryforward we had no US income tax liability for the six months ended June 30, 2005

Liquidity and capital resources

At June30, 2006 and December 31, 2005 we had working capital of $272,343 and $213,461 and cash and cash equivalents of $293,614 and $268,271.

We generated $24,456 in cash flow from operating activities in the six months ended June 30, 2006 compared to $53,364 in the six months ended June 30, 2005. The principal reasons for the increase in use of cash of $28,908 was the result of an increase of $13,439 in accounts receivable and a decrease of $20,100 in accounts payable. Cash generated or used in operating activities principally reflects the gain or loss from operations and the related changes in working capital components.

We had investing activities of $652 in the six months ended June 30, 2006 and none in 2005.

We did not have any financing activities in the six months ended June 30, 2006 or 2005.

ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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, 2005, 2004, 2003 and 2002. If we do not develop a long-term business strategy, our reliance on one customer relationship will eventually result in the termination of our business.

We reported loss of $36,093 in 2002, a profit of $70,032 for 2003, a profit of $65,124 in 2004 and a profit of $120,524 in 2005. We also have an accumulated deficit of $6,147,083 and a stockholders' equity of $218,350 as of December 31, 2005. We can

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provide no assurance we will be profitable in the future and if we do not continue to be profitable our business could be adversely affected.

We were delisted by the NASDAQ Stock Market on October 9, 2001 and our stock has been trading on the OTC Bulletin Board Market (OTCBB) since that time.

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 only operating subsidiary lost its major supplier of product in July 2002.

Our NRCJ subsidiary was 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. While the remaining royalty activities continue to increase in unit sales the higher volume is being offset by lower unit prices resulting in a decrease in royalty income over the past year.

There is no assurance that the remaining royalty income is sufficient to allow the Company to continue operations.

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 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.

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Because our ownership is concentrated, our officers and directors and independently our majority stockholder will be able to control all matters requiring stockholder approval including delaying or preventing a change in our corporate control or taking other actions of which individual shareholders may disapprove.

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

ITEM 4. CONTROLS AND PROCEDURES

Under the supervision and with the participating of our Chief Executive and Financial Officers, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), within 90 days of the filing of this report. Based on this evaluation, our Chief Executive and Financial Officers concluded that the Company’s disclosure controls and procedures are effective. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports under the Exchange Act are processed and reported within the time periods specified by law. The design of any such system of controls is based in part on assumptions about the

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likelihood of future events, and there can be no assurance that any such system of controls will succeed in all circumstances.

Since the date of the evaluation described above, there have been no significant changes in our internal controls or in other factors that could significantly affect these controls.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are not currently involved in any litigation that is expected to have a material adverse effect on our 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.

ITEM 2. CHANGES IN SECURITIES.

Not Applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not Applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not Applicable

ITEM 5. OTHER INFORMATION.

Not Applicable.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

Exhibits –

Exhibit 31.1 – Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

Exhibit 31.2 - Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended

Exhibit 32.1 – Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 – Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Reports on Form 8-K - None

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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.

Date: July 24, 2006

PASW, INC.

/s/ WILLIAM E. SLINEY

William E. Sliney

President and Chief Financial Officer

(Duly Authorized Officer and Principal

Financial and Accounting Officer)

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