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**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-KSB/A**


**AMENDMENT
      NO. 1**




(Mark
      One)




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





FOR
      THE
      FISCAL YEAR ENDED MAY 31, 2005




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





For
      the
      transition period from ___________ to _______________




Commission
      File Number 0-22182




**PATRIOT
      SCIENTIFIC CORPORATION**


(Name
      of
      small business issuer in its charter)





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





6183
                Paseo Del Norte, Suite 180, Carlsbad, California
              (Address
                of principal executive offices)
            92011
              (Zip
                Code)





(Issuer’s
      telephone number): (760) 547-2700





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 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 o




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B 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. o




Issuer’s
      revenues for its most recent fiscal year (May 31, 2006) was $10,309,709 (which
      does not include approximately $27,848,000 in income resulting from the
      Company’s investment in Phoenix Digital Solutions, LLC). Issuer’s net income for
      its most recent fiscal year (May 31, 2006) was $28,672,688.




The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant on October 2, 2006 was $321,496,396 based
      on a
      closing price of $0.87 as reported on the OTC Electronic Bulletin Board
      system.




On
      October 2, 2006, 369,536,087 shares of common stock, par value $.00001 per
      share
      (the issuer’s only class of voting stock) were outstanding.




Documents
      Incorporated By Reference: None.




Transitional
      Small Business Disclosure Format (check one): YES o  NO x





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EXPLANATORY
      NOTE





This
      Amendment No. 1 to the Company’s Form 10-KSB for the year ended May 31, 2005 is
      being filed in conjunction with our decision to restate and re-audit the audited
      financial statements contained in our report on Form 10-KSB for the fiscal
      year
      ended May 31, 2005 (the “2005 10-KSB”), filed with the Securities and Exchange
      Commission on September 13, 2005. Our board of directors determined, on
      September 8, 2006, that the original financial statements for the periods in
      question should no longer be relied upon. We have filed a Form 8-K and an
      amendment thereto on Item 4.02 Non-Reliance on Previously Issued Financial
      Statements or a Related Audit Report or Completed Interim Review for the
      restatement.




As
      disclosed in Item 8B in our Form 10-KSB for the year ended May 31, 2006, the
      Audit Committee of our Board of Directors authorized us to amend and restate
      our
      financial statements and other financial information for the year ended
      May 31, 2005, and the quarters ended August 31, 2005,
      November 30, 2005, and February 28, 2006, **** as
      a
      result of a change in judgment regarding (i) the accounting treatment for
      our previously outstanding convertible debentures and (ii) our accounting
      treatment of our interest in Phoenix Digital Solutions, LLC. The issue
      pertaining to the convertible debentures also relates to the previous years
      ended May 31, 2004, 2003 and 2002. See the Notes to the 2006 consolidated
      financial statements for more information and for significant subsequent
      events.


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**TABLE
      OF CONTENTS**




**PART
                II****Item
                7. Financial Statements**
            **4****Item
                8A. Controls and
                Procedures**
            **4****PART
                III****Item
                13. Exhibits**
            **5**





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**PART
      II**




**ITEM
      7.****FINANCIAL
      STATEMENTS**




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




**ITEM
      8A.****CONTROLS
      AND PROCEDURES**




***Evaluation
      of Disclosure Controls and Procedures***




As
      required by Rule 13a-15(e) under the Exchange Act, as of May 31, 2005,
      the end of the period to which this annual report relates, we have carried
      out
      an evaluation of the effectiveness of the design and operation of the Company’s
      disclosure controls and procedures. This evaluation was carried out under the
      supervision and with the participation of our management, including our Chief
      Executive Officer and our Chief Financial Officer.




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in our reports filed or
      submitted under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the Securities and Exchange
      Commission’s rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed in our reports filed under the Exchange Act is
      accumulated and communicated to management, including the Chief Executive
      Officer and Chief Financial Officer as appropriate, to allow timely decisions
      regarding required disclosure. Management recognizes that any controls and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving their objectives, and management necessarily
      applies its judgment in evaluating the cost-benefit relationship of possible
      controls and procedures.  Based on the evaluation of our disclosure
      controls and procedures as of May 31, 2005, our Chief Executive Officer and
      Chief Financial Officer concluded that, as of such date, our disclosure controls
      and procedures were not effective due to the following two discrete issues,
      that
      pertain to material weaknesses, discussed in more detail, below.




Notwithstanding
      the material weaknesses discussed below, the Company's management has concluded
      that the consolidated financial statements included in this Annual Report on
      Form 10-KSB fairly present in all material respects the Company's financial
      condition, results of operations and cash flows for the periods presented in
      conformity with accounting principles generally accepted in the United States
      of
      America.




***Effect
      of Restatement on Disclosure Controls***




As
      disclosed in Item 8B in our Form 10-KSB for the year ended May 31, 2006, the
      Audit Committee of our Board of Directors authorized us to amend and restate
      our
      financial statements and other financial information for the year ended
      May 31, 2005, and the quarters ended August 31, 2005,
      November 30, 2005, and February 28, 2006, **** as
      a
      result of a change in judgment regarding (i) the accounting treatment for
      our previously outstanding convertible debentures and (ii) our accounting
      treatment of our interest in Phoenix Digital Solutions, LLC. The issue
      pertaining to the convertible debentures also relates to the previous years
      ended May 31, 2004, 2003, 2002. See the Notes to the 2006 consolidated financial
      statements for more information.




In
      connection with the restatement, and in light of the change in judgment which
      gave rise to it, our Chief Executive Officer and our Chief Financial Officer
      considered the effect of the error on the adequacy of our disclosure controls
      and procedures as of the end of the period covered by this Annual Report on
      Form
      10-KSB for the year ended May 31, 2005.  The certifying officers determined
      that disclosure controls and procedures were not effective as a consequence
      of
      the material weaknesses described below.




A
      material weakness is a control deficiency, or combination of control
      deficiencies, that results in more than a remote likelihood that a material
      misstatement of the annual or interim financial statements will not be prevented
      or detected.  As a result of the restatements described above, the
      following material weaknesses were identified in the Company's assessment of
      the
      effectiveness of disclosure controls and procedures as of May 31,
      2005:  -4-
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i) The
      Company did not maintain effective controls over the identification of a
      variable conversion feature and put option embedded within its convertible
      debt
      instruments and the determination of the appropriate accounting treatment for
      those debt instruments.




ii) The
      Company
      did not maintain effective controls over the accounting for its investment
      in
      Phoenix Digital, LLC and the determination of the appropriate accounting
      treatment for the investment.




As
      a
      result of these weaknesses, management has taken steps, including the retention
      of new and additional accounting personnel, and continues to monitor the
      controls and procedures, to ensure that the errors will not occur again and
      that
      the Company’s disclosure controls and procedures are operating at the reasonable
      assurance level. In addition, management has engaged our current auditors to
      perform a re-audit of the fiscal years ended May 31, 2005, 2004, 2003 and 2002
      (including the beginning balances for 2001).




***Changes
      in Internal Control over Financial Reporting***




There
      were no changes to our internal control over financial reporting (as defined
      in
      Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most
      recently completed fiscal quarter that materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.




**ITEM
      13.****EXHIBITS**




(a)
            The
                following documents are filed as a part of this
                Report:




1.
            Financial
                Statements. The following consolidated financial statements and Report
                of
                Independent Registered Public Accounting Firm are included in Part II
                of this Report:




Report
      of
      Corbin & Company, LLP, Independent Registered Public Accounting
      Firm




Consolidated
      Balance Sheets as of May 31, 2005 (as restated) and 2004 (as restated)




Consolidated
      Statements of Operations for the Years Ended May 31, 2005 (as restated) and
      2004 (as restated)




Consolidated
      Statement of Stockholders’ Deficit for the Years Ended May 31, 2005 (as
      restated) and 2004 (as restated)




Consolidated
      Statements of Cash Flows for the Years Ended May 31, 2005 (as restated) and
      2004 (as restated)




Notes
      to
      Consolidated Financial Statements




2.
            Exhibits.
                The following Exhibits are filed as part of, or incorporated by
                reference into, this Report:




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**Exhibit No.**
            
            **Document**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*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*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
                filed April 29, 1996*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 filed January 9,
                1997*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 filed
                January 9, 1997*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*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*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 3.3 to Form 8-K dated May 12, 1992*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*3.3.2
            
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on June 24,1997, incorporated by
                reference to Exhibit 3.3.2 to Form 10-KSB for the fiscal year
                ended May 31, 1997, filed July 18, 1997*3.3.3
            
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed with the Delaware Secretary of State on April 28, 2000,
                incorporated by reference to Exhibit 3.3.3 to Registration Statement
                on Form S-3 filed May 5, 2000*3.3.4
            
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on May 6, 2002, incorporated by
                reference to Exhibit 3.3.4 to Registration Statement on Form S-3
                filed June 27, 2002*3.3.5
            
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on October 16, 2003,
                incorporated by reference to Exhibit 3.3.5 to Registration Statement
                on Form SB-2 filed May 21, 2004*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 3.4 to Form
                8-K dated May 12, 1992*




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**Exhibit No.**
              
              **Document**3.5
              
              Certificate
                  of Merger issued by the Delaware Secretary of State on May 8, 1992,
                  incorporated by reference to Exhibit 3.5 to Form 8-K dated
                  May 12, 1992*Certificate
                  of Merger issued by the Colorado Secretary of State on May 12, 1992,
                  incorporated by reference to Exhibit 3.6 to Form 8-K dated
                  May 12, 1992*3.7
              
              Bylaws
                  of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K
                  dated May 12, 1992*4.1
              
              Specimen
                  common stock certificate, incorporated by reference to Exhibit 4.1
                  Form 8-K dated May 12, 1992*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
                  February 29, 1996, filed March 15, 1996*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, filed October 15, 1996*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*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 filed June 17,
                  1997*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 filed June 17,
                  1997*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
                  filed June 17, 1997*4.8
              
              Registration
                  Rights Agreement dated June 2, 1997 by and among the Company and
                  Swartz Investments, LLC related to the registration of the common
                  stock
                  related to Exhibit 4.7 incorporated by reference to Exhibit 4.8
                  to Form 8-K filed June 17, 1997*4.9
              
              Form
                  of 5% Convertible Term Debenture (CC Investments, LDC) due June 2,
                  1999 aggregating $1,000,000 to two investors incorporated by reference
                  to
                  Exhibit 4.9 to Form 10-KSB for the fiscal year ended May 31,
                  1998, filed August 19, 1998*4.10
              
              Form
                  of Stock Purchase Warrant (CC Investments, LDC) dated November 24,
                  1997 exercisable to purchase an aggregate of 200,000 common shares
                  at
                  $1.50 per share until June 2, 2002, granted to two investors in
                  connection with the offering of securities described in Exhibit 4.9
                  incorporated by reference to Exhibit 4.10 to Form 10-KSB for the year
                  ended May 31, 1998, filed August 19,
                  1998*
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  **Exhibit No.**
                
                **Document**4.11
                
                Form
                    of Warrant to Purchase Common Stock (Swartz Family Partnership,
                    L.P.)
                    dated November 24, 1997 exercisable to purchase an aggregate of
                    105,867 common shares at $1.50 per share until June 2, 2002, granted
                    to a group of investors in connection with the offering of securities
                    described in Exhibit 4.9 incorporated by reference to
                    Exhibit 4.11 to Form 10-KSB for the year ended May 31, 1998,
                    filed August 19, 1998*4.12
                
                Form
                    of Warrant to Purchase Common Stock (Investor Communications
                    Group, Inc.)
                    dated June 16, 1997 exercisable to purchase an aggregate of 130,000
                    common shares at prices ranging from $2.50 to $7.50 per share
                    until
                    June 15, 1999 incorporated by reference to Exhibit 4.12 to Form
                    10-KSB for the year ended May 31, 1998, filed August 19,
                    1998*4.13
                
                Warrant
                    to Purchase Common Stock issued to Spellcaster Telecommunications,
                    Inc.
                    dated April 28, 1998 exercisable to purchase an aggregate of 100,000
                    common shares at $1.25 per share until April 28, 2000 incorporated by
                    reference to Exhibit 4.13 to Form 10-KSB for the year ended
                    May 31, 1998, filed August 19, 1998*4.14
                
                Investment
                    agreement dated February 24, 1999 by and between the Company and
                    Swartz Private Equity, LLC for a maximum aggregate amount of
                    $5,000,000
                    incorporated by reference to Exhibit 4.14 to Form 10-QSB/A for the
                    fiscal quarter ended November 30, 1998, filed March 5,
                    1999*4.15
                
                Registration
                    Rights Agreement dated February 24, 1999 by and between the Company
                    and Swartz Private Equity, LLC related to the registration of
                    the common
                    stock related to Exhibit 4.14 incorporated by reference to
                    Exhibit 4.15 to Form 10-QSB/A for the fiscal quarter ended
                    November 30, 1998, filed March 5, 1999*4.16
                
                Form
                    of Warrant to Purchase Common Stock (Swartz Private Equity, LLC)
                    dated
                    February 24, 1999 exercisable to purchase common shares in connection
                    with the offering of securities in Exhibit 4.14 incorporated by
                    reference to Exhibit 4.16 to Form 10-QSB/A for the fiscal quarter
                    ended November 30, 1998, filed March 5, 1999*4.17
                
                Amended
                    and Restated Investment Agreement dated July 12, 1999 by and between
                    the Company and Swartz Private Equity, LLC for a maximum aggregate
                    amount
                    of $5,000,000 incorporated by reference to Exhibit 4.17 to
                    Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
                    filed July 15, 1999*4.18
                
                Investment
                    Agreement dated May 2, 2000 by and between the Company and Swartz
                    Private Equity, LLC for a maximum aggregate amount of $30,000,000
                    incorporated by reference to Exhibit 4.18 to Registration Statement
                    on Form S-3 filed May 5, 2000*4.18.1
                
                Waiver
                    and Agreement dated September 24, 2001 amending the Investment
                    Agreement (1) dated May 2, 2000 by and between the Company and
                    Swartz Private Equity, LLC for a maximum aggregate amount of
                    $30,000,000
                    incorporated by reference to Exhibit 4.18.1 to Registration Statement
                    on Form S-1 filed October 11, 2001*4.19
                
                2001
                    Stock Option Plan of the Company dated February 21, 2001 incorporated
                    by reference to Exhibit 4.19 to Registration Statement on Form S-8
                    filed March 26, 2001*4.20
                
                Investment
                    agreement dated September 17, 2001 by and between the Company and
                    Swartz Private Equity, LLC for a maximum aggregate amount of
                    $25,000,000
                    incorporated by reference to Exhibit 4.20 to Registration Statement
                    on Form S-1 filed October 11,
                    2001*
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 **Exhibit No.**
                  
                  **Document**4.20
                  
                  Investment
                      agreement dated September 17, 2001 by and between the Company and
                      Swartz Private Equity, LLC for a maximum aggregate amount of
                      $25,000,000
                      incorporated by reference to Exhibit 4.20 to Registration Statement
                      on Form S-1 filed October 11, 2001*4.21
                  
                  Registration
                      Rights Agreement dated September 17, 2001 by and between the Company
                      and Swartz Private Equity, LLC related to the registration
                      of the common
                      stock related to Exhibit 4.20 incorporated by reference to
                      Exhibit 4.21 to Registration Statement on Form S-1 filed
                      October 11, 2001*4.22
                  
                  Warrant
                      to Purchase Common Stock dated September 17, 2001 exercisable to
                      purchase common shares in connection with the Offering of securities
                      in
                      Exhibit 4.20 incorporated by reference to Exhibit 4.22 to
                      Registration Statement on Form S-1 filed October 11,
                      2001*4.23
                  
                  Financial
                      Consulting Services Agreement between the Company and M. Blaine
                      Riley, Randall Letcavage and Rosemary Nguyen incorporated by
                      reference to
                      Exhibit 4.23 to Registration Statement on Form S-8 filed
                      January 22, 2002*4.24
                  
                  Form
                      of 8% Convertible Debenture (Lincoln Ventures, LLC) due June 10, 2004
                      aggregating $1,000,000 to six investors incorporated by reference
                      to
                      Exhibit 4.24 to Registration Statement on Form S-3 filed
                      June 27, 2002*4.25
                  
                  Form
                      of Stock Purchase Warrant (Lincoln Ventures, LLC) dated June 10, 2002
                      exercisable to purchase an aggregate of 12,859,175 common shares
                      at
                      initial exercise prices ranging from $0.08616 to $0.10289 per
                      share until
                      June 10, 2007, granted to six investors in connection with the
                      offering of securities described in Exhibit 4.24 incorporated by
                      reference to Exhibit 4.25 to Registration Statement on Form S-3 filed
                      June 27, 2002*4.26
                  
                  Form
                      of Registration Rights Agreement (Lincoln Ventures, LLC) dated
                      June 10, 2002 by and among the Company and six investors related
                      to
                      the registration of the common stock related to Exhibit 4.24
                      incorporated by reference to Exhibit 4.26 to Registration Statement
                      on Form S-3 filed June 27, 2002*4.27
                  
                  2003
                      Stock Option Plan of the Company dated July 2, 2003 incorporated by
                      reference to Exhibit 4.27 to Registration Statement on Form S-8 filed
                      September 4, 2003*4.28
                  
                  Form
                      of 8% Convertible Debenture, Stock Purchase Warrant, Registration
                      Rights
                      Agreement and Securities Purchase Agreement for financings
                      entered into
                      between September 28, 2004 and January 17, 2005 incorporated by
                      reference to Exhibit 4.28 to Registration Statement on Form SB-2
                      filed February 2, 2005.*4.29
                  
                  Approval
                      Rights Agreement and Termination of Antidilution Agreement
                      and Addendum to
                      Warrants dated October 10, 2006, incorporated by reference
                      to
                      Exhibit 4.29 to Form 10-KSB filed October 13,
                      2006*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*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 filed
                      July 17, 1996*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*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, filed August 16,
                      1996*
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  **Exhibit No.**
                    
                    **Document**10.3
                    
                    Lease
                        Agreement between the Company’s subsidiary Metacomp, Inc. and Clar-O-Wood
                        Partnership, a California limited partnership dated April 11, 1991 as
                        amended November 11, 1992 and November 2, 1995 incorporated by
                        reference to Exhibit 10.3 to Form 10-KSB for fiscal year ended
                        May 31, 1997, filed July 18, 1997*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 filed December 11, 1995*10.4.1
                    
                    Letter
                        Amendment to Stock Purchase Agreement dated January 31, 1996, between
                        the Company and SEA, Ltd., incorporated by reference to
                        Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended
                        February 29, 1996, filed March 15, 1996*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
                        November 30, 1995, filed December 28, 1995*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
                        February 29, 1996, filed March 15, 1996*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
                        February 29, 1996, filed March 15, 1996*10.8
                    
                    Distribution
                        and Representation Agreement dated February 28, 1996, between the
                        Company and Innoware, Inc., incorporated by reference to
                        Exhibit 10.8
                        to Form 10-QSB for fiscal quarter ended February 29, 1996, filed
                        March 15, 1996*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 filed March 18, 1996*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 filed May 23, 1996*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 filed March 18, 1996*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
                        filed April 29, 1996*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 Exhibit 10.11.1 to Pre-Effective
                        Amendment No. 1 to Registration Statement on Form SB-2 filed
                        April 29, 1996*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 Exhibit 10.12 to
                        Pre-Effective Amendment No. 2 to Registration Statement on
                        Form SB-2 filed May 23,
                        1996*
  -10-
 **Back
                  to Table of Contents**
 **Exhibit No.**
                    
                    **Document**10.12.1
                    
                    First
                        Amendment to Employment Agreement dated as of May 8, 1996 between the
                        Company and Michael A. Carenzo dated September 23, 1996, incorporated
                        by reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal
                        year ended May 31, 1997, filed July 18, 1997*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
                        Exhibit 10.13 to Pre-Effective Amendment No. 2 to Registration
                        Statement on Form SB-2 filed May 23, 1996*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, filed
                        August 16, 1996*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, filed August 16, 1996*10.16
                    
                    Employment
                        Agreement dated January 1, 1997 between the Company and
                        Norman J. Dawson incorporated by reference to Exhibit 10.16 to
                        Form 10-KSB for fiscal year ended May 31, 1997, filed July 18,
                        1997*10.17
                    
                    Employment
                        Agreement dated January 1, 1997 between the Company and
                        Jayanta K. Maitra incorporated by reference to Exhibit 10.17 to
                        Form 10-KSB for fiscal year ended May 31, 1997, filed
                        July 18, 1997*10.18
                    
                    Technology
                        License and Distribution Agreement dated June 23, 1997 between the
                        Company and Sun Microsystems, Inc. incorporated by reference
                        to
                        Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31,
                        1997, filed July 18, 1997*10.19
                    
                    Employment
                        Agreement dated March 23, 1999 between the Company and James T.
                        Lunney incorporated by reference to Exhibit 10.19 to Form 10-KSB for
                        the fiscal year ended May 31, 1998, filed August 19,
                        1998*10.20
                    
                    Employment
                        Agreement dated July 28, 1997 between the Company and Phillip
                        Morettini incorporated by reference to Exhibit 10.20 to
                        Form 10-KSB for the fiscal year ended May 31, 1998, filed
                        August 19, 1998*10.21
                    
                    Employment
                        Agreement dated July 23, 1998 between the Company and Lowell W.
                        Giffhorn incorporated by reference to Exhibit 10.21 to
                        Form 10-KSB for the fiscal year ended May 31, 1998, filed
                        August 19, 1998*10.22
                    
                    Secured
                        Promissory Note dated June 12, 2000 between the Company and
                        James T. Lunney incorporated by reference to Exhibit 10.22 to
                        Form 10-KSB for the fiscal year ended May 31, 2000, filed
                        August 29, 2000*10.23
                    
                    Purchase
                        Agreement dated June 29, 2000 between the Company and 4S 37/38, LLC
                        incorporated by reference to Exhibit 10.23 to Form 10-KSB for the
                        fiscal year ended May 31, 2000*10.24
                    
                    Employment
                        Agreement dated October 2, 2000 between the Company and
                        Miklos B. Korodi incorporated by reference to Exhibit 10.24 to
                        Form 10-QSB for the fiscal quarter ended November 30, 2000, filed
                        January 12, 2001*
  -11-
 **Back
                  to Table of Contents**
  **Exhibit No.**
                        
                        **Document**10.25
                        
                        Employment
                            Agreement dated December 1, 2000 between the Company and
                            Richard G. Blum incorporated by reference to Exhibit 10.25 to
                            Form 10-QSB for the fiscal quarter ended November 30, 2000, filed
                            January 12, 2001*10.26
                        
                        Employment
                            Agreement dated January 29, 2001 between the Company and Serge J.
                            Miller incorporated by reference to Exhibit 10.26 to Form 10-KSB
                            for the fiscal year ended May 31, 2001, filed August 29,
                            2001*10.27
                        
                        Lease
                            Agreement dated February 23, 2001 between the Company and Arden
                            Realty Finance IV, LLC incorporated by reference to Exhibit 10.27 to
                            Form 10-KSB for the fiscal year ended May 31, 2001, filed
                            August 29, 2001*10.28
                        
                        Employment
                            Agreement dated January 1, 2001 between the Company and David H.
                            Pohl incorporated by reference to Exhibit 10.28 to Form 10-KSB
                            for the fiscal year ended May 31, 2001, filed August 29,
                            2001*10.29
                        
                        Employment
                            Agreement dated April 26, 2001 between the Company and David H.
                            Pohl incorporated by reference to Exhibit 10.29 to Form 10-KSB for
                            the fiscal year ended May 31, 2001, filed August 29,
                            2001*10.30
                        
                        Employment
                            Agreement dated November 17, 2001 between the Company and
                            Lowell W. Giffhorn incorporated by reference to Exhibit 10.30 to
                            Registration Statement on Form S-3 filed June 27,
                            2002*10.31
                        
                        Employment
                            Agreement dated December 20, 2001 between the Company and Jayanta
                            Maitra incorporated by reference to Exhibit 10.31 to Registration
                            Statement on Form S-3 filed June 27, 2002*10.32
                        
                        Consulting
                            Agreement dated March 7, 2002 between the Company and SDMC, Inc.
                            incorporated by reference to Exhibit 10.32 to Registration Statement
                            on Form S-3 filed June 27, 2002*10.33
                        
                        Employment
                            Agreement dated January 2, 2004 between the Company and Jayanta
                            Maitra incorporated by reference to Exhibit 10.33 to Registration
                            statement on Form SB-2 filed May 21, 2004*10.34
                        
                        Consulting
                            Agreement dated March 18, 2004 between the Company and SDMC, Inc.
                            incorporated by reference to Exhibit 10.34 to Registration Statement
                            en Form SB-2 filed May 21, 2004*10.35
                        
                        Employment
                            Agreement dated June 1, 2004 between the Company and Patrick Nunally
                            incorporated by reference to Exhibit 10.35 to Form 10-KSB for the
                            fiscal year ended May 31, 2004, filed August 19,
                            2004*10.36
                        
                        Amendment
                            No. 1 to Employment Agreement dated July 12, 2004 between the
                            Company and Patrick Nunally incorporated by reference
                            to
                            Exhibit 10.36 to Form 10-KSB for the fiscal year ended May 31,
                            2004, filed August 19, 2004*10.37
                        
                        Employment
                            Agreement dated September 1, 2004 between the Company and Lowell W.
                            Giffhorn incorporated by reference to Exhibit 10.37 to Registration
                            Statement on Form SB-2 filed February 2, 2005*10.38
                        
                        IGNITE
                            License Agreement with Advanced Micro Devices, Inc.,
                            dated
                            February 21, 2005, incorporated by reference to Exhibit 10.38 to
                            Form 10-KSB filed October 13, 2006*
  -12-
 **Back
                      to Table of Contents**
 **Exhibit No.**
                          
                          **Document**10.39
                          
                          Patent
                              Portfolio License Agreement with Advanced Micro Devices,
                              Inc., dated
                              February 21, 2005, incorporated by reference to Exhibit 10.39 to
                              Form 10-KSB filed October 13, 2006*10.40
                          
                          Master
                              Agreement, dated as of June 7, 2005, by and among the Company,
                              Technology Properties Limited Inc., a California corporation
                              and Charles
                              H. Moore, an individual, incorporated by reference
                              to Exhibit 10.40
                              to Form 8-K filed June 15, 2005*10.41
                          
                          Commercialization
                              Agreement dated as of June 7, 2005 by and among the JV LLC,
                              Technology Properties Limited Inc., a California corporation,
                              and the
                              Company, incorporated by reference to Exhibit 10.41 to Form 8-K filed
                              June 15, 2005*10.42
                          
                          Limited
                              Liability Company Operating Agreement of JV LLC, a
                              Delaware limited
                              liability company, dated as of June 7, 2005, incorporated by
                              reference to Exhibit 10.42 to Form 8-K filed June 15,
                              2005*10.43
                          
                          Agreement
                              for Part-Time Employment dated August 3, 2005 between the Company and
                              Thomas J. Sweeney, incorporated by reference to Exhibit 99.3 to Form
                              8-K filed August 9, 2005*14.1
                          
                          Code
                              of Ethics for Senior Financial Officers incorporated
                              by reference to
                              Exhibit 14.1 to Form 10-K for the fiscal year ended May 31,
                              2003, filed August 29, 2003*21.1
                          
                          Subsidiaries
                              of the small business issuer, incorporated by reference
                              to
                              Exhibit 21.1 to Form 10-KSB filed October 13,
                              2006*31.1
                          
                          Certification
                              of David H. Pohl, CEO, pursuant to Section 302 of the Sarbanes-Oxley
                              Act of 2002**31.2
                          
                          Certification
                              of Thomas J. Sweeney, CFO, pursuant to Section 302 of the
                              Sarbanes-Oxley Act of 2002**32.1
                          
                          Certification
                              of David H. Pohl, CEO, pursuant to Section 906 of the Sarbanes-Oxley
                              Act of 2002**32.2
                          
                          Certification
                              of Thomas J. Sweeney, CFO, pursuant to Section 906 of the
                              Sarbanes-Oxley Act of 2002**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*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*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 filed May 23,
                              1996*99.4
                          
                          Form
                              of Non-Qualified 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 filed May 23,
                              1996*99.5
                          
                          Press
                              Release of the Company dated November 4, 1996 incorporated by
                              reference to Exhibit 99.5 to Form 8-K filed January 9,
                              1997*
  -13-
 **Back
                        to Table of Contents**
  **Exhibit No.**
                            
                            **Document**99.6
                            
                            Form
                                of Incentive Stock Option Agreement to the Company’s 2001 Stock Option
                                Plan incorporated by reference to Exhibit 99.6 to Registration
                                Statement on Form S-8 filed March 26, 2001*99.7
                            
                            Form
                                of Non-Qualified Stock Option Agreement to the Company’s 2001 Stock Option
                                Plan incorporated by reference to Exhibit 99.7 to Registration
                                Statement on Form S-8 filed March 26, 2001*99.8
                            
                            Form
                                of Incentive Stock Option Agreement to the Company’s 2003 Stock Option
                                Plan incorporated by reference to Exhibit 99.8 to Registration
                                Statement on Form S-8 filed September 4, 2003*99.9
                            
                            Form
                                of Non-Qualified Stock Option Agreement to the Company’s 2003 Stock Option
                                Plan incorporated by reference to Exhibit 99.9 to Registration
                                Statement on Form S-8 filed September 4,
                                2003*
 
 *
                            Previously
                                filed in indicated registration statement or
                                report.


**
            Exhibit filed
                herewith this Annual Report on Form 10-KSB for the fiscal year ended
                May 31, 2005




-14-
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          to Table of Contents**




Patriot
                  Scientific CorporationIndex
                  to Consolidated Financial StatementsReport
                  of Independent RegisteredPublic
                  Accounting Firm
              F-2Consolidated
                  Balance Sheets as of May 31, 2005 (as restated) and 2004 (as
                  restated)
              F-3Consolidated
                  Statements of Operations for the Years EndedMay 31,
                  2005 (as restated) and 2004 (as restated)
              F-4Consolidated
                  Statement of Stockholders’ Deficitfor
                  the Years Ended May 31, 2005 (as restated) and 2004 (as
                  restated)
              F-5Consolidated
                  Statements of Cash Flows for the Years EndedMay 31,
                  2005 (as restated) and 2004 (as restated)
              F-6
                  to F-7Summary
                  of Accounting Policies
              F-8
                  to F-13Notes
                  to Consolidated Financial Statements
              F-14
                  to F-27




F-1
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          to Table of Contents**




REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To
      the
      Stockholders and Board of Directors


Patriot
      Scientific Corporation




We
      have
      audited the accompanying consolidated balance sheets of Patriot Scientific
      Corporation (the “Company”) as of May 31, 2005 and 2004, and the related
      consolidated statements of operations, stockholders’ deficit and cash flows for
      each of the years in the two-year period ended May 31, 2005. These consolidated
      financial statements are the responsibility of the Company’s management. Our
      responsibility is to express an opinion on these consolidated financial
      statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor were we engaged to perform, an audit on its
      internal control over financial reporting. Our audit included consideration
      of
      internal control over financial reporting as a basis for designing audit
      procedures that are appropriate in the circumstances, but not for the purpose
      of
      expressing an opinion on the effectiveness of the Company's internal control
      over financial reporting. Accordingly, we express no such opinion. An audit
      includes examining, on a test basis, evidence supporting the amounts and
      disclosures in the consolidated financial statements. An audit also includes
      assessing the accounting principles used and significant estimates made by
      management, as well as evaluating the overall consolidated financial statement
      presentation. We believe that our audits provide a reasonable basis for our
      opinion.




In
      our
      opinion, the consolidated financial statements referred to above, present
      fairly, in all material respects, the consolidated financial position of Patriot
      Scientific Corporation at May 31, 2005 and 2004, and the consolidated results
      of
      its operations and its cash flows for each of the years in the two-year period
      ended May 31, 2005, in conformity with accounting principles generally accepted
      in the United States of America.





As
      discussed in Note 1, the accompanying consolidated financial statements for
      the
      years ended May 31, 2005 and 2004 have been restated.








CORBIN
      & COMPANY, LLP


Irvine,
      California


October
      11, 2006


F-2
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          to Table of Contents**




PATRIOT
      SCIENTIFIC CORPORATION


Consolidated
      Balance Sheets


May
                31,ASSETS
            
            2005
            
            2004As
                restated, see NOTE 1Current
                assets:Cash
                and cash equivalents
            
            $
            591,426
            
            $
            355,940Marketable
                securities and short-term investments
            
            
            697,524
            
            
            22,646Restricted
                short-term investment
            
            
            201,648
            
            
            —Licenses
                receivable
            
            
            2,000,000
            
            
            —Accounts
                receivable
            
            
            —
            
            
            1,225Prepaid
                expenses and other current assets
            
            
            121,758
            
            
            322,068Total
                current assets
            
            
            3,612,356
            
            
            701,879Property
                and equipment, net
            
            
            21,376
            
            
            68,389Other
                assets, net
            
            
            23,891
            
            
            41,221Patents
                and trademarks, net of accumulated amortizationof
                $549,563 and $501,235
            
            
            66,411
            
            
            114,739$
            3,724,034
            
            $
            926,228LIABILITIES
                AND STOCKHOLDERS’ DEFICITCurrent
                liabilities:Line
                of credit
            
            $
            100,000
            
            $
            —Current
                portion of 8% convertible debentures, net of debt discountof
                $301,320 and $27,180
            
            
            421,847
            
            
            145,320Secured
                notes payable to stockholders
            
            
            —
            
            
            100,000Accounts
                payable
            
            
            268,458
            
            
            134,600Accrued
                liabilities and other
            
            
            505,153
            
            
            160,102Current
                portion of capital lease obligation
            
            
            2,306
            
            
            8,020Accrued
                contested fee payable
            
            
            346,000
            
            
            —Total
                current liabilities
            
            
            1,643,764
            
            
            548,0428%
                Convertible debentures, net of debt discount of $111,559
              and
                $2,047,966
            
            
            45,942
            
            
            227,701Warrant
                and derivative liabilities
            
            
            9,274,712
            
            
            5,872,662Long-term
                portion of capital lease obligation
            
            
            —
            
            
            2,306Total
                liabilities
            
            
            10,964,418
            
            
            6,650,711Commitments
                and contingenciesStockholders’
                deficit:Preferred
                stock, $0.00001 par value; 5,000,000 sharesauthorized;
                none outstanding
            
            
            —
            
            
            —Common
                stock, $0.00001 par value; 500,000,000 sharesauthorized;
                280,492,013 and 171,156,363 shares issued andoutstanding
            
            
            2,805
            
            
            1,712Additional
                paid-in capital
            
            
            55,459,253
            
            
            46,457,543Accumulated
                deficit
            
            
            (62,702,442
            )
            
            (52,183,738
            )Total
                stockholders’ deficit
            
            
            (7,240,384
            )
            
            (5,724,483
            )$
            3,724,034
            
            $
            926,228


See
      accompanying report of independent registered public accounting
      firm,


summary
        of accounting policies and notes to consolidated financial
        statements
 F-3
 **Back
            to Table of Contents**
  PATRIOT
        SCIENTIFIC CORPORATION
 Consolidated
        Statements of Operations


Years
                Ended May 31,2005
            
            2004As
                restated, see NOTE 1Net
                sales:Product
            
            $
            25,077
            
            $
            74,017Licenses
                and royalties
            
            
            2,957,509
            
            
            2,4002,982,586
            
            
            76,417Cost
                of sales
            
            
            —
            
            
            10,472Gross
                profit
            
            
            2,982,586
            
            
            65,945Operating
                expenses:Research
                and development
            
            
            294,735
            
            
            549,756Selling,
                general and administrative
            
            
            2,600,430
            
            
            1,253,559Operating
                expenses
            
            
            2,895,165
            
            
            1,803,315Operating
                income (loss)
            
            
            87,421
            
            
            (1,737,370
            )Other
                income (expense):Gain
                on sale of technology
            
            
            —
            
            
            75,500Unrealized
                loss on marketable securities
            
            
            (21,180
            )
            
            (45,354
            )Interest
                and other income
            
            
            56,251
            
            
            270Gain
                on sale of assets
            
            
            4,128
            
            
            —Interest
                expense
            
            
            (3,081,760
            )
            
            (4,218,452
            )Change
                in fair value of warrant and derivative liabilities
            
            
            (7,563,564
            )
            
            164,253Other
                expense, net
            
            
            (10,606,125
            )
            
            (4,023,513
            )Net
                loss
            
            $
            (10,518,704
            )
            $
            (5,760,883
            )Basic
                and diluted loss per common share
            
            $
            (0.05
            )
            $
            (0.04
            )Weighted
                average number of common shares outstanding during the period - basic
                and
                diluted
            
            
            222,495,047
            
            
            139,767,276


See
      accompanying report of independent registered public accounting
      firm,


summary
      of accounting policies and notes to consolidated financial
      statements


F-4
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          to Table of Contents**




PATRIOT
      SCIENTIFIC CORPORATION


Consolidated
      Statements of Stockholders’ Deficit


Common
                Stock
            
            Additional
            
            Accumulated
            
            Stockholders’Shares
            
            Amount
            
            Paid-in
                Capital
            
            Deficit
            
            DeficitAs
                restated, see NOTE 1Balance,
                June 1, 2003
            
            
            106,547,807
            
            $
            1,066
            
            $
            41,517,464
            
            $
            (46,422,855
            )
            $
            (4,904,325
            )Issuance
                of common stock at $.025 to $.034 per share
            
            
            1,800,752
            
            
            18
            
            
            50,422
            
            
            —
            
            
            50,440Exercise
                of warrants and options at $.0172 to $.04 per share
            
            
            11,184,175
            
            
            112
            
            
            331,995
            
            
            —
            
            
            332,107Issuance
                of common stock for services at $.043 to $.117 per share
            
            
            1,126,496
            
            
            11
            
            
            59,841
            
            
            —
            
            
            59,852Conversion
                of debentures plus accrued interest at $.017 to $.064 per
                share
            
            
            50,497,133
            
            
            505
            
            
            1,757,123
            
            
            —
            
            
            1,757,628Reclassification
                of warrant and derivative liabilities associated with debt conversions
                and
                warrant exercises
            
            
            —
            
            
            —
            
            
            2,740,698
            
            
            —
            
            
            2,740,698Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (5,760,883
            )
            
            (5,760,883
            )Balance,
                May 31, 2004
            
            
            171,156,363
            
            
            1,712
            
            
            46,457,543
            
            
            (52,183,738
            )
            
            (5,724,483
            )Issuance
                of common stock at $.03 and $.10 per share
            
            
            4,625,000
            
            
            46
            
            
            453,204
            
            
            —
            
            
            453,250Exercise
                of warrants and options at $.02 to 4.06 per share
            
            
            39,028,511
            
            
            390
            
            
            820,899
            
            
            —
            
            
            821,289Issuance
                of common stock for services at $.05 and $.09 per share
            
            
            796,000
            
            
            8
            
            
            58,792
            
            
            —
            
            
            58,800Conversion
                of debentures payable plus accrued interest at $.02 and $.05 per
                share
            
            
            64,886,139
            
            
            649
            
            
            2,169,287
            
            
            —
            
            
            2,169,936Non-cash
                compensation
            
            
            —
            
            
            —
            
            
            59,675
            
            
            —
            
            
            59,675Reclassification
                of warrant and derivative liabilities associated with debt conversions
                and
                warrant exercises
            
            
            —
            
            
            
            
            
            5,439,853
            
            
            —
            
            
            5,439,853Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (10,518,704
            )
            
            (10,518,704
            )Balance,
                May 31, 2005
            
            
            280,492,013
            
            $
            2,805
            
            $
            55,459,253
            
            $
            (62,702,442
            )
            $
            (7,240,384
            )


See
      accompanying report of independent registered public accounting
      firm,


summary
      of accounting policies and notes to consolidated financial
      statements


F-5
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          to Table of Contents**




PATRIOT
      SCIENTIFIC CORPORATION


Consolidated
      Statements of Cash Flows


Years
                Ended May 31,2005
            
            2004As
                restated, see NOTE 1Cash
                flows from operating activities:Net
                loss
            
            $
            (10,518,704
            )
            $
            (5,760,883
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Amortization
                and depreciation
            
            
            94,353
            
            
            135,450Non-cash
                interest expense related to convertible debentures,notes
                payable and warrants
            
            
            2,940,608
            
            
            4,069,350Gain
                on sale of technology
            
            
            —
            
            
            (75,500
            )Gain
                on disposal of fixed assets
            
            
            (4,012
            )
            
            —Unrealized
                loss on marketable securities
            
            
            21,180
            
            
            45,354Expense
                related to common stock, options and warrants issued forservices
            
            
            118,476
            
            
            59,852Change
                in fair value of warrant and derivative liabilities
            
            
            7,563,564
            
            
            (164,523
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            —
            
            
            (18,639
            )Prepaid
                and other current assets
            
            
            218,865
            
            
            (217,039
            )Licenses
                receivable
            
            
            (2,000,000
            )
            
            —Accounts
                payable and accrued expenses
            
            
            435,644
            
            
            (149,394
            )Contingency
                fee payable
            
            
            501,700
            
            
            —Net
                cash used in operating activities
            
            
            (628,326
            )
            
            (2,075,972
            )Cash
                flows from investing activities:Purchase
                of short-term investments
            
            
            (897,706
            )
            
            —Proceeds
                from sale of fixed assets
            
            
            5,000
            
            
            —Proceeds
                from sale of technology
            
            
            —
            
            
            7,500Purchase
                of property, equipment and patents
            
            
            —
            
            
            (36,123
            )Net
                cash used in investing activities
            
            
            (892,706
            )
            
            (28,623
            )Cash
                flows from financing activities:Payment
                of shareholder note
            
            
            (100,000
            )
            
            —Proceeds
                from line of credit
            
            
            100,000
            
            
            —Proceeds
                from issuance of secured notes payable
            
            
            —
            
            
            12,320Payments
                for capital lease obligations
            
            
            (8,020
            )
            
            (6,405
            )Proceeds
                from issuance of convertible debentures
            
            
            490,000
            
            
            2,175,000Proceeds
                from issuance of common stock
            
            
            453,250
            
            
            50,440Proceeds
                from exercise of common stock warrants and options
            
            
            821,288
            
            
            175,237Proceeds
                from sale of accounts receivable
            
            
            —
            
            
            21,280Net
                cash provided by financing activities
            
            
            1,756,518
            
            
            2,427,872Net
                change in cash and cash equivalents
            
            
            235,486
            
            
            323,277Cash
                and cash equivalents, beginning of year
            
            
            355,940
            
            
            32,663Cash
                and cash equivalents, end of year
            
            $
            591,426
            
            $
            355,940


See
      accompanying report of independent registered public accounting
      firm,


summary
      of accounting policies and notes to consolidated financial
      statements


F-6
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          to Table of Contents**




PATRIOT
      SCIENTIFIC CORPORATION


Consolidated
      Statements of Cash Flows


Years
                Ended May 31,Supplemental
              Disclosure of Cash Flow Information:
            
            2005
            
            2004Cash
                paid during the year for:Interest
            
            $
            15,406
            
            $
            17,220Income
                taxes
            
            $
            4,800
            
            $
            —Supplemental
                Schedule of Non-Cash Investing Activities:Convertible
                debentures, notes payable and accrued interest exchanged for common
                stock
            
            $
            2,169,936
            
            $
            1,757,628Debt
                discount recorded on issuance of convertible debentures
            
            $
            490,000
            
            $
            2,898,167Conversion
                of secured notes payable to debenture
            
            $
            —
            
            $
            723,167Cancellation
                of secured note payable and accrued interest for exercise of
                warrants
            
            $
            —
            
            $
            110,707Reclassification
                of warrant and derivative liabilities associated with debt conversions
                and
                warrant exercises
            
            $
            5,439,853
            
            $
            2,740,698


See
        accompanying report of independent registered public accounting
        firm,
 summary
        of accounting policies and notes to consolidated financial
        statements
 F-7
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            to Table of Contents**
  PATRIOT
        SCIENTIFIC CORPORATION
 Summary
        of Accounting Policies


**ORGANIZATION
      AND BUSINESS**





Patriot
      Scientific Corporation (the "Company", “we”, “us” or “our”), a Delaware
      corporation incorporated in 1987, is engaged in the development, marketing,
      and
      sale of patented microprocessor technology and the sale of high-performance
      high-speed data communication products.




**BASIS
      OF PRESENTATION AND CONSOLIDATION**




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





**RECLASSIFICATIONS**





Certain
      reclassifications have been made to the 2004 financial statements in order
      for
      them to conform to the 2005 presentation. Such reclassifications have no impact
      on the Company's financial position or results of operations.





**FINANCIAL
      INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK**





Financial
      instruments that potentially subject the Company to concentrations of credit
      risk consist principally of cash, short-term investments and accounts and
      licenses receivable.





At
      times,
      the Company's balance of cash and investments in certificates of deposits
      maintained with its bank may exceed the FDIC insured limit of $100,000. The
      Company limits its exposure of loss by maintaining its cash with financially
      stable financial institutions. When the Company has excess cash, the Company's
      cash equivalents are placed in high quality money market accounts with major
      financial institutions and high grade short-term commercial paper. The Company
      believes this investment policy limits its exposure to concentrations of credit
      risk. Money market accounts are federally insured; however, commercial paper
      is
      not insured. The Company has not experienced any losses in such accounts.





Concentrations
      of credit risk with respect to receivables are primarily limited due to the
      high
      credit worthiness of the Company's customers. The Company routinely assesses
      the
      financial strength of its customers and, as a consequence, believes that its
      accounts receivable credit risk exposure is limited. Generally, the Company
      does
      not require collateral or other security to support customer receivables.





The
      carrying value of financial instruments, including cash, cash equivalents,
      short-term investments, accounts receivable, accounts payable and accrued
      liabilities, approximate fair value because of the immediate or short-term
      maturity of these instruments. The carrying value of the Company's line of
      credit obligation approximates its estimated fair value due to the instrument
      bearing a variable rate of interest which reflects the current market rate
      available to the Company. The carrying value of the Company's convertible
      debentures approximates its fair value at May 31, 2005 and 2004.




**CASH
      EQUIVALENTS**




For
      purposes of balance sheet classification and the statements of cash flows,
      the
      Company considers all highly liquid investments acquired with a maturity of
      three months or less to be cash equivalents.




**MARKETABLE
      SECURITIES AND SHORT TERM INVESTMENTS**




At
      May
      31, 2005 and 2004, the Company had investments in marketable equity securities
      having a carrying value of $1,466 and $22,646, respectively. Marketable equity
      securities are carried at their fair value, with unrealized gains or losses
      reflected in the statement of operations. During the years ended May 31, 2005
      and 2004, the Company recognized unrealized losses related to the write down
      in
      the carrying value of the securities of approximately $21,000 and
      $45,000.


F-8
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          to Table of Contents**


PATRIOT
        SCIENTIFIC CORPORATION
 Summary
        of Accounting Policies


**MARKETABLE
      SECURITIES AND SHORT TERM INVESTMENTS, continued**





At
      May
      31, 2005, the Company also has approximately $696,000 in certificates of deposit
      maintained with various financial institutions. The certificates mature at
      various dates in fiscal 2006, bear interest at rates ranging from 3.1% to 3.6%,
      and are reported at their original cost plus accrued interest.




**PROPERTY,
      EQUIPMENT AND DEPRECIATION**





Property
      and equipment are stated at cost. Depreciation is computed over each asset's
      estimated useful life, ranging from three to five years, using the straight-line
      method. The Company follows the provisions of the Financial Accounting Standards
      Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144, *Accounting
      for the Impairment of Long-lived Assets* .
      Long-lived assets and certain identifiable intangibles to be held and used
      by
      the Company are reviewed for impairment whenever events or changes in
      circumstances indicate that the carrying amount of an asset may not be
      recoverable. The Company evaluates the recoverability of its long-lived assets
      based on estimated future cash flows and the estimated fair value of such
      long-lived assets and provides for impairment if such undiscounted cash flows
      are insufficient to recover the carrying amount of the long-lived asset.





**PATENTS
      AND TRADEMARKS**





Patents
      and trademarks are carried at cost less accumulated amortization and are
      amortized over their estimated useful lives of four years. Estimated future
      annual amortization expense arising from the patents is approximately $35,000,
      $23,000 and $9,000 in fiscal years 2006, 2007, and 2008, respectively. The
      carrying value of patents and trademarks is periodically reviewed and
      impairments, if any, are recognized when the expected future benefit to be
      derived from individual intangible assets is less than its carrying value
      determined based on the provisions of SFAS No. 144 as discussed above.





**DERIVATIVE
      FINANCIAL INSTRUMENTS**





In
      connection with the issuance of certain convertible debentures (see Note 5),
      the
      terms of the debentures included a reset conversion feature which provided
      for a
      conversion of the debentures into shares of the Company’s common stock at a rate
      which was determined to be variable, and an embedded conversion option. The
      Company determined that the reset conversion feature was an embedded derivative
      instrument and that the conversion option was an embedded put option pursuant
      to
      SFAS No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      as
      amended, and Emerging Issues Task Force (“EITF”) Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock* .
      The
      accounting treatment of derivative financial instruments requires that the
      Company record the derivatives and related warrants at their fair values as
      of
      the inception date of the convertible debenture agreements and at fair value
      as
      of each subsequent balance sheet date.  In addition, under the provisions
      of EITF Issue No. 00-19, as a result of entering into the convertible debenture
      agreements, the Company was required to classify all other non-employee warrants
      and options as derivative liabilities and record them at their fair values
      at
      each balance sheet date.  Any change in fair value was recorded as
      non-operating, non-cash income or expense at each balance sheet date.  If
      the fair value of the derivatives was higher at the subsequent balance sheet
      date, the Company recorded a non-operating, non-cash charge.  If the fair
      value of the derivatives was lower at the subsequent balance sheet date, the
      Company recorded non-operating, non-cash income.




During
      the years ended May 31, 2005 and 2004, the Company recognized other income
      (expense) of approximately $(7,564,000) and $165,000, related to recording
      the
      warrant and derivative liabilities at fair value. At May 31, 2005 and 2004,
      there were approximately $9,275,000 and $5,873,000 of warrant and derivative
      liabilities as the related variable debt instruments were not
      settled.





The
      Company’s derivative instruments were valued by an independent third party
      valuation firm. The conversion feature of the convertible notes and the warrants
      were valued using a Monte Carlo simulation model incorporating the instruments’
multiple reset dates.


F-9
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          to Table of Contents**




PATRIOT
      SCIENTIFIC CORPORATION


Summary
        of Accounting Policies




**DERIVATIVE
        FINANCIAL INSTRUMENTS, continued**





The
      following assumptions were used for valuing the call and the put pricing models
      during the years ended May 31, 2005 and 2004:





May
                31, 2005
            
            May
                31, 2004Estimated
                dividends
            None
            
            NoneExpected
                volatility
            161
                - 266%
            
            154
                - 244%Risk-free
                interest rate
            1.3
                - 4.4%
            
            1.0
                - 4.4%Expected
                term (years)
            2
                -
                7
            
            2
                -
                7





**REVENUE
      RECOGNITION**





The
      Company recognizes revenue from the sale of its product upon shipment to the
      customer, at which time title transfers and the Company has no further
      obligations. Amounts received under technology licensing fee arrangements are
      recognized at the time the arrangement is executed, at which time the rights
      to
      the Company's technology have been transferred and no significant performance
      obligations remain. Fees for maintenance or support are recorded on a
      straight-line basis over the underlying period of performance.





**RESEARCH
      AND DEVELOPMENT COSTS**





Research
      and development costs are expensed as incurred.





**ADVERTISING**





The
      Company expenses advertising costs as incurred. Advertising expense was
      approximately $14,000 and $3,000 for the years ended May 31, 2005 and 2004,
      respectively.





**INCOME
      TAXES**





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





**NET
      LOSS PER SHARE**





The
      Company applies SFAS No. 128, *Earnings
      Per Share* ,
      for the
      calculation of "Basic" and "Diluted" earnings (loss) per share. Basic earnings
      (loss) per share includes no dilution and is computed by dividing income (loss)
      available to common stockholders by the weighted average number of common shares
      outstanding for the period. Diluted earnings (loss) per share reflects the
      potential dilution of securities that could share in the earnings (loss) of
      an
      entity. At May 31, 2005 and 2004, potential common shares of 143,826,204 and
      193,271,524 related to the Company's outstanding convertible debentures,
      warrants, and options were not included in the calculation of diluted loss
      per
      share as they had an antidilutive effect.





**Year
                Ended May 31, 2005**Numerator
                (Loss)
            
            Denominator
                (Shares)
            
            Per
                Share AmountBasic
              EPS:Net
                loss
            
            $
            (10,518,704
            )
            
            222,495,047
            
            $
            (0.05
            )Diluted
                EPS
            
            $
            —
            
            
            —Income
                available to common shareholders
            
            $
            (10,518,704
            )
            
            222,495,047
            
            $
            (0.05
            )




F-10
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          to Table of Contents**




PATRIOT
      SCIENTIFIC CORPORATION


Summary
          of Accounting Policies
  **NET
          LOSS PER SHARE, continued**





**Year
                Ended May 31, 2004**Numerator
                (Loss)
            
            Denominator
                (Shares)
            
            Per
                Share AmountBasic
              EPS:Net
                loss
            
            $
            (5,760,883
            )
            
            139,767,276
            
            $
            (0.04
            )Diluted
                EPS
            
            $
            —
            
            
            —Income
                available to common shareholders
            
            $
            (5,760,883
            )
            
            139,767,276
            
            $
            (0.04
            )




**USE
      OF ESTIMATES**





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the consolidated financial statements and the reported amounts of revenues
      and
      expenses during the reporting period. Actual results could differ from those
      estimates. Significant estimates underlying the Company's financial statements
      include the accrual for contested fees payable. Management has made the estimate
      based on information currently available to it; however, given the contingent
      nature of the liability, it is possible that the ultimate resolution of the
      liability could result in a payment of an amount greater or lesser than the
      amount accrued. To the extent the ultimate payment, if any, related to this
      matter is different than the Company's current estimate, the Company's results
      of operations in future periods may be impacted.




**SALE
      OF ACCOUNTS RECEIVABLE**





The
      Company has adopted SFAS No. 140, "Accounting for Transfers and Servicing of
      Financial Assets and Extinguishments of Liabilities". SFAS No. 140 provides
      consistent standards for distinguishing transfers of financial assets that
      are
      sales from transfers that are secured borrowings. A $400,000 factoring line
      established by the Company with a bank enables the Company to sell selected
      accounts receivable invoices to the bank with full recourse against the Company.
      These transactions qualify for a sale of assets since (1) the Company has
      transferred all of its right, title and interest in the selected accounts
      receivable invoices to the bank, (2) the bank may pledge, sell or transfer
      the
      selected accounts receivable invoices, and (3) the Company has no effective
      control over the selected accounts receivable invoices since it is not entitled
      to or obligated to repurchase or redeem the invoices before their maturity
      and
      it does not have the ability to unilaterally cause the bank to return the
      invoices. Under SFAS No. 140, after a transfer of financial assets, an entity
      recognizes the financial and servicing assets it controls and the liabilities
      it
      has incurred, derecognizes financial assets when control has been surrendered,
      and derecognizes liabilities when extinguished. During fiscal 2005 and 2004,
      the
      Company sold approximately none and $27,000, respectively, of its accounts
      receivable to a bank under a factoring agreement for approximately none and
      $21,000, respectively. Pursuant to the provisions of SFAS No. 140, the Company
      reflected the transaction as a sale of assets and established an accounts
      receivable from the bank for the retained amount less the costs of the
      transaction and less any anticipated future loss in the value of the retained
      asset. The retained amount is equal to 20% of the total accounts receivable
      invoice sold to the bank less 1% of the total invoice as an administrative
      fee
      and 1.75% per month of the total outstanding accounts receivable invoices as
      a
      finance fee. The estimated future loss reserve for each receivable included
      in
      the estimated value of the retained asset is based on the payment history of
      the
      accounts receivable customer. At May 31, 2004, there was no outstanding balance.
      During fiscal year 2005 the factoring line was terminated.




**STOCK-BASED
      COMPENSATION**





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





SFAS
      No.
      123, *Accounting
      for Stock-Based Compensation* ,
      and
      SFAS No. 148, *Accounting
      for Stock-Based Compensation-Transition and Disclosure* ,
      require
      the Company to provide pro forma information regarding reported net loss as
      if
      compensation cost for the Company's stock option plans had been determined
      in
      accordance with the fair value


F-11
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          to Table of Contents**




PATRIOT
        SCIENTIFIC CORPORATION
 Summary
          of Accounting Policies


**STOCK-BASED
      COMPENSATION, continued**





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. SFAS No. 148 also
      provides for alternative methods of transition for a voluntary change to the
      fair value based method of accounting for stock-based employee compensation.
      The
      Company has elected to continue to account for stock based compensation under
      APB No. 25.





The
      Company applies SFAS No. 123 in valuing options and warrants granted to
      consultants and estimates the fair value of such options using the Black-Scholes
      option-pricing model. The fair value is recorded as consulting expense as
      services are provided. Options granted to consultants for which vesting is
      contingent based on future performance are measured at their then current fair
      value at each period end, until vested.





Had
      the
      Company used the accounting provisions of SFAS No. 123, the Company’s net loss
      per share would have been increased by the pro forma amounts indicated
      below:





Years
                Ended May 31,2005
            
            2004Net
                loss as reported
            
            $
            (10,518,704
            )
            $
            (5,760,883
            )Add:Stock
                based compensation expense included in reported net loss, net of
                related
                tax effects
            
            
            —
            
            
            —Deduct:Total
                stock based method under fair value based method for all awards net
                of
                related tax effects
            
            
            138,883
            
            
            152,074Pro
                forma net loss
            
            $
            (10,657,587
            )
            $
            (5,912,957
            )Net
                loss per common share, as reported - basic and diluted
            
            $
            (0.05
            )
            $
            (0.04
            )Net
                loss per common share, pro forma - basic and diluted
            
            $
            (0.05
            )
            $
            (0.04
            )


**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the FASB issued SFAS 123R, *Share
      Based Payment* .
      This
      statement replaces SFAS No. 123 and supersedes APB Opinion 25. SFAS No. 123R
      requires that the cost of share-based payment transactions (including those
      with
      employees and non-employees) be recognized as compensation based on the
      estimated fair value of the equity instrument awarded. SFAS No. 123R applies
      to
      all share-based payment transactions in which an entity acquires goods or
      services by issuing (or offering to issue) its shares, options, or other equity
      instruments or by incurring liabilities in amounts based on the price of the
      entity's shares or other equity instruments, or that require (or may require)
      settlement by the issuance of an entity's shares or other equity instruments,
      This statement applies to all new awards granted during the fiscal year
      beginning after December 15, 2005 and to previous awards that are modified
      or
      cancelled after such date. The Company has not yet fully evaluated the effect
      of
      adopting SFAS No. 123R on its financial statements.





In
      December 2004, the FASB issued SFAS No. 153, *Exchange
      of Nonmonetary Assets* ,
      an
      amendment of APB Opinion No. 29, *Accounting for Nonmmonetary Transaction.* SFAS No.
      153 is based on the principle that exchanges of nonmonetary assets should be
      measured based on the fair market value of the assets exchanged. SFAS No. 153
      eliminates the exception of nonmonetary exchanges of similar productive assets
      and replaces it with a general exception for exchanges of nonmonetary assets
      that do not have commercial substance. SFAS 153 is effective for nonmonetary
      asset exchanges in fiscal periods beginning after June 15, 2005. The Company
      does not believe that the provisions of SFAS No. 153 will have a material impact
      on its financial statements.


F-12
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          to Table of Contents**




PATRIOT
      SCIENTIFIC CORPORATION


Summary
          of Accounting Policies


**RECENT
      ACCOUNTING PRONOUNCEMENTS, continued**





In
      May
      2005, the FASB issued SFAS No. 154, *Accounting
      Changes and Error Corrections* ,
      which
      replaces APB Opinion No. 20, *Accounting
      Changes* ,
      and
      FASB Statement No. 3, *Reporting
      Accounting Changes in Interim Financial Statements* ,
      and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle. SFAS No. 154 requires retrospective application to prior
      periods' financial statements of changes in accounting principle, unless it
      is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS No. 154 is effective for accounting changes and
      correction of errors made in fiscal years beginning after December 15, 2005.
      Early adoption is permitted for accounting changes and correction of errors
      made
      in fiscal years beginning after the date SFAS No. 154 was issued. At the present
      time, the Company does not believe that adoption of SFAS No. 154 will have
      a
      material effect on its financial statements.


F-13
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          to Table of Contents**




PATRIOT
        SCIENTIFIC CORPORATION
 Summary
          of Accounting Policies






NOTE
      1
      - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS





During
      fiscal 2006, the Company determined that the manner in which it historically
      accounted for the reset conversion feature and embedded put option of certain
      of
      its convertible debentures issued during fiscal 2002 through fiscal 2005 was
      not
      in accordance with SFAS No. 133, as amended, and EITF Issue No. 00-19. The
      Company determined that the reset conversion feature was an embedded derivative
      instrument and that the conversion option was an embedded put option pursuant
      to
      SFAS No. 133. The accounting treatment of derivative financial instruments
      requires that the Company record the derivatives and related warrants at their
      fair values as of the inception date of the convertible debenture agreements
      and
      at fair value as of each subsequent balance sheet date.  In addition, under
      the provisions of EITF Issue No. 00-19, as a result of entering into the
      convertible debenture agreements, the Company was required to classify all
      other
      non-employee warrants and options as derivative liabilities and record them
      at
      their fair values at each balance sheet date.  Any change in fair value was
      required to be recorded as non-operating, non-cash income or expense at each
      balance sheet date.  If the fair value of the derivatives was higher at the
      subsequent balance sheet date, the Company was required to record a
      non-operating, non-cash charge.  If the fair value of the derivatives was
      lower at the subsequent balance sheet date, the Company was required to record
      non-operating, non-cash income.  Accordingly, in connection with the
      restatement adjustments, the Company has appropriately reflected the
      non-operating, non-cash income or expense resulting from the changes in fair
      value. The Company had previously not recorded the embedded derivative
      instruments as liabilities and did not record the related changes in fair
      value.





The
      following tables present a summary of the effects of the restatement adjustments
      on the Company’s consolidated balance sheets at May 31, 2005 and 2004 and the
      consolidated statements of operations and cash flows for the years ended May
      31,
      2005 and 2004:




Consolidated
                Balance SheetAs
              of May 31, 2005
            
            
            As
                Previously Reported
            
            
            Adjustments
            
            
            As
                RestatedWarrant
                and derivative liabilities
            
            $
            —
            
            $
            9,274,712
            
            $
            9,274,712Total
                liabilities
            
            $
            1,689,706
            
            $
            9,274,712
            
            $
            10,964,418Additional
                paid-in capital
            
            $
            54,569,091
            
            $
            890,162
            
            $
            55,459,253Accumulated
                deficit
            
            $
            (52,537,568
            )
            $
            (10,164,874
            )
            $
            (62,702,442
            )Total
                stockholders’ equity (deficit)
            
            $
            2,034,328
            
            $
            (9,274,712
            )
            $
            (7,240,384
            )





Statement
                of OperationsYear
                ended May 31, 2005
            
            As
                Previously Reported
            
            Adjustments
            
            As
                RestatedChange
                  in fair value of warrant and derivativeliabilities
            
            $
            —
            
            $
            (7,563,564
            )
            $
            (7,563,564
            )Interest
                expense
            
            $
            (2,820,170
            )
            $
            (261,590
            )
            $
            (3,081,760
            )Total
                other expense
            
            $
            (2,780,971
            )
            $
            (7,825,154
            )
            $
            (10,606,125
            )Net
                loss
            
            $
            (2,693,550
            )
            $
            (7,825,154
            )
            $
            (10,518,704
            )LOSS
                PER COMMON SHARE:Basic
            
            $
            (0.01
            )
            $
            (0.04
            )
            $
            (0.05
            )Diluted
            
            $
            (0.01
            )
            $
            (0.04
            )
            $
            (0.05
            )










Statement
                of Cash FlowsYear
                ended May 31, 2005
            
            As
                Previously Reported
            
            Adjustments
            
            As
                RestatedNet
                loss
            
            $
            (2,693,550
            )
            $
            (7,825,154
            )
            $
            (10,518,704
            )Change
                  in fair value of warrant and derivativeliabilities
            
            $
            —
            
            $
            7,563,564
            
            $
            7,563,564Non-cash
                interest expense related to convertible debentures, notes payable
                and
                warrants
            
            $
            2,679,018
            
            $
            261,590
            
            $
            2,940,608




F-14
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          to Table of Contents**


PATRIOT
        SCIENTIFIC CORPORATION
 Summary
          of Accounting Policies






NOTE
      1
      - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS,
      continued


Consolidated
                Balance SheetAs
                of May 31, 2004
            
            
            As
                Previously Reported
            
            
            Adjustments
            
            
            As
                RestatedWarrant
                and derivative liabilities
            
            $
            —
            
            $
            5,872,662
            
            $
            5,872,662Total
                liabilities
            
            $
            778,049
            
            $
            5,872,662
            
            $
            6,650,711Additional
                paid-in capital
            
            $
            49,990,485
            
            $
            (3,532,942
            )
            $
            46,457,543Accumulated
                deficit
            
            $
            (49,844,018
            )
            $
            (2,339,720
            )
            $
            (52,183,738
            )Total
                stockholders’ equity (deficit)
            
            $
            148,179
            
            $
            (5,872,662
            )
            $
            (5,724,483
            )





Statement
                of OperationsYear
                ended May 31, 2004
            
            As
                Previously Reported
            
            Adjustments
            
            As
                RestatedChange
                  in fair value of warrant and derivativeliabilities
            
            $
            —
            
            $
            164,523
            
            $
            164,523Interest
                expense
            
            $
            (2,443,024
            )
            $
            (1,775,428
            )
            $
            (4,218,452
            )Total
                other expense
            
            $
            (2,412,608
            )
            $
            (1,610,905
            )
            $
            (4,023,513
            )Net
                loss
            
            $
            (4,149,978
            )
            $
            (1,610,905
            )
            $
            (5,760,883
            )LOSS
                PER COMMON SHARE:Basic
            
            $
            (0.03
            )
            $
            (0.01
            )
            $
            (0.04
            )Diluted
            
            $
            (0.03
            )
            $
            (0.01
            )
            $
            $(0.04
            )










Statement
                of Cash FlowsYear
                ended May 31, 2004
            
            As
                Previously Reported
            
            Adjustments
            
            As
                RestatedNet
                loss
            
            $
            (4,149,978
            )
            $
            (1,610,905
            )
            $
            (5,760,883
            )Change
                  in fair value of warrant and derivativeliabilities
            
            $
            —
            
            $
            (164,523
            )
            $
            (164,523
            )Non-cash
                interest expense related to convertible debentures, notes payable
                and
                warrants
            
            $
            2,293,922
            
            $
            1,775,428
            
            $
            4,069,350




NOTE
      2
      - PROPERTY AND EQUIPMENT





Property
      and equipment consisted of the following at May 31, 2005 and 2004:





2005
            
            2004Computer
                equipment and software
            
            $
            857,948
            
            $
            1,660,707Furniture
                and fixtures
            
            
            213,458
            
            
            499,274Laboratory
                equipment
            
            
            35,673
            
            
            205,5941,107,079
            
            
            2,365,575Less
                accumulated depreciation and amortization
            
            
            (1,085,703
            )
            
            (2,297,186
            )Net
                property and equipment
            
            $
            21,376
            
            $
            68,389


Depreciation
      expense was $46,026 and $85,141 for the years ended May 31, 2005 and
      2004.


F-15
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PATRIOT
        SCIENTIFIC CORPORATION
 Summary
          of Accounting Policies


NOTE
      3
      - LICENSE AGREEMENTS





In
      February 2005, the Company entered into two separate licensing agreements with
      one customer for the Company's Ignite microprocessor technology and the patent
      portfolio technology. The aggregate amount of the two licenses was $3,050,000,
      of which $2,950,000 was for licensing fees and $100,000 was for deferred
      maintenance. Maintenance under the agreement is expected to be provided over
      a
      period not to exceed four years. The payment terms of the agreements require
      aggregate payments of $300,000 at the time of execution, three quarterly
      payments of $750,000 each on April 1, August 15, and November 15, 2005 and
      one
      final payment of $500,000 on February 15, 2006. Total payments received to
      date
      under the agreements include $1,050,000 in fiscal 2005 and $750,000 in fiscal
      2006. The agreements also provide for the future payment of royalties to the
      Company based on sales of product using the licensed technology. In connection
      with the license agreement, the Company became obligated to the former
      co-inventor of the Ignite technology for $207,600, payable in quarterly
      installments of $51,900, of which $155,700 remains outstanding at May 31, 2005
      and is included in accrued liabilities and other in the accompanying
      consolidated balance sheet.





Also,
      in
      conjunction with entering into these license agreements, as well as the license
      agreement described in Note 14, the legal advisor who had previously assisted
      the Company in its negotiations, has asserted a claim against the Company for
      amounts which it believes it is entitled. The Company is contesting the matter;
      the outcome of which is currently unknown. Based on its current assessment
      of
      the matter, the Company has accrued an expense of $346,000 as of May 31, 2005.
      The Company intends to vigorously defend itself in this matter; however, it
      is
      possible that, were the Company not to prevail in the suit, the ultimate amount
      payable to such legal advisor could be significantly higher based on any future
      license agreements entered into by the Company.





NOTE
      4
      - LINES OF CREDIT





The
      Company has a line of credit with a bank which provides for advances up to
      $180,000 and which matures in March 2006. Advances under the line, which totaled
      $100,000 at May 31, 2005, are secured by a $200,000 certificate of deposit.
      The
      line of credit bears an interest rate at 2.25% above the index (5.31% at May
      31,
      2005).





Additionally,
      the Company has a $400,000 line of credit with a financial institution, pursuant
      to which it may factor accounts receivable. There were no balances outstanding
      under the line of credit at May 31, 2005 and 2004. During fiscal 2004, the
      Company sold approximately $27,000 of receivables under the agreement; no
      receivables were sold during fiscal 2005.




NOTE
      5
      - RELATED PARTY TRANSACTIONS





During
      fiscal 2004, the Company sold services totaling approximately $25,000 to an
      entity owned by an officer.




NOTE
      6
      - SECURED NOTES PAYABLE




Swartz
      Private Equity LLC




Effective
      October 9, 2001, the Company entered into a Secured Promissory Note and
      Agreement, as amended from time to time (the “Note Agreement”), with Swartz
      Private Equity LLC (“Swartz”) which provides for working capital advances.
      Outstanding amounts under the Note Agreement bear interest at 5% per annum
      and
      are secured by the Company’s assets.




As
      part
      of the consideration for entering into the Note Agreement, the Company agreed
      to
      issue warrants to Swartz related to each advance against the note. In connection
      with each advance, the Company issued to Swartz a warrant to purchase a number
      of shares of common stock equal to the amount of the advance multiplied by
      8.25
      at an initial exercise price equal to the lesser of (a) the factor of the
      average of the volume weighted average price per share, as defined by Bloomberg
      L.P., for each trading day in the period beginning on the date of the previous
      advance and ending on the trading day immediately preceding the date of the
      current advance multiplied by .70 or (b) the volume weighted average price
      per
      share minus $0.05.


F-16
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PATRIOT
        SCIENTIFIC CORPORATION
 Summary
          of Accounting Policies


NOTE
      6
      - SECURED NOTES PAYABLE, continued




In
      connection with the anti-dilution provision in certain amendments to the Note
      Agreement, the Company was obligated to issue to Swartz warrants equal to 11%
      of
      the common stock issued between January 28, 2002 and March 11, 2002 and 20%
      of
      the common stock issued between March 12, 2002 and April 1, 2003 to any parties
      other than Swartz. After April 1, 2003, the Company is obligated to issue to
      Swartz warrants equal to 30% of the common stock issued to any parties other
      than Swartz.




In
      addition, in connection with certain amendments to the Note Agreement, the
      Company agreed to extend the expiration date to December 31, 2006 on certain
      warrants that were set to expire prior to December 31, 2006. The Company
      determined that the value associated with the extension of the expiration dates
      was insignificant. In exchange for these concessions, Swartz agreed to extend
      the due date of the Note Agreement to March 1, 2004 and allowed the Company
      to
      unreserve 20,007,350 shares that had been reserved for the exercise of warrants
      for a period the sooner of 1) March 19, 2004, or 2) 90 days after the date
      on
      which the Company’s common stock exceeded $0.375 for 10 consecutive trading
      days.




During
      the years ended May 31, 2005 and 2004, the Company issued warrants to Swartz
      to
      purchase 7,330,548 and 10,042,496 shares of the Company’s common stock,
      respectively, under the anti-dilution provision of the Note Agreement, which
      were valued at $225,174 and $215,548, respectively, using a Monte Carlo
      simulation model. The Company recorded these amounts as additional interest
      expense with a corresponding amount to derivative and warrant
      liabilities.




On
      March
      23, 2004, outstanding principal of $635,276 plus accrued interest of $87,892
      under the Note Agreement was exchanged for an 8% convertible debenture for
      $723,168 with a maturity date of March 23, 2006 (see Note 8). As part of the
      consideration for exchanging the note for an 8% convertible debenture, we agreed
      to extend the expiration dates on certain outstanding warrants to April 1,
      2011.
      The Company determined that the value associated with extending the expiration
      dates was insignificant.





Secured
      Notes Payable to Stockholders





During
      fiscal 2003, the Company issued an aggregate of $180,000 in notes payable to
      a
      stockholder. The notes payable bore interest at 8% per annum and were secured
      by
      the Company’s assets. In January 2004, the note payable with a balance of
      $200,353, which included accrued interest of $20,353, was partially used to
      exercise a warrant with the balance of $100,000 converted into four one-year
      $25,000 notes due January 9, 2005 issued to four heirs of the estate over which
      the stockholder is a trustee. The interest rate on the four notes is 6% and
      the
      notes are secured by the assets of the Company.




NOTE
      7
      - ACCRUED LIABILIITES





At
      May
      31, 2005 and 2004, accrued liabilities consisted on the following:





2005
            
            2004Due
                to co-inventor (Note 3)
            
            $
            155,700
            
            $
            —Accrued
                lease obligation (Note 11)
            
            
            100,000
            
            
            —Deferred
                maintenance fee
            
            
            93,750
            
            
            —Compensation
                and benefits
            
            
            80,049
            
            
            97,757Interest
            
            
            75,654
            
            
            62,345$
            505,153
            
            $
            160,102




F-17
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PATRIOT
        SCIENTIFIC CORPORATION
 Summary
          of Accounting Policies






NOTE
      8
      - CONVERTIBLE DEBENTURES





*Overview* .
      From
      fiscal 2002 through fiscal 2005, the Company raised approximately $5,400,000
      through the issuance of convertible debentures, having stated interest rates
      ranging from 8% to 12%, to a limited group of investors. The convertible
      debentures entitle the debenture holder to convert the principal, and any
      accrued interest thereon, into shares of the Company's common stock for up
      to
      two years from the date of issuance. The following represents a summary of
      certain salient features of the convertible debentures.




*Number
      of Shares of Common Stock Into Which the Debentures May Be
      Converted* .
      The
      debentures were initially convertible into shares of common stock at conversion
      prices that ranging from approximately $0.02 to $0.10 per share. The debentures
      contain provisions which allow for the conversion rate to be reset on a periodic
      basis based on a comparison of the market price of the Company's common stock
      to
      the conversion price of the debentures. On those measurement dates where the
      market price is less than the conversion rate, a new conversion rate is set
      based on a weighted average of the market price for the ten days prior to the
      reset measurement date. As of May 31, 2005, the reset conversion rate on
      debentures outstanding range from $0.02 to $0.04.





*Warrants* .
      Concurrent with the issuance of the convertible debentures, the Company issued
      to the debenture holders warrants to purchase shares of the Company's common
      stock. These warrants are exercisable for five years from the date of issuance
      at either initial negotiated exercise prices or prices equal to 115% of the
      volume weighted average price for our common stock for the ten days previous
      to
      the debenture date. The warrant exercise price is generally subject to being
      reset on each six month anniversary of its issuance, however, if the warrant
      holder elects to have the warrant shares registered, then the exercise price
      is
      fixed at the price in effect on the date of the election.





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





*Shareholder
      Approval* .
      The
      Company may currently issue more than 20% of our outstanding shares under the
      convertible debentures. If the Company were to become listed on the NASDAQ
      Small
      Cap Market or NASDAQ National Market, then it must get shareholder approval
      to
      issue more than 20% of our outstanding shares. Currently, shareholder approval
      is not required.





*Restrictive
      Covenants* .
      For a
      period of 18 months from the date of issuance of the debentures, the Company
      is
      prohibited from entering into certain transactions. These include the issuance
      of any debt or equity securities in a private transaction which are convertible
      or exercisable into shares of common stock at a price based on the trading
      price
      of the common stock at any time after the initial issuance of such securities;
      the issuance of any debt or equity securities with a fixed conversion or
      exercise price subject to adjustment; and any private equity line type
      agreements without obtaining the debenture holders' prior written approval.
      Additionally, so long as the debentures remain outstanding, the Company cannot
      declare or pay dividends without the debenture holders' approval.





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





*Registration
      Rights* .
      Except
      for one debenture issued on March 23, 2004, the Company is responsible for
      registering the resale of the shares of its common stock which will be issued
      on
      the conversion of the debentures. As of May 31, 2005, there have been six
      registration statements (designated A through F).





*Security
      Interest* .
      The
      convertible debentures are secured by substantially all assets of the
      Company.


F-18
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****PATRIOT
      SCIENTIFIC CORPORATION****


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      8
      - CONVERTIBLE DEBENTURES, continued




The
      following tables present the status activity of the Company’s convertible
      debentures as of and through May 31, 2005:




Principal
            
            
            
            
            
            Effective
            
            Shares
            
            WarrantDates
                of
            
            Aggregate
            
            Balance
                at
            
            Conversion
                Prices
            
            Registration
            
            Converted
                as of
            
            SharesSeries
            
            Issuance
            
            Principal
            
            May
                31, 2005
            
            Initial
            
            Reset
            
            Date
            
            May
                31, 2005
            
            IssuedA
            
            
            4/23/2002-
            
            $
            1,000,000
            
            $
            —
            
            $
            0.08616-
            
            $
            0.04190-
            
            
            10/29/2002
            
            
            24,099,548
            
            
            12,859,1756/10/2002
            
            
            
            
            
            
            
            $
            0.10289
            
            $
            0.04457B
            
            
            8/23/2002-
            
            
            605,000
            
            
            —
            
            $
            0.05126-
            
            $
            0.04381-
            
            
            3/7/2003
            
            
            14,777,350
            
            
            11,234,8351/24/2003
            
            
            
            
            
            
            
            $
            0.0727
            
            $
            0.04722C
            
            
            3/24/2002-
            
            
            510,000
            
            
            —
            
            $
            0.041-
            
            $
            0.041-
            
            
            6/26/2003
            
            
            10,470,554
            
            
            9,377,9436/9/2003
            
            
            
            
            
            
            
            $
            0.065
            
            $
            0.065D
            
            
            8/1/2003-
            
            
            547,500
            
            
            —
            
            $
            0.0172-
            
            $
            0.0172-
            
            
            11/18/2003
            
            
            25,178,803
            
            
            22,455,35510/21/2003
            
            
            
            
            
            
            
            $
            0.048
            
            $
            0.0477E
            
            
            12/1/2003-
            
            
            1,527,500
            
            
            —
            
            $
            0.0267-
            
            $
            0.0267-
            
            
            6/7/2004
            
            
            46,794,618
            
            
            30,395,3925/11/2004
            
            
            
            
            
            
            
            $
            0.10
            
            $
            0.10F
            
            
            3/23/2004
            
            
            723,168
            
            
            723,168
            
            $
            0.09
            
            $
            0.09
            
            
            Not
                registered
            
            
            —
            
            
            8,035,192G
            
            
            9/28/2004-
            
            
            490,000
            
            
            157,500
            
            $
            0.016710-
            
            $
            0.01670-
            
            
            5/22/2006
            
            
            12,433,273
            
            
            21,690,8151/17/2005
            
            
            
            
            
            
            
            $
            0.04
            
            $
            0.04Totals
            
            
            
            
            $
            5,403,168
            
            $
            880,668
            
            
            
            
            
            
            
            
            
            
            
            133,754,146
            
            
            116,048,707





Convertible
                debentures outstanding as of May 31, is as follows:2005
            
            2004Convertible
                debentures issued
            
            $
            5,403,168
            
            $
            4,913,167Less
                amounts converted to common stock
            
            
            (4,522,500
            )
            
            (2,465,000
            )880,668
            
            
            2,448,167Less
                debt discount
            
            
            (412,879
            )
            
            (2,075,146
            )467,789
            
            
            373,021Less
                current portion
            
            
            (421,847
            )
            
            (145,320
            )Long-term
                portion
            
            $
            45,942
            
            $
            227,701





At
      May
      31, 2005, the Company's convertible debentures were convertible into
      approximately 27,556,000 shares of the Company's common stock. Subsequent to
      May
      31, 2005, holders of debentures having a principal balance of $132,500 converted
      their debentures, together with accrued interest thereon of approximately
      $6,000, into 8,295,789 shares of the Company's common stock.





Future
      annual minimum principal payments at May 31, 2005 are as follows:





Years
                Ending May 31,2006
            
            $
            723,1682007
            
            
            157,500Total
            
            $
            880,668




F-19
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**PATRIOT
      SCIENTIFIC CORPORATION**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      8
      - CONVERTIBLE DEBENTURES, continued





The
      terms
      of the convertible debentures include certain features that considered embedded
      derivative financial instruments, such as the conversion feature and a reset
      conversion feature which provides for the conversion of the debentures into
      shares of the Company’s common stock at a rate which is variable. Because the
      debentures are not conventional convertible debt, the Company is required to
      record the derivative financial instruments and the warrants issued in
      connection with the convertible debentures at their fair values as of the
      issuance date of each of the debentures. The initial fair values assigned to
      the
      embedded derivatives related to convertible debentures issued during the years
      ended May 31, 2005 and 2004 was $371,246 and $3,069,794, respectively. The
      initial fair values assigned to the warrants issued in connection with the
      convertible debentures during the years ended May 31, 2005 and 2004 was $681,921
      and $1,992,875, respectively.





The
      Company recorded the fair value of the derivative instruments and warrants
      as a
      debt discount which will be amortized to interest expense over the term of
      the
      convertible debentures. During the years ended May 31, 2005 and 2004, the
      Company recorded interest expense of $2,152,267 and $1,636,032, respectively,
      related to the amortization of the debt discount. If the total fair value of
      the
      derivative instruments and warrants was in excess of the proceeds received
      on
      the convertible debentures, the Company recorded the excess as additional
      interest expense. The Company recorded additional interest expense of $563,167
      and $2,171,607, during the years ended May 31, 2005 and 2004, respectively,
      related to the fair values of derivative instruments and warrants in excess
      of
      proceeds received.





Under
      the
      provisions of EITF Issue No. 00-19, the Company was required to classify all
      non-employee warrants and options as derivative liabilities and record them
      at
      their fair values at each balance sheet date until the related debt is
      settled.  On April 23, 2002, the Company reclassified the total fair value
      of non-employee warrants and options


of
      $997,687 from additional paid-in capital to warrant and derivative
      liabilities.  Any change in fair value of the non-employee warrants and
      options is required to be recorded as non-operating, non-cash income or expense
      at each balance sheet date.





During
      the years ended May 31, 2005 and 2004, the Company converted principal of $2,057,500 and
      $1,665,000, respectively, and related accrued interest of $112,436
      and $92,628,
      respectively, into 64,886,139 and 50,497,133
      shares of the Company’s common stock, respectively.




NOTE
      9
      - STOCKHOLDERS' EQUITY (DEFICIT)





During
      fiscal 2004, the Company's shareholders approved an increase in the authorized
      number of common shares from 200,000,000 to 400,000,000. During fiscal 2005,
      the
      authorized number of common shares was increased to 500,000,000.





Private
      Stock Offerings





During
      fiscal 2005, 4,625,000 restricted shares of common stock were issued to a group
      of individual investors in exchange for $453,250. Additionally, the Company
      issued 796,000 shares of common stock, valued at $58,800, to a vendor in
      exchange for services.





During
      fiscal 2004, 1,800,752 restricted shares of common stock were issued to a group
      of individual investors for $50,440 and 1,126,496 shares of common stock were
      issued to a vendor in satisfaction of $59,852 of trade accounts
      payable.


F-20
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**PATRIOT
      SCIENTIFIC CORPORATION**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      9
      - STOCKHOLDERS' EQUITY (DEFICIT), continued





Warrants





At
      May
      31, 2005, the Company had warrants outstanding to purchase 109,122,581 shares
      of
      common stock at exercise prices ranging from approximately $0.02 to $0.065
      per
      share expiring at various dates through 2012. During fiscal 2005, the Company
      issued warrants to purchase 29,021,363 shares of common stock at exercise prices
      ranging from $0.02 to $0.08 per share and issued 38,358,511 shares of common
      stock on the exercise of warrants at exercise prices ranging from $0.02 to
      $0.04
      per share.





At
      May
      31, 2004, the Company had warrants outstanding to purchase 121,349,420 shares
      of
      common stock at exercise prices ranging from $0.02 to $0.6 per share expiring
      through 2011. During fiscal 2004, the Company issued warrants to purchase
      73,436,127 shares of common stock at exercise prices ranging from $0.02 to
      $0.10
      per share and issued 11,079,175 shares of common stock on the exercise of
      warrants at exercise prices ranging from $0.02 to $0.04 per share.





The
      following table presents outstanding warrants at May 31, 2005 and
      2004:





2005
            
            2004Issued
                in conjunction with:Convertible
                debentures
            
            
            75,196,854
            
            
            83,278,716Anti-dilution
                agreements
            
            
            20,813,081
            
            
            15,398,058Equity
                line of credit
            
            
            9,965,369
            
            
            18,765,369Other
            
            
            3,147,277
            
            
            3,907,277109,122,581
            
            $
            121,349,420





1992
      Incentive Stock Option Plan ("ISO")





The
      Company has an ISO Plan which expired March 20, 2002. The ISO Plan provided
      for
      grants to either full or part time employees, at the discretion of the board
      of
      directors, to purchase common stock of the Company at a price not less than
      the
      fair market value of the shares on the date of grant. In the case of a
      significant stockholder, the option price of the share could not be less than
      110 percent of the fair market value of the share on the date of grant. Any
      options granted under the ISO Plan must be exercised within ten years of the
      date they were granted (five years in the case of a significant stockholder).
      At
      May 31, 2005, there were no remaining outstanding options to purchase shares
      of
      common stock under the ISO Plan.




1992
      Non-Statutory Stock Option Plan ("NSO")





The
      Company has an NSO Plan which expired March 20, 2002. The NSO Plan provided,
      at
      the discretion of the board of directors, for grants to either full or part
      time
      employees, directors and consultants of the Company to purchase common stock
      of
      the Company at a price not less than the fair market value of the shares on
      the
      date of grant. Any options granted under the NSO Plan must be exercised within
      ten years of the date they were granted. At May 31, 2005, there were no
      remaining outstanding options to purchase shares of common stock under the
      NSO
      Plan.


F-21
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          to Table of Contents**




**PATRIOT
        SCIENTIFIC CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      9
      - STOCKHOLDERS' EQUITY (DEFICIT), continued





1996
      Stock Option Plan





Effective
      March 1996, as amended, the Company adopted the 1996 Stock Option Plan. Under
      the 1996 Stock Option Plan, which expires in March 2006, options to purchase
      up
      to 4,000,000 shares of common stock of the Company may be granted to either
      full
      or part time employees, directors and consultants 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, 2005, the Company granted options to purchase 645,000 shares
      of
      common stock under the 1996 Stock Option Plan. No options were granted during
      fiscal 2004.





2001
      Stock Option Plan





The
      2001
      Stock Option Plan, which expires in February 2011, provides for the granting
      of
      options to purchase up to 3,000,000 shares of the Company's common stock to
      either full or part time employees, directors and consultants of the Company
      at
      a price not less than the fair market value on the date of grant for incentive
      stock options or not less than 85% of the fair market value on the date of
      grant
      for non-qualified stock options. In the case of a significant stockholder,
      the
      option price of the share is not less than 110 percent of the fair market value
      of the shares on the date of grant. Any option granted under the 2001 Stock
      Option Plan must be exercised within ten years of the date they are granted
      (five years in the case of a significant stockholder). During the fiscal year
      ended May 31, 2005, the Company granted options to purchase 1,150,000 shares
      of
      its common stock. During the fiscal year ended May 31, 2004, no options were
      granted.





2003
      Stock Option Plan





The
      2003
      Stock Option Plan, which expires in 2013, provides for the granting of options
      to acquire up to 6,000,000 shares of the Company's common stock to either full
      or part time employees, directors and consultants 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 2003 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 years
      ended May 31, 2005 and 2004, the Company granted options to purchase 1,695,000
      and 2,210,000 shares of the Company's common stock at market value,
      respectively.




SFAS
      No.
      123, "Accounting for Stock-Based Compensation," requires the Company to provide
      pro forma information regarding net loss and net loss per share as if
      compensation costs for the Company's stock option plans and other stock awards
      had been determined in accordance with the fair value based method prescribed
      in
      SFAS No. 123. The Company estimates the fair value of each stock award at the
      grant date by using the Black-Scholes option-pricing model with the following
      weighted-average assumptions used for the two years ended May 31, 2005 and
      2004,
      respectively: dividend yield of zero percent for both years; expected volatility
      of 121% to 129% and 107% to 127%, risk-free interest rates of 3.4% to 4.0%
      and
      2.1% to 3.9%; and expected lives of three to five years for both
      years.


F-22
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          to Table of Contents**




**PATRIOT
        SCIENTIFIC CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      9
      - STOCKHOLDERS' EQUITY (DEFICIT), continued





A
      summary
      of the status of the Company's stock option plans and warrants as of May 31,
      2005 and 2004 and changes during the years ending on those dates is presented
      below:





Options
            
            WarrantsShares
            
            Weighted
                Average Exercise Price
            
            Shares
            
            Weighted
                Average Exercise PriceOutstanding,
                May 31, 2003
            
            
            5,054,000
            
            $
            0.28
            
            
            58,992,468
            
            $
            0.06Granted
            
            
            2,210,000
            
            
            0.06
            
            
            73,436,127
            
            
            0.05Cancelled
            
            
            (156,000
            )
            
            0.13
            
            
            —
            
            
            —Exercised
            
            
            (105,000
            )
            
            0.05
            
            
            (11,079,175
            )
            
            0.03Outstanding,
                May 31, 2004
            
            
            7,003,000
            
            
            0.21
            
            
            121,349,420
            
            
            0.05Granted
            
            
            3,490,000
            
            
            0.08
            
            
            29,021,363
            
            
            0.04Cancelled
            
            
            (2,675,000
            )
            
            0.31
            
            
            (2,889,691
            )
            
            0.07Exercised
            
            
            (670,000
            )
            
            0.05
            
            
            (38,358,511
            )
            
            0.03Outstanding,
                May 31, 2005
            
            
            7,148,000
            
            $
            0.13
            
            
            109,122,581
            
            $
            0.04Exercisable,
                May 31, 2004
            
            
            5,904,434
            
            $
            0.24
            
            
            120,149,420
            
            $
            0.05Exercisable,
                May 31, 2005
            
            
            5,748,000
            
            $
            0.14
            
            
            108,622,581
            
            $
            0.04Weighted
                average fair value of optionsand
                warrants granted during the yearended
                May 31, 2004
            
            
            
            
            $
            0.05
            
            
            
            
            $
            0.06Weighted
                average fair value of optionsand
                warrants granted during the yearended
                May 31, 2005
            
            
            
            
            $
            0.04
            
            
            
            
            $
            0.05


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





Subsequent
      to May 31, 2005, 1,201,942 warrants were exercised, through which the Company
      received approximately $53,000.


F-23
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          to Table of Contents**




**PATRIOT
        SCIENTIFIC CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      9
      - STOCKHOLDERS' EQUITY (DEFICIT), continued





The
      following table summarizes information about stock options and warrants
      outstanding at May 31, 2005:





Outstanding
            
            ExercisableRange
                of Exercise Prices
            
            Number
              Outstanding
            
            Weighted
                Average
              Remaining
              Contractual
                Life
            
            Weighted
                Average
              Exercise
                Price
            
            Number
              Exercisable
            
            Weighted
                Average
              Exercise
                PriceOptions$0.04-0.05
            
            
            1,055,000
            
            
            3.50
            
            $
            0.04
            
            
            1,055,000
            
            $
            0.040.07-0.09
            
            
            3,135,000
            
            
            3.64
            
            
            0.08
            
            
            1,985,000
            
            
            0.080.10-0.13
            
            
            2,633,000
            
            
            3.05
            
            
            0.11
            
            
            2,383,000
            
            
            0.100.61-1.18
            
            
            325,000
            
            
            0.38
            
            
            1.09
            
            
            325,000
            
            
            1.09$0.04-1.18
            
            
            7,148,000
            
            
            3.25
            
            
            0.13
            
            
            5,748,000
            
            
            0.14Warrants$0.02-0.039
            
            
            42,117,446
            
            
            5.84
            
            
            0.03
            
            
            42,117,446
            
            
            0.030.04-0.044
            
            
            43,162,252
            
            
            5.39
            
            
            0.04
            
            
            43,162,252
            
            
            0.040.045-0.049
            
            
            9,365,058
            
            
            3.99
            
            
            0.05
            
            
            9,365,058
            
            
            0.050.05-0.08
            
            
            11,030,548
            
            
            5.65
            
            
            0.07
            
            
            10,530,548
            
            
            0.070.10-0.65
            
            
            3,447,277
            
            
            2.06
            
            
            0.12
            
            
            3,447,277
            
            
            0.12$0.02-0.65
            
            
            109,122,581
            
            
            5.36
            
            $
            0.04
            
            
            108,622,581
            
            $
            0.04


NOTE
      10 - INCOME TAXES




No
      provision for income taxes was recorded for the years ended May 31, 2005 and
      2004 due to the significant net operating loss carryforwards.




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





May
                31,2005
            
            2004Federal
                income tax rate
            
            
            34
            %
            
            (34
            )%State
                income tax rate, net of Federal effect
            
            
            —
            %
            
            —
            %Increase
                (decrease) in valuation allowance and other
            
            
            (34
            )%
            
            34
            %Effective
                income tax rate
            
            
            —
            %
            
            —
            %




F-24
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**PATRIOT
      SCIENTIFIC CORPORATION**


**NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      10 - INCOME TAXES, continued




Deferred
      tax assets and liabilities reflect the net tax effect of temporary differences
      between the carrying amount of asset and liabilities for financial reporting
      purposes and amounts used for income tax purposes. Significant components of
      the
      Company’s deferred tax assets are as follows:




May
                31,2005
            
            2004Deferred
                tax assets:Net
                operating loss carryforwards
            
            $
            13,488,125
            
            $
            13,609,659Accruals
            
            
            1,888,087
            
            
            1,931,639Basis
                difference in fixed assets
            
            
            68,435
            
            
            27,972Inventory
                and other reserves
            
            
            41,446
            
            
            41,446Credits
            
            
            329,583
            
            
            251,142Less:
                valuation allowance
            
            
            (15,815,676
            )
            
            (15,861,858
            )Net
                deferred tax assets
            
            $
            —
            
            $
            —




As
      of May
      31, 2005 and 2004, valuation allowances equal to the net deferred tax asset
      recognized have been recorded; as management has not determined that it is
      more
      likely than not that the deferred tax asset will be realized. No current tax
      provision was recorded for fiscal 2005 and 2004 due to reported losses. The
      valuation allowance decreased $46,182 for the year ended May 31, 2005 and
      increased $475,674 for the year ended May 31, 2004.




At
      May
      31, 2005, the Company has federal net operating loss carryforwards of
      approximately $34,218,000 that expire during the years 2006 through 2024, at
      May
      31, 2004 the federal net operating loss carryforwards were approximately
      $34,345,000 expiring 2005 through 2023. All losses are subject to certain
      limitations under the Internal Revenue Code of 1986, as amended. As such,
      certain federal net operating loss carryforwards may expire unused and per
      year
      availability may be subject to change of ownership limitations under Internal
      Revenue Code Section 382.




At
      May
      31, 2005, the Company has state net operating loss carryforwards of
      approximately $19,173,000 that expire during the years 2003 through 2013, at
      May
      31, 2004 state net operating loss carryforwards were approximately $20,745,000
      expiring 2002 through 2013. The state of California suspended the utilization
      of
      net operating losses for 2002 and 2003 and removed the suspension in 2004
      allowing taxpayers to utilize the 2002 and 2003 suspended losses.




NOTE
      11 - COMMITMENTS AND CONTINGENCIES





Litigation





The
      Company is involved, both as a plaintiff and as a defendant, in several patent
      infringement lawsuits pertaining to various issues surrounding the Company's
      technology. During 2005, several of the suits were settled, the outcome of
      which
      being the license agreements described in Notes 3 and 13. The Company is also
      involved in a legal matter related to disputed legal services performed for
      the
      Company related to obtaining the license agreements, which is also discussed
      in
      Note 3. At various times the Company is involved in other legal matters which
      arise in the ordinary conduct of its business and which, at the present time,
      are not expected to have a material impact on the Company's financial position,
      cash flow, or results of operations.





Profit
      Sharing Plan





The
      Company has a savings and profit-sharing plan that allows participants to make
      contributions by salary reduction pursuant to Section 401(k) of the Internal
      Revenue Code. At the Company's discretion, the Company may match contributions
      at 20% of the employee's contribution up to 6% of the employee's salary. The
      Company contributions are vested 20% per year beginning with the first year
      of
      service. The Company made no matching contributions to the plan in fiscal 2005
      or 2004.


F-25
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**PATRIOT
        SCIENTIFIC CORPORATION**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      11 - COMMITMENTS AND CONTINGENCIES, continued




Employment
      Contracts





The
      Company is obligated under employment contracts with certain key employees
      to
      pay severance upon termination under certain defined conditions. Generally,
      unless relieved of their duties for cause, the executive officers are entitled
      to severance pay equal to two to four months of their then current monthly
      salary. In the case of a change in control, generally, the executive officers
      are entitled to severance pay equal to twelve months of their then current
      monthly salary unless they continue to work for the new controlling interest
      in
      the same function as previous to the change. Subsequent to May 31, 2005, two
      officers covered under employment contracts were terminated. The Company is
      currently in negotiations with one of the individuals to finalize his severance
      agreement. In September 2005, the Company agreed to pay the other key employee
      approximately $148,700 in full settlement of all amounts owed to him under
      his
      employment contract.





Operating
      and Capital Leases





At
      May
      31, 2005, the Company has equipment acquired through a capital lease
      arrangement. The equipment was recorded at an original cost of $24,995;
      accumulated depreciation on the equipment at May 31, 2005 and 2004 was $24,995
      and $21,524, respectively. The Company's obligation under the capital lease
      at
      May 31, 2005 was approximately $2,300, which amount is due in fiscal
      2006.





The
      Company has a non-cancelable operating lease for its office and manufacturing
      facilities located in San Diego, California. Future minimum lease payments
      required under the operating lease are $141,658 in fiscal 2006 and $23,782
      in
      fiscal 2007. Rent expense for fiscal 2005 and 2004 was $180,527 and $181,135,
      respectively. Through the first quarter of fiscal 2005, the Company had sublet
      a
      portion of this facility to a third-party. The third-party vacated its portion
      of the facility in 2005 and paid the Company approximately $47,000 in
      consideration for all future amounts owed the Company under the sublease
      agreement. This amount is reflected in other income in the 2005 statement of
      operations. During the fourth quarter of 2005, the Company determined that
      this
      vacated portion of the facility will not provide any future benefit to the
      Company, nor is it probable that the space could be subleased again.
      Accordingly, the Company accrued $100,000 related to its remaining contractual
      lease obligation related to this space.




Indemnities
      and Guarantees




During
      the normal course of business, the Company has made certain indemnities and
      guarantees under which it may be required to make payments in relation to
      certain transactions.  The Company indemnifies its directors, officers,
      employees and agents to the maximum extent permitted under the laws of the
      State
      of Delaware.  These indemnities include certain agreements with the
      Company's officers under which the Company may be required to indemnify such
      person for liabilities arising out of their employment relationship.  In
      connection with its facility leases, the Company has indemnified its lessors
      for
      certain claims arising from the use of the facilities. The Company granted
      a
      lien and security interest in substantially all of its assets to the bank under
      the accounts receivable factoring line and to investors under its notes payable
      and convertible debentures. The duration of these indemnities and guarantees
      varies and, in certain cases, is indefinite.  The majority of these
      indemnities and guarantees do not provide for any limitation of the maximum
      potential future payments the Company could be obligated to make. 
Historically, the Company has not been obligated to make significant payments
      for these obligations and no liabilities have been recorded for these
      indemnities and guarantees in the accompanying consolidated balance
      sheet.




NOTE
      12 - SEGMENT INFORMATION





The
      Company is engaged in one business segment, the development and marketing of
      microprocessor technology related products and licenses. During the fiscal
      years
      ended May 31, 2005 and 2004, the Company's product sales of high technology
      computer products were approximately $9,000 and $14,000 and telecommunication
      products were $16,000 and $63,000. Substantially all of the Company's products
      were sold to customers located in the United States. During the year ended
      May
      31, 2004, three customers accounted for 33%, 23%, and 12% of the Company's
      total
      product sales. During the year ended May 31, 2005, there were no major customers
      related to the Company's product sales.


F-26
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          to Table of Contents**




**PATRIOT
      SCIENTIFIC CORPORATION**


**NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**


NOTE
      12 - SEGMENT INFORMATION, continued





Additionally,
      during the fiscal year ended May 31, 2005, the Company recorded license revenues
      as more fully described in Note 3.





NOTE
      13 - SUBSEQUENT EVENT





In
      June
      2005, the Company entered into an agreement with the co-inventor of certain
      of
      the Company's technology pursuant to which the Company and the co-inventor
      resolved all legal disputes between them. As a result of the agreement, the
      Company formed a new joint venture with the co-inventor into which both parties
      contributed their rights to the technologies. Concurrently therewith, the joint
      venture entered into a license agreement with a third party pursuant to which
      it
      received $20,000,000. Both the Company and the venture partner agreed to
      establish a working capital fund for the new venture of $4,000,000, as well
      as
      to fund future working capital requirements. Net proceeds received by the
      Company from the license agreement transaction were approximately $6,700,000.
      In
      connection with this transaction, the Company paid amounts aggregating $170,000
      to certain of its board members in consideration of their efforts in the
      consummation of this transaction. Payments totaling approximately $960,000
      were
      made in the first quarter of fiscal 2006 to the co-inventors of the technology.
      Additionally, a legal advisor who had previously provided services to the
      Company may assert a success fee against the Company based upon proceeds
      received by the Company under the license agreement. See further discussion
      in
      Note 3.





The
      Company granted a warrant to its venture partner to acquire up to 3,500,000
      shares of the Company's common stock at a per share price of $0.125. The warrant
      has a term of seven years. At the date of grant, the right to acquire 1,400,000
      shares of common stock vested; the right to acquire the remaining 2,100,000
      shares will vest in 700,000 increments only upon the Company's per share stock
      price reaching $0.50, $0.75, and $1.00.





In
      order
      to complete the agreement, the Company was required to obtain approval from
      various warrant holders. The Company believes, based on consultation with its
      attorneys, it was not required by applicable law or other existing agreements
      to
      obtain approval from shareholders or any parties other than the various warrant
      holders. To obtain the approval of those warrant holders, the Company paid
      them
      approximately $1,890,000 and agreed to reset the per share exercise price of
      approximately 34,900,000 warrants to $0.015 for which the warrant holders
      conveyed warrants to acquire 12,000,000 shares back to the Company. Further,
      other warrant holders were paid $438,000 and issued additional warrants to
      acquire approximately 290,000 shares of the Company's common stock.


F-27
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SIGNATURES




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




DATED:
                October 16, 2006
            PATRIOT
                SCIENTIFIC CORPORATION
              
              
              /S/
                DAVID H. POHL
              David
                H. Pohl
              Chief
                Executive 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.




Signature
            
            Title
            
            Date/S/
                DAVID H. POHL
            
            President,
                Chief Executive Officer, and Director
            
            October
                16, 2006David
              H. Pohl/S/
                THOMAS J. SWEENEY
            
            Chief
                Financial Officer and Principal Accounting Officer
            
            October 16,
                2006Thomas
              J. Sweeney/S/
                CARLTON M. JOHNSON
            
            Director
            
            October 16,
                2006Carlton
              M. Johnson/S/
                GLORIA H. FELCYN
            
            Director
            
            October 16,
                2006Gloria
              H. Felcyn/S/
                HELMUT FALK, JR.
            
            Director
            
            October 16,
                2006Helmut
              Falk, Jr./S/
                JAMES L. TURLEY
            
            Director
            
            October
                16, 2006James
              L. Turley




F-28