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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM 10-KSB

|           |  |                                                                               
|---------- |  | ------------------------------------------------------------------------------
|(Mark One)
|[X]        |  | ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended May 31, 2001


|      |  |                                                                                   
|----- |  | ----------------------------------------------------------------------------------
|[   ] |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________ Commission File Number 0-22182


PATRIOT SCIENTIFIC CORPORATION
(Name of small business issuer in its charter)

|                                                                        |  |                                     
|----------------------------------------------------------------------- |  | ------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 84-1070278
(I.R.S. Empl. Ident. No.)

|                                                                                   |  |                 
|---------------------------------------------------------------------------------- |  | ----------------
|10989 Via Frontera, San Diego, California
(Address of principal executive offices) |  | 92127
(Zip Code)

(Issuers telephone number):  (858) 674-5000

Securities registered under Section 12(b) of the Exchange Act:   NONE
Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.00001 par value
(Title of Class)

Check whether the issuer (1 ) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
   YES   [X]     NO   [   ]

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]

State issuers revenues for its most recent fiscal year. $337,384

The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 23, 2001 was $14,431,469 based on a closing bid price of
$0.27 as reported on the OTC Electronic Bulletin Board system.

At August 23, 2001, 60,365,757 shares of common stock, par value $.00001 per
share (the registrants only class of voting stock) were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrants proxy statement for its 2001 annual meeting of
stockholders are incorporated by reference into Part III of this Annual Report
on Form 10-KSB.



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TABLE OF CONTENTS



|                                                   |                                                                                               |                                                 |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|PART I                                            
|                                                   | Item 1. DESCRIPTION OF BUSINESS                                                              
|                                                   | Item 2. DESCRIPTION OF PROPERTY                                                              
|                                                   | Item 3. LEGAL PROCEEDINGS                                                                    
|                                                   | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                           
|                                                   | Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                             
|                                                   | Item 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                   | Item 7. FINANCIAL STATEMENTS                                                                 
|                                                   | Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III                                          
|                                                   | Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                   
|                                                   | Item 10. EXECUTIVE COMPENSATION                                                              
|                                                   | Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                   | Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|                                                   | Item 13. EXHIBITS AND REPORTS ON FORM 8-K                                                    
|Index to Consolidated Financial Statements        
|Report of Independent Certified Public Accountants
|                                                   |                                                                                               | Consolidated Balance Sheet                     
|                                                   |                                                                                               | Consolidated Statements of Operations          
|                                                   |                                                                                               | Consolidated Statements of Stockholders Equity
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                                                   |                                                                                               | Summary of Accounting Policies                 
|                                                   |                                                                                               | Notes to Consolidated Financial Statements     
|SIGNATURES                                        
|Exhibit Index                                     
|EXHIBIT 10.26                                     
|EXHIBIT 10.27                                     
|EXHIBIT 10.28                                     
|EXHIBIT 10.29                                     
|EXHIBIT 23.1                                      



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TABLE OF CONTENTS

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|ITEM 1.  |  | Description of Business                                                               |  | 3   
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|ITEM 2.  |  | Description of Property                                                               |  | 14  
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|ITEM 3.  |  | Legal Proceedings                                                                     |  | 14  
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|ITEM 7.  |  | Financial Statements                                                                  |  | 21  
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|ITEM 9.  |  | Directors and Executive Officers                                                      |  | 21  
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|ITEM 10. |  | Executive Compensation                                                                |  | 22  
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|ITEM 11. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 23  
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|ITEM 12. |  | Certain Relationships and Related Transactions                                        |  | 23  
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|ITEM 13. |  | Exhibits and Reports on Form 8-K                                                      |  | 23  



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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-KSB, including all documents incorporated by
reference, includes forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Exchange Act and the Private
Securities Litigation Reform Act of 1995, and we desire to take advantage of
the safe harbor provisions thereof. Therefore, we are including this
statement for the express purpose of availing ourselves of the protections of
such safe harbor with respect to all of such forward-looking statements. The
forward-looking statements in this Report reflect our current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain risks and uncertainties, including
specifically the absence of significant revenues, a history of losses, no
assurance that technology can be completed or that our completion will not be
delayed, significant competition, the uncertainty of patent and proprietary
rights, uncertainty as to royalty payments and indemnification risks, possible
adverse effects of future sales of shares on the market, trading risks of
low-priced stocks and those other risks and uncertainties discussed herein,
that could cause actual results to differ materially from historical results or
those anticipated. In this report, the words anticipates, believes,
expects, intends, future and similar expressions identify certain of the
forward-looking statements. Readers are cautioned not to place undue reliance
on the forward-looking statements contained herein, which speak only as of the
date hereof. We undertake no obligation to publicly revise these
forward-looking statements to reflect events or circumstances that may arise
after the date hereof. All subsequent written and oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by this section.




PART I




Item 1. DESCRIPTION OF BUSINESS

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.

We are engaged in the development, marketing, and sale of patented
microprocessor technology, including JUICEtechnology, and the sale of
high-performance data communication products. These products have applications
in the Internet and computer, networking and telecommunications markets. We
are currently selling only matured legacy communication products and are not
attempting to develop any new communication products. We also own innovative
radar technology that is currently in a dormant state. We sold our antenna
technology in August 1999. 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.



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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

Organization and Corporate Development.Our business involves the
following technologies:



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

The stages of development of our technologies are as follows:



| |  |  | Ignite I. 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 I to be our main
product line, it currently accounts for only 15% of our revenue.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | JUICEtechnology. This technology was recently introduced
to address the need to conserve power in embedded applications by
varying                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



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| |   |  | 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 is being generated primarily from mature communication
products that are at the end of their life cycles. We have
decided to concentrate our efforts on the Ignite I and
JUICEtechnology and have suspended our efforts to introduce new
communication products to the market. Although the
communications product line accounted for approximately 85% of our
fiscal year 2001 revenue, we anticipate that the Ignite I 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 I
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 I and high-speed data communications technologies. The
Ignite I is targeted for the embedded controller and Java language processor
marketplaces.

In reviewing our communication technology markets, we determined that we
could not effectively compete in the ISDN (which stands for integrated services
digital network, a high-speed method of transmitting data over the Internet)
market. However, we continue to sell matured communication products to a
select number of customers who have requirements for older generation products.
We are currently attempting to sell this product line so we can concentrate
our efforts and resources on the Ignite I and JUICEtechnology.

Internet Growth and the Emergence of the Java Programming Language.The
Internet is a rapidly growing 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, is emerging 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, although no assurance can be given, Java appears to be emerging as
a fundamental platform for Internet related applications. A growing 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 I 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



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(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 may 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
(such as Microsoft DOS). 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 correcting errors in 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. The
latest generation, which is in production, is a 0.35-micron microprocessor and
features reduced 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 contemplating, but have not expended
funds, on future enhancements and generations of silicon production for our
Ignite I.

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,



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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 I. The Ignite I 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 I was designed to be a sophisticated 32-bit reduced operand set
computer (ROSC) microprocessor with advanced features, including the most
commonly needed support logic, but at a low cost; thereby providing improved
performance to reduced instruction set computer (RISC) embedded control
applications and creating 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
because it is ROSC-oriented, 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; and the 0.35-micron
microprocessor at a speed of 150Mhz. 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
0.35-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 I from other 8-bit to 64-bit microprocessors targeted for embedded
control applications. Considering the reduced requirement for support
microprocessors, the Ignite I is intended to be available at a high volume
price that



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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 I has been designed to allow high-speed and
high-yield fabrication using generally available wafer fabrication technology
and facilities.

The
Ignite I as a Java Processor.
We believe the Ignite I 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
I executes the virtual stack machine internal to Java efficiently. Many Java
operation codes or instructions require only a single 8-bit Ignite I
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 I 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 I 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 I, 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 these implementations should result in a
microprocessor which is competitive in the Java virtual machine and embedded
applications markets. We believe that with this package of software the Ignite
I will be competitive with Java microprocessors announced by competitors.
However, there can be no assurance of market acceptance for this package of
software or for the Ignite I.

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 I 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 I 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
increases operating speed and cost performance over the previous generations of
the Ignite I.

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
I. VHDL is a very large scale integration hardware definition language that
enables the hardware design inside a microprocessor, or silicon device to be
represented as a software program. This, in essence, replaces the old style of
designing microprocessors using



8



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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 I for specific applications.

We believe that the Ignite I 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 I 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 I would best address due
to its low cost, low power consumption and ability to run Java efficiently.

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

We believe that our ROSC 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 eight international distributors for foreign markets. We also
have significantly increased the domestic sales and marketing activities by
appointing a new Vice President of Sales and Marketing to lead marketing of the
Ignite I, creating a new position for business development, opening sales and
support offices in West Virginia and Illinois, and creating a strategic
alliance with an outside consulting firm to market the JUICEtechnology product
line.

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 I 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 microprocessors were
performed by contract fabrication facilities. The 0.35-micron microprocessor
is being fabricated by a contract fabrication facility that has agreed to
provide production quantities for our customers. There can be no assurance
fabrication facilities will be available to produce the Ignite I in the future.
However, since there are a large number of fabrication facilities with the
capability to produce the Ignite I, 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



9



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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 I, 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
Holdings plc and MIPS Technologies, Inc. and microprocessors from Hitachi,
Motorola and IBM. As a Java processor, we expect our Ignite I will compete
with a broad range of microprocessors including those incorporating
co-processor technology or PicoJava 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
users experience of the wireless internet by expanding the capabilities of the
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 8Kbits to 19.6Kbits in North America.
Voice transmissions account for the majority of wireless use. 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. JUICEtechnology 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



10



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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 and
we anticipate to have a working model available for demonstrations and
commercialization during the third calendar quarter of 2001.

Business Strategy. To launch JUICEtechnology we have established a
business relationship with a highly qualified group of wireless and mobile
information product marketing specialists with histories of successfully
introducing new wireless technology products into world markets. These
individuals have held senior positions in new business development programs for
such companies as Motorola, Nokia, Qualcomm, IBM Microelectronics, Texas
Instruments, Panasonic and Hitachi.

We anticipate to sell licences to and generate recurring revenue from
equipment manufacturers, wireless service providers and content suppliers.

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 matured, legacy communication products that we continue to sell are:                                                                                                                                                                                 
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | VME Product Line- We sell a line of intelligent high-speed
communications engines in a virtual memory European form factor. Some
of our customers for these products include the military as well as
large satellite based data communications companies.
|
| |  | Atcomm2/4 Product Line- We also sell an intelligent two or four
channel product that is used for high-speed data communications.                                                                                                                         

Our product strategy is to sell this product line so we may concentrate
our efforts and resources on the Ignite I and on JUICEtechnology. We are no
longer developing or commercializing new communication products.

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 I 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.



11



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##### Table of Contents



We incurred research and development expenditures of $2,218,433 for our
fiscal year ended May 31, 2001 and $3,170,166 for our fiscal year ended May 31,
2000. The majority of our expenditures in fiscal 2001 and 2000 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 and four U.S. patents pending, most
dating back to 1989, on the microprocessor technology. We have one
microprocessor technology patent pending in five European countries and 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 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 nor any assurance that we
could successfully exploit any potential patent claims against larger
competitors.

Based on the 1994 asset purchase agreement and plan of reorganization
between Patriot, nanoTronics and Mr. Falk, we were the recipients of a number
of warranties and indemnities. 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 I. 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 JavaOS 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 I. We have ported personalJava to the
Ignite I.
|
| |  |  | 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 I.                                                                                                                                                                                                                                                                                          
|
| |  |  | 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
I as a microprocessor using the Forth programming language.                                                                                                                                                                                                            



12



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##### Table of Contents



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:

|                     |               |  |      |    |      |  |     |    |  
|-------------------- | ------------- |  | ---- | -- | ---- |  | --- | -- | -
|                     |               |  | 2001 |    | 2000
|                     |               |  |      |    |     
|Domestic sales       |               |  | 75   | %  |      |  | 65  | % 
|                    
|                    
|                    
|                    
|Foreign sales
  Asia |               |  | 7    | %  |      |  | 7   | % 
|                    
|                    
|                    
|                    
|                     | Europe        |  |      | 6  | %    |  |     | 19 | %
|                    
|                    
|                    
|                    
|                     | North America |  |      | 12 | %    |  |     | 9  | %
|                     |               |  |      |    |      |  |     |   
|Total sales          |               |  | 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:

|            |  |      |        |      |  |   |         | 
|----------- |  | ---- | ------ | ---- |  | - | ------- | 
|            |  | 2001 |        | 2000
|            |  |      |        |     
|Raytheon    |  | $    | 88,000 |      |  | $ |        | 
|           
|           
|           
|           
|SAIC        |  |      | 41,000 |      |  |   |        | 
|           
|           
|           
|           
|Spellcaster |  |      | 40,000 |      |  |   |        | 
|           
|           
|           
|           
|Sipex       |  |      |       |      |  |   | 138,000 | 
|           
|           
|           
|           
|Intermec    |  |      |       |      |  |   | 137,000 | 
|           
|           
|           
|           
|Miel        |  |      |       |      |  |   | 127,000 | 

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



13



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##### Table of Contents



Employees.We currently have twenty-six personnel. Thirteen persons are
employed in research and development, three are engaged in manufacturing and
assembly, five in marketing and sales and five 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.




Item 2. DESCRIPTION OF PROPERTY

We have one 10,340 square foot office located at 10989 Via Frontera, San
Diego, California. The facility is leased through July 2006. In addition,
several of our employees, who support the sales and marketing of our
microprocessor, telecommute from their homes in Illinois and West Virginia.




Item 3. LEGAL PROCEEDINGS

In January 1999, the Company was sued in the Superior Court of San Diego
County, California by the Fish Family Trust, a co-inventor of the original
technology on which our microprocessor is based. 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 or cash flows.

A former employee has filed a claim in arbitration seeking the right to
exercise terminated options. Management believes that the claim has no merit
and will have no impact on our financial position or cash flows.




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

No matters were submitted to a vote of security holders during the quarter
ended May 31, 2001.




PART II




Item 5. 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



14



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##### Table of Contents



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, 2001 and 2000.

|                               |                |  |                |      |     |  |   |      | 
|------------------------------ | -------------- |  | -------------- | ---- | --- |  | - | ---- | 
|                               |                |  | Bid Quotations
|                               |                |  |               
|                               |                |  | High           |      | Low
|                               |                |  |                |      |    
|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 | 
|                              
|                              
|                              
|                              
|Fiscal Year Ended May 31, 2000 |                |  |                |      |     |  |   |     
|                              
|                              
|                              
|                              
|                               | First Quarter  |  | $              | 0.66 |     |  | $ | 0.37 | 
|                              
|                              
|                              
|                              
|                               | Second Quarter |  | $              | 0.46 |     |  | $ | 0.29 | 
|                              
|                              
|                              
|                              
|                               | Third Quarter  |  | $              | 6.25 |     |  | $ | 0.34 | 
|                              
|                              
|                              
|                              
|                               | Fourth Quarter |  | $              | 6.00 |     |  | $ | 1.16 | 

We have approximately 355 shareholders of record as of May 31, 2001.
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.




Item 6. 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.                                         

Results of Operations for the Years Ended May 31, 2001 and 2000

Our net sales in fiscal 2001 and 2000 were as follows:

|            |  |        |                   |                                        |  |                  
|----------- |  | ------ | ----------------- | -------------------------------------- |  | -----------------
|Fiscal Year |  | Amount |                   | % Change from the Previous Fiscal Year
|            |  |        |                   |                                       
|2001
2000   |  |        | $337,384
$716,960 |                                        |  | Decrease of 52.9%

Net sales. Total net sales for the fiscal year ended May 31, 2001
decreased from the previous fiscal year. This decrease was due to a lack of
follow-on shipments for our matured communication products, several of which
are at the end of their life cycles. We have stopped any development and sales
efforts of new communications products as we are



15



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##### Table of Contents



now concentrating on the
microprocessor product line. We anticipate the downward trend in communication
product revenue to continue since we are attempting to sell this line and have
initiated a last buy program for our communication customers. Future sales
will be derived from the communication product last buys of approximately
$300,000 and sales of microprocessors and licensing of microprocessor
technology.

Our cost of sales in fiscal 2001 and 2000 were as follows:

|            |  |        |         |                      |  |                   |  |  |       |   |       |  
|----------- |  | ------ | ------- | -------------------- |  | ----------------- |  |  | ----- | - | ----- | -
|            |  |        |         |                      |  | % Change from the |  |  |       |  
|Fiscal Year |  | Amount |         | Previous Fiscal Year |  | % of Net Sales   
|            |  |        |         |                      |  |                  
|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 increased in
the fiscal year ended May 31, 2001 compared to the previous fiscal year. This
increase was due to the fixed manufacturing overhead being allocated to a
smaller revenue base during the current fiscal year and a $138,000 reduction
in royalties during the current fiscal year compared to the previous fiscal
year negatively impacting the percentage comparison.

Our research and development
expenses in fiscal 2001 and 2000 were as follows:

|            |  |        |           |                                        |  |                   |  | 
|----------- |  | ------ | --------- | -------------------------------------- |  | ----------------- |  | 
|Fiscal Year |  | Amount |           | % Change from the Previous Fiscal Year
|            |  |        |           |                                       
|2001        |  | $      | 2,218,433 |                                        |  | Decrease of 30.0%
|           
|           
|           
|           
|2000        |  | $      | 3,170,166 |                                        |  |                   |  | 

Research and development expenses decreased during the current fiscal year
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 a ramp up in personnel costs of approximately $300,000 and consulting
services of approximately $150,000. The increase in personnel and consulting
costs was to introduce 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 current fiscal year.

Our selling, general and administrative expenses
in fiscal 2001 and 2000 were as
follows:

|            |  |        |           |                                        |  |                   |  | 
|----------- |  | ------ | --------- | -------------------------------------- |  | ----------------- |  | 
|Fiscal Year |  | Amount |           | % Change from the Previous Fiscal Year
|            |  |        |           |                                       
|2001        |  | $      | 2,588,579 |                                        |  | Decrease of 26.0%
|           
|           
|           
|           
|2000        |  | $      | 3,501,128 |                                        |  |                   |  | 

Selling, general and administrative expenses decreased during the current
fiscal year compared to the previous fiscal year. This decrease was due
primarily to non-cash compensation expense of $2,150,307 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 employment and consulting
costs of approximately $444,000. 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 current fiscal year.



16



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##### Table of Contents



Our other income (expenses) in fiscal 2001 and 2000 were as follows:

|            |  |        |          |                                        |  |                |  | 
|----------- |  | ------ | -------- | -------------------------------------- |  | -------------- |  | 
|Fiscal Year |  | Amount |          | % Change from the Previous Fiscal Year
|            |  |        |          |                                       
|2001        |  | $      | 45,045   |                                        |  | Not meaningful
|           
|           
|           
|           
|2000        |  | $      | (809,366 | )                                      |  |                |  | 

Other income (expenses) changed significantly for the current fiscal year
compared to the previous fiscal year. During the current fiscal year, other
income was recognized primarily from interest income as opposed to the previous
fiscal year when other expense resulted primarily from the recognition of
$995,651 of non-cash interest expense related to the amortization of debt
discount and $51,181 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.

Liquidity and Capital Resources

In connection with their report on our consolidated financial statements
as of and for the year ended May 31, 2001, BDO Seidman, LLP, 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. See Note 1 to the consolidated financial statements for
discussion.

At May 31, 2001, we had working capital of $328,605 and cash and cash
equivalents of $464,350. We have historically funded our operations primarily
through the issuance of securities and debt financings. Cash and cash
equivalents decreased $1,635,892 during the current fiscal year due to net cash
used in operations of $4,839,180, additions to property, equipment and patents,
net of $388,557, web site development costs of $25,000 and the issuance of a
note receivable of $80,000 to a previous officer of the Company offset by funds
generated primarily from the exercise of warrants and options to purchase our
common stock of $289,073 and the sale of common stock under an investment
agreement of $3,342,197. The net cash used in operations is primarily a result
of operating losses coupled with an increase in inventory of $252,229 which was
a result of costs associated with the next generation microprocessor and
related development kits and an increase in accounts receivable of $242,405
partially offset by an increase of accounts payable and accrued expenses of
$98,039. As of May 31, 2001, we had approximately 35%, $85,606, in accounts
receivable from one customer against whom we have initiated a collection
lawsuit. We have set up a reserve of $20,000 related to the collection effort.
We believe that we will prevail in collection of the entire amount due.

We estimate our current cash requirements to sustain our operations for
the next twelve months through May 2002 to be $3.1 million. Since we are
attempting to sell the communications product line, we are assuming that there
will be no additional product revenue beyond what was in backlog as of May 31,
2001. In addition to limitations based on trading volume and market price of
the common stock, our ability to obtain equity financing under the $30 million
equity line of credit is dependent on our having registered an adequate number
of shares to sell to Swartz. As of August 15, 2001, we have only 4 million
registered shares remaining to sell to Swartz under the current effective
registration statement. At the current market price and assuming adequate
market volume, we estimate we will run out of registered shares in December
2001. We have, therefore, negotiated with Swartz a letter of agreement to
enter into a new $25 million equity line of credit with terms and language that
we believe is acceptable to the Securities and Exchange Commission (SEC). We
believe that the definitive agreement for the new $25 million equity line of
credit will be completed by the end of August 2001 and that a registration
statement will be filed and become effective in time to continue funding under
an equity line of credit without any interruptions. 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 are similar to the existing $30 million equity line of credit.
Upon closing of this agreement, as compensation for entering into this
agreement, we will issue a warrant to purchase a number of shares equal to 4.9%
of the then fully diluted shares of common stock, less all warrants previously
issued to Swartz under the existing agreements. In addition, we have
formulated a cost reduction plan which can be initiated to reduce our cash
requirements, if necessary. Based on the above assumptions, we expect that the
$3.1 million requirement will be provided by the current working capital of
$328,605; available funds under the $30 million and $25 million equity lines of
credit, as discussed above and below, $677,000 of which has been funded from
June 1 through August 15, 2001; proceeds from the exercise of outstanding stock
options and warrants; and reduction in costs pursuant to a cost reduction plan.
In addition, we have remaining $314,993 of a $400,000 accounts receivable
factoring agreement with our bank.



17



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We anticipate that we may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development
of our technologies. Product introductions such as those currently underway for
the Ignite I and JUICEtechnology may require significant inventory, product
launch, marketing personnel and other expenditures that cannot be currently
estimated. Further, if expanded development is commenced or new generations of
microprocessors are accelerated beyond their 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. In
addition, in February 2001, the Company entered into a five year extension on
its building lease.

Based on our current plan and assumptions, we anticipate that we will be
able to meet our cash requirements for the next twelve months. However, if we
are not able to meet our current plan, 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 $30 million equity line of credit or
the anticipated $25 million equity line of credit. 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 any such 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.

$30 Million Equity Line of Credit

Overview.On May 2, 2000, we entered into an investment agreement with
Swartz Private Equity, LLC. The investment agreement entitles us to issue and
sell our common stock for up to an aggregate of $30 million from time to time
during a three-year period starting June 23, 2000, the effective date of the
registration statement to register 13.8 million shares, including 1.8 million
shares reserved for the issuance of common stock upon the exercise of warrants.
This is also referred to as a put right. During the current fiscal year, we
received proceeds of $3,342,197 from the sale of 5,411,320 shares of common
stock. During our first fiscal quarter of 2002 which will end August 31,
2001, we received proceeds of $676,604 from the sale of 2,588,680 shares of
common stock. See above discussion for further information and proposed $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 a period which begins on the business day immediately
following the day we invoked the put right and ends on and includes the day
which is twenty business days after the date we invoked the put right.

Swartz will pay us a portion of the market price for each share of common
stock under the put. If the market price is less than $1.00 per share, the
amount will be $.10 less than the market price; if the price is between $1.00
to $2.00 per share, the amount will be 90% of the market price; and if the
market price is $2.00 or greater, the amount will be 93% of the market price.
Market price is defined as the lowest closing bid price for the common stock
during the applicable pricing period which consists of two consecutive ten
business day periods following the date notice of the put was provided to
Swartz. However, the market price may not be less than the designated minimum
per share price, if any, that we indicated in our notice.

Warrants.Within five business days after the end of each pricing period,
we are required to issue and deliver to Swartz a warrant to purchase a number
of shares of common stock equal to 15% of the common shares issued to Swartz in
the applicable put. Each warrant will be exercisable at a price which will
initially equal 110% of the closing bid price on the put date for the
applicable put. The warrants have semi-annual reset provisions which may
reduce the



18



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exercise price. Each warrant will be immediately exercisable and
have a term beginning on the date of issuance and ending five years thereafter.

Limitations and Conditions Precedent to Our Put Rights.Swartz is not
required to acquire and pay for any common shares with respect to any
particular put for which:



| |  |  | we have announced or implemented a stock split or combination of our common stock;                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | we have paid a common stock dividend;                                                                                                                                               
| |  |  | we have made a distribution of our common stock or of all
or any portion of our assets between the put notice date and the
date the particular put closes; or                       
| |  |  | we have consummated a major transaction (including a
transaction, which constitutes a change of control) between the
advance put notice date and the date the particular put closes.

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.

Cancellation of Puts.We must cancel a particular put between the date of
the advance put notice and the last day of the pricing period if:



| |  |  | we discover an undisclosed material fact relevant to Swartzs investment decision;                                                                                    
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |  | the registration statement registering resales of the common shares becomes ineffective; or                                                                           
| |  |  | shares are delisted from the then primary exchange.                                                                                                                   
|
| |   |  | However, we will be required to issue common shares equal to the
lesser of:                                                                                           
|
| |  |  | 20% of the daily reported trading volume of our common
stock during the pricing periods up to the applicable put
cancellation date;                                   
| |  |  | the number of shares of common stock put to Swartz which
when multiplied by the applicable put share price equals the
designated maximum dollar amount for the put; or
| |  |  | 9.9% of the total amount of our common stock that would
be outstanding upon completion of the put.                                                                    

Shareholder Approval.We may currently issue more than 20% of our
outstanding shares. 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 one-year 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. We are also prohibited from entering
into any private equity line type agreements similar to the investment
agreement 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 six 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



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we made in connection with the investment agreement, our registration rights
agreement, other related agreements, or the registration statement.

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 is
effective June 1, 2001 for us. We believe the adoption of this statement will
have no material impact on our financial statements.

In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. We adopted the Interpretation on July 1, 2000. The
Interpretation requires that stock options that have been modified to reduce
the exercise price be accounted for using variable accounting. We repriced
certain stock options on October 5, 1999 and in accordance with generally
accepted accounting principles accounted for the repriced stock options using
fixed accounting. As a result of adopting the Interpretation, we are required
to apply variable accounting to these options. Accordingly, if the market
price of our stock increases subsequent to July 1, 2000, we will recognize
additional compensation expense that we otherwise would not have incurred. As
of May 31, 2001, there was no additional compensation expense recorded because
the market price of our 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.

In December 1999, the Securities and Exchange Commission (the SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements which provides additional guidance in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 was effective for our fourth quarter of the fiscal year ended May 31,
2001. The adoption of this bulletin has had no material impact on our
financial statements.

In March 2000, the FASB issued Emerging Issues Task Force Issue No 00-2,
Accounting for Web Site Development Costs (EITF 00-2), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred to
develop a web site based on the nature of each cost. We capitalized $25,000 in
web site development costs and amortized to expense $8,333 during the fiscal
year ended May 31, 2001.

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



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reassess the useful lives of other intangible
assets within the first interim quarter after adoption of SFAS No. 142.

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
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 August 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. We believe the adoption of this statement will have no material impact
on our financial statements.

Tax Loss Carryforwards

As of May 31, 2001, we had approximately $24,372,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred
tax asset of $11,989,000 arising primarily from tax loss carryforwards because
we cannot determine that it is more likely than not that the deferred tax asset
will be realized. See Note 9 to the Consolidated Financial Statements.




Item 7. FINANCIAL STATEMENTS

The financial statements required by this item begin on page F-1 with the
index to consolidated financial statements.




Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None




PART III




Item 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information required by this item concerning our directors is
incorporated by reference to the information in the section entitled Proposal
No. 1- Election of Directors in our Proxy Statement for the 2001 Annual
Meeting of Stockholders to be filed with the Commission within 120 days after
the end of our fiscal year ended May 31, 2001.



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Executive Officers of the Registrant

Our executive officers and their ages as of May 31, 2001, were as follows:

|                   |  |     |    |                      |  |                                                     
|------------------ |  | --- | -- | -------------------- |  | ----------------------------------------------------
|Name               |  | Age |    | Position and Offices
|                  
|                  
|                  
|                  
|Richard G. Blum    |  |     | 70 |                      |  | Chief Executive Officer and President               
|                  
|                  
|                  
|                  
|Lowell W. Giffhorn |  |     | 54 |                      |  | Executive Vice President and Chief Financial
Officer
|                  
|                  
|                  
|                  
|Miklos Korodi      |  |     | 63 |                      |  | Vice President Sales and Marketing                  
|                  
|                  
|                  
|                  
|Serge Miller       |  |     | 53 |                      |  | Vice President Engineering                          
|                  
|                  
|                  
|                  
|David Pohl         |  |     | 63 |                      |  | Vice President Administration and Secretary         

In August 2001, the Board of Directors appointed Donald Bernier as
Chairman of the Board and Chief Executive Officer and appointed Mr. Giffhorn,
Mr. Korodi and Mr. Miller to serve jointly as the President.

Biographical Information

Richard G. Blum.Mr. Blum has served as our Chief Executive Officer and
President since September 2000 and has served on our board of directors since
February 1999. Mr. Blum retired as Chairman and President of Kysor Europe, a
wholly owned subsidiary of Kysor Industrial Corporation, in 1991. Previously
Mr. Blum held a variety of executive level positions with ITT Europe and ADT
Europe. He completed his undergraduate work at Oregon State and Linfield
Colleges in 1951 and postgraduate work at John Carrol and Canisius Universities
in 1958.

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 November 1996 to May 1997, Mr. Giffhorn, in
addition to other consulting engagements, performed the duties of Acting CFO
for Patriot. 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. Previously Mr. Giffhorn held a variety of financial
positions, including eleven years as Controller for Langley Corporation, a
publicly traded, San Diego, defense contractor. 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.

Miklos Korodi.Mr. Korodi joined us as Vice President of Sales and
Marketing in October 2000. Prior to joining us and since 1993, Mr. Korodi was
the principal in his own telecommunication consulting firm. Mr. Korodis
previous experience included Chairman and CEO of Cellular Data, Inc., President
of Warner Amex Cable Communications Security Systems (a joint venture of Warner
Communications and American Express), a subsidiary of Warner Amex Cable
Communications, Senior Vice President of Warner Cable Communications and Vice
President and General Manager of the QUBE Division of Warner Cable Television.

Serge Miller.Mr. Miller joined us as Vice President of Engineering in
January 2001. Prior to joining us and since 1998, Mr. Miller was Director of
HMI Development for Invensys PLC and from 1995 to 1998 was Director of Advanced
Industrial Controls for Siebe PLC. Previously Mr. Miller held various
management positions with Measurex Corporation. Mr. Miller obtained a BS in
Physics and Mathematics from the University of Manitoba in 1971 and has
completed postgraduate work at Northeastern University.

David Pohl.Mr. Pohl joined us as Secretary in February 2001 and as Vice
President of Administration in April 2001. Mr. Pohl has served on our board of
directors since April 2001. Prior to joining us and since 1997, Mr.



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Pohl was
in private practice and from 1995 to 1996 was Special Counsel to the Ohio
Attorney General. Mr. Pohl obtained a BS in Administrative Sciences in 1960
and a JD in Law in 1962 from the Ohio State University.

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

The information required by this item concerning compliance with Section
16(a) of the Securities Exchange Act of 1934, as amended, is incorporated by
reference to information in the section entitled Security Ownership of Certain
Beneficial Owners and Management Stock Ownership of Directors and Executive
Officers- Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy
Statement for the 2001 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year ended May 31, 2001.




Item 10. EXECUTIVE COMPENSATION

The information required by this item regarding executive compensation is
incorporated by reference to the information in the section entitled Executive
Compensation in our Proxy Statement for the 2001 Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the end of
our fiscal year ended May 31, 2001.




Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information required by this item regarding security ownership of
certain beneficial owners and management is incorporated by reference to the
information in the section entitled Security Ownership of Certain Beneficial
Owners and Management Stock Ownership of Directors and Executive Officers in
our Proxy Statement for the 2001 Annual Meeting of Stockholders to be filed
with the Commission within 120 days after the end of our fiscal year ended May
31, 2001.




Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by this item regarding certain relationships and
related transactions is incorporated by reference to the information in the
section entitled Certain Relationships and Related Transactions in our Proxy
Statement for the 2001 Annual Meeting of Stockholders to be filed with the
Commission within 120 days after the end of our fiscal year ended May 31, 2001.




Item 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)  The following is a list and index of Exhibits required by Item 601 of
Regulation S-B along with an indication of the location of the Exhibit:

Exhibit Index

|         |  |                                                                                                                                                                                                                |  |    
|-------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. 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, incorporated by reference to Exhibit 2.1 to Form 8-K
dated August 10, 1989                                                       |  | (1)
|        
|        
|        
|        
|2.2      |  | Assets Purchase Agreement and Plan of Reorganization dated June 22,
1994, among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4
to Form 8-K dated July 6, 1994 |  | (1)
|        
|        
|        
|        
|2.2.1    |  | Amendment to Development Agreement dated April 23, 1996 between the
Company and Sierra Systems, incorporated by                                                                                                |  |    



23



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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                  |  |    
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                         |  | No.
|         |  |                                                                                                                                                                                                                                                  |  |    
|        
|        
|        
|        
|         |  | reference to Exhibit 2.2.1
to Pre-Effective Amendment No. 1 to
Registration Statement on Form SB-2 dated April 29, 1996                                                                                                                          |  | (1)
|        
|        
|        
|        
|2.3      |  | Form of Exchange Offer dated December 4, 1996 between the Company and
certain shareholders of Metacomp, Inc. incorporated by reference to Exhibit 2.3
to Form 8-K dated January 9, 1997                                                          |  | (1)
|        
|        
|        
|        
|2.4      |  | Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc.
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                            |  | (1)
|        
|        
|        
|        
|3.0      |  | Articles and Bylaws.                                                                                                                                                                                                                             |  |    
|        
|        
|        
|        
|3.1      |  | Original Articles of Incorporation of the Companys predecessor,
Patriot Financial Corporation, incorporated by reference to Exhibit 3.1
to registration statement on Form S-18, file no.
33-23143-FW                                            |  | (1)
|        
|        
|        
|        
|3.2      |  | Articles of Amendment of Patriot Financial Corporation, as filed
with the 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                    |  | (1)
|        
|        
|        
|        
|3.3      |  | Certificate of Incorporation of the Company, as filed with the Delaware
Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.1 to Form 8-K dated May 12, 1992                                                            |  | (1)
|        
|        
|        
|        
|3.3.1    |  | Certificate of Amendment to the Certificate of Incorporation
of the Company, as 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   |  | (1)
|        
|        
|        
|        
|3.3.2    |  | Certificate of Amendment to the Certificate of Incorporation of the
Company, as 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    |  | (1)
|        
|        
|        
|        
|3.3.3    |  | Certificate of Amendment to the Certificate of Incorporation of the
Company, as 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 |  | (1)
|        
|        
|        
|        
|3.4      |  | Articles and Certificate of Merger of Patriot Financial Corporation
into the Company dated May 1, 1992, with Agreement and Plan of
Merger attached thereto as Exhibit A, incorporated by reference to
Exhibit 3.2 to Form 8-K dated May 12, 1992 |  | (1)
|        
|        
|        
|        
|3.5      |  | Certificate of Merger issued by the Delaware Secretary of State on May
8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
dated May 12, 1992                                                                                          |  | (1)
|        
|        
|        
|        
|3.6      |  | Certificate of Merger issued by the Colorado Secretary of State on May
12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
dated May 12, 1992                                                                                         |  | (1)
|        
|        
|        
|        
|3.7      |  | Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
Form 8-K dated May 12, 1992                                                                                                                                                   |  | (1)



24



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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                             |  |    
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                                                                                                    |  | No.
|         |  |                                                                                                                                                                                                                                                                                                                                                                             |  |    
|        
|        
|        
|        
|4.0      |  | Instruments Establishing Rights of Security Holders.                                                                                                                                                                                                                                                                                                                        |  |    
|        
|        
|        
|        
|4.1      |  | Specimen common stock certificate, incorporated by reference to
Exhibit 4.1 Form 8-K dated May 12, 1992                                                                                                                                                                                                                                                                     |  | (1)
|        
|        
|        
|        
|4.2      |  | Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
1996, 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 2/29/96         |  | (1)
|        
|        
|        
|        
|4.3      |  | Form of 6% Convertible Subordinated Promissory Note due September 30,
1998 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                                                                                                                                                         |  | (1)
|        
|        
|        
|        
|4.4      |  | Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2,
1999 aggregating $2,000,000 to two investors incorporated
by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997                                                                                                                                                                               |  | (1)
|        
|        
|        
|        
|4.5      |  | Form of Stock Purchase Warrant (CC Investments, LDC) dated
June 2, 1997 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                              |  | (1)
|        
|        
|        
|        
|4.6      |  | Registration Rights Agreement dated June 2, 1997 by and among the
Company and 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                                                                                       |  | (1)
|        
|        
|        
|        
|4.7      |  | Form of Warrant to Purchase Common Stock (Swartz Family Partnership,
L.P.) 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 |  | (1)
|        
|        
|        
|        
|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 to Exhibit 4.7 incorporated by reference to
Exhibit 4.8 to Form 8-K dated June 16, 1997                                                                                                                       |  | (1)
|        
|        
|        
|        
|4.9      |  | Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2,
1999 aggregating $1,000,000 to two investors incorporated by
reference to Exhibit 4.9 to Form 10-KSB for the year ended May 31, 1998                                                                                                                                                                |  | (1)
|        
|        
|        
|        
|4.10     |  | Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24,
1997 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 in Exhibit 4.9 incorporated
by reference to Exhibit 4.10 to Form 10-KSB for the year ended May 31, 1998            |  | (1)



25



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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                                               |  |    
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                                                                                                                      |  | No.
|         |  |                                                                                                                                                                                                                                                                                                                                                                                               |  |    
|        
|        
|        
|        
|4.11     |  | Form of Warrant to Purchase Common Stock (Swartz Family Partnership,
L.P.) 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 in
Exhibit 4.9 incorporated by
reference to Exhibit 4.11 to Form 10-KSB for the year ended May 31, 1998 |  | (1)
|        
|        
|        
|        
|4.12     |  | Form of Warrant to Purchase Common Stock (Investor Communications Group,
Inc.) 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                                                                 |  | (1)
|        
|        
|        
|        
|4.13     |  | Warrant to Purchase Common Stock issued to Spellcaster Telecommunications,
Inc. 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                                                                                           |  | (1)
|        
|        
|        
|        
|4.14     |  | Investment agreement dated February 24, 1999 by and between the Company and
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                                                                                                                                 |  | (1)
|        
|        
|        
|        
|4.15     |  | Registration Rights Agreement dated February 24, 1999 by and between the
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                                                                                            |  | (1)
|        
|        
|        
|        
|4.16     |  | Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC) dated
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                                                                                   |  | (1)
|        
|        
|        
|        
|4.17     |  | Amended and Restated Investment Agreement dated July 12, 1999 by and between
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                                                                                    |  | (1)
|        
|        
|        
|        
|4.18     |  | Investment Agreement 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 to Registration Statement on Form S-3
dated May 5, 2000                                                                                                                                           |  | (1)
|        
|        
|        
|        
|4.19     |  | 2001 Stock Option Plan of the Company dated February 21, 2001 incorporated
by reference to Exhibit 4.19 to Registration Statement on Form S-8 dated
March 26, 2001                                                                                                                                                                                                                            |  | (1)
|        
|        
|        
|        
|10.0     |  | Material Contracts.                                                                                                                                                                                                                                                                                                                                                                           |  |    
|        
|        
|        
|        
|10.1     |  | 1992 Incentive Stock Option Plan of the Company, incorporated
by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992                                                                                                                                                                                                                                                                     |  | (1)
|        
|        
|        
|        
|10.1.1   |  | Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17, 1996                                                                                                                                                                                                                                             |  | (1)



26



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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                       |  |    
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                              |  | No.
|         |  |                                                                                                                                                                                                                                                                                                       |  |    
|        
|        
|        
|        
|10.2     |  | 1992 Non-Statutory Stock Option Plan of the Company,
incorporated by reference to Exhibit 10.2 to Form 8-K
dated May 12, 1992                                                                                                                                                                         |  | (1)
|        
|        
|        
|        
|10.2.1   |  | Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal year
ended May 31, 1996                                                                                                                                |  | (1)
|        
|        
|        
|        
|10.3     |  | Lease Agreement between the Companys subsidiary Metacomp, Inc. and
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 the fiscal year
ended May 31, 1997 |  | (1)
|        
|        
|        
|        
|10.4     |  | Stock Purchase Agreement dated November 29 and 30, 1995, between the
Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4 to Form 8-K dated December 11, 1995                                                                                                                             |  | (1)
|        
|        
|        
|        
|10.4.1   |  | Letter Amendment to Stock Purchase Agreement dated February 21, 1996,
between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96                                                                                                  |  | (1)
|        
|        
|        
|        
|10.5     |  | 1995 Employee Stock Compensation Plan of the Company,
incorporated by reference to Exhibit 10.5 to Form 10-QSB
for fiscal quarter ended 11/30/95                                                                                                                                                      |  | (1)
|        
|        
|        
|        
|10.6     |  | Letter Stock and Warrant Agreement dated January 10, 1996
between the Company and Robert E. Crawford, Jr., incorporated
by reference to Exhibit 10.6 to Form 10-QSB for fiscal quarter ended 2/29/96                                                                                                  |  | (1)
|        
|        
|        
|        
|10.7     |  | Non-Exclusive Manufacturing and Line of Credit Agreement dated February
28, 1996, between the Company and Labway Corporation, incorporated by
reference to Exhibit 10.7 to Form 10-QSB for
fiscal quarter ended 2/29/96                                                                               |  | (1)
|        
|        
|        
|        
|10.8     |  | Distribution and Representation Agreement dated February 28, 1996,
between the Company and Innoware, Inc., incorporated by
reference to Form 10-QSB for fiscal quarter ended 2/29/96                                                                                                                  |  | (1)
|        
|        
|        
|        
|10.9     |  | Employment Agreement dated November 20, 1995 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9
to Registration Statement on Form SB-2 dated March 18, 1996                                                                                                          |  | (1)
|        
|        
|        
|        
|10.9.1   |  | First Amendment to Employment Agreement dated May 17, 1996 between the
Company 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                                                           |  | (1)
|        
|        
|        
|        
|10.10    |  | Employment Agreement dated November 20, 1995 between the
Company and Robert Putnam, incorporated by reference to Exhibit 10.10
to Registration Statement on Form SB-2 dated March 18, 1996                                                                                                            |  | (1)
|        
|        
|        
|        
|10.11    |  | Sales Contractual Agreement dated March 19, 1996 between the Company
and Evolve 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                                                               |  | (1)



27



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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                 |  |    
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                        |  | No.
|         |  |                                                                                                                                                                                                                                                                                 |  |    
|        
|        
|        
|        
|10.11.1  |  | Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
at $2.85, incorporated by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29, 1996 |  | (1)
|        
|        
|        
|        
|10.12    |  | Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A  Stock Option Agreement, incorporated
by reference to Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996                    |  | (1)
|        
|        
|        
|        
|10.12.1  |  | First Amendment to Employment Agreement dated May 8, 1996 between
the 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                                               |  | (1)
|        
|        
|        
|        
|10.13    |  | 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996                                               |  | (1)
|        
|        
|        
|        
|10.14    |  | Sales Contractual Agreement dated June 20, 1996 between the Company
and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
Form 10-KSB for fiscal year ended May 31, 1996                                                                                   |  | (1)
|        
|        
|        
|        
|10.15    |  | Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
Form 10-KSB for fiscal year ended May 31, 1996                                                                              |  | (1)
|        
|        
|        
|        
|10.16    |  | Employment Agreement dated January 1, 1997 between the
Company and Norman J. Dawson, incorporated by reference to Exhibit 10.16
to Form 10-KSB for the fiscal year ended May 31, 1997                                                                                           |  | (1)
|        
|        
|        
|        
|10.17    |  | Employment Agreement dated January 1, 1997 between the
Company and Jayanta K. Maitra, incorporated by reference to Exhibit 10.17
to Form 10-KSB for the fiscal year ended May 31, 1997                                                                                          |  | (1)
|        
|        
|        
|        
|10.18    |  | Technology License and Distribution Agreement dated June 23, 1997
between the Company and Sun Microsystems, Inc. , incorporated by reference
to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997                                                             |  | (1)
|        
|        
|        
|        
|10.19    |  | Employment Agreement dated March 23, 1998 between the Company and James
Lunney incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998                                                                                                 |  | (1)
|        
|        
|        
|        
|10.20    |  | Employment Agreement dated July 28, 1997 between the Company and Philip
Morettini incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998                                                                                              |  | (1)
|        
|        
|        
|        
|10.21    |  | Employment Agreement dated July 23, 1998 between the Company
and Lowell W. Giffhorn incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998                                                                                            |  | (1)
|        
|        
|        
|        
|10.22    |  | Secured Promissory Note dated June 12, 2000 between the Company and
James T. Lunney incorporated by reference to Exhibit 10.22 to
Form 10-KSB for the fiscal year ended May 31, 2000                                                                                            |  | (1)



28



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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                          |  |    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                 |  | No.
|         |  |                                                                                                                                                                                                                                                                                          |  |    
|        
|        
|        
|        
|10.23    |  | Purchase Agreement dated June 29, 2000 between the Company and 4S
37/38, LLC incorporated by reference to Exhibit 10.23 to
Form 10-KSB for the fiscal year ended May 31, 2000                                                                                                            |  | (1)
|        
|        
|        
|        
|10.24    |  | Employment Agreement dated October 2, 2000 between the Company and
Miklos B. Korodi incorporated by reference to Exhibit 10.24 to
Form 10-QSB for the fiscal quarter ended November 30, 2000                                                                                             |  | (1)
|        
|        
|        
|        
|10.25    |  | Employment Agreement dated December 1, 2000 between the Company and
Richard G. Blum incorporated by reference to Exhibit 10.25 to
Form 10-QSB for the fiscal quarter ended November 30, 2000                                                                                             |  | (1)
|        
|        
|        
|        
|10.26    |  | Employment Agreement dated January 29, 2001 between the Company
and Serge J. Miller                                                                                                                                                                                                      |  | (2)
|        
|        
|        
|        
|10.27    |  | Lease Agreement dated February 23, 2001 between Arden Realty
Finance IV, LLC and the Company                                                                                                                                                                                             |  | (2)
|        
|        
|        
|        
|10.28    |  | Employment Agreement dated January 1, 2001 between the Company
and David H. Pohl                                                                                                                                                                                                         |  | (2)
|        
|        
|        
|        
|10.29    |  | Employment Agreement dated April 26, 2001 between the Company
and David H. Pohl                                                                                                                                                                                                          |  | (2)
|        
|        
|        
|        
|23.0     |  | Consents of Experts and Counsel                                                                                                                                                                                                                                                          |  |    
|        
|        
|        
|        
|23.1     |  | Consent of BDO Seidman, LLP                                                                                                                                                                                                                                                              |  | (2)
|        
|        
|        
|        
|99.0     |  | Additional Exhibits.                                                                                                                                                                                                                                                                     |  |    
|        
|        
|        
|        
|99.1     |  | Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by
reference to Exhibit 28.2 to registration
statement on Form SB-2, file no. 33-57858                                                                                                                                 |  | (1)
|        
|        
|        
|        
|99.2     |  | Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by
reference to Exhibit 28.3 to registration
statement on Form SB-2, file no. 33-57858                                                                                                                                 |  | (1)
|        
|        
|        
|        
|99.3     |  | Form of Incentive Stock Option Agreement to the Companys
1996 Stock Option 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  |  | (1)
|        
|        
|        
|        
|99.4     |  | Form of NonQualified Stock Option Agreement to the Companys
1996 Stock Option 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 |  | (1)
|        
|        
|        
|        
|99.5     |  | Press Release of the Company dated November 4, 1996 incorporated by
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997                                                                                                                                                          |  | (1)
|        
|        
|        
|        
|99.6     |  | Form of Incentive Stock Option Agreement to the Companys 2001 Stock
Option Plan incorporated by reference to Exhibit 99.6
to registration statement on Form S-8 filed March 26, 2001                                                                                                    |  | (1)



29



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##### Table of Contents



|         |  |                                                                                                                                                                                           |  |    
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                  |  | No.
|         |  |                                                                                                                                                                                           |  |    
|        
|        
|        
|        
|99.7     |  | Form of Non-Qualified Stock Option Agreement to the Companys 2001
Stock Option Plan incorporated by reference to Exhibit 99.7
to registration statement on Form S-8 filed March 26, 2001 |  | (1)



| |  |  | (1) Previously filed in indicated registration statement or report.                                
| |  |  | ---------------------------------------------------------------------------------------------------
| |  |  | (2) Exhibit filed herewith this Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2001



|(b) |  | The Company did not file a report on Form 8-K for the quarter ended May 31,
2001. The Company did file a report on Form 8-K on August 10, 2001
announcing the appointment of a new Chairman and Chief Executive Officer, a
new board member and three individuals as President.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



30



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##### Table of Contents



Patriot Scientific Corporation




Index to Consolidated Financial Statements

|                                                                                          |  |  |             | 
|----------------------------------------------------------------------------------------- |  |  | ----------- | 
|Report of Independent Certified Public Accountants                                        |  |  | F-2         | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Consolidated Balance Sheet as of May 31, 2001                                             |  |  | F-3         | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Consolidated Statements of Operations for the Years Ended
May 31, 2001 and 2000           |  |  | F-4         | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Consolidated Statements of Stockholders Equity for the
Years Ended May 31, 2001 and 2000 |  |  | F-5         | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Consolidated Statements of Cash Flows for the Years Ended
May 31, 2001 and 2000           |  |  | F-6         | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Summary of Accounting Policies                                                            |  |  | F-7 - F-12  | 
|                                                                                         
|                                                                                         
|                                                                                         
|                                                                                         
|Notes to Consolidated Financial Statements                                                |  |  | F-13 - F-26 | 



F- 1



---



##### Table of Contents






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. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements 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 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
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.

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- 2



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##### Table of Contents






Patriot Scientific Corporation
Consolidated Balance Sheet

|                                                                    |                                                                                                   |      |           |             |  
|------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | ---- | --------- | ----------- | -
|May 31,                                                             |                                                                                                   | 2001
|                                                                    |                                                                                                   |     
|ASSETS(Note 12)                                                     |                                                                                                   |      |           |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Current assets:                                                     |                                                                                                   |      |           |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Cash and cash equivalents                                                                         |      | $         | 464,350     |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accounts receivable, net of allowance
of $54,000 for uncollectible accounts                       |      |           | 188,982     |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Inventories (Note 2)                                                                              |      |           | 223,393     |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Prepaid expenses                                                                                  |      |           | 73,185      |  
|                                                                    |                                                                                                   |      |           |            
|Total current assets                                                |                                                                                                   |      | 949,910   |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Property and equipment, net (Note 3)                                |                                                                                                   |      | 423,528   |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Other assets, net of accumulated amortization of $8,333             |                                                                                                   |      | 16,667    |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Patents and trademarks, net of accumulated amortization
of $337,363 |                                                                                                   |      | 153,588   |            
|                                                                    |                                                                                                   |      |           |            
|                                                                    |                                                                                                   | $    | 1,543,693 |            
|                                                                    |                                                                                                   |      |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY                                |                                                                                                   |      |           |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Current liabilities:                                                |                                                                                                   |      |           |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accounts payable                                                                                  |      | $         | 434,838     |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accrued liabilities                                                                               |      |           | 186,467     |  
|                                                                    |                                                                                                   |      |           |            
|Total current liabilities                                           |                                                                                                   |      | 621,305   |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Commitments and contingencies(Notes 1, 7, 11 and 12)                |                                                                                                   |      |           |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|Stockholders equity(Notes 5, 6, 7 and 8):                          |                                                                                                   |      |           |            
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding                 |      |           |            |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Common stock, $.00001 par value; 100,000,000 shares
authorized: issued and outstanding 57,535,411 |      |           | 575         |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Additional paid-in capital                                                                        |      |           | 37,320,503  |  
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Accumulated deficit                                                                               |      |           | (36,318,690 | )
|                                                                   
|                                                                   
|                                                                   
|                                                                   
|                                                                    | Note receivable (Note 4)                                                                          |      |           | (80,000     | )
|                                                                    |                                                                                                   |      |           |            
|Total stockholders equity                                          |                                                                                                   |      | 922,388   |            
|                                                                    |                                                                                                   |      |           |            
|                                                                    |                                                                                                   | $    | 1,543,693 |            
|                                                                    |                                                                                                   |      |           |            

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



F- 3



---



##### Table of Contents






Patriot Scientific Corporation
Consolidated Statements of Operations

|                                                                                |                                              |      |            |           |   |   |            |            |  
|------------------------------------------------------------------------------- | -------------------------------------------- | ---- | ---------- | --------- | - | - | ---------- | ---------- | -
|Years Ended May 31,                                                             |                                              | 2001 |            | 2000     
|                                                                                |                                              |      |            |          
|Net sales (Note 13):                                                            |                                              |      |            |           |   |   |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Product                                      |      | $          | 336,684   |   |   | $          | 553,181    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Licenses and royalties                       |      |            | 700       |   |   |            | 163,779    |  
|                                                                                |                                              |      |            |           |   |   |            |           
|Net sales                                                                       |                                              |      | 337,384    |           |   |   | 716,960    |           
|                                                                                |                                              |      |            |           |   |   |            |           
|Cost of sales:                                                                  |                                              |      |            |           |   |   |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Product costs                                |      |            | 444,320   |   |   |            | 455,008    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Inventory obsolescence                       |      |            | 100,000   |   |   |            | 270,000    |  
|                                                                                |                                              |      |            |           |   |   |            |           
|Cost of sales                                                                   |                                              |      | 544,320    |           |   |   | 725,008    |           
|                                                                                |                                              |      |            |           |   |   |            |           
|Gross loss                                                                      |                                              |      | (206,936   | )         |   |   | (8,048     | )         
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Operating expenses:                                                             |                                              |      |            |           |   |   |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Research and development (Note 7)            |      |            | 2,218,433 |   |   |            | 3,170,166  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Selling, general and administrative (Note 7) |      |            | 2,588,579 |   |   |            | 3,501,128  |  
|                                                                                |                                              |      |            |           |   |   |            |           
|Operating expenses                                                              |                                              |      | 4,807,012  |           |   |   | 6,671,294  |           
|                                                                                |                                              |      |            |           |   |   |            |           
|Operating loss                                                                  |                                              |      | (5,013,948 | )         |   |   | (6,679,342 | )         
|                                                                                |                                              |      |            |           |   |   |            |           
|Other income (expenses):                                                        |                                              |      |            |           |   |   |            |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Gain on sale of technology                   |      |            |          |   |   |            | 250,000    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest income                              |      |            | 48,329    |   |   |            | 28,014     |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest expense (Note 5)                    |      |            | (3,284    | ) |   |            | (1,087,380 | )
|                                                                                |                                              |      |            |           |   |   |            |           
|Other income (expenses)                                                         |                                              |      | 45,045     |           |   |   | (809,366   | )         
|                                                                                |                                              |      |            |           |   |   |            |           
|Net loss                                                                        |                                              | $    | (4,968,903 | )         |   | $ | (7,488,708 | )         
|                                                                                |                                              |      |            |           |   |   |            |           
|Basic and diluted loss
per common share (Note 8)                                |                                              | $    | (0.09      | )         |   | $ | (0.17      | )         
|                                                                                |                                              |      |            |           |   |   |            |           
|Weighted average number of
common shares outstanding
during the period (Note 8) |                                              |      | 53,433,788 |           |   |   | 44,156,418 |           
|                                                                                |                                              |      |            |           |   |   |            |           

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



F- 4



---



##### Table of Contents






Patriot Scientific Corporation
Consolidated Statements of Stockholders Equity

Years Ended May 31, 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 6)                       |  |              | 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 7) |  |              | 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 7)                                            |  |              |           |            |  |                 |    |               |  |                  | 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                                                          |  |              |           |            |  |                 |    |               |  |                  | 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 6)                      |  |              | 5,411,320  |            |  |                 | 54  |               |  |                  | 3,342,143  |     |  |   |            |   |  |   | 3,342,197  |  
|                                                                                 
|                                                                                 
|                                                                                 
|                                                                                 
|Exercise of common stock warrants and
options at $.25 to $.32 per share (Note 7)  |  |              | 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 | (1) |  | $ | (36,318,690 | ) |  | $ | 922,388    |  
|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  

See accompanying report 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 $37,320,503.
|--- |  | ---------------------------------------------------------------------------------------------------------------



F- 5



---



##### Table of Contents






PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |            |           |          |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | ---------- | ------- | -------- | ---------- | ---------- | --------- | -------- | -
|Increase (Decrease) in Cash and Cash Equivalents     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|Years Ended May 31,                                  |                                                                                          | 2001                                                                                     |                                       | 2000      
|                                                     |                                                                                          |                                                                                          |                                       |           
|Operating activities:                                |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                                 |                                                                                          | $                                     | (4,968,903 | )       |          | $          | (7,488,708 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss
to cash used in operating activities:                  |                                                                                          |                                       |            |         |          |            |            |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Amortization and depreciation                                                            |                                       |            | 260,316 |          |            |            | 367,395   |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Provision for doubtful accounts                                                          |                                       |            | 49,000  |          |            |            | 41,919    |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Provision for inventory obsolescence                                                     |                                       |            | 100,000 |          |            |            | 270,000   |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Issuance of options for services                                                         |                                       |            | 119,565 |          |            |            |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Non -cash interest expense related to convertible
debentures, notes payable and warrants |                                       |            |        |          |            |            | 995,651   |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Gain on sale of technology                                                               |                                       |            |        |          |            |            | (250,000  | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Non-cash compensation expense                                                            |                                       |            |        |          |            |            | 3,739,267 |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Changes in:                                                                              |                                       |            |         |          |            |            |           |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                                                                          | Accounts receivable                   |            |         | (242,405 | )          |            |           | (159,709 | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                                                                          | Inventories                           |            |         | (252,229 | )          |            |           | (91,331  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                                                                          | Prepaid and other assets              |            |         | (2,563   | )          |            |           | 75,150   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          |                                                                                          | Accounts payable and accrued expenses |            |         | 98,039   |            |            |           | (982,684 | )
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|Net cash used in operating activities                |                                                                                          |                                                                                          | (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                                         |                                                                                          |                                       | (388,557   | )       |          |            | (169,116   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of technology                                                         |                                                                                          |                                       |           |         |          |            | 250,000    |          
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|Net cash (used in) provided by investing activities  |                                                                                          |                                                                                          | (493,557                              | )          |         |          | 80,884     |           
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|Financing activities:                                |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of short term notes payable                                       |                                                                                          |                                       |           |         |          |            | 410,000    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments on notes payable and
long-term debt                                   |                                                                                          |                                       |           |         |          |            | (720,355   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of common stock
and exercise of common stock warrants
and options |                                                                                          |                                       | 3,631,270  |         |          |            | 5,634,950  |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of accounts receivable                                                |                                                                                          |                                       | 65,575     |         |          |            | 142,000    |          
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|Net cash provided by financing activities            |                                                                                          |                                                                                          | 3,696,845                             |            |         |          | 5,466,595  |           
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|Net (decrease) increase in cash and cash equivalents |                                                                                          |                                                                                          | (1,635,892                            | )          |         |          | 2,064,429  |           
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of year         |                                                                                          |                                                                                          | 2,100,242                             |            |         |          | 35,813     |           
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|Cash and cash equivalents, end of year               |                                                                                          | $                                                                                        | 464,350                               |            |         | $        | 2,100,242  |           
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|Supplemental Disclosure of Cash Flow Information:    |                                                                                          |                                                                                          |                                       |            |         |          |            |           
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Convertible debentures, notes payable and accrued
interest exchanged for common stock    |                                                                                          | $                                     |           |         |          | $          | 405,182    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Options issued for prepaid services                                                      |                                                                                          |                                       | 10,574     |         |          |            |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash payments for interest                                                               |                                                                                          |                                       |           |         |          |            | 102,137    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Write-off of inventory                                                                   |                                                                                          |                                       | 177,000    |         |          |            | 347,000    |          
|                                                     |                                                                                          |                                                                                          |                                       |            |         |          |            |           

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



F- 6



---



##### Table of Contents






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
accounting principles generally accepted in the United States of America 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 2000 financial statements in
order for them to conform to the 2001 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. As of May 31, 2001, the
Company had approximately 35%, $85,606, in accounts receivable from one
customer against whom the Company has initiated a collection lawsuit. The
Company has set up a reserve of $20,000 related to the collection effort.
Management believes that the Company will prevail in collection of the entire
amount due.

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. The carrying value of the note receivable approximates fair
value.



F- 7



---



##### Table of Contents



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.

Other Assets

During the year ended May 31, 2001, the Company adopted Emerging Issues Task
Force Issue No. 00-2, Accounting for Web Site Development Costs (EITF
00-2). EITF 00-2 requires that companies capitalize certain web site
development costs once certain criteria are met. Under EITF 00-2 , overhead,
general and administrative and training costs are not capitalized. The Company
capitalized $25,000 in web site development costs and amortized to expense
$8,333 during the fiscal year ended May 31, 2001.

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 determined based on
the provisions of SFAS No. 121 as discussed above.

Revenue Recognition

Revenue is recognized upon the shipment of product to the customer. Licensing
and royalty income is recognized when earned.

Research and Development Costs

Research and development costs are expensed as incurred.

Income Taxes

The Company accounts for income taxes under SFAS No. 109, Accounting for
Income Taxes. Temporary differences are differences between the tax basis of
assets and liabilities and their



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Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

reported amounts in the financial statements that will result in taxable or
deductible amounts in future years.

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 reflects 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 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, 2001, 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 $100,000.

Sale of Accounts Receivable

The Company had a factoring line with a bank under which it sold accounts
receivable in fiscal year 2000. These transactions were accounted for as sales
of financial assets pursuant to SFAS No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
In May 2001, the Company renegotiated a $400,000 factoring line with a bank
enabling the Company to sell selected accounts receivable invoices to the bank
with full recourse against the Company. In September 2000, the FASB issued
SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, a replacement of FASB No. 125. SFAS No. 140
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishments
of liabilities after March 31, 2001. The Companys sales of accounts
receivable invoices under this agreement qualify as 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 may not redeem the invoices sold previous to the invoices being greater
than 90 days past due. 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 assets when control has
been surrendered, and derecognizes liabilities when extinguished. During
fiscal 2001 and 2000, the Company sold approximately $82,000 and $178,000,
respectively, of its accounts receivable to a bank under a factoring agreement
for approximately $66,000 and $142,000, respectively. Pursuant to the
provisions of SFAS No.140, the Company reflected the transaction as


F- 9Table of Contents

Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

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 in July 2001, and
there was no allowance for future losses. As of May 31, 2001, the retained
balance equaled $15,526 and $334,000 was available for future factoring of
accounts receivable invoices. See Note 12 for further discussion.

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 loss 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 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.

In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. The Company adopted the Interpretation on July 1, 2000. The
Interpretation requires that stock options that have been modified to reduce
the exercise price be accounted for using variable accounting. The Company
repriced certain stock options on October 5, 1999 and in accordance with
generally accepted accounting principles at the time accounted for the repriced
stock options using fixed accounting. As a result of adopting the
Interpretation, the Company is required to apply variable accounting to these
options. 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, 2001, 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.



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Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

Recent Accounting Pronouncements

In June 1998, the 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 is
effective June 1, 2001 for the Company. The Company believes the adoption of
this statement will have no material impact on its financial statements.

In December 1999, the Securities and Exchange Commission (the SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements which provides additional guidance in applying generally
accepted accounting principles to revenue
recognition in financial statements. SAB 101 was effective for the Company as
of the fourth quarter of the fiscal year ended May 31, 2001. The adoption of
this bulletin has had no material impact on the Companys 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.



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Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

The Companys 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
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.



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements

1. Continued Existence and Managements Plan

The Companys 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. The ability of
the Company to continue as a going concern is contingent upon it obtaining
sufficient financing to sustain its operations. The Company incurred a net
loss of $4,968,903 and $7,488,708 and negative cash flow from operations of
$4,839,180 and $3,483,050 in the years ended May 31, 2001 and 2000,
respectively. At May 31, 2001, the Company had working capital of $328,605 and
cash and cash equivalents of $464,350. The Company has funded its operations
primarily through the issuance of securities and debt financings. Cash and
cash equivalents decreased $1,635,895 during fiscal 2001. In April 2000, the
Company entered into an investment agreement with Swartz Private Equity LLC
(Swartz). The investment agreement entitles the Company, at the Companys
option, to issue and sell its common stock for up to an aggregate of $30
million from time to time during a three-year period through June 23, 2003,
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 can be sold to Swartz
within a 30 day time period based on the trading volume of the stock, among
others. Swartz may purchase the common stock from the Company at a discount as
determined in the agreement. In addition to the common stock purchased, Swartz
receives warrants to purchase an additional 15% of the common stock equal to
110% of the market price as determined in the agreement, subject to further
semi-annual adjustment if the price of the common stock goes down.

The Company estimates its current cash requirements to sustain its operations
for the next twelve months through May 2002 to be $3.1 million. Since the
Company is attempting to sell its communications product line, it is assuming
that there will be no additional product revenue beyond what was in backlog as
of May 31, 2001. In addition to limitations based on trading volume and market
price of the common stock, the Companys ability to obtain equity financing
under the $30 million equity line of credit is dependent on it having
registered an adequate number of shares to sell to Swartz. As of August 15,
2001, the Company has only 4 million registered shares remaining to sell to
Swartz under the current effective registration statement. At the current
market price and assuming adequate market volume, the Company estimates it will
run out of registered shares in December 2001. The Company has, therefore,
negotiated with Swartz a letter of agreement to enter into a new $25 million
equity line of credit with terms and language that it believes is acceptable to
the Securities and Exchange Commission (SEC). The Company believes that the
definitive agreement for the new $25 million equity line of credit will be
completed by the end of August 2001 and that a registration statement will be
filed and become effective in time to continue funding under an equity line of
credit without any interruptions. 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 are
similar to the existing $30 million equity line of credit. Upon the closing of
this agreement, as compensation for entering into this agreement, the Company
will issue a warrant to purchase a number of shares equal to 4.9% of the then
fully diluted shares of common stock of the Company, less all warrants
previously issued to Swartz under the



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

existing agreements. In addition, the Company has formulated a cost reduction
plan which it could initiate to reduce its cash requirements, if necessary.

Based on the above assumptions, management of the Company expects that the $3.1
million requirement will be provided by the current working capital of
$328,605; available funds under the $30 million and $25 million equity lines of
credit, as discussed above, $677,000 of which has been funded from June 1
through August 15, 2001; proceeds from the exercise of outstanding stock
options and warrants; and reductions in costs pursuant to a cost reduction
plan. In addition, the Company has remaining $314,993 of a $400,000 accounts
receivable factoring agreement with its bank.

The Company anticipates that it may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development
of its technologies. Product introductions such as those currently underway for
the Ignite I and JUICEtechnology may require significant inventory, product
launch, marketing personnel and other expenditures that cannot be currently
estimated. Further, if expanded development is commenced or new generations of
microprocessors are accelerated beyond their current plans, additional
expenditures the Company cannot currently estimate, may be required. It is
possible therefore, that higher levels of expenditures may be required than are
currently contemplated resulting from changes in development plans or as
required to support new developments or commercialization activities or
otherwise. In addition, in February 2001, the Company entered into a five
year extension on its building lease.

Based on its current plan and assumptions, the Company anticipates that it will
be able to meet its cash requirements for the next twelve months. However, if
the Company is not able to meet its current plan, 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 $30 million equity line
of credit or the anticipated $25 million equity line of credit. The lack of
additional capital could force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its
business. Further, there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Companys existing shareholders. As such,
there is substantial doubt about the Companys 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
the possible inability of the Company to continue as a going concern.



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

2. Inventories

Inventories at May 31, 2001 consisted of the following:

|                         |  |   |          |  
|------------------------ |  | - | -------- | -
|Component parts          |  | $ | 343,430  |  
|                        
|                        
|                        
|                        
|Work in process          |  |   | 20,000   |  
|                        
|                        
|                        
|                        
|Finished goods           |  |   | 121,963  |  
|                         |  |   |          |  
|                         |  |   | 485,393  |  
|                        
|                        
|                        
|                        
|Reserve for obsolescence |  |   | (262,000 | )
|                         |  |   |          |  
|                         |  | $ | 223,393  |  
|                         |  |   |          |  

3. Property and Equipment

Property and equipment consisted of the following at May 31, 2001:

|                                                                   |  |   |           | 
|------------------------------------------------------------------ |  | - | --------- | 
|Computer equipment and software                                    |  | $ | 1,593,907 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Furniture and fixtures                                             |  |   | 493,649   | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Laboratory equipment                                               |  |   | 205,594   | 
|                                                                   |  |   |           | 
|                                                                   |  |   | 2,293,150 | 
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Less accumulated depreciation and amortization                     |  |   | 1,869,622 | 
|                                                                   |  |   |           | 
|Net property and equipment                                         |  | $ | 423,528   | 
|                                                                   |  |   |           | 
|Depreciation expense was $186,621 and $283,952 for the
years ended |  |   |           | 
|May 31, 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. 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.

5. Notes Payable

During the year ended May 31, 2000, the Company borrowed $410,000 from an
institutional investor and a group of individual investors, one of which is a
major shareholder in the Company. The original terms of the notes typically
included maturity dates of four months with interest rates ranging from
10%-18%. Also during the year ended May 31, 2000, the Company paid off short
term loans aggregating $719,000 from the group of individual investors. Also,
$102,500 of a short term loan with an institutional investor was exchanged for
convertible debt and converted into the
Companys common stock. The debt was convertible at a discount to market and,
therefore, generated a beneficial conversion feature. The beneficial
conversion feature was valued at $86,388



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

and was reflected as non-cash interest expense for the year ended May 31, 2000.
In addition, $289,000 of short term loans with a group of individual investors
were settled through the cashless exercise of warrants during the year ended
May 31, 2000.

In addition to the interest on the loans, warrants exercisable for three years
were issued to investors at exercise prices ranging from $.25 to $1.12 which
was equal to the market price of the common stock on the date of the issuances.
During the year ended May 31, 2000, warrants to purchase 1,338,342 common
shares of the Company were issued related to the short term loans placed during
the year and warrants to purchase 2,443,447 common shares of the Company were
issued to the individual investors and the institutional investor to extend the
due dates of their short term loans. These warrants were valued using the
Black-Scholes model and the value was reflected as a discount to the debt and
was amortized over the life of the debt. In fiscal 2000, $909,263 of the debt
discount related to the warrants and $86,388 related to the conversion
discussed above, were amortized and reflected as non-cash interest expense.

6. Investment Agreements

$5 Million

In February 1999, as amended in July 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 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.

The Company put 780,460, 1,784,640 and 4,449,696 shares of its common stock to
Swartz with effective closing dates of November 30, 1999, December 27, 1999 and
February 10, 2000. 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 with the February 10, 2000 closing. The total number of
shares placed with Swartz was 13.9% of the total number of shares outstanding
at February 10, 2000 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 from
$0.341 to $0.715 (after reprices) are issuable to Swartz upon the exercise of
warrants issued under the investment agreement. None of the warrants had been
exercised as of May 31, 2001. See Note 7 for further information on the
warrants.



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

$30 Million

In May 2000, the Company entered into a second investment agreement with
Swartz. The second investment agreement entitles the Company, at the Companys
option, to issue and sell its common stock for up to an aggregate of $30
million from time to time during a three-year period through
June 23, 2003, 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 that can be sold to Swartz within a
30 day time period based on the trading volume of the stock, among others.
Swartz can purchase the common stock from the Company at a discount. There are
currently 13.8 million shares of common stock registered for resale, including
1.8 million shares reserved for the issuance of common stock upon the exercise
of warrants that have or may be issued to Swartz under this agreement. If the
market price is less than $1.00 per share, the discount is $.10 per share; if
the market price is between $1.00 to $2.00 per share, the discount is 10%; and
if the market price is $2.00 or greater, the discount is 7%. In addition to
the common stock purchased, Swartz will receive 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. The registration
statement went effective on June 23, 2000.

During the current fiscal year, the Company received proceeds of $3,342,197
from the sale of 5,411,320 shares of common stock . In May 2001, the Company
issued 588,680 shares of common stock in excess of the required shares under
the May 30, 2001 put. These shares are returnable to the Company and thus
have not been included as issued or outstanding in the consolidated financial
statements. Per the terms of the investment agreement, the Company issued six
five-year warrants to purchase 811,698 shares of common stock exercisable
initially at prices ranging from $0.65 to $1.09 per share. During the first
fiscal quarter of 2002 which will end on August 31, 2001, the Company received
proceeds of $676,604 from the sale of 2,588,680 shares of common stock and
issued five-year warrants for 388,302 shares of common stock exercisable
initially at prices ranging from $0.26 to $0.539 per share. None of the
warrants had been exercised as of May 31, 2001. See Note 7 for further
information on the warrants.

The total number of shares placed with Swartz under the $30 million investment
agreement was 9.4% of the total number of shares outstanding at May 31, 2001 or
5,411,320 common shares at prices ranging from $0.4345 to $1.053. The average
price per share paid by Swartz was $0.62 compared to the average closing price
during the twenty day pricing periods of $0.81 per share.

The Companys investment agreements contain certain restrictive covenants,
which prohibit the Company, for the term of the investment agreement and for a
period of one-year thereafter, from entering into certain transactions. These
include the issuing of 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; entering into any private equity line type agreement similar to the
investment agreement without obtaining Swartzs prior written approval;



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

and providing Swartz with a right of first refusal to purchase any variable
priced securities offered by the Company in any private transaction which
closes on or prior to six months after the termination of these investment
agreements. See Note 1 for further discussion.

7. Stockholders Equity

Warrants

At May 31, 2001, the Company had warrants outstanding to purchase 4,961,463
common shares at exercise prices ranging from $0.25 to $1.12 per share expiring
beginning in 2002 through 2006.
During fiscal 2001, the Company issued warrants to purchase 836,698 common
shares of stock at 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 arrangement. During fiscal 2000, the Company issued
warrants to purchase 4,834,009 common shares of stock at exercise prices
ranging from $0.25 to $1.12 per share. Of this amount, warrants to purchase
1,052,219 common shares of stock were issued to Swartz related to
the $5 million investment agreement and warrants to purchase 3,781,790 common
shares of stock were issued to individual and institutional investors related
to notes payable.

During fiscal year 2001 and 2000, the Company issued warrants to Swartz to
purchase 811,698 and 1,052,219 shares of common stock which are subject to
repricings at the six month anniversary of the issuance of the warrant. At
each six month anniversary date, the warrants will be repriced to the lesser of
the initial exercise price or 110% of the lowest closing bid price of the
Companys common stock for the five trading days ending on such six month
anniversary date of the date of issuance. As of May 31, 2001, a warrant to
purchase 667,454 common shares of the Companys stock was repriced at each
reset date from $1.265 to $0.715, a warrant to purchase 150,000 common shares
of the Companys stock was repriced at each reset date from $0.9625 to $0.7205,
and a warrant to purchase 125,310 common shares of the Companys stock was
repriced at each reset date from $1.562 to $0.715.

During fiscal 2001, individual and institutional investors exercised warrants
to purchase 631,416 shares of common stock at exercise prices ranging from
$0.25 to $0.32 per share. During fiscal
2000, individual and institutional investors exercised warrants to purchase
2,118,890 shares of common stock at exercise prices ranging from $0.25 to $0.50
per share and one warrant to purchase 100,000 common shares at an exercise
price of $1.25 expired unexercised.

1992 Incentive Stock Option Plan (ISO)

The Company has an ISO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the
Companys common stock. The ISO Plan provides 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


F- 18Table of Contents

Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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 is not 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). During the fiscal years ended May 31, 2001
and 2000, the Company granted options to purchase 132,500 and 0 shares of
common stock at market value. At May 31, 2001, options to purchase 132,500
shares of common stock were outstanding under the ISO Plan.

1992 Non-Statutory Stock Option Plan(NSO)

The Company has an NSO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Companys common stock. The NSO 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 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. During the fiscal years ended May 31,
2001 and 2000, the Company granted options to purchase 100,000 and 0 shares of
common stock at market value. At May 31, 2001, options to purchase 135,753
shares of common stock were outstanding under the NSO Plan.

1996 Stock Option Plan

Effective March 1996, the Company adopted the 1996 Stock Option Plan (1996
Plan), which was amended by the Shareholders in December 1997, expiring March
24, 2006, reserving for issuance 4,000,000 shares of the Companys common
stock. The 1996 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 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, 2001, the
Company granted options to purchase 1,860,000 shares of common stock at market
value. During the fiscal year ended May 31, 2000, the Company granted options
to purchase 150,000 shares of stock at market value. At May 31, 2001, options
to purchase 2,309,571 shares of common stock were outstanding under the 1996
Plan.

2001 Stock Option Plan

In February 2001, the Companys board of directors approved the 2001 Stock
Option Plan (2001 Plan) expiring in February 2010, reserving for issuance
3,000,000 shares of the Companys common stock. The 2001 Plan is subject to
approval by the Companys shareholders at the next annual meeting of
shareholders. Until shareholder approval is obtained, options granted under the
2001 Plan cannot be considered outstanding or measurable. Upon shareholder
approval, the excess



F- 19



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

of the market price of the common stock over the exercise price of any options
granted prior to approval, will result in a charge to compensation expense.
During the year ended May 31, 2001, the Company granted 650,000 options under
the 2001 Plan. The 2001 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 Plan must be exercised within
ten years of the date they are granted (five years in the case of a significant
stockholder).

Other

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. The stock options were repriced at an exercise price of $.32.

Non-cash compensation expense of $3,739,267 was recorded in the fiscal year
ended May 31, 2000 as a result of the Company providing employees and directors
the option of exercising their stock
options using a cashless exercise provision. Generally accepted accounting
principles require that such exercises must be recorded using variable
accounting which reflects 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 was exchanged in the transaction, a like amount
was recorded as additional paid-in capital. For the year ended May 31, 2000,
$1,588,960 and $2,150,307 have been included in the accompanying financial
statements under the captions research and development and selling, general and
administrative expenses, respectively.

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 respectively: dividend yield of zero percent
for all years; expected volatility of 90 percent; risk-free interest rates of
4.8 to 6.4 percent; and expected lives of
3 to 5 years.



F- 20



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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:

|                      |                        |  |      |            |      |  |   |            |  
|--------------------- | ---------------------- |  | ---- | ---------- | ---- |  | - | ---------- | -
|                      |                        |  | 2001 |            | 2000
|                      |                        |  |      |            |     
|As reported           |                        |  |      |            |      |  |   |           
|                     
|                     
|                     
|                     
|                      | Net loss               |  | $    | (4,968,903 | )    |  | $ | (7,488,708 | )
|                      |                        |  |      |            |      |  |   |           
|Pro forma             |                        |  |      |            |      |  |   |           
|                     
|                     
|                     
|                     
|                      | Net loss               |  | $    | (5,348,529 | )    |  | $ | (7,492,658 | )
|                      |                        |  |      |            |      |  |   |           
|As reported per share |                        |  |      |            |      |  |   |           
|                     
|                     
|                     
|                     
|                      | Basic and diluted loss |  | $    | (0.09      | )    |  | $ | (0.17      | )
|                      |                        |  |      |            |      |  |   |           
|Pro forma per share   |                        |  |      |            |      |  |   |           
|                     
|                     
|                     
|                     
|                      | Basic and diluted loss |  | $    | (0.10      | )    |  | $ | (0.17      | )
|                      |                        |  |      |            |      |  |   |           

A summary of the status of the Companys stock option plans and warrants as of
May 31, 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 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |           |            |          |   |      |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |           |            |          |   |      |     
|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 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |           |            |          |   |      |     
|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 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |           |            |          |   |      |     

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

See earlier discussion under 2001 Stock Option Plan.



F- 21



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

The following table summarizes information about stock options and warrants
outstanding at May 31, 2001:

|         |  |             |           |             |        |           |           |             |      |             |      |          |      |         |      |             |       |           |           |  |      |      |      | 
|-------- |  | ----------- | --------- | ----------- | ------ | --------- | --------- | ----------- | ---- | ----------- | ---- | -------- | ---- | ------- | ---- | ----------- | ----- | --------- | --------- |  | ---- | ---- | ---- | 
|         |  |             |           |             |        |           |           |             |      | Outstanding |      |          |      |         |      | Exercisable
|         |  |             |           |             |        |           |           |            
|         |  |             |           |             |        |           |           |             |      | Weighted    |      |          |      |         |      |             |       |           |           |  |      |     
|         |  |             |           |             |        |           |           |             |      | Average     |      | Weighted |      |         |      |             |       | Weighted 
|Range of |  |             |           |             |        | Remaining |           | Average     |      |             |      |          |      | Average
|Exercise |  | Number      |           | Contractual |        | Exercise  |           | Number      |      | Exercise   
|Prices   |  | Outstanding |           | Life        |        | Price     |           | Exercisable |      | Price      
|         |  |             |           |             |        |           |           |             |      |            
|Options  |  |             |           |             |        |           |           |             |      |             |      |          |      |         |      |             |       |           |           | 
|        
|        
|        
|        
|         |  |             | $         | 0.18        |        |           | 35,753    |             |      |             | 0.57 |          |      | $       | 0.18 |             |       |           | 35,753    |  |      | $    | 0.18 | 
|        
|        
|        
|        
|         |  |             | 0.32-0.34 |             |        | 606,666   |           |             |      | 1.91        |      |          |      | 0.32    |      |             |       | 520,666   |           |  |      | 0.32 |     
|        
|        
|        
|        
|         |  |             | 0.48-1.20 |             |        | 1,160,000 |           |             |      | 4.41        |      |          |      | 0.98    |      |             |       | 405,000   |           |  |      | 0.81 |     
|        
|        
|        
|        
|         |  |             |           | 1.325       |        |           | 682,500   |             |      |             | 4.00 |          |      |         | 1.33 |             |       |           | 235,834   |  |      |      | 1.33 | 
|        
|        
|        
|        
|         |  | 1.35-1.615  |           |             | 92,905 |           |           |             | 4.22 |             |      |          | 1.44 |         |      |             | 2,905 |           |           |  | 1.41 |     
|         |  |             |           |             |        |           |           |             |      |             |      |          |      |         |      |             |       |           |           |  |      |     
|         |  |             | $         | 0.18-1.615  |        |           | 2,577,824 |             |      |             | 3.66 |          |      | $       | 0.92 |             |       |           | 1,200,158 |  |      | $    | 0.68 | 
|        
|        
|        
|        
|Warrants |  |             |           |             |        |           |           |             |      |             |      |          |      |         |      |             |       |           |           | 
|        
|        
|        
|        
|         |  |             | $         | 0.25        |        |           | 2,205,000 |             |      |             | 1.35 |          |      | $       | 0.25 |             |       |           | 2,205,000 |  |      | $    | 0.25 | 
|        
|        
|        
|        
|         |  |             | 0.30-0.32 |             |        | 652,168   |           |             |      | 1.17        |      |          |      | 0.32    |      |             |       | 652,168   |           |  |      | 0.32 |     
|        
|        
|        
|        
|         |  |             | 0.34-0.44 |             |        | 525,143   |           |             |      | 2.97        |      |          |      | 0.37    |      |             |       | 525,143   |           |  |      | 0.37 |     
|        
|        
|        
|        
|         |  |             | 0.59-0.74 |             |        | 1,432,269 |           |             |      | 3.87        |      |          |      | 0.71    |      |             |       | 1,432,269 |           |  |      | 0.71 |     
|        
|        
|        
|        
|         |  |             | 0.84-1.12 |             |        | 146,883   |           |             |      | 3.79        |      |          |      | 0.91    |      |             |       | 146,883   |           |  |      | 0.91 |     
|         |  |             |           |             |        |           |           |             |      |             |      |          |      |         |      |             |       |           |           |  |      |     
|         |  |             | $         | 0.25-1.12   |        |           | 4,961,463 |             |      |             | 2.30 |          |      | $       | 0.42 |             |       |           | 4,961,463 |  |      | $    | 0.42 | 

8. Net Loss 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 loss
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 (loss) 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, 2001 and 2000, common stock options and
warrants exercisable into approximately 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-22



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

9. Income Taxes

|                                                                                                                   |  |   |            | 
|------------------------------------------------------------------------------------------------------------------ |  | - | ---------- | 
|As of May 31, 2001, the net deferred
tax asset recorded and its approximate tax effect
consisted of the following: |  |   |            | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Net operating loss carryforwards                                                                                   |  | $ | 9,309,000  | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Purchased technology                                                                                               |  |   | 519,000    | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Depreciation and amortization                                                                                      |  |   | 1,982,000  | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Other, net                                                                                                         |  |   | 179,000    | 
|                                                                                                                   |  |   |            | 
|                                                                                                                   |  |   | 11,989,000 | 
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|                                                                                                                  
|Valuation allowance                                                                                                |  |   | 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,            |                                                                   | 2001 |   | 2000      
|                   |                                                                   |      |   |           
|                   | Federal income tax benefit computed at the Federal statutory rate |      | $ | (1,689,000 | ) |   | $ | (2,546,000 | )
|                  
|                  
|                  
|                  
|                   | State income tax benefit net of Federal benefit                   |      |   | (298,000   | ) |   |   | (449,000   | )
|                  
|                  
|                  
|                  
|                   | Other- permanent differences                                      |      |   | 43,000     |   |   |   | (265,000   | )
|                  
|                  
|                  
|                  
|                   | Exercise of stock options using a cashless exercise provision     |      |   |           |   |   |   | (1,496,000 | )
|                  
|                  
|                  
|                  
|                   | Expiration of state net operating loss carryforwards              |      |   | 81,000     |   |   |   |           |  
|                  
|                  
|                  
|                  
|                   | Change in valuation allowance                                     |      |   | 1,863,000  |   |   |   | 4,756,000  |  
|                   |                                                                   |      |   |            |   |   |   |           
|Income tax benefit |                                                                   | $    |  |            |   | $ |  |           
|                   |                                                                   |      |   |            |   |   |   |           

As of May 31, 2001, a valuation allowance equal to the net deferred tax asset
recognized has 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 2001
and 2000 due to reported losses. The valuation allowance increased $1,863,000
from the prior year.

At May 31, 2001, the Company has federal net operating loss carryforwards of
approximately $24,372,000 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.

At May 31, 2001, the Company has state net operating loss carryforwards of
approximately $17,031,000 that expire through 2007.



F- 23



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

10. 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 2001 or 2000.

11. Contingencies

In January 1999, the Company was 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, the Company joined with
nanoTronics and Gloria Felcyn and filed its 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 the financial position or cash
flows of the Company.

A former employee has filed a claim in arbitration seeking the right to
exercise terminated options. Management believes that the claim has no merit
and will have no impact on the financial position or cash flows of the Company.

12. Commitments and Lease Obligations

The Company is obligated under employment contracts with certain key employees
to pay severance upon termination under certain defined conditions.

Effective August 6, 2001, the Company relieved the former CEO of his duties as
Chairman, President and Chief Executive Officer. In accordance with his
employment agreement, the Company may be obligated to pay him between $0 and
$368,000 as severance pay.

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



F- 24



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

The Company has a non-cancellable 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,         |  |   |         | 
|                            
|                            
|                            
|                            
|                            
|2002                         |  | $ | 113,740 | 
|                            
|                            
|                            
|                            
|2003                         |  |   | 123,046 | 
|                            
|                            
|                            
|                            
|2004                         |  |   | 129,250 | 
|                            
|                            
|                            
|                            
|2005                         |  |   | 135,454 | 
|                            
|                            
|                            
|                            
|2006                         |  |   | 141,658 | 
|                             |  |   |        
|                            
|                            
|                            
|                            
|Total minimum lease payments |  | $ | 643,148 | 
|                             |  |   |        

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

13. Segment Information

Export Sales

The Company is engaged in one business segment, the development and marketing
of high technology computer and telecommunication products. The Company plans
on selling the telecommunications line. However, there can be no assurance
that a buyer will be found. During the fiscal years ended May 31, 2001 and
2000, the Companys product sales of high technology computer products were
$50,511 and $38,088 and telecommunication products were $286,173 and $515,093.

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, 2001 and 2000, the Companys sales by geographic location
consisted of the following:

|                    |               |   |         |        |      |   |         |         | 
|------------------- | ------------- | - | ------- | ------ | ---- | - | ------- | ------- | 
|                    |               |   | 2001    |        | 2000
|                    |               |   |         |        |     
|Domestic sales      |               | $ | 253,000 |        |      | $ | 469,000 |        
|                   
|                   
|                   
|                   
|Foreign sales:      |               |   |         |        |      |   |         |        
|                   
|                   
|                   
|                   
|                    | Europe        |   |         | 19,000 |      |   |         | 136,000 | 
|                   
|                   
|                   
|                   
|                    | North America |   |         | 40,000 |      |   |         | 64,000  | 
|                   
|                   
|                   
|                   
|                    | Asia          |   |         | 25,000 |      |   |         | 47,000  | 
|                   
|                   
|                   
|                   
|                    | Other         |   |         |       |      |   |         | 1,000   | 
|                    |               |   |         |        |      |   |         |        
|Total foreign sales |               |   | 84,000  |        |      |   | 248,000 |        
|                    |               |   |         |        |      |   |         |        
|Total net sales     |               | $ | 337,000 |        |      | $ | 717,000 |        
|                    |               |   |         |        |      |   |         |        

The Company has no foreign assets.



F-25



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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

Sales to Major Customers

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

|         |  |       |        |         |  |       |      |         |  |   |         |  |  |  |      |  
|-------- |  | ----- | ------ | ------- |  | ----- | ---- | ------- |  | - | ------- |  |  |  | ---- | -
|         |  | 2001  |        | 2000   
|         |  |       |        |        
|Customer |  | Sales |        | Percent |  | Sales |      | Percent
|         |  |       |        |         |  |       |      |        
|A        |  | $     | 88,000 |         |  |       | 26.1 | %       |  | $ |        |  |  |  |     |  
|        
|        
|        
|        
|B        |  |       | 41,000 |         |  |       | 12.2 | %       |  |   |        |  |  |  |     |  
|        
|        
|        
|        
|C        |  |       | 40,000 |         |  |       | 11.9 | %       |  |   |        |  |  |  |     |  
|        
|        
|        
|        
|D        |  |       |       |         |  |       |     |         |  |   | 138,000 |  |  |  | 19.2 | %
|        
|        
|        
|        
|E        |  |       |       |         |  |       |     |         |  |   | 137,000 |  |  |  | 19.1 | %
|        
|        
|        
|        
|F        |  |       |       |         |  |       |     |         |  |   | 127,000 |  |  |  | 17.8 | %

14. Related Party Transactions

During fiscal year 2001, the Company contracted with a company, which was owned
by a related party to the President, Chairman and CEO, for web site
development, marketing support and other various services. The Company paid
$139,253 to the related party for these services. Additionally, included in
accounts payable at May 31, 2001 is $21,550 due to the related party. No such
related party transactions occurred during fiscal year 2000.

Subsequent to year end, the Company elected a member of Swartz Institutional
Finance to the Board of Directors.



F- 26



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##### Table of Contents






SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.



|                       |     |                                                                                  
|---------------------- | --- | ---------------------------------------------------------------------------------
|DATED: August 27, 2001 |     | PATRIOT SCIENTIFIC CORPORATION                                                   
|                       |     |                                                                                  
|                       |     |                                                                                  
|                       | By: | /s/ LOWELL W. GIFFHORN                                                           
|                       |     |                                                                                  
|                       |     | Lowell W. Giffhorn                                                               
|                       |     | President, Executive Vice President and
Chief Financial Officer, and Director (1)

In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.

|                                          |  |                                                                                                                                             |  |                
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------
|Signature                                 |  | Title                                                                                                                                       |  | Date           
|                                          |  |                                                                                                                                             |  |                
|/s/ DONALD BERNIER
Donald Bernier         |  | Chairman, Chief Executive
Officer and Director (1)                                                                                          |  | August 27, 2001
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|/s/ LOWELL W. GIFFHORN
Lowell W. Giffhorn |  | President, Executive Vice President and
Chief Financial Officer, Principal
Financial Officer, Principal Accounting
Officer and Director (1) |  | August 27, 2001
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|/s/ DAVID POHL
David Pohl                 |  | Vice President of Administration,
Secretary and Director                                                                                    |  | August 27, 2001
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|Frederick G. Thiel                        |  | Director                                                                                                                                    |  |                
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|/s/ HELMUT FALK JR.
Helmut Falk Jr.       |  | Director                                                                                                                                    |  | August 27, 2001
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|/s/ CARLTON JOHNSON
Carlton Johnson       |  | Director                                                                                                                                    |  | August 27, 2001
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|/s/ MIKLOS B. KORODI
Miklos B. Korodi     |  | President, Vice President of
Sales and Marketing (1)                                                                                        |  | August 27, 2001
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|/s/ SERGE J. MILLER
Serge J. Miller       |  | President, Vice President of
Engineering (1)                                                                                                |  | August 27, 2001



|(1) |  | In August 2001, the Board of Directors appointed Donald Bernier as
Chairman of the Board and Chief Executive Officer and appointed
Mr. Giffhorn, Mr. Korodi and Mr. Miller to serve jointly as the President.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







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##### Table of Contents






Exhibit Index

|         |  |                                                                                                                                                                                                                                                |  |    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. 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, incorporated by reference to Exhibit 2.1 to Form 8-K
dated August 10, 1989                                                                                       |  | (1)
|        
|        
|        
|        
|2.2      |  | Assets Purchase Agreement and Plan of Reorganization dated June 22,
1994, among the Company, nanoTronics Corporation and Helmut Falk,
incorporated by reference to Exhibit 10.4
to Form 8-K dated July 6, 1994                                 |  | (1)
|        
|        
|        
|        
|2.2.1    |  | Amendment to Development Agreement dated April 23, 1996 between the
Company and 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        |  | (1)
|        
|        
|        
|        
|2.3      |  | Form of Exchange Offer dated December 4, 1996 between the Company and
certain shareholders of Metacomp, Inc. incorporated by reference to Exhibit 2.3
to Form 8-K dated January 9, 1997                                                        |  | (1)
|        
|        
|        
|        
|2.4      |  | Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc.
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                          |  | (1)
|        
|        
|        
|        
|3.0      |  | Articles and Bylaws.                                                                                                                                                                                                                           |  |    
|        
|        
|        
|        
|3.1      |  | Original Articles of Incorporation of the Companys predecessor,
Patriot Financial Corporation, incorporated by reference to Exhibit 3.1
to registration statement on Form S-18, file no.
33-23143-FW                                          |  | (1)
|        
|        
|        
|        
|3.2      |  | Articles of Amendment of Patriot Financial Corporation, as filed
with the 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                  |  | (1)
|        
|        
|        
|        
|3.3      |  | Certificate of Incorporation of the Company, as filed with the Delaware
Secretary of State on March 24, 1992, incorporated by
reference to Exhibit 3.1 to Form 8-K dated May 12, 1992                                                          |  | (1)
|        
|        
|        
|        
|3.3.1    |  | Certificate of Amendment to the Certificate of Incorporation
of the Company, as 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 |  | (1)
|        
|        
|        
|        
|3.3.2    |  | Certificate of Amendment to the Certificate of Incorporation of the
Company, as 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  |  | (1)







---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                     |  |    
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                                                                                            |  | No.
|         |  |                                                                                                                                                                                                                                                                                                                                                                     |  |    
|        
|        
|        
|        
|3.3.3    |  | Certificate of Amendment to the Certificate of Incorporation of the
Company, as 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                                                                                                                    |  | (1)
|        
|        
|        
|        
|3.4      |  | Articles and Certificate of Merger of Patriot Financial Corporation
into the Company dated May 1, 1992, with Agreement and Plan of
Merger attached thereto as Exhibit A, incorporated by reference to
Exhibit 3.2 to Form 8-K dated May 12, 1992                                                                                                                    |  | (1)
|        
|        
|        
|        
|3.5      |  | Certificate of Merger issued by the Delaware Secretary of State on May
8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
dated May 12, 1992                                                                                                                                                                                                             |  | (1)
|        
|        
|        
|        
|3.6      |  | Certificate of Merger issued by the Colorado Secretary of State on May
12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
dated May 12, 1992                                                                                                                                                                                                            |  | (1)
|        
|        
|        
|        
|3.7      |  | Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
Form 8-K dated May 12, 1992                                                                                                                                                                                                                                                                      |  | (1)
|        
|        
|        
|        
|4.0      |  | Instruments Establishing Rights of Security Holders.                                                                                                                                                                                                                                                                                                                |  |    
|        
|        
|        
|        
|4.1      |  | Specimen common stock certificate, incorporated by reference to
Exhibit 4.1 Form 8-K dated May 12, 1992                                                                                                                                                                                                                                                             |  | (1)
|        
|        
|        
|        
|4.2      |  | Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
1996, 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 2/29/96 |  | (1)
|        
|        
|        
|        
|4.3      |  | Form of 6% Convertible Subordinated Promissory Note due September 30,
1998 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                                                                                                                                                 |  | (1)
|        
|        
|        
|        
|4.4      |  | Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2,
1999 aggregating $2,000,000 to two investors incorporated
by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997                                                                                                                                                                       |  | (1)
|        
|        
|        
|        
|4.5      |  | Form of Stock Purchase Warrant (CC Investments, LDC) dated
June 2, 1997 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                      |  | (1)
|        
|        
|        
|        
|4.6      |  | Registration Rights Agreement dated June 2, 1997 by and among the
Company and 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                                                                               |  | (1)
|        
|        
|        
|        
|4.7      |  | Form of Warrant to Purchase Common Stock (Swartz Family                                                                                                                                                                                                                                                                                                             |  |    







---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                                                                                                               |  |    
|-------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                                                                                                                      |  | No.
|         |  |                                                                                                                                                                                                                                                                                                                                                                                               |  |    
|        
|        
|        
|        
|         |  | Partnership,
L.P.) 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                                                                           |  | (1)
|        
|        
|        
|        
|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 to Exhibit 4.7 incorporated by reference to
Exhibit 4.8 to Form 8-K dated June 16, 1997                                                                                                                                         |  | (1)
|        
|        
|        
|        
|4.9      |  | Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2,
1999 aggregating $1,000,000 to two investors incorporated by
reference to Exhibit 4.9 to Form 10-KSB for the year ended May 31, 1998                                                                                                                                                                                  |  | (1)
|        
|        
|        
|        
|4.10     |  | Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24,
1997 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 in Exhibit 4.9 incorporated
by
reference to Exhibit 4.10 to Form 10-KSB for the year ended May 31, 1998                              |  | (1)
|        
|        
|        
|        
|4.11     |  | Form of Warrant to Purchase Common Stock (Swartz Family Partnership,
L.P.) 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 in
Exhibit 4.9 incorporated by
reference to Exhibit 4.11 to Form 10-KSB for the year ended May 31, 1998 |  | (1)
|        
|        
|        
|        
|4.12     |  | Form of Warrant to Purchase Common Stock (Investor Communications Group,
Inc.) 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                                                                 |  | (1)
|        
|        
|        
|        
|4.13     |  | Warrant to Purchase Common Stock issued to Spellcaster Telecommunications,
Inc. 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                                                                                           |  | (1)
|        
|        
|        
|        
|4.14     |  | Investment agreement dated February 24, 1999 by and between the Company and
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                                                                                                                                 |  | (1)
|        
|        
|        
|        
|4.15     |  | Registration Rights Agreement dated February 24, 1999 by and between the
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                                                                                            |  | (1)
|        
|        
|        
|        
|4.16     |  | Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC) dated
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                                                                                   |  | (1)
|        
|        
|        
|        
|4.17     |  | Amended and Restated Investment Agreement dated July 12, 1999 by and between
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                                                                                                                                                     |  |    







---



##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                                       |  |    
|-------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                              |  | No.
|         |  |                                                                                                                                                                                                                                                                                                       |  |    
|        
|        
|        
|        
|         |  | No. 2 to Registration Statement on Form SB-2 dated July 14, 1999                                                                                                                                                                                                                                      |  | (1)
|        
|        
|        
|        
|4.18     |  | Investment Agreement 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 to Registration Statement on Form S-3
dated May 5, 2000                                                   |  | (1)
|        
|        
|        
|        
|4.19     |  | 2001 Stock Option Plan of the Company dated February 21, 2001 incorporated
by reference to Exhibit 4.19 to Registration Statement on Form S-8 dated
March 26, 2001                                                                                                                                    |  | (1)
|        
|        
|        
|        
|10.0     |  | Material Contracts.                                                                                                                                                                                                                                                                                   |  |    
|        
|        
|        
|        
|10.1     |  | 1992 Incentive Stock Option Plan of the Company, incorporated
by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992                                                                                                                                                                             |  | (1)
|        
|        
|        
|        
|10.1.1   |  | Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17, 1996                                                                                                                                                     |  | (1)
|        
|        
|        
|        
|10.2     |  | 1992 Non-Statutory Stock Option Plan of the Company,
incorporated by reference to Exhibit 10.2 to Form 8-K
dated May 12, 1992                                                                                                                                                                         |  | (1)
|        
|        
|        
|        
|10.2.1   |  | Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal year
ended May 31, 1996                                                                                                                                |  | (1)
|        
|        
|        
|        
|10.3     |  | Lease Agreement between the Companys subsidiary Metacomp, Inc. and
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 the fiscal year
ended May 31, 1997 |  | (1)
|        
|        
|        
|        
|10.4     |  | Stock Purchase Agreement dated November 29 and 30, 1995, between the
Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4 to Form 8-K dated December 11, 1995                                                                                                                             |  | (1)
|        
|        
|        
|        
|10.4.1   |  | Letter Amendment to Stock Purchase Agreement dated February 21, 1996,
between the Company and SEA, Ltd., incorporated by reference
to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96                                                                                                  |  | (1)
|        
|        
|        
|        
|10.5     |  | 1995 Employee Stock Compensation Plan of the Company,
incorporated by reference to Exhibit 10.5 to Form 10-QSB
for fiscal quarter ended 11/30/95                                                                                                                                                      |  | (1)
|        
|        
|        
|        
|10.6     |  | Letter Stock and Warrant Agreement dated January 10, 1996
between the Company and Robert E. Crawford, Jr., incorporated
by reference to Exhibit 10.6 to Form 10-QSB for fiscal quarter ended 2/29/96                                                                                                  |  | (1)
|        
|        
|        
|        
|10.7     |  | Non-Exclusive Manufacturing and Line of Credit Agreement dated February
28, 1996, between the Company and Labway Corporation, incorporated by
reference to Exhibit 10.7 to Form 10-QSB for
fiscal quarter ended 2/29/96                                                                               |  | (1)







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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                 |  |    
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                        |  | No.
|         |  |                                                                                                                                                                                                                                                                                 |  |    
|        
|        
|        
|        
|10.8     |  | Distribution and Representation Agreement dated February 28, 1996,
between the Company and Innoware, Inc., incorporated by
reference to Form 10-QSB for fiscal quarter ended 2/29/96                                                                                            |  | (1)
|        
|        
|        
|        
|10.9     |  | Employment Agreement dated November 20, 1995 between the
Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9
to Registration Statement on Form SB-2 dated March 18, 1996                                                                                    |  | (1)
|        
|        
|        
|        
|10.9.1   |  | First Amendment to Employment Agreement dated May 17, 1996 between the
Company 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                                     |  | (1)
|        
|        
|        
|        
|10.10    |  | Employment Agreement dated November 20, 1995 between the
Company and Robert Putnam, incorporated by reference to Exhibit 10.10
to Registration Statement on Form SB-2 dated March 18, 1996                                                                                      |  | (1)
|        
|        
|        
|        
|10.11    |  | Sales Contractual Agreement dated March 19, 1996 between the Company
and Evolve 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                                         |  | (1)
|        
|        
|        
|        
|10.11.1  |  | Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
at $2.85, incorporated by reference to Pre-Effective
Amendment No. 1 to Registration Statement on Form SB-2 dated April 29, 1996 |  | (1)
|        
|        
|        
|        
|10.12    |  | Employment Agreement dated as of May 8, 1996 between the Company and
Michael A. Carenzo, including Schedule A  Stock Option Agreement, incorporated
by reference to Pre-Effective Amendment No. 2 to Registration Statement on
Form SB-2 dated May 23, 1996                    |  | (1)
|        
|        
|        
|        
|10.12.1  |  | First Amendment to Employment Agreement dated May 8, 1996 between
the 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                                               |  | (1)
|        
|        
|        
|        
|10.13    |  | 1996 Stock Option Plan of the Company dated March 25, 1996 and approved
by the Shareholders on May 17, 1996, incorporated by reference to
Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
dated May 23, 1996                                               |  | (1)
|        
|        
|        
|        
|10.14    |  | Sales Contractual Agreement dated June 20, 1996 between the Company
and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
Form 10-KSB for fiscal year ended May 31, 1996                                                                                   |  | (1)
|        
|        
|        
|        
|10.15    |  | Sales Contractual Agreement dated July 31, 1996 between the Company and
Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
Form 10-KSB for fiscal year ended May 31, 1996                                                                              |  | (1)
|        
|        
|        
|        
|10.16    |  | Employment Agreement dated January 1, 1997 between the
Company and Norman J. Dawson, incorporated by reference to Exhibit 10.16
to Form 10-KSB for the fiscal year ended May 31, 1997                                                                                           |  | (1)
|        
|        
|        
|        
|10.17    |  | Employment Agreement dated January 1, 1997 between the                                                                                                                                                                                                                          |  |    







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##### Table of Contents



|         |  |                                                                                                                                                                                                                     |  |    
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                            |  | No.
|         |  |                                                                                                                                                                                                                     |  |    
|        
|        
|        
|        
|         |  | Company and Jayanta K. Maitra, incorporated by reference to Exhibit 10.17
to Form 10-KSB for the fiscal year ended May 31, 1997                                                                                     |  | (1)
|        
|        
|        
|        
|10.18    |  | Technology License and Distribution Agreement dated June 23, 1997
between the Company and Sun Microsystems, Inc. , incorporated by reference
to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997 |  | (1)
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|10.19    |  | Employment Agreement dated March 23, 1998 between the Company and James
Lunney incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998                                     |  | (1)
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|10.20    |  | Employment Agreement dated July 28, 1997 between the Company and Philip
Morettini incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998                                  |  | (1)
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|10.21    |  | Employment Agreement dated July 23, 1998 between the Company
and Lowell W. Giffhorn incorporated by reference to Exhibit 10.21 to
Form 10-KSB for the fiscal year ended May 31, 1998                                |  | (1)
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|10.22    |  | Secured Promissory Note dated June 12, 2000 between the Company and
James T. Lunney incorporated by reference to Exhibit 10.22 to
Form 10-KSB for the fiscal year ended May 31, 2000                                |  | (1)
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|10.23    |  | Purchase Agreement dated June 29, 2000 between the Company and 4S
37/38, LLC incorporated by reference to Exhibit 10.23 to
Form 10-KSB for the fiscal year ended May 31, 2000                                       |  | (1)
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|10.24    |  | Employment Agreement dated October 2, 2000 between the Company and
Miklos B. Korodi incorporated by reference to Exhibit 10.24 to
Form 10-QSB for the fiscal quarter ended November 30, 2000                        |  | (1)
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|10.25    |  | Employment Agreement dated December 1, 2000 between the Company and
Richard G. Blum incorporated by reference to Exhibit 10.25 to
Form 10-QSB for the fiscal quarter ended November 30, 2000                        |  | (1)
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|10.26    |  | Employment Agreement dated January 29, 2001 between the Company
and Serge J. Miller                                                                                                                                 |  | (2)
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|10.27    |  | Lease Agreement dated February 23, 2001 between Arden Realty
Finance IV, LLC and the Company                                                                                                                        |  | (2)
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|10.28    |  | Employment Agreement dated January 1, 2001 between the Company
and David H. Pohl                                                                                                                                    |  | (2)
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|10.29    |  | Employment Agreement dated April 26, 2001 between the Company
and David H. Pohl                                                                                                                                     |  | (2)
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|23.0     |  | Consents of Experts and Counsel                                                                                                                                                                                     |  |    
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|23.1     |  | Consent of BDO Seidman, LLP                                                                                                                                                                                         |  | (2)
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|99.0     |  | Additional Exhibits.                                                                                                                                                                                                |  |    
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|99.1     |  | Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by
reference to Exhibit 28.2 to registration
statement on Form SB-2, file no. 33-57858                                                            |  | (1)







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##### Table of Contents



|         |  |                                                                                                                                                                                                                                                                                          |  |    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---
|Exh. No. |  | Document                                                                                                                                                                                                                                                                                 |  | No.
|         |  |                                                                                                                                                                                                                                                                                          |  |    
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|99.2     |  | Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by
reference to Exhibit 28.3 to registration
statement on Form SB-2, file no. 33-57858                                                                                                                                 |  | (1)
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|99.3     |  | Form of Incentive Stock Option Agreement to the Companys
1996 Stock Option 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  |  | (1)
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|99.4     |  | Form of NonQualified Stock Option Agreement to the Companys
1996 Stock Option 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 |  | (1)
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|99.5     |  | Press Release of the Company dated November 4, 1996 incorporated by
reference to Exhibit 99.5 to Form 8-K dated January 9, 1997                                                                                                                                                          |  | (1)
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|99.6     |  | Form of Incentive Stock Option Agreement to the Companys 2001 Stock
Option Plan incorporated by reference to Exhibit 99.6
to registration statement on Form S-8 filed March 26, 2001                                                                                                    |  | (1)
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|99.7     |  | Form of Non-Qualified Stock Option Agreement to the Companys 2001
Stock Option Plan incorporated by reference to Exhibit 99.7
to registration statement on Form S-8 filed March 26, 2001                                                                                                |  | (1)
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|         |  | (1) Previously filed in indicated registration statement or report.                                                                                                                                                                                                                      |  |    
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|         |  | (2) Exhibit filed herewith this Annual Report on Form 10-KSB for the
fiscal year ended May 31, 2001                                                                                                                                                                                      |  |