<PAGE>   1
                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
[X]    ANNUAL REPORT UNDER SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required]

                     FOR THE FISCAL YEAR ENDED MAY 31, 1997

[ ]    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
       SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
       For the transition period from ___________ to _______________

                         Commission File Number 0-22182

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

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

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

              (619) 674-5000
              --------------
         (Issuer's telephone number)

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 Exchange Act of 1934 during the past 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. $1,847,421

The aggregate market value of the voting stock held by non-affiliates of the
registrant on July 1, 1997 was $33,076,473 based on a closing bid price of $1.90
as reported on the OTC Electronic Bulletin Board system.

At July 11, 1997, 33,189,195 shares of common stock, par value $.00001 per share
(the registrant's only class of voting stock) were outstanding.


                    DOCUMENTS INCORPORATED BY REFERENCE: None

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                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
                                     PART I
<S>    <C>                                                               <C>
ITEM 1.  Description of Business                                            6
ITEM 2.  Description of Property                                            19
ITEM 3.  Legal Proceedings                                                  19
ITEM 4.  Submission of Matters to a Vote of Security Holders                19

                                     PART II
ITEM 5.  Market for Common Equity and Related                               19
           Stockholder Matters
ITEM 6.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations                              20
ITEM 7.  Financial Statements                                               21
ITEM 8.  Changes in and Disagreement with Accountants on                    22
           Accounting and Financial Disclosure

                                    PART III
ITEM 9.  Directors, Executive Officers, Promoters and Control Persons;      22
           Compliance With Section 16(a) of the Exchange Act
ITEM 10. Executive Compensation                                             25
ITEM 11. Security Ownership of Certain Beneficial Owners and Management     28
ITEM 12. Certain Relationships and Related Transactions                     30

ITEM 13. Exhibits and Reports on Form 8-K                                   31
</TABLE>


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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 12E of the Exchange Act and the Private
Securities Litigation Reform Act of 1995, and the Company desires to take
advantage of the "safe harbor" provisions thereof. Therefore, the Company is
including this statement for the express purpose of availing itself of the
protections of such safe harbor with respect to all of such forward-looking
statements. The forward-looking statements in this Prospectus reflect the
company's current views with respect to future events and financial performance.
These forward-looking statements are subject to certain risks and uncertainties,
including specifically absence of significant revenues, history of losses, no
assurance that technology can be completed or that it might be delayed,
significant competition, the uncertainty of patent and proprietary rights, the
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 forward-looking statements.
Readers are cautioned to consider the specific risk factors described herein and
in "Risk Factors", and not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes 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 the
Company or persons acting on its behalf are expressly qualified in their
entirety by this section.


                           GLOSSARY OF TECHNICAL TERMS

ASIC (Application Specific Integrated Circuit) - a chip built to meet the
      specific application of one customer, requiring large volumes to recover
      the high development costs.

ASSP (Application Specific Standard Product) - a chip designed for a particular
      market application rather than a single customer, e.g. a keyboard
      controller that can be used by many customers.

AT - The first IBM computer that had a 16 bit computer data bus (connectors for
      communication cards.)

BANDWIDTH - the rate or speed at which information can move in a given medium,
      such as an electronic wire or the air.

BRI (Basic Rate Interface) - A digital service consisting of 2 B channels and 1
      D channel. The B channels are used for data and the D channel is used for
      control.

BIT - a binary digit, the smallest unit of digital information - either an "on"
      (1) or "off" (0) signal. Microprocessors are generally 4-bit to 32-bit
      referring to the amount of data they can process.

BROWSER OR WEB BROWSER - user interface software used to navigate the Internet.
      It integrates many Internet functions such as Web searching and transfer,
      file transfers, news group communications and electronic mail under one
      simple easy-to-learn and use interface.

BUS - a group of connectors in a computer system that allow a number of
      different cards to communicate.

CENTRAL PROCESSING UNIT (CPU) - the part of a computer that interprets and
      executes instructions.

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CHIP (DIE) - the small piece of a silicon wafer containing the microscopic
      electrical components and wiring for an integrated circuit -- the
      integrated circuit without a package surrounding it.

CMOS - (Complementary Metal-Oxide Semiconductor) a structure for building
      transistors using pairs of positively and negatively charged areas within
      the silicon. It is the dominant semiconductor manufacturing process
      because of its high-density and low-power attributes.

COMPUTER - a programmable electronic machine that performs high-speed
      mathematical and logical operations or otherwise processes information.

CYBERSHARK - the Company's tradename for its ISDN digital modem product.

DIGITAL MODEM - Allows non ISDN devices, e.g. computers, to be connected to ISDN
      telephone lines. In computer use it operates comparable to modems for
      analog telephone lines. More technical term is a "terminal adapter" and
      sometimes called an "ISDN modem."

E1 - The European equivalent of T1.
      EMBEDDED CONTROL SYSTEMS (Embedded systems, embedded controller, embedded
      control microprocessor) - products that contain computers, but are not
      necessarily used as computers. Used for control applications such as laser
      printer controllers, graphics controllers, accelerator cards, motion
      controllers, digital communication devices and video terminal controllers.

GROUND PENETRATING RADAR (GPR) - a technique employing microwave radiation
      (radar) to penetrate the earth's surface. Devices using this technique may
      also be used to penetrate walls and other objects.

INTEGRATED CIRCUIT - A device that incorporates many transistors in a small area
      or "chip" of silicon, which is encapsulated in plastic, ceramic or other
      forms of packaging and connected to a circuit board.

INTERNET - a worldwide cooperative interconnection of smaller public and private
      computer networks (an interconnected network of networks) consisting of an
      estimated seven million linked computers. The World Wide Web is a portion
      of the Internet.

INTERNET COMPUTER - a portable computer-based device specifically designed to
      access the Internet or the World Wide Web. Also referred to as a Internet
      Terminal, Teleputer, Web Terminal, Net Computer, Internet PC, Internet
      Appliance, Browser Box, Internet Box and similar names. A number of
      companies have announced the introduction of such portable devices. Many
      of these devices are expected to utilize Java.

INTRANET - private networks (primarily corporate) that use the infrastructure
      and standards of the Internet and the World Wide Web but are cordoned off
      from the public Internet.

ISA - (Industry Standard Architecture) - The name given by all the manufacturers
      to the BUS used in the IBM AT computer.

JAVA - an object-oriented programming language that operates independent of any
      particular operating system and was developed by Sun Microsystems Inc.
      Java programs, called applets, can be accessed over a network and run on
      any processor whenever needed.

JAVA PROCESSOR - a microprocessor designed primarily to execute the Java  
      language on a particular CPU.

ISDN (Integrated Services Digital Network) - is a set of digital transmission
      protocols that virtually all of the world's communications carriers have
      adopted as a standard to allow a standard twisted-pair copper telephone
      line to be a high-speed high-capacity digital line capable of multiple
      transmissions.

KBPS - Kilobits per second, thousand bits per second.

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MICROCONTROLLER - a specialized microprocessor that contains embedded within a
      single silicon chip memory and input-output devices in addition to the
      central processing unit (CPU) designed to perform a specific function. For
      example, the devices used for managing a car's odometer or running the
      paper feeder in a printer.

MICROPROCESSOR - an integrated circuit that contains the entire central
      processing unit (CPU) of a computer, typically fabricated on a single
      silicon chip. A microprocessor processes system data and controls
      input/output, peripheral and memory devices.

PRI - (Primary Rate Interface) - A variation of T1 which consists of 23 B
      channels and 1 D channel. The B channels are used to carry data and the D
      channel is used for controls. Each B channel has a data rate capacity of
      64 kilo bits per second.

PROPRIETARY - means that the Company is the sole owner of the technology and has
      the sole right to economically exploit the technology.

PSC1000 - The Company's first proprietary RISC-based 32-bit microprocessor that
      is based on the ShBoom technology and architecture and is integrated on a
      single chip using a 0.8 micron silicon manufacturing process. The ShBoom
      technology or architecture describes the broad technology that can be
      incorporated in a number of microprocessors of different configurations
      and silicon manufacturing processes.

PCI - A newer faster BUS which supports 32 or 64 data bit transfers.

REGISTER - a directly addressable location for storing data within a computer.
      Most microprocessors are register based. Also see Stack/Register
      Architecture.

RISC (Reduced Instruction Set Computer) - a computer whose instructions are much
      simpler than Complex Instruction Set Computers (CISC). This, and other
      architectural differences, allow RISC instructions to execute at a faster
      rate and thus provide higher performance than a similar technology CISC
      machine.

SEMICONDUCTOR - a substance, such as silicon, on which many transistors and the
      connections between them are fabricated as an integrated circuit. The term
      "Semiconductors" is often more broadly defined as integrated circuits.

SHBOOM - The Company's tradename for its proprietary RISC-based 32-bit
      microprocessor (CPU) technology and/or architecture.

STACK - A group of storage locations within a computer, maintained in sequence,
      accessible for data retrieval primarily from the top of the stack. The
      limited accessibility of stacks simplify computer algorithms by reducing
      the amount of information that must be kept to find a given piece of
      information -- all data is located relative to the top of the stack.
      Stack-based or stack-oriented has advantages in certain applications over
      the vast majority of computers which are register-based designs.

STACK/REGISTER ARCHITECTURE - The combined stack/register architecture employed
      by the ShBoom is primarily stack-based but offers some design benefits of
      register-based architectures.

SUB-MICRON - silicon chip design using transistors smaller than 1.0 micron. The
      smaller the transistor size, the more functionality can be contained on a
      chip of a given physical dimension The PSC1000 is currently designed in
      0.8 micron geometry and the ShBoom technology is designed to accommodate
      smaller micron geometry.

T1 - A telephone service which carries digital signals between the customer and
      the central office at 1.544 megahertz speeds.

TRANSISTOR - a small electronic device containing a semiconductor. It is the
      lowest level element in an integrated circuit which switches the flow of
      electricity "on" or "off."

VME - An older BUS system typically used for industrial control systems.


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WAFERS - the typically 6" or 8" diameter slices of silicon crystal on which
      integrated circuits are fabricated.

WORLDWIDE WEB OR WWW - a portion of the Internet which is a distributed
      hypermedia system using hypertext documents which use text with pointers
      to other text. The World Wide Web is accessed using browser programs
      allowing searches and linking of documents and databases. Allows
      non-technical users to exploit the capabilities of the Internet.


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

        Patriot Scientific Corporation (the "Company" or "Patriot") 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. Its address is 10989 Via Frontera, San Diego, California 92127, and its
telephone number is (619) 674-5000. The Company's home page can be located on
the World Wide Web at http://www.ptsc.com.

        The Company is engaged in the development and marketing of patented
microprocessor technology and high-performance digital communication products.
The Company also owns and is developing innovative radar and antenna technology.
The Company's strategy is to exploit its technologies through product sales,
licensing, strategic alliances or government contracting.

        The Company has had limited revenues since its inception and, as a
result of the acquisition of Metacomp and initiation of CyberShark sales, only
recently emerged from the development stage. There can be no assurance the
Company can achieve profitable operations, and the Company may need additional
financial resources during the next twelve months.

BACKGROUND

        In February of 1989 the Company completed its initial public offering
pursuant to a Registration Statement on Form S-18 under the Securities Act of
1933 (the "Act"), raising 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 August 10, 1989, the Company acquired its GPR technology from the
inventor, Mr. Elwood G. Norris, now the Company's Chairman. The details of that
acquisition and certain related agreements are described in more detail in
"Certain Transactions" below. A description of the GPR technology, certain
information about the industry generally, and the Company's operational plans
are discussed below under the caption "Business".

        On May 12, 1992, the Company redomiciled itself from Colorado to
Delaware by merging into a wholly-owned Delaware subsidiary (Patriot Scientific
Corporation) organized for that purpose. The reincorporation resulted in a
combination (reverse split) of each three of the Company's common shares, par
value $.00001, into one share of the Delaware corporation, par value $.00001.
The reincorporation also effected a change in the Company's charter and bylaws
and a name change to Patriot Scientific Corporation.

        In May of 1993, the Company registered under the Act a total of
7,631,606 shares issuable upon the exercise of outstanding Class A and Class B
common stock purchase warrants. The Company 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, pursuant to an Assets Purchase Agreement and
Plan of Reorganization ("nanoTronics Agreement") between the Company,
nanoTronics Corporation ("nanoTronics") located in Eagle Point, Oregon and
Helmut Falk ("Falk"), the Company issued a total of 10,000,000 restricted common
shares to

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nanoTronics to acquire certain microprocessor technology of nanoTronics. The
technology acquired ("ShBoom technology") is being 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 5,000,000 shares are subject to the
terms of an earnout escrow arrangement. See "Business."

        Effective December 26, 1996, pursuant to an exchange offer and letter of
transmittal, the Company acquired 96.9% of the outstanding shares of Metacomp
Inc., a California corporation ("Metacomp") from 56 shareholders in exchange for
the issuance of 1,272,068 shares of the Company's common stock. Based on the
closing price of the Company's common stock of $1.375 on the date of the
acquisition, the price of the acquisition was $1,749,094. This business
combination has been accounted for as a pooling-of-interests. Sixteen persons
who hold an aggregate of 1,059,574 common shares issued in the Metacomp
acquisition, have agreed to a lock-up arrangement limiting sales by each holder
to 5% of their shares per month through December 1998.

                                    BUSINESS

ORGANIZATION AND CORPORATE DEVELOPMENT
        The Company's business is managed as three major technologies/divisions
(1) ShBoom microprocessor technology, (2) digital communications and (3) radar
and antennae technology. The Company anticipates that the PSC1000 family of the
ShBoom microprocessors will benefit the radar and antennae technology and the
digital communications division, in that the ShBoom microprocessor may provide a
low-cost, high performance alternative to existing microprocessors. Due to the
Company's small size, staffing overlaps among the divisions with certain
personnel working on more than one of the technologies from time to time. As a
result of the business combination with Metacomp, the Company is no longer a
development stage company.

        During fiscal years 1997 and 1996 the Company focused its efforts on the
ShBoom technology and digital communications technologies. The ShBoom technology
and the Company's initial microprocessors, the PSC1000 family, are targeted for
the embedded controller and Java language processor marketplaces.

        In reviewing markets for the ShBoom technology, the Company identified
within the communications market a possible opportunity for its ISDN product.
During fiscal 1995 the Company initiated the development of a computer
compatible plug-in card allowing high-speed, cost-effective digital ISDN access
to the Internet and other networks. This product, the CyberShark digital modem,
is being marketed to Internet providers, distributors, value added resalers and
original equipment manufacturers and has been integrated with Metacomp's digital
communication products.

        In 1994, during the course of the Company's GPR development, the Company
identified certain antenna technology employing ionized gas as the conducting
element. In April, 1997 the Company obtained a government contract to evaluate
and characterize the gas antenna technology. Management believes this technology
could also have applications in digital communications and radar. However,
Company has no present plans to devote significant resources to this technology
other than from outside funding.

INTERNET GROWTH AND THE EMERGENCE OF THE JAVA PROGRAMMING LANGUAGE

        The Internet is a rapidly growing global web of computer networks.
Developed over 25 years ago, this "network of networks" allows any computer
connected to the Internet to talk to any other using the Internet Protocol. 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.
The Company believes 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 since its commercialization in the
early 1990's. While industry estimates of the number of Internet users varies
widely, a survey conducted by CommerceNet-Nielsen Media Research in December
1996 and January 1997 indicates that 50.6 million persons in the U.S. and Canada
use the Internet, more than twice the usage that occurred in 1995. The Internet
is a rapidly growing market segment impacting computer hardware, software and
peripheral industries. The rapid growth in popularity of the Internet is in

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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 and the growing awareness of such resources among
individuals, and 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. The large and growing number of users
connecting to the Internet is creating a demand for traditional analog modems
and ISDN digital modems, such as the Company's CyberShark, and other digital
communication devices such as those produced by Metacomp. New software, such as
Java, is emerging to serve the requirements of Internet users.

        The Java programming language was originally developed for personal
digital assistant devices (PDA's) and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. It was launched on the Internet through the free offer of a
Java programming software developer's kit and Java related browser, a form of
Internet software interface. 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
the fundamental platform for distributed, network-centric applications. There is
a growing list of Java applications or applets now available on the Internet
that not only enhance Web pages but perform many functions of traditional
computer software programs. The Company's ShBoom technology lends itself to
potential acceptance in this market.

        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,
sometimes referred to as just-in-time software. Among its various attributes,
two key features of Java are (1) its ability to run on a variety of computer
operating systems thus avoiding the problem of incompatibility across networks,
and (2) security, because Java enables the construction of virus-free,
tamper-free 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 computers 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 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 operating systems (such as
Microsoft DOS or Windows, UNIX or Macintosh). The concept is to design
inexpensive Internet computer devices or scaled down computers to access and
compute via the Internet. Public announcements of such devices have been made by
major companies such as Oracle and Sun Microsystems. There can be no assurance
that any such devices will become successful or that any will use the ShBoom
technology in the future.

SHBOOM MICROPROCESSOR TECHNOLOGY

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

        Since the acquisition of the ShBoom technology from nanoTronics,
effective May 31, 1994, the Company has 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. The Company obtained the
latest run of prototype chips in late May 1996 (current version, the PSC1008, an
0.8 micron chip). These chips are being employed in demonstrations for
prospective customers and are available for sale. However, prospective customers
are generally awaiting the next generation of the PSC1000 family, the PSC1005, a
0.5 micron production chip which is expected to feature lower cost, reduced size
and improved performance. Future enhancements and generations or modifications
of chips employing the ShBoom technology and architecture are contemplated by
the Company.

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        INDUSTRY BACKGROUND. The semiconductor logic market has three major
sectors: (1) Standard Logic Products, (2) Application Specific Standard Products
(ASSPs), and (3) Application Specific Integrated Circuit (ASICs). Standard logic
products, such as the Intel 80X86 and Motorola 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. ASICs are designed to meet the
specific application of one customer. While cost effective for that application,
ASICs require large sales volumes of that application to recover their
development costs. ASSPs are developed for one or more applications but are not
generally proprietary to one customer. Examples of ASSP applications include
modems, cellular telephones, wireless communications, multimedia applications,
facsimile machines and local area networks. The Company's chip is a
microprocessor designed to be combined with application-specific software to
serve as an embedded control product for the ASSP market sector.

        ASSPs are typically used in embedded control systems by manufacturers to
provide an integrated solution for application specific control requirements.
Such systems usually contain a microprocessor or microcontroller, logic
circuitry, memory and input/output circuitry. Electronic system manufacturers
combine one or more of these elements to fit a specific application. The
microprocessor provides the intelligence to control the system. The logic
circuitry provides functions specific to the end application. The input/output
circuitry may also be application specific or an industry standard component.
The memory element, if not on the microprocessor, is usually a standard product
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 ASSP chip or chip set, such as the
ShBoom-architecture PSC1000 family. The PSC1000 family provides close
integration of the microprocessor and input/output function with the logic
circuitry, thereby providing an advanced ASSP.

        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.

        Microcontrollers are generally available in 4-bit through 32-bit
architectures, which refers to the amount of data they can process. Although
4-bit microcontrollers are relatively inexpensive, typically less than $1.00
each, they lack performance and features but 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 and 32-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 and 32-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 which
can be used to reduce system costs and improve performance. For these needs, the
ShBoom architecture was designed to be a sophisticated 32-bit RISC (reduced
instruction set computer) microprocessor with advanced features, including the
most commonly needed support logic, but at a low cost; thereby providing
improved performance to existing 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 chip cost.


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        The Company's technology is fundamentally different from most other
microprocessors because it is stack-oriented, in that the data is stored in
groups. The Company's microprocessor further 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. The
Company's design combines two processors in one highly-integrated package, a
microprocessing unit (MPU) for performing conventional processing tasks, and an
input-output processor (IOP) for performing input-output functions. The IOP
replaces many dedicated peripheral functions supplied with other processors. The
microprocessor's design simplifies the manipulation of data. ShBoom's
architecture employs instructions which are shrunk from 32-bits to 8-bits. This
simplified instruction scheme improves execution speed for computer
instructions. The Company's architecture incorporates many on-chip system
functions, thus eliminating the requirement of support chips and reducing system
cost to users.

        The PSC1008, the 0.8 micron chip, has been designed to operate at a
speed of 50Mhz; and the PSC1005, the 0.5 micron chip, has been designed to
operate at a speed of 100Mhz. They are compatible with a wide range of memory
technology from low cost DRAM (dynamic random-access memory) to high speed SRAM
(static random access memory). The chips 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 chips or future versions or that
all of the desired functions will perform as anticipated.

        The ShBoom technology is not designed or targeted to compete with
high-end processors for use in personal computers. It is targeted for embedded
control applications. The Company believes that the above advanced features
differentiate the PSC1000 family from other 8-bit to 32-bit chips targeted for
embedded control applications. Considering the reduced requirement for support
chips, the PSC1000 family is intended to be available at a high volume price
that should be price competitive with high-end 8-bit chip and general 16-bit
chip systems but with higher performance (speed and functional capability). The
PSC1000 family has been designed to allow high-speed and high-yield fabrication
using generally available wafer fabrication technology and facilities.

        THE SHBOOM MICROPROCESSOR AS A JAVA PROCESSOR. The Company believes the
ShBoom microprocessor architecture is capable of being a highly-efficient and
cost-effective Java programming language processor. This is because Java is
designed to run on a stack-oriented architecture and the stack-oriented ShBoom
architecture is very efficient for executing the virtual stack machine internal
to Java. Many Java bytecodes (byte or 8-bit sized operation codes or
instructions) require only a single 8-bit PSC1000 family instruction to be
executed, providing a performance advantage over other more expensive processors
that require six or more 32-bit instructions to do the same task. This is an
important advantage for executing Java programs with increased speed. In
addition, the incorporation of many on-chip system functions is expected to
allow the PSC1000 family to perform most of the other functions required of an
Internet computer device or Java accelerator, thereby eliminating components.
Since Internet computers are designed to be inexpensive appliances for Internet
access, cost, speed and performance are expected to be key requirements for
designers. The Company believes the ShBoom technology can compete favorably on
the basis of such requirements, although there can be no assurance the Company
can successfully exploit Java related applications or that competitors will not
create superior Java processors.

        The Company is currently in the process of porting a Java operating
system to the PSC1000 family, which currently utilizes the C programming
language for software support. In June 1997 the Company signed a Technology
License and Distribution Agreement with Sun Microsystems which will enable the
Company to develop and distribute products based on Sun's JavaOS Technology.
Successful implementation of a Java operating system is expected to produce one
of the best price performance chips available in silicon supporting the Java
virtual machine amongst many having been announced, including Sun
Microelectronics' PicoJava chip. The Company believes that, if the
implementation is successfully completed, the PSC1000 family will be competitive
with Java chips announced by competitors. However, there can be no assurance of
successful implementation of a Java operating system or of a market for a
PSC1000 family Java chip.

        STAGE OF DEVELOPMENT. An initial first-generation production of wafers
was fabricated in early 1994 at a contract fabrication facility using 6-inch
wafers employing 0.8 micron double-metal CMOS technology. After the May 31, 1994
acquisition, the Company 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 chips (of the same CMOS technology) were
fabricated by a contract fabrication facility. Subsequently, the Company tested
the resultant chips, while completing a C computer language compiler and
preparing application development tools. The compiler and

                                       10
<PAGE>   11

application development tools are necessary to enable system designers to
program the PSC1000 family for specific applications. The Company made
corrections to the design from testing the first run and produced an additional
run of second-generation chips from existing wafers. Second run chips (the
PSC1008) were received in May 1996. In July 1996, the Company commenced
employing these chips in demonstration boards for use by developers and
prospective customers and licensees.

        In December 1996 the Company commenced development efforts aimed at
producing a 0.5 micron chip based on the ShBoom technology. Management
anticipates that a reduction to 0.5 micron double-metal CMOS technology (the
PSC1005) will improve operating speed, reduce power requirements, reduce
physical size and reduce fabrication cost resulting in improved cost-performance
over the PSC1008 and competitors. Management believes, although there can be no
assurance, that the reduction in size and the Java language implementation can
be completed by the end of August, 1997.

        At each stage of development, chips 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 chips for prospective customers and licensees. Although PSC1008
version chips have been sent to prospective customers in anticipation of
production quantity orders, there can be no assurance that the Company, during
its 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 the
Company's technology and the Company's financial condition.

        The Company has developed marketing materials, product manuals and
application development tools for use by prospective licensees and customers.
The manuals and tools are necessary to enable system designers to quickly and
easily program the PSC1000 family for specific applications.

        Management believes that the PSC1000 family is ready for licensing or
sale and that any additional changes encountered in current testing will be
minor and can be made during initial production runs of PSC1000 family chips for
customers, when and if orders are obtained. Management also believes the ShBoom
core technology is ready for licensing for use by others to develop custom
multiple function chips. Certain initial licensing discussions and customer
demonstrations have commenced. However, there can be no assurance of market
acceptance of the PSC1000 family or the Company's ShBoom technology.

        BUSINESS STRATEGY. The increasing demand for embedded control has made
the market for microcontrollers one of the largest segments of the semiconductor
logic market. The Company's strategy does not entail competing directly with
suppliers who have multiple chips in various market segments, but on identifying
certain market niches that would benefit from the advanced features of the
ShBoom-architecture embedded microprocessors and its corresponding low system
cost.

        Because of the above factors and competitive conditions, management
intends to focus most of its marketing development efforts on the Java processor
business, a new but highly-competitive field without an established base of
efficient chips and for which management believes the ShBoom architecture has
certain technical advantages.

        Management believes that the ShBoom architecture is suited for
controller applications requiring high-performance and low system cost, such as
laser printers, dot-matrix printers, video terminals, robotics, motion
controllers, industrial controllers, digital communication devices, video games,
cable and satellite modems and TV set-top boxes. The Company expects that early
licensing of the technology and product applications will focus on embedded
control.


                                       11
<PAGE>   12

        Management believes the appropriate approach for the Company initially
lies in a balanced effort of cultivating licensees and developing specific
product enhancement partnerships, producing OEM products, developing innovative
in-house products, and providing technical support to third parties on a
contract basis. The overall balance of these approaches will be monitored and
modified as management attempts to ascertain and capitalize on the highly
dynamic and competitive embedded microprocessor market. There can be no
assurance that the Company can successfully exploit its ShBoom microprocessor
technology.

        Subject to the availability of financial and personnel resources, while
the Company is commercializing the PSC1000 family and the ShBoom core
technology, the Company's strategy is to also design and develop future versions
of the chip with more demanding sub-micron technology and with more features.
However, the Company's resources are limited and there can be no assurance the
Company will be able to continue chip enhancement.

        Initial fabrications of the PSC1008 were performed by a contract
fabrication facility. The PSC1005 has been delivered for fabrication to a
contract fabrication facility that has agreed to provide production quantities
for the Company's customers. There can be no assurance fabrication facilities
will be available to produce the PSC1000 family in the future. However, since
there are a large number of fabrication facilities with the capability to
produce the PSC1008 or PSC1005, management believes chips can be produced on a
contract basis. Industry shortages of fabrication facilities that may exist and
are predicted to exist in the future are generally limited to the more demanding
architectures. If a shortage of fabrication facilities develop, it could have a
material adverse effect on the Company's profitability.

        The Company has appointed Compunetics Incorporated, a private company
controlled by a director of the Company, as its exclusive ShBoom microprocessor
representative to the three major U.S. auto producers and Premier Technical
Sales, Inc. as the primary marketing representative organization in the U.S.
They are responsible for representing the PSC1000 family to a wide range of
prospective embedded control users. The Company has appointed additional
representatives in other markets and/or for other distribution channels. The
Company has also created a full-time Vice President position to lead marketing
of the PSC1000 family.

        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 the
Company. The market for microprocessors and for embedded control applications is
at least as competitive.

        While the Company's strategy is to target high-volume licensees and
markets requiring more sophisticated but low-cost devices, the Company can still
expect significant competition. The Company may also elect to develop embedded
control system products utilizing the ShBoom architecture for itself or by
contract for other manufacturers.

        The Company expects that the PSC1000 family, if successfully
commercialized in the embedded controller market, will compete with a variety of
16/32-bit microprocessors manufactured by major competitors including Intel,
Motorola, NEC, Zilog, and Advanced Micro Devices. As a Java processor, the
Company expects its PSC1000 family will compete with a broad range of
microprocessors including most modern standard logic chips such as the Pentium,
PowerPC, 80486, Sparc and ARM. A number of major companies have recently
announced chips targeted for low-cost Internet Terminals including Sun
Microsystems, Inc. and Digital Equipment Corp. These companies have
significantly greater resources than the Company.

        A new entrant, such as the Company, is at a competitive disadvantage
compared to these and other established producers due to a number of factors,
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.

DIGITAL COMMUNICATIONS

        GENERAL BACKGROUND. Starting in fiscal 1995 the Company initiated the
development of a computer compatible plug-in card allowing high-speed,
cost-effective digital ISDN access to the Internet and other networks. In
December, 1996 the Company acquired 96.9% of Metacomp Inc. to create a
communications division including engineering, assembly, marketing and
distribution. The acquisition of Metacomp expanded the product line and added a
digital communications revenue and customer base. Digital communication revenues
accounted for substantially all of the Company's revenues for the fiscal year
ended May 31, 1997.

        Metacomp, founded in 1978, is a high technology company that designs,
assembles, and sells a wide range of high performance data and
telecommunications solutions for wide area networking and digital communications
requirements. In 1990, Metacomp filed a Chapter 11 bankruptcy petition. In 1991,
the Bankruptcy Court confirmed

                                       12
<PAGE>   13

Metacomp's plan of reorganization. As of July 31, 1996, all unsecured creditors
debt had been discharged and one secured creditor had entered into a forbearance
agreement for a balance of $252,796, which was paid in full by the Company in
January 1997.

        The business combination with Metacomp is being treated as a
pooling-of-interests, and the Metacomp product line has been combined with the
Company's ISDN product to form the communications division.

        ISDN AND DIGITAL COMMUNICATIONS DESCRIPTION. The Integrated Services
Digital Network (ISDN) is a set of digital transmission protocols that virtually
all of the world's communications carriers have adopted as a standard. ISDN
brings the digital network to the individual user by turning the twisted-pair
copper telephone line into a high-speed, high-capacity ISDN line with the
capacity for three transmissions (two voice, fax or computer conversations and
one data conversation) to happen at the same time. Further, up to eight separate
devices (telephones, computers, fax machines, etc.) can be connected to the same
ISDN line and each given separate telephone numbers. In many home and business
applications, the use of an ISDN line provides dramatically increased speed and,
by allowing multiple uses of one line, improved economics over multiple lines.
ISDN service is easily connected by local telephone companies.

        In addition to ISDN products, the Company's communications division is
also engaged in providing solutions in wide area networking for both personal
computers as well as higher speed industrial systems using VME interfaces.

        MAJOR COMMUNICATIONS DIVISION PRODUCTS. The Company has a line of ISDN
interface products for high speed, cost effective digital communications through
telephone networks. These products include:

        CyberShark Family
      CyberShark - This low-cost Basic Rate ISDN (BRI) adapter card for ISA bus
      is targeted to allow home users, small businesses, and telecommuters to
      access corporate networks and the Internet via ISDN. The card includes an
      analog phone jack which allows the user to connect his existing analog
      phone or fax machines for simultaneous voice conversation.
      This card is designed specifically for Windows/95.

      CyberShark/HSET - This BRI adapter card for ISA bus is designed to be used
      with a headset/handset as opposed to an analog phone. It offers access to
      the D channel and supports domestic as well as European telco switches.
      Drivers for Windows/95, Windows/NT, and Linux are available.

      CyberShark/BRI - This BRI adapter card for ISA bus is designed for OEM
      integrators for the international market. Drivers for Windows/95,
      Windows/NT, and Linux are available.

      CyberShark/PRI - This Primary Rate ISDN (PRI) adapter card for ISA bus
      provides intelligent support of up to 23 simultaneous digital connections
      offered by the 23B+D interface. An optional MVIP Bus interface on board
      allows easy integration into third-party voice or video codec boards.
      Other downloadable firmware engines are available to support
      T1/Fractional-T1 services. Drivers for Windows/NT and Linux are available.

        FlagShip Family
      FlagShip/PRI-2 - This newest member of the Company's ISDN product family
      is a dual-span PRI adapter card for PCI bus which supports up to 46
      simultaneous digital connections. The MVIP Bus interface is also available
      as an option. Firmware engines to support T1/Fractional-T1 services will
      be offered. A driver for Windows/NT will be available.

      VME Product Line - The Company also offers a line of intelligent high
      speed communications engines in a VME 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 - The Company also markets an intelligent two or
      four channel product which is used around the world for high speed data
      communications.

                                       13
<PAGE>   14

      Other - The communications division also obtains revenue from providing
      contract engineering and software development for customers. The Company
      from time to time is able to retain a proprietary interest in developed
      products and in such circumstances retains a license/royalty interest.

        The Company's product strategy is to continue to provide data
communication solutions through improving current products and introducing new
products. The Company has seven research and development personnel assigned to
digital communication product development and enhancement. These activities
include customer specific development for OEMs, VARs and others as well as new
proprietary product development and enhancement.

        PRODUCTION AND MARKETING STRATEGY. The Company's strategy is to have its
digital communication products manufactured on a sub-contract basis with, in
some instances, final assembly at the Company's facility. Products are tested
and distributed by the Company. Effective February 28, 1996, with respect to
CyberShark, the Company entered into a non-exclusive manufacturing agreement and
line of credit with Labway Corporation, a Taiwan-based contract manufacturer.
Labway Corporation has agreed to manufacture the CyberShark product for the
Company.

        The Company recently hired a Vice President of Sales and Marketing for
the communications division. The marketing of the Company's digital
communications products is managed by an in-house marketing staff. The Company's
satellite and telecommunication products and ISDN products (other than
CyberShark) are targeted for OEMs, systems integrators, VARs and sophisticated
end users. The CyberShark is more of a consumer product and is targeted for
Internet service providers (businesses that provide individuals and businesses
access to the Internet through a local telephone number), sales through Internet
marketers and ISDN equipment resellers. Effective February 28, 1996 the Company
entered into a non-exclusive distribution and representation agreement with
Innoware, Inc., a wholly-owned subsidiary of Labway Corporation based in San
Diego, California. Innoware, Inc. currently markets multimedia products (sound
cards, video cards and communication cards for PC's) to PC system OEMs, PC
peripheral distributors and computer retailers.

        COMPETITION. There are a number of ISDN terminal adapters competitive to
CyberShark offered by competitors including Ascend Communications, Inc.,
Motorola, Inc., ISDN-tek, Inc., Zyxel, Digi International and U.S. Robotics.
These companies have substantially greater resources than the Company. Although
not all of these companies offer PC plug-in card terminal adapters directly
competitive with the Company's product, there can be no assurance additional
direct competitors will not introduce competitive products.

        The Company believes its products are competitive on both features and
price with the products currently in the marketplace or those known by
management to have been announced. ISDN modems also compete with traditional
analog modems and with other interface technologies such as cable modems.
Accordingly this field is subject to rapid technological change and fierce
competition.

        The Company does not believe it can avail itself of patent protection on
most of its digital communication products in development. The Company does rely
on trade secrets and copyrights to protect its digital communications products.

RADAR AND ANTENNA TECHNOLOGY

        BACKGROUND. During the period from 1980-1983, Mr. Norris, Chairman of
the Company, developed a technique employing microwave radiation to penetrate
the earth's surface. This radar technology relates to "ground penetrating radar"
or "GPR." GPR technology is one of many of a family of geophysical tools and
sensing technologies which include seismic, electromagnetics, gravity, borehole
sampling and other techniques. GPR is a technique for producing profiles of
subsurface strata and features by emitting radar waves and recording the
reflected signals.

        The Company commenced active development of its GPR technology in April
1992. By May 1993 the Company was able to demonstrate the sensing, processing
and crude visualization of images from its technology, and by May 1994 the
Company had completed its prototype device. Since May 1994 the Company has
focused its efforts and limited financial resources on the ShBoom technology and
communication products, effectively suspending development and most marketing
efforts related to GPR.



                                       14
<PAGE>   15

        GPR TECHNOLOGY DESCRIPTION. The Company has developed sensors (wave
generators and antennae) and techniques for the processing, conversion,
compression, storage, and visualization (collectively, computer processing) of
GPR data. The Company has developed proprietary techniques for wave generation
and proprietary antennae for the sending and receiving of data. The Company uses
proprietary methods to capture and process returned signals.

        The Company has assembled a mobile prototype version of its GPR
technology. This prototype encompasses a blending of laboratory equipment (with
internal software and hardware custom configured and modified to function as
desired) and specialized components including antennae, power generators and
amplifiers. The prototype has demonstrated the ability to penetrate multiple
solid objects (walls and barriers) and identify return signals from additional
objects such as walls, persons and manmade barriers. In certain ground strata,
the Company has been able to resolve objects of six inch size at approximately
ten feet in depth. The Company's device does not require contact with the ground
providing enhanced mobility, extended area coverage and the ability to look
sideways (for example through walls and in mine shafts).

        The Company has one U.S. patent on antenna technology for its GPR. Other
aspects of the GPR system are maintained as trade secrets, although additional
patent applications may be filed in the future.

        STAGE OF DEVELOPMENT OF GPR TECHNOLOGY. The Company's prototype system
is used for limited prospective customer and user evaluations of the technology.
The Company has demonstrated using the technology to detect plastic mines, side
viewing through walls and solid structures for detection of bodies or other
objects, and viewing of plastic pipes and other underground objects.

        The Company believes most prospective users will require more
specifically tailored equipment and multiple devices. Commercialization of the
GPR technology will require additional development to improve visualization
software and to replace the current system with specifically designed components
to minimize cost and weight and improve portability.

        There can be no assurance that a commercially viable device will or can
be produced, and the Company has no existing users or customers. There can be no
assurance any prospective users will select the Company's device over
competitive devices (See "Competition").

        GAS ANTENNA TECHNOLOGY. In September 1994 the Company filed a patent
application on certain gas antenna technology invented during its radar
development. Immediately upon receiving notice of allowance, the invention was
classified secret by the U.S. Department of Commerce in June, 1995 at the
request of a defense agency. This technology is not currently used in and is
separate and apart from the GPR technology, although it may be employed in the
GPR technology in the future.

        In January 1996 the Company filed an application seeking
declassification of the technology, and in June 1996 was advised that
de-classification had been approved and the U.S. patent issued in January, 1997.
The de-classification allows the Company to exploit the technology for both
governmental and commercial purposes.

        The Company's gas antenna technology employs ionized gas as the
conducting element of an antenna. This is a fundamental change from traditional
antenna design which generally employs solid wires as the conducting element.
Management believes ionized gas is an efficient conducting element with a number
of advantages. Since the gas is ionized only for the precise time of
transmission or reception, ringing and associated effects of solid wire antenna
design is reduced. The design allows for extremely short pulses, important to
many forms of digital communication and radar. The design further provides the
opportunity to construct an antenna that can be dynamically reconfigured for
frequency, direction, bandwidth, gain and beamwidth. Management believes
antennas can be designed that are low in weight, small in size and with lower
power consumption than traditional solid wire antennas.

        In April, 1997 the Company obtained a small contract to evaluate a
prototype of the gas antenna technology. There can be no assurance that the
Company will obtain additional development funds or that it can successfully
exploit this technology.



                                       15
<PAGE>   16

        BUSINESS STRATEGY. The Company has limited resources to pursue further
development to commercialize a GPR system for the above markets and to exploit
the gas antenna technology. The Company's strategy is to use its GPR and gas
antenna prototypes to demonstrate to prospective users the Company's
capabilities and to seek partnering arrangements to develop custom commercial
devices for specific applications. The Company's marketing activities to date
have been very limited and are focused primarily towards governmental agencies.
The strategy is to seek sponsorship to assist in further development and
commercialization of the present technology. There can be no assurance that the
Company can obtain any outside assistance or successfully complete development
and commercially exploit its GPR or gas antenna technology.

        COMPETITION. The segment of the electronics industry which involves the
manufacture and sale of GPR equipment is not large or cohesive enough to be
referred to as an "industry" but is more a specialized subset of geophysical
tools which include seismic equipment and other geophysical and scientific
instruments. The antenna industry is very competitive and consists of a large
number of companies with substantial resources, a large installed base,
established government and commercial relationships, and large research and
development staffs. It is possible that any such technology owned or developed
by others may be further advanced than the Company's technology.

        The Company has not yet developed a commercially marketable prototype of
its GPR or gas antenna technology. Most of the Company's potential competitors
are actively engaged in operations and have had time to develop product
recognition and market share and have greater financial and other resources than
the Company.

RESEARCH AND DEVELOPMENT
        The Company's current development efforts are focused on the
introduction of the PSC1000-family microprocessor and digital communication
products. The development of the Company's technologies has taken longer than
anticipated by management and could be subject to additional delays. Therefore,
there can be no assurance of timely or successful marketing of the
PSC1000-family or of continued market acceptance of existing and proposed
digital communication products.

        The Company incurred research and development expenditures of $1,367,937
and $1,527,759 for the fiscal years ended May 31, 1997 and 1996, respectively.
The majority of the Company's expenditures in fiscal 1997 and 1996 have been
expended on its ShBoom and digital communications technologies. To date, the
Company has expensed internal software development costs as incurred. The
Company believes that technical advances are essential to its success and
expects that it will continue to expend funds on research and development of its
technologies; however, there can be no assurance that such research and
development efforts will result in the design and development of competitive
technologies in a timely manner.

LICENSES, PATENTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS
        The Company relies on a combination of patents, copyright and trademark
laws, trade secrets, software security measures, license agreements and
nondisclosure agreements to protect its proprietary technologies. The Company
pursues a policy of seeking the issuance of patents that it considers important
to its business to protect inventions and technology that support the Company's
microprocessor and radar and antennae technologies.

        The Company has three U.S. patents issued and has six U.S. patents
pending, most dating back to 1989, on the ShBoom microprocessor technology. The
Company has one ShBoom 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, the Company believes 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 the Company to
obtain patent and technology licenses from other companies relating to certain
technology that may be employed in future products or processes. To date, the
Company has not received notices of claimed infringement of patents with any
existing processes or products; but, due to the nature of the industry, the
Company may receive such claims in the future. Likewise, the Company believes
that it may have claims against other semiconductor companies should certain of
its pending patents be favorably granted, but there can be no assurance thereof
nor any assurance that the Company could successfully exploit any potential
patent claims against larger competitors.


                                       16
<PAGE>   17

        The Company believes that it is not obligated to pay royalties with
regard to the ShBoom Technology. The Company acquired the ShBoom Technology from
nanoTronics for common stock but expressly did not assume any royalty
obligations of nanoTronics. However, pursuant to its agreement with nanoTronics,
the Company could become liable for up to $1,250,000 of indemnification costs if
a court of competent jurisdiction determines that nanoTronics is liable for cash
royalties based on sales by the Company of products incorporating the ShBoom
Technology. nanoTronics has claimed that it is also entitled to indemnification
in the event that it is required to transfer any of its shares of Company common
stock as an up-front license fee to the inventor of the technology. royalty
payment. The Company disputes this claim.

        Pursuant to the Assets Purchase Agreement and Plan of Reorganization
(Agreement) between the Company, nanoTronics Corporation and Helmut Falk (Falk),
the Company was the recipient of a number of warranties and indemnities. The
Company believes nanoTronics Corporation has been or is in the process of
liquidation and due to Mr. Falk's death in July 1995, the Company may be limited
in its ability to obtain satisfaction should it have any future claims pursuant
to the Agreement.

        The Company has one U.S. patent on its gas antenna technology which was
issued in January, 1997. The Company's ability to obtain protection in other
countries may be limited due to the time delay caused by the secrecy order. The
Company also has one U.S. patent on antennae technology directly related to its
GPR technology. No foreign application was made. Although plans in this regard
are not definite, the Company's intention is to apply for patents only as to
selected aspects of the Company's GPR and gas antenna technology in order to
reduce the risk of infringement or duplication by competitors. Considering the
rapid advancements in the field of electronics generally, the Company believes
that its interests will best be served by treating as trade secrets non-patented
components or instrumentation groups used in some of its technologies. There are
a large number of patents owned by others in the radar and antenna fields
generally and in the field of GPR specifically. Accordingly, although the
Company is not aware of any possible infringement and has not received any
notices of claimed infringement, the Company may receive claims in the future.

        Certain base-ISDN software technology has been licensed to the Company
by a third party. In addition to the protection afforded the Company through the
ISDN technology licenses, the Company has created its own software and hardware
designs and uses copyright, trade secrets, software security measures and
nondisclosure agreements to protect its proprietary products, technology and
software. The Company has no patent applications pending with respect to its
digital communication technology. Despite the Company's precautions, it may be
possible for unauthorized third parties to copy aspects of, or otherwise obtain
and use, the Company's digital communication technology and software without
authorization. In addition, the Company cannot be certain that others will not
develop substantially equivalent or superseding proprietary technology thereby
substantially reducing the value of the Company's proprietary rights.

        Metacomp has licensed a family of chips to Sipex Corporation under a
royalty agreement providing for approximately $100,000 per year. There can be no
assurance that royalties will continue in the future.

        There can be no assurance that any patents will issue from pending or
future applications or that any patents that are issued will provide meaningful
protection or other commercial advantages to the Company. Although the Company
intends to protect its rights vigorously, there can be no assurance that these
measures will be successful.

        The Company generally requires all its employees and consultants,
including its management, to sign a non-disclosure and invention assignment
agreement upon employment with the Company.


                                       17
<PAGE>   18

MARKETING AND DISTRIBUTION
        The Company's products are marketed through a combination of a direct
sales force and distributors. Approximate sales by principal geographic area (as
a percentage of sales) were for fiscal years ended:


<TABLE>
<CAPTION>
                                                1997                  1996
                                                ----                  ----

<S>                                              <C>                   <C>
               Domestic sales                     77%                   91%
               Foreign sales
                      North America               13%                    6%
                      Europe                       6%                    3%
                      Other                        4%                    -
                                                 ---                   ---

               Total sales                       100%                  100%
                                                 ===                   ===
</TABLE>

        All operating assets are located within the United States. While sales
to certain geographic areas generally vary from year to year, the Company does
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 the Company's consolidated net sales for
the fiscal years indicated were derived from shipments to the following
customers:

<TABLE>
<CAPTION>
                                                  1997                 1996
                                                  ----                 ----

<S>                                               <C>                  <C>
        A                                         $473,000             $396,000
        B                                         $472,000             $450,000
        C                                         $212,000
        D                                                              $330,000
</TABLE>

        While the level of shipments to individual customers generally varies
from year to year, the Company does not expect that changes in customer
composition will have a material adverse effect on operations.

EMPLOYEES
        The Company currently has twenty-three full-time and three part-time
personnel. Fourteen full-time personnel were employees of Metacomp prior to the
December 1996 acquisition. Ten full-time persons are employed in research and
development, six full-time persons are engaged in manufacturing and assembly,
two full-time persons, and one part-time person are engaged in marketing and
five full-time and two part-time persons are engaged in general and
administrative activities. These persons include Mr. Norris and Mr. Putnam, who
only devote a part of their available time to the affairs of the Company. This
also includes a full-time chief financial officer who was hired in May, 1997 who
had previously been engaged as a consultant. The Company also engages additional
consultants and part-time persons as needed from time to time.

        The Company's future success depends in significant part upon the
continued service of its key technical and senior management personnel. The
competition for highly qualified personnel is intense and there can be no
assurance that the Company will be able to retain its key managerial and
technical employees or that it will be able to attract and retain additional
highly qualified technical and managerial personnel in the future. None of the
Company's employees is represented by a labor union and it considers its
relations with its employees to be good.

GOVERNMENT REGULATION
        To the Company's knowledge, its products are not subject to governmental
regulation by any federal, state or local agencies which would affect the
manufacture, sale or use of its products. The Company cannot, of course, predict
what sort of regulations of this type may be imposed in the future but does not
anticipate any unusual difficulties in complying with governmental regulations
which may be adopted in the future. If any technical or rating standards of
professional bodies (such as UL or SAE) are applicable to any equipment or
components produced by the Company, it is management's intention to comply with
such standards.



                                       18
<PAGE>   19

        The Company's proposed GPR device and antenna technology uses microwave
radio waves. The use of such waves are regulated by the Federal Communications
Commission (FCC) and, should the Company elect to sell such devices, their
operation would have to meet applicable FCC rules and regulations. Management
does not believe that the operation of the GPR prototype on contract analysis
projects requires FCC approval.

        The Company has not incurred costs associated with environmental laws
and does not anticipate such laws will have any significant effect on the future
business of the Company.

ITEM 2. DESCRIPTION OF PROPERTY

        Effective January, 1997 the Company merged its operations with Metacomp
and moved its principal executive and operating office to space leased by
Metacomp at 10989 Via Frontera, San Diego, California. This space contains
approximately 7,300 square feet of space, including approximately 5,000 square
feet of improved space for office and technical personnel and approximately
2,300 square feet of unimproved warehouse space. Management believes this
facility is adequate for the present needs of the Company and Metacomp for at
least the next twelve months. Three research and development personnel are
located in Los Gatos, California. The Company has executed a one year lease at a
monthly rate of $1,975 commencing August 19, 1996 for 1,795 square feet of
improved office space at 170 Knowles Drive, #200, Los Gatos, California as a
research and development facility.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not party to any material legal proceedings.

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

        In June, 1997 the Shareholders approved via an Action by Shareholders
Without a Meeting an increase in the authorized number of shares of $.00001 par
value per share stock from 40,000,000 to 65,000,000. This amount includes
5,000,000 authorized preferred shares.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

        The following table sets forth the high and low bid quotations for the
Common Stock for the fiscal years ended May 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                             BID QUOTATIONS
                                                             --------------
                                                            HIGH        LOW
                                                            ----        ---
<S>                                                        <C>        <C>
        Fiscal Year Ended May 31,1997
          First Quarter                                     $3.50      $1.75
          Second Quarter                                    $2.44      $1.12
          Third Quarter                                     $1.83      $0.94
          Fourth Quarter                                    $1.62      $0.97

        Fiscal Year Ended May 31, 1996
          First Quarter                                     $0.35      $0.12
          Second Quarter                                    $0.76      $0.22
          Third Quarter                                     $3.53      $0.47
          Fourth Quarter                                    $3.97      $2.00
</TABLE>



                                       19
<PAGE>   20

        The Company had approximately 200 shareholders of record as of May 8,
1997. At July 11, 1997 there were 33,189,195 shares of Common Stock issued and
outstanding. The Company has never paid a cash dividend on its Common Stock and
does not expect to pay one in the foreseeable future.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

        The Company's results of operations have and may continue to be subject
to significant variations. The results for a particular period may vary due to a
number of factors, including the overall state of the semiconductor and
communications segments of the economy, the development status of and demand for
the Company's products, economic conditions in the Company's markets, the timing
of orders, the timing of expenditures in anticipation of future sales, the mix
of products sold by the Company, the introduction of new products and product
enhancements by the Company or its competitors and pricing and other competitive
conditions.

As described in Note 1 to the consolidated financial statements of the Company,
effective December 26, 1996, the Company acquired 96.9% of the common stock of
Metacomp. The business combination was accounted for as a pooling-of-interests
and, accordingly, the Company's financial statements have been presented to
include the results of Metacomp as though the business combination occurred as
of June 1, 1995. In addition, Metacomp changed its fiscal year end from July 31
to May 31 to conform to the Company's fiscal year-end. Based on the difference
in fiscal year-ends, results of operations for the two months ended July 31,
1996 have been included in both years ended May 31, 1997 and 1996.


RESULTS OF OPERATIONS

Net sales. Total net sales for the fiscal year ended May 31, 1997 decreased
17.0% to $1,847,421 from $2,224,708 for the fiscal year ended May 31, 1996. This
decrease was due primarily to the completion of a government contract for VME
communications products during fiscal 1996 and the phase out of older product
lines, offset partially by revenues from a new communications product, the
CyberShark.

Cost of sales. Cost of sales as a percentage of net sales increased to 54.3% in
fiscal 1997 compared to 48.0% in fiscal 1996. This increase in the cost of sales
percentage was a result of a write down in inventory values related to the
obsolescence of components and finished parts of the older product lines being
phased out.

Research and development expenses decreased 10.5% from $1,527,759 in fiscal 1996
to $1,367,937 for fiscal 1997. This decrease was due primarily to the completion
of software for the communication products discussed above.

Selling, general and administrative expenses increased 26.9% from $1,358,673 in
fiscal 1996 to $1,723,751 in fiscal 1997. This increase was due primarily to the
costs related to the business combination with Metacomp, the costs of raising
funds, and non-cash compensation arising from the issuance of employee stock
options at an exercise price less than the market price on the date of grant.

Amortization of purchased technology was constant between the two periods at
$612,333.

Other income (expense) was significantly higher for fiscal year 1997 as a result
of the non-cash interest related to discounted Notes discussed in Note 5 to the
consolidated financial statements.

An extraordinary income item of $1,779,457 is included in both periods. This
item is the result of the discharge of debts by Metacomp in July, 1996 as a
result of their successful completion of their Chapter 11 case. The amount is
included in both periods as a result of Metacomp changing its year end to May 31
from July 31 resulting in the months of June and July 1996 being reflected in
both fiscal years. This income was the primary source of income for these two
months.



                                       20
<PAGE>   21


LIQUIDITY AND CAPITAL RESOURCES

        At May 31, 1997, working capital was $846,741 and cash and cash
equivalents totaled $477,675. In addition, the Company concluded a financing in
early June 1997 for net proceeds of $1,700,000. The Company has funded its
operations primarily through cash flows from operations and the issuance of
securities. The cash and cash equivalents decreased $386,269 during fiscal year
1997. The net cash used in operating activities of $1,733,168, additions to
property and equipment of $238,447, and a payment on Metacomp's line of credit
of $312,306 was offset by a new issuance of convertible debt in the amount of
$1,500,000 and the issuance of common stock and common stock warrants in the
amount of $405,362. The convertible debt was subsequently converted into common
shares of the Company.

        The Company's liquidity for the next twelve months is anticipated to be
supplemented by introducing to market and commencing sales and licensing of
ShBoom microprocessors, designing future generations of the ShBoom and
communication product technologies and exploiting the radar and antenna
technology and by expanding the marketing of communication products through its
recent acquisition of Metacomp.

        The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months to continue
development of the Company's technologies. Product introductions such as those
currently underway for communication products and the ShBoom microprocessor may
require significant inventory and other expenditures not presently estimable by
management. Further, if expanded development is commenced or new generations of
microprocessors or radar are accelerated beyond current plans, additional
expenditures, not currently estimable by management, may be required. It is
possible therefore, that higher levels of expenditures may be required than
currently contemplated by management resulting from changes in development plans
or as required to support new developments or commercialization activities or
otherwise.

        Based on the potential rate of cash operating expenditures and current
plans, management anticipates the cash requirements for the next twelve months
have been satisfied with the June 1997 financing. The Company anticipates that
future cash requirements will be satisfied by improved product sales, the sale
of additional Company equity securities, debt financing and/or the sale or
licensing of certain of the Company's technologies. There can be no assurance
that any future funds required will be generated from operations or from the
aforementioned or other potential sources. The lack of additional capital could
force the Company to substantially curtail or cease operations and would
therefore have a material adverse effect on the Company's 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 existing shareholders of the Company.

TAX LOSS CARRYFORWARDS

        As of May 31, 1997, the Company has approximately $5,997,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred tax
asset of $3,111,000 arising primarily from tax loss carryforwards because
management can not determine that it is more likely than not that the deferred
tax asset will not be realized.

NEW ACCOUNTING PRONOUNCEMENTS

        On March 3, 1997, the FASB issued SFAS No. 128, "Earnings Per Share."
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with Accounting Board Opinion ("APB") No.
15, "Earnings Per Share". SFAS 128 provides for the calculation of "Basic" and
"Dilutive" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in 1998 and its implementation is not expected to have a
material effect on the consolidated statements.

ITEM 7. FINANCIAL STATEMENTS

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

                                       21
<PAGE>   22

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

        None

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
        WITH SECTION 16(a) OF THE EXCHANGE ACT

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
        The current directors and executive officers of the Registrant, their
ages, positions held in the Company and duration as such, are as follows:

<TABLE>
<CAPTION>
      NAME                  AGE      POSITION AND OFFICES         DIRECTOR SINCE

<S>                      <C>     <C>                             <C>
      Elwood G. Norris       58   Chairman and Director              August 1989
      Michael A. Carenzo     56   President, CEO and Director          June 1996
      Robert Putnam          39   Secretary, Treasurer, Director     August 1989
      Norman J. Dawson       56   Vice President, General Manager
                                    and Director                    January 1997
      Jayanta K. Maitra      47   Vice President Engineering                 n/a
      Lowell W. Giffhorn     50   Chief Financial Officer                    n/a
      Donald R. Bernier      55   Director                          January 1995
      Richard D. McDaniel    72   Director                         December 1995
      Peter vR. Cooper       41   Director                          January 1996
</TABLE>


        The terms of all directors will expire at the next annual meeting of the
Company's shareholders, or when their successors are elected and have qualified.
Directors are elected each year, and all directors serve one-year terms.
Officers serve at the pleasure of the Board of Directors. No family relationship
exists among the Company's management members.

BIOGRAPHICAL INFORMATION

        ELWOOD G. NORRIS. Mr. Norris has been a director of Patriot since 1989
and served as Chairman and CEO until June 1994. In June 1995 he was again
appointed President and CEO until June 1996 when he was appointed Chairman.
Since March 1988 he has been a director of Norris Communications Inc. ("NCI"), a
public company engaged in electronic product development, distribution and
sales. Until October 1995, when he became Chief Technology Officer, he was also
President of NCI, and in January 1997 he was appointed interim CEO. Since August
1980 he has also been a director of American Technology Corporation ("ATC"), a
publicly held consumer electronics products company, and served as its President
and CEO until February 1994. Mr. Norris is an inventor with over twenty U.S.
patents primarily in the fields of electrical and acoustical engineering. He
invented the base GPR technology and the gas antenna technology owned by the
Company. Mr. Norris devotes only part-time services to the Company.

        MICHAEL A. CARENZO. Mr. Carenzo has been the President, CEO and a
Director of the Company since June 1996. He was a Senior Partner of CADWA
Associates, a management consulting group specializing in extended executive
consulting assignments, from July 1994 to December 1996. Prior to joining the
Company in June 1996, he devoted a majority of his consulting efforts to
developing strategic alliances and international markets at the senior executive
level with the Coors Ceramics division of NYSE listed ACX Technologies Inc. From
February 1992 to June 1994, he served as President and Director of Datakey Inc.,
a public company engaged in semiconductor-based manufacturing of portable memory
devices. Prior to February 1992, Mr. Carenzo served 22 years with the DuPont
Co., where he held a number of key executive positions with the DuPont
Electronics Group. Mr. Carenzo is a 1966 graduate of American International
College where he received a B.S. degree in Business.



                                       22
<PAGE>   23

        ROBERT PUTNAM. Mr. Putnam has been the Secretary and Treasurer of the
Company since 1989. Since 1988 he has served as Secretary of NCI. Since 1984 he
has been a director of ATC, where he served as Secretary/Treasurer from 1984
until February 1994 when he was appointed President and CEO. He received a B.A.
degree in Mass Communication/Advertising from Brigham Young University in 1983.
Mr. Putnam devotes only part-time services to the Company.

        NORMAN J. DAWSON. Mr. Dawson has been the President & CEO of Metacomp
since July, 1995 and was appointed a Director and Vice President and General
Manager of the Company in January 1997. From June, 1990 to July 1995 he was Vice
President-Operations of Metacomp. From 1962 to 1990 he held various executive
positions with several computer companies including NCR and Control Data. In
1962 Mr. Dawson obtained a B.S. in Engineering from Montreal Institute of
Technology.

        JAYANTA K. MAITRA. Mr. Maitra has been Vice President of Engineering of
Metacomp since 1990 and was appointed Vice President of Engineering of the
Company in January 1997. From 1985 to 1987 he was Manager of Hardware
Engineering for Systech Corporation, a San Diego based hardware and software
communications company. From 1974 to 1985 he held various engineering positions
with several computer related technology companies. He obtained a B.S. in
Electrical Engineering from the Indian Institute of Technology in 1972 and an
M.S. in Electrical Sciences at State University of New York in 1973.

        LOWELL W. GIFFHORN. Mr. Giffhorn was the principal in his own financial
management consulting firm from August 1996 until joining the Company as Chief
Financial Officer in May 1997. Since November 1996, Mr. Giffhorn, in addition to
other consulting engagements, performed the duties of Acting Chief Financial
Officer for the Company. From June 1992 to August 1996 and from September 1987
to June 1990 he was the Chief Financial Officer of Sym-Tek Systems, Inc. and
Vice President of Finance for its successor, Sym-Tek Inc. Sym-Tek Systems, Inc.
was a major supplier of capital equipment to the semiconductor industry which
filed under Chapter 11 of the U.S. Bankruptcy Code in May 1994 while Mr.
Giffhorn was the Chief Financial Officer. He was instrumental in selling the
assets of Sym-Tek Systems, Inc. to Sym-Tek Inc., a wholly owned subsidiary of
Aetrium Inc. He continued with Sym-Tek Inc. as Vice President Finance during the
transition and concluded the liquidation of Sym-Tek Systems, Inc. He has over
twenty-five years of experience in a variety of financial positions, including
eleven years as Controller for Langley Corporation, a publicly traded, San
Diego, defense contractor. In 1975 Mr. Giffhorn obtained an M.B.A. degree from
National University, and in 1969 he obtained a B.S. in Accountancy from the
University of Illinois.

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

        RICHARD D. MCDANIEL. Mr. McDaniel retired as Chairman and CEO of The
First National Bank of North East, Maryland in 1987. He is presently engaged in
private investment banking and personal investments. Since 1960 he has been the
Chairman of McDaniel Enterprises, Inc., a Wilmington, Delaware based family
holding company. In July 1995 he became Chairman of Smart Business Systems, a
copier and facsimile equipment distributor located in Wilmington. He graduated
with a degree in Business from the University of Delaware in 1950.

        PETER VR. COOPER. Mr. Cooper has been an officer, Director and owner of
Virtual Research Corporation, a Westlake Village, California-based software firm
since its founding in 1986. He is currently its President. Virtual Research
Corporation provides hardware, software and consulting services to the insurance
industry. Mr. Cooper previously held senior management systems positions at
Delphi Systems Inc. and Promethean Systems Inc., both which supplied hardware,
software and services to vertical market industries. Mr. Cooper received his
B.A. Degree in Economics from the University of California at Los Angeles in
1979.

GENERAL CONFLICTS OF INTEREST
        Conflicts of interest now exist and will continue to exist between the
Company and certain of its officers and directors due to the fact that certain
officers and directors have other employment or business interests to which they
devote attention. The Company has not established policies or procedures for the
resolution of current or potential



                                       23
<PAGE>   24

conflicts of interest between the Company and its management or
management-affiliated entities. There can be no assurance that members of
management will resolve all conflicts of interest in the Company's favor.

        It is conceivable that the respective areas of interest of the Company,
ATC and NCI could overlap or conflict. The Company believes that, although each
of the three corporations is involved in the electronics industry, their
respective areas of focus, products and technology are sufficiently distinct
that no conflict in business lines or executive loyalties will result.
Therefore, no steps have been taken to resolve possible conflicts among the
Company, ATC, and NCI; and any such conflicts, should they arise, will be
addressed at the appropriate time.


SPECIAL CONFLICTS OF INTEREST
        Officer and director Robert Putnam also acts as Secretary of NCI and
President and Chief Executive Officer of ATC, and both companies are effectively
controlled by Elwood Norris. The possibility exists that these other
relationships could affect Mr. Putnam's independence as a Director of the
Company.

        The Company has not provided a method of resolving these conflicts (such
as refusal from voting as directors and obtaining an independent third-party
evaluation of proposed actions) and probably will not do so, partly due to
inevitable extra expense and delay any such measures would occasion and partly
because Mr. Norris and Mr. Putnam do not represent a majority of the Board of
Directors and do not control the outside directors. Mr. Norris and Mr. Putnam
are obligated to perform their duties in good faith and to act in the best
interest of the Company and its shareholders, and any failure on their part to
do so may constitute a breach of their fiduciary duties and expose them to
damages and other liability under applicable law.

INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS
        As permitted by Delaware law, the Company's Certificate of Incorporation
provides that the Company will indemnify its officers, directors, employees and
agents against attorneys' fees and other expenses and liabilities they incur to
defend, settle or satisfy any civil or criminal action brought against them
arising out of their association with or activities on behalf of the Company
unless, in any such action, they are adjudged to have acted with gross
negligence or to have engaged in willful misconduct. The Company may also bear
the expenses of such litigation for any such persons upon their promise to repay
such sums if it is ultimately determined that they are not entitled to
indemnification. Such expenditures could be substantial and may not be recouped,
even if the Company is so entitled. Insofar as indemnification for liabilities
arising under the Securities Act of 1933 may be permitted to directors, officers
or persons controlling the Company pursuant to the foregoing provisions, the
Company has been informed that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in that
Act and may, therefore, unenforceable.

EXCLUSION OF DIRECTOR LIABILITY
        Pursuant to the General Corporation Law of Delaware, the Company's
Certificate of Incorporation excludes personal liability on the part of its
directors to the Company for monetary damages based upon any violation of their
fiduciary duties as directors, except as to liability for any breach of the duty
of loyalty, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, acts in violation of Section 174 of
the General Corporation Law of Delaware, or any transaction from which a
director receives an improper personal benefit. This exclusion of liability does
not limit any right which a director may have to be indemnified and does not
affect any director's liability under federal or applicable state securities
laws.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

        Section 16(a) of the Securities Exchange Act of 1934 (the "Act")
requires the Company's officers, directors and persons who own more than 10% of
a class of the Company's securities registered under Section 12(g) of the Act to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors and greater than 10%
shareholders are required by SEC regulation to furnish the Company with copies
of all Section 16(a) forms they file.

                                       24
<PAGE>   25

        Based solely on its review of copies of the reports it has received from
persons required to make such filings and its own records, the Company believes
that from the period June 1, 1996 through July 15, 1997, all persons subject to
the Section 16(a) reporting requirements timely filed the required reports.

ITEM 10. EXECUTIVE COMPENSATION

        There is shown below information concerning the compensation of the
Company's chief executive officers (each a "Named Officer") for the fiscal years
ended May 31, 1995, 1996 and 1997. Compensation for the other four most highly
compensated executive officers is neither required nor presented as no such
other executive officer's salary and bonus exceeded $100,000. Information is
also set forth below for two officers (each also a "Named Officer") of Metacomp
for the fiscal year ended May 31, 1997, the year in which Metacomp was acquired
by the Company. No other officer of Metacomp received a salary and bonus
exceeding $100,000 in fiscal 1997.

                           SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                             Annual Cash Compensation                Long-Term Compensation
                             ------------------------                ----------------------
      Name and               Fiscal                              Options              All Other
Principal Position           Year    Salary     Bonus          (# of Shares)        Compensation (6)
------------------           ----    ------     -----          -------------        ----------------
<S>                         <C>     <C>       <C>            <C>                  <C>
Michael A. Carenzo           1997    $138,000   Nil            900,000 shares            None
  President and CEO (1)

Elwood G. Norris             1996    $ 60,693   Nil            50,000 shares             None
 President and CEO (2)       1995    $ 43,599   Nil            None                      None

Helmut Falk                  1996    $  9,231   Nil            None                      None
 Chairman, President and     1995    $104,069   Nil            None                      None
 CEO (3)

Norman J. Dawson             1997    $128,483   Nil            533,953                   $4,241
  Vice President and
  General Manager (4)

Jayanta K. Maitra            1997    $118,700   Nil            535,753                   $2,874
  Vice President
  Engineering (5)
</TABLE>

      (1)  Mr. Carenzo has served as President and CEO since June 1, 1996.

      (2) Mr. Norris served as CEO from 1989 to June 1994, upon the appointment
      of Mr. Falk as Chairman, President and CEO. He was reappointed President
      and CEO on June 5, 1995 due to Mr. Falk's illness and served in such
      capacity until June 1, 1996 when Mr. Michael A Carenzo was appointed
      President and CEO.

      (3) Mr. Falk served as Chairman from June 1994 until his death on July 6,
      1995. He also served as President and CEO from June 1994 to June 5, 1995.

      (4) Mr. Dawson was appointed Vice President and General Manager on
      December 26, 1996 as a result of the business combination with Metacomp.
      The amounts disclosed reflect his compensation before and after the
      acquisition.

      (5) Mr. Maitra was appointed Vice President Engineering on December 26,
      1996 as a result of the business combination with Metacomp. The amounts
      disclosed reflect his compensation before and after the acquisition.

      (6) Represents long-term disability insurance payments made by the Company
      on behalf of Mr. Dawson and Mr. Maitra during the fiscal year ended May
      31, 1997.

                                       25
<PAGE>   26

        The Company maintains employee benefits that are generally available to
all Company employees, including medical, dental and life insurance benefits and
a 401(k) retirement savings plan. There were no Company matching contributions
under the 401(k) plan to the Named Officers during the fiscal year ended May 31,
1997.

OPTION GRANTS

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

             OPTION GRANTS TABLE FOR FISCAL YEAR ENDED MAY 31, 1997

<TABLE>
<CAPTION>
                                                Percent of Total
                         Number of               Options Granted            Exercise  Expiration
        Name          Options Granted       to Employees in Fiscal Year      Price       Date
        ----          ---------------       ---------------------------      -----       ----

<S>                  <C>                   <C>                          <C>          <C>
Norman J. Dawson          72,000                     3.5%                   $1.37       12/26/01
                         428,000                    20.8%                   $1.17       12/26/01
                          33,953                     1.7%                   $0.18       12/26/01

Jayanta K. Maitra         72,000                     3.5%                   $1.37       12/26/01
                         428,000                    20.8%                   $1.17       12/26/01
                          35,753                     1.7%                   $0.18       12/26/01
</TABLE>

        Of the above options granted during the fiscal year ended May 31, 1997,
500,000 each of Mr. Dawson's and Mr. Maitra's are subject to shareholders
approval of an increase in the number of shares authorized under the 1996 Stock
Option Plan.



AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES

        There were no options exercised by Named Officers during the fiscal year
ended May 31, 1997. The following table provides information on unexercised
options at May 31, 1997:











                          FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                Number of Unexercised              Value of Unexercised
                                   Options Held At                In-The-Money Options At
                                    May 31, 1997                       May 31, 1997
                                    ------------                       ------------
Name                          Exercisable  Unexercisable        Exercisable    Unexercisable
----                          -----------  -------------        -----------    -------------

<S>                         <C>          <C>                   <C>            <C>
Elwood G. Norris                 50,000          -               $      -       $      -
Michael A. Carenzo              337,500      562,500             $  213,355     $ 365,625
Norman J. Dawson                 83,953      450,000             $   47,120     $ 121,600
Jayanta K. Maitra                85,753      450,000             $   49,406     $ 121,600
</TABLE>

(1) Based on the last sale price at the close of business on the last trading
day of the fiscal year of $1.45.

        The Company has not awarded stock appreciation rights to any employee of
the Company and has no long-term incentive plans, as that term is defined in
Securities and Exchange Commission regulations (other than a

                                       26
<PAGE>   27

$50,000 demonstration bonus payable to Mr. Norris upon successful demonstration
of a prototype GPR device meeting specified performance criteria, see "Certain
Transactions").

      During the fiscal year ended May 31, 1997, pursuant to Mr. Carenzo's
Employment Contract, the Company amended the exercise price of stock options
awarded to Mr. Carenzo on April 23, 1996 from $2.30 for 900,000 shares to $0.94
for 43,000 shares and $0.80 for 857,000 shares. The Company has no defined
benefit or actuarial plans covering any person.

COMPENSATION OF DIRECTORS

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

EMPLOYMENT CONTRACTS

        Mr. Norris may be entitled to future compensation pursuant to agreements
described in "Certain Transactions". The Company has an employment agreement
dated November 20, 1995 with Mr. Norris, the Company's Chairman, for a three
year term providing for a base salary of $60,000 with annual increases of 5% on
each June 1. The Company may terminate Mr. Norris' employment with or without
cause, but termination without cause (other than disability or death) would
result in a lump sum severance payment of 24 months salary. Likewise upon a
change in control, as defined in the agreement, Mr. Norris may elect to
terminate employment and obtain a lump sum severance payment of 24 months
salary.

        The Company entered into an employment agreement dated as of May 8,
1996, approved by the Company's directors and executed on May 17, 1996, and
amended by the Board of Directors on September 23, 1996, with Mr. Carenzo
providing for his employment as President and CEO effective June 1, 1996. The
agreement, as amended, is for a three year term providing for a base salary of
$168,000 per year (for the period November 1, 1996 to May 31, 1997) with an
increase in the second and third years to at least $186,000 as determined by the
Board of Directors. The agreement provides for incentive bonuses in certain
instances of at least 50% of the total yearly base compensation. The Company may
terminate Mr. Carenzo's employment with or without cause, but termination
without cause (other than disability or death) would result in a lump sum
severance payment ranging, depending on length of service, from six to twelve
months salary plus any prorated earned bonuses. Likewise upon a change of
control, as defined in the agreement, Mr. Carenzo may elect to terminate
employment and obtain a lump sum severance payment ranging, depending on length
of service, from six to twelve months salary plus any prorated earned bonuses.
The Company has granted Mr. Carenzo options to purchase 900,000 common shares,
90,000 vesting on June 1, 1996 and the balance vesting monthly in equal amounts
over three years subject to earlier vesting based on certain events.

        The Company entered into an employment agreement dated January 1, 1997
with Mr. Dawson providing for his employment as Vice President and General
Manager. The agreement is for a three year term providing for a base salary of
$120,000 per year with an increase in the second and third years as recommended
by the President and Chief Executive Officer and approved by the Board of
Directors. The agreement provides for incentive bonuses in certain instances of
up to 50% of the total yearly base compensation. The Company may terminate Mr.
Dawson's employment with or without cause, but termination without cause (other
than disability or death) during either of the first two years of the agreement
would result in a lump sum severance payment equal to twelve months salary. The
Company has granted Mr. Dawson options to purchase 533,953 common shares, 83,953
vesting on December 26, 1996 and the balance vesting one-third per year starting
December 31, 1997 subject to certain performance standards. Options may vest
earlier subject to the discretion of the Board of Directors.

        The Company entered into an employment agreement dated January 1, 1997
with Mr. Maitra providing for his employment as Vice President of Engineering.
The agreement is for a three year term providing for a base salary of $104,400
per year with an increase in the second and third years as recommended by the
President and Chief Executive Officer and approved by the Board of Directors.
The agreement provides for incentive bonuses in certain instances of up to 50%
of the total yearly base compensation. The Company may terminate Mr. Maitra's
employment with or without cause, but termination without cause (other than
disability or death) during the first year of the

                                       27
<PAGE>   28

agreement would result in a lump sum severance payment equal to twelve months
salary. The Company has granted Mr. Maitra options to purchase 535,753 common
shares, 85,753 vesting on December 26, 1996 and the balance vesting one-third
per year starting December 31, 1997 subject to certain performance standards.
Options may vest earlier subject to the discretion of the Board of Directors.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth, as of July 11, 1997, the stock ownership
of each officer and director of the Company, of all officers and directors of
the Company as a group, and of each person known by the Company to be a
beneficial owner of 5% or more of its Common Stock. Except as otherwise noted,
each person listed below is the sole beneficial owner of the shares and has sole
investment and voting power over such shares. No person listed below has any
option, warrant or other right to acquire additional securities of the Company,
except as otherwise noted.

<TABLE>
<CAPTION>
                  Name and Address              Amount & Nature
 Title              of Beneficial                of Beneficial        Percent
of Class                Owner                      Ownership         of Class
--------                -----                      ---------         --------
<S>             <C>                            <C>            <C>  <C>
Common stock      Gloria Felcyn, CPA               9,825,000   (1)      28.8%
par value         14395 Saratoga Ave., Suite 110
$.00001           Saratoga, California 95070

SAME              nanoTronics Corporation          5,000,000   (2)      14.7%
                  attn: Gloria Felcyn, CPA
                  14395 Saratoga Ave., Suite 110
                  Saratoga, California 95070


SAME              Helmut Falk Family Trust         4,825,000   (3)      14.2%
                  Gloria Felcyn, Trustee
                  14395 Saratoga Ave., Suite 110
                  Saratoga, California 95070

SAME              Elwood G. Norris                 4,645,000   (4)      13.6%
                  10989 Via Frontera
                  San Diego, California 92127

SAME              Richard D. McDaniel              1,050,000   (4)(5)(6) 3.1%
                  10989 Via Frontera
                  San Diego, California 92127

SAME              Michael A. Carenzo                 427,500   (7)       1.3%
                  10989 Via Frontera
                  San Diego, California 92127

SAME              Jayanta K. Maitra                  273,095  (10)        *
                  10989 Via Frontera
                  San Diego, California 92127

SAME              Norman J. Dawson                   201,270   (8)        *
                  10989 Via Frontera
                  San Diego, California 92127

SAME              Lowell W. Giffhorn                  30,000   (9)        *
                  10989 Via Frontera
                  San Diego, California 92127
</TABLE>

                                       28
<PAGE>   29
<TABLE>
<S>             <C>                            <C>            <C>  <C>

SAME              Robert Putnam                      100,000  (11)        *
                  10989 Via Frontera
                  San Diego, California 92127


SAME              Donald R. Bernier                   75,000   (4)        *
                  10989 Via Frontera
                  San Diego, California 92127

SAME              Peter vR. Cooper                    50,000   (4)        *
                  10989 Via Frontera
                  San Diego, California 92127

                  All directors & officers          6,851,865  (12)     20.1%
                   as a group (9 persons)
</TABLE>

      * Less than 1%.

      (1) As trustee of the Helmut Falk Family Trust and executor of the Helmut
      Falk estate, Ms. Felcyn effectively controls the shares described in Notes
      2 and 3 below.

      (2) These shares have been issued but are subject to an escrow arrangement
      as described in "Certain Transactions" below. The shares were originally
      issued to nanoTronics in connection with the ShBoom technology
      acquisition.

      (3) These shares remain from 5,000,000 non-escrowed shares that were
      originally issued to nanoTronics in connection with the ShBoom technology
      acquisition and were subsequently transferred to the Helmut Falk Family
      Trust.

      (4) For each of Messrs. Norris, McDaniel, Bernier and Cooper, the amount
      includes 50,000 shares issuable upon the exercise of immediately
      exercisable outstanding stock options granted pursuant to the 1996 Stock
      Option Plan.

      (5) Includes 1,000,000 common shares held by Sea Ltd., a corporation
      through which Mr. McDaniel may direct certain investment powers.

      (6) Mr. McDaniel is pursuing a claim against the Falk estate pursuant to a
      written agreement with Mr. Falk pursuant to which he believes he is
      entitled to 5% of Patriot common shares (representing 250,000 shares held
      outside of escrow and 250,000 shares held in escrow for a total of 500,000
      common shares) held by nanoTronics (see Notes 2 and 3). Representatives of
      nanoTronics have advised the Company that they believe Mr. McDaniel's
      claim relates only to an interest in nanoTronics and that he therefore has
      no direct interest in nanoTronics' Patriot common shares until and if the
      claim is resolved. The additional 500,000 shares claimed by Mr. McDaniel
      are not included in Mr. McDaniel's holdings described herein since he
      cannot presently exert investment or voting control over the shares and
      there can be no assurance he will prevail in his claim.

      (7) Consists entirely of shares issuable upon the exercise of outstanding
      stock options. A total of 90,000 options vested on June 1, 1996 and the
      balance at the rate of 22,500 monthly for 36 months, however any unvested
      options may vest earlier in certain circumstances.

      (8) Includes 83,953 shares issuable upon the exercise of outstanding stock
      options.



                                       29
<PAGE>   30


      (9) Includes 30,000 shares issuable upon the exercise of outstanding stock
      options.

      (10) Includes 85,753 shares issuable upon the exercise of outstanding
      stock options.

      (11) Includes 100,000 shares issuable upon the exercise of outstanding
      stock options.

      (12) Includes 5,955,525 shares issued and outstanding and 896,340 shares
      issuable upon exercise of stock options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        There were no transactions, or series of transactions, during fiscal
1996 or 1997, nor are there any currently proposed transactions, or series of
transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to the knowledge of the Company any director, executive
officer, nominee, five percent or greater shareholder, or any member of the
immediate family of any of the foregoing persons, have or will have any direct
or indirect material interest other than described below.

        Pursuant to an Assets Purchase Agreement and Plan of Reorganization
("Purchase Agreement") dated June 22, 1994 between the Company, nanoTronics
Corporation ("nanoTronics") and Helmut Falk ("Falk"), the Company issued a total
of 10,000,000 restricted common shares to nanoTronics, 5,000,000 of which are a
contingent payment subject to the terms of an earnout escrow. These shares were
issued in consideration of technology acquired.

        NanoTronics was formed in 1991 and acquired certain base technology for
a RISC-based (Reduced Instruction Set Computing) 32-bit microprocessor
integrated on a single chip with merged stack/register architecture. NanoTronics
expended in excess of $1.9 million (unaudited) while engaged in further
development of that technology and produced from the basic architecture an
enhanced chip (ShBoom-architecture microprocessor). In connection with the
acquisition, the Company also acquired certain fixed assets including a Sun
Sparc 2 Work Station and various terminals, peripheral devices and software. A
majority of the expenditures by nanoTronics consisted of chip and related
software development costs. The result of these efforts was a successful initial
fabrication of the chip in early 1994 demonstrating technical feasibility of the
ShBoom architecture. nanoTronics also expended funds on the preparation and
prosecution of patent applications.

        The shares were issued to nanoTronics of which Falk was the sole
shareholder. Although 5,000,000 of the shares issued are subject to the terms of
an earnout escrow, as more fully described below, the shares are issued for the
purpose of dividends and voting. Prior to the transaction, Mr. Falk was an
unaffiliated person with respect to the Company. At the time of issuance the
10,000,000 common shares represented approximately 36% of the total issued and
outstanding shares of the Company.

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

        Pursuant to the terms of the Purchase Agreement, 5,000,000 of the common
shares were issued to nanoTronics pursuant to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the Purchase Agreement, provides for the release from escrow of 500,000 common
shares for each $500,000 of Patriot revenues commencing June 1, 1994 and ending
May 31, 1999. The Purchase Agreement also provides for release on other major
corporate events including a sale of substantially all the assets of the
Company, certain mergers, combinations or consolidations, certain tender offers
and upon a liquidation or dissolution. Any shares not earned by May 31, 1999
would be canceled. The shares may be sold, assigned or transferred within the
escrow arrangement but would still be subject to the escrow terms.

        The Company has granted certain registration and information rights with
respect to the shares issued to nanoTronics, such rights being assignable to
Falk and the Fish Family Trust (such trust having certain rights to become a
shareholder in nanoTronics). The Company has been advised that nanoTronics has
been liquidated with the



                                       30
<PAGE>   31

10,000,000 shares in the process of being transferred to the Helmut Falk Family
Trust which is entitled to the same registration rights. The Company is
obligated to use its best efforts to effect a registration upon written request
up to two times subject to certain limitations. The Company is also obligated to
include the shares, subject to certain limitations, in any underwriting and in
any other registration filed by the Company.

        Under the terms of an Agreement to Exchange Technology for Stock dated
August 8, 1989 between Mr. Norris and the Company, Mr. Norris is entitled to a
royalty equal to two and one-half percent (2.5%) of the gross revenues received
by the Company directly or indirectly from exploitation of its GPR technology
(up to a maximum royalty of $400,000), against which royalty an advance payment
of $17,000 already has been made. Mr. Norris also is entitled to a cash bonus of
$50,000 within 45 days after the Company successfully demonstrates a working
prototype of a GPR unit meeting specified performance criteria and a request for
such bonus is made to the Board of Directors and approved.

        Mr. Norris provided the Company with an independent valuation report to
satisfy the valuation provisions of the Share Escrow Agreement dated August 10,
1989 for the release of all of the 5,000,000 common shares of the Company
therein. However, pursuant to the terms of the Agreement to Exchange Technology
for Stock dated August 8, 1989, the acquisition of the technology from
nanoTronics as described above resulted in a termination of the Share Escrow
Agreement and pursuant to the terms thereof the shares were released to Mr.
Norris on July 8, 1994.

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

<TABLE>
<CAPTION>
Exh.No.              Document                                               No.
-------              --------                                               ---

<S>     <C>                                                               <C>
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)
</TABLE>

                                  31
<PAGE>   32

<TABLE>
<S>    <C>                                                               <C>
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                                                    (2)

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)
</TABLE>

                                       32
<PAGE>   33
<TABLE>
<S>    <C>                                                               <C>
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)

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                                               (2)


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)
</TABLE>

                                       33
<PAGE>   34
<TABLE>
<S>    <C>                                                               <C>
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)

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                                                           (2)

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)
</TABLE>

                                       34
<PAGE>   35
<TABLE>
<S>    <C>                                                               <C>
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                                       (2)

10.17    Employment Agreement dated January 1, 1997 between the
         Company and Jayanta K. Maitra                                      (2)

10.18    Technology License and Distribution Agreement dated June 23,
         1997 between the Company and Sun Microsystems, Inc.                (2)

23.0     CONSENTS OF EXPERTS AND COUNSEL.

23.1     Consent of BDO Seidman, LLP                                        (2)

23.2     Consent of Harlan & Boettger, LLP, Certified Public Accountants    (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)
</TABLE>


         (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, 1997

(b) The Company filed no reports on Form 8-K during the last fiscal
    quarter of the year ended May 31, 1997. The Company did file a
    report on Form 8-K on June 17, 1997 which was subsequent to the
    fiscal year end.

                                       35
<PAGE>   36
                                   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.

                                    PATRIOT SCIENTIFIC CORPORATION

                                    July 17, 1997


                                    By: /s/ LOWELL W. GIFFHORN
                                       -------------------------------
                                       Lowell W. Giffhorn
                                       Chief Financial Officer

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.

<TABLE>
<CAPTION>
             Signature                         Title                              Date
             ---------                         -----                              ----
<S>                              <C>                                       <C>
      /s/MICHAEL A. CARENZO        President, Director, Chief Executive       July 17, 1997
      ----------------------       Officer
      Michael A. Carenzo


      /s/LOWELL W. GIFFHORN        Chief Financial Officer, Principal         July 17, 1997
      ----------------------       Financial Officer and Principal
      Lowell W. Giffhorn           Accounting  Officer

      /s/ROBERT PUTNAM             Director, Treasurer and Secretary          July 17, 1997
      ----------------------
      Robert Putnam


      /s/ELWOOD G. NORRIS          Chairman and Director                      July 17, 1997
      ----------------------
      Elwood G. Norris


      /s/NORMAN J. DAWSON          Vice President, General Manager            July 17, 1997
      ----------------------       and Director
      Norman J. Dawson


      /s/DONALD BERNIER            Director                                   July 17, 1997
      ----------------------
      Donald Bernier


      /s/PETER vR. COOPER          Director                                   July 17, 1997
      ----------------------
      Peter vR. Cooper


      /s/RICHARD D. MCDANIEL       Director                                   July 17, 1997
      ----------------------
      Richard D. McDaniel
</TABLE>


<PAGE>   37


Patriot Scientific Corporation

Index to Consolidated Financial Statements



    Report of Independent Certified Public Accountants................... F-2-
                                                                          F-3

    Consolidated Balance Sheet as of May 31, 1997........................ F-4

    Consolidated Statements of Operations for the Years Ended
           May 31, 1997 and 1996......................................... F-5

    Consolidated Statements of Stockholders' Equity for the Years
           Ended  May 31, 1997 and 1996.................................. F-6

    Consolidated Statements of Cash Flows for the Years ended
           May 31, 1997 and 1996......................................... F-7

    Summary of Accounting Policies....................................... F-8-
                                                                          F-11

    Notes to Consolidated Financial Statements........................... F-12 -
                                                                          F-22

                                      F-1


<PAGE>   38

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, 1997 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the two
year period ended May 31, 1997. 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. The consolidated
financial statements give retroactive effect to the merger of Patriot Scientific
Corporation and Metacomp, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. We
did not audit the financial statements of Metacomp Inc., the Company's majority
owned subsidiary for 1996, which statements reflect total assets of $838,193 as
of July 31, 1996 and total revenues of $2,224,708 for the year then ended.

We conducted our audits in accordance with generally accepted auditing
standards. 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 and the report of other auditors for 1996 provide a
reasonable basis for our opinion.

In our opinion, based on our audits and the report of other auditors for 1996,
the consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of Patriot Scientific Corporation as
of May 31, 1997, and the results of their operations and their cash flows for
each of the years in the two year period ended May 31, 1997 in conformity with
generally accepted accounting principles.





/s/ BDO Seidman, LLP

Denver, Colorado
July 3, 1997


                                      F-2
<PAGE>   39






       (Harlan & Boettger, LLP, Certified Public Accountants Letterhead)





               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of METACOMP, INC.:

We have audited the balance sheet of METACOMP, Inc. a California Corporation, as
of July 31, 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. 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 audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of July 31,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.


/s/ Harlan & Boettger, LLP

San Diego, California
December 17, 1996




                                      F-3
<PAGE>   40
                         PATRIOT SCIENTIFIC CORPORATION
                           CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>

May 31,                                                             1997
--------------------------------------------------------------------------------

ASSETS

CURRENT ASSETS:
<S>                                                          <C>         
      Cash and cash equivalents                                $    477,675
      Accounts receivable, net of allowance
        of $5,000 for uncollectible accounts                        260,120
      Inventories (Note 2)                                          529,533
      Prepaid expenses                                               88,353
                                                               ------------

Total current assets                                              1,355,681

PROPERTY AND EQUIPMENT, net (Note 3)                                380,312

OTHER ASSETS:
      Patents and trademarks, net                                   193,688
      Other                                                           6,773
                                                               ------------
Total other assets                                                  200,461
                                                               ------------
                                                               $  1,936,454
                                                               ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
      Accounts payable                                         $    340,983
      Accrued liabilities                                           165,236
      Current portion-capital lease obligations (Note 8)              2,721
                                                               ------------
Total current liabilities                                           508,940
                                                               ------------

CAPITAL LEASE OBLIGATIONS (Note 8)                                    3,534
                                                               ------------

COMMITMENTS AND CONTINGENCIES (Note 8)

STOCKHOLDERS' EQUITY (Notes 5, 7 and 10)
     Common Stock, $.00001 par value; 40,000,000 shares
        authorized: issued and outstanding 33,068,329                   331
      Additional paid-in capital                                 12,768,487
      Accumulated deficit                                       (11,344,838)
                                                               ------------
Total stockholders' equity                                        1,423,980
                                                               ------------
                                                               $  1,936,454
                                                               ------------
</TABLE>

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


                                      F-4

<PAGE>   41
                          PATRIOT SCIENTIFIC CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                             (SEE NOTE 1)
Years Ended May 31,                     1997             1996
-------------------------------------------------------------------------------
<S>                               <C>               <C>
Net sales                         $   1,847,421     $   2,224,708

Cost of sales                         1,003,445         1,067,190
                                  -------------     -------------


Gross profit                            843,976         1,157,518

Operating expenses:
     Research and development         1,367,937         1,527,759
     Selling, general and
       administrative                 1,723,751         1,358,673
     Amortization                       612,333           612,333
                                  -------------     -------------
                                      3,704,021         3,498,765
                                  -------------     -------------

Other income (expenses):
     Interest income                     39,302            54,013
     Interest expense                   (47,506)          (49,943)
     Non-cash interest expense
       related to convertible
       notes (Note 5)                  (375,000)              -
                                  -------------     -------------
                                       (383,204)            4,070
                                  -------------     -------------
Net loss before taxes on income
     and extraordinary item          (3,243,249)       (2,337,177)
Taxes on income (Note 6)                   --                --
                                  -------------     -------------
Net loss before extraordinary
     item                            (3,243,249)       (2,337,177)

Extraordinary income (Note 9)         1,779,457         1,779,457
                                  -------------     -------------

Net loss                          $  (1,463,792)    $    (557,720)
                                  =============     =============

Net loss per share before
     extraordinary item           $       (0.12)    $       (0.09)
Extraordinary income                       0.07              0.07
                                  -------------     -------------
Net loss per share                $       (0.05)    $       (0.02)
                                  =============     =============

Weighted average number of
  common shares outstanding
  during the period (Note 5)         27,188,255        24,601,501
                                  =============     =============
</TABLE>

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



                                      F-5
<PAGE>   42
                         PATRIOT SCIENTIFIC CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (See Note 1)


Years Ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
                                              Common Stock        Additional                           Total
                                         ----------------------    Paid-in       Accumulated        Stockholders'
                                            Shares      Amount     Capital          Deficit           Equity
                                         ----------     ------   -----------     ------------      ------------
<S>                                    <C>            <C>      <C>             <C>               <C>
BALANCE, June 1, 1995                    28,330,569     $283     $ 8,311,818     $ (7,581,626)     $   730,475

Common stock issued for services
  at $.30 to $2.00 per share                270,000        3         264,747             --            264,750
Issuance of common stock in
  private offering for cash at
  $.50, net of offering costs               700,000        7         349,993             --            350,000
Issuance of common stock in
  private offering for cash at
  $1.28, net of offering costs              140,281        2         179,998             --            180,000
Issuance of common stock in
  private offering for cash at
  $1.58, net of offering costs              253,166        3         399,997             --            400,000
Value assigned to warrants issued              --        --            8,400             --              8,400
Exercise of warrants at $.50
  and $1.58 per share                       826,583        8         549,992             --            550,000
Exercise of options at $.20
  per share                                 464,658        4          86,079             --             86,083
Net loss                                       --        --             --           (557,720)        (557,720)
                                         ----------     ----     -----------     ------------      ------------

BALANCE, May 31, 1996                    30,985,257      310      10,151,024       (8,139,346)       2,011,988

Exercise of warrants at $1.58
  per share                                 154,883        2         239,499             --            239,501
Common stock issued for services
  at $1.28 per share                         22,600      --           28,927             --             28,927
Exercise of stock options at $.20 to
  $.625 per share                           380,486        4         165,857             --            165,861
Non-cash interest expense related to
  convertible notes recorded to
  additional paid-in capital                   --        --          375,000             --            375,000
Non-cash compensation expense                  --        --          291,180             --            291,180
Conversion of 6% Convertible
  Subordinated Notes plus interest
  at $.85 to $1.27 per share              1,525,103       15       1,517,000             --          1,517,015
Adjustment for Metacomp Inc.
  pooling of interests from year-
  end change (Note 1)                          --        --             --         (1,741,700)      (1,741,700)
Net loss                                       --        --             --         (1,463,792)      (1,463,792)
                                         ----------     ----     -----------     ------------      ------------

BALANCE, May 31, 1997                    33,068,329     $331     $12,768,487     $(11,344,838)     $ 1,423,980
                                         ==========     ====     ===========     ============      ===========
</TABLE>

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



                                      F-6
<PAGE>   43
                         PATRIOT SCIENTIFIC CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS


INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Years Ended May 31,                                             1997             1996
                                                          --------------     ------------
<S>                                                       <C>                <C>
OPERATING ACTIVITIES:
       Net loss                                           $   (1,463,792)    $   (557,720)
       Adjustments to reconcile net loss
         to cash used in operating activities:
           Adjustment for Metacomp Inc. pooling of
             interests from year-end change (Note 1)          (1,741,700)            --
           Amortization and depreciation                         836,692          770,447
           Common stock and warrants issued for services          28,927          269,450
           Non-cash interest expense related to
               convertible notes                                 375,000             --
           Non-cash compensation expense                         291,180             --
           Changes in:
              Accounts and note receivable                       (60,719)         109,399
              Inventories                                         81,623         (243,302)
              Prepaid and other assets                           (23,163)          (6,322)
              Accounts payable and accrued expenses              (57,216)         170,107
              Chapter 11 debt obligations                           --         (1,845,518)
                                                          --------------     ------------
Net cash used in operating activities                         (1,733,168)      (1,333,459)
                                                          --------------     ------------
INVESTING ACTIVITIES:
       Purchase of property, equipment and patents              (238,447)        (343,330)
                                                          --------------     ------------
  Net cash used in investing activities                         (238,447)        (343,330)
                                                          --------------     ------------

FINANCING ACTIVITIES:
       Principal payments on notes payable and
         long-term debt                                         (320,016)        (164,117)
       Proceeds from issuance of common stock
         and exercise of common stock warrants
         and options                                             405,362        1,569,783
       Proceeds from issuance of convertible
         notes and accrued interest                            1,500,000              --
                                                          --------------     ------------
Net cash provided by financing activities                      1,585,346        1,405,666
                                                          --------------     ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS            (386,269)        (271,123)

CASH AND CASH EQUIVALENTS, beginning of year                     863,944        1,135,067
                                                          --------------     ------------
CASH AND CASH EQUIVALENTS, end of year                    $      477,675     $    863,944
                                                          ==============     ============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
       Convertible notes and accrued interest
         exchanged for common stock                       $    1,500,000     $        --
       Cash payments for interest                                 30,491           49,943
                                                          ==============     ============
</TABLE>

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


                                      F-7
<PAGE>   44

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES

ORGANIZATION AND BUSINESS
Patriot Scientific Corporation (the "Company") is engaged in the development and
marketing of patented microprocessor technology and high-performance digital
communication products. The Company also owns and is developing innovative radar
and antenna technology.

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

As described in Note 1, effective December 26, 1996, the Company acquired 96.9%
of the common stock of Metacomp. The business combination was accounted for as a
pooling-of-interests and, accordingly, the Company's financial statements have
been presented to include the results of Metacomp as though the business
combination occurred as of June 1, 1995.

DEVELOPMENT STAGE COMPANY
As a result of the business combination with Metacomp, the Company no longer
qualifies as a development stage company. Accordingly, the consolidated
statements of operations and statements of cash flows no longer include
development stage cumulative results.

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. The investment policy limits the Company's
exposure to concentrations of credit risk. Such deposit accounts at times may
exceed federally insured limits. 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 receivable.

The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses
approximated fair value because of the immediate or short-term maturity of these
instruments.



                                      F-8
<PAGE>   45



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.

PURCHASED TECHNOLOGY
In accordance with the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method", purchased
semiconductor microprocessor technology that is determined to have alternative
future uses is capitalized at cost. Effective June 1, 1994, the Company began
amortizing such technology using the straight-line method over its estimated
useful life of three years (See Note 4).

Purchased technology is assessed periodically for impairment. The amount of
impairment, if any, is charged to operations. The Company recovers its
investments in purchased technology based upon net cash flows from future sales
and license agreements.

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

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 Statement of Financial Accounting
Standards No. 109 ("SFAS No. 109"). Temporary differences are differences
between the tax basis of assets and liabilities and their reported amounts in
the financial statements that will result in taxable or deductible amounts in
future years.


                                      F-9
<PAGE>   46


PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

NET LOSS PER SHARE
Net loss per common share is based on the weighted average number of shares
outstanding during each period presented. Options and warrants to purchase stock
are included as common stock equivalents, when dilutive. Outstanding shares of
common stock held in escrow whose release are dependent upon the attainment of
future revenues or other events are not considered outstanding for purposes of
the calculation of net loss per share until such shares are released from escrow
(See Note 4).

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

During the quarter ended May 31, 1997, 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
approximately $110,000.

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

STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with an original maturity of three months or less
to be cash equivalents.


                                      F-10
<PAGE>   47


PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

RECENT ACCOUNTING PRONOUNCEMENTS
On March 3, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS No. 128").
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with Accounting Board Opinion ("APB") No.
15, "Earnings Per Share." SFAS 128 provides for the calculation of "Basic" and
"Dilutive" earnings per share. Basic earnings per share includes no dilution and
is computed by dividing income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in the
earnings of an entity, similar to fully diluted earnings per share. The Company
will adopt SFAS No. 128 in 1998 and its implementation is not expected to have a
material effect on the consolidated financial statements.

RECLASSIFICATIONS
Certain items included in the 1996 financial statements have been reclassified
to conform to the current year presentation.


                                      F-11
<PAGE>   48

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ACQUISITION OF METACOMP, INC. COMMON STOCK

On December 26, 1996, the Company acquired 96.9% of the common stock of
Metacomp, Inc. ("Metacomp") in exchange for 1,272,068 shares of the Company's
common stock. Metacomp designs, manufactures, and sells high-performance digital
communication products. The business combination was accounted for as a pooling
of interests. Accordingly, the Company's financial statements have been restated
to include the results of Metacomp for all periods presented. Metacomp's fiscal
year-end has been changed from July 31 to May 31 to conform to the Company's
fiscal year-end. Based on the difference in fiscal year-ends, results of
operations for the two months ended July 31, 1996 have been included in the
consolidated statements of operations for both years ended May 31, 1997 and
1996. For the two months ended July 31, 1996, Metacomp recorded total revenues
of $239,501, a net loss before extraordinary item of $37,759, extraordinary
income of $1,779,457 and net income after extraordinary item of $1,741,700. The
accompanying consolidated statements of stockholders' equity and cash flows for
the year ended May 31, 1997, have also been adjusted to eliminate the net income
after extraordinary item. The extraordinary income was the primary source of
income for these two months.

Separate net sales, net income and related per share amounts of the merged
entities through the date of the business combination are presented in the
following table. In addition, the table includes unaudited pro forma net income
and net income per share amounts as of the date of the business combination
which reflect the elimination of the nonrecurring merger costs and expenses.

<TABLE>
<CAPTION>
                                                 1997         1996
                                             -----------   -----------
<S>                                       <C>           <C>
Net sales
       Patriot                               $    19,362   $      --
       Metacomp                                  874,377     2,224,708
                                             -----------   -----------
       Total                                 $   893,739   $ 2,224,708
                                             -----------   -----------

Net income (loss)
       Patriot                               $(1,202,485)  $(2,358,649)
       Metacomp before extraordinary income       40,706         1,910
       Metacomp extraordinary income           1,779,457     1,779,457
                                             -----------   -----------
       Pro forma net income (loss)               617,678      (577,282)
       Merger costs and expenses                 (30,000)         --
       Interest income                            (6,000)      (19,562)
       Interest expense                           15,625        39,124
                                             -----------   -----------
       Net income (loss), as reported        $   597,303   $  (557,720)
                                             -----------   -----------

Net income (loss) per share
       As reported                           $      0.02   $     (0.02)
       Pro forma                             $      0.02   $     (0.02)
</TABLE>



Merger costs and expenses consisted of legal and accounting fees.


                                      F-12
<PAGE>   49
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. INVENTORIES      Inventories at May 31, 1997 consisted of the following:


<TABLE>
<S>                      <C>     
Component parts          $344,334
Work in process            90,086
Finished goods             95,113
                         --------
                         $529,533
</TABLE>

3. PROPERTY AND     Property and equipment consisted of the following at May 31,
   EQUIPMENT        1997:

<TABLE>
<S>                                                     <C>       
Computer equipment and software                         $  737,832
Furniture and fixtures                                     304,249
Laboratory equipment                                       193,954
                                                        ----------


                                                         1,236,035

Less accumulated depreciation and amortization             855,723
                                                        ----------

Net property and equipment                              $  380,312
                                                        ----------

Depreciation expense was approximately $184,055 and
$146,903 for the years ended May 31, 1997 and 1996.

At May 31, 1997 property and equipment includes
certain equipment under capital lease agreements
with an original cost of $36,427 and accumulated
depreciation of $21,310.
</TABLE>


4. PURCHASED TECHNOLOGY

SEMICONDUCTOR MICROPROCESSOR TECHNOLOGY

Effective May 31, 1994, the Company acquired certain proprietary semiconductor
microprocessor technology (the "ShBoom Chip") and related computer software from
a corporation in exchange for 10,000,000 restricted shares of the Company's
common stock (5,000,000 of which are in escrow subject to release as discussed
below).

The cost of this technology of $1,875,000 was based upon the estimated current
fair market value of the 5,000,000 non-contingent shares of the Company's common
stock issued under this agreement. The remaining 5,000,000 shares issued for
this technology are subject to an earnout escrow arrangement. As such, when the
escrowed shares are earned, they will be charged to compensation in a manner
similar to a variable stock option plan. The terms of the escrow arrangement
provide for


                                      F-13
<PAGE>   50
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the release from escrow of 500,000 shares for each $500,000 of revenues earned
by the Company during the period from June 1, 1994 through May 31, 1999.
Additionally, this agreement also provides for the release of these shares upon
the occurrence of certain defined major corporate events. Any of the contingent
shares not released by May 31, 1999 would be returned to the Company and
canceled.

The terms of the above purchase agreement contain a provision that if rights to
the technology are licensed to certain entities, then the Company may be
required to make certain payments. Such payments, as defined in the agreement,
are based upon up-front license fees received and any royalties for a period of
five years. As of May 31, 1997 no amounts have been paid nor are due.

RADAR TECHNOLOGY

Effective August 8, 1989, the Company acquired certain proprietary ground
penetrating radar ("GPR technology") from a current director of the Company,
primarily in exchange for 5,000,000 shares of the Company's common stock. Such
shares were subject to an escrow agreement and were releaseable to the director
under various specified conditions including the Company's subsequent merger or
business combination with any third party.

As a result of the Company's acquisition of the ShBoom, these 5,00,000 shares
were released to the director and the escrow agreement was terminated. Effective
May 31, 1994, additional cost totaling $1,875,000 of this previously purchased
GPR technology was recorded as compensation expense due to the release of the
5,000,000 shares. Such cost was based upon the estimated current fair market
value of the Company's common stock.

Additionally, under the terms of the agreement to acquire the GPR technology,
the director is to be paid a royalty equal to 2.5% of all gross revenues
received from the GPR technology, up to a maximum of $400,000. The director also
is to receive a $50,000 bonus upon the successful demonstration of a working
prototype of the technology meeting specified performance criteria. As of May
31, 1997 no amounts were due under this agreement; however, an advance of
$17,000 against the royalty was paid at the inception of the agreement.

5. STOCKHOLDERS' EQUITY

COMMON STOCK

During fiscal 1996, the Company issued 75,000 shares of common stock valued at
the estimated fair market value of $.30 per share in exchange for services.


1995 EMPLOYEE STOCK COMPENSATION PLAN ("ESC")

Effective October 1995, the Company adopted the ESC Plan, expiring September 30,
1998, reserving for issuance 250,000 shares of the Company's common stock. The
ESC Plan provides for compensation awards of the Company's common stock to
employees (as defined), at the discretion 


                                      F-14
<PAGE>   51
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

of the Board of Directors. During fiscal 1997 and 1996, the Company issued
22,600 and 195,000 shares of common stock under the Plan recording compensation
expense of $28,928 and $242,250 for awards valued at an estimated fair market
value ranging from $.59 to $2.00 per share.

PRIVATE OFFERINGS AND WARRANTS

During fiscal 1996, the Company completed private offerings of 700,000 units and
253,166 units, consisting each of one share of the Company's common stock and
one warrant to purchase one share of the Company's common stock at $.50 and
$1.58 per share, respectively. During fiscal 1996, in connection with such
offerings, a total of 826,583 shares of the Company's common stock were issued
upon the exercise of outstanding warrants providing net proceeds of $550,000.
Additionally, in connection with a $250,000 manufacturing line-of-credit
agreement and a sales contractual agreement, the Company granted warrants which
were exercisable into 50,000 shares of the Company's common stock at $1.58 per
share and 25,000 shares at $2.85 per share.

During fiscal 1997, a total of 151,583 shares of the Company's common stock were
issued upon the exercise of outstanding warrants which had been issued in fiscal
1996. The net proceeds from the exercise were $239,501.

During fiscal 1997, the Company issued for cash an aggregate of $1,500,000 of
unsecured 6% Convertible Subordinated Promissory Notes due September 30, 1998
("Notes"). The principal and interest amount of each Note could at the election
of the Note holder be converted one or more times into fully paid and
nonassessable shares of common stock, $.00001 par value, ("Shares") of the
Company, at a price which was the lower of (i) $2.00 per share or (ii) 80% of
the average of the five days market price prior to conversion but not less than
$0.80 per share. As of May 31, 1997 all Notes plus accrued interest had been
converted into 1,525,103 shares of common stock of the Company.

According to the Securities and Exchange Commission, convertible debt
instruments which are convertible at a discount to market should be accounted
for by treating such discount as additional interest expense. The Company
computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the date the
Notes were issued. The Company has recorded $375,000 of additional paid-in
capital for the discount related to the embedded interest in the Notes. This
same amount has been expensed during fiscal 1997 under the caption "Non-cash
interest expense related to convertible notes."

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, options to purchase common stock of the Company at a price not less
than the fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of the share 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). 


                                      F-15
<PAGE>   52
PATRIOT SCIENTIFIC CORPORATION 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


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 for grants
to either full or part time employees, at the discretion of the Board of
Directors, options 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.

1996 STOCK OPTION PLAN

Effective March 1996, the Company adopted the 1996 Stock Option Plan, expiring
March 24, 2006, reserving for issuance 1,500,000 shares of the Company's common
stock. The 1996 Stock Option Plan provides for grants to either full or part
time employees, at the discretion of the Board of Directors, options to purchase
common stock of the Company at a price not less than the fair market value on
the date of grant for incentive stock options or not less than 85% of the fair
market value on the date of grant for non-qualified stock options. In the case
of a significant stockholder, the option price of the share is not less than 110
percent of the fair market value of the shares on the date of grant. Any option
granted under the 1996 Stock Option Plan must be exercised within ten years of
the date they are granted (five years in the case of a significant stockholder).
During the fiscal year ended May 31, 1997, the Company issued options to
purchase 1,713,000 shares of stock under the non-qualified provisions of the
plan at an exercise price of 85% of the fair market value on the date of grant
and recorded, during the quarter ended May 31, 1997, corresponding non-cash
compensation in the amount of $291,180.

At May 31, 1997, options to purchase 3,290,526 shares of the Company's Common
Stock had been granted under the 1996 Stock Option Plan. Of this amount,
1,875,000 are subject to shareholders' approval to increase the number of shares
reserved for issuance from 1,500,000 to 3,500,000.

FASB Statement 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"),
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 40 percent;
risk-free interest rates of 6.0 to 6.4 percent; and expected lives of 3 to 5
years.


                                      F-16
<PAGE>   53
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:


<TABLE>
<CAPTION>
                                                                 1997             1996
                                                             -----------      -----------
<S>                                                          <C>              <C>         

As reported
     Net loss before extraordinary item                      $(3,243,249)     $(2,337,177)
     Extraordinary item                                        1,779,457        1,779,457
                                                             -----------      -----------
     Net loss                                                $(1,463,792)     $  (557,720)
                                                             ===========      ===========

Proforma
     Net loss before extraordinary item                      $(3,735,409)     $(2,549,503)
     Extraordinary item                                        1,779,457        1,779,457
                                                             -----------      -----------
     Net loss                                                $(1,955,952)     $  (770,046)
                                                             ===========      ===========

As reported per share
     Net loss before extraordinary item                      $     (0.12)     $     (0.09)
     Extraordinary item                                             0.07             0.07
                                                             -----------      -----------
     Net loss                                                $     (0.05)     $     (0.02)
                                                             ===========      ===========

Proforma per share
     Net loss before extraordinary item                      $     (0.14)     $     (0.10)
     Extraordinary item                                             0.07             0.07
                                                             -----------      -----------
     Net loss                                                $     (0.07)     $     (0.03)
                                                             ===========      ===========
</TABLE>


During the initial phase-in period of SFAS 123, the effect on pro forma results
are not likely to be representative of the effects on pro forma results in
future years since options vest over several years and additional awards could
be made each year.


                                      F-17
<PAGE>   54
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the status of the Company's stock option plans and warrants as of
May 31, 1997 and 1996 and changes during the years ending on those dates is
presented below:

<TABLE>
<CAPTION>
                                                           1997                            1996
                                                 -------------------------     -------------------------------
                                                                  Weighted
                                                                   Average                         Range of
                                                                  Exercise                         Exercise
                                                   Shares           Price       Shares              Prices
                                                 ---------        --------     ---------        --------------
<S>                                              <C>              <C>          <C>              <C>    

Outstanding, beginning of year                   3,077,775        $   1.08     1,609,713        $   .18 - .88
     Granted                                     1,940,000            1.36     2,724,666            .18 - 2.85
     Cancelled                                    (362,375)           2.01      (207,500)           .18 - .63
     Exercised                                    (532,069)           0.76    (1,049,104)           .18 - 1.58
                                                 ---------        --------     ---------        --------------
Outstanding, end of year                         4,123,331        $   1.24     3,077,775        $   .18 - 2.85
                                                 =========        ========    ==========        ==============

                                                 ---------        --------    ----------        --------------
Exercisable, end of year                         1,526,332        $   0.85     1,190,670        $   .18 - 2.85
                                                 =========        ========    ==========        ==============


Weighted average fair value of options
     and warrants granted during the year                         $   0.68                      $   1.15
                                                                  ========                      ==============
</TABLE>




The following table summarizes information about stock options and warrants
outstanding at May 31, 1997:

<TABLE>
<CAPTION>
                                 Outstanding                      Exercisable
                     ------------------------------------   -----------------------
                                     Weighted
                                      Average    Weighted                  Weighted
   Range of             Number       Remaining    Average      Number       Average
   Exercise          Outstanding    Contractual  Exercise   Exercisable    Exercise
    Prices            at 5/31/97       Life        Price     at 5/31/97     Price
---------------     ------------    -----------  --------   -----------    --------
<S>                 <C>             <C>          <C>        <C>            <C>     

$          0.18         113,331        4.56       $0.18        113,331     $   0.18
    0.30 - 0.37         575,000        1.63        0.35        493,750         0.36
    0.50 - 0.94       1,315,000        3.11        0.74        524,050         0.68
    1.12 - 1.76       1,590,000        4.59        1.22        155,001         1.25
    2.28 - 2.30         530,000        3.82        2.30        240,200         2.30
---------------       ---------        ----       -----      ---------     --------
$   0.18 - 2.30       4,123,331        3.61       $1.24      1,526,332     $   0.85
===============       =========        ====       =====      =========     ========
</TABLE>


                                      F-18
<PAGE>   55
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES

As of May 31, 1997, the net deferred tax asset recorded and its approximate tax
effect consisted of the following.


<TABLE>
<S>                                    <C>        
Net operating loss carryforwards       $ 2,039,000
Purchased technology                       642,000
Depreciation and amortization              242,000
Other, net                                 188,000
                                       -----------

                                         3,111,000
Valuation allowance                     (3,111,000)
                                       -----------

Net deferred tax asset                 $         -
                                       ===========
</TABLE>


As of May 31, 1997, 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.

At May 31, 1997, the Company has net operating loss carryforwards of
approximately $5,997,000 which expire through 2012 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended.

7. PROFIT-SHARING PLAN

Effective July 1, 1993, the Company adopted a savings and profit-sharing plan
which 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's contributions to the
plan were $642 and $1,045 in fiscal 1997 and 1996.


                                      F-19
<PAGE>   56
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. COMMITMENT AND CAPITAL
   LEASE OBLIGATIONS

Patriot Scientific Corp. through its subsidiary, Metacomp, entered into an
eight year operating lease for its office and manufacturing facilities located
in San Diego, California.                                     
                                                                             
The Company also leases a copier, computers, and test equipment at interest
rates between (4-18%). Future minimum lease payments required under the
operating and capital leases are as follows:
                             
                             

<TABLE>
<CAPTION>
                                   Operating      Capital Leases
                                  ------------    --------------
<S>                               <C>                <C>      
                                                   
1998                              $     65,590       $   3,104
1999                                    63,460           2,388
2000                                    10,610           1,393
                                  ------------       ---------
                                                   
Total minimum lease payments           139,660           6,885
                                                   
Less amount representing interest            -             630
                                  ------------       ---------
                                                   
Present value of net minimum                       
  lease payments                       139,660           6,255
                                                   
Less current portion                         -           2,721
                                  ------------       ---------
                                                   
Total                             $   139,660        $   3,534
                                  ============       =========
</TABLE>
                                               
   Rent expense for fiscal 1997 and 1996 was $80,371 and $89,918,respectively.


9. EXTRAORDINARY INCOME

The extraordinary income is a gain from the discharge of debt as a result of the
completion of Metacomp's Plan of Reorganization under Chapter 11 of the U.S.
Bankruptcy Code as of July, 1996.

In 1990 Metacomp filed a Chapter 11 bankruptcy petition. In 1991 the Bankruptcy
Court confirmed Metacomp's plan of reorganization which provided for 60 monthly
payments to creditors with minimum payments averaging $23,400 per month or
larger depending on operating results. As of July, 1996, the unsecured creditors
were paid approximately 13% of their approved claims and the balance was
discharged. One secured creditor was scheduled to be paid in full as part of the
plan of reorganization. As of July 31, 1996, this secured creditor had a
remaining balance of $312,306. The Company paid to this secured creditor a
remaining balance of $252, 306 plus accrued interest in conjunction with the
business combination with Metacomp.


                                      F-20
<PAGE>   57
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


10. SALES INFORMATION

EXPORT SALES
During the fiscal year ended May 31, 1997, the Company's sales by geographic
area consisted of the following:


<TABLE>
<S>                                                         <C>       
               Domestic sales                               $1,428,000

               Foreign sales:
                 Canada                                        244,000
                 Other                                         175,000
                                                            ----------
                      Total foreign sales                      419,000
                                                            ----------

               Total net product sales                      $1,847,000
                                                            ==========
</TABLE>

The Company has no foreign assets. During the fiscal year ended May 31, 1996,
the Company's foreign sales were less than 10% of total sales.

SALES TO MAJOR CUSTOMERS

The Company had sales in excess of 10% to the following customers:

<TABLE>
<CAPTION>
                                 1997                          1996
                                 ----                          ----

   Customer              Sales         Percent         Sales         Percent
   --------              -----         -------         -----         -------
<S>                      <C>           <C>             <C>           <C>  
                                                                    
   A                     $473,000      25.6%           $396,000      17.8%
   B                     $472,000      25.5%           $450,000      20.2%
   C                     $212,000      11.5%               -           -
   D                         -           -             $330,000      14.8%
</TABLE>

11. SUBSEQUENT EVENTS

FINANCING
On June 2, 1997, the Company issued to a limited number of investors for cash an
aggregate of $2,000,000 of unsecured 5% Convertible Term Debentures due June 2,
1999 and Stock Purchase Warrants ("Securities") with a right to purchase an
aggregate 611,733 shares of common stock, par value $.00001 per share, at an
exercise price of $1.69125. The principal and interest amount of each Debenture
may, at the election of the holder, be converted in whole or in part and from
time to time into fully paid and nonassessable shares of common stock, $.00001
par value, of the Company, at a price which is the lower of (i) $1.1646 per
share or (ii) depending on the number of days the


                                      F-21
<PAGE>   58
PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


Debentures have been held after the funding date, from 75% to 91% of the average
of the closing bid prices for the common stock for the ten consecutive trading
days ending on the trading day immediately preceding such conversion date. If
the Debentures have not been converted into common shares of the Company by June
2, 1999, under certain conditions the Debentures will automatically be converted
into shares of the common stock of the Company. Under certain conditions, at the
election of the Company and for a certain period of time, the Company may issue
an additional $1,000,000 of unsecured 5% Convertible Term Debentures due June 2,
1999 and Stock Purchase Warrants with a right to purchase an additional 305,867
shares of common stock.

The Company expects that the net proceeds of the offering, $1,760,000 after
offering costs, will be used for the purchase of software development tools,
chip development, silicon runs, radar and antenna development, development of
communications software, marketing and sales collateral and for general
corporate purposes.

According to the Securities and Exchange Commission, convertible debt
instruments which are convertible at a discount to market should be accounted
for by treating such discount as additional interest expense. The Company
computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the date the
Notes were issued. The Company will record in fiscal 1998 $507,300 of additional
paid-in capital for the discount related to the embedded interest in the Notes.
This same amount will be expensed during fiscal 1998 under the caption "Non-cash
interest expense related to convertible notes."

PREFERRED STOCK
On June 19, 1997, a majority of the shareholders of the Company approved an
increase in the authorized shares of capital stock to 65,000,000 shares of which
5,000,000 shares were designated Preferred Stock, par value $.00001, and
60,000,000 shares were designated as Common Stock, par value $.00001. As of July
3, 1997, none of the Preferred Stock was issued or outstanding.


                                      F-22
<PAGE>   59
================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                             EXHIBITS TO FORM 10-KSB


                     ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934


         For fiscal year ended May 31, 1997 Commission File No. 0-22182
                               --- --  ----                     -------


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

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


                                      EX-1
<PAGE>   60
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exh.No.                              Document                                        No.
-------                              --------                                        ---

<S>   <C>                                                                            <C>
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                                                                (2)
</TABLE>


                                      EX-2
<PAGE>   61
<TABLE>
<S>   <C>                                                                            <C>
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 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) 
</TABLE>


                                      EX-3
<PAGE>   62
<TABLE>
<S>   <C>                                                                            <C>
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)

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              (2)
                                                                                     
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)
</TABLE>


                                      EX-4
<PAGE>   63
<TABLE>
<S>   <C>                                                                             <C>
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                   (2)
        
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                                                  (2)

10.17   Employment Agreement dated January 1, 1997 between the
        Company and Jayanta K. Maitra                                                 (2)

10.18   Technology License and Distribution Agreement dated June 23, 1997
        between the Company and Sun Microsystems, Inc.                                (2)

23.0    CONSENTS OF EXPERTS AND COUNSEL.

23.1    Consent of BDO Seidman, LLP                                                   (2)

23.2    Consent of Harlan & Boettger, LLP, Certified Public Accountants               (2)

27.0    Financial Data Schedule
</TABLE>


                                      EX-5
<PAGE>   64
<TABLE>
<S>    <C>                                                                           <C>
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)


       (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, 1997
</TABLE>


                                      EX-6