AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 2003
REGISTRATION NO. __________

================================================================================

SECURITIES AND EXCHANGE COMMISSION

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________

PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 3699 84-1070278
(State or Jurisdiction of Primary SIC Code (I.R.S. Employer
Incorporation or Organization) Identification Number)

10989 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
(858) 674-5000
(Address and telephone number of registrant's principal executive offices)

LOWELL W. GIFFHORN, SECRETARY
PATRIOT SCIENTIFIC CORPORATION
10989 VIA FRONTERA
SAN DIEGO, CALIFORNIA 92127
(858) 674-5000
(Name, address and telephone number of agent for service)
___________
COPIES TO:
OTTO E. SORENSEN, ESQ.
LUCE, FORWARD, HAMILTON & SCRIPPS LLP
600 WEST BROADWAY, SUITE 2600
SAN DIEGO, CALIFORNIA 92101
(619) 236-1414
(619) 232-8311 (FAX)
___________

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
___________
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [X]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. []

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. []

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering.[]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.[]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

___________

CALCULATION OF REGISTRATION FEE

- ----------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum
Title of Each Class of Securities Proposed Maximum Aggregate Offering Amount of
to be Registered Amount to be Registered Offereing Price Per Unit (4) Price Registration Fee
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.00001 par value (1) 20,149,013 $0.046 $ 926,855 $ 85.27
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.00001 par value (2) 780,000 $0.046 $ 35,880 $ 3.30
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.00001 par value (3) 1,000,000 $0.046 $ 46,000 $ 4.23
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL 21,929,013 $0.046 $1,008,735 $ 92.80
- ----------------------------------------------------------------------------------------------------------------------------------

S1Feb03.doc

(1) Shares of the Registrant's common stock, $.00001 par value per share, are
being registered for resale on behalf of certain selling security holders.
The common stock being registered is issuable to the selling security
holders on their conversion of the Company's 8% Convertible Debentures (the
"Debentures"). The terms of the Debentures do not fix the number of common
shares that may be issuable upon conversion, however, the Company hereby
registers a good faith estimate of the maximum number of shares it
anticipates to issue upon conversion. The Company will not rely on Rule 416
of Regulation C if the conversion price results in an insufficient number
of shares being registered. In the event that the number of shares actually
issued exceeds the number of shares included in the registration fee table,
the Company will file a new registration statement to cover the resale of
any additional shares.
(2) Shares of common stock issued to selling security holders in payment of
trade accounts payable and settlement of litigation.
(3) Issuable upon the exercise of common stock purchase warrants issued to
selling security holders.
(4) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933, as amended
(the "Act"), based on the average of the closing bid and asked prices for
the Registrant's Common Stock (the "Common Stock") as reported on the OTC
Electronic Bulletin Board on February 14, 2003.

The information in this preliminary prospectus is not complete and may be
changed. These securities may not be sold until the registration statement filed
with the Securities and Exchange Commission (SEC) is effective. This preliminary
prospectus is not an offer to sell nor does it seek an offer to buy these
securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION; AS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ON FEBRUARY 19, 2003

P R O S P E C T U S

PATRIOT SCIENTIFIC CORPORATION
10989 Via Frontera
San Diego, California 92127
(858) 674-5000

THE OFFERING

The resale of up to 21,929,013 shares of common stock in the
over-the-counter market at the prevailing market price or in negotiated
transactions.

- - 780,000 shares are presently outstanding,
- - up to 20,149,013 shares are issuable to the selling shareholders as
conversion shares upon the conversion of our 8% Convertible Debentures,
- - 1,000,000 shares are issuable upon the exercise of warrants issuable to
other selling security holders.

We will receive no proceeds from the sale of the shares by the selling
shareholders. However, if exercised, we may receive proceeds from the exercise
of the warrants into common stock.

TRADING SYMBOL
PTSC (Over-the-counter Electronic Bulletin Board)

THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK.
Please refer to Risk Factors Beginning on Page 8

THE SECURITIES AND EXCHANGE COMMISSION (SEC) AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL
OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.

Please read this prospectus carefully. It describes our company, finances and
products. Federal and state securities laws require that we include in this
prospectus all the material information that you will need to make an investment
decision.

We have not authorized anyone to provide you with information that is different
from what is contained in this prospectus.

The following table of contents has been designed to help you find important
information contained in this prospectus. We have included subheadings to aid
you in searching for particular information you might want to return to. We
encourage you to read the entire prospectus.

TABLE OF CONTENTS

Page
PROSPECTUS SUMMARY 5
About our company 5
About our convertible debentures 5
Additional shares we are registering 6
Key facts 7

RISK FACTORS 8
Related to our business
Our major product line has had limited revenues 8
We have incurred significant losses and may continue to do so 8
Our limited sales and marketing experience has effected our revenue 9
Our products may not be completed on time 9

Related to our industry
The market in which we operate is highly competitive 9
Protection of our intellectual property is limited; there is a risk of
claims for infringement 10
Our products are dependent on the Internet and Java 10
We may be impacted as a result of terrorism 11

Related to our offering and share price
The price and the trading volume of our common stock have an effect on the
amount of capital that can be raised 11
We will require additional financing 11
Large block sales of our stock may decrease the price of our stock 12
Our stock is subject to penny-stock rules which limits our ability to
attract competitive funding 13
The price of our stock could be subject to short sale pressure 13
On a significant drop in the price of our stock, we could be subject
to a change in control 13

Forward-looking statements 14

PLAN OF DISTRIBUTION 14

SELLING SHAREHOLDERS 15

THE COMPANY 16
General 16
Background 17

Page
Business 18
Available information 18
Organization and corporate development 18
Internet growth and the emergence of the java programming language 19
Microprocessor technology 20
General background 20
Industry background 21
Technology description 22
The Ignite microprocessor as a java processor 23
Stage of development 23
Business strategy 24
Competition 25
JUICEtechnology 26
General background 26
Industry background 26
Technology description 27
Stage of development 27
Business strategy 27
Competition 27
High speed data communications products 27
Radar and antenna technology 27
General background 27
Gas antenna technology description 28
Research and development 28
Licenses, patents, trade secrets and other proprietary rights 28
Marketing and distribution 30
Dependence upon single customers 30
Facilities 30
Employees 31
Government regulation 31

USE OF PROCEEDS 31

LITIGATION 31

SELECTED CONSOLIDATED FINANCIAL DATA 32

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 33
Critical Accounting Policies 33
Results of operations for the six months ended November 30, 2002 and 2001 34
Results of operations for the years ended May 31, 2002, 2001 and 2000 36
Supplementary Financial Information 38
Liquidity and capital resources 39
$25 Million Equity Line of Credit 40
Secured Note Payable 43
8% Convertible Debentures 44
New accounting pronouncements 46
Tax loss carryforwards 48

CHANGES IN ACCOUNTANTS 48

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 49

MANAGEMENT 50
Identification of directors and executive officers 50

Biographical information 50
Indemnification of officers, directors and others 52
Executive compensation 52
Option grants 53
Aggregated option exercises and fiscal year-end values 54
Compensation of directors 54
Employee contracts 54

PRINCIPAL SHAREHOLDERS 56

CERTAIN TRANSACTIONS 58

TRADING MARKET AND RELATED MATTERS 59

DESCRIPTION OF SECURITIES 60

LEGAL MATTERS 61

EXPERTS 61

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE F-1

PROSPECTUS SUMMARY

ABOUT OUR COMPANY

We develop, market, and sell microprocessors, our technology behind the
microprocessors, and complimentary products which enable computers and other
data processing devices to communicate. These products can be used to connect
to the Internet or other telecommunication networks. The microprocessor
technology product line accounted for approximately 3% of our revenue in fiscal
2002. The balance of our 2002 revenue was generated from a communication
product line that, subsequent to a completed last buy program, is generating
minimal revenue. We also have a patent for special radar technology which, if
fully developed, may allow a potential licensee to penetrate the ground or
structures to find various objects. We also owned gas plasma antenna
technology which we sold for $250,000 in August 1999. We potentially could
receive up to an additional $250,000 from the sale of the gas plasma technology
in the form of royalties. Our strategy is to exploit our microprocessor
technologies through product sales, licensing, and strategic alliances.

Our auditors have stated in their report on our consolidated financial
statements as of and for the year ended May 31, 2002, substantial doubt about
our ability to continue operating as a going concern because of recurring net
losses and negative cash flows from operations. We have an accumulated deficit
of $43,826,470 and negative working capital of $1,267,935 as of November 30,
2002 and a history of substantial operating losses, net losses and negative cash
flow.

We have our principal executive offices at 10989 Via Frontera, San Diego,
California 92127. Our telephone number is (858) 674-5000 and our website is
www.ptsc.com.
---------

ABOUT OUR CONVERTIBLE DEBENTURES

OVERVIEW. From August 23, 2002 through January 24, 2003, we sold to and
received cash from the selling shareholders an aggregate of $605,000 of 8%
convertible debentures with two year maturity dates. The convertible debentures
entitle the debenture holder to convert the principal and unpaid accrued
interest into our common stock on any date up to and including the maturity
date. In addition, the debenture holder received warrants exercisable into a
number of our common shares.

INITIAL NUMBER OF SHARES DEBENTURES MAY BE CONVERTED INTO. The debentures
can be converted into a number of our common shares based on either a negotiated
number of shares or the following calculation: the amount of the debenture
divided by 115% of the volume weighted average price for our common stock for
the ten days previous to the debenture date.

RESETS OF CONVERSION PRICE AND CONVERSION SHARES. A reset date occurs on
each three month anniversary of the closing date of each debenture and on the
date the registration statement to which this prospectus is a part becomes
effective. If the volume weighted average price for our common stock for the ten
days previous to the reset date is less than the conversion price in effect at
the time of the reset date, then the number of common shares issuable to the
selling shareholder on conversion will be increased. If the conversion price is
reset, the debenture can be converted into a number of our common shares based
on the following calculation: the amount of the debenture plus any unpaid
accrued interest divided by the reset conversion price which shall equal the
volume weighted average price for our common stock for the ten days previous to
the reset date.

WARRANTS. Concurrent with the issuance of the convertible debentures, we
issued to the selling shareholders warrants to purchase up to 11,234,835 shares
of our common stock. These warrants are exercisable for five years from the date
of issuance at initial exercise prices equal to either a negotiated exercise
price or 115% of the volume weighted average price for our common stock for the
ten days previous to the debenture date. The warrant exercise price is subject
to being reset on each six month anniversary of its issuance and on the date the
registration statement of which this prospectus is a part becomes effective.

OPTIONS TO PURCHASE ADDITIONAL DEBENTURES. Subject to the price of our
common stock being equal to or greater than $0.20 per share and a two year
limitation, the debenture holders may purchase additional debentures equal to
the value of their initial debentures. The price at which the optional
additional debentures could be converted would initially equal 115% of the
volume weighted average price for our common stock for the ten days previous to
the date on which the optional additional debentures were sold. The optional
additional debentures would carry the same warrant amounts and reset privileges
as the initial debentures.

SHAREHOLDER APPROVAL. We may currently issue more than 20% of our
outstanding shares under the convertible debentures. If we become listed on the
Nasdaq Small Cap Market or Nasdaq National Market, then we must get shareholder
approval to issue more than 20% of our outstanding shares. Since we are
currently a bulletin board company, we do not need shareholder approval.

RESTRICTIVE COVENANTS. For a period of 18 months from the date of the
debentures, we are prohibited from engaging in certain transactions without
obtaining the selling shareholders' prior written approval. These types of
transactions include the issuance of any debt or equity securities in a private
transaction which are convertible or exercisable into shares of common stock at
a price based on the trading price of the common stock at any time after the
initial issuance of such securities; the issuance of any debt or equity
securities with a fixed conversion or exercise price subject to adjustment; and
any private equity line type agreements.

RIGHT OF FIRST REFUSAL. The selling shareholders have a right of first
refusal to purchase or participate in any securities offered by us in any
private transaction which closes on or prior to the date that is two years after
the issue date of each debenture.

SELLING SHAREHOLDERS' RIGHT OF INDEMNIFICATION. We are obligated to
indemnify the selling shareholders (including their stockholders, officers,
directors, employees and agents) from all liability and losses resulting from
any misrepresentations or breaches we made in connection with the convertible
debenture, our registration rights agreement, other related agreements, or the
registration statement.

ADDITIONAL SHARES WE ARE REGISTERING

COMMON STOCK. The following table shows recent issuances of common stock
to private investors.

Name Date of Issuance Number of Shares
---- ---------------- ----------------

Richard Blum October 23, 2002 400,000

John Rigg January 16, 2003 380,000
-------

Total additional shares being registered 780,000
-------

The shares issued to Mr. Blum were in partial settlement of litigation that
Mr. Blum initiated against us in September 2001. The shares issued to John Rigg
were in lieu of a cash payment for the services he provided to us through
December 31, 2002.

WARRANTS. The following table shows the private investors and the number of
shares issuable upon the exercise of warrants we granted to them in conjunction
with sales representation contracts.

Name Date of Grant Number of Shares Issuable
---- ------------- -------------------------

Tero Koivunen October 24, 2002 500,000

Tony Yen November 1, 2002 500,000
---------

Total shares issuable on exercise of warrants 1,000,000
---------

KEY FACTS

Shares being offered for resale to the public 21,929,013 (22.8% of our
shares currently outstanding)

Total shares outstanding prior to the offering 96,339,667 as of February 12, 2003

Total shares outstanding after the offering 117,488,680

Total shares that would be outstanding assuming
full conversion of the current offering and exercise
of all outstanding debentures, options and warrants 186,762,027

Price per share to the public Market price at time of resale

Total proceeds raised by offering None, however, amounts may be
received from the exercise of warrants

Convertible debentures A form of our convertible debenture with
the selling shareholders was
included as an exhibit to the S-3
registration statement filed with
the SEC on June 27, 2002

Dividend policy We have never paid a dividend and
do not anticipate paying a dividend
in the foreseeable future

RISK FACTORS

Before purchasing any of the common shares, you should carefully consider
the following factors relating to our business and prospects.

RELATED TO OUR BUSINESS
- --------------------------

PATRIOT'S MICROPROCESSOR TECHNOLOGIES HAVE RESULTED IN LIMITED REVENUES AND
SEVERAL RELATED PRODUCTS ARE STILL IN THE DEVELOPMENT STAGE

We are in the development stage on several components of our microprocessor
technology product line, and the products which have been commercialized have
had limited revenues. Our other product lines have not generated enough revenue
to support our company. Therefore, we have limited financial results upon which
you may judge our potential. We may not become profitable. We have experienced
in the past and may experience in the future many of the problems, delays and
expenses encountered by any early stage business, many of which are beyond our
control. These include:

- substantial delays and expenses related to testing and development of
our new products,
- production and marketing problems encountered in connection with our
new and existing products and technologies,
- competition from larger and more established companies, and
- lack of market acceptance of our new products and technologies.

PATRIOT HAS A HISTORY OF LOSSES, EXPECTS FUTURE LOSSES AND MAY NOT ACHIEVE OR
SUSTAIN ANNUAL PROFITABILITY

We expect to incur operating losses in the future. Sales of our products
may never generate sufficient revenues to fund our continuing operations. We
may never generate positive cash flow or attain profitability. To date, we have
incurred significant losses. As of November 30, 2002, our accumulated deficit
was $43,826,470 and we had negative working capital of $1,267,935. For the
fiscal years ended May 31, 2002, 2001 and 2000, we incurred net losses of
$5,487,051, $4,968,903 and $7,488,708. Because of this, there is substantial
doubt about our ability to continue as a going concern. These losses have
resulted primarily from:

- significant costs associated with the development of our products,
- costs associated with the marketing of those products,
- the interest charges and expenses related to previous equity and debt
financings, and
- compensation costs related to the cashless exercise of options and to
the earnout of escrowed common shares.

Should our losses continue and should we be unable to fund our operations
from external

sources, we would need to cease doing business and/or liquidate or sell our
assets.

PATRIOT'S LIMITED SALES AND MARKETING EXPERIENCE HAS AFFECTED OUR REVENUE

Our operating results depend to a large extent on our ability to
successfully market and sell our products. We currently have limited marketing
capabilities and need to hire additional sales and marketing personnel. In part
as a consequence of our limited resources, we may not be able to recruit, train,
or retain qualified personnel to sell and market our products and we may not be
able to develop a successful sales and marketing strategy. We also have very
limited marketing experience. There can be no assurance that any marketing
efforts undertaken by us will be successful or will result in any significant
sales of our products. A continued lack of significant revenues from the sale
of our products would require us to cease doing business and/or liquidate or
sell our assets.

PATRIOT MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF NEW PRODUCTS THAT
COULD RESULT IN PATRIOT HAVING TO INCUR SIGNIFICANT UNEXPECTED EXPENSES OR DELAY
THE LAUNCH OF NEW PRODUCTS

Our technologies and products are in various stages of development. Our
development stage products may not be completed in time to allow production or
marketing due to the inherent risks of new product and technology development,
limitations on financing, competition, obsolescence, loss of key personnel and
other factors. Although we may license some of our technology at its current
stage of development, there can be no assurance that we will be able to do so or
that any revenues generated from licensing would be sufficient to support
operations at their current level. Unanticipated technical obstacles can arise
at any time and result in lengthy and costly delays or in a determination that
further development is not feasible. Discovery of microprocessor design errors,
frequent in the industry prior to and after production, could result in lengthy
and costly redesign, fabrication (production) and testing in an industry where
new technology rapidly eclipses prior innovations.

The development of our technologies has taken longer than anticipated and
could be additionally delayed. Therefore, there can be no assurance of timely
completion and introduction of improved products on a cost-effective basis, or
that such products, if introduced, will achieve
market acceptance such that, in combination with existing products, they will
sustain us or allow us to achieve profitable operations.

RELATED TO OUR INDUSTRY
- -----------------------

INTENSE COMPETITION IN THE MARKET FOR MICROPROCESSORS COULD PREVENT PATRIOT FROM
INCREASING OR SUSTAINING REVENUE AND PREVENT PATRIOT FROM ACHIEVING OR
SUSTAINING ANNUAL PROFITABILITY

Our products could be rendered noncompetitive or obsolete. Technological
competition from larger and more established microprocessor companies is
significant and expected to increase. Most of the companies with which we
compete and expect to compete have far greater capital resources and more
significant research and development staffs, marketing and distribution programs
and facilities, and many of them have substantially greater experience in the
production and marketing of products. Our ability to compete effectively may
be adversely affected by the ability of these competitors to devote greater
resources to the sale and marketing of their products than we can. In addition,
one or more of our competitors may succeed or may already have succeeded in
developing technologies and products that are more effective than any of those
we currently offer or are developing.

PATRIOT'S LIMITED ABILITY TO PROTECT ITS INTELLECTUAL PROPERTY MAY INADVERTENTLY
ADVERSELY AFFECT ITS ABILITY TO COMPETE

A successful challenge to our ownership of our technology could materially
damage our business prospects. Our technologies may infringe upon the
proprietary rights of others. Licenses required by us from others may not be
available on commercially reasonable terms, if at all. We rely on a combination
of patents, trademarks, copyrights, trade secret laws, confidentiality
procedures and licensing arrangements to protect our intellectual property
rights. We currently have eight U.S. patents issued and three U.S. patents
pending. We have one patent issued in Europe and have filed an application for
another patent in Europe, Japan and elsewhere. Any issued patent may be
challenged and invalidated. Patents may not issue from any of our pending
applications. Any claims allowed from existing or pending patents may not be of
sufficient scope or strength to provide significant protection for our products.
Patents may not be issued in all countries where our products can be sold so as
to provide meaningful protection or any commercial advantage to us. Our
competitors may also be able to design around our patents.

Vigorous protection and pursuit of intellectual property rights or
positions characterize the fiercely competitive semiconductor industry, which
has resulted in significant and often protracted and expensive litigation.
Therefore, our competitors may assert that our technologies or products infringe
on their patents or proprietary rights. Problems with patents or other rights
could increase the cost of our products or delay or preclude new product
development and commercialization by us. If infringement claims against us are
deemed valid, we may not be able to obtain appropriate licenses on acceptable
terms or at all. Litigation could be costly and time-consuming but may be
necessary to protect our future patent and/or technology license positions or to
defend against infringement claims.

We did not develop the technology which is the basis for our products. This
technology, which was originally known as the ShBoom technology, was acquired
through a series of agreements from two co- inventors. We have been, and may
again be, subject to claims from such prior parties related to the technology.
Such parties may also attempt to exploit the technology independently of our
rights to do so. One of the co-inventors of this technology filed a lawsuit
against another prior owner and us. The trial judge ruled in favor of the prior
owner and us. However, the co-inventor has filed an appeal and the trial judge's
ruling may be revised in a manner that is detrimental to us. The asset purchase
agreement and plan of reorganization between Patriot, nanoTronics Corporation
and Helmut Falk was the agreement under which we acquired the basic ShBoom
technology. The agreement also contained a number of warranties and indemnities
related to the ownership of the technology and other matters. We believe
nanoTronics Corporation has been liquidated and, due to Mr. Falk's death in July
1995, our ability to obtain satisfaction for any future claims as a result of a
breach of the agreement may be limited.

PATRIOT IS DEPENDENT ON THE INTERNET AND JAVA FOR ACCEPTANCE OF ITS PRODUCTS

The marketing of our microprocessor products will depend in large part upon
a robust and growing industry and infrastructure for providing Internet access
and carrying Internet traffic and the emergence of Java as a widespread

programming language for the Internet or in embedded applications. The
infrastructure or complementary products necessary to make the Internet a viable
commercial marketplace may not be developed, or, even if they are developed, the
Internet may not become a viable commercial marketplace. Also, Java may not
become a widespread programming language for the Internet or in embedded
applications, and a market may not develop for devices to run Java efficiently.
If the Internet does not become a viable commercial marketplace or if Java does
not become a generally accepted programming language, then our business,
operating results and financial condition will be materially and adversely
affected.

PATRIOT MAY FACE INTERRUPTION OF PRODUCTION AND SERVICES DUE TO INCREASED
SECURITY MEASURES IN RESPONSE TO TERRORISM

Our business depends on the free flow of products and services through the
channels of commerce. Recently, in response to terrorists' activities and
threats aimed at the United States, transportation, mail, financial and other
services have been slowed or stopped altogether. Further delays or stoppages in
transportation, mail, financial or other services could have a material adverse
effect on our business, results of operations and financial condition.
Furthermore, we may experience an increase in operating costs, such as costs for
transportation, insurance and security as a result of these activities and
potential activities. We may also experience delays in receiving payments from
payers that have been affected by terrorist activities and potential activities.
The U.S. economy in general is being adversely affected by terrorist activities,
and potential activities and any economic downturn could adversely impact our
results of operations, impair our ability to raise capital or otherwise
adversely affect our ability to grow our business.

RELATED TO OUR OFFERING AND SHARE PRICE
- ---------------------------------------

THE PRICE AND THE TRADING VOLUME OF PATRIOT'S COMMON STOCK HAVE AN EFFECT ON THE
AMOUNT OF CAPITAL THAT CAN BE RAISED

We are exposed to fluctuations in the price and trading volume of our
common stock and the effect on the amount of capital we are able to raise
related to our $25 million line of credit. We registered 15,000,000 shares of
our common stock in November 2001, comprised of 14,100,000 put shares and
900,000 warrant shares which have been issued to Swartz Private Equity LLC under
a three year, $25 million investment agreement. The actual number of shares
that potentially could be issued under the investment agreement is determined by
the price of our stock during the pricing periods and the discount that Swartz
receives and is limited by the trading volume of our stock during the defined
period. We can impose a floor under which we will not be obligated to issue
stock to Swartz, and we set a predetermined number of shares to be issued for
each put. In this manner, we maintain the ability to have an effect on when,
how much and at what price the stock will be issued to Swartz. We ran out of
registered shares related to the $25 million equity line of credit in May 2002.
Before we can make additional use of the $25 million equity line of credit, we
would need to register additional common shares beyond the 15,000,000 shares
previously registered and issued.

PATRIOT MAY NOT BE ABLE TO OBTAIN ADDITIONAL CAPITAL TO FUND ITS OPERATIONS WHEN
NEEDED

A lack of additional funding could force us to substantially curtail or
cease our operations, which would have a material adverse effect on our

business. Our ability to raise additional funds under the debenture agreement
is subject to certain conditions. These conditions include the effectiveness of
a registration statement covering the resale of the shares sold on the
conversion of the debentures or the exercise of the warrants issued concurrently
with the debentures. We estimate our current annual cash requirements to
sustain our operations to be $2.4 million. There can be no assurance that any
future funds required will be generated from operations or from other potential
sources. Further, any such required funds may only be available on unattractive
terms and may significantly dilute the value of our existing shares.

IF THE SELLING SHAREHOLDERS SELL A LARGE NUMBER OF PATRIOT SHARES ALL AT ONCE OR
IN BLOCKS, THE MARKET PRICE OF OUR SHARES WOULD MOST LIKELY DECLINE

The selling shareholders are offering all of the common stock offered
through this prospectus. The selling shareholders are not restricted in the
price at which they can sell the common stock. Shares sold at a price below the
current market price at which the common stock is trading may cause the market
price to decline. The shares of common stock that are issuable on the conversion
of the debentures or exercise of the warrants issued concurrent with the
debentures represent 23.2% of our outstanding shares. However, should the price
of our stock drop, the number of common shares issuable on the conversion of
these debentures, plus the conversion of currently outstanding previously issued
debentures, would be subject to reset provisions which would substantially
increase the number of common shares to be issued. To the extent the selling
shareholders, and shareholders of currently outstanding previously issued
debentures, convert and then sell their common stock, the common stock price may
decrease due to the additional shares in the market. This could allow the
selling shareholders, and shareholders of currently outstanding previously
issued debentures, to convert their convertible debentures into even greater
amounts of common stock, the sales of which would further depress the stock
price. Accordingly, we do not know the exact number of shares that will be
issued on the conversions of the debentures. The following table presents the
potential number of shares that could be issued and the total number of shares
outstanding under several alternative scenarios:

Market Price as of If January 15, 2003 Market Price Decreases
January 15, 2003 25% 50% 75%

Market price (conversion price) $ 0.090 $ 0.068 $ 0.045 $ 0.023

Common stock currently outstanding 96,339,667 96,339,667 96,339,667 96,339,667

Number of shares issuable on conversion 23,716,186 23,924,580 27,086,124 53,478,261

Number of warrants issuable on exercise 24,094,010 24,094,010 24,094,010 24,094,010

Potential common stock outstanding 144,149,863 144,358,257 147,519,801 173,911,938

Dilutive effect to current shareholders 50% 50% 53% 81%

In addition, at the option of the debenture holder, interest accruing at the
annual rate of 8% can be converted into shares of our common stock at the same
time and at the same conversion price as the principal portion of the debenture.

Should the debenture holders accumulate interest, a larger number of shares
would be issued on conversion and if the price of the common stock declines, the
reset provisions which allow greater amounts of shares to be issued would also
be in effect for the interest portion of the debenture. As of December 31,
2002, $59,966 interest was payable to the debenture holders which could be
converted into 1,199,320 shares of common stock at an average
conversion price of $0.05.

THE MARKET FOR PATRIOT'S STOCK IS SUBJECT TO RULES RELATING TO LOW-PRICED STOCK
WHICH LIMITS OUR ABILITY TO ATTRACT COMPETITIVE FUNDING

Our common stock is currently listed for trading in the NASD
Over-The-Counter Bulletin Board Market and is subject to the "penny stock rules"
adopted pursuant to Section 15 (g) of the Securities Exchange Act of 1934, as
amended. In general, the penny stock rules apply to non-NASDAQ or non-national
stock exchange companies whose common stock trades at less than $5.00 per share
or which have tangible net worth of less than $5,000,000 ($2,000,000 if the
company has been operating for three or more years). Such rules require, among
other things, that brokers who trade "penny stock" to persons other than
"established customers" complete certain documentation, make suitability
inquiries of investors and provide investors with certain information concerning
trading in the security, including a risk disclosure document, quote
information, broker's commission information and rights and remedies available
to investors in penny stocks. Many brokers have decided not to trade "penny
stock" because of the requirements of the penny stock rules and, as a result,
the number of broker-dealers willing to act as market makers in such securities
is limited. The "penny stock rules," therefore, may have an adverse impact on
the market for our common stock and may effect our ability to attract
competitive funding.

OUR SHARE PRICE COULD BE LOWERED AS A RESULT OF SHORT SALES

The significant downward pressure on the price of the common stock as the
selling shareholders convert and sell material amounts of common stock could
encourage short sales by the selling shareholders or others. When an investor
sells stock that he does not own, it is known as a short sale. The seller,
anticipating the price of the stock to go down, will buy the stock at a later
date. If the price of the stock goes down, the seller will profit for the
difference between what he origianally sold it for less what he later had to buy
it for. Short sales enable the seller to profit in a down market. Short sales
could place significant downward pressure on the price of our common stock.

ON A SIGNIFICANT DROP IN THE PRICE OF OUR STOCK, WE COULD BE SUBJECT TO A CHANGE
IN CONTROL

There is a possibility that a significant number of shares, the exact
number of which we do not know, of our common stock could be issued on the
conversion of the debentures. This possibly could result in a change in control
of the company. Such a change in control could have a material adverse effect
on our operations and business plans. We are unable to determine the impact
such a change in control could have on our company.

FORWARD-LOOKING STATEMENTS

This prospectus includes "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995,
and we desire to take advantage of the "safe harbor" provisions in those laws.
Therefore, we are including this statement for the express purpose of availing
ourselves of the protections of these safe harbor provisions with respect to all
of the forward-looking statements we make. The forward-looking statements in
this prospectus reflect our current views with respect to possible future events
and financial performance. These forward-looking statements are subject to
certain risks and uncertainties, including specifically the absence of
significant revenues and financial resources, a history of losses, no assurance
that the development of technology can be completed or that its completion will
not be delayed, significant competition, the uncertainty of patent and
proprietary rights, uncertainty as to royalty payments and indemnification
risks, trading risks of low-priced stocks and those other risks and
uncertainties discussed herein that could cause our actual results to differ
materially from our historical results or those we anticipate. In this
prospectus, the words "anticipates," "believes," "expects," "intends," "future"
and similar expressions identify certain forward-looking statements. You are
cautioned to consider the specific risk factors described in "Risk Factors" and
elsewhere in this prospectus and not to place undue reliance on the
forward-looking statements contained in this prospectus, which speak only as of
the date of this prospectus. We undertake no obligation to publicly revise
these forward-looking statements to reflect the effect of events or
circumstances that may arise after the date of this prospectus. All written and
oral forward-looking statements made subsequent to the date of this prospectus
and attributable to us or persons acting on our behalf are expressly qualified
in their entirety by this section.

PLAN OF DISTRIBUTIONPLAN OF DISTRIBUTION

After the effective date of the registration statement of which this
prospectus is a part, each selling shareholder will be free to offer and sell
his or her common shares at such times, in such manner and at such prices as he
or she may determine. The types of transactions in which the common shares are
sold may include transactions in the over-the-counter market (including block
transactions), negotiated transactions, the settlement of short sales of common
shares, or a combination of such methods of sale. The sales will be at market
prices prevailing at the time of sale or at negotiated prices. Such
transactions may or may not involve brokers or dealers. The selling
shareholders have advised us that they have not entered into any agreements,
understandings or arrangements with any underwriters or broker-dealers regarding
the sale of their securities. The selling shareholders do not have an
underwriter or coordinating broker acting in connection with the proposed sale
of the common shares.

The selling shareholders may effect such transactions by selling common
stock directly to purchasers or to or through broker-dealers, which may act as
agents or principals. Such broker-dealers may receive compensation in the form
of discounts, concessions, or commissions from the selling shareholders. They
may also receive compensation from the purchasers of common shares for whom such
broker-dealers may act as agents or to whom they sell as principals, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions).

The selling shareholders and any broker-dealer that acts in connection with
the sale of common shares may be "underwriters" within the meaning of Section
2(11) of the Securities Act. Any commissions received by such broker-dealers and
any profit on the resale of the common shares sold by them while acting as
principals are deemed to be underwriting discounts or commissions.

Because the selling shareholders may be "underwriters" within the meaning
of Section 2(11) of the Securities Act, the selling shareholders will be subject
to prospectus delivery requirements.

Selling shareholders also may resell all or a portion of the common shares
in open market transactions in reliance upon Rule 144 under the Securities
Exchange Act, provided they meet the criteria and conform to the requirements of
such Rule.

SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
selling shareholders as of February 12, 2003. Except as set forth below, none of
the selling shareholders currently is an affiliate of ours, and none of them had
has a material relationship with us during the past three years. None of the
selling shareholders are or were affiliated with registered broker-dealers.

Amount and
Percentage of
Beneficial Maximum Number Common Stock
Ownership of of Shares of After the Sale
Common Stock as Common Stock --------------------------
Name of February 12, 2003 Offered for Sale Number %
- -------------------------- ------------------- ---------------- ---------------------------

Lincoln Ventures, LLC 32,425,616 (2) 8,311,689 24,113,927 (2) 23.82% (2)
Clifford Koerner 2,780,403 (3) 1,755,755 1,024,648 (3) 1.08%
Victor Gabourel 3,130,339 (4) 975,419 2,154,920 (4) 2.30%
Gloria Felcyn, Trustee (1) 17,904,222 (5) 4,814,305 13,089,917 (5) 13.41%
James and Josephine Zolin 2,839,634 (6) 390,168 2,449,466 (6) 2.63%
Richard Daniels 3,240,764 (7) 975,419 2,265,345 (7) 2.41%
Frederick Feck, Trustee 1,536,334 (8) 975,419 560,915 (8) *
Stan Caplan 1,536,334 (9) 975,419 560,915 (9) *
Dan Nunes 768,168 (10) 487,710 280,458 (10) *
Leo Correia 768,168 (11) 487,710 280,458 (11) *
Richard Blum 400,000 400,000 - *
John Rigg 380,000 380,000 - *
Tero Koivunen 500,000 500,000 - *
Tony Yen 500,000 500,000 - *

* Denotes less than 1%

(1) As trustee of the Helmut Falk Family Trust and executor of the Helmut
Falk estate, Ms. Felcyn effectively controls the shares that were
subject to an escrow arrangement originally issued to nanoTronics in
connection with the ShBoom technology acquisition and shares that
remain from 5,000,000 non-escrowed shares originally issued to
nanoTronics in connection with the ShBoom technology acquisition and
subsequently transferred to the Helmut Falk Family Trust.

(2) This number includes 9,495,694 shares of common stock issuable upon
the conversion of previously issued convertible debentures. These
shares have been previously registered. This number also includes
14,618,233 shares of common stock issuable upon exercise of
outstanding warrants previously issued to Lincoln which are currently
exercisable, which shares would not be deemed beneficially owned (due
to exercise restrictions within the warrants) within the meaning of
Sections 13(d) and 13(g) of the Exchange Act to the extent that their
acquisition in a warrant exercise by Lincoln would cause Lincoln to
own in excess of 4.99% of our outstanding common stock immediately
following such exercise. By the terms of the Debentures, the 4.99%
limitation may be increased to a maximum of 9.99% if the Company
accepts a tender offer and a change in control takes place. Therefore,
it is expected that Lincoln will not beneficially own more than 9.99%
of our outstanding common stock at any time. Roy Adams has ultimate
voting and/or investment control over the securities owned by Lincoln.

(3) Includes 1,024,648 shares of common stock issuable upon exercise of
outstanding warrants

(4) Includes 580,316 shares of common stock issuable upon the conversion
of previously issued convertible debentures. These shares have been
previously registered. This number also includes 1,424,604 shares of
common stock issuable upon exercise of outstanding warrants

(5) Includes 2,321,263 shares of common stock issuable upon the conversion
of previously issued convertible debentures. These shares have been
previously registered. This number also includes 4,102,431 of common
stock issuable upon exercise of outstanding warrants and 50,000 shares
of common stock issuable upon exercise of stock options issued to Ms.
Felcyn, as an individual, as a director of the company.

(6) Includes 580,316 shares of common stock issuable upon the conversion
of previously issued convertible debentures. These shares have been
previously registered. This number also includes 1,456,336 shares of
common stock issuable upon exercise of outstanding warrants

(7) Includes 580,316 shares of common stock issuable upon the conversion
of previously issued convertible debentures. These shares have been
previously registered. This number also includes 1,650,029 shares of
common stock issuable upon exercise of outstanding warrants

(8) Includes 560,915 shares of common stock issuable upon exercise of
outstanding warrants

(9) Includes 560,915 shares of common stock issuable upon exercise of
outstanding warrants

(10) Includes 280,458 shares of common stock issuable upon exercise of
outstanding warrants

(11) Includes 280,458 shares of common stock issuable upon exercise of
outstanding warrants

INFORMATION ABOUT US
THE COMPANY

Patriot Scientific Corporation was organized under Delaware law on March
24, 1992, as the successor by merger to Patriot Financial Corporation, a
Colorado corporation incorporated on June 10, 1987. Our address is 10989 Via
Frontera, San Diego, California 92127, and our telephone number is (858)
674-5000. Our home page can be located on the World Wide Web at
http://www.ptsc.com.

product line that, subsequent to a completed last buy program, is generating
minimal revenue. We also have a patent for special radar technology which, if
fully developed, may allow a potential licensee to penetrate the ground or
structures to find various objects. We also owned gas plasma antenna
technology which we sold for $250,000 in August 1999. We potentially could
receive up to an additional $250,000 from the sale of the gas plasma technology
in the form of royalties. Our strategy is to exploit our microprocessor
technologies through product sales, licensing, and strategic alliances.

In 1997, we emerged from the development stage primarily as a result of the
acquisition of Metacomp Inc. There can be no assurance that we can achieve
profitable operations, and we may need additional financial resources during the
next twelve months.

BACKGROUND

In February 1989, we completed our initial public offering under a
registration statement on Form S-18 under the Securities Act of 1933. This
offering raised gross proceeds of $50,000 and net proceeds of approximately
$28,640 upon the sale of 2,500,000 units at $.02 per unit. Each unit sold in
the public offering consisted of one common share and one Class A common stock
purchase warrant exercisable to acquire one share of common stock and one Class
B common stock purchase warrant. All Class A and Class B warrants have since
been exercised or have lapsed.

On May 12, 1992, we redomiciled ourselves from Colorado to Delaware by
merging into a wholly owned Delaware subsidiary, Patriot Scientific Corporation,
organized for that purpose. The reincorporation resulted in a reverse stock
split. Three shares of the Colorado corporation, par value $.00001, were
converted into one share of the Delaware corporation, par value $.00001. The
reincorporation also effected a change in our charter and bylaws and a name
change to Patriot Scientific Corporation.

In May 1993, we registered under the Securities Act of 1933 a total of
7,631,606 shares issuable upon the exercise of outstanding Class A and Class B
common stock purchase warrants. We received net proceeds of $3,343,915 upon the
exercise of those warrants and the issuance of 7,538,102 common shares. None
of such warrants remain outstanding.

Effective May 31, 1994, we entered into an asset purchase agreement and
plan of reorganization with nanoTronics Corporation located in Eagle Point,
Oregon and Helmut Falk. We issued a total of 8,500,000 restricted common
shares to nanoTronics to acquire certain microprocessor technology of
nanoTronics. The technology acquired was used to develop a sophisticated yet
low cost microprocessor. 5,000,000 of the shares were issued on a
non-contingent basis, and the remaining 3,500,000 shares were issued subject to
the terms of an earnout escrow arrangement, which concluded on May 31, 1999.

Effective December 26, 1996, we acquired 96.9% of the outstanding shares of
Metacomp, Inc., a California corporation, from 56 shareholders in exchange for
the issuance of 1,272,068 shares of our common stock. Based on the closing
price of our common stock of $1.375 on the date of the acquisition, the price of
the acquisition was $1,749,094. This business combination was accounted for as
a pooling-of-interests.

BUSINESS

AVAILABLE INFORMATION

We file reports, proxy statements and other information with the SEC, and
these reports may be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington,
D.C. 20549. You may obtain information on the operation of the public reference
room by calling the SEC at 1-800-SEC-0330. The same information may be obtained
at the following Regional Offices of the SEC: 75 Park Place, New York, New York
10007, and the Northwest Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60621. Copies of such material may be obtained from the
Public Reference Section of the SEC's Washington, D.C. office at prescribed
rates.

We mail a copy of our audited Annual Report on Form 10-K along with a proxy
statement to our shareholders prior to our annual meeting.

We have filed a registration statement on Form S-1, of which this
prospectus is a part, with the SEC. This registration statement or any part
thereof may also be inspected and copied at the public reference facilities of
the SEC.

Our filings may also be accessed through the SEC's web site
(http://www.sec.gov) or by visiting our web site at (http://www.ptsc.com) and
linking to the SEC's site.

ORGANIZATION AND CORPORATE DEVELOPMENT. Our business involves the
following technologies:

- Ignite microprocessor technology,
- JUICEtechnology,
- high-speed data communications technology, and
- radar technology.

The stages of development of our technologies is as follows:

- Ignite microprocessor. This technology is generating minor amounts of
revenue from the sale of development boards, microprocessors and
initial license fees related to the microprocessor application. We run
the technology on a 0.35-micron microprocessor, which is in current
production. We have ported the WindRiver VxWorks operating system and
the Sun Microsystems personalJava virtual machine to the
microprocessor. In addition, the technology is available for sale as
intellectual property which enables the prospective customer to
incorporate the microprocessor functions with other parties'
applications to arrive at a system on a chip solution. Although we
anticipate the Ignite technology to be our main product line, it
currently accounts for only 3% of our revenue in fiscal year 2002.

- JUICEtechnology. This technology was introduced to address the need to
conserve power in embedded applications by varying the speed at which
any microprocessor processes data. By varying the speed of the
microprocessor, battery life can be significantly expanded thereby

enhancing the users internet experience on a variety of handheld
devices including cell phones, smart phones, pocket PCs and personal
digital assistants. There has been no revenue generated from this
product as of yet.

- High-speed data communications. Revenue from this technology was
phased out during fiscal year 2002 as a result of the products
reaching the end of their life cycles. During fiscal 2002 we initiated
a last time buy program and except for minor repeat orders have
discontinued to sell this product line. We have decided to concentrate
our efforts on the Ignite microprocessor and JUICEtechnology. Although
the communications product line accounted for approximately 97% of our
fiscal year 2002 revenue, we anticipate that the Ignite microprocessor
and JUICEtechnology will be our main product lines in the future.

- Radar and antenna. We sold the gas plasma antenna technology in August
1999. Our radar technology has not generated any revenue and we have
suspended further development of this technology in order to
concentrate our resources on our Ignite and JUICEtechnology products.

Due to our small size and staffing overlaps among the technologies, certain
personnel may work on any or all of our technologies from time to time.

During at least the last three years, we have focused the majority of our
efforts on the Ignite and high-speed data communications technologies. The
Ignite technology is targeted for the embedded controller and Java language
processor marketplaces.

INTERNET GROWTH AND THE EMERGENCE OF THE JAVA PROGRAMMING LANGUAGE. The
Internet is a global web of computer networks. This "network of networks"
allows computers connected to the Internet to "talk" to one another. The
Internet provides organizations and individuals with new means to conduct
business. Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
We believe that organizations will also increasingly use the Internet and
private Intranet networks to improve communications, distribute information,
lower operating costs and change operations. Use of the Internet has grown
rapidly impacting computer hardware, software and peripheral industries. The
rapid growth in popularity of the Internet is in part due to continuing
penetration of computers and modems into U.S. households, growth of the
informational, entertainment and commercial applications and resources of the
Internet, the growing awareness of such resources among individuals, and the
increasing availability of user-friendly navigational and utility tools which
enable easier access to the Internet's resources.

The growth of the Internet and corporate Intranets is creating a demand for
hardware, software and peripherals. Software, such as Java, has been developed
to serve the requirements of Internet users.

Java is a programming language that was originally developed for personal
digital assistant devices and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. A large number of major computer, software, browser and

on-line service provider companies have licensed the Java language.
Accordingly, Java is a fundamental platform for Internet related applications.
A significant number of Java applications, or applets, are now available on the
Internet. These applications not only enhance web pages but also perform many
functions of traditional computer software programs. Our Ignite technology
lends itself to potential markets in which the use of Java is prevalent.

With Java, data and programs do not have to be stored on the user's
computer, but can reside anywhere on the Internet to be called upon as needed.
Among its various attributes, two key features of Java are (1) its ability to
run on a variety of computer operating systems thus avoiding the problem of
incompatibility across networks, and (2) security, because Java enables the
construction of virus-resistant, tamper-resistant systems by using
resource-access control and public-key encryption. Because of Java's useful
features, it has also become a popular programming language for embedded
applications.

Since Java is designed to run on multiple types of devices and operating
systems, it allows developers to write a program once for many types of
operating systems, instead of having to write new versions for each type. Java
does this by interpreting a program's commands into something that a particular
type of computer can understand. This interpretive design runs programs slower
than if they were tailored for each type of computer and is resulting in a need
for specialized microprocessors and compilers to increase Java's speed.

The growth of Java is causing a number of companies to consider it as a
basis for a new style of computing tailored to the Internet and not encumbered
by the limitations of, or requiring, traditional computer operating systems.
The concept is to design inexpensive access devices to communicate via the
Internet.

OUR MICROPROCESSOR TECHNOLOGY.

General Background. In 1991, nanoTronics Corporation was formed and
------------------
acquired a base technology for an advanced microprocessor integrated on a single
computer chip. nanoTronics subsequently engaged in substantial technical
development and fabricated a first-generation microprocessor in early 1994.

Since the acquisition of the technology from nanoTronics, effective May 31,
1994, we have been engaged in enhancing the microprocessor design, adding
additional technical features to further modernize the design, and improving and
testing the new design. We initially fabricated a prototype 0.8-micron
microprocessor in May 1996. The next generation was a 0.5-micron microprocessor
that was delivered in September 1997. The 0.5-micron microprocessor was
employed in demonstrations for prospective customers and was shipped in limited
numbers to customers as an embedded microprocessor. In 1998 we introduced a
0.35-micron microprocessor whose features included a reduction in size and
improved performance. In addition, in September 2000 we completed a VHDL model
of this technology which enables customers to purchase intellectual property
incorporating microprocessor functions with other parties' applications to
arrive at a system on a chip solution. By purchasing this software model,
customers can significantly reduce their time to market by simulating results as
opposed to trial and error commitment to silicon production. We are currently
working on a 0.18-micron enhancement of silicon production for our Ignite
microprocessor technology.

Industry Background. The semiconductor logic market has three major
-------------------
sectors:

- standard logic products,
- application specific standard products, and
- application specific integrated circuits.

Standard logic products, such as the Intel's X86 and Pentium and Motorola's
680X0 microprocessor families, are neither application nor customer specific.
They are intended to be utilized by a large group of systems designers for a
broad range of applications. Because they are designed to be used in a broad
array of applications, they may not be cost effective for specific applications.
Application specific integrated circuits are designed to meet the specific
application of one customer. While cost effective for that application,
application specific integrated circuits require large sales volumes of that
application to recover their development costs. Application specific standard
processors are developed for one or more applications but are not generally
proprietary to one customer. Examples of these applications include modems,
cellular telephones, wireless communications, multimedia applications, facsimile
machines and local area networks. We have designed our microprocessor to be
combined with application specific software to serve as an embedded control
product for the application specific standard processor market sector.

Application specific standard processors are typically used in embedded
control systems by manufacturers to provide an integrated solution for
application specific control requirements. Such systems usually contain a
microprocessor or microcontroller, logic circuitry, memory and input/output
circuitry. Electronic system manufacturers combine one or more of these
elements to fit a specific application. The microprocessor provides the
intelligence to control the system. The logic circuitry provides functions
specific to the end application. The input/output circuitry may also be
application specific or an industry standard component. The memory element, if
not on the microprocessor, is usually a standard product used to store program
instructions and data. In the past, these functions have been executed through
multiple integrated circuits assembled on a printed circuit board. The
requirements for reduced cost and improved system performance have created
market opportunities for semiconductor suppliers to integrate some or all of
these elements into a single application specific standard processor or chip
set, such as the Ignite family of microprocessors. The Ignite family provides
close integration of the microprocessor and input/output function with the logic
circuitry, thereby providing an advanced application specific standard
processor.

Embedded control systems enable manufacturers to differentiate their
products, replace less efficient electromechanical control devices, add product
functionality and reduce product costs. In addition, embedded control systems
facilitate the emergence of completely new classes of products. Embedded
control systems have been incorporated into thousands of products and
subassemblies worldwide, including automotive systems, remote controls,
appliances, portable computers and devices, cordless and cellular telephones,
motor controls and many other systems.

Microprocessors are generally available in 4-bit through 64-bit
architectures, which refers to the amount of data they can process. 4-bit
microprocessors are relatively inexpensive, typically less than $1.00 each.
Although they lack certain performance and features, they account for more than

40% of worldwide microcontroller volume. Also in general use today are 8-bit
architectures, generally costing $1.00 to $10.00 each and accounting for an
additional 40% of worldwide microcontroller volume. To date 16-bit, 32-bit and
64-bit architectures, with typical costs of over $10.00 each, have offered very
high performance, but are generally considered to be expensive for high-volume
embedded control applications. The use of 16-bit, 32-bit and 64-bit
architectures offers fewer internal limitations, making programming easier and
providing higher performance. Although generally more expensive per unit and
requiring more support logic and memory, these devices offer many advantages for
more sophisticated embedded control systems.

Electronic system designers, driven by competitive market forces, seek
semiconductor products with more intelligence, functionality and control that
can be used to reduce system costs and improve performance. For these needs,
the Ignite product family was designed to be a sophisticated 32-bit
microprocessor with advanced features. The Ignite product family uses a smaller
number of transistors compared to other RISC processors which results in less
power consumption and more economical prices compared to other embedded control
applications. This creates the opportunity for the development of new,
cost-effective applications.

Technology Description. Conventional high-performance microprocessors are
----------------------
register-based with large register sets. These registers are directly
addressable storage locations requiring a complex architecture that consumes
costly silicon. This conventional architecture provides processing power for
computer applications but complicates and slows the execution of individual
instructions and increases silicon size, thereby increasing the microprocessor
cost.

Our technology is fundamentally different from most other microprocessors
in that the data is stored in groups. Our microprocessor employs certain
features of both register and stack designs. The resultant merged
stack-register architecture improves program execution for a wide range of
embedded applications. Our design combines two processors in one highly
integrated package, a microprocessing unit for performing conventional
processing tasks, and an input-output processor for performing input-output
functions. This replaces many dedicated peripheral functions supplied with
other processors. The microprocessor's design simplifies the manipulation of
data. Our architecture employs instructions that are shrunk from 32-bits to
8-bits. This simplified instruction scheme improves execution speed for
computer instructions. Our architecture incorporates many on-chip system
functions, thus eliminating the requirement of support microprocessors and
reducing system cost to users.

The 0.8-micron microprocessor was designed to operate at a speed of 50Mhz;
the 0.5-micron microprocessor at a speed of 100Mhz; the 0.35-micron
microprocessor at 150MHz; and the 0.18-micron to operate at speeds in excess of
300Mhz. They are all compatible with a wide range of memory technology from low
cost dynamic random access memory to high-speed static random access memory.
The microprocessors can be packaged in various surface-mount and die-form
packaging. There can be no assurance that the designed speed will be achieved
with production models of the 0.5 or 0.18-micron microprocessors or future
versions or that all of the desired functions will perform as anticipated.

Our technology is not designed or targeted to compete with high-end
processors for use in personal computers. It is targeted for embedded control
applications. We believe that the features described above differentiate the
Ignite family from other 8-bit to 64-bit microprocessors targeted for embedded

control applications. Considering the reduced requirement for support
microprocessors, the Ignite family is intended to be available at a high volume
price that should be price competitive with high-end 8-bit microprocessor and
general 16-bit microprocessor systems but with higher performance (speed and
functional capability). The Ignite family has been designed to allow high-speed
and high-yield fabrication using generally available wafer fabrication
technology and facilities.

The Ignite Microprocessor as a Java Processor. We believe the Ignite
---------------------------------------------
microprocessor architecture is capable of being an efficient and cost effective
Java programming language processor, because Java is designed to run on a
stack-oriented architecture and the Ignite architecture executes the virtual
stack machine internal to Java efficiently. Many Java operation codes or
instructions require only a single 8-bit Ignite family instruction to be
executed, providing a performance advantage over other more expensive processors
that require six or more 32-bit instructions to do the same task. This feature
allows the execution of Java programs with increased speed and reduced code size
thereby enabling lower system memory costs. In addition, the incorporation of
many on-chip system functions is expected to allow the Ignite family to perform
most of the other functions required of an Internet computer device or Java
accelerator, thereby eliminating components. Since Internet computers are
designed to be inexpensive appliances for Internet access, cost, speed and
performance are expected to be key requirements for designers. We believe the
Ignite technology can compete favorably on the basis of such requirements,
although there can be no assurance we can successfully exploit Java related
applications or that competitors will not create superior Java processors.

We have ported the Java operating environment to the Ignite family, which
currently uses the C programming language for software support. We are a
licensee of Sun Microsystems Inc. This enables us to develop and distribute
products based on Sun's personalJava, a platform on which to run Java
applications. We have also licensed from Wind River an operating system,
VxWorks, and entered into a relationship with Forth Inc. whereby Forth will
provide software support and operating system development tools for the Forth
Programming language. We expect that successful implementation of this software
should result in a microprocessor which is competitive in the Java virtual
machine and embedded applications markets. We believe that, if the
implementation is successfully completed, the Ignite I family will be
competitive with Java microprocessors announced by competitors. However, there
can be no assurance of successful implementation of this package of software or
of a market for an Ignite family Java microprocessor.

Stage of Development. In early 1994, nanoTronics initiated production of a
--------------------
first generation of wafers at a contract fabrication facility using 6 inch
wafers employing 0.8-micron double-metal CMOS technology. After the May 31,
1994 acquisition, we improved the original design, added new features and
performed simulations and tests of the improved designs. In October 1995, a run
of six wafers of second generation 0.8-micron microprocessors was fabricated by
a contract fabrication facility. Subsequently, we tested these microprocessors,
while completing a C computer language compiler and preparing application
development tools. The compiler and application development tools are necessary
to enable system designers to program the Ignite family for specific
applications. We made corrections to the design suggested by the testing of
prototype units and produced an additional run of second generation
microprocessors from remaining wafers in May 1996. In July 1996, we employed
these microprocessors in demonstration boards for use by developers and
prospective customers and licensees.

In December 1997, we completed development of and started shipping a
0.5-micron microprocessor based on the Ignite technology and found that
0.5-micron double-metal CMOS technology improved operating speed, reduced power
requirements, reduced physical size and reduced fabrication cost. In May 1998,
we began a production run of a 0.35-micron microprocessor that further increased
operating speed and cost performance over the previous generations of the Ignite
family of microprocessors.

At each stage of development, microprocessors require extensive testing to
ascertain performance limitations and the extent and nature of errors (bugs), if
any. When significant limitations or errors are discovered, additional rounds
of design modifications and fabrication are required prior to having functional
and demonstrable microprocessors for prospective customers and licensees.
Although our 0.5 and 0.35-micron microprocessors have been sent to prospective
customers in anticipation of production orders, there can be no assurance that
we, during our continued testing of these products, will not identify errors
requiring additional rounds of design and fabrication prior to commercial
production. Additional delays could have an adverse effect on the marketability
of our technology and financial condition.

In September 2000, we completed the VHDL soft-core version of the Ignite
microprocessor family. The hardware design inside a microprocessor, or silicon
device, can be represented as a software program. This, in essence, replaces
the old style of designing microprocessors using schematics. VHDL is the
predominant software language used to design semiconductors. In addition to the
design aspects, VHDL also contains sophisticated simulation tools that allow the
designer to simulate the functionality of the entire design before committing to
silicon. Also VHDL enables a designer to easily modify and enhance the design.
A design represented in VHDL goes through a synthesis process whereby it is
converted to the most basic element of a design, logical gates. This gate level
representation in turn is used with computer aided engineering tools to
translate the design into the most fundamental component of semiconductors,
transistors. The characteristics of the transistors can be given as a library
to a foundry. Therefore, a design represented in VHDL is technology and foundry
independent and can be targeted for any given transistor geometry (such as 0.18,
0.25, or 0.35- micron) for any foundry of choice.

We have developed marketing materials, product manuals and application
development tools for use by licensees and customers. The manuals and tools are
necessary to enable system designers to quickly and easily program the Ignite
family for specific applications.

We believe that the Ignite family is ready for licensing or sale and that
any additional changes encountered in current testing will be minor and can be
made during subsequent production runs of Ignite family microprocessors for
customers, when and if orders are obtained. We also believe the core technology
is ready for licensing for use by others to develop custom multiple function
microprocessors.

Business Strategy. The increasing demand for embedded control has made the
-----------------
market for microprocessors one of the largest segments of the semiconductor
logic market. This demand will drive the need for embedded processors. Our
strategy does not entail competing directly with suppliers who have multiple
microprocessor types addressing all parts of the embedded systems market, but on
identifying certain market niches that the Ignite would best address due to its
low cost, low power consumption and small number of transistors.

Because of the above factors, we intend to focus the majority of our
efforts on the embedded microprocessor business, a market without an established
base of microprocessor products and for which we believe the Ignite has
desirable technical and market advantages.

We believe that our architecture is suited for controller applications
requiring high performance and low system cost, such as cell phones, printers,
video terminals, robotics, motion controllers, industrial controllers, digital
communication devices, video games, kiosks, cable and satellite modems and TV
set top boxes. We expect that early licensing of the technology and product
applications will focus on embedded control.

We have three international representatives for foreign markets and are
addressing the domestic market with an in-house business development person. We
also have a strategic alliance with an outside microprocessor design house.

We believe the appropriate approach for us initially lies in a balanced
effort of cultivating licensees and developing specific product enhancement
partnerships, producing original equipment manufactured products, and providing
technical support to third parties on a contract basis. The overall balance of
these approaches will be monitored and modified as we attempt to ascertain and
capitalize on the highly dynamic and competitive embedded microprocessor market.
There can be no assurance that we can successfully exploit our microprocessor
technology.

Subject to the availability of financial and personnel resources, while we
are commercializing the Ignite family and the core technology, our strategy is
to also design and develop future versions of the microprocessor with more
demanding sub-micron technology and with more features. However, our resources
are limited, and there can be no assurance that we will be able to continue
microprocessor enhancement.

Initial fabrications of the 0.8-micron and 0.5-micron processors were
performed by contract fabrication facilities. The 0.35-micron microprocessor
was fabricated by a contract fabrication facility that had agreed to provide
production quantities for our customers. We are currently working with a
contract fabrication facility and our design house partner to produce a
0.18-micron version of the Ignite. There can be no assurance fabrication
facilities will be available to produce the Ignite family in the future.
However, since there are a large number of fabrication facilities with the
capability to produce the Ignite family of microprocessors, we believe
microprocessors can be produced on a contract basis. Industry shortages of
fabrication facilities that may exist and are predicted to exist in the future
are generally limited to the more demanding architectures. If a shortage of
fabrication facilities develops, it could have a material adverse effect on our
financial condition.

Competition. The semiconductor industry is intensely competitive and has
-----------
been characterized by price erosion, rapid technological change and foreign
competition in many markets. The industry consists of major domestic and
international semiconductor companies, most of which have greater financial,
technical, marketing, distribution, development and other resources than ours.
The market for microprocessors and for embedded control applications is at least
as competitive.

While our strategy is to target high-volume licensees and microprocessor
customers requiring more sophisticated but low-cost, low-power consumption
devices, we can still expect significant competition. We may also elect to
develop embedded control system products utilizing our own architecture or by
contract for other manufacturers.

We expect that the Ignite family, if successfully commercialized in the
embedded controller market, will compete with a variety of 16/64-bit
microprocessors including those based on intellectual property from ARM and MIPS
and microprocessors from Hitachi, Motorola and IBM. As a Java processor, we
expect our Ignite family will compete with a broad range of microprocessors
including those incorporating co-processor accelerator technology. The
producers of these microprocessors have significantly greater resources than
ours.

A new entrant, such as ours, is at a competitive disadvantage compared to
these and other established producers. A number of factors contribute to this,
including:

- the lack of product performance experience,
- lack of experience by customers in using application development
systems,
- no record of technical service and support, and
- limited marketing and sales capabilities.

JUICETECHNOLOGY

General Background. During 2001 we introduced a technology to enhance the
------------------
users experience of the wireless internet by expanding the capabilities of his
device (either a cell phone, PDA, smart phone or pocket PC). By varying the
speed at which the microprocessor processes information, the device can present
information in a richer format than is available from current technologies and,
additionally, doing so with less drain on the device's battery.

Industry Background. The wireless industry currently provides voice and
-------------------
text data over airwaves ranging from 8Kbps to 19.6Kbps in North America. Voice
transmissions account for the majority of wireless use, however at these band
widths data content providers are limited to the type of product they are able
to transmit and display on a user's device. In addition, users are now familiar
with the internet content they receive on their desk top and lap top computers
provided by land lines and, therefore, may not be overly enthusiastic about
inferior products provided by the wireless internet. Eventually the band width
is expected to increase to over 2Mbits. When this happens, content providers
will be able to transmit information to a user's device in a way similar to
existing land lines thereby meeting the user's current expectations. These
enhanced transmissions may include items such as video streaming, video mail,
mobile television, video conferencing and video on demand just to name a few.
In North America we are still several years away from this solution. Currently
only 4% of wireless users are internet connected. Significant funds will need
to be expended to procure band width and provide the infrastructure to meet the
demands of next generation wireless applications. In the meantime, device
manufacturers, wireless data network providers and content providers continue to
attempt to attract a larger number of wireless internet subscribers with
existing technology. Several areas which are having a dampening effect on
attracting internet subscribers are the mobile wireless device's small screen
size and limited battery power, the user's difficulty in interacting when using
small keypads or number pads, and the network carrier's transmission of text
only or limited graphics.

Technology Description. JUICEtechnology provides a solution for text only
----------------------
and limited graphics content and limited battery power. Juice allows
interaction between the microprocessor contained in the user's device and the
data being transmitted by the content provider. When the content is such that
increased processor speed is required to provide a better display, as would be
the case in expanded graphics, the microprocessor simply increases its
functioning speed. Conversely, if the content is such that the microprocessor
can effectively process the content at a lower speed, then the processor slows
down, thereby, conserving energy. This combination provides for both expanded
battery life for the user's device and for a richer wireless internet experience
for the user.

Stage of Development. The engineering is complete for JUICEtechnology,
--------------------
however, we are awaiting significant customer interest before we commit to the
development of a working model available for demonstrations and
commercialization.

Business Strategy. To launch JUICEtechnology we will need the
-----------------
support of a major manufacturer, wireless service provider or content supplier
who can introduce the product as a defacto standard.

Competition. Although we are not aware of any other solutions which
-----------
condition data in the manner that JUICEtechnology does, there are a variety of
companies that are attempting to vary the speed at which a microprocessor
processes data including Intel, Hitachi, Transmeta and AMD. Some of our existing
and potential competitors have substantially greater financial, technical,
marketing and distribution resources than we do. Additionally, many of these
companies have greater name recognition and more established relationships with
our target customers. Furthermore, these competitors may be able to adopt more
aggressive pricing policies and offer customers more attractive terms than we
can.

HIGH SPEED DATA COMMUNICATIONS PRODUCTS.

The communication products that reached the end of their life cycles are:

VME Product Line - a line of intelligent high-speed communications engines
in a virtual memory European form factor. Some of our customers for these
products included the military as well as large satellite based data
communications companies.

Atcomm2/4 Product Line - an intelligent two or four channel product that
was used for high-speed data communications.

Except for minor repeat orders, we no longer support this product line. We
have disposed of or fully reserved the communication product line inventory and
are concentrating our efforts and resources on Ignite and JUICEtechnology.

RADAR AND ANTENNA TECHNOLOGY.

General Background.We commenced active development of our ground
-------------------
penetrating radar technology in April 1992. By May 1993, we were able to

demonstrate the sensing, processing and crude visualization of images from our
technology, and by May 1994 we had completed our prototype device. Since May
1994, we have focused our efforts and limited financial resources on the
microprocessor technology and communication products, effectively suspending
development and marketing efforts related to ground penetrating radar.

Gas Antenna Technology Description.
----------------------------------

We sold our gas plasma technology in August 1999.

RESEARCH AND DEVELOPMENT. Our current development efforts are focused on
improvement of and additional features for the Ignite family microprocessor and
developing the JUICEtechnology. The development of these technologies has taken
longer than anticipated and could be subject to additional delays. Therefore,
there can be no assurance of timely or successful marketing of these
technologies.

We incurred research and development expenditures of $1,372,421, $2,218,433
and $3,170,166 for our fiscal years ended May 31, 2002, 2001 and 2000. The
majority of these expenditures have been devoted to our microprocessor
technology. We believe that technical advances are essential to our success
and expect that we will continue to expend substantial funds on research and
development of our technology. However, there can be no assurance that such
research and development efforts will result in the design and development of a
competitive technology in a timely manner.

LICENSES, PATENTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS. We rely on
a combination of patents, copyright and trademark laws, trade secrets, software
security measures, license agreements and nondisclosure agreements to protect
our proprietary technologies. Our policy is to seek the issuance of patents
that we consider important to our business to protect inventions and technology
that support our microprocessor technology.

We have six U.S. patents issued dating back to 1989 on the microprocessor
technology. We have one microprocessor technology patent pending in five
European countries and one patent issued in Japan and may file additional
applications under international treaties depending on an evaluation of the
costs and anticipated benefits that may be obtained by expanding possible patent
coverage. In addition, we have one U.S. patent issued on the ground penetrating
radar technology and one U.S. patent issued on one of the communications
products. We also have three patents pending related to several other
development programs including JUICEtechnology.

In addition to such factors as innovation, technological expertise and
experienced personnel, we believe that a strong patent position is becoming
increasingly important to compete effectively in the semiconductor industry. It
may become necessary or desirable in the future for us to obtain patent and
technology licenses from other companies relating to certain technology that may
be employed in future products or processes. To date, we have not received
notices of claimed infringement of patents based on our existing processes or
products; but, due to the nature of the industry, we may receive such claims in
the future. Likewise, we believe that we may have claims against other
semiconductor companies should certain of our pending patents be favorably
granted. However, there can be no assurance thereof or any assurance that we
could successfully exploit any potential patent claims against larger
competitors.

Based on the asset purchase agreement and plan of reorganization between
Patriot, nanoTronics and Mr. Falk, we were the recipients of a number of
warranties and indemnities. We believe nanoTronics has been liquidated and, due
to Mr. Falk's death in July 1995, we may be limited in our ability to obtain
satisfaction should we have any future claims against nanoTronics or its
successor, the Falk Family Estate.

We have entered into the following licenses related to the microprocessor
technology:

- Sierra Systems. In June 1994, we entered into an agreement with Sierra
Systems whereby we could provide the C programming language on the
Ignite. We currently provide development boards with the C programming
language.

- Sun Microsystems Inc. In June 1997, we entered into an agreement with
Sun Microsystems, Inc. which enabled us to develop and distribute
products based on Sun's Java's technology. In June 1998, we exercised
an option under that agreement to license from Sun, personalJava, a
smaller platform on which to run Java applications that did not
include an operating system. We determined that personalJava was
better suited to the markets available to the Ignite. We have ported
personalJava to the Ignite.

- Wind River. In July 1997, we entered into an agreement with Wind River
that provided us with a license for an operating system, VxWorks, to
be used in conjunction with personalJava. We have ported VxWorks to
the Ignite.

- Forth Inc. In July 1997, we entered into a license agreement with
Forth Inc. whereby Forth will provide software support and operating
system development tools for the Forth programming language. Several
customers are evaluating the Ignite as a microprocessor using the
Forth programming language.

We had one U.S. patent on our gas plasma antenna technology that was sold
in August 1999.

We have one U.S. patent on our ground penetrating radar technology. No
foreign application has been made. There are a large number of patents owned
by others in the radar field generally and in the field of ground penetrating
radar specifically. Accordingly, although we are not aware of any possible
infringement and have not received any notices of claimed infringement, we may
receive such claims in the future.

There can be no assurance that any patents will be issued from pending or
future applications or that any patents that are issued will provide meaningful
protection or other commercial advantages to us. Although we intend to protect
our rights vigorously, there can be no assurance that these measures will be
successful.

We generally require all of our employees and consultants, including our
management, to sign a non-disclosure and invention assignment agreement upon
employment with us.

MARKETING AND DISTRIBUTION. Our products are marketed through a
combination of direct sales and distributors. Approximate sales by principal
geographic area (as a percentage of sales) for fiscal years ended May 31 were as
follows:

2002 2001 2000
-------- --------- --------
Domestic sales 99% 75% 65%

Foreign sales
Asia - % 7% 7%
Europe 1 % 6% 19%
North America - % 12% 9%
-------- --------- --------
Total sales 100% 100% 100%
======== ========= ========

All of our operating assets are located within the United States. While
sales to certain geographic areas generally vary from year to year, we do not
expect that changes in the geographic composition of sales will have a material
adverse effect on operations.

DEPENDENCE UPON SINGLE CUSTOMERS. Ten percent (10%) or more of our
consolidated net sales were derived from shipments to the following customers
for the fiscal years ended May 31as follows:

2002 2001 2000
---- ---- ----

Advanced Relay $151,000 $ - $ -
Schindler 59,000 - -
Raytheon - 88,000 -
SAIC - 41,000 -
Spellcaster - 40,000 -
Intermec - - 137,000
Sipex - - 138,000
Miel - - 127,000

All of the above sales were for communication products and were shipped
against multiple purchase orders from each customer.

We had no backlog as of January 31, 2003 or January 31, 2002.

FACILITIES. We have one 10,300 square foot office located at 10989 Via
Frontera, San Diego, California. The facility is leased through July 2006. In
July 2002, we sublet approximately 5,000 square feet of our facility to an
independent third party. The term of the sublease coincides with the remaining
term of our lease. The reduced floor space provides adequate and suitable
facilities for all of our corporate functions.

EMPLOYEES. We currently have eight personnel. Four persons are employed
in research and development, one in marketing and sales and three are engaged in
general and administrative activities. We also engage additional consultants
and part-time persons as needed from time to time.

Our future success depends in significant part upon the continued service
of our key technical and senior management personnel. The competition for
highly qualified personnel is intense, and there can be no assurance that we
will be able to retain our key managerial and technical employees or that we
will be able to attract and retain additional highly qualified technical and
managerial personnel in the future. None of our employees is represented by a
labor union, and we consider our relations with our employees to be good. None
of our employees is covered by key man life insurance policies.

GOVERNMENT REGULATION. To our knowledge, our products are not subject to
governmental regulation by any federal, state or local agencies that would
affect the manufacture, sale or use of our products, other than occupational
health and safety laws and labor laws which are generally applicable to most
companies. We cannot, of course, predict what sort of regulations of this type
may be imposed in the future but do not anticipate any unusual difficulties in
complying with governmental regulations which may be adopted in the future.

We have not incurred costs associated with environmental laws and do not
anticipate such laws will have any significant effect on our future business.

USE OF PROCEEDS

We will not receive any proceeds from the resale of these securities.

LEGAL PROCEEDINGS

In January 1999, we were sued in the Superior Court of San Diego County,
California by the Fish Family Trust, a co-inventor of the original ShBoom
technology. The suit also named as defendants nanoTronics and Gloria Felcyn on
behalf of the Falk Family Trust. The suit sought a judgment for damages, a
rescission of the Technology Transfer Agreement and a restoration of the
technology to the co-inventor. In March 1999, we joined with nanoTronics and
Gloria Felcyn and filed our response and cross-complaint against the Fish Family
Trust. In November 2000, the judge issued a summary ruling in favor of the
defendants on all counts. The Fish Family Trust filed an appeal in January
2001. Management believes that it is unlikely that the appellate court will
overturn the trial court's ruling and that the resolution of the appeal process
will have no impact on our financial position, income or cash flows.

In September 2001, an action was filed against us in the Superior Court of
San Diego County, California by Richard G. Blum, our former Chairman, President
and Chief Executive Officer. Mr. Blum contended that he was wrongfully
terminated on August 5, 2001 in violation of his employment agreement dated
December 1, 2000. He sought damages for the alleged breach of his employment
agreement, age discrimination, as well as other related claims. In October
2002, we entered into a settlement agreement with Mr. Blum whereby we agreed to
pay him $60,000 over twelve months and to issue him 400,000 shares of our common
stock. This liability has been recorded in our consolidated financial
statements for the six months ended November 30, 2002.

SELECTED FINANCIAL DATA

You should read the selected consolidated financial data set forth below in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and the
notes to those statements included elsewhere in this report. The selected
unaudited consolidated financial data set forth below for the first two fiscal
quarters ended November 30, 2002 and 2001 have been derived from our unaudited
consolidated financial statements. In the opinion of management, these interim
financial statements reflect all adjustments of a normal recurring nature
necessary for a fair statement of the results for interim periods. Operating
results for the six month period are not necessarily indicative of the results
that may be expected for the year. The selected consolidated financial data set
forth below for the fiscal years ended May 31, 2002, 2001, 2000, 1999, and 1998
have been derived from our consolidated financial statements which have been
audited by Nation Smith Hermes Diamond, independent auditors, for the year ended
May 31, 2002 and BDO Seidman, LLP, independent auditors, for the preceding four
years.

SIX MONTHS ENDED NOVEMBER 30, YEARS ENDED MAY 31,
---------------------------- ---------------------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------ ------------ -----------
inaudited
--------------------------

STATEMENTS OF OPERATIONS DATA:
Revenue:
Sales $ 45,049 $ 321,889 $ 358,809 $ 337,384 $ 716,960 $ 1,134,545 $1,902,874
------------ ------------ ------------ ------------ ------------ ------------ -----------
Costs and expenses:
Cost of sales 11,989 390,011 393,980 544,320 725,008 711,195 1,163,688
Research and development 373,505 871,247 1,372,421 2,218,433 3,170,166 2,149,361 1,607,828
Selling, general and administrative 1,064,234 1,392,412 2,708,579 2,588,579 3,501,128 2,015,058 4,090,937
------------ ------------ ------------ ------------ ------------ ------------ -----------
Total costs and expenses 1,449,728 2,653,670 4,474,980 5,351,332 7,396,302 4,875,614 6,862,453
------------ ------------ ------------ ------------ ------------ ------------ -----------
Operating loss (1,404,679) (2,331,781) (4,116,171) (5,013,948) (6,679,342) (3,741,069) (4,959,579)
Other income (expense), net (616,050) (273,791) (1,370,880) 45,045 (809,366) (535,387) (2,555,206)
------------ ------------ ------------ ------------ ------------ ------------ -----------
Net loss $(2,020,729) $(2,605,572) $(5,487,051) $(4,968,903) $(7,488,708) $(4,276,456)$(7,514,785)
============ ============ ============ ============ ============ ============ ===========

Basic and diluted loss per common share $ (0.02) $ (0.04) $ (0.08) $ (0.09) $ (0.17) $ (0.11) $ (0.24)

Weighted average number of shares-
basic and diluted 82,752,899 60,741,712 66,810,028 53,433,788 44,156,418 38,042,734 31,016,956

May 31,
November 30, ------------------------------------------------------------------
2002 2002 2001 2000 1999 1998
----------------- ------------ ------------- ----------- ------------ ----------
(unaudited)
BALANCE SHEET DATA:
Cash and cash equivalents $ 2,210 $ 88,108 $ 464,350 $2,100,242 $ 35,813 $ 602,456
Working capital (deficiency) (1,267,935) (918,768) 328,605 1,769,340 (1,545,055) 1,011,329
Total assets 662,979 934,526 1,543,693 2,733,148 1,145,027 2,189,654
Long-term obligations, net of current maturities 278,622 331,929 - - - 508,355
Total stockholders' equity (deficit) (1,030,826) (444,825) 922,388 2,209,882 (981,234) 1,156,848

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

Our Results of Operations have been and may continue to be subject to
significant variations. The results for a particular period may vary due to a
number of factors. These include:

- - the overall state of the semiconductor and communications segments of the
economy,
- - the development status of and demand for our products,
- - economic conditions in our markets,
- - the timing of orders,
- - the timing of expenditures in anticipation of future sales,
- - the mix of products sold by us,
- - the introduction of new products,
- - product enhancements by us or our competitors, and
- - pricing and other competitive conditions.

CRITICAL ACCOUNTING POLICIES

We believe that the following represent our critical accounting policies:

Property, Equipment and Depreciation

Property and equipment are stated at cost. Depreciation is computed over
the estimated useful life of three to five years using the straight-line method.
Long-lived assets and certain identifiable intangibles to be held and used by
the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We continuously evaluate the recoverability of our long-lived
assets based on estimated future cash flows from and the estimated fair value of
such long-lived assets, and provide for impairment if such undiscounted cash
flows are insufficient to recover the carrying amount of the long-lived asset.

Patents and Trademarks

Patents and trademarks are carried at cost less accumulated amortization
and are amortized over their estimated useful lives of four years. The carrying
value of patents and trademarks is periodically reviewed and impairments, if
any, are recognized when the expected future benefit to be derived from an
individual intangible asset is less than its carrying value.

Revenue Recognition

We recognize revenue on the shipment to our customers of communication
products, microprocessor integrated chips and evaluation boards. We anticipate
that in the future we will also derive revenue from fees for the transfer of
proven and reusable intellectual property components or the performance of
engineering services. We anticipate to enter into licensing agreements that will
provide licensees the right to incorporate our intellectual property components
in their products with terms and conditions that we anticipate to vary by
licensee. Generally, we anticipate these payments will include a nonrefundable
technology license fee, which will be payable upon the transfer of intellectual
property, or a nonrefundable engineering service fee, which generally will be
payable upon achievement of defined milestones. In addition, we anticipate these
agreements will include royalty payments, which will be payable upon sale of a

licensee's product, and maintenance and limited support fees. We will classify
all revenue that involves the future sale of a licensee's products as royalty
revenue. Royalty revenue will be generally recognized in the quarter in which a
report is received from a licensee detailing the shipments of products
incorporating our intellectual property components (i.e., in the quarter
following the sale of licensed product by the licensee). We will classify all
revenue that does not involve the future sale of a licensee's products,
primarily license fees and engineering service fees and maintenance and support
fees, as contract revenue. License fees will be recognized upon the execution of
the license agreement and transfer of intellectual property, provided no further
significant performance obligations exist and collectibility is deemed probable.
Fees related to engineering services contracts, which will be performed on a
best efforts basis and for which we will receive periodic milestone payments,
will be recognized as revenue over the estimated development period, using a
cost-based percentage of completion method. Annual maintenance and support fees,
which will be renewable by the licensee, will be classified as contract revenue
and will be amortized over the period of support, generally 12 months.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Options

The Company applies Accounting Principles Board ("APB") Opinion 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for all stock option plans. Under APB Opinion 25, compensation cost
has been recognized for stock options granted to employees when the option price
is less than the market price of the underlying common stock on the date of
grant.

Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," requires the Company to provide pro forma information
regarding net income as if compensation cost for the Company's stock option
plans had been determined in accordance with the fair value based method
prescribed in SFAS No. 123. To provide the required pro forma information, the
Company estimates the fair value of each stock option at the grant date by using
the Black-Scholes option-pricing model.

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 reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. During the year ended May 31, 2002, based upon
information then available, we revised our estimates regarding the recovery of
our inventories. As a result, we increased existing reserves for obsolescence by
$111,381.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 2002 AND NOVEMBER
30, 2001

NET SALES. Total net sales for the six months ended November 30, 2002 decreased
86.0% to $45,049 from $321,889 for the corresponding period of the previous

fiscal year. This decrease was due to the final buys on our matured
communication products having been substantially completed the previous fiscal
year. We are currently expending our efforts on marketing and sale of our
microprocessor technology. The microprocessor technology generated minimal
revenue during the six months ended November 30, 2002. We anticipate that
future revenue will be derived from up front license fees and royalties as a
result of the shift in focus to the commercialization of our microprocessor and
related technology intellectual property. Previously we focused primarily on
the sale of silicon products. We cannot estimate when significant revenue will
be generated from the microprocessor technology.

COST OF SALES. Cost of sales as a percentage of net sales decreased to 26.6% in
the six months ended November 30, 2002 compared to 121.2% for the corresponding
period of the previous fiscal year. This significant decrease was due to minor
sales during the first two quarters of 2003 not having associated costs due to
having previously written off the communication product line inventory. A
$149,433 write-down of the inventory to zero during the previous fiscal year was
a result of not being able to find a buyer for the communication product line
and our decision to focus future company revenue on the sale of licenses and
intellectual property related to our microprocessor technology versus the sale
of microprocessor silicon and related products. The winding down of the
communication product line did not impair any of our other assets. Also, as a
result of eliminating the communication product line, overhead expenses charged
to cost of sales the previous fiscal year are now being charged to general and
administrative expenses.

RESEARCH AND DEVELOPMENT EXPENSES decreased 57.1% from $871,248 for the six
months ended November 30, 2001 compared to $373,505 for the six months ended
November 30, 2002. This decrease was due to a reduction in consulting services
compared to the previous fiscal year related to the development of a new soft
core version of the microprocessor technology in the amount of $87,802 and a
reduction in payroll expense as a result of downsizing the department by six
individuals during the second and third fiscal quarters of the previous fiscal
year in an amount
of $370,625.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased 23.6% to $1,064,234 for
the six months ended November 30, 2002 compared to $1,392,412 for the six months
of the previous fiscal year. This decrease was due primarily to a reduction in
executive, marketing and sales personnel in the amount of $309,932 as a result
of downsizing the company during the second and third fiscal quarters of the
previous fiscal year.

OTHER EXPENSES for the six months ended November 30, 2002, were $616,050
compared to other expenses of $273,791 for the corresponding period of the
previous fiscal year. This change resulted primarily from the recognition of
non-cash interest expense of $550,566 related to the amortization of the debt
discount associated with the issuance of warrants under a secured note payable
and convertible debentures coupled with interest expense of $65,669 related to
the note and debentures for the current fiscal period compared to $261,068 and
$13,087, respectively for the same fiscal period of the previous fiscal year.

RESULTS OF OPERATIONS FOR THE YEARS ENDED MAY 31, 2002, 2001 AND 2000

OUR NET SALES IN FISCAL 2002, 2001 AND 2000 WERE AS FOLLOWS:

Fiscal Year Amount % Change from the Previous Fiscal Year
----------- ----------- --------------------------------------

2002 $ 358,809 Increase of 6.3%
2001 $ 337,384 Decrease of 52.9%
2000 $ 716,960

Net sales. Total net sales for the year ended May 31, 2002 increased
slightly over the previous year as a result of our last buy program for the
communications products all of which have reached the end of their life cycles.
Net sales for the year ended May 31, 2001 decreased from the previous fiscal
year. This decrease was due to a lack of follow-on shipments for the matured
communication products. We have stopped production of our communications
products as we are now concentrating on the microprocessor product line. We
anticipate only minor, if any, communication product revenue since we are
attempting to sell this line. Future sales will be derived from sales of
microprocessors and licensing of microprocessor technology.

OUR COST OF SALES IN FISCAL 2002, 2001 AND 2000 WERE AS FOLLOWS:

Fiscal Year Amount % Change from the % of Net Sales
----------- ------ Previous Fiscal Year --------------
--------------------

2002 $ 393,980 Decrease of 27.6% 109.8%
2001 $ 544,320 Decrease of 24.9% 161.3%
2000 $ 725,008 101.1%

Cost of sales. Cost of sales as a percentage of net sales decreased in the
fiscal year ended May 31, 2002 compared to the previous fiscal year. This
decrease was due to a reduction in fixed manufacturing overhead as a result of
cost cutting programs instituted in conjunction with the completion of the
communication product line during the current fiscal year. Cost of sales as a
percentage of net sales increased in the fiscal year ended May 31, 2001 compared
to the previous fiscal year. This increase was due to fixed manufacturing
overhead being allocated to a smaller revenue base during the fiscal year ended
May 31, 2001 and a $138,000 reduction in royalties during the fiscal year ended
May 31, 2001 compared to the previous fiscal year negatively impacting the
percentage comparison.

OUR RESEARCH AND DEVELOPMENT EXPENSES IN FISCAL 2002, 2001 AND 2000 WERE AS
FOLLOWS:

Fiscal Year Amount % Change from the Previous Fiscal Year
----------------- ----------- ----------------------------------------

2002 $1,372,421 Decrease of 38.1%
2001 $2,218,433 Decrease of 30.0%
2000 $3,170,166

Research and development expenses decreased during the fiscal year ended
May 31, 2002 compared to the previous fiscal year. This decrease was due
primarily to a reduction of approximately $406,000 in personnel costs, a
$221,000 reduction in the costs of outside consultants and a reduction in
software maintenance costs of $77,000. These reductions in costs were as a
result of a cost cutting program initiated during the first half of the current
fiscal year. Research and development expenses decreased during the fiscal year
ended May 31, 2001 compared to the previous fiscal year. This decrease was due
primarily to non-cash compensation expense of $1,588,960 being recorded the
previous fiscal year as a result of the Company providing employees and
directors the option of exercising their stock options using a cashless exercise
provision compared to no similar expense in the current fiscal year. This
decrease was partially offset by an increase in personnel costs of approximately
$300,000 and consulting services of $150,000. The increase in personnel and
consulting costs was attributable to the introduction of the new soft core
version of the microprocessor technology and to accelerate the effort to
complete and improve the marketability of the Ignite I and JUICEtechnology. We
added four research and development personnel, including one executive, during
the fiscal year ended May 31, 2001.

OUR SELLING, GENERAL AND ADMINISTRATIVE EXPENSES IN FISCAL 2002, 2001 AND
2000 WERE AS FOLLOWS:

Fiscal Year Amount % Change from the Previous Fiscal Year
------------- ----------- --------------------------------------

2002 $2,708,579 Increase of 4.6%
2001 $2,588,579 Decrease of 26.0%
2000 $3,501,128

Selling, general and administrative expenses increased during the fiscal
year ended May 31, 2002. This increase was due primarily to approximately
$294,000 of legal, accounting and shareholder costs associated with several
registrations of securities and two shareholder meetings, non-cash compensation
of $105,000 related to services provided to support our merger and acquisition
activities, offset by reductions in consulting expenses of $286,000. Selling,
general and administrative expenses decreased during the fiscal year ended May
31, 2001, compared to the previous fiscal year. This decrease was due
primarily to non-cash compensation expense of approximately $2,150,000 being
recorded during the previous fiscal year as a result of the Company providing
employees and directors the option of exercising their stock options using a
cashless exercise provision compared to no similar expense in the current fiscal
year. This decrease was partially offset by an increase in marketing,
employment and consulting costs of approximately $1,174,000. This increase was
due to increased marketing expenses related to Ignite I and JUICEtechnology and
additional compensation and relocation costs related to changes in several
executive level positions. We added six selling, general and administrative
personnel, including two executives, during the fiscal year ended May 31, 2001.

OUR OTHER INCOME (EXPENSES) IN FISCAL 2002, 2001 AND 2000 WERE AS FOLLOWS:

Fiscal Year Amount % Change from the Previous Fiscal Year
---------------- -------------- ------------------------------------

2002 $(1,370,880) Not meaningful
2001 $ 45,045 Not meaningful
2000 $ (809,366)

Other income (expense) changed significantly for the fiscal year ended May
31, 2002 compared to the previous fiscal year. This change resulted primarily
from the recognition of non-cash interest expense of approximately $1,324,000
related to the amortization of the debt discount associated with the issuance of
warrants under the secured note payable, convertible debentures, and equity line
of credit and interest expense related to the excess of the market price over
the carrying value of the common shares sold to Swartz for which the proceeds
were applied to the note payable balance. Other income (expenses) changed
significantly for the fiscal year ended May 31, 2001, compared to the previous
fiscal year. During the fiscal year ended May 31, 2001, other income was
recognized primarily from interest income as opposed to the previous fiscal year
when other expense resulted primarily from the recognition of approximately
$996,000 of non-cash interest expense related to the amortization of debt
discount and $51,000 increase in interest expense over 2001 related to short
term notes. The 2000 expenses were partially offset by a gain of $250,000 on
the sale of the gas plasma antenna technology.

SUPPLEMENTARY FINANCIAL INFORMATION

The following table presents unaudited, select information for each of the
ten fiscal quarters in the period ended November 30, 2002:

First Second Third Fourth
Quarter Quarter Quarter Quarter
----------------- ----------------- ----------------- -----------------

Fiscal 2003:
Total revenues $ 39,889 $ 5,160
Operating loss (661,408) (743,271)
Net loss (943,441) (1,077,288)
Net loss per basic and diluted share $ (0.01) $ (0.01)

Fiscal 2002:
Total revenues $ 314,500 $ 7,389 $ 4,620 $ 32,300
Operating loss (1,039,217) (1,292,564) (964,703) (819,687)
Net loss (1,046,970) (1,558,602) (1,260,676) (1,620,803)
Net loss per basic and diluted share $ (0.02) $ (0.02) $ (0.02) $ (0.02)

Fiscal 2001:
Total revenues $ 119,101 $ 57,623 $ 66,045 $ 94,615
Operating loss (900,412) (1,202,001) (1,365,203) (1,546,332)
Net loss (886,540) (1,186,663) (1,352,694) (1,543,006)
Net loss per basic and diluted share $ (0.02) $ (0.02) $ (0.03) $ (0.02)

LIQUIDITY AND CAPITAL RESOURCES

In connection with their report on our consolidated financial statements as of
and for the year ended May 31, 2002, Nation Smith Hermes Diamond, our
independent certified public accountants, expressed substantial doubt about our
ability to continue as a going concern because of recurring net losses and
negative cash flow from operations.

At November 30, 2002, we had deficit working capital of $1,267,935 and cash and
cash equivalents of $2,210. We have historically funded our operations
primarily through the issuance of securities and debt financings. Cash and cash
equivalents decreased $85,898 during the six months ended November 30, 2002 due
to net cash used in operations of $1,108,120 offset by funds generated primarily
from the issuance of convertible debentures of $847,000 and short term notes
payable of $150,000. The net cash used in operations was $1,108,120 for the six
months ended November 30, 2002 compared to $2,073,812 for the corresponding
period of the previous fiscal year. The decrease in cash required in operations
was due primarily to a $764,150 reduction in net loss as adjusted to reconcile
to cash used in operating activities coupled with a $167,211 change in prepaid
expenses and other assets between the two periods. Cash used in investing
activities was $34,240 for the six months ended November 30, 2002 compared to
$51,348 for the corresponding period of the previous fiscal year. Cash provided
by financing activities was $1,056,462 for the six months ended November 30,
2002 compared to $1,703,603 for the corresponding period of the previous fiscal
year. This decrease was primarily the result of a reduced issuance of common
stock of $761,604 during the current fiscal period compared to the corresponding
period of the previous fiscal year.

We estimate our current annual cash requirements to sustain our operations for
the next twelve months to be $2.4 million. Since we are no longer supporting
the communications product line, we are assuming that there will be no
communications product revenue. We have a note payable to Swartz Private
Equity, LLC ("Swartz") of $635,276 at November 30, 2002 which was originally
due in January 2003 and subsequent to the end of the quarter has been extended
to April 2003. We also have convertible debentures with a group of investors as
of November 30, 2002 aggregating $1,280,000. At the option of the debenture
holders, they may purchase additional debentures up to $1 million at any time
during the next two years as long as the price of our common stock is in excess
of $0.20 per share. During the first six months ended November 30, 2002, we
obtained $50,000 from the sale of equity to several private investors and
$150,000 from short term notes entered into with a related party. Subsequent
to November 30, 2002, we obtained an additional $33,350 from the sale of equity
to several private investors, $250,000 from the issuance of additional
convertible debentures and $30,000 from a short term note entered into with a
related party. In addition, we are negotiating the terms of a $12 million
equity line of credit.

If we are not successful at obtaining and drawing down on the $12 million equity
line of credit or if the optional amounts under the convertible debentures are
not raised in sufficient amounts, then we may not have funds sufficient to meet
our cash requirements. In such circumstances, we may need to secure additional
short-term debt, private placement debt and/or equity financings with individual
or institutional investors. In addition, we may need to make additional cost
reductions if our cash requirements cannot be met from external sources. We
expect that the $2.4 million requirement will be provided by:

- additional funds under the $12 million equity line of credit if we are
successful in concluding negotiations with the potential investor and
are able to register additional shares of common stock, and such
available funding exceeds the remaining balance of the note payable to
Swartz;

- proceeds from the exercise of outstanding stock options and warrants;
and

- additional debt and/or equity financings.

In addition, we have formulated additional cost reduction plans which can be
implemented if the required funds are not obtainable. We also have remaining a
$400,000 accounts receivable factoring agreement with our bank; however, we have
no eligible accounts receivable to factor as of November 30, 2002.

We anticipate our future revenue to be derived primarily from the sale of
licenses and royalties. To receive this revenue, we may require additional
equipment, fabrication, components and supplies during the next twelve months to
support potential customer requirements and further develop our technologies.
Product introductions such as those currently underway for the Ignite I and
JUICEtechnology may require significant product launch, marketing personnel and
other expenditures that cannot be currently estimated. Further, if expanded
development is commenced or new generations of microprocessor technology are
accelerated beyond current plans, additional expenditures we cannot currently
estimate, may be required. It is possible therefore, that higher levels of
expenditures may be required than we currently contemplate resulting from
changes in development plans or as required to support new developments or
commercialization activities or otherwise.

If we are unable to obtain the necessary funds, we could be forced to
substantially curtail or cease operations which would have a material adverse
effect on our business. Further, there can be no assurance that we will be able
to timely receive shareholder approval to increase the number of authorized
shares or that required funds, if available, will be available on attractive
terms or that they will not have a significantly dilutive effect on our existing
shareholders. As such, there is substantial doubt about our ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from our possible inability to continue as a going concern.

$25 MILLION EQUITY LINE OF CREDIT

Overview. On September 17, 2001, we entered into an investment agreement
with Swartz. The investment agreement entitles us to issue and sell our common
stock to Swartz for up to an aggregate of $25 million from time to time during a
three-year period following the effective date of the registration statement.
This is also referred to as a put right. We filed a registration statement on
Form S-1 on October 11, 2001 that was declared effective on November 5, 2001 for
15,000,000 shares of our common stock which we issued to Swartz during the
fiscal year ended May 31, 2002. There remains approximately $24 million
available under this line conditioned on us filing one or more additional
registration statements. As of January 31, 2003, we have not filed a statement
requesting the registration of additional shares to put to Swartz under the $25
million equity line of credit.

Put Rights. In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the common
shares which may be issued as a consequence of the invocation of that put right.
Additionally, we must give at least ten but not more than twenty business days
advance notice to Swartz of the date on which we intend to exercise a particular
put right, and we must indicate the number of shares of common stock we intend
to sell to Swartz. At our option, we may also designate a maximum dollar amount
of common stock (not to exceed $3 million) which we will sell to Swartz during
the put and/or a minimum purchase price per common share at which Swartz may
purchase shares during the put. The number of common shares sold to Swartz may
not exceed 20% of the aggregate daily reported trading volume during each of two
consecutive ten business day periods beginning on the business day immediately
following the day we invoked the put right.

The price Swartz will pay for each share of common stock sold in a put is
equal to the lesser of (i) the market price for each of the two consecutive ten
business day periods beginning on the business day immediately following the day
we invoked the put right minus $0.10, or (ii) X percent of the market price for
each of the two ten day periods, where, X is equal to 90% if the market price is
below $2.00 and 93% if market price is equal to or greater than $2.00. Market
price is defined as the lowest closing bid price for the common stock during
each of the two consecutive ten business day periods. However, the purchase
price may not be less than the designated minimum per share price, if any, that
we indicated in our notice.

Limitations and Conditions Precedent to Our Put Rights. We may not
initiate a put if, as of the proposed date of such put:

- we have issued shares of our common stock that have been paid for by
Swartz and the amount of proceeds we have received is equal to the
maximum offering amount;

- the registration statement covering the resale of the shares becomes
ineffective or unavailable for use;

- our common stock is not actively trading on the OTC Bulletin Board,
the Nasdaq Small Cap Market, the Nasdaq National Market, the American
Stock Exchange, or the New York Stock Exchange, or is suspended or
delisted with respect to the trading on such market or exchange.

If any of the following events occur during the pricing period for a put,
the volume accrual shall cease. For the put, the pricing period shall be
adjusted to end 10 business days after the date that we notify Swartz of the
event, and any minimum price per share we specified shall not apply to the put:

- we have announced or implemented a stock split or combination of our
common stock between the advanced put notice date and the end of the
pricing period;

- we have paid a common stock dividend or made any other distribution of
our common stock between the advanced put notice date and the end of
the pricing period;

- we have made a distribution to the holders of our common stock or of
all or any portion of our assets or evidences of indebtedness between
the put notice date and the end of the pricing period;

- we have consummated a major transaction (including a transaction,
which constitutes a change of control) between the advance put notice
date and the end of the pricing period, the registration statement
covering the resale of the shares becomes ineffective or unavailable
for use, or our stock becomes delisted for trading on our then primary
exchange; or

- we discover the existence of facts that cause us to believe that the
registration statement contains an untrue statement or omits to state
a material fact.

Short Sales. Swartz and its affiliates are prohibited from engaging in
short sales of our common stock unless they have received a put notice and the
amount of shares involved in a short sale does not exceed the number of shares
specified in the put notice.

Shareholder Approval. We may currently issue more than 20% of
our outstanding shares under the investment agreement. If we become listed on
the Nasdaq Small Cap Market or Nasdaq National Market, then we must get
shareholder approval to issue more than 20% of our outstanding shares. Since we
are currently a bulletin board company, we do not need shareholder approval.

Termination of Investment Agreement. We may also terminate our right to
initiate further puts or terminate the investment agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the investment
agreement or any
related agreement.

Restrictive Covenants. During the term of the investment agreement and for
a period of two months thereafter, we are prohibited from certain transactions.
These include the issuance of any debt or equity securities in a private
transaction which are convertible or exercisable into shares of common stock at
a price based on the trading price of the common stock at any time after the
initial issuance of such securities or with a fixed conversion or exercise price
subject to adjustment without obtaining Swartz's prior written approval.

Right of First Refusal. Swartz has a right of first refusal to purchase
any variable priced securities offered by us in any private transaction which
closes on or prior to two months after the termination of the investment
agreement and a right of participation for any equity securities offered by us
in any private transaction which closes on or prior to two months after the
termination of the investment agreement.

Swartz's Right of Indemnification. We are obligated to indemnify Swartz
(including their stockholders, officers, directors, employees and agents) from
all liability and losses resulting from any misrepresentations or breaches we
made in connection with the investment agreement, our registration rights
agreement, other related agreements, or the registration statement.

Waiver and Agreement. On March 12, 2002, we entered into an amended waiver
and agreement with Swartz which replaced and superseded all previous waivers and
agreements. This amended waiver and agreement extended the time of the put
beyond twenty days and redefined the price of the put to be the lesser of the
factor of (a) the volume weighted average price per share, as defined by
Bloomberg L.P., for each day of the put multiplied by .70 or (b) the volume
weighted average price per share minus $0.05 multiplied by 20% of the acceptable
daily volume as defined in the waiver. At the discretion of Swartz, the 20%
daily volume limitation could be increased up to 30% of the daily volume. In
addition, the amended waiver and agreement increased the intended put share
amount for the first put to 14,100,000 shares, which is the total number of
shares we had registered so far under the $25 million equity line of credit. On
May 30, 2002 we closed the first put under the $25 million equity line of credit
by applying the proceeds of $926,924 to the secured note payable discussed
below.

Warrants. In connection with closing the $25 million equity line of
credit, we issued to Swartz a commitment warrant to purchase 900,000 shares of
our common stock as discussed further in Note 7 to the consolidated financial
statements. This warrant was valued on the issuance date using the
Black-Scholes pricing model and the value was recorded as a debt discount.

SECURED NOTE PAYABLE

On March 12, 2002, we replaced and superceded a previously issued Secured
Promissory Note with Swartz with an Amended Secured Promissory Note and
Agreement with an effective date of October 9, 2001 and an Addendum to Amended
Secured Promissory Note dated March 12, 2002. The amended note, which
originally was to mature on January 9, 2003, has been extended to April 2003 and
amounts outstanding under the note bear interest at the rate of 5% per annum.
Per the addendum to the amended note, principal and interest payments are
deferred until April 2003.

As part of the consideration for entering into the above amended note, we agreed
to issue warrants to Swartz related to each advance against the note. In
connection with each advance, we issued to Swartz a warrant to purchase a number
of shares of common stock equal to the amount of the advance multiplied by 8.25
at an initial exercise price equal to the lesser of (a) the factor of the
average of the volume weighted average price per share, as defined by Bloomberg
L.P., for each trading day in the period beginning on the date of the previous
advance and ending on the trading day immediately preceding the date of the
current advance multiplied by .70 or (b) the volume weighted average price per
share minus $0.05. In addition, if after March 12, 2002, we issue common stock
to any parties other than Swartz, we are obligated to issue to Swartz warrants
equal to 20% of the common stock so issued. The amended note also gives to
Swartz the right of first refusal and rights to participate in subsequent debt
or equity transactions entered into by us through March 15, 2003.

As of November 30, 2002 we issued warrants to purchase up to 14,817,481 shares
of our common stock in accordance with the amended note agreements. The
warrants issued were valued using the Black-Scholes pricing model based on the
expected fair value at issuance and the estimated fair value was also recorded
as debt discount. See Note 7 to the consolidated financial statements for
discussion of the terms of the warrants

The note is secured by our assets.

All debt discounts are to be amortized as additional interest expense over the
term of the note payable. As of November 30, 2002, $1,107,238 had been
reflected as debt discount of which $917,722, $86,781 and $189,516 was amortized
to interest expense during the year ended May 31, 2002 and the three and six
months ended November 30, 2002, respectively.

Advances against the note $1,790,000
Less amount applied against $30 million equity line of credit (227,800)
Less amount applied against $25 million equity line of credit (926,924)
Less debt discount
Total 1,107,238
Amount amortized to expense (1,107,238) -
------------ -----------
Note payable at November 30, 2002 $ 635,276
===========

On November 9, 2001, an offset of $227,800 from the sale of 2,500,000 shares of
common stock was applied against the final put under the $30 million equity line
of credit discussed below.

On May 30, 2002, an offset of $926,924 from the sale of 14,100,000 shares of
common stock was applied against the first and only put under the $25 million
equity line of credit discussed below.

8% CONVERTIBLE DEBENTURES

Overview. From April 23, 2002 through January 31, 2003, we sold an aggregate of
- ---------
$1,605,000 of 8% convertible debentures to a group of eleven investors. The
convertible debentures entitle the debenture holder to convert the principal and
unpaid accrued interest into our common stock for two years from the date of
closing. In addition, the debenture holders received warrants exercisable into
a number of our common shares.

Number of Shares Debentures May Be Converted Into. The debentures can be
- --------------------------------------------------
converted into a number of our common shares at conversion prices that initially
equaled $0.05126 to $0.10289 per share.

Resets of Conversion Price and Conversion Shares. A reset date occurs on each
- ------------------------------------------------
three month anniversary of the closing date of each debenture and on the date
the registration statement becomes effective, October 29, 2002 for the first
$1,000,000 of principal. If the volume weighted average price for our common
stock for the ten days previous to the reset date is less than the conversion
price in effect at the time of the reset date, then the number of common shares
issuable to the selling shareholder on conversion will be increased. If the
conversion price is reset, the debenture can be converted into a number of our
common shares based on the following calculation: the amount of the debenture
plus any unpaid accrued interest divided by the reset conversion price which
shall equal the volume weighted average price for our common stock for the ten
days previous to the reset date. On October 29, 2002, the date the
registration statement for the first $1,000,000 of principal became effective,
the conversion price for debentures dated April 23, 2002 in an amount of
$225,000 and June 10, 2002 in amounts accumulating $775,000 were reset to
$0.04457 from initial conversion prices of $0.10289 and $0.08616.

Warrants. Concurrent with the issuance of the convertible debentures, we issued
- --------
to the debenture holders warrants to purchase up to 24,094,010 shares of our
common stock. These warrants are exercisable for five years from the date of
issuance at either initial negotiated exercise prices or prices equal to 115% of
the volume weighted average price for our common stock for the ten days previous
to the debenture date. The warrant exercise price is subject to being reset on
each six month anniversary of its issuance. On October 23, 2002, the six month
anniversary for a debenture dated April 23, 2002 in an amount of $225,000, the
warrant exercise price was reset to $0.04685 from an initial exercise price of
$0.10289.

Options to Purchase Additional Debentures. Subject to the price of our common
- -----------------------------------------
stock being equal to or greater than $0.20 per share and a two year limitation,
the debenture holders may purchase additional debentures equal to the value of
their initial debentures. The price at which the optional additional debentures
could be converted would initially equal 115% of the volume weighted average
price for our common stock for the ten days previous to the date on which the
optional additional debentures were closed. The optional additional debentures
would carry the same warrant amounts and reset privileges as the initial
debentures.

Shareholder Approval. We may currently issue more than 20% of our outstanding
- ---------------------
shares under the convertible debentures. If we become listed on the NASDAQ
Small Cap Market or NASDAQ National Market, then we must get shareholder
approval to issue more than 20% of our outstanding shares. Since we are
currently a bulletin board company, we do not need shareholder approval.

Restrictive Covenants. For a period of 18 months from the date of the
- ---------------------
debentures, we are prohibited from certain transactions. These include the
issuance of any debt or equity securities in a private transaction which are
convertible or exercisable into shares of common stock at a price based on the
trading price of the common stock at any time after the initial issuance of such
securities; the issuance of any debt or equity securities with a fixed
conversion or exercise price subject to adjustment; and any private equity line
type agreements without obtaining the debenture holders' prior written approval.

Right of First Refusal. The debenture holders have a right of first refusal to
- ----------------------
purchase or participate in any equity securities offered by us in any private
transaction which closes on or prior to the date that is two years after the
issue date of each debenture.

Registration Rights. We are responsible for registering the resale of the
- -------------------
shares of our common stock which will be issued on the conversion of the
debentures. On October 29, 2002, a registration statement covering the first
$1,000,000 of debentures was declared effective by the Securities and Exchange
Commission.

As of November 30, 2002 we issued warrants to purchase up to 19,665,438 shares
of our common stock in accordance with the convertible debentures. The warrants
issued were valued using the Black-Scholes pricing model based on the expected
fair value at issuance and the estimated fair value was also recorded as debt
discount. See Note 7 to the consolidated financial statements for discussion of
the terms of the warrants. Debt discounts related to the warrant valuations are
to be amortized as additional interest expense over the term of the convertible
debenture. As of November 30, 2002, $950,268 has been reflected as debt

discount of which $108,689, $203,104 and $8,383 was amortized to interest
expense during the three and six months ended November 30, 2002 and the year
ended May 31, 2002, respectively.

In addition, the convertible debentures contain beneficial conversion features.
Such features require us to allocate the proceeds received to both the warrants
and the debt and to calculate an intrinsic value for the debt portion if the per
share price allocated to debt is less than the fair market per share price as of
the first date the debenture is sold. Accordingly, during the three and six
months ended November 30, 2002, we recorded $58,842 and $404,732 to additional
paid in capital to reflect the intrinsic value of the convertible debentures.
The intrinsic value of the beneficial conversion feature of the convertible
debenture is amortized to non-cash interest expense over the life of the
convertible debenture. Accordingly, we amortized to non-cash interest expense
$45,688 and $71,139 during the three and six months ended November 30, 2002.

During November 2002, holders converted debentures accumulating $75,000 of
principal and $394 of accrued interest into 1,691,597 shares of our common
stock. The balance of unamortized debt discount related to the beneficial
conversion features and debt discount on the date of conversion of $57,288 was
charged to additional paid in capital.

The convertible debentures are secured by our assets.

Convertible debenture dated April 23, 2002 $ 225,000
Convertible debentures dated June 10, 2002 775,000
Convertible debenture dated August 23, 2002 175,000
Convertible debentures dated October 29, 2002 180,000

Less amounts converted to common stock ( 75,000)

Less debt discount
Total 1,355,000
Amount amortized to expense ( 282,626)
Amount cancelled on conversion (57,288) (1,015,086)
----------- -------------

Convertible debentures at November 30, 2002 $ 264,914
=============

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended
by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB No. 133," and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities" which
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The
key criterion for hedge accounting is that the hedging relationship must be
highly effective in achieving offsetting changes in fair value or cash flows.
SFAS No. 133 was effective for us on June 1, 2001. The adoption of this
statement had no material impact on our consolidated financial statements.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations"
and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires
the use of the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that companies recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business combinations completed
on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that
companies reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS No. 141.

SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that companies identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No.142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires companies to complete a
transitional goodwill impairment test six months from the date of adoption.
Companies are also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS No. 142. The
adoption of this statement had no material impact on our consolidated financial
statements.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires the fair value of a liability
for an asset retirement obligation to be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. SFAS No. 143 is effective for the fiscal year ending May 31,
2003. The adoption of this statement had no material impact on our consolidated
financial statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
occurred. SFAS No. 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001 and, generally, is to be applied
prospectively. The adoption of this statement had no material impact on our
consolidated financial statements.

In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
This statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to the debt extinguishment are
effective for fiscal years beginning after May 15, 2002. Adoption of this
standard did not have any effect on the Company's consolidated financial
statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. Adoption of this standard
will not have any effect on the Company's consolidated financial statements.

TAX LOSS CARRYFORWARDS

Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes.
Deferred tax assets consist primarily of income tax benefits from net operating
loss carry-forwards. A valuation allowance has been recorded to fully offset
the deferred tax asset as it is more likely than not that the assets will not be
utilized. The valuation allowance increased approximately $432,000 in the first
six months of 2003, from $13,446,000 at May 31, 2002 to $13,878,000 at November
30, 2002.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

Effective May 20, 2002, the client-auditor relationship between Patriot
Scientific Corporation (the "Company") and BDO Seidman, LLP ("BDO") ceased. The
Company dismissed BDO on May 20, 2002 as part of its cost reduction program
which was initiated earlier in this fiscal year.

The change in certifying accountants was approved by the Company's board of
directors.

BDO's reports on the consolidated financial statements of the Company for
each of the past two years did not contain an adverse opinion or a disclaimer of
opinion, or was qualified as to any uncertainty in audit scope or accounting

principle; however the audit opinion of BDO on the Company's most recent
consolidated financial statements as of and for the period ending May 31, 2001
was modified to include an explanatory paragraph which contained a statement
that the Company's recurring losses from operations and negative cash flows
raised substantial doubt about the Company's ability to continue as a going
concern.

During the two years ended May 31, 2001 and the subsequent interim periods
preceding the date of the dismissal of BDO on May 20, 2002, there were no
disagreements with BDO on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreement(s), if not resolved to the satisfaction of BDO, would have caused
the former accountant to make a reference to the subject matter of the
disagreement(s) in connection with its reports covering such periods.

During the two years ended May 31, 2001 and the subsequent interim periods
preceding the date of the dismissal of BDO on May 20, 2002, there were no
"reportable events" (hereinafter defined) requiring disclosure pursuant to Item
304 (a) (1) (v) of Regulation S-K. As used herein, the term "reportable events"
means any of the items listed in paragraphs (a) (1) (v) (A) - (D) of Item 304 of
Regulation S-K.

Effective May 20, 2002, the Company engaged Nation Smith Hermes Diamond, a
professional corporation, which is a member of the BDO Seidman Alliance
("Nation") , as its independent accountants. During the two years ended May 31,
2001 and the subsequent interim periods preceding the effective date of the
engagement of May 20, 2002, neither the Company nor anyone on its behalf
consulted Nation regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Company's consolidated financial
statements, nor has Nation provided to the Company a written report or oral
advice regarding such principles or audit opinion.

The Company requested that BDO furnish it with a letter addressed to the
Securities and Exchange Commission stating whether or not it agrees with the
above statements. A copy of the letter from BDO dated June 4, 2002 was filed as
Exhibit 16.1 to the Form 8-K/A filed June 5, 2002.

QUANITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to interest rate risk on investments of our excess cash.
The primary objective of our investment activities is to preserve capital. To
achieve this objective and minimize the exposure due to adverse shifts in
interest rates, we invest from time to time in high quality short-term maturity
commercial paper and money market funds operated by reputable financial
institutions in the United States. Due to the nature of our investments, we
believe that we do not have a material interest rate exposure.

As of November 30 and May 31, 2002, our notes payable to corporations and
individuals totaling $2.1 and $1.1 million before unamortized discounts,
respectively, bore interest at fixed rates of 5% to 8%. Our capital lease
obligation totaling $19,432 and $21,847, respectively, is discounted at a fixed
rate of interest of 22.7%.

MANAGEMENT

The following table and biographical summaries set forth information, including
principal occupation and business experience, about our directors and the
executive officers at January 1, 2003:

NAME AGE POSITION AND OFFICES DIRECTOR SINCE
- ---- --- -------------------- --------------
Donald R. Bernier 60 Chairman and Director January 1995
David H. Pohl 65 Director April 2001
Jeffrey Wallin 55 President and CEO n/a
Lowell W. Giffhorn 55 Executive Vice President,
CFO, Secretary and Director August 1999
Carlton M. Johnson, Jr. 43 Director August 2001
Helmut Falk, Jr. 46 Director December 1997
Gloria Felcyn 55 Director October 2002
Joey Maitra 52 Vice President Engineering n/a
Patrick Nunally 39 Vice President and CTO n/a

BIOGRAPHICAL INFORMATION

DONALD R. BERNIER. Mr. Bernier was appointed Chairman of the Board on
August 5, 2001. Since 1971, Mr. Bernier has been the owner and President of
Compunetics Incorporated, a Troy, Michigan-based electronics firm of which he is
the founder. Compunetics engages in contract research and development,
specializing in microelectronics primarily for the automotive industry.

DAVID H. POHL. Mr. Pohl has served on our board of directors since April
2001, and served as an officer of the Company from January 2001 to March 2002.
Except for his service with PTSC, Mr. Pohl has been in the private practice of
law counseling business clients since 1997, and from 1995 to 1996 was Special
Counsel to the Ohio Attorney General. Previously, he was a senior attorney with
a large U.S. law firm, and held positions as a senior officer and general
counsel in large financial services corporations. Mr. Pohl earned a J.D. degree
in 1962 from the Ohio State University College of Law, and also holds a BS in
Administrative Sciences from Ohio State.

JEFFREY E. WALLIN. Mr. Wallin has served as our Chief Executive Officer
and President since March 2002. Since 1999, Mr. Wallin was president of SDMC
Inc., a consulting company serving the multimedia system integration and
communications markets. From 1996 to 1999, Mr. Wallin was President and CEO of
TV/COM International, a division of Hyundai that developed and manufactured
end-to-end digital communications systems. Previously Mr. Wallin held senior
level management positions with Snell & Wilcox, General Instrument, now a major
division of Motorola, and Teledyne Corporation. Mr. Wallin obtained a B.S.
degree from Bemidji State University in 1970.

LOWELL W. GIFFHORN. Mr. Giffhorn was the principal in his own financial
management consulting firm from August 1996 until joining Patriot as Chief
Financial Officer (CFO) in May 1997. Mr. Giffhorn has served on our board of
directors since August 1999. From June 1992 to August 1996 and from September
1987 to June 1990 he was the CFO of Sym-Tek Systems, Inc. and Vice President of
Finance for its successor, Sym-Tek Inc., a major supplier of capital equipment
to the semiconductor industry. Mr. Giffhorn obtained a M.B.A. degree from
National University in 1975 and he obtained a B.S. in Accountancy from the
University of Illinois in 1969.

CARLTON M. JOHNSON, JR. Mr. Johnson was appointed a Director on August 5,
2001. Mr. Johnson is in-house legal counsel for Swartz Investments, LLC, a
position he has held since June 1996. Mr. Johnson has practiced law in Alabama
since 1986, Florida since 1988, and Georgia since 1997. He has been a
shareholder in the Pensacola, Florida AV rated law firm of Smith, Sauer, DeMaria
& Johnson and as President-Elect of the 500 member Escambia-Santa Rosa Bar
Association. He also served on the Florida Bar Young Lawyers Division Board of
Governors. Mr. Johnson earned a degree in History/Political Science at Auburn
University and Juris Doctor at Samford University - Cumberland School of Law.

HELMUT FALK, JR. Since 1992, Dr. Falk has been the Director of Anesthesia
for the Johnson Memorial Hospital in Franklin, Indiana. Dr. Falk received his
D.O. from the College of Osteopathic Medicine of the Pacific in 1987 and his
B.S. in Biology from the University of California, Irvine in 1983. Dr. Falk is
the son of the late Helmut Falk, who was the sole shareholder of nanoTronics and
the Chairman and CEO of Patriot until his death in July 1995. Dr. Falk is also
an heir to the Helmut Falk Estate, which is the beneficial owner of the
Company's shares held by the Helmut Falk Family Trust.

GLORIA FELCYN. Ms. Felcyn was appointed a Director and chairman of our
audit committee on October 10, 2002. Since 1982 Ms. Felcyn has been the
principal in her own public accounting firm. Ms. Felcyn received a B.S. degree
in Business Economics for Trinity University in 1968.

PATRICK O. NUNALLY. Dr. Nunally joined us as Vice President of Business
Development and Chief Technical Officer in June 2001, previous to which he had
been providing consulting services to us since May 2000. Dr. Nunally has more
than 20 years of entrepreneurial experience in semiconductor and embedded
processor design. From December 1998 to May 2000, he was President and CEO of
Intertech, a company he founded specializing in intellectual property
development for embedded processor and communications systems. From June 1998
to December 1998, he was President and CEO of Gruppe Telekom, Inc., a licensee
of Interactive Video and Data Service Spectrum. From April 1996 to June 1998, he
served as Chief Technical Officer and co-founder of Aristo, now PlayNet Inc., a
Java-based games company. Dr. Nunally also held other senior management
positions with Wave Interactive Network, Sensormatic Video Products Division,
Intellisys Automation Inc., E-Metrics Inc., General Dynamics Corporation and
Interstate Electronics. Dr. Nunally received his PhD in Electrical Engineering
from the Pacific Western University in 1996, a MBA from the University of
LaVerne in 1993 and a BS in Electrical and Electronics Engineering from
California State Polytechnic University in 1987.

JOEY MAITRA. Mr. Maitra was Vice President of Engineering for Metacomp
since 1990 and was appointed Vice President of Engineering of Patriot in
December 1996 through February 2001. Mr. Maitra was reappointed to the same
position in November 2001. Previously Mr. Maitra held various engineering
positions with several computer related technology companies. Mr. Maitra
obtained a B.S. in Electrical Engineering from the Indian Institute of
Technology in 1972 and a M.S. in Electrical Sciences at State University of New
York in 1973.

There is no family relationship between any of our executive officers.

INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS

As permitted by Delaware law, our certificate of incorporation provides
that we will indemnify our officers, directors, employees and agents. This
includes indemnification against attorneys' fees and other expenses and
liabilities they incur to defend, settle or satisfy any civil or criminal action
brought against them arising out of their association with or activities on
behalf of us. However, they will not be indemnified if they are adjudged to have
acted with gross negligence or to have engaged in willful misconduct. We may
also bear the expenses of such litigation for any such persons upon their
promise to repay such sums if it is ultimately determined that they are not
entitled to indemnification. Such expenditures could be substantial and may not
be recouped, even if we are so entitled. We have provided for indemnification
for liabilities arising under the Securities Act of 1933 as they may be
permitted to directors, officers or persons controlling us. The SEC has
informed us that such indemnification is against public policy and may be
unenforceable.

EXECUTIVE COMPENSATION

There is shown below information concerning the compensation of our
chief executive officers and the most highly compensated executive officers
whose salary and bonus exceeded $100,000 (each a "Named Officer") for the fiscal
years ended May 31, 2002, 2001, and 2000.

Annual Cash Compensation Long-Term Compensation
------------------------ ----------------------
Name and Fiscal Repriced All Other
Principal Position Year Salary Bonus (# of Shares) Options Compensation
------------------ ---- ------ ----- ------------- ------- ------------

Richard G. Blum 2002 $34,062 (3) Nil None None None
President and CEO (1) 2001 $128,862 (3) Nil 325,000 None None

Don Bernier 2002 $7,500 (3) Nil 350,000 None None
CEO (2)

Jeff Wallin 2002 $68,800 (3) Nil 1,000,000 None None
President and CEO (2)

Lowell W. Giffhorn 2002 $139,908 (3) Nil 255,000 None None
Exec. V.P., CFO and Secy. 2001 $126,650 (3) Nil 125,000 None None
2000 $110,000 Nil None 300,000 None

Joey Maitra 2002 $125,058 (3) Nil 335,000 None None
VP Engineering 2001 $120,000 Nil None None None
2000 $120,000 Nil None 225,000 None

Patrick O. Nunally 2002 $173,046 (3) Nil 250,000 None $105,000 (4)
VP and CTO

(1) Mr. Blum served as President and CEO from September 25, 2000 until August
5, 2001 when he was relieved of his duties. In September 2001, an action
was filed against the Company in the Superior Court of San Diego County,
California by Mr. Blum. He contended that he was wrongfully terminated on
August 5, 2001 in violation of his employment agreement dated December 1,
2000. He sought damages for the alleged breach of his employment agreement,
age discrimination, as well as other related claims. In October 2002, we
entered into a settlement agreement with Mr. Blum whereby we agreed to pay
him $60,000 over twelve months and to issue him 400,000 shares of our
common stock. This liability has been recorded in our consolidated
financial statements for the six months ended November 30, 2002.

(2) Mr. Bernier served as CEO from August 5, 2001 until March 18, 2002 when Mr.
Wallin was appointed President and CEO under a contract entered into
between the Company and SDMC, Inc.

(3) Included in Mssr. Blum, Wallin, Giffhorn, Maitra and Nunally is cash
compensation of $400 per month for car allowance.

(4) Payments to Mr. Nunally for assignments to the Company of intellectual
property rights.

The Company maintains employee benefits that are generally
available to all of its employees, including medical, dental and life insurance
benefits and a 401(k) retirement savings plan. The Company did not make any
matching contributions under the 401(k) plan for any of the above named officers
during the fiscal years ended May 31, 2002, 2001 and 2000.

OPTION GRANTS

Shown below is information on grants of stock options pursuant to the
Company's 1992, 1996 and 2001 Stock Option Plans to the Named Officers reflected
in the Summary Compensation Table shown above.

Option Grants Table for Fiscal Year Ended May 31, 2002
------------------------------------------------------

Potential Realizable Value
Percent of Total of Assumed Annual Rates
Options Granted of Stock Price Appreciation
Number of to Employees in Exercise Expiration for Option Term (1)
Name Options Granted Fiscal Year Price Date 5% ($) 10% ($)
---- --------------- ----------- ----- ---- ------ -------

Jeffrey E. Wallin 1,000,000 24.1% $ 0.090 4/8/2007 $ 24,865 $ 54,946

Lowell W. Giffhorn 255,000 6.2% $ 0.110 11/1/2006 $ 7,750 $ 17,125

Joey Maitra 335,000 8.1% $ 0.133 1/2/2007 $ 12,310 $ 27,201

Donald Bernier 350,000 8.4% $ 0.110 11/1/2006 $ 10,637 $ 23,505

Patrick Nunally 250,000 6.0% $ 0.110 11/1/2006 $ 7,598 $ 16,789

Richard Blum - - - - $ - $ -

(1) These amounts represent certain assumed rates of appreciation only. Actual
gains, if any, on stock option exercises are dependent upon the future
performance of the company's common stock, overall market conditions and
the executive's continued involvement with the company. The amounts
represented in this table will not necessarily be achieved.

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

There were no exercises of stock options for the fiscal year ended May 31,
2002 by any of the officers reflected in the Summary Compensation Table shown
above. Shown below is information on fiscal year-end values under the Company's
1992, 1996 and 2001 Stock Option Plans to the officers reflected in the Summary
Compensation Table shown above.

Number of Unexercised Value of Unexercised
Options Held At In-The-Money Options At
May 31, 2002 May 31, 2002
------------ ------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ------------ -------------

Jeffrey E. Wallin 520,000 500,000 $ - $ -
Lowell W. Giffhorn 133,333 246,667 $ - $ -
Joey Maitra 210,000 150,000 $ - $ -
Donald Bernier 150,000 275,000 $ - $ -
Patrick Nunally 195,000 355,000 $ - $ -
Richard Blum - - $ - $ -

The fair market value of the unexercised in-the-money options at May 31,
2002 was determined by subtracting the option exercise price from the last sale
price as reported on the over the counter bulletin board on May 31, 2002, $0.08.

The Company has not awarded stock appreciation rights to any of its
employees. The Company has no long-term incentive plans.

COMPENSATION OF DIRECTORS

No direct or indirect remuneration has been paid or is payable by us to the
directors in their capacity as directors other than the granting of stock
options. We expect that, during the next twelve months, we will not pay any
direct or indirect remuneration to any directors of ours in their capacity as
directors other than in the form of stock option grants or the reimbursement of
expenses of attending directors' or committee meetings.

EMPLOYMENT CONTRACTS

The Company entered into a consulting agreement dated as of March 7,
2002, with SDMC, Inc. whereby SDMC would provide the services of Mr. Wallin to
be the President and Chief Executive Officer. The agreement is for a term
through March 18, 2004 providing for payments of $133,200 per annum. The
agreement provides for a bonus up to 50% of the annual base consideration for
the applicable year. The agreement also provides for potential bonuses to be
paid based on the increase in the price of the Company's common stock. Should
the price of the common stock reach $0.25 for twenty consecutive days, SDMC
would receive a cash payment of $10,000, $0.40- $20,000, $0.50- $20,000, $0.60-
$30,000, $0.80- $30,000, $1.00- $50,000, $1.50- $100,000, and $2.00- $150,000.
The Company may terminate SDMC's agreement with or without cause, but

termination without cause (other than disability or death) would result in
severance payments equal to the lesser of (i) four months of the then current
compensation or (ii) the balance remaining of the current compensation for the
term of his agreement. If a change in control, as defined in the agreement,
occurs during the term of his agreement, and if Mr. Wallin refuses to accept or
voluntarily resigns from a position other than a qualified position, as that
term is defined in the agreement, then SDMC will receive a lump sum severance
payment equal to twelve months of the then current compensation. Under the
agreement, the Company granted SDMC options to purchase 1,000,000 common shares,
500,000 vesting on March 7, 2002, 250,000 vesting on March 7, 2003 and 250,000
vesting on March 7, 2004. The Company also placed in escrow four months of
payments which shall be released to SDMC on the termination of Mr. Wallin's
services for any reason other than cause or his resignation.

The Company entered into an employment agreement dated as of November
17, 2001, with Mr. Giffhorn providing for his employment as Executive Vice
President and Chief Financial Officer. The agreement is for a term through
September 4, 2004 providing for a base salary of $144,000 per annum. The base
salary may be increased at the discretion of the Board of Directors. The
agreement provides for a bonus up to 50% of the annual base salary for the
applicable year. The agreement also provides Mr. Giffhorn a monthly car
allowance of $400. The Company may terminate Mr.Giffhorn's employment with or
without cause, but termination without cause (other than disability or death)
would result in severance payments equal to the lesser of (i) four months of the
then current base salary or (ii) the balance remaining of the current base
salary for the term of his agreement. If a change in control, as defined in the
agreement, occurs during the term of his agreement, and if Mr. Giffhorn refuses
to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary.

The Company entered into an employment agreement dated as of December 20,
2001, with Mr. Maitra providing for his employment as Vice President of
Engineering. The agreement is for a term through January 2, 2003 providing for a
base salary initially of $120,000 per annum which was increased to $126,000 in
April 2002. The base salary may be increased at the discretion of the Board of
Directors. The agreement provides for a bonus up to 50% of the annual base
salary for the applicable year. The agreement also provides Mr. Maitra a
monthly car allowance of $400. The Company may terminate Mr.Maitra's employment
with or without cause, but termination without cause (other than disability or
death) would result in severance payments equal to the lesser of (i) four months
of the then current base salary or (ii) the balance remaining of the current
base salary for the term of his agreement. If a change in control, as defined
in the agreement, occurs during the term of his agreement, and if Mr. Maitra
refuses to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary. Under
the agreement, the Company granted Mr. Maitra options to purchase 335,000 common
shares, 185,000 vesting on January 2, 2002 and 150,000 vesting on January 2,
2003.

The Company entered into a letter of intent dated May 31, 2001 with Dr.
Nunally providing for his employment as the Chief Technical Officer of the
Company. The terms of the letter provide for a base salary of $180,000 per
annum. The letter provides for a bonus up to 50% of the annual base
consideration for the applicable year. In addition, the letter provides for
monthly payments of $4,500 for the purchase from Dr. Nunally of certain

intellectual property assets and assignment of worldwide patent rights. On March
30, 2001, the Company entered into an agreement with Dr. Nunally providing for
additional monthly payments of $3,000 for additional intellectual property
assets.

Mr. Giffhorn was an executive officer and a member of the compensation
committee during the fiscal year ended May 31, 2001. Through October 10, 2002,
the entire Board of Directors served as the compensation committee. Any actions
effecting Mr. Giffhorn's compensation or stock option grants during the period
of time he served on the compensation committee were approved by the entire
Board of Directors.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth, as of February 12, 2003, the stock
ownership of each officer and director of the Company, of all officers and
directors of the Company as a group, and of each person known by the Company to
be a beneficial owner of 5% or more of its Common Stock. Except as otherwise
noted, each person listed below is the sole beneficial owner of the shares and
has sole investment and voting power over such shares. No person listed below
has any option, warrant or other right to acquire additional securities of the
Company, except as otherwise noted.

Name and Address Amount & Nature
Title of Beneficial of Beneficial Percent
of Class Owner Ownership of Class
- -------------- --------------------------- ----------------------- -----------------
Common stock Gloria Felcyn, CPA 17,904,222 (1) 16.6%
par value 20440 Williams Ave.
$.00001 Saratoga, California 95070

SAME Donald R. Bernier 487,500 (2) *
10989 Via Frontera
San Diego, California 92127

SAME Helmut Falk, Jr. 149,500 (3) *
10989 Via Frontera
San Diego, California 92127

SAME Lowell W. Giffhorn 536,614 (4) *
10989 Via Frontera
San Diego, California 92127

SAME SDMC, Inc. 520,000 (5) *
10989 Via Frontera
San Diego, California 92127

SAME David H. Pohl 325,000 (6) *
10989 Via Frontera
San Diego, California 92127

SAME Patrick O. Nunally 399,500 (7) *
10989 Via Frontera
San Diego, California 92127

SAME Joey Maitra 512,342 (8) *
10989 Via Frontera
San Diego, California 92127

SAME Carlton M. Johnson, Jr. 75,000 (9) *
10989 Via Frontera
San Diego, California 92127

All directors & officers 20,909,678 (10) 19.0%
as a group (8 persons)

* Less than 1%.

1) As trustee of the Helmut Falk Family Trust and executor of the Helmut Falk
estate, Ms. Felcyn effectively controls the shares which were subject to an
escrow arrangement (as described in "Certain Transactions" below) originally
issued to nanoTronics in connection with the ShBoom technology acquisition and
shares that remain from 5,000,000 non-escrowed shares that were originally
issued to nanoTronics in connection with the ShBoom technology acquisition and
were subsequently transferred to the Helmut Falk Family Trust. Includes
11,237,999 shares that are issuable on the conversion of 8% Convertible
Debentures and the exercise of warrants into shares of common stock and 50,000
shares issuable upon the exercise of outstanding stock options.

2) Includes 262,500 shares issuable upon the exercise of outstanding stock
options.

3) Includes 115,000 shares issuable upon the exercise of outstanding stock
options.

4) Includes 311,666 shares issuable upon the exercise of outstanding stock
options.

5) Includes 520,000 shares issuable upon the exercise of outstanding stock
options.

6) Includes 325,000 shares issuable upon the exercise of outstanding stock
options.

7) Includes 387,500 shares issuable upon the exercise of outstanding stock
options.

8) Includes 335,000 shares issuable upon the exercise of outstanding stock
options.

9) Includes 75,000 shares issuable upon the exercise of outstanding stock
options.

10) Includes 7,290,013 shares issued and outstanding and 13,619,665 shares
issuable upon exercise of stock options, conversion of convertible debentures
and exercise of warrants.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

There were no transactions, or series of transactions, during fiscal 2002,
2001 or 2000, nor are there any currently proposed transactions, or series of
transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to its knowledge any director, executive officer, nominee,
five percent or greater shareholder, or any member of the immediate family of
any of the foregoing persons, has or will have any direct or indirect material
interest other than as described below.

Based on the asset purchase agreement and plan of reorganization dated
June 22, 1994 between Patriot, nanoTronics Corporation and Helmut Falk, we
issued a total of 8,500,000 restricted common shares to nanoTronics, 3,500,000
of which were a contingent payment subject to the terms of an earnout escrow.
These shares were issued in consideration of technology acquired. nanoTronics
was formed in 1991 and acquired certain base technology for a simplified 32-bit
microprocessor integrated on a single chip with merged stack/register
architecture. nanoTronics expended in excess of $1.9 million (unaudited) while
engaged in further development of that technology and produced from the basic
architecture an enhanced microprocessor (ShBoom-architecture microprocessor).
A majority of the expenditures by nanoTronics consisted of microprocessor and
related software development costs. The result of these efforts was a successful
initial fabrication of the microprocessor in early 1994 demonstrating technical
feasibility of the ShBoom architecture. nanoTronics also expended funds on the
preparation and prosecution of patent applications.

The shares were initially issued to nanoTronics who on dissolution
subsequently transferred the shares to the Helmut Falk Family Trust. Prior to
the transaction, Mr. Falk was an unaffiliated person with respect to us. At the
time of issuance the common shares represented approximately 36% of our total
issued and outstanding shares.

Although the transaction did not result in a majority change in our board
of directors, or a majority change in our stock ownership, the issuance of new
stock resulted in a large percentage ownership controlled by one entity with the
ability to have significant influence over our future affairs.

Based on the terms of the purchase agreement, 5,000,000 of the common
shares were issued to nanoTronics subject to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the purchase agreement, provided for the earnout from escrow of 500,000 common
shares for each $500,000 of Patriot revenues commencing June 1, 1994 and ending
May 31, 1999. As of May 31, 2002:

- 3,500,000 shares were released from escrow, and
- the remaining 1,500,000 shares were returned to us and cancelled since
revenue was not sufficient to earn this portion of the escrowed
shares.

During January 1999 through April 1999, we entered into four short-term
notes with Gloria Felcyn, the trustee for the Falk Family Trust, aggregating
$175,000 with maturity dates ranging from October 22, 1999 to January 15, 2000.
The short-term notes were paid in December 1999 and January 2000. Ms. Felcyn
was appointed to our board of directors in October 2002.

In June 2000, we entered into a three-year, $80,000 secured promissory note
receivable with James T. Lunney, a previous Chairman, President and CEO. The
note bears interest at the rate of 6% with interest payments due semi-annually
and the principal due at the maturity of the note. Mr. Lunney pledged 100,000
shares of Patriot's common stock that he held on the date of issuance as
security for this note.

During the fiscal years ended May 31, 2002 and 2001, we paid $70,292 and
$139,253 to Webster Incorporated for design and maintenance of our web site and
for marketing support and materials. The principal in Webster Incorporated,
Christine Blum, is the daughter of our previous Chairman, President and CEO,
Richard Blum.

From June 10, 2002 through August 23, 2002, we issued to Gloria Felcyn,
Trustee of the Helmut Falk Family Trust, two 8% Convertible Debentures with
accumulative principal balances of $275,000 due June 10, 2004 through August 23,
2004. The initial exercise prices ranged from $0.0727 to $0.08616 and are
subject to a downward revisions if the price of our stock is lower on any three
month anniversary of the debentures or on the date that a statement registering
the resale of the common stock issuable upon conversion of the debentures
becomes effective. Also, in conjunction with the debentures, we issued five
year warrants to purchase up to 4,102,431 shares of our common stock at an
initial exercise prices ranging from $0.0727 to $0.08616 subject to reset
provisions on each six month anniversary of the issuance of the warrants. If
the price of our common stock is in excess of $0.20 per share, Ms. Felcyn has a
two year option to purchase up to an additional $275,000 of 8% Convertible
Debentures on the same terms.

During October 2002 through December 2002, we entered into three 8%
short-term notes with Gloria Felcyn, the trustee for the Falk Family Trust,
aggregating $180,000 with initial maturity dates ranging from January 2 to March
16, 2003. Notes accumulating $150,000 due on January 2 and January 15, 2003
have each been extended for an additional three months.

MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Our common stock is traded in the over-the-counter market and is quoted on
the NASD OTC Bulletin Board system maintained by the National Association of
Securities Dealers, Inc. Prices reported represent prices between dealers, do
not include markups, markdowns or commissions and do not necessarily represent
actual transactions. The market for our shares has been sporadic and at times
very limited.

The following table sets forth the high and low closing bid quotations for
the Common Stock for the fiscal years ended May 31, 2002 and 2001 and for the
fiscal year 2003 through February 14, 2003.

QUOTATIONS
- --------------
HIGH LOW
Fiscal Year Ending May 31, 2003
First Quarter $0.08 $0.06
Second Quarter $0.14 $0.03
Third Quarter through February 14, 2003 $0.09 $0.05

Fiscal Year Ended May 31, 2002
First Quarter $0.53 $0.25
Second Quarter $0.25 $0.10
Third Quarter $0.15 $0.07
Fourth Quarter $0.14 $0.07

Fiscal Year Ended May 31, 2001
First Quarter $1.72 $0.65
Second Quarter $1.60 $0.78
Third Quarter $1.09 $0.49
Fourth Quarter $0.84 $0.50

We have approximately 416 shareholders of record as of May 31, 2002.
Because most of our common stock is held by brokers and other institutions on
behalf of stockholders, we are unable to estimate the total number of
stockholders represented by these record holders. We have never paid a cash
dividend on our common stock and do not expect to pay one in the foreseeable
future.

DESCRIPTION OF SECURITIES

Our authorized capital stock consists of 200,000,000 shares of common
stock, $.00001 par value per share. At February 12, 2003, a total of 96,339,667
common shares were issued and outstanding. The holders of common stock are
entitled to one vote for each share held. The affirmative vote of a majority of
votes cast at a meeting which commences with a lawful quorum is sufficient for
approval of most matters upon which shareholders may or must vote, including the
questions presented for approval or ratification at the Annual Meeting.
However, removal of a director from office or repeal of the certificate of
incorporation in its entirety require the affirmative vote of a majority of the
total voting power for approval, and certain other matters (such as shareholder
amendment of the bylaws, and amendment, repeal or adoption of any provision
inconsistent with provisions in the certificate of incorporation regarding
indemnification of directors, officers and others, exclusion of director
liability, and our election not to be governed by statutory provisions
concerning business combinations with interested shareholders) require the
affirmative vote of two-thirds of the total voting power for approval. Common
shares do not carry cumulative voting rights, and holders of more than 50% of
the common stock have the power to elect all directors and, as a practical
matter, to control the company. Holders of common stock are not entitled to
preemptive rights, and the common stock may only be redeemed at our election.

A special meeting of shareholders may be called by or at the request of:

- the Chairman of the Board,
- the President or any two directors, and
- persons owning in the aggregate not less than 20% of the issued and
outstanding common shares entitled to vote in elections for directors.

After the satisfaction of requirements with respect to preferential
dividends, if any, holders of common stock are entitled to receive, pro rata,
dividends when and as declared by the board of directors out of funds legally
available therefor. Upon our liquidation, dissolution or winding-up, after
distribution in full of the preferential amount, if any, to be distributed to
holders of the preferred stock, holders of common stock are entitled to share
ratably in our assets legally available for distribution to our shareholders.

Our board of directors is authorized to issue 5,000,000 shares of
undesignated preferred stock, $.00001 par value, without any further action by
the stockholders. The board of directors may also divide any and all shares of
preferred stock into series and fix and determine the relative rights and
preferences of the preferred stock, such as the designation of series and the
number of shares constituting such series, dividend rights, redemption and
sinking fund provisions, liquidation and dissolution preferences, conversion or
exchange rights and voting rights, if any. Issuance of preferred stock by the
board of directors will result in such shares having dividend and/or liquidation
preferences senior to the rights of the holders of common stock and could dilute
the voting rights of the holders of common stock. There are currently no shares
of preferred stock issued and outstanding.

We have not paid any cash dividends to date, and no cash dividends will be
declared or paid on the common shares in the foreseeable future. Payment of
dividends is solely at the discretion of our board of directors.

Interwest Transfer Company, Inc., 1981 East 4800 South, Suite 100, Salt
Lake City, Utah 84117, acts as our transfer agent and registrar for our common
stock. Their telephone number is (801) 272-9294.

LEGAL OPINION

Luce, Forward, Hamilton & Scripps LLP, 600 West Broadway Street, Suite
2600, San Diego, California 92101 will pass on the validity of the common stock
offered by us.

EXPERTS

The financial statements and schedule for the year ended May 31, 2002
included in this Prospectus and in the Registration Statement have been audited
by Nation, Smith, Hermes and Diamond, independent certified public accountants,
to the extent and for the periods set forth in their report (which contain an
explanatory paragraph regarding the Company's ability to continue as a going
concern) appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given the authority of said firm as
experts in auditing and accounting.

The financial statements and schedule for the years ended May 31, 2001 and
2000 included in this Prospectus and in the Registration Statement have been
audited by BDO Seidman, LLP, independent certified public accountants, to the
extent and for the periods set forth in their report (which contain an
explanatory paragraph regarding the Company's ability to continue as a going
concern) appearing elsewhere herein and in the Registration Statement, and are
included in reliance upon such reports given the authority of said firm as
experts in auditing and accounting.

Index to Consolidated Financial Statements

Report of Nation Smith Hermes Diamond,
Independent Certified Public Accountants . . . . . . . . . . . . . . . . F-2

Report of BDO Seidman, LLP, Independent Certified Public Accountants . . . F-3

Consolidated Balance Sheets as of May 31, 2002 and 2001 . . . . . . . . . F-4

Consolidated Statements of Operations for the Years Ended May 31,
2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . . . . . F-5

Consolidated Statement of Stockholders' Equity (Deficit) for the
Years Ended May 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . F-6

Consolidated Statements of Cash Flows for the Years Ended
May 31, 2002, 2001 and 2000 . . . . . . . . . . . . . . . . . . . . . F-7

Summary of Accounting Policies . . . . . . . . . . . . . . . . . . . . . F-8-F-14

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-15-F-36

Schedule II- Valuation and Qualifying Accounts . . . . . . . . . . . . . . F-37

Consolidated Balance Sheets as of November 30, 2002 (unaudited)
and May 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . F-38

Consolidated Statements of Operations for the Three and Six Months
ended November 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . F-39

Consolidated Statements of Cash Flows for the Six Months
ended November 30, 2002 and 2001 (unaudited) . . . . . . . . . . . . . . F-40

Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . F-41- F-55

F-1

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
Patriot Scientific Corporation
San Diego, California

We have audited the accompanying consolidated balance sheet of Patriot
Scientific Corporation as of May 31, 2002, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flow for the
year ended May 31, 2002. We have also audited the schedule listed in the
accompanying index. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Patriot Scientific
Corporation at May 31, 2002, and the consolidated results of its operations and
its cash flows for the year ended May 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations,
has negative cash flows and has negative working capital that raise substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ Nation Smith Hermes Diamond

San Diego, California

July 19, 2002, except for note 1,
dated as of August 23, 2002

F-2

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Stockholders and Board of Directors
Patriot Scientific Corporation
San Diego, California

We have audited the accompanying consolidated balance sheet of Patriot
Scientific Corporation as of May 31, 2001 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
years in the two year period ended May 31, 2001. We have also audited the
schedule listed in the accompanying index for each of the two years in the
period ended May 31, 2001. These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and schedule. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement and schedule presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Patriot Scientific
Corporation at May 31, 2001 and the consolidated results of its operations and
its cash flows for each of the years in the two year period ended May 31, 2001
in conformity with accounting principles generally accepted in the United States
of America.

Also, in our opinion, the schedule presents fairly, in all material respects,
the information set forth therein for each of the two years in the period ended
May 31, 2001.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has negative cash flows that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ BDO Seidman, LLP

Denver, Colorado
August 9, 2001, except for Note 1, dated as
of August 15, 2001

F-3

Patriot Scientific Corporation
Consolidated Balance Sheets

May 31, 2002 2001
- ---------------------------------------------------------------------------------------------------------------------------

ASSETS (Notes 5 and 6)

Current assets:

Cash and cash equivalents $ 88,108 $ 464,350
Accounts receivable, net of allowance
of $6,000 and $54,000 for uncollectible accounts 4,797 188,982
Inventories (Note 2) - 223,393
Prepaid expenses 35,749 73,185
- ---------------------------------------------------------------------------------------------------------------------------

Total current assets 128,654 949,910

Property and equipment, net (Note 3) 285,488 423,528

Other assets, net of accumulated amortization of $20,833 and $8,333 330,863 16,667

Patents and trademarks, net of accumulated amortization
of $400,158 and $337,363 189,521 153,588
- ---------------------------------------------------------------------------------------------------------------------------
$ 934,526 $ 1,543,693
- ---------------------------------------------------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current liabilities:
Secured note payable, net of debt discount of $189,516 (Note 5) $ 445,760 $ -
Accounts payable 385,255 434,838
Accrued liabilities 211,291 186,467
Current portion of capital lease obligation 5,116 -
- ---------------------------------------------------------------------------------------------------------------------------

Total current liabilities 1,047,422 621,305

8% Convertible Debentures, net of debt discount of $192,802 (Note 6) 315,198 -

Long term portion of capital lease obligation 16,731 -

Commitments and contingencies (Notes 1, 8, 12 and 13)

Stockholders' equity (deficit) (Notes 5, 6, 7, 8 and 9):
Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding - -
Common stock, $.00001par value; 200,000,000 and 100,000,000
shares authorized: 81,465,757 and 57,535,411 issued and
outstanding at May 31, 2002 and 2001, respectively 815 575
Additional paid-in capital 41,440,101 37,320,503
Accumulated deficit (41,805,741) (36,318,690)
Note receivable (Note 4) (80,000) (80,000)
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (444,825) 922,388
- ---------------------------------------------------------------------------------------------------------------------------
$ 934,526 $ 1,543,693
- ---------------------------------------------------------------------------------------------------------------------------
See accompanying reports of independent certified public accountants, summary of accounting policies and notes to
consolidated financial statements.

F-4

Patriot Scientific Corporation
Consolidated Statements of Operations

Years Ended May 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------

Net sales (Note 14):

Product $ 358,809 $ 336,684 $ 553,181
Licenses and royalties - 700 163,779
- ----------------------------------------------------------------------------------------------------------------
Net sales 358,809 337,384 716,960
- ----------------------------------------------------------------------------------------------------------------

Cost of sales:
Product costs 244,547 444,320 455,008
Inventory obsolescence 149,433 100,000 270,000
- ----------------------------------------------------------------------------------------------------------------
Cost of sales 393,980 544,320 725,008
- ----------------------------------------------------------------------------------------------------------------

Gross loss (35,171) (206,936) (8,048)

Operating expenses:
Research and development 1,372,421 2,218,433 3,170,166
Selling, general and administrative 2,708,579 2,588,579 3,501,128
- ----------------------------------------------------------------------------------------------------------------
Operating expenses 4,081,000 4,807,012 6,671,294
- ----------------------------------------------------------------------------------------------------------------
Operating loss (4,116,171) (5,013,948) (6,679,342)
- ----------------------------------------------------------------------------------------------------------------
Other income (expenses):
Gain on sale of technology - - 250,000
Interest income 2,662 48,329 28,014
Interest expense (Notes 5, 6 and 7) (1,373,542) (3,284) (1,087,380)
- ----------------------------------------------------------------------------------------------------------------
Other income (expenses) (1,370,880) 45,045 (809,366)
- ----------------------------------------------------------------------------------------------------------------
Net loss $ (5,487,051) $ (4,968,903) $ (7,488,708)
================================================================================================================

Basic and diluted loss
per common share (Note 9) $ (0.08) $ (0.09) $ (0.17)
================================================================================================================

Weighted average number of
common shares outstanding
during the period (Note 9) 66,810,028 53,433,788 44,156,418
================================================================================================================

See accompanying reports of independent certified public accountants, summary of accounting policies and notes to
consolidated financial statements.

F-5

Patriot Scientific Corporation
Consolidated Statements of Stockholders' Equity (Deficit)

- ----------------------------------------------------------------------------------------------------------------------------
Years Ended May 31, 2002, 2001 and 2000
Common Stock
------------------------- Additional Accumulated Stockholders'
Shares Amount Paid-in Capital Deficit Equity (Deficit)
- ----------------------------------------------------------------------------------------------------------------------------

Balance, June 1, 1999 39,563,915 $ 396 $ 22,879,449 $ (23,861,079) $ (981,234)

Issuance of common stock at $.25 to $.98
per share (Note 7) 7,014,796 70 4,999,930 - 5,000,000
Exercise of common stock warrants and
options at $.18 to $1.46 per share (Note 8) 3,750,759 37 923,913 - 923,950
Reclassification of stock subject to
rescission at $.18 to $.20 per share 400,000 4 74,996 - 75,000
Non-cash compensation expense (Note 8) - - 3,739,267 - 3,739,267
Conversion of notes payable plus
interest at $.29 per share (Note 5) 397,205 4 116,178 - 116,182
Value of warrants issued (Note 8) - - 739,037 - 739,037
Non-cash interest on conversion of
notes payable (Note 5) - - 86,388 - 86,388
Net loss - - - (7,488,708) (7,488,708)
- ----------------------------------------------------------------------------------------------------------------------------

Balance, May 31, 2000 51,126,675 $ 511 $ 33,559,158 $ (31,349,787) $ 2,209,882
============================================================================================================================

Issuance of common stock at $.43 to $1.05
per share (Note 8) 5,411,320 54 3,342,143 - 3,342,197
Exercise of common stock warrants and
options at $.25 to $.32 per share (Note 8) 997,416 10 289,063 - 289,073
Issuance of options for services - - 130,139 - 130,139
Issuance of note receivable (Note 4) - - (80,000) - (80,000)
Net loss - - - (4,968,903) (4,968,903)
- ----------------------------------------------------------------------------------------------------------------------------

Balance, May 31, 2001 57,535,411 $ 575 $ 37,240,503 $ (36,318,690) $ 922,388
============================================================================================================================

Issuance of common stock at $.07 to $.30
per share (Notes 7 and 8) 4,888,680 49 879,556 - 879,605
Exercise of common stock warrants and
options at $.25 to $.32 per share (Note 8) 241,666 3 73,830 - 73,833
Issuance of options for services - - 106,926 - 106,926
Issuance of common stock for services
at $.09 per share 2,200,000 22 197,978 - 198,000
Conversion of notes payable
at $.07 to $.09 per share (Note 5) 16,600,000 166 1,552,885 - 1,553,051
Value of warrants issued - - 1,308,423 - 1,308,423
Net loss - - - (5,487,051) (5,487,051)
- ----------------------------------------------------------------------------------------------------------------------------

Balance, May 31, 2002 81,465,757 $ 815 $ 41,360,101 (1)$ (41,805,741) $ (444,825)
============================================================================================================================

See accompanying reports of independent certified public accountants, summary of accounting policies and notes to consolidated
financial statements.

(1) Additional Paid-In Capital includes a note receivable of $80,000 and additional paid-in capital of $41,440,101.

F-6

Patriot Scientific Corporation
Consolidated Statements of Cash Flows

- -------------------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents
Years Ended May 31, 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Operating activities:

Net loss $ (5,487,051) $ (4,968,903) $ (7,488,708)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 285,759 260,316 367,395
Provision for doubtful accounts 76,000 49,000 41,919
Provision for inventory obsolescence 149,433 100,000 270,000
Common stock, options and warrants issued for
services 99,000 119,565 -
Non -cash interest expense related to convertible
debentures, notes payable and warrants 1,324,431 - 995,651
Gain on sale of technology - - (250,000)
Non -cash compensation expense - - 3,739,267
Changes in:
Accounts receivable (45,973) (242,405) (159,709)
Inventories 73,960 (252,229) (91,331)
Prepaid and other assets (83,334) (2,563) 75,150
Accounts payable and accrued expenses (24,759) 98,039 (982,684)
- -------------------------------------------------------------------------------------------------------
Net cash used in operating activities (3,632,534) (4,839,180) (3,483,050)
- -------------------------------------------------------------------------------------------------------
Investing activities:
Note receivable (Note 4) - (80,000) -
Web site development costs - (25,000) -
Purchase of property, equipment and patents, net (146,156) (388,557) (169,116)
Proceeds from sale of technology - - 250,000
- -------------------------------------------------------------------------------------------------------
Net cash (used in) provided by investing activities (146,156) (493,557) 80,884
- -------------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from issuance of secured note payable 1,790,000 - 410,000
Payments for capital lease obligations (3,148) - -
Proceeds from issuance of convertible debentures 508,000 - -
Principal payments on notes payable and
long-term debt - - (720,355)
Proceeds from issuance of common stock 879,605 3,342,197 5,000,000
Proceeds from exercise of common stock warrants
and options 73,833 289,073 634,950
Proceeds from sale of accounts receivable 154,158 65,575 142,000
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 3,402,448 3,696,845 5,466,595
- -------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents (376,242) (1,635,892) 2,064,429
Cash and cash equivalents, beginning of year 464,350 2,100,242 35,813
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 88,108 $ 464,350 $ 2,100,242
=======================================================================================================

Supplemental Disclosure of Cash Flow Information:
Convertible debentures, notes payable and accrued
interest exchanged for common stock $ 1,154,725 $ - $ 405,182
Cash payments for interest 19,719 - 102,137
Common stock, warrants and options issued
for prepaid services 315,500 10,574 -
Write-off of inventory 38,052 177,000 347,000
Capital lease obligation 24,996 - -
Debt discount 1,308,423 - -
=======================================================================================================

See accompanying report of independent certified public accountants, summary of accounting policies and
notes to consolidated financial statements.

F-7

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS
Patriot Scientific Corporation (the "Company") is engaged in the development,
marketing, and sale of patented microprocessor technology and the sale of
high-performance high-speed data
communication products. The Company also owns innovative radar technology. The
Company sold its antenna technology in August 1999.

BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles and include the accounts of the
Company, its majority owned subsidiaries, Metacomp, Inc. ("Metacomp") and Plasma
Scientific Corporation. All material intercompany transactions and balances
have been eliminated in consolidation.

RECLASSIFICATIONS
Certain reclassifications have been made to the 2001 and 2000 financial
statements in order for them to conform to the 2002 presentation. Such
reclassifications have no impact on the Company's financial position or results
of operations.

FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK
The Company's financial instruments that are exposed to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable.

The Company's cash equivalents are placed in high quality money market accounts
with major financial institutions and high grade short-term commercial paper.
The investment policy limits the Company's exposure to concentrations of credit
risk. Money market accounts are federally insured; however, commercial paper is
not insured. The Company has not experienced any losses in such accounts.

Concentrations of credit risk with respect to accounts receivable are limited
due to the wide variety of customers and markets which comprise the Company's
customer base, as well as their dispersion across many different geographic
areas. The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its accounts receivable credit risk
exposure is limited. Generally, the Company does not require collateral or
other security to support customer receivables.

The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximated fair value because of the immediate or short-term maturity of these
instruments. With respect to the long-term debt, the carrying amounts
approximate fair value because the debt was issued immediately prior to the end
of the fiscal year.

F-8

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

INVENTORIES
Inventories consist of raw materials, work in process and finished goods and are
valued at the weighted average cost method, which approximates cost on a
first-in, first-out basis, not in excess of market value.

PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight-line method.
The Company follows the provisions of the Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-lived Assets and for Long-lived Assets
to be Disposed Of." Long-lived assets and certain identifiable intangibles to
be held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company continuously evaluates the recoverability of its
long-lived assets based on estimated future cash flows from and the estimated
fair value of such long-lived assets, and provides for impairment if such
undiscounted cash flows are insufficient to recover the carrying amount of the
long-lived asset.

PATENTS AND TRADEMARKS
Patents and trademarks are carried at cost less accumulated amortization and are
amortized over their estimated useful lives of four years. The carrying value
of patents and trademarks is periodically reviewed and impairments, if any, are
recognized when the expected future benefit to be derived from individual
intangible assets is less than its carrying value determined based on the
provisions of SFAS No. 121 as discussed above.

REVENUE RECOGNITION
We recognize revenue on the shipment to our customers of communication products,
microprocessor integrated chips and evaluation boards. We anticipate that in
the future we will also derive revenue from fees for the transfer of proven and
reusable intellectual property components or the performance of engineering
services. We anticipate to enter into licensing agreements that will provide
licensees the right to incorporate our intellectual property components in their
products with terms and conditions that we anticipate to vary by licensee.
Generally, we anticipate these payments will include a nonrefundable technology
license fee, which will be payable upon the transfer of intellectual property,
or a nonrefundable engineering service fee, which generally will be payable upon
achievement of defined milestones. In addition, we anticipate these agreements
will include royalty payments, which will be payable upon sale of a licensee's
product, and maintenance and limited support fees. We will classify all revenue
that involves the future sale of a licensee's products as royalty revenue.
Royalty revenue will be generally recognized in the quarter in which a report is
received from a licensee detailing the shipments of products incorporating our
intellectual property components (i.e., in the quarter following the sale of
licensed product by the licensee). We will classify all revenue that does not
involve the future sale of a licensee's products, primarily license fees and
engineering service fees and maintenance and support fees, as contract revenue.
License fees will be recognized upon the execution of the license agreement and
transfer of
F-9

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

intellectual property, provided no further significant performance obligations
exist and collectibility is deemed probable.

Fees related to engineering services contracts, which will be performed on a
best efforts basis and for which we will receive periodic milestone payments,
will be recognized as revenue over the estimated development period, using a
cost-based percentage of completion method. Annual maintenance and support fees,
which will be renewable by the licensee, will be classified as contract revenue
and will be amortized over the period of support, generally 12 months.

RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.

ADVERTISING
The Company expenses advertising costs as incurred. Advertising expenses were
approximately $9,000, $7,400 and $2,100 for the years ended May 31, 2002, 2001
and 2000, respectively.

INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes". Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end based on enacted tax laws and
statutory tax rates applicable to the periods in which the differences are
expected to affect taxable income. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense is the combination of the tax payable for the year and the
change during the year in deferred tax assets and liabilities.

NET LOSS PER SHARE
The Company applies SFAS No. 128, "Earnings Per Share" for the calculation of
"Basic" and "Diluted" earnings (loss) per share. Basic earnings (loss) per
share includes no dilution and is computed by dividing income (loss) available
to common stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings (loss) per share reflect the
potential dilution of securities that could share in the earnings (loss) of an
entity.

USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management 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 consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

During the year ended May 31, 2002, based upon information then available, the
Company revised its estimates regarding the recovery of certain inventories. As
a result, the Company increased existing reserves for obsolescence by $111,381.

F-10

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

SALE OF ACCOUNTS RECEIVABLE
The Company has adopted SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 140"). SFAS 140
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured
borrowings. A $400,000 factoring line established by the Company with a bank
enables the Company to sell selected accounts receivable invoices to the bank
with full recourse against the Company. These transactions qualify for a sale
of assets since (1) the Company has transferred all of its right, title and
interest in the selected accounts receivable invoices to the bank, (2) the bank
may pledge, sell or transfer the selected accounts receivable invoices, and (3)
the Company has no effective control over the selected accounts receivable
invoices since it is not entitled to or obligated to repurchase or redeem the
invoices before their maturity and it does not have the ability to unilaterally
cause the bank to return the invoices. Under SFAS 140, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
During fiscal 2002 and 2001, the Company sold approximately $193,000 and
$82,000, respectively, of its accounts receivable to a bank under a factoring
agreement for approximately $177,000 and $66,000, respectively. Pursuant to the
provisions of SFAS 140, the Company reflected the transaction as a sale of
assets and established an accounts receivable from the bank for the retained
amount less the costs of the transaction and less any anticipated future loss in
the value of the retained asset. The retained amount is equal to 20% of the
total accounts receivable invoice sold to the bank less 1% of the total invoice
as an administrative fee and 1.75% per month of the total outstanding accounts
receivable invoices as a finance fee. The estimated future loss reserve for
each receivable included in the estimated value of the retained asset is based
on the payment history of the accounts receivable customer. The Company
collected the entire retained amount and there were no balances for retained
amounts outstanding at May 31, 2002. Also, at May 31, 2002, the entire line of
$400,000 is available for future factoring of accounts receivable invoices.

STOCK OPTIONS
The Company applies Accounting Principles Board ("APB") Opinion 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting for
all stock option plans. Under APB Opinion 25, compensation cost has been
recognized for stock options granted to employees when the option price is less
than the market price of the underlying common stock on the date of grant.

SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net income as if compensation cost for
the Company's stock option plans had been determined in accordance with the fair
value based method prescribed in SFAS No. 123. To provide the required pro
forma information, the Company estimates the fair value of each stock option at
the grant date by using the Black-Scholes option-pricing model.

The Company applies SFAS No. 123 in valuing options granted to consultants and
estimates the fair value of such options using the Black-Scholes option-pricing
model. The fair value is recorded as

F-11

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

consulting expense as services are provided. Options granted to consultants for
which vesting is contingent based on future performance are measured at their
then current fair value at each period end, until vested.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB No. 133," and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities" which
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No.
133 was effective for us on June 1, 2001. The adoption of this statement had no
material impact on our financial statements.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that companies recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business combinations completed
on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that
companies reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS No. 141.

SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that companies identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No.142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires companies to complete a
transitional goodwill impairment test six months from the date of adoption.
Companies are also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS No. 142. Upon
the adoption of this statement no material impact on our financial statements is
expected.

F-12

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

under the purchase method, which may result in the recognition of goodwill and
other intangible assets, some of which will be recognized through operations,
either by amortization or impairment charges, in the future. We will be required
to reassess the useful lives of our intangible assets within the first fiscal
quarter of 2003.

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for the fiscal year ending May 31, 2003. Upon the
adoption of this statement no material impact on our financial statements is
expected.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. The
adoption of this statement may impact the presentation of information in our
future financial statements.

In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This
statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement also contains other nonsubstantive corrections to authoritative
accounting literature. The changes related to the debt extinguishment will be
effective for fiscal years beginning after May 15, 2002. Adoption of this
standard will not have any effect on the Company's consolidated financial
statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will
adopt the provisions of SFAS No. 146 for restructuring activities initiated
after December 31, 2002. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well
F-13

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

as the amount recognized. Adoption of this standard will not have any effect on
the Company's consolidated financial statements.

F-14

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. CONTINUED EXISTENCE AND MANAGEMENT'S PLAN

Our consolidated financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Our ability to continue as a going concern is
contingent upon our obtaining sufficient financing to sustain our operations.
We incurred a net loss of $5,487,051, $4,968,903 and $7,488,708 and negative
cash flow from operations of $3,632,534, $4,839,180 and $3,483,050 in the years
ended May 31, 2002, 2001 and 2000, respectively. At May 31, 2002, we had
deficit working capital of $918,768 and cash and cash equivalents of $88,108.
We have historically funded our operations primarily through the issuance of
securities and debt financings. Cash and cash equivalents decreased $376,242
during the year ended May 31, 2002.

We estimate our current cash requirements to sustain our operations for the next
twelve months through May 2003 to be $2.4 million. Since we are attempting to
sell the communications product line, we are assuming that there will be no
communications product revenue. We have a note payable to Swartz of $635,276 at
May 31, 2002 which is due in November 2002. We also have a convertible
debenture with one investor as of May 31, 2002 of $225,000 and have received
advances against additional convertible dentures of $283,000. In addition to
limitations based on trading volume and market price of the common stock, our
ability to obtain equity financing under the $25 million equity line of credit
(see Note 7 to the consolidated financial statements) is dependent on our having
registered shares of our common stock to sell to Swartz Private Equity, LLC
("Swartz"). As of May 31, 2002, we do not have any registered shares to sell to
Swartz. Subsequent to May 31, 2002, we completed the first funding of the
convertible debentures by receiving an additional $492,000. At the option of
the debenture holders, they may purchase additional debentures up to $1 million
at any time during the next two years as long as the price of our common stock
is in excess of $0.20 per share.

The terms of the $25 million equity line of credit, including limitations on the
amount of shares that can be sold to Swartz based on the trading volume and
market price of the common stock and the potential additional amounts that may
be raised under the convertible debentures may not provide funds sufficient to
meet our cash requirements. In order to meet our cash requirements, we may need
to receive additional advances from Swartz, secure short-term debt, private
placement debt and/or equity financings with individual or institutional
investors. In addition to the cost reduction plan implemented during the
current fiscal year, including the reduction in personnel, we may need to make
additional cost reductions if our cash requirements cannot be met from external
sources. We expect that the $2.4 million requirement will be provided by:

- the additional funds received subsequent to May 31, 2002, related to
the convertible debentures of $492,000;

- optional amounts which may received under the convertible debentures
of $1,000,000;

F-15

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

- additional funds under the $25 million equity line of credit if we are
successful in registering additional shares of common stock,
limitations based on trading volume and market price of the common
stock allow adequate funding, and such available funding exceeds the
remaining balance of the note payable to Swartz;

- proceeds from the exercise of outstanding stock options and warrants;
and

- additional debt and/or equity financings.

Based on our current plan and assumptions, we anticipate that we will be able to
meet our cash requirements for the next twelve months. We anticipate meeting
our cash needs as follows:

F-16

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Cash available:

Cash available at May 31, 2002 $ 88,108
Subsequent advances
Additional amounts under convertible debentures received
subsequent to May 31, 2002 492,000
-------------------

Total 580,108
-------------------

Cash needs:

Estimated needs 2,400,000

Note payable to Swartz at October 9, 2002 635,276
-------------------

Total 3,035,276
-------------------

Required funds from external sources $ 2,455,168
===================

As shown above, we need to obtain $3,035,276. Any additional funding under the
existing $25 million equity line of credit is dependent on many factors.
However, there can be no assurance that any funds required during the next
twelve months or thereafter can be generated from sales of common stock under
the existing $25 million equity line of credit or that we will be able to
secure additional debt or equity financing. The lack of additional capital
could force us to substantially curtail or cease operations and would,
therefore, have a material adverse effect on our business. Further, there can
be no assurance that we will be able to timely receive shareholder approval to
increase the number of authorized shares or that required funds, if available,
will be available on attractive terms or that they will not have a significantly
dilutive effect on our existing shareholders. As such, there is substantial
doubt about our ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from our possible inability to
continue as a going concern.

F-17

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Inventories Inventories consisted of the following:
May 31,
-----------------------------------
2002 2001
-----------------------------------------------------------------------------

Component parts $ 301,548 $ 343,430
Work in process - 20,000
Finished goods 71,833 121,963
----------------- -----------------
373,381 485,393
Reserve for obsolescence (373,381) (262,000)
----------------- -----------------
$ - $ 223,393
-----------------------------------------------------------------------------

3. Property and Property and equipment consisted of the following:
Equipment

May 31,
------------------------------------
2002 2001
------------------------------------------------------------------------------------------------

Computer equipment and software $ 1,660,707 $ 1,593,907
Furniture and fixtures 499,274 493,649
Laboratory equipment 205,594 205,594
------------------ ------------------

2,365,575 2,293,150

Less accumulated depreciation and amortization 2,080,087 1,869,622
------------------ ------------------

Net property and equipment $ 285,488 $ 423,528
------------------------------------------------------------------------------------------------

Depreciation expense was $211,850, $186,621 and $283,952
for the years ended May 31, 2002, 2001 and 2000.

4. NOTE RECEIVABLE

In June 2000, the Company entered into a three-year, $80,000 Secured Promissory
Note Receivable with an individual who was, at the time of the issuance of the
note, an executive officer of the Company. The note is due June 12, 2003. On
September 25, 2000, he requested and was relieved of his duties as an executive
officer and director of the Company. The note bears interest at the rate of 6%
per annum with interest payments due semi-annually and the principal due at the
maturity of the note. The individual pledged 100,000 shares of the Company's
common stock that he held on the date of issuance as security for this note.

F-18

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. SECURED NOTE PAYABLE

On March 12, 2002, we replaced and superceded a previously issued Secured
Promissory Note with Swartz with an Amended Secured Promissory Note and
Agreement with an effective date of October 9, 2001 and an Addendum to Amended
Secured Promissory Note dated March 12, 2002. The amended note matures on
October 9, 2002 and amounts outstanding under the note bear interest at the rate
of 5% per annum. Upon mutual agreement between Swartz and us, Swartz may advance
additional amounts under the amended note. Per the addendum to the amended
note, principal and interest payments are deferred until October 9, 2002.

As of May 31, 2002 we issued warrants to purchase up to 12,188,150 shares of our
common stock in accordance with the amended note agreement. The warrants issued
were valued using the Black-Scholes pricing model based on the expected fair
value at issuance and the estimated fair value was also recorded as debt
discount. See Note 7 to the consolidated financial statements for discussion of
the terms of the warrants

The note is secured by our assets.

All debt discounts are to be amortized as additional interest expense over the
term of the note payable. As of May 31, 2002, $1,107,238 has been reflected as
debt discount of which $917,722 was amortized to interest expense during the
year ended May 31, 2002.

Note payable at May 31, 2002 $ 445,760
============

F-19

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On November 9, 2001, an offset of $227,800 from the sale of 2,500,000 shares of
common stock was applied against the final put under the $30 million equity line
of credit discussed below. The excess of the market value of the underlying
2,500,000 shares of common stock over the principal reduction of $227,800 was
recorded as additional interest expense of $197,250 during the year ended May
31, 2002.

On May 30, 2002, an offset of $926,924 from the sale of 14,100,000 shares of
common stock was applied against the first put under the $25 million equity line
of credit discussed below. The excess of the market value of the underlying
14,100,000 shares of common stock over the principal reduction of $926,924 was
recorded as additional interest expense of $201,076 during the year ended May
31, 2002.

6. 8% CONVERTIBLE DEBENTURES

Overview. From April 23, 2002 through June 10, 2002, we sold an aggregate of
- ---------
$1,000,000 of 8% convertible debentures to a group of six investors. The
initial funding of $225,000 was completed on April 23, 2002 and we received
additional advances of $283,000 as of May 31, 2002 towards the $775,000 closing
on June 10, 2002. The convertible debentures entitle the debenture holder to
convert the principal and unpaid accrued interest into our common stock through
June 10, 2004. In addition, the debenture holder received warrants exercisable
into a number of our common shares.

Initial Number of Shares Debentures May Be Converted Into. The $225,000
- ----------------------------------------------------------
debenture can be converted into a number of our common shares at a conversion
price that initially equals $0.10289 per share and the $775,000 debenture can be
converted into a number of our common shares at a conversion price that
initially equals $0.086 per share.

Resets of Conversion Price and Conversion Shares. A reset date occurs on each
- ------------------------------------------------
three month anniversary of the closing date of each debenture and on the date
the registration statement filed in June 2002 becomes effective. If the volume
weighted average price for our common stock for the ten days previous to the
reset date is less than the conversion price in effect at the time of the reset
date, then the number of common shares issuable to the selling shareholder on
conversion will be increased. If the conversion price is reset, the debenture
can be converted into a number of our common shares based on the following
calculation: the amount of the debenture plus any unpaid accrued interest
divided by the reset conversion price which shall equal the volume weighted
average price for our common stock for the ten days previous to the reset date.

Warrants. Concurrent with the issuance of the convertible debentures, we issued
- --------
to the selling shareholders warrants to purchase up to 12,859,175 shares of our
common stock. These warrants are exercisable for five years from the date of
issuance at initial exercise prices equal to 115% of the volume weighted average
price for our common stock for the ten days previous to the debenture date. The
warrant exercise price is subject to being reset on each six month anniversary
of its issuance.

F-20

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Right of First Refusal. The selling shareholders have a right of first refusal
- ----------------------
to purchase or participate in any equity securities offered by us in any private
transaction which closes on or prior to the date that is two years after the
issue date of each debenture.

As of May 31, 2002 we issued warrants to purchase up to 2,514,809 shares of our
common stock in accordance with the convertible debenture. The warrants issued
were valued using the Black-Scholes pricing model based on the expected fair
value at issuance and the estimated fair value was also recorded as debt
discount. See Note 8 to the consolidated financial statements for discussion of
the terms of the warrants.

All debt discounts are to be amortized as additional interest expense over the
term of the convertible debenture. As of May 31, 2002, $201,185 has been
reflected as debt discount of which $8,383 was amortized to interest expense
during the year ended May 31, 2002.

The convertible debenture is secured by our assets.

F-21

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Convertible debenture dated April 23, 2002 $ 225,000
Advances against convertible debenture dated June 10, 2002 as of
May 31, 2002 283,000
Less debt discount
Total 201,185
Amount amortized to expense ( 8,383) (192,802)
--------- ----------
Convertible debenture at May 31, 2002 $ 315,198
==========

7. INVESTMENT AGREEMENTS

$5 Million Equity Line of Credit Agreement
- ------------------------------------------

In February 1999, the Company entered into an investment agreement with Swartz
Private Equity LLC ("Swartz"). The investment agreement entitled the Company,
at the Company's option, to issue and sell its common stock for up to an
aggregate of $5 million from time to time during a three-year period through
February 24, 2002, subject to certain conditions including (1) an effective
registration statement must be on file with the SEC registering the resale of
the common shares, and (2) a limitation on the number of common shares which
could be sold to Swartz within a 30 day time period based on the trading volume
of the stock, among others. Swartz could purchase the common stock from the
Company at a discount ranging from 10% to 20% depending on the price of the
common stock. In addition to the common stock purchased, Swartz received
warrants to purchase an additional 15% of the common stock equal to 110% of the
market price as determined during the pricing period, subject to further
semi-annual price adjustments if the price of the common stock goes down.

In July 1999, the Company amended and restated the investment agreement with
Swartz to eliminate the discretion of Swartz as to the timing of its purchase of
the Company's common stock.

The amended and restated investment agreement required Swartz, after the Company
put shares of common stock to it, to purchase the Company's common stock on the
twentieth day following the put. The previous agreement enabled Swartz, in its
sole discretion, to purchase the Company's common stock at any time during a
twenty-day period following the Company's put to it.

The registration statement went effective on October 5, 1999. As a result of
an increase in the market price and trading volume of the Company's common
stock, the Company completed the $5 million placement of shares in February
2000. The total number of shares placed with Swartz was 13.9% of the total
number of shares outstanding at the time or 7,014,796 common shares at prices
ranging from $0.248 to $0.9775. The average price per share paid by Swartz was
$0.71 compared to the average closing price during the twenty day pricing
periods of $1.34 per share.

F-22

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

An additional 1,052,219 shares of common stock at exercise prices ranging
initially from $0.341 to $1.265 are issuable to Swartz upon the exercise of
warrants issued under the investment agreement. The warrants contain a reset
provision which may reduce the exercise price if the price, as defined in the
agreement, is lower on any subsequent six month anniversary. As a result of the
reset provision, the exercise prices have been reduced to a range of $0.072 to
$0.08 as of May 31, 2002. None of the warrants had been exercised as of May
31, 2002.

$30 Million Equity Line of Credit Agreement
- -------------------------------------------

In May 2000, we entered into an investment agreement with Swartz. The
investment agreement entitled us , at our option, to issue and sell our common
stock for up to an aggregate of $30 million from time to time during a
three-year period, subject to certain conditions including among other items (1)
an effective registration statement must be on file with the SEC registering the
resale of the common shares, and (2) a limitation on the number of common shares
that can be sold to Swartz within a 30 day time period based on the trading
volume of the stock. Swartz could purchase the common stock from us at a
discount. If the market price was less than $1.00 per share, the discount was
$.10 per share; if the market price was between $1.00 to $1.99 per share, the
discount was 10%; and if the market price was $2.00 or greater, the discount was
7%. In addition to the common stock purchased, Swartz received warrants to
purchase an additional 15% of the common stock equal to 110% of the market price
as determined during the pricing period, subject to further semi-annual price
adjustments if the price of our common stock goes down.

The registration statement went effective on June 23, 2000. In May 2001, we
issued 588,680 shares of common stock in excess of the required shares under the
May 30, 2001 put. These shares were applied to puts subsequent to May 31, 2001
and, accordingly, were not included as issued or outstanding in the May 31, 2001
consolidated financial statements. Since the inception of the agreement through
May 31, 2002, we received proceeds of $4,381,601 from the sale of 12,000,000
shares of common stock . Per the terms of the investment agreement, through May
31, 2002, we issued ten five-year warrants for 1,800,000 shares of common stock
exercisable initially at prices ranging from $0.091 to $1.562. The warrants
contain a reset provision which may reduce the exercise price if the price, as
defined in the agreement, is lower on any subsequent six month anniversary. As
a result of the reset provision, the exercise prices have been reduced to a
range of $0.072 to $0.132 as of May 31, 2002. None of the warrants had been
exercised as of May 31, 2002.

On September 17, 2001, we entered into a $25 million equity line of credit
agreement with Swartz, thereby, effectively concluding the $30 million equity
line of credit at the conclusion of the put in effect on that date.

F-23

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

as defined by Bloomberg L.P., for each day of the put multiplied by .70 or (b)
the volume weighted average price per share minus $0.05 multiplied by 20% of the
acceptable daily volume as defined in the waiver. At the discretion of Swartz
the 20% daily volume limitation could be increased up to 30% of the daily
volume. In addition, the waiver included the issuance of a purchase warrant to
purchase 2,125,000 shares of common stock at an initial exercise price of
$0.0911. The purchase warrant shares were issued to Swartz as restricted shares
subject to "piggyback' registration rights and are subject to repricings on each
six month anniversary if 110% of the lowest closing bid price for the five days
previous to the anniversary date is less than the initial or subsequent reset
exercise prices. See Note 8 for further information on the warrants.

$25 Million Equity Line of Credit Agreement
- -------------------------------------------

Overview. On September 17, 2001, we entered into an investment agreement with
- --------
Swartz. The investment agreement entitles us to issue and sell our common stock
to Swartz for up to an aggregate of $25 million from time to time during a
three-year period following the effective date of the registration statement.
This is also referred to as a put right. We filed a registration statement on
Form S-1 on October 11, 2001 that was declared effective on November 5, 2001 for
15,000,000 shares of our common stock which we issued to Swartz during the
fiscal year ended May 31, 2002. There remains approximately $24 million
available under this line conditioned on us filing one or more additional
registration statements. As of August 1, 2002, we have not filed a statement
requesting the registration of additional shares to put to Swartz under the $25
million equity line of credit.

Put Rights. In order to invoke a put right, we must have an effective
- ----------
registration statement on file with the SEC registering the resale of the common
shares which may be issued as a consequence of the invocation of that put right.
Additionally, we must give at least ten but not more than twenty business days
advance notice to Swartz of the date on which we intend to exercise a particular
put right, and we must indicate the number of shares of common stock we intend
to sell to Swartz. At our option, we may also designate a maximum dollar amount
of common stock (not to exceed $3 million) which we will sell to Swartz during
the put and/or a minimum purchase price per common share at which Swartz may
purchase shares during the put. The number of common shares sold to Swartz may
not exceed 20% of the aggregate daily reported trading volume during each of two
consecutive ten business day periods beginning on the business day immediately
following the day we invoked the put right.

The price Swartz will pay for each share of common stock sold in a put is equal
to the lesser of (i) the market price for each of the two consecutive ten
business day periods beginning on the business day immediately following the day
we invoked the put right minus $0.10, or (ii) X percent of the market price for
each of the two ten day periods, where, X is equal to 90% if the market price is
below $2.00 and 93% if market price is equal to or greater than $2.00. Market
price is defined as the lowest closing bid price for the common stock during
each of the two consecutive ten business day periods. However, the purchase
price may not be less than the designated minimum per share price, if any, that
we indicated in our notice.

F-24

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Limitations and Conditions Precedent to Our Put Rights. We may not initiate a
- -------------------------------------------------------
put if, as of the proposed date of such put:

- we have issued shares of our common stock that have been paid for by
Swartz and the amount of proceeds we have received is equal to the
maximum offering amount;
- the registration statement covering the resale of the shares becomes
ineffective or unavailable for use;
- our common stock is not actively trading on the OTC Bulletin Board,
the NASDAQ Small Cap Market, the NASDAQ National Market, the American
Stock Exchange, or the New York Stock Exchange, or is suspended or
desisted with respect to the trading on such market or exchange.

If any of the following events occur during the pricing period for a put, the
volume accrual shall cease. For the put, the pricing period shall be adjusted
to end 10 business days after the date that we notify Swartz of the event, and
any minimum price per share we specified should not apply to the put:

- we have announced or implemented a stock split or combination of our
common stock between the advanced put notice date and the end of the
pricing period;
- we have paid a common stock dividend or made any other distribution of
our common stock between the advanced put notice date and the end of
the pricing period;
- we have made a distribution to the holders of our common stock or of
all or any portion of our assets or evidences of indebtedness between
the put notice date and the end of the pricing period;
- we have consummated a major transaction (including a transaction,
which constitutes a change of control) between the advance put notice
date and the end of the pricing period, the registration statement
covering the resale of the shares becomes ineffective or unavailable
for use, or our stock becomes delisted for trading on our then primary
exchange; or
- we discover the existence of facts that cause us to believe that the
registration statement contains an untrue statement or omits to state
a material fact.

Short Sales. Swartz and its affiliates are prohibited from engaging in short
- -----------
sales of our common stock unless they have received a put notice and the amount
of shares involved in a short sale does not exceed the number of shares
specified in the put notice.

Shareholder Approval. We may currently issue more than 20% of our outstanding
- ----------------------
shares under the investment agreement. If we become listed on the Nasdaq Small
Cap Market or Nasdaq National Market, then we must get shareholder approval to
issue more than 20% of our outstanding shares.

F-25

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Since we are currently a bulletin board company, we do not need shareholder
approval.

Termination of Investment Agreement. We may also terminate our right to
- ------------------------------------
initiate further puts or terminate the investment agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the
investment agreement or any related agreement.

Restrictive Covenants. During the term of the investment agreement and for a
- ---------------------
period of two months thereafter, we are prohibited from certain transactions.
These include the issuance of any debt or equity securities in a private
transaction which are convertible or exercisable into shares of common stock at
a price based on the trading price of the common stock at any time after the
initial issuance of such securities or with a fixed conversion or exercise price
subject to adjustment without obtaining Swartz's prior written approval.

Right of First Refusal. Swartz has a right of first refusal to purchase any
- ----------------------
variable priced securities offered by us in any private transaction which closes
on or prior to two months after the termination of the investment agreement and
a right of participation for any equity securities offered by us in any private
transaction which closes on or prior to two months after the termination of the
investment agreement.

Swartz's Right of Indemnification. We are obligated to indemnify Swartz
- ---------------------------------
(including their stockholders, officers, directors, employees and agents) from
all liability and losses resulting from any misrepresentations or breaches we
made in connection with the investment agreement, our registration rights
agreement, other related agreements, or the registration statement.

Waiver and Agreement. On March 12, 2002, we entered into an amended waiver and
- ---------------------
agreement with Swartz which replaced and superseded all previous waivers and
agreements. This amended waiver and agreement extended the time of the put
beyond twenty days and redefined the price of the put to be the lesser of the
factor of (a) the volume weighted average price per share, as defined by
Bloomberg L.P., for each day of the put multiplied by .70 or (b) the volume
weighted average price per share minus $0.05 multiplied by 20% of the acceptable
daily volume as defined in the waiver. At the discretion of Swartz, the 20%
daily volume limitation could be increased up to 30% of the daily volume. In
addition, the amended waiver and agreement increased the intended put share
amount for the first put to 14,100,000 shares, which is the total number of
shares we had registered so far under the $25 million equity line of credit. On
May 30, 2002 we closed the first put under the $25 million equity line of credit
by applying the proceeds of $926,924 to the secured note payable discussed
below.

Warrants. In connection with closing the $25 million equity line of credit, we
- --------
issued to Swartz a commitment warrant to purchase 900,000 shares of our common
stock as discussed further in Note 8 to the consolidated financial statements.
This warrant was valued on the issuance date using the Black-Scholes pricing
model and the value was recorded as a debt discount.

F-26

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (DEFICIT)

PRIVATE OFFERINGS AND WARRANTS
- ------------------------------

During fiscal 2002, 2,200,000 shares of common stock were issued to an
investment bank in exchange for services. The fair value (as determined by the
quoted market price) of the common stock of $198,000 is being amortized over the
life of the contract and $99,000 was recorded as additional general and
administrative expense during the year ended May 31, 2002. Also, during fiscal
2002, the Company issued 800,000 shares of common stock to two individual
investors for cash of $68,000.

At May 31, 2002, the Company had warrants outstanding to purchase 24,477,724
common shares at exercise prices ranging from $0.048 to $1.12 per share expiring
beginning in 2002 through 2007.

During fiscal 2002, the Company issued warrants to purchase 23,197,201 common
shares of stock at exercise prices ranging from $0.048 to $0.54 per share. Of
this amount, warrants to purchase 3,113,302 common shares of stock were issued
to Swartz related to the $30 million investment agreement, a warrant to purchase
900,000 common shares of stock was issued to Swartz related to the $25 million
investment agreement, warrants to purchase 16,519,090 common shares of stock
were issued to Swartz related to the 5% Secured Note Payable of which 3,630,940
were cancelled, a warrant to purchase 2,514,809 common shares of stock was
issued to Lincoln Ventures LLC related to the first funding under the 8%
Convertible Debenture and a warrant to purchase 150,000 common shares of stock
was issued to a consultant. See Notes 5 and 6 for further discussion.

During fiscal 2001, the Company issued warrants to purchase 836,698 common
shares of stock at initial exercise prices ranging from $0.65 to $1.09 per
share. Of this amount, warrants to purchase 811,698 common shares of stock were
issued to Swartz related to the $30 million investment
agreement and a warrant to purchase 25,000 common shares of stock was issued to
the bank related to a $400,000 factoring agreement.

Also, during fiscal 2002, the Company's shareholders approved an increase in the
authorized number of common shares from 100,000,000 to 200,000,000.

1992 INCENTIVE STOCK OPTION PLAN ("ISO")
- ----------------------------------------

The Company has an ISO Plan which expired May 20, 2002. The ISO Plan provided
for grants to either full or part time employees, at the discretion of the board
of directors, to purchase common stock of the Company at a price not less than
the fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of the share could not be less than
110 percent of the fair market value of the share on the date of grant. Any
options granted under the ISO Plan must be exercised within ten years of the
date they were granted (five years in the case of a significant stockholder). At
May 31, 2002, options to purchase up to 45,834 shares of common stock remained
outstanding and will expire starting in 2002 through 2005.

F-27

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1992 NON-STATUTORY STOCK OPTION PLAN("NSO")
- -------------------------------------------

The Company has an NSO Plan which expired May 20, 2002. The NSO Plan provided,
at the discretion of the board of directors, for grants to either full or part
time employees, directors and consultants of the Company to purchase common
stock of the Company at a price not less than the fair market value of the
shares on the date of grant. Any options granted under the NSO Plan must
be exercised within ten years of the date they were granted. At May 31, 2002,
options to purchase up to 50,000 shares of common stock remained outstanding and
will expire in 2005.

1996 STOCK OPTION PLAN
- ----------------------

Effective March 1996, the Company adopted the 1996 Stock Option Plan, which was
amended by the Stockholders in December 1997, expiring March 24, 2006, reserving
for issuance 4,000,000 shares of the Company's common stock. The 1996 Stock
Option Plan provides, at the discretion of the board of directors, for grants to
either full or part time employees, directors and consultants of the Company to
purchase common stock of the Company at a price not less than the fair market
value on the date of grant for incentive stock options or not less than 85% of
the fair market value on the date of grant for non-qualified stock options. In
the case of a significant stockholder, the option price of the share is not less
than 110 percent of the fair market value of the shares on the date of grant.
Any option granted under the 1996 Stock Option Plan must be exercised within ten
years of the date they are granted (five years in the case of a significant
stockholder). During the fiscal year ended May 31, 2002, the Company granted
options to purchase 1,000,000 shares of stock at market value. During the fiscal
year ended May 31, 2001, the Company granted options to purchase 1,860,000
shares of stock at market value.

2001 STOCK OPTION PLAN
- ----------------------

Effective February 2001, the Company adopted the 2001 Stock Option Plan,
expiring February 21, 2011, reserving for issuance 3,000,000 shares of the
Company's common stock. The 2001 Stock Option Plan provides, at the discretion
of the board of directors, for grants to either full or part time employees,
directors and consultants of the Company to purchase common stock of the Company
at a price not less than the fair market value on the date of grant for
incentive stock options or not less than 85% of the fair market value on the
date of grant for non-qualified stock options. In the case of a significant
stockholder, the option price of the share is not less than 110 percent of the
fair market value of the shares on the date of grant. Any option granted under
the 2001 Stock Option Plan must be exercised within ten years of the date they
are granted (five years in the case of a significant stockholder). During the
fiscal year ended May 31, 2002, the Company granted options to purchase
3,145,000 shares of stock at market value.

F-28

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

During fiscal 2000, the Company repriced stock options to purchase 2,706,000
shares of common stock at exercise prices originally ranging from $.3625 to
$2.30 using fixed accounting rules in effect at the time. The stock options
were repriced to an exercise price of $.32 and no additional compensation
expense was recorded. Subsequent to the repricing, the Company adopted
accounting principles generally accepted in the United States of America that
require stock options that have been modified to reduce the exercise price to be
accounted for using variable accounting. Accordingly, if the market price of the
Company's stock increases subsequent to July 1, 2000, it will recognize
additional compensation expense that it otherwise would not have incurred. As of
May 31, 2002, there was no additional compensation expense recorded because the
market price of the Company's common stock was lower than the price at July 1,
2000. However, the ultimate impact cannot be determined as it is dependent on
the change in the market price of the stock from July 1, 2000 until the stock
options are exercised, forfeited or expire unexercised.

Non-cash compensation expense of $3,739,267 was recorded in the fiscal year
ended May 31, 2000 as a result of employees and directors exercising their stock
options using a cashless exercise provision. Generally accepted accounting
principles require that such exercises must be recorded using variable
accounting which reflect the incremental difference between the exercise price
and the market price on the date of exercise as though it were additional
compensation. Since no cash is exchanged in the transaction, a like amount was
recorded as additional paid-in capital.

SFAS No. 123, "Accounting for Stock-Based Compensation," requires the Company to
provide pro forma information regarding net loss and net loss per share as if
compensation costs for the Company's stock option plans and other stock awards
had been determined in accordance with the fair value based method prescribed in
SFAS No. 123. The Company estimates the fair value of each stock award at the
grant date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the three years ended May 31, 2002, 2001
and 2000, respectively: dividend yield of zero percent for all years; expected
volatility of 90, 90 and 50 percent; risk-free interest rates of 3.5 to 4.8, 4.8
to 6.4, and 5.6 to 6.1 percent; and expected lives of 3 to 5 years for all
years.

Under the accounting provisions for SFAS No. 123, the Company's net loss per
share would have been increased by the pro forma amounts indicated below:

2002 2001 2000
- ----------------------------------------------------------------------------------------------------

As reported
Net loss $ (5,487,051) $ (4,968,903) $ (7,488,708)
=================== =================== ===================
Pro forma
Net loss $ (6,054,061) $ (5,348,529) $ (7,492,658)
=================== =================== ===================
As reported per share
Basic and diluted loss $ (0.08) $ (0.09) $ (0.17)
=================== =================== ===================
Pro forma per share
Basic and diluted loss $ (0.09) $ (0.10) $ (0.17)
=================== =================== ===================

F-29

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the status of the Company's stock option plans and warrants as of
May 31, 2002, 2001 and 2000 and changes during the years ending on those dates
is presented below:

Options Warrants
--------------------------------- -------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------------

Outstanding, June 1, 1999 3,723,444 $ 0.83 2,141,062 $ 0.36
Granted 2,856,000 0.32 4,834,009 0.40
Cancelled (3,516,251) 0.84 (100,000) 1.25
Exercised (1,631,869) 0.37 (2,118,890) 0.31
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, May 31, 2000 1,431,324 0.38 4,756,181 0.40
- ---------------------------------------------------------------------------------------------------------------------------------
Granted 2,092,500 1.16 836,698 0.74
Cancelled (580,000) 0.72 - -
Exercised (366,000) 0.32 (631,416) 0.27
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, May 31, 2001 2,577,824 $ 0.92 4,961,463 $ 0.42
- ---------------------------------------------------------------------------------------------------------------------------------
Granted 4,145,000 0.21 23,197,201 0.09
Cancelled (2,281,419) 0.67 (3,630,940) 0.10
Exercised (191,666) 0.32 (50,000) 0.25
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, May 31, 2002 4,249,739 $ 0.39 24,477,724 $ 0.11
- ---------------------------------------------------------------------------------------------------------------------------------

- ---------------------------------------------------------------------------------------------------------------------------------
Exercisable, May 31, 2000 851,824 $ 0.32 4,756,181 $ 0.40
- ---------------------------------------------------------------------------------------------------------------------------------
Exercisable, May 31, 2001 1,200,158 $ 0.68 4,961,463 $ 0.42
- ---------------------------------------------------------------------------------------------------------------------------------
Exercisable, May 31, 2002 2,418,072 $ 0.48 24,477,724 $ 0.11
- ---------------------------------------------------------------------------------------------------------------------------------

Weighted average fair value of options and warrants
granted during the year ended May 31, 2000 $ 0.22 $ 0.68
Weighted average fair value of options and warrants
granted during the year ended May 31, 2001 $ 0.86 $ 0.44
Weighted average fair value of options and warrants
granted during the year ended May 31, 2002 $ 0.07 $ 0.11
- ---------------------------------------------------------------------------------------------------------------------------------

Included in the above table are certain options for which vesting is contingent
based on various
future performance measures.

The following table summarizes information about stock options and warrants
outstanding at May 31, 2002:

F-30

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Outstanding Exercisable
---------------------------------------------- -------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------

Options

$ 0.09-0.11 2,600,000 4.50 $ 0.10 1,200,000 $ 0.10
0.1275-.032 461,000 3.64 0.18 311,000 0.21
0.60-0.69 320,000 1.44 0.67 300,000 0.68
1.16-1.20 435,000 2.48 1.18 255,000 1.19
1.325-1.615 433,739 2.72 1.33 352,072 1.33
- -----------------------------------------------------------------------------------------------------
$ 0.09-1.615 4,249,739 3.79 $ 0.39 2,418,072 $ 0.48

Warrants

$ 0.048-0.099 16,769,358 4.45 $ 0.08 16,769,358 $ 0.08
0.103-0.132 4,510,820 4.40 0.11 4,510,820 0.11
0.25 2,155,000 0.36 0.25 2,155,000 0.25
0.30-0.32 652,168 0.17 0.32 652,168 0.32
0.40-1.12 390,378 2.37 0.48 390,378 0.48
- -----------------------------------------------------------------------------------------------------
$ 0.048-1.12 24,477,724 3.93 $ 0.11 24,477,724 $ 0.11

9. NET LOSS PER SHARE

The Company has implemented Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share." SFAS No. 128 provides for the calculation of
"Basic" and "Diluted" earnings per share ("EPS"). Basic EPS includes no dilution
and is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution of securities that could share in the earnings
of an entity. The Company's net losses for the periods presented cause the
inclusion of potential common stock instruments outstanding to be antidilutive
and, therefore, in accordance with SFAS No. 128, the Company is not required to
present a diluted EPS. During the years ended May 31, 2002, 2001 and 2000,
common stock options and warrants convertible or exercisable into approximately
28,727,463, 7,539,287 and 6,187,505 shares of common stock were not included in
diluted loss per share as the effect was antidilutive due to the Company
recording losses in each of those years.

F-31

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

Options

Warrants

9. NET LOSS PER SHARE

F-31

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. INCOME TAXES The net deferred tax asset recorded and its approximate tax effect
consisted of the following:

May 31,
----------------------------------------
2002 2001
------------------------------------------------------------------------------------

Net operating loss carryforwards $ 11,030,000 $ 9,309,000
Purchased technology 470,000 519,000
Depreciation and amortization 1,754,000 1,982,000
Other, net 192,000 179,000
-------------------------------------------------------------- --------------------
13,446,000 11,989,000
Valuation allowance 13,446,000 11,989,000
-------------------------------------------------------------- --------------------

Net deferred tax asset $ - $ -
------------------------------------------------------------------------------------

A reconciliation of the income taxes at the federal statutory rate to the effective tax rate is as follows:

May 31, 2002 2001 2000
- ----------------------------------------------------------------------------------------------------------------------------

Federal income tax benefit computed at the Federal statutory rate $ (1,866,000) $ (1,689,000) $(2,546,000)
State income tax benefit net of Federal benefit (211,000) (298,000) (449,000)
Other- permanent differences 502,000 43,000 (265,000)
Exercise of stock options using a cashless exercise provision - - (1,496,000)
Expiration of state net operating loss carryforwards 118,000 81,000 -
Change in valuation allowance 1,457,000 1,863,000 4,756,000
- ----------------------------------------------------------------------------------------------------------------------------

Income tax benefit $ - $ - $ -
- ----------------------------------------------------------------------------------------------------------------------------

As of May 31, 2002 and 2001, valuation allowances equal to the net deferred tax
asset recognized have been recorded, as Management has not determined that it is
more likely than not that the deferred tax asset will be realized. No current
tax provision was recorded for fiscal 2002, 2001 and 2000 due to reported
losses. The valuation allowance increased $1,457,000 for the year ended May 31,
2002 and $1,863,00 for the year ended May 31, 2001.

At May 31, 2002, the Company has federal net operating loss carryforwards of
approximately $28,972,000 that expire through 2021 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended. As such,
certain federal net operating loss carryforwards may expire unused.

F-32

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At May 31, 2002, the Company has state net operating loss carryforwards of
approximately $19,671,000 that expire through 2008.

11. Profit-Sharing Plan

Effective July 1, 1993, the Company adopted a savings and profit-sharing plan
that allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the Company's discretion, the
Company may match contributions at 20% of the employee's contribution up to 6%
of the employee's salary. The Company contributions are vested 20% per year
beginning with the first year of service. The Company made no matching
contribution in fiscal 2002, 2001 or 2000.

12. Contingencies

In January 1999, we were sued in the Superior Court of San Diego County,
California by the Fish Family Trust, a co-inventor of the original ShBoom
technology. The suit also named as defendants nanoTronics and Gloria Felcyn on
behalf of the Falk Family Trust. The suit sought a judgment for damages, a
rescission of the Technology Transfer Agreement and a restoration of the
technology to the co-inventor. In March 1999, we joined with nanoTronics and
Gloria Felcyn and filed our response and cross-complaint against the Fish Family
Trust. In November 2000, the judge issued a summary ruling in favor of the
defendants on all counts. The Fish Family Trust filed an appeal in January 2001.
Management believes that it is unlikely that the appellate court will overturn
the trial court's ruling and that the resolution of the appeal process will have
no impact on our financial position, income or cash flows.

In September 2001, an action was filed against us in the Superior Court of San
Diego County, California by Richard G. Blum, our former Chairman, President and
Chief Executive Officer. Mr. Blum contends that he was wrongfully terminated on
August 5, 2001 in violation of his employment agreement dated December 1, 2000.
He seeks damages for the alleged breach of his employment agreement, age
discrimination, as well as other related claims. Management denies Mr. Blum's
claims and contends it exercised its business judgment for legitimate
nondiscriminatory reasons. In accordance with his employment agreement, we may
be obligated to pay him between $0 and $400,000 as severance pay. We intend to
vigorously defend our position in this case.

In October 2001, an action was filed against us in the Superior Court of San
Diego County, California by Daniel Beach, a former marketing and sales
consultant whose contract we terminated in August 2001. Mr. Beach contends that
we breached both a written and an oral contract, that we did not perform on
certain promises, and that we made false and misleading representations in
addition to other claims. In July 2002, we entered into negotiations on a
settlement agreement with Mr. Beach. Management believes that it is probable
that a settlement will be reached whereby we will agree to pay him $50,000 over
five months. Accordingly, a liability for $50,000 has been recorded in the
financial statements as of May 31, 2002, in connection with this litigation.

F-33

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUed)

13. Commitments and Lease Obligations

The Company is obligated under employment contracts with certain key employees
to pay severance upon termination under certain defined conditions. Generally,
unless relieved of their duties for cause, the executive officers are entitled
to severance pay equal to four months of their then current monthly salary. In
the case of a change in control, generally, the executive officers are entitled
to severance pay equal to twelve months of their then current monthly salary
unless they continue to work for the new controlling interest in the same
function as previous to the change.

The Company granted a lien and security interest in substantially all of its
assets to the bank under the accounts receivable factoring line.

The Company has a non-cancellabe operating lease for its office and
manufacturing facilities located in San Diego, California.

Future minimum lease payments required under the operating lease are as follows:

Years ending May 31,
------------------------------------------------------------------------------------------------
Gross Sublease Net
Payments Income Payments

2003 $ 123,046 $ 56,250 $ 66,796
2004 129,250 68,850 60,400
2005 135,454 70,470 64,984
2006 141,658 72,540 69,118
2007 23,782 12,150 11,632
------------------------------------------------------------------------------------------------

Total minimum lease payments $ 553,190 $ 280,260 $ 272,930
------------------------------------------------------------------------------------------------

Rent expense for fiscal 2002, 2001 and 2000 was $147,373, $149,494, and $105,964, respectively.

The Company has one capital lease at May 31, 2002.

F-34

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Future minimum lease payments are as follows:

Year ending May 31,
2003 $ 9,562
2004 9,562
2005 9,562
2006 2,391
- ------------------------------------------------------------------
Total minimum lease payments 31,077
Amount representing interest 9,230
- ------------------------------------------------------------------
Present value of minimum lease payments 21,847

Total obligation 21,847
Less current portion (5,116)
- ------------------------------------------------------------------
Long-term portion $ 16,731
==================================================================

Capital leases included in fixed assets at May 31, 2002, were $20,135 net of an
allowance for depreciation of $4,860. Depreciation expense related to the
capitalized lease was $4,860 for the year ended May 31, 2002.

14. SEGMENT INFORMATION

Export Sales
- ------------

The Company is engaged in one business segment, the development and marketing of
microprocessor technology related products and licenses. Telecommunication
products have reached the end of their life cycles and will no longer provide
any significant sales. During the fiscal years ended May 31, 2002, 2001 and
2000, the Company's product sales of high technology computer products and
licenses were $9,625, $50,511 and $63,088 and telecommunication products and
licenses were $349,184, $286,173 and $653,872.

For the purpose of allocating revenues by geographic location, the Company uses
the physical location of its customers as its basis. During the fiscal years
ended May 31, 2002, 2001 and 2000, the Company's sales by geographic location
consisted of the following:

2002 2001 2000
------------- ------------- --------------

Domestic sales $ 355,000 $ 253,000 $ 469,000

Foreign sales:
Europe 4,000 19,000 136,000
North America - 40,000 64,000
Asia - 25,000 47,000
Other - - 1,000
--------------------------------------------------
Total foreign sales 4,000 84,000 248,000
--------------------------------------------------

Total net product sales $ 359,000 $ 337,000 $ 717,000
==================================================

F-35

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The Company has no foreign assets.

SALES TO MAJOR CUSTOMERS
- ------------------------

During the fiscal years ended May 31, 2002, 2001 and 2000, revenues from
significant customers consisted of the following:

2002 2001 2000
------------------------------- --------------------------------- ------------------------------
Customer Sales Percent Sales Percent Sales Percent
-------- --------------- ------------- ------------------ ------------- --------------- ------------

A $ 151,000 42.0% $ - - $ - -
B 59,000 16.4% - - - -
C - - 88,000 26.1% - -
D - - 41,000 12.2% - -
E - - 40,000 11.9% - -
F - - - - 138,000 19.2%
G - - - - 137,000 19.1%
H - - - - 127,000 17.8%

15. RELATED PARTY TRANSACTIONS

During fiscal years 2002 and 2001, the Company contracted with a company, which
was owned by the daughter of our previous President, Chairman and CEO, for web
site development, marketing support and other various services. The Company paid
$70,292 and $139,253, respectively, in fiscal years 2002 and 2001 to the related
party for these services. No such related party transactions occurred during
fiscal year 2000.

16. SUBSEQUENT EVENTS

Subsequent to year end, we concluded the second funding of our 8% Convertible
Debenture. We received advances against the second closing of $283,000 as of May
31, 2002 and the balance of $492,000 subsequent to year end from a group of six
investors. In conjunction with the debentures, in June 2002, we also issued
warrants to purchase up to 10,344,366 shares of our common stock at an initial
exercise price of $0.08616 per share, subject to being reset at each six month
anniversary to the closing.

F-36

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Allowance for Doubtful Accounts
- -------------------------------

Balance at Charged to Balance at
beginning of costs and end of
Description period expenses Deductions period
----------- ------ -------- ---------- ------

Year ended May 31, 2002 $ 54,000 $ 76,027 $ 124,027 $ 6,000

Year ended May 31, 2001 $ 5,000 $ 49,000 $ - $ 54,000

Year ended May 31, 2000 $ 22,000 $ 41,919 $ 58,919 $ 5,000

Reserve for Inventory Obsolescence
- ----------------------------------

Balance at Charged to Balance at
beginning of costs and end of
Description period expenses Deductions period
----------- ------ -------- ---------- ------

Year ended May 31, 2002 $ 262,000 $ 149,433 $ 38,052 $ 373,381

Year ended May 31, 2001 $ 339,000 $ 100,000 $ 177,000 $ 262,000

Year ended May 31, 2000 $ 416,000 $ 270,000 $ 347,000 $ 339,000

F-37

PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS

November 30, May 31,
2002 2002
-------------------- -------------------
(Unaudited)

ASSETS (Notes 4 and 5)

Current assets:

Cash and cash equivalents $ 2,210 $ 88,108
Accounts receivable, net of allowance
of $6,000 and $6,000 for uncollectible accounts (Note 1) 4,235 4,797
Prepaid expenses 140,803 35,749
-------------------- -------------------

Total current assets 147,248 128,654

Property and equipment, net 219,508 285,488

Other assets, net 107,621 330,863

Patents and trademarks, net 188,602 189,521
-------------------- -------------------
$ 662,979 $ 934,526
==================== ===================

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
Note payable, net of unamortized debt discount
of $0 and $189,516 (Notes 3 and 4) $ 635,276 $ 445,760
Notes payable to a related party 150,000 -
Accounts payable 429,167 385,255
Accrued liabilities 195,016 211,291
Current portion of capital lease obligation 5,724 5,116
-------------------- -------------------

Total current liabilities 1,415,183 1,047,422

8% Convertible debentures, net of debt discount of $1,015,086 264,914 315,198
and $192,802 (Notes 3 and 5)

Long term portion of capital lease obligation 13,708 16,731

Commitments and contingencies (Notes 3, 6, 7 and 9)

Stockholders' deficit: (Note 7)
Preferred stock, $.00001 par value; 5,000,000 shares
authorized none outstanding - -
Common stock, $.00001 par value; 200,000,000 shares
authorized; issued and outstanding 87,489,354 and 81,465,757 875 815
Additional paid-in capital 42,874,769 41,440,101
Accumulated deficit (43,826,470) (41,805,741)
Note receivable (80,000) (80,000)
-------------------- -------------------
Total stockholders' deficit (1,030,826) (444,825)
-------------------- -------------------
$ 662,979 $ 934,526
==================== ===================

See accompanying summary of accounting policies and notes to unaudited consolidated financial statements.

F-38

PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

Three Months Ended Six Months Ended
------------------------------------- -------------------------------------
November 30, November 30, November 30, November 30,
2002 2001 2002 2001
----------------- ----------------- ------------------ -----------------

Net sales $ 5,160 $ 7,389 $ 45,049 $ 321,889

Cost of sales:
Product costs 7,080 36,409 11,989 240,578
Inventory obsolescence - 149,433 - 149,433
----------------- ----------------- ------------------ -----------------
Cost of sales 7,080 185,842 11,989 390,011

Gross profit (loss) (1,920) (178,453) 33,060 (68,122)

Operating expenses:
Research and development 164,218 375,439 373,505 871,247
Selling, general and
administrative 577,133 738,672 1,064,234 1,392,412
----------------- ----------------- ------------------ -----------------
741,351 1,114,111 1,437,739 2,263,659
----------------- ----------------- ------------------ -----------------
Operating loss (743,271) (1,292,564) (1,404,679) (2,331,781)
----------------- ----------------- ------------------ -----------------
Other income (expenses):
Interest income 10 58 185 363
Interest expense (334,027) (266,096) (616,235) (274,154)
----------------- ----------------- ------------------ -----------------
(334,017) (266,038) (616,050) (273,791)
----------------- ----------------- ------------------ -----------------
Net loss $ (1,077,288) $ (1,558,602) $ (2,020,729) $ (2,605,572)
================= ================= ================== =================

Basic and diluted loss
per common share $ (0.01) $ (0.02) $ (0.02) $ (0.04)
================= ================= ================== =================

Weighted average number of
common shares outstanding
during the period (Note 1) 84,054,186 62,761,554 82,752,899 60,741,712
================= ================= ================== =================

See accompanying summary of accounting policies and notes to unaudited consolidated financial statements.

F-39

PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Six Months Ended
-----------------------------------------------
November 30, 2002 November 30, 2001
---------------------- ----------------------

Decrease in Cash and Cash Equivalents
Operating activities:
Net loss $ (2,020,729) $ (2,605,572)
Adjustments to reconcile net loss
to cash used in operating activities:
Amortization and depreciation 105,306 121,464
Provision for doubtful accounts - 70,600
Provision for inventory obsolescense - 149,433
Non-cash interest expense related to convertible
debentures, notes payable and warrants 550,566 261,068
Common stock issued for services and litigation settlements 126,000 -
Changes in:
Accounts receivable (11,315) (43,248)
Inventories - 73,960
Prepaid expenses and other assets 114,021 (53,190)
Accounts payable and accrued liabilities 28,031 (48,327)
-----------------------------------------------
Net cash used in operating activities (1,108,120) (2,073,812)
-----------------------------------------------

Investing activities:
-----------------------------------------------
Purchase of property, equipment and patents (34,240) (51,348)
-----------------------------------------------

Financing activities:
Proceeds from the issuance of short term notes payable 150,000 665,000
Proceeds from the issuance of convertible debentures 847,000 -
Proceeds from the issuance of common stock 50,000 811,604
Principal payments for capital lease obligations (2,415) (992)
Proceeds from sales of accounts receivable 11,877 154,158
Proceeds from exercise of common stock
warrants and options - 73,833
-----------------------------------------------
Net cash provided by financing activities 1,056,462 1,703,603
-----------------------------------------------

Net decrease in cash and cash equivalents (85,898) (421,557)

Cash and cash equivalents, beginning of period 88,108 464,350
-----------------------------------------------

Cash and cash equivalents, end of period $ 2,210 $ 42,793
-----------------------------------------------

Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ 8,223 $ 11,656
Warrants and options issued for prepaid services $ - $ 57,500
Capital lease obligation $ - $ 24,996
Cancellation of options issued for prepaid services $ - $ 10,574
Common stock issued on conversion of debentures,
notes payable and accrued interest $ 75,394 $ 227,800
Debt discount $ 1,240,622 $ 351,000
---------------------------------------------
See accompanying summary of accounting policies and notes to unaudited consolidated financial statements.

F-40

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements of Patriot Scientific Corporation
("Patriot") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America. These statements should be
read in conjunction with our audited consolidated financial statements and notes
thereto for the year ended May 31, 2002.

In the opinion of management, the interim consolidated financial statements
reflect all adjustments of a normal recurring nature necessary for a fair
statement of the results for interim periods. Operating results for the three
and six month periods are not necessarily indicative of the results that may be
expected for the year.

Loss Per Share

We follow Statement of Financial Accounting Standards ("SFAS") No. 128,
"Earnings per Share." Under SFAS No. 128, basic loss per share is calculated as
loss available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted loss per share is calculated as net loss
divided by the diluted weighted average number of common shares. The diluted
weighted average number of common shares is calculated using the treasury stock
method for common stock issuable pursuant to outstanding stock options and
common stock warrants. Common stock options and warrants of 48,744,320 and
13,450,923 for the three and six months ended November 30, 2002 and 2001,
respectively, were not included in diluted loss per share for the periods as the
effect was antidilutive due to our recording losses in each of those periods.
See Notes 5 and 7 for discussion of commitments to issue additional shares of
common stock and warrants.

Sale of Accounts Receivable

We follow SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," a replacement of SFAS No. 125. SFAS
No. 140 provides consistent standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings. A $400,000
factoring line we established with a bank enables us to sell selected accounts
receivable invoices to the bank with full recourse against us. These
transactions qualify for a sale of assets since (1) we have transferred all of
our rights, title and interest in the selected accounts receivable invoices to
the bank, (2) the bank may pledge, sell or transfer the selected accounts
receivable invoices, and (3) we have no effective control over the selected
accounts receivable invoices since we are not entitled to or obligated to
repurchase or redeem the invoices before their maturity and we do not have the
ability to unilaterally cause the bank to return the invoices. Under SFAS
No.140, after a transfer of financial assets, an entity recognizes the financial
and servicing assets it controls and the liabilities it has incurred,
derecognizes financial

F-41

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

assets when control has been surrendered, and derecognizes liabilities when
extinguished. During the first six months of fiscal 2003, we sold $14,846 of our
accounts receivable to a bank under the factoring agreement for $11,877.
Pursuant to the provisions of SFAS No. 140, we reflected the transactions as
sales of assets and established a receivable from the bank for the retained
amount less the costs of the transactions and less any anticipated future loss
in the value of the retained asset. The retained amount was equal to 20% of the
total accounts receivable invoices sold to the bank less 1% of the total
invoices as an administrative fee and 1.75% per month of the total outstanding
accounts receivable invoices as a finance fee. The estimated future loss reserve
for each receivable included in the estimated value of the retained asset was
based on the payment history of the accounts receivable customer. As of November
30, 2002, there were no qualifying accounts receivable invoices available to
factor resulting in no balance outstanding under the factoring line and $400,000
remaining available for future factoring of accounts receivable invoices.

Reclassifications

Certain items in the unaudited November 30, 2001 consolidated financial
statements have been reclassified to conform to the current presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," amended by
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-
Deferral of the Effective Date of FASB No. 133," and SFAS No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging Activities" which
requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedge accounting. The key
criterion for hedge accounting is that the hedging relationship must be highly
effective in achieving offsetting changes in fair value or cash flows. SFAS No.
133 was effective for us on June 1, 2001. The adoption of this statement had no
material impact on our consolidated financial statements.

In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires the use of
the purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business combinations initiated
after June 30, 2001. SFAS No. 141 also requires that companies recognize
acquired intangible assets apart from goodwill if the acquired intangible assets
meet certain criteria. SFAS No. 141 applies to all business combinations
initiated after June 30, 2001 and for purchase business combinations completed
on or after July 1, 2001. It also requires, upon adoption of SFAS No. 142, that
companies reclassify the carrying amounts of intangible assets and goodwill
based on the criteria in SFAS No. 141.

F-42

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SFAS No. 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS No. 142 requires that companies identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No.142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires companies to complete a
transitional goodwill impairment test six months from the date of adoption.
Companies are also required to reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS No. 142. The
adoption of this statement had no material impact on our consolidated financial
statements.

Our previous business combinations were accounted for using the
pooling-of-interests method. The pooling-of-interests method does not result in
the recognition of acquired goodwill or other intangible assets. As a result,
the adoption of SFAS No. 141 and No. 142 will not affect the results of past
acquisition transactions. However, all future business combinations will be
accounted for under the purchase method, which may result in the recognition of
goodwill and other intangible assets, some of which will be recognized through
operations, either by amortization or impairment charges, in the future.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires the fair value of a liability for an asset
retirement obligation to be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset retirement
costs are capitalized as part of the carrying amount of the long-lived asset.
SFAS No. 143 is effective for the fiscal year ending May 31, 2003. The adoption
of this statement had no material impact on our consolidated financial
statements.

In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred. SFAS
No. 144 is effective for financial statements issued for fiscal years beginning
after December 15, 2001 and, generally, is to be applied prospectively. The
adoption of this statement had no material impact on our consolidated financial
statements.

In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This
statement eliminates the current requirement that gains and losses on debt
extinguishment must be classified as extraordinary items in the income
statement. Instead, such gains and losses will be classified as extraordinary
items only if they are deemed to be unusual and infrequent, in accordance with
the current GAAP criteria for extraordinary classification. In addition, SFAS
145 eliminates an inconsistency in lease accounting by requiring that
modifications of capital leases that result in reclassification as operating
leases be accounted for consistent with sale-leaseback accounting rules. The
statement

F-43

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

also contains other nonsubstantive corrections to authoritative accounting
literature. The changes related to the debt extinguishment are effective for
fiscal years beginning after May 15, 2002. Adoption of this standard did not
have any effect on the Company's consolidated financial statements.

In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, which addresses accounting for restructuring and
similar costs. SFAS No. 146 supersedes previous accounting guidance, principally
Emerging Issues Task Force (EITF) Issue No. 94-3. The Company will adopt the
provisions of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 requires that the liability for costs associated with an
exit or disposal activity be recognized when the liability is incurred. Under
EITF No. 94-3, a liability for an exit cost was recognized at the date of a
company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amount recognized. Adoption of this standard will not have any
effect on the Company's consolidated financial statements.

3. CONTINUED EXISTENCE AND MANAGEMENT'S PLAN

Our consolidated financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Our ability to continue as a going concern is
contingent upon our obtaining sufficient financing to sustain our operations. We
incurred a net loss of $2,020,729, $5,487,051 and $4,968,903 and negative cash
flow from operations of $1,108,120, $3,632,534 and $4,839,180 in the six months
ended November 30, 2002 and the years ended May 31, 2002 and 2001, respectively.
At November 30, 2002, we had deficit working capital of $1,267,935 and cash and
cash equivalents of $2,210. We have historically funded our operations primarily
through the issuance of securities and debt financings. Cash and cash
equivalents decreased $85,898 during the six months ended November 30, 2002.

We estimate our current cash requirements to sustain our operations for the next
twelve months through November 2003 to be $2.4 million. Since we are no longer
supporting the communications product line, we are assuming that there will be
no communications product revenue. We have a note payable to Swartz Private
Equity, LLC ("Swartz") of $635,276 at November 30, 2002 which was originally due
in January 2003 and subsequent to the end of the quarter has been extended to
April 2003. We also have convertible debentures with a group of investors as of
November 30, 2002 aggregating $1,280,000. At the option of the debenture
holders, they may purchase additional debentures up to $1 million at any time
during the next two years as long as the price of our common stock is in excess
of $0.20 per share. During the first six months ended November 30, 2002, we
obtained $50,000 from the sale of equity to several private investors and
$150,000 from short term notes entered into with a related party. Subsequent to
November 30, 2002, we obtained an additional $28,350 from the sale of equity to
several private investors, $200,000 from the issuance of additional convertible
debentures and $30,000 from a short term note entered into with a related party.
In addition, we are negotiating the terms of a $12 million equity line of
credit.

F-44

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

If we are not successful at obtaining and drawing down on the $12 million equity
line of credit or if the optional amounts under the convertible debentures are
not raised in sufficient amounts, then we may not have funds sufficient to meet
our cash requirements. In such circumstances, we may need to receive additional
advances from Swartz, secure additional short-term debt, private placement debt
and/or equity financings with individual or institutional investors. In
addition, we may need to make additional cost reductions if our cash
requirements cannot be met from external sources. We expect that the $2.4
million requirement will be provided by:

o additional funds under the $12 million equity line of credit if we are
successful in negotiating with the potential investor and are able to
register additional shares of common stock, and such available funding
exceeds the remaining balance of the note payable to Swartz;

o proceeds from the exercise of outstanding stock options and warrants;
and

o additional debt and/or equity financings.

F-45

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

4. SECURED NOTE PAYABLE

On March 12, 2002, we replaced and superceded a previously issued Secured
Promissory Note with Swartz with an Amended Secured Promissory Note and
Agreement with an effective date of October 9, 2001 and an Addendum to Amended
Secured Promissory Note dated March 12, 2002. The amended note, which originally
was to mature on January 9, 2003, has been extended to April 2003 and amounts
outstanding under the note bear interest at the rate of 5% per annum. Per the
addendum to the amended note, principal and interest payments are deferred until
April 2003.

As of November 30, 2002 we issued warrants to purchase up to 14,817,481 shares
of our common stock in accordance with the amended note agreements. The warrants
issued were valued using the Black-Scholes pricing model based on the expected
fair value at issuance and the estimated fair value was also recorded as debt
discount. See Note 7 to the consolidated financial statements for discussion of
the terms of the warrants

The note is secured by our assets.

All debt discounts are to be amortized as additional interest expense over the
term of the note payable. As of November 30, 2002, $1,107,238 had been reflected
as debt discount of which $917,722, $86,781 and $189,516 was amortized to
interest expense during the year ended May 31, 2002 and the three and six months
ended November 30, 2002, respectively.

Advances against the note $1,790,000
Less amount applied against $30 million equity line of credit (227,800)
Less amount applied against $25 million equity line of credit (926,924)

Less debt discount
Total 1,107,238
Amount amortized to expense (1,107,238) -
------------- ----------

Note payable at November 30, 2002 $ 635,276
==========

F-46

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On November 9, 2001, an offset of $227,800 from the sale of 2,500,000 shares of
common stock was applied against the final put under the $30 million equity line
of credit discussed below.

On May 30, 2002, an offset of $926,924 from the sale of 14,100,000 shares of
common stock was applied against the first and only put under the $25 million
equity line of credit discussed below.

5. 8% CONVERTIBLE DEBENTURES

Overview. From April 23, 2002 through November 30, 2002, we sold an aggregate of
$1,355,000 of 8% convertible debentures to a group of eleven investors. The
convertible debentures entitle the debenture holder to convert the principal and
unpaid accrued interest into our common stock for two years from the date of
closing. In addition, the debenture holders received warrants exercisable into a
number of our common shares.

Number of Shares Debentures May Be Converted Into. The debentures can be
converted into a number of our common shares at conversion prices that initially
equaled $0.05126 to $0.10289 per share.

Resets of Conversion Price and Conversion Shares. A reset date occurs on each
three month anniversary of the closing date of each debenture and on the date
the registration statement becomes effective, October 29, 2002 for the first
$1,000,000 of principal. If the volume weighted average price for our common
stock for the ten days previous to the reset date is less than the conversion
price in effect at the time of the reset date, then the number of common shares
issuable to the selling shareholder on conversion will be increased. If the
conversion price is reset, the debenture can be converted into a number of our
common shares based on the following calculation: the amount of the debenture
plus any unpaid accrued interest divided by the reset conversion price which
shall equal the volume weighted average price for our common stock for the ten
days previous to the reset date. On October 29, 2002, the date the registration
statement for the first $1,000,000 of principal became effective, the conversion
price for debentures dated April 23, 2002 in an amount of $225,000 and June 10,
2002 in amounts accumulating $775,000 were reset to $0.04457 from initial
conversion prices of $0.10289 and $0.08616.

Warrants. Concurrent with the issuance of the convertible debentures, we issued
to the debenture holders warrants to purchase up to 19,665,438 shares of our
common stock. These warrants are exercisable for five years from the date of
issuance at initial exercise prices equal to 115% of the volume weighted average
price for our common stock for the ten days previous to the debenture date. The
warrant exercise price is subject to being reset on each six month anniversary
of its issuance. On October 23, 2002, the six month anniversary for a debenture
dated April 23, 2002 in an amount of $225,000, the warrant exercise price was
reset to $0.04685 from an initial exercise price of $0.10289.

Options to Purchase Additional Debentures. Subject to the price of our common
stock being equal to or greater than $0.20 per share and a two year limitation,
the debenture holders may purchase additional debentures equal to the value of
their initial debentures. The price at which the optional

F-47

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

additional debentures could be converted would initially equal 115% of the
volume weighted average price for our common stock for the ten days previous to
the date on which the optional additional debentures were closed. The optional
additional debentures would carry the same warrant amounts and reset privileges
as the initial debentures.

Shareholder Approval. We may currently issue more than 20% of our outstanding
shares under the convertible debentures. If we become listed on the NASDAQ Small
Cap Market or NASDAQ National Market, then we must get shareholder approval to
issue more than 20% of our outstanding shares. Since we are currently a bulletin
board company, we do not need shareholder approval.

Restrictive Covenants. For a period of 18 months from the date of the
debentures, we are prohibited from certain transactions. These include the
issuance of any debt or equity securities in a private transaction which are
convertible or exercisable into shares of common stock at a price based on the
trading price of the common stock at any time after the initial issuance of such
securities; the issuance of any debt or equity securities with a fixed
conversion or exercise price subject to adjustment; and any private equity line
type agreements without obtaining the debenture holders' prior written approval.

Right of First Refusal. The debenture holders have a right of first refusal to
purchase or participate in any equity securities offered by us in any private
transaction which closes on or prior to the date that is two years after the
issue date of each debenture.

Registration Rights. We are responsible for registering the resale of the shares
of our common stock which will be issued on the conversion of the debentures. On
October 29, 2002, a registration statement covering the first $1,000,000 of
debentures was declared effective by the Securities and Exchange Commission.

F-48

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

convertible debenture. Accordingly, we amortized to non-cash interest expense
$45,688 and $71,139 during the three and six months ended November 30, 2002.

The convertible debentures are secured by our assets.

Less amounts converted to common stock ( 75,000)

Less debt discount
Total 1,355,000
Amount amortized to expense ( 282,626)
Amount cancelled on conversion ( 57,288) (1,015,086)
------------ -----------

Convertible debentures at November 30, 2002 $ 264,914
===========

6. INVESTMENT AGREEMENTS

$5 Million Equity Line of Credit Agreement

In February 1999, the Company entered into an investment agreement with Swartz.
The investment agreement entitled the Company, at the Company's option, to issue
and sell its common stock for up to an aggregate of $5 million from time to time
during a three-year period through February 24, 2002, subject to certain
conditions including (1) an effective registration statement must be on file
with the SEC registering the resale of the common shares, and (2) a limitation
on the number of common shares which could be sold to Swartz within a 30 day
time period based on the trading volume of the stock, among others. Swartz could
purchase the common stock from the Company at a discount ranging from 10% to 20%
depending on the price of the common stock. In addition to the common stock
purchased, Swartz received warrants to purchase an additional 15% of the common
stock equal to 110% of the market price as determined during the pricing period,
subject to further semi-annual price adjustments if the price of the common
stock goes down.

In July 1999, the Company amended and restated the investment agreement with
Swartz to eliminate the discretion of Swartz as to the timing of its purchase of
the Company's common stock.

F-49

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The registration statement went effective on October 5, 1999. As a result of an
increase in the market price and trading volume of the Company's common stock,
the Company completed the $5 million placement of shares in February 2000. The
total number of shares placed with Swartz was 13.9% of the total number of
shares outstanding at the time or 7,014,796 common shares at prices ranging from
$0.248 to $0.9775. The average price per share paid by Swartz was $0.71 compared
to the average closing price during the twenty day pricing periods of $1.34 per
share.

An additional 1,052,219 shares of common stock at exercise prices ranging
initially from $0.341 to $1.265 are issuable to Swartz upon the exercise of
warrants issued under the investment agreement. The warrants contain a reset
provision which may reduce the exercise price if the price, as defined in the
agreement, is lower on any subsequent six month anniversary. As a result of the
reset provision, the exercise prices have been reduced to a range of $0.066 to
$0.077 as of November 30, 2002. None of the warrants had been exercised as of
November 30, 2002.

$30 Million Equity Line of Credit Agreement

In May 2000, we entered into an investment agreement with Swartz. The investment
agreement entitled us , at our option, to issue and sell our common stock for up
to an aggregate of $30 million from time to time during a three-year period,
subject to certain conditions including among other items (1) an effective
registration statement being on file with the SEC registering the resale of the
common shares, and (2) a limitation on the number of common shares that could
have been sold to Swartz within a 30 day time period based on the trading volume
of the stock. Swartz could purchase the common stock from us at a discount. If
the market price was less than $1.00 per share, the discount was $.10 per share;
if the market price was between $1.00 to $1.99 per share, the discount was 10%;
and if the market price was $2.00 or greater, the discount was 7%. In addition
to the common stock purchased, Swartz received warrants to purchase an
additional 15% of the common stock equal to 110% of the market price as
determined during the pricing period, subject to further semi-annual price
adjustments if the price of our common stock goes down.

The registration statement went effective on June 23, 2000 and we received a
total of $4,381,601 from the sale of 12,000,000 shares of common stock . Per the
terms of the investment agreement, we issued ten five-year warrants for
1,800,000 shares of common stock exercisable initially at prices ranging from
$0.091 to $1.562. The warrants contain a reset provision which may reduce the
exercise price if the price, as defined in the agreement, is lower on any
subsequent six month anniversary. As a result of the reset provision, the
exercise prices have been reduced to a range of $0.0385 to $0.0858 as of
November 30, 2002. None of the warrants had been exercised as of November 30,
2002.

F-50

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On September 24, 2001, we entered into a waiver and agreement with Swartz
whereby Swartz was able to advance us $227,800 prior to the close of the final
put under the $30 million equity line of credit. The waiver and agreement
extended the time of the put beyond twenty days and redefined the price of the
put to be the lesser of the factor of (a) the volume weighted average price per
share, as defined by Bloomberg L.P., for each day of the put multiplied by .70
or (b) the volume weighted average price per share minus $0.05 multiplied by 20%
of the acceptable daily volume as defined in the waiver. At the discretion of
Swartz the 20% daily volume limitation could be increased up to 30% of the daily
volume. In addition, the waiver included the issuance of a purchase warrant to
purchase 2,125,000 shares of common stock at an initial exercise price of
$0.0911. The purchase warrant shares were issued to Swartz as restricted shares
subject to "piggyback" registration rights and are subject to repricings on each
six month anniversary if 110% of the lowest closing bid price for the five days
previous to the anniversary date is less than the initial or subsequent reset
exercise prices. As a result of the reset provision, the exercise price has been
reduced to $0.0858 as of November 30, 2002. None of the warrants had been
exercised as of November 30, 2002.
See Note 7 for further information on the warrants.

$25 Million Equity Line of Credit Agreement

On September 17, 2001, we entered into an investment agreement with Swartz. The
investment agreement entitled us to issue and sell our common stock to Swartz
for up to an aggregate of $25 million from time to time during a three-year
period following the effective date of the registration statement. We filed a
registration statement on Form S-1 that was declared effective on November 5,
2001 for 15,000,000 shares of our common stock. We issued the 15,000,000 shares
of common stock to Swartz during the fiscal year ended May 31, 2002 to be
applied against a note payable that Swartz had issued to us.

We issued to Swartz a commitment warrant to purchase up to 900,000 shares of our
common stock concurrent with the execution of the investment agreement. This
warrant is exercisable through September 17, 2006 at an initial exercise price
of $0.22. The commitment warrant exercise price is subject to being reset on
each six month anniversary of its issuance. As a result of the reset provision,
the exercise price has been reduced to $0.0858 as of November 30, 2002. None of
the warrants had been exercised as of November 30, 2002.

Restrictive Covenants. For a period of two years after the termination of the
agreeement, we are prohibited from certain transactions. These include the
issuance of any debt or equity securities in a private transaction which are
convertible or exercisable into shares of common stock at a price based on the
trading price of the common stock at any time after the initial issuance of such
securities or with a fixed conversion or exercise price subject to adjustment
without obtaining Swartz's prior written approval.

F-51

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Right of First Refusal. Swartz has a right of first refusal to purchase any
variable priced securities offered by us in any private transaction which closes
on or prior to two years after the termination of the investment agreement and a
right of participation for any equity securities offered by us in any private
transaction which closes on or prior to two years after the termination of the
investment agreement.

Waiver and Agreement. On March 12, 2002, we entered into an amended waiver and
agreement with Swartz which replaced and superseded all previous waivers and
agreements. This amended waiver and agreement extended the time of the put
beyond twenty days and redefined the price of the put to be the lesser of the
factor of (a) the volume weighted average price per share, as defined by
Bloomberg L.P., for each day of the put multiplied by .70 or (b) the volume
weighted average price per share minus $0.05 multiplied by 20% of the acceptable
daily volume as defined in the waiver. At the discretion of Swartz, the 20%
daily volume limitation could be increased up to 30% of the daily volume. In
addition, the amended waiver and agreement increased the intended put share
amount for the first put to 14,100,000 shares, which is the total number of
shares we had registered under the $25 million equity line of credit. On May 30,
2002 we closed the first put and effectively the $25 million equity line of
credit by applying the proceeds of $926,924 to the secured note payable
discussed below.

Warrants. In connection with closing the $25 million equity line of credit, we
issued to Swartz a commitment warrant to purchase 900,000 shares of our common
stock as discussed further in Note 7 to the consolidated financial statements.
This warrant was valued on the issuance date using the Black-Scholes pricing
model and the value was recorded as a debt discount.

7. STOCKHOLDERS' DEFICIT

The following table summarizes equity transactions during the six months ended
November 30, 2002:

Common
Shares Dollars
---------------- -----------------

Balance June 1, 2002 81,465,757 $ 41,440,916

Sale of common stock 1,932,000 50,000
Stock issued for services 2,000,000 110,000
Stock issued to settle litigation 400,000 16,000
Stock issued on conversion of
debentures and accrued interest 1,691,597 75,395
Non-cash interest and debt discount
related to warrants and debentures - 1,183,333
---------------- -----------------

Balance November 30, 2002 87,489,354 $ 42,875,644
================ =================

F-52

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Stock Options

At November 30, 2002, we had 17,500 options outstanding pursuant to our 1992 ISO
Stock Option Plan exercisable at $1.325 per share expiring in 2005; 50,000
options outstanding pursuant to our 1992 NSO Stock Option Plan exercisable at
$1.325 per share expiring in 2005; 2,204,405 options outstanding pursuant to our
1996 Stock Option Plan exercisable at a range of $0.0575 to $1.41 per share
expiring beginning in 2002 through 2007; and 2,305,000 options outstanding
pursuant to our 2001 Stock Option Plan exercisable at a range of $0.07 to $0.70
per share expiring beginning in 2002 through 2007.

Some of the options outstanding under these plans are not presently exercisable
and are subject to meeting vesting criteria.

Warrants

At November 30, 2002, we had warrants outstanding exercisable into 44,167,415
common shares at exercise prices ranging from $0.033 to $1.12 per share expiring
beginning in 2002 through 2007. During the six months ended November 30, 2002,
we issued warrants to purchase 17,150,629 shares of common stock which are
subject to repricings at the six month anniversary of the issuance of the
warrant. At each anniversary date the warrants will be repriced to the lesser of
the initial exercise price or 110% of the lowest closing bid price of our common
stock for the five trading days ending on such six month anniversary date.
During the six months ended November 30, 2002, warrants to purchase 14,202,869
shares of common stock with initial or reset exercise prices ranging from
$0.0657 to $0.1320 have been repriced to exercise prices ranging from $0.033 to
$0.077.

During the six months ended November 30, 2002, we issued to two individuals
warrants exercisable for five years into 1,000,000 common shares at an exercise
price of $0.05 per share. These individuals are acting as our marketing
representatives and the warrants are scheduled to vest based on sales activity
as defined in their contracts.

Also, during the six months ended November 30, 2002, we issued to Swartz snap
shot warrants exercisable for five years into 1,929,331 common shares at
exercise prices ranging from $0.047 to $0.068 per share. These snap shot
warrants were issued under an agreement with Swartz whereby we will issue to
Swartz warrants to purchase common shares equal to 20% of any common stock or
warrants we issue to parties other than Swartz or their affiliates after March
12, 2002.

Common Stock

During the six months ended November 30, 2002, we sold to a group of individual
private investors a total of 1,932,000 shares of common stock at prices ranging
from $0.025 to $0.0301 for an accumulated total of $50,000. The investors have
agreed to hold these shares for a minimum of one year.

F-53

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In October 2002, we entered into an agreement with Barry Clark whereby he will
provide consulting services through April 2003 to help structure financing,
provide innovative capital resources and advise us on other strategic decisions.
In October 2002 we issued to Mr. Clark 2,000,000 shares of our common stock as
compensation for the consulting services. We recorded $110,000, the value of the
common stock on the day it was issued, as a prepaid expense and additional
paid-in capital of which, during the six months ended November 30, 2002, we
amortized to expense $36,667 as non-cash compensation.

In October 2002, we entered into a settlement agreement with a former executive
officer of the Company. As part of the agreement, we issued to him 400,000
shares of our common stock. During the six months ended November 30, 2002, we
recorded $16,000, the value of the common stock on the day of the settlement, as
litigation expense. The shares are subject to registration and will be included
in our next registration statement.

In December 2001, we entered into a series of agreements with iCapital
Corporation ("iCapital") and several principals of iCapital whereby they
provided consulting services through December 2002 to help structure financing,
provide innovative capital resources, identify and assist with merger and
acquisition opportunities and advise us on other strategic decisions. In January
2002, based on meeting several performance criteria, we issued to iCapital and
the principals of iCapital 2,200,000 shares of our common stock as compensation
for the consulting services. During our previous fiscal year, we recorded
$198,000, the value of the common stock on the day it was issued, as a prepaid
expense and additional paid-in capital of which, during the six months ended
November 30, 2002, we amortized to expense $99,000 as non-cash compensation.

8. NOTE RECEIVABLE

In June 2000, we entered into a three-year, $80,000 Secured Promissory Note
Receivable with an individual who was, at the time of the issuance of the note,
an executive officer of Patriot. On September 25, 2000, he requested and was
relieved of his duties as an executive officer and director of Patriot. The note
bears interest at the rate of 6% per annum with interest payments due
semi-annually and the principal due at the maturity of the note. The individual
pledged 100,000 shares of our common stock that he held on the date of issuance
as security for this note.

9. LEGAL PROCEEDINGS

In January 1999, we were sued in the Superior Court of San Diego County,
California by the Fish Family Trust, a co-inventor of the original ShBoom
technology. The suit also named as defendants nanoTronics and Gloria Felcyn on
behalf of the Falk Family Trust. The suit sought a judgment for damages, a
rescission of the Technology Transfer Agreement and a restoration of the
technology to the co-inventor. In March 1999, we joined with nanoTronics and
Gloria Felcyn and filed our response and cross-complaint against the Fish Family
Trust. In November 2000, the judge issued a summary ruling in favor of the
defendants on all counts. The Fish Family Trust filed an appeal in January 2001.
Management believes that it is unlikely that the appellate court will overturn
the trial

F-54

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

court's ruling and that the resolution of the appeal process will have no impact
on our financial position, income or cash flows.

In September 2001, an action was filed against us in the Superior Court of San
Diego County, California by Richard G. Blum, our former Chairman, President and
Chief Executive Officer. Mr. Blum contended that he was wrongfully terminated on
August 5, 2001 in violation of his employment agreement dated December 1, 2000.
He sought damages for the alleged breach of his employment agreement, age
discrimination, as well as other related claims. In October 2002, we entered
into a settlement agreement with Mr. Blum whereby we agreed to pay him $60,000
over twelve months and to issue him 400,000 shares of our common stock. This
liability has been recorded in our consolidated financial statements for the six
months ended November 30, 2002.

F-55

=========================================================== ========================================================

Until the completion of the resale of the common stock
included in this prospectus, all dealers that effect
transactions in these securities, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation
to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments The Resale of
or subscriptions. 21,929,013 Shares
of
Table of Contents Common Stock
Offered by
Prospectus Summary..................... 5 Selling Shareholders
Risk Factors........................... 8
Plan of Distribution .................. 14
Selling Shareholders................... 15
The Company............................ 16
Use of Proceeds........................ 31
Litigation............................. 31
Selected Financial Data................ 32 PATRIOT SCIENTIFIC
Management's Discussion and CORPORATION
Analysis of Financial Condition........ 33
Changes in Accountants................. 48
Quantitative and Qualitative
Disclosure About Market Risk........... 49
Management............................. 50
Principal Shareholders................. 56 PROSPECTUS
Certain Transactions................... 58
Trading Market and Related Matters 59
Description of Securities ............. 60
Legal Matters.......................... 61
Experts ............................... 61
Index to Financial Statements.......... F-1 Subject to Completion, February 19, 2003

=========================================================== =========================================================

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

Expenses payable in connection with the registration and distribution
of the securities being registered hereunder, all of which will be borne by the
Registrant, are as follows:

Registration Fee - Securities and Exchange Commission.......... $ 93
Printing and Engraving.......................................... 1,000*
Legal Fees and Expenses......................................... 15,000*
Accounting Fees................................................. 15,000*
Blue Sky Fees and Expenses...................................... 1,000*
----------
Total.................................................. $32,093*

* Estimated

ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.

Pursuant to the Company's Certificate of Incorporation, and as
permitted by Section 145 of the General Corporation Law of Delaware, the Company
may indemnify its directors and officers under certain circumstances against
reasonable expenses (including court costs and attorney's fees), judgments,
penalties, fines, and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding, whether civil,
criminal, administrative or investigative, to which any of them is a party by
reason of his being a director, officer, employee, or agent of the Company if it
is determined that he acted in accordance with the applicable standard of
conduct set forth in such statutory provisions. Thus, the indemnification
provisions will protect officers and directors from liability only if the
officer or director meets the applicable standard of conduct and the Company has
the financial ability to honor the indemnity.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

We offered and sold the following common stock, either for cash or in
consideration of services rendered as indicated below, without registration
under the Securities Act of 1933, as amended, and exemption for such sales from
registration under the Act is claimed in reliance upon the exemption provided by
Section 4(2) thereof on the basis that such offers and sales were transactions
not involving any public offering. Appropriate precautions against transfer have
been taken, including the placing of a restrictive legend on all certificates
evidencing such securities. All such sales were effected without the aid of
underwriters, and no sales commissions were paid.

Purchase
Number of Aggregate Price Per
Name Date of Sale Shares Purchase Price Share
---- ------------ ------ -------------- -----------

Donald Longo December 6, 2002 111,111 $5,000 $0.05 Cash

Red Oak Inc. December 6, 2002 111,111 $5,000 $0.05 Cash

Donald Riley December 9, 2002 118,889 $5,350 $0.04 Cash

Greg Erickson December 16, 2002 100,000 $5,000 $0.05 Cash

Dean Gulick December 19, 2002 102,459 $5,000 $0.05 Cash

Robert Vincent December 19, 2002 61,475 $3,000 $0.05 Cash

John Laws January 21, 2003 98,039 $5,000 $0.05 Cash

REC Music Foundation February 3, 2003 400,000 $12,000 $0.03 Cash

John Castellano February 3, 2003 138,889 $5,000 $0.04 Cash

Lyle Armstrong February 7, 2003 125,000 $4,500 $0.04 Cash

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

The Exhibits and Financial Statement Schedules to this Registration
Statement are listed in the Exhibit Index commencing at page EX-1 hereof.

ITEM 17. UNDERTAKINGS.

The undersigned Registrant hereby undertakes the following:

(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;

(ii) to reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information in this Registration
Statement; and

(iii) to include any material information with respect to the
plan of distribution not previously disclosed in this registration, or any
material change to such information in the Registration Statement.

(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.

(3) To remove from registration by means of a post-effective
amendment to this Registration Statement any of the securities being registered
which remain unsold at the termination of this offering.

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers or persons controlling the
Registrant pursuant to the General Corporation Law of Delaware, the Certificate
of Incorporation, or otherwise, the Registrant has been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in such Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or person controlling the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or person controlling the Registrant in connection with any
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the final
adjudication of such issue.

iii

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of San Diego,
State of California, on February 19, 2003

PATRIOT SCIENTIFIC CORPORATION

By: /s/ LOWELL W. GIFFHORN
--------------------------------
Lowell W. Giffhorn
Executive Vice President,
Chief Financial Officer,
Secretary and Director

Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.

Signature Title Date
--------- ----- ----

/s/JEFFREY E. WALLIN President and Chief Executive February 19, 2003
-------------------- Officer
Jeffrey E. Wallin

/s/LOWELL W. GIFFHORN Chief Financial Officer, Principal February 19, 2003
--------------------- Financial Officer, Principal
Lowell W. Giffhorn Accounting Officer, Secretary
and Director

/s/DAVID POHL Director February 19, 2003
-------------
David Pohl

/s/CARLTON JOHNSON Director February 19, 2003
--------------------------
Carlton Johnson

/s/DONALD BERNIER Chairman of the Board and February 19, 2003
----------------- Director
Donald Bernier

/s/HELMUT FALK JR. Director February 19, 2003
------------------
Helmut Falk Jr.

/s/GLORIA H. FELCYN Director February 19, 2003
-------------------
Gloria H. Felcyn

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
Registration Statement
Under The Securities Act of 1933

EXHIBITS

PATRIOT SCIENTIFIC CORPORATION
(Exact name of registrant as specified in its charter)

Ex-1

PATRIOT SCIENTIFIC CORPORATION

(a) Exhibits

The following exhibits are included as part of this registration
statement, except those exhibits marked (1), which have previously been filed
with the Securities and Exchange Commission and are incorporated by reference to
another registration statement, report or document. References to the "Company"
in this Exhibit Index mean PATRIOT SCIENTIFIC CORPORATION, a Delaware
corporation.

Exhibit No. Document No.
- ----------- -------- ---

2.0 PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.

2.1 Agreement to Exchange Technology for Stock in Patriot Scientific Corporation, (1)
incorporated by reference to Exhibit 2.1 to Form 8-K dated August 10, 1989

2.2 Assets Purchase Agreement and Plan of Reorganization dated June 22, 1994, (1)
among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4 to Form 8-K dated
July 6, 1994

2.2.1 Amendment to Development Agreement dated April 23, 1996 between the Company and (1)
Sierra Systems, incorporated by reference to Exhibit 2.2.1 to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29, 1996

2.3 Form of Exchange Offer dated December 4, 1996 between the Company and certain (1)
shareholders of Metacomp, Inc. incorporated by reference to Exhibit 2.3 to Form
8-K dated January 9, 1997

2.4 Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc. (1)
Tendered Pursuant to the Exchange Offer Dated December 4, 1996 incorporated by
reference to Exhibit 2.4 to Form 8-K dated January 9, 1997

3.0 ARTICLES AND BYLAWS.

3.1 Original Articles of Incorporation of the Company's predecessor, Patriot (1)
Financial Corporation, incorporated by reference to Exhibit
3.1 to registration statement on Form S-18, file no.
33-23143-FW

3.2 Articles of Amendment of Patriot Financial Corporation, as filed with the (1)
Colorado Secretary of State on July 21, 1988, incorporated by reference to
Exhibit 3.2 to registration statement on Form S-18, File No. 33-23143-FW

3.3 Certificate of Incorporation of the Company, as filed with the Delaware (1)
Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.3 to Form 8-K dated May 12, 1992

3.3.1 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on April 18, 1995, incorporated by
reference to Exhibit 3.3.1 to Form 10-KSB for the fiscal year ended May 31,
1995

Ex-2

Exhibit No. Document No.
- ----------- -------- ---

3.3.2 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on June 19,1997, incorporated by
reference to Exhibit 3.3.2 to Form 10-KSB for the fiscal year ended May 31, 1997

3.3.3 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on April 28, 2000, incorporated by
reference to Exhibit 3.3.3 to Registration Statement on Form S-3 dated
May 5, 2000

3.3.4 Certificate of Amendment to the Certificate of Incorporation of the Company, as (1)
filed with the Delaware Secretary of State on May 6, 2002, incorporated by
reference to Exhibit 3.3.4 to Registration Statement on Form S-3 dated June 27,
2002

3.4 Articles and Certificate of Merger of Patriot Financial Corporation into the (1)
Company dated May 1, 1992, with Agreement and Plan of Merger attached thereto
as Exhibit A, incorporated by reference to Exhibit 3.4 to Form 8-K dated May
12, 1992

3.5 Certificate of Merger issued by the Delaware Secretary of State on May 8, (1)
1992, incorporated by reference to Exhibit 3.5 to Form 8-K dated May 12, 1992

3.6 Certificate of Merger issued by the Colorado Secretary of State on May 12, (1)
1992, incorporated by reference to Exhibit 3.6 to Form 8-K dated May 12, 1992

3.7 Bylaws of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K (1)
dated May 12, 1992

4.0 INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.

4.1 Specimen common stock certificate, incorporated by reference to Exhibit 4.1 (1)
Form 8-K dated May 12, 1992

4.2 Form of Stock Purchase Warrant (Labway Corporation) dated February 29, 1996, (1)
exercisable to purchase 253,166 common shares at $1.58 per
share until August 31, 1996, granted to investors in
connection with an offering of securities made in reliance
upon Regulation S, incorporated by reference to Exhibit 4.2 to
Form 10-QSB for fiscal quarter ended February 29, 1996

4.3 Form of 6% Convertible Subordinated Promissory Note due September 30, 1998 (1)
aggregating $1,500,000 to six investors incorporated by reference to Exhibit
4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996

4.4 Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999 (1)
aggregating $2,000,000 to two investors incorporated by reference to Exhibit
4.4 to Form 8-K dated June 16, 1997

Ex-3

Exhibit No. Document No.
- ----------- -------- ---

4.5 Form of Stock Purchase Warrant (CC Investments, LDC) dated June 2, 1997 (1)
exercisable to purchase an aggregate of 400,000 common shares at $1.69125 per
share until June 2, 2002, granted to two investors in connection with the
offering of securities in Exhibit 4.4 incorporated by
reference to Exhibit 4.5 to Form 8-K dated June 16, 1997

4.6 Registration Rights Agreement dated June 2, 1997 by and among the Company and (1)
CC Investments, LDC and the Matthew Fund, N.V. related to the registration of
the common stock related to Exhibits 4.4 and 4.5 incorporated
by reference to Exhibit 4.6 to Form 8-K dated June 16, 1997

4.7 Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) (1)
dated June 2, 1997 exercisable to purchase an aggregate of 211,733 common
shares at $1.69125 per share until June 2, 2002, granted to a group of
investors in connection with the offering of securities in Exhibit 4.4
incorporated by reference to Exhibit 4.7 to Form 8-K dated June 16, 1997

4.8 Registration Rights Agreement dated June 2, 1997 by and among the Company and
Swartz Investments, LLC related to the registration of the common stock related (1)
to Exhibit 4.7 incorporated by reference to Exhibit 4.8 to Form 8-K dated June
16, 1997

4.9 Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999 (1)
aggregating $1,000,000 to two investors incorporated by
reference to Exhibit 4.9 to Form 10-KSB for the fiscal year
ended May 31, 1998

4.10 Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24, 1997 (1)
exercisable to purchase an aggregate of 200,000 common shares
at $1.50 per share until June 2, 2002, granted to two
investors in connection with the offering of securities
described in Exhibit 4.9 incorporated by reference to Exhibit
4.10 to Form 10-KSB for the year ended May 31, 1998

4.11 Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) (1)
dated November 24, 1997 exercisable to purchase an aggregate of 105,867 common
shares at $1.50 per share until June 2, 2002, granted to a group of investors
in connection with the offering of securities described in Exhibit 4.9
incorporated by reference to Exhibit 4.11 to Form 10-KSB for the year ended May
31, 1998

4.12 Form of Warrant to Purchase Common Stock (Investor Communications Group, Inc.) (1)
dated June 16, 1997 exercisable to purchase an aggregate of 130,000 common
shares at prices ranging from $2.50 to $7.50 per share until June 15, 1999
incorporated by reference to Exhibit 4.12 to Form 10-KSB for the year ended May
31, 1998

4.13 Warrant to Purchase Common Stock issued to Spellcaster Telecommunications, Inc. (1)
dated April 28, 1998 exercisable to purchase an aggregate of
100,000 common shares at $1.25 per share until April 28, 2000
incorporated by reference to Exhibit 4.13 to Form 10-KSB for
the year ended May 31, 1998

Ex-4

Exhibit No. Document No.
- ----------- -------- ---

4.14 Investment agreement dated February 24, 1999 by and between the Company and (1)
Swartz Private Equity, LLC for a maximum aggregate amount of $5,000,000
incorporated by reference to Exhibit 4.14 to Form 10-QSB/A for the fiscal
quarter ended November 30, 1998

4.15 Registration Rights Agreement dated February 24, 1999 by and between the (1)
Company and Swartz Private Equity, LLC related to the registration of the
common stock related to Exhibit 4.14 incorporated by reference to Exhibit 4.15
to Form 10-QSB/A for the fiscal quarter ended November 30, 1998

4.16 Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC) dated (1)
February 24, 1999 exercisable to purchase common shares in connection with the
offering of securities in Exhibit 4.14 incorporated by reference to Exhibit
4.16 to Form 10-QSB/A for the fiscal quarter ended November 30, 1998

4.17 Amended and Restated Investment Agreement dated July 12, 1999 by and between (1)
the Company and Swartz Private Equity, LLC for a maximum aggregate amount of
$5,000,000 incorporated by reference to Exhibit 4.17 to Pre-Effective Amendment
No. 2 to Registration Statement on Form SB-2 dated July 14, 1999

4.18 Investment Agreement dated April 28, 2000 by and between the Company and Swartz (1)
Private Equity, LLC for a maximum aggregate amount of $30,000,000 incorporated
by reference to Exhibit 4.18 to Registration Statement on Form S-3 dated May 5,
2000

4.18.1 Waiver and Agreement dated September 24, 2001 amending the Investment Agreement (1)
dated April 28, 2000 by and between the Company and Swartz Private Equity, LLC
for a maximum aggregate amount of $30,000,000 incorporated by reference to
Exhibit 4.18.1 to Registration Statement on Form
S-1 dated October 11, 2001

4.19 2001 Stock Option Plan of the Company dated February 21, 2001 incorporated by (1)
reference to Exhibit 4.19 to Registration Statement on Form S-8 dated March 26,
2001

4.20 Investment agreement dated September 17, 2001 by and between the Company and (1)
Swartz Private Equity, LLC for a maximum aggregate amount of $25,000,000
incorporated by reference to Exhibit 4.20 to Registration Statement
on Form S-1 dated October 11, 2001

Ex-5

Exhibit No. Document No.
- ----------- -------- ---

4.21 Registration Rights Agreement dated September 17, 2001 by and between the (1)
Company and Swartz Private Equity, LLC related to the registration of the
common stock related to Exhibit 4.20 incorporated by reference to Exhibit 4.21
to Registration Statement on Form S-1 dated October 11, 2001

4.22 Warrant to Purchase Common Stock dated September 17, 2001 exercisable to (1)
purchase common shares in connection with the Offering of securities in Exhibit
4.20 incorporated by reference to Exhibit 4.22 to Registration Statement on
Form S-1 dated October 11, 2001

4.23 Financial Consulting Services Agreement between the Company and M. Blaine (1)
Riley, Randall Letcavage and Rosemary Nguyen incorporated by reference to
Exhibit 4.23 to Registration Statement on Form S-8 dated January 22, 2002

4.24 Form of 8% Convertible Debenture (Lincoln Ventures, LLC) due June 10, 2004 (1)
aggregating $1,000,000 to six investors incorporated by reference to Exhibit
4.24 to Registration Statement on Form S-3 dated June 27, 2002

4.25 Form of Stock Purchase Warrant (Lincoln Ventures, LLC) dated June 10, 2002 (1)
exercisable to purchase an aggregate of 12,859,175 common shares at initial
exercise prices ranging form $0.08616 to $0.10289 per share until June 10,
2007, granted to six investors in connection with the offering of securities
described in Exhibit 4.24 incorporated by reference to Exhibit 4.25 to
Registration Statement on Form S-3 dated June 27, 2002

4.26 Form of Registration Rights Agreement (Lincoln Ventures, LLC) (1)
dated June 10, 2002 by and among the Company and six investors
related to the registration of the common stock related to
Exhibit 4.24 incorporated by reference to Exhibit 4.26 to
Registration Statement on Form S-3 dated June 27, 2002

5.0 OPINION RE LEGALITY.

5.1 Legal opinion of Luce, Forward, Hamilton & Scripps LLP, attorney (2)

10.0 MATERIAL CONTRACTS.

10.1 1992 Incentive Stock Option Plan of the Company, incorporated by reference to (1)
Exhibit 10.1 to Form 8-K dated May 12, 1992

10.1.1 Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995, (1)
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17, 1996

10.2 1992 Non-Statutory Stock Option Plan of the Company, incorporated by reference (1)
to Exhibit 10.2 to Form 8-K dated May 12, 1992

Ex-6

Exhibit No. Document No.
- ----------- -------- ---

10.2.1 Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995 (1)
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal year
ended May 31, 1996

10.3 Lease Agreement between the Company's subsidiary Metacomp, Inc. and (1)
Clar-O-Wood Partnership, a California limited partnership dated April 11, 1991
as amended November 11, 1992 and November 2, 1995 incorporated by reference to
Exhibit 10.3 to Form 10-KSB for fiscal year ended May 31, 1997

10.4 Stock Purchase Agreement dated November 29 and 30, 1995, between the Company (1)
and SEA, Ltd., incorporated by reference to Exhibit 10.4 to Form 8-K dated
December 11, 1995

10.4.1 Letter Amendment to Stock Purchase Agreement dated February 21, 1996, between (1)
the Company and SEA, Ltd., incorporated by reference to Exhibit 10.4.1 to Form
10-QSB for fiscal quarter ended 2/29/96

10.5 1995 Employee Stock Compensation Plan of the Company, incorporated by reference (1)
to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended 11/30/95

10.6 Letter Stock and Warrant Agreement dated January 10, 1996 between the Company (1)
and Robert E. Crawford, Jr., incorporated by reference to Exhibit 10.6 to Form
10-QSB for fiscal quarter ended February 29, 1996

10.7 Non-Exclusive Manufacturing and Line of Credit Agreement dated February 28, (1)
1996, between the Company and Labway Corporation, incorporated by reference to
Exhibit 10.7 to Form 10-QSB for fiscal quarter ended February 29, 1996

10.8 Distribution and Representation Agreement dated February 28, 1996, between the (1)
Company and Innoware, Inc., incorporated by reference to Exhibit 10.8 to Form
10-QSB for fiscal quarter ended February 29, 1996

10.9 Employment Agreement dated November 20, 1995 between the Company and Elwood G. (1)
Norris, incorporated by reference to Exhibit 10.9 to
Registration Statement on Form SB-2 dated March 18, 1996

10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between the Company (1)
and Elwood G. Norris, incorporated by reference to Exhibit 10.9.1 to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 dated May
23, 1996

10.10 Employment Agreement dated November 20, 1995 between the Company and Robert (1)
Putnam, incorporated by reference to Exhibit 10.10 to
Registration Statement on Form SB-2 dated March 18, 1996

10.11 Sales Contractual Agreement dated March 19, 1996 between the Company and Evolve (1)
Software, Inc., incorporated by reference to Exhibit 10.11 to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29, 1996

Ex-7

Exhibit No. Document No.
- ----------- -------- ---

10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve (1)
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares at
$2.85, incorporated by reference to Exhibit 10.11.1 to Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2 dated April 29, 1996

10.12 Employment Agreement dated as of May 8, 1996 between the Company and Michael A. (1)
Carenzo, including Schedule A - Stock Option Agreement, incorporated by
reference to Exhibit 10.12 to Pre-Effective Amendment No. 2 to Registration
Statement on Form SB-2 dated May 23, 1996

10.12.1 First Amendment to Employment Agreement dated as of May 8, 1996 between the (1)
Company and Michael A. Carenzo dated September 23, 1996, incorporated by
reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended May 31,
1997

10.13 1996 Stock Option Plan of the Company dated March 25, 1996 and approved by the (1)
Shareholders on May 17, 1996, incorporated by reference to Exhibit 10.13 to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 dated May
23, 1996

10.14 Sales Contractual Agreement dated June 20, 1996 between the Company and (1)
Compunetics Incorporated incorporated by reference to Exhibit
10.14 to Form 10-KSB for fiscal year ended May 31, 1996

10.15 Sales Contractual Agreement dated July 31, 1996 between the Company and Premier (1)
Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to Form 10-KSB
for fiscal year ended May 31, 1996

10.16 Employment Agreement dated January 1, 1997 between the Company and Norman J. (1)
Dawson incorporated by reference to Exhibit 10.16 to Form
10-KSB for fiscal year ended May 31, 1997

10.17 Employment Agreement dated January 1, 1997 between the Company and Jayanta K. (1)
Maitra incorporated by reference to Exhibit 10.17 to Form
10-KSB for fiscal year ended May 31, 1997

10.18 Technology License and Distribution Agreement dated June 23, 1997 between the (1)
Company and Sun Microsystems, Inc. incorporated by reference to Exhibit 10.18
to Form 10-KSB for the fiscal year ended May 31, 1997

10.19 Employment Agreement dated March 23, 1998 between the Company and James T. (1)
Lunney incorporated by reference to Exhibit 10.19 to Form
10-KSB for the fiscal year ended May 31, 1998

10.20 Employment Agreement dated July 28, 1997 between the Company and Phillip (1)
Morettini incorporated by reference to Exhibit 10.20 to Form
10-KSB for the fiscal year ended May 31, 1998

10.21 Employment Agreement dated July 23, 1998 between the Company and Lowell W. (1)
Giffhorn incorporated by reference to Exhibit 10.21 to Form
10-KSB for the fiscal year ended May 31, 1998

Ex-8

Exhibit No. Document No.
- ----------- -------- ---

10.22 Secured Promissory Note dated June 12, 2000 between the Company and James T. (1)
Lunney incorporated by reference to Exhibit 10.22 to Form
10-KSB for the fiscal year ended May 31, 2000

10.23 Purchase Agreement dated June 29, 2000 between the Company and 4S 37/38, LLC (1)
incorporated by reference to Exhibit 10.23 to Form 10-KSB for the fiscal year
ended May 31, 2000

10.24 Employment Agreement dated October 2, 2000 between the Company and Miklos B. (1)
Korodi incorporated by reference to Exhibit 10.24 to Form
10-QSB for the fiscal quarter ended November 30, 2000

10.25 Employment Agreement dated December 1, 2000 between the Company and Richard G. (1)
Blum incorporated by reference to Exhibit 10.25 to Form 10-QSB
for the fiscal quarter ended November 30, 2000

10.26 Employment Agreement dated January 29, 2001 between the Company and Serge J. (1)
Miller incorporated by reference to Exhibit 10.26 to Form
10-KSB for the fiscal year ended May 31, 2001

10.27 Lease Agreement dated February 23, 2001 between the Company and Arden Realty (1)
Finance IV, LLC incorporated by reference to Exhibit 10.27 to
Form 10-KSB for the fiscal year ended May 31, 2001

10.28 Employment Agreement dated January 1, 2001 between the Company and David H. (1)
Pohl incorporated by reference to Exhibit 10.28 to Form 10-KSB
for the fiscal year ended May 31, 2001

10.29 Employment Agreement dated April 26, 2001 between the Company and David H. Pohl (1)
incorporated by reference to Exhibit 10.29 to Form 10-KSB for the fiscal year
ended May 31, 2001

10.30 Employment Agreement dated November 17, 2001 between the Company and Lowell W. (1)
Giffhorn incorporated by reference to Exhibit 10.30 to Registration Statement
on Form S-3 dated June 27, 2002

10.31 Employment Agreement dated December 20, 2001 between the (1)
Company and Jayanta Maitra incorporated by reference to
Exhibit 10.31 to Registration Statement on Form S-3 dated June
27, 2002

10.32 Consulting Agreement dated March 7, 2002 between the Company (1)
and SDMC, Inc.
incorporated by reference to Exhibit 10.32 to Registration
Statement on Form S-3 dated June 27, 2002

23.0 CONSENTS OF EXPERTS AND COUNSEL

Ex-9

Exhibit No. Document No.
- ----------- -------- ---

23.1 Consent of Luce, Forward, Hamilton & Scripps LLP, attorneys at law ( included (2)
in Exhibit 5.1)

23.2 Consent of BDO Seidman, LLP independent certified public accountants (2)

23.3 Consent of Nation Smith Hermes Diamond, LLP independent certified public (2)
accountants

99.0 Additional Exhibits.

99.1 Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by reference (1)
to Exhibit 28.2 to registration statement on Form SB-2, file no. 33-57858

99.2 Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by reference (1)
to Exhibit 28.3 to registration statement on Form SB-2, file no. 33-57858

99.3 Form of Incentive Stock Option Agreement to the Company's 1996 Stock Option (1)
Plan (individual agreements differ as to number of shares,
dates, prices and vesting), incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996

99.4 Form of NonQualified Stock Option Agreement to the Company's 1996 Stock Option (1)
Plan (individual agreement differ as to number of shares,
date, prices and vesting), incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996

99.5 Press Release of the Company dated November 4, 1996 incorporated by (1)
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997

99.6 Form of Incentive Stock Option Agreement to the Company's 2001 Stock Option (1)
Plan incorporated by reference to Exhibit 99.6 to Registration Statement on
Form S-8 filed March 26, 2001

99.7 Form of Non-Qualified Stock Option Agreement to the Company's 2001 Stock Option (1)
Plan incorporated by reference to Exhibit 99.6 to Registration Statement on
Form S-8 filed March 26, 2001

99.8 Certification of Chief Executive Officer pursuant to Section 906 of the (2)
Sarbanes-Oxley Act of 2002

99.9 Certification of Chief Financial Officer pursuant to Section 906 of the (2)
Sarbanes- Oxley Act of 2002

Ex-10

(1) Previously filed in indicated registration statement or report.
(2) Exhibit filed herewith this Registration Statement on Form S-1.

(b) Financial Statement Schedule

The following financial statement schedule filed herein as a part of this report
at F-37

Schedule II- Valuation and Qualifying Accounts

All other schedules have been omitted because the information required to be set
forth therein is not applicable or is shown in the Consolidated Financial
Statements or the Notes thereto.

Ex-11