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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
[X]                 ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                     FOR THE FISCAL YEAR ENDED MAY 31, 1998
                    
                    

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

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

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

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

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

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

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

State issuer's revenues for its most recent fiscal year. $1,902,874

The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 14, 1998 was $10,988,978 based on a closing bid price of
$0.47 as reported on the OTC Electronic Bulletin Board system.

At August 14, 1998, 38,248,110 shares of common stock, par value $.00001 per 
share (the registrant's only class of voting stock) were outstanding.

                    DOCUMENTS INCORPORATED BY REFERENCE: None

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

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

                                    PART III
ITEM 9.        Directors, Executive Officers, Promoters and Control Persons; 
                 Compliance With Section 16(a) of the Exchange Act                    22
ITEM 10.       Executive Compensation                                                 26
ITEM 11.       Security Ownership of Certain Beneficial Owners and Management         29
ITEM 12.       Certain Relationships and Related Transactions                         31

ITEM 13.       Exhibits and Reports on Form 8-K                                       33
</TABLE>


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                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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


                           GLOSSARY OF TECHNICAL TERMS

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

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

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

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

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

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

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

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

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


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

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

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

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

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

E1 - The European equivalent of T1.

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

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

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

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

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

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

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

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

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

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


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KBPS - Kilobits per second, thousand bits per second.

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

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

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

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

PSC1000 - The Company's first proprietary RISC-based 32-bit microprocessor that
     is based on the ShBoom technology and architecture and is integrated on a
     single microprocessor using a 0.35 micron silicon manufacturing process.
     The ShBoom technology or architecture describes the broad technology that
     can be incorporated in a number of microprocessors of different
     configurations and silicon manufacturing processes.

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

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

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

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

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

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

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

SUB-MICRON - silicon microprocessor design using transistors smaller than 1.0
     micron. The smaller the transistor size, the more functionality can be
     contained on a microprocessor of a given physical dimension The PSC1000 is
     currently designed in 0.35 micron geometry and the ShBoom technology is
     designed to accommodate smaller micron geometry.

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


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

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

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

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


                                     PART I

ITEM 1. DESCRIPTION OF BUSINESS

THE COMPANY

        Patriot Scientific Corporation (the "Company" or "Patriot") was
organized under Delaware law on March 24, 1992 as the successor by merger to
Patriot Financial Corporation, a Colorado corporation incorporated on June 10,
1987. Its address is 10989 Via Frontera, San Diego, California 92127, and its
telephone number is (619) 674-5000. The Company's home page can be located on
the World Wide Web at http://www.ptsc.com.

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

        In 1997, the Company emerged from the development stage primarily as a
result of the acquisition of Metacomp Inc. ("Metacomp") as discussed further
below under the caption "Background." There can be no assurance the Company can
achieve profitable operations, and the Company may need additional financial
resources during the next twelve months.

BACKGROUND

        In February of 1989, the Company completed its initial public offering
pursuant to a Registration Statement on Form S-18 under the Securities Act of
1933 (the "Act"), raising gross proceeds of $50,000 and net proceeds of
approximately $28,640 upon the sale of 2,500,000 units at $.02 per unit. Each
unit sold in the public offering consisted of one Common Share and one Class A
common stock purchase warrant exercisable to acquire one share of common stock
and one Class B common stock purchase warrant. All Class A and Class B warrants
have since been exercised or have lapsed.

        On August 10, 1989, the Company acquired its GPR technology from the
inventor, Mr. Elwood G. Norris, now the Company's Chairman. The details of that
acquisition and certain related agreements are described in more detail in
"Certain Transactions" below. A description of the GPR technology, certain
information about the industry generally, and the Company's operational plans
are discussed below under the caption "Business".

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

        In May of 1993, the Company registered under the Act a total of
7,631,606 shares issuable upon the exercise of outstanding Class A and Class B
common stock purchase warrants. The Company received net proceeds of 


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$3,343,915 upon the exercise of those warrants and the issuance of 7,538,102
common shares. None of such warrants remain outstanding.

        Effective May 31, 1994, pursuant to an Assets Purchase Agreement and
Plan of Reorganization ("nanoTronics Agreement") between the Company,
nanoTronics Corporation ("nanoTronics") located in Eagle Point, Oregon and
Helmut Falk ("Falk"), the Company issued a total of 10,000,000 restricted common
shares to nanoTronics to acquire certain microprocessor technology of
nanoTronics. The technology acquired ("ShBoom technology") is being used to
develop a sophisticated yet low cost microprocessor. 5,000,000 of the shares
were issued on a non-contingent basis, and the remaining 5,000,000 shares were
subject to the terms of an earnout escrow arrangement of which 500,000 shares
have been released from escrow as of May 31, 1998. See "Business."

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

                                    BUSINESS

ORGANIZATION AND CORPORATE DEVELOPMENT

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

        During fiscal years 1998 and 1997, the Company focused the majority of
its efforts on the PSC1000 and high-speed data communications technologies. The
PSC1000 technology and the Company's initial microprocessors, the PSC1000
family, are targeted for the embedded controller and Java language processor
marketplaces.

        In reviewing markets for the PSC1000 technology, the Company identified
within the communications markets a possible opportunity for its ISDN product.
During fiscal 1995, the Company initiated the development of a computer
compatible plug-in card allowing high-speed, cost-effective digital ISDN access
to the Internet and other networks. This product, the CyberShark high-speed data
modem, is being marketed to Internet providers, distributors, value-added
resellers and original equipment manufacturers and has been integrated with
Metacomp's high speed data communication products.

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

INTERNET GROWTH AND THE EMERGENCE OF THE JAVA PROGRAMMING LANGUAGE

        The Internet is a rapidly growing global web of computer networks.
Developed over 25 years ago, this "network of networks" allows any computer
connected to the Internet to talk to any other using the Internet Protocol. The
Internet provides organizations and individuals with new means to conduct
business. Commercial uses of the Internet include business-to-business and
business-to-consumer transactions, product marketing, advertising,
entertainment, electronic publishing, electronic services and customer support.
The Company believes that 


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organizations will also increasingly use the Internet and private Intranet
networks to improve communications, distribute information, lower operating
costs and change operations.

        Use of the Internet has grown rapidly since its commercialization in the
early 1990's, impacting computer hardware, software and peripheral industries.
The rapid growth in popularity of the Internet is in part due to continuing
penetration of computers and modems into U.S. households, growth of the
informational, entertainment and commercial applications and resources of the
Internet and the growing awareness of such resources among individuals, and
increasing availability of user-friendly navigational and utility tools which
enable easier access to the Internet's resources.

        The growth of the Internet and corporate Intranets is creating a demand
for hardware, software and peripherals. The large and growing number of users
connecting to the Internet is creating a demand for traditional analog and ISDN
digital modems, such as the Company's CyberShark, and other high speed data
communication devices. New software, such as Java, is emerging to serve the
requirements of Internet users.

        The Java programming language was originally developed for personal
digital assistant devices (PDA's) and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. It was launched on the Internet through the free offer of a
Java programming software developer's kit and Java related browser, a form of
Internet software interface. A large number of major computer, software, browser
and on-line service provider companies have licensed the Java language.
Accordingly, although no assurance can be given, Java appears to be emerging as
the fundamental platform for distributed, network-centric applications. There is
a growing list of Java applications, or applets, now available on the Internet
that not only enhance Web pages but also perform many functions of traditional
computer software programs. The Company's PSC1000 technology lends itself to
potential acceptance in this market.

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

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

        The growth of Java is causing a number of companies to consider it as a
basis for a new style of computing tailored to the Internet and not encumbered
by the limitations of, or requiring, traditional operating systems (such as
Microsoft DOS or Windows, UNIX or Macintosh). The concept is to design
inexpensive access devices to communicate via the Internet. Public announcements
of such devices have been made by major companies such as Oracle and Sun
Microsystems Inc. There can be no assurance that any such devices will become
successful or that any will use the PSC1000 technology in the future.

SHBOOM MICROPROCESSOR TECHNOLOGY

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

        Since the acquisition of the ShBoom technology from nanoTronics,
effective May 31, 1994, the Company has been engaged in correcting errors in the
microprocessor design, adding additional technical features to further modernize
the design, and improving and testing the new design. The Company obtained the
first run of prototype microprocessors in late May 1996, a 0.8 micron
microprocessor. The next generation of the PSC1000 family was a 0.5 micron
microprocessor that was delivered in September 1997. The 0.5 micron
microprocessor is being employed in 


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demonstrations for prospective customers and is currently being shipped to
customers as an embedded microprocessor. A 0.35 micron production microprocessor
will be available for sale featuring a reduced size and improved performance.
Future enhancements and generations or modifications of microprocessors
employing the ShBoom technology and architecture are contemplated by the
Company.

        INDUSTRY BACKGROUND. The semiconductor logic market has three major
sectors: (1) Standard Logic Products, (2) Application Specific Standard Products
(ASSPs), and (3) Application Specific Integrated Circuit (ASICs). Standard logic
products, such as the Intel 80X86 and Motorola 680X0 microprocessor families,
are neither application nor customer specific. They are intended to be utilized
by a large group of systems designers for a broad range of applications. Because
they are designed to be used in a broad array of applications, they may not be
cost effective for specific applications. ASICs are designed to meet the
specific application of one customer. While cost effective for that application,
ASICs require large sales volumes of that application to recover their
development costs. ASSPs are developed for one or more applications but are not
generally proprietary to one customer. Examples of ASSP applications include
modems, cellular telephones, wireless communications, multimedia applications,
facsimile machines and local area networks. The Company's microprocessor is
designed to be combined with application-specific software to serve as an
embedded control product for the ASSP market sector.

        ASSPs are typically used in embedded control systems by manufacturers to
provide an integrated solution for application specific control requirements.
Such systems usually contain a microprocessor or microcontroller, logic
circuitry, memory and input/output circuitry. Electronic system manufacturers
combine one or more of these elements to fit a specific application. The
microprocessor provides the intelligence to control the system. The logic
circuitry provides functions specific to the end application. The input/output
circuitry may also be application specific or an industry standard component.
The memory element, if not on the microprocessor, is usually a standard product
used to store program instructions and data. In the past, these functions have
been executed through multiple integrated circuits assembled on a printed
circuit board. The requirements for reduced cost and improved system performance
have created market opportunities for semiconductor suppliers to integrate some
or all of these elements into a single ASSP microprocessor or chip set, such as
the ShBoom-architecture PSC1000 family. The PSC1000 family provides close
integration of the microprocessor and input/output function with the logic
circuitry, thereby providing an advanced ASSP.

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

        Microcontrollers are generally available in 4-bit through 32-bit
architectures, which refers to the amount of data they can process. Although
4-bit microcontrollers are relatively inexpensive, typically less than $1.00
each, they lack performance and features but account for more than 40% of
worldwide microcontroller volume. Also, in general use today are 8-bit
architectures, generally costing $1.00 to $10.00 each and accounting for an
additional 40% of worldwide microcontroller volume. To date 16-bit and 32-bit
architectures, with typical costs of over $10.00 each, have offered very high
performance, but are generally considered to be expensive for high-volume
embedded control applications. The use of 16-bit and 32-bit architectures offers
fewer internal limitations, making programming easier and providing higher
performance. Although generally more expensive per unit and requiring more
support logic and memory, these devices offer many advantages for more
sophisticated embedded control systems.

        Electronic system designers, driven by competitive market forces, seek
semiconductor products with more intelligence, functionality and control that
can be used to reduce system costs and improve performance. For these needs, the
ShBoom architecture was designed to be a sophisticated 32-bit RISC (reduced
instruction set computer) microprocessor with advanced features, including the
most commonly needed support logic, but at a low cost; thereby providing
improved performance to existing embedded control applications and creating the
opportunity for the development of new, cost-effective applications.

        TECHNOLOGY DESCRIPTION. Conventional high-performance microprocessors
are register-based with large register sets. These registers are directly
addressable storage locations requiring a complex architecture that consumes


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costly silicon. This conventional architecture provides processing power for
computer applications but complicates and slows the execution of individual
instructions and increases silicon size, thereby increasing chip cost.

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

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

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

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

        The Company has ported the Java operating environment to the PSC1000
family, which currently utilizes the C programming language for software
support. The Company is a licensee of Sun Microsystems Inc. which enables the
Company to develop and distribute products based on Sun's JavaOS Technology. The
Company recently exercised an option to license from Sun Microsystems Inc.,
Personal Java, a platform on which to run Java applications; licensed from Wind
River VXWorks, an operating system; and entered into a relationship with Forth
Inc. whereby Forth will provide software support and operating system
development tools for the Forth Programming language. Successful implementation
of this software is expected to produce one of the best price performance
microprocessors available in silicon supporting the Java virtual machine and
embedded applications. The Company believes that, if the implementation is
successfully completed, the PSC1000 family will be competitive with Java
microprocessors announced by competitors. However, there can be no assurance of
successful implementation of this package of software or of a market for a
PSC1000 family Java microprocessor.


                                       10
<PAGE>   11

        STAGE OF DEVELOPMENT. An initial first-generation production of wafers
was fabricated in early 1994 at a contract fabrication facility using 6-inch
wafers employing 0.8 micron double-metal CMOS technology. After the May 31, 1994
acquisition, the Company improved the original design, added new features and
performed simulations and tests of the improved designs. In October 1995, a run
of six wafers of second-generation microprocessors (of the same CMOS technology)
were fabricated by a contract fabrication facility. Subsequently, the Company
tested the resultant microprocessors, while completing a C computer language
compiler and preparing application development tools. The compiler and
application development tools are necessary to enable system designers to
program the PSC1000 family for specific applications. The Company made
corrections to the design from testing the first run and produced an additional
run of second-generation microprocessors from existing wafers. Second run
microprocessors (the 0.8 micron microprocessor) were received in May 1996. In
July 1996, the Company commenced employing these microprocessors in
demonstration boards for use by developers and prospective customers and
licensees.

        In December 1996, the Company commenced development efforts aimed at
producing a 0.5 micron microprocessor based on the PSC1000 technology. A
reduction to 0.5 micron double-metal CMOS technology improved operating speed,
reduced power requirements, reduced physical size and reduced fabrication cost
resulting in improved cost-performance over the 0.8 micron microprocessor and
competitors. In May 1998, the Company commenced production run of a 0.35 micron
microprocessor that management anticipates will further increase operating speed
and cost-performance over the previous generations of the PSC1000 family of
microprocessors.

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

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

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

        In April 1998 the Company received its first major contract
incorporating the PSC1000 microprocessor. The PSC1000 will be used as a main
component on a digital video disk (DVD) controller card used in a kiosk
application for the travel industry. The value of the contract was in excess of
$3 million with deliveries scheduled for fiscal year 1999.

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

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

        Management believes that the ShBoom architecture is suited for
controller applications requiring high-performance and low system cost, such as
kiosks, laser printers, dot-matrix printers, video terminals, robotics, motion


                                       11
<PAGE>   12

controllers, industrial controllers, digital communication devices, video games,
cable and satellite modems and TV set-top boxes. The Company expects that early
licensing of the technology and product applications will focus on embedded
control.

        The Company has appointed eight international distributors for foreign
markets. The Company has a full-time Vice President of Sales and Marketing to
lead marketing of the PSC1000 family.

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

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

        Initial fabrications of the 0.8 micron and 0.5 micron processors were
performed by contract fabrication facilities. The 0.35 micron microprocessor has
been delivered for fabrication to a contract fabrication facility that has
agreed to provide production quantities for the Company's customers. There can
be no assurance fabrication facilities will be available to produce the PSC1000
family in the future. However, since there are a large number of fabrication
facilities with the capability to produce the PSC1000 family of microprocessors,
management believes microprocessors can be produced on a contract basis.
Industry shortages of fabrication facilities that may exist and are predicted to
exist in the future are generally limited to the more demanding architectures.
If a shortage of fabrication facilities develop, it could have a material
adverse effect on the Company's profitability.

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

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

        The Company expects that the PSC1000 family, if successfully
commercialized in the embedded controller market, will compete with a variety of
16/32-bit microprocessors including ARM, MIPS and the PowerPC. As a Java
processor, the Company expects its PSC1000 family will compete with a broad
range of microprocessors including licensees of Sun Microsystems, Inc.'s
PicoJava. These companies have significantly greater resources than the Company.

        A new entrant, such as the Company, is at a competitive disadvantage
compared to these and other established producers due to a number of factors,
including the lack of product performance experience, lack of experience by
customers in using application development systems, no record of technical
service and support, and limited marketing and sales capabilities.

HIGH SPEED DATA COMMUNICATIONS

        GENERAL BACKGROUND. Starting in fiscal 1995 the Company initiated the
development of a computer compatible plug-in card allowing high-speed,
cost-effective digital ISDN access to the Internet and other networks. In
December 1996, the Company acquired 96.9% of Metacomp to create a communications
division including 


                                       12
<PAGE>   13

engineering, assembly, marketing and distribution. The acquisition of Metacomp
expanded the product line and added a high-speed data communications revenue and
customer base. High-speed data communication revenues accounted for
substantially all of the Company's revenues for the fiscal year ended May 31,
1998.

        Metacomp, founded in 1978, is a high technology company that designs,
assembles, and sells a wide range of high performance data and
telecommunications solutions for wide area networking and high speed data
communications requirements.

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

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

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

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

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

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

      CyberShark/PRI - This Primary Rate ISDN (PRI) adapter card for ISA bus
      provides intelligent support of up to 23 simultaneous digital connections
      offered by the 23B+D interface. An optional MVIP Bus interface on board
      allows easy integration into third-party voice, analog modem, or video
      codec boards. Other downloadable firmware engines are available to support
      T1/Fractional-T1, E1 and ETSI PRI services. Drivers for Windows/NT are
      available.

        FlagShip Family
      FlagShip/PRI-2 - This newest member of the Company's ISDN product family
      is a dual-span PRI adapter card for PCI bus that supports up to 46
      simultaneous digital connections. The MVIP Bus interface is standard.
      Firmware engines to support T1/Fractional-T1, E1 and ETSI PRI services
      will be offered. A driver for Windows/NT is available.

      VME Product Line - The Company also offers a line of intelligent high
      speed communications engines in a VME form factor. Some of our customers
      for these products include the military as well as large satellite based
      data communications companies.

      ATcomm2/4 Product Line - The Company also markets an intelligent two or
      four channel product that is used around the world for high speed data
      communications.


                                       13
<PAGE>   14

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

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

        PRODUCTION AND MARKETING STRATEGY. The Company's strategy is to have its
high-speed data communication products manufactured on a sub-contract basis
with, in some instances, final assembly at the Company's facility. Products are
tested and distributed by the Company. An in-house marketing staff manages the
marketing of the Company's high-speed data communications products. The
Company's telecommunication products and ISDN products (other than CyberShark)
are targeted for OEMs, systems integrators, VARs and sophisticated end users.

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

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

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



RADAR AND ANTENNA TECHNOLOGY

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

        The Company commenced active development of its GPR technology in April
1992. By May 1993 the Company was able to demonstrate the sensing, processing
and crude visualization of images from its technology, and by May 1994 the
Company had completed its prototype device. Since May 1994 the Company has
focused its efforts and limited financial resources on the PSC1000 technology
and communication products, effectively suspending development and most
marketing efforts related to GPR.

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

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


                                       14
<PAGE>   15

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

        The Company has obtained two government contracts to evaluate a
prototype of the gas antenna technology. There can be no assurance that the
Company will obtain additional development funds or that it can successfully
exploit this technology.

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

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

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

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

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

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

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

        COMPETITION. The segment of the electronics industry that involves the
manufacture and sale of GPR equipment is not large or cohesive enough to be
referred to as an "industry" but is more a specialized subset of geophysical
tools that include seismic equipment and other geophysical and scientific
instruments. The antenna 


                                       15
<PAGE>   16

industry is very competitive and consists of a large number of companies with
substantial resources, a large installed base, established government and
commercial relationships, and large research and development staffs. It is
possible that any such technology owned or developed by others may be further
advanced than the Company's technology.

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

RESEARCH AND DEVELOPMENT

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

        The Company incurred research and development expenditures of $1,607,828
and $1,367,937 for the fiscal years ended May 31, 1998 and 1997, respectively.
The majority of the Company's expenditures in fiscal 1998 and 1997 have been
expended on its PSC1000 and high-speed data communications technologies. To
date, the Company has expensed internal software development costs as incurred.
The Company believes that technical advances are essential to its success and
expects that it will continue to expend substantial funds on research and
development of its technologies; however, there can be no assurance that such
research and development efforts will result in the design and development of
competitive technologies in a timely manner.

LICENSES, PATENTS, TRADE SECRETS AND OTHER PROPRIETARY RIGHTS

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

        The Company has four U.S. patents issued and has three U.S. patents
pending, most dating back to 1989, on the ShBoom microprocessor technology. The
Company has one ShBoom technology patent pending in five European countries and
Japan and may file additional applications under international treaties
depending on an evaluation of the costs and anticipated benefits that may be
obtained by expanding possible patent coverage.

        In addition to such factors as innovation, technological expertise and
experienced personnel, the Company believes that a strong patent position is
becoming increasingly important to compete effectively in the semiconductor
industry. It may become necessary or desirable in the future for the Company to
obtain patent and technology licenses from other companies relating to certain
technology that may be employed in future products or processes. To date, the
Company has not received notices of claimed infringement of patents with any
existing processes or products; but, due to the nature of the industry, the
Company may receive such claims in the future. Likewise, the Company believes
that it may have claims against other semiconductor companies should certain of
its pending patents be favorably granted, but there can be no assurance thereof
nor any assurance that the Company could successfully exploit any potential
patent claims against larger competitors.

        The Company acquired the basic ShBoom technology from nanoTronics
Corporation in return for 10,000,000 shares of the Company's common stock in
1994. The Company does not believe it is obligated to pay any royalties on
aspects of the ShBoom technology specified in prior agreements between
nanoTronics Corporation and a previous inventor. The Company believes, should
there be royalties due to the previous inventor, that the obligation is that of
nanoTronics. The Company has been informed by nanoTronics that a tender of a
part of the consideration paid by the Company to nanoTronics for the basic
ShBoom technology has initially been rejected by the inventor and that the
inventor has proposed that he is entitled to royalties and the basic technology
be returned by nanoTronics and licensed back to the Company. nanoTronics has
rejected this proposal and the Company and nanoTronics are continuing
discussions with the inventor in an effort to resolve these issues. However, if
it is ultimately determined that the 


                                       16
<PAGE>   17
inventor is entitled to royalties, the Company could be subject to
indemnification claims by nanoTronics of up to $1,250,000 pursuant to its
agreement with nanoTronics. See Item 12, "Certain Relationships and Related
Transactions," for further discussion.

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

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

        A third party has licensed certain ISDN software technology to the
Company. In addition to the protection afforded the Company through the ISDN
technology licenses, the Company has created its own software and hardware
designs and uses copyright, trade secrets, software security measures and
nondisclosure agreements to protect its proprietary products, technology and
software. The Company has one U.S. patent on its high-speed data communication
technology. Despite the Company's precautions, it may be possible for
unauthorized third parties to copy aspects of, or otherwise obtain and use, the
Company's high-speed data communication technology and software without
authorization. In addition, the Company cannot be certain that others will not
develop substantially equivalent or superseding proprietary technology thereby
substantially reducing the value of the Company's proprietary rights.

        Metacomp has licensed a family of interface chips to Sipex Corporation
under a royalty agreement providing for a minimum of $50,000 per year through
calendar year 1998 after which time it becomes a royalty free license.

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

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

MARKETING AND DISTRIBUTION

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

<TABLE>
<CAPTION>
                                                  1998                 1997
                                                  ----                 ----

<S>                                               <C>                   <C>
               Domestic sales                     96%                   77%
               Foreign sales
                      North America                1%                   13%
                      Europe                       3%                    6%
                      Other                        -                     4%
                                                 ----                  ----

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


                                       17
<PAGE>   18

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

DEPENDENCE UPON SINGLE CUSTOMERS

        Ten percent (10%) or more of the Company's consolidated net sales for
the fiscal years indicated were derived from shipments to the following
customers:

<TABLE>
<CAPTION>
                                                  1998                 1997
                                                  ----                 ----
<S>                                               <C>                  <C>     
        A                                         $578,000             $473,000
        B                                         $478,000             $472,000
        C                                                -             $212,000
        D                                         $207,000                    -
</TABLE>

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

EMPLOYEES

        The Company currently has twenty full-time and two part-time personnel.
Ten full-time persons are employed in research and development, four full-time
persons are engaged in manufacturing and assembly, two full-time persons are
engaged in marketing and four full-time and two part-time persons are engaged in
general and administrative activities. These persons include Mr. Norris and Mr.
Putnam, who only devote a part of their available time to the affairs of the
Company. The Company also engages additional consultants and part-time persons
as needed from time to time.

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

GOVERNMENT REGULATION

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

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

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


                                       18
<PAGE>   19

ITEM 2. DESCRIPTION OF PROPERTY

        Effective January, 1997 the Company merged its operations with Metacomp
and moved its principal executive and operating office to space leased by
Metacomp at 10989 Via Frontera, San Diego, California. This space contains
approximately 10,000 square feet of space, including approximately 7,500 square
feet of improved space for office and technical personnel and approximately
2,500 square feet of unimproved warehouse space. Management believes this
facility is adequate for the present needs of the Company and Metacomp for at
least the next twelve months. Four research and development personnel are
located in the Los Gatos, California area, and one research and development
person is located in the Austin, Texas area. Each of these individuals
telecommutes from their respective home offices with the San Diego facility.

ITEM 3. LEGAL PROCEEDINGS

        The Company is not party to any material pending legal proceedings.

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

        None.

                                     PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

        The following table sets forth the high and low bid quotations for the
Common Stock for the fiscal years ended May 31, 1998 and 1997.

<TABLE>
<CAPTION>
                                                             BID QUOTATIONS
                                                             --------------
                                                            HIGH        LOW
<S>                                                         <C>        <C>  
        Fiscal Year Ended May 31,1998
          First Quarter                                     $2.31      $1.36
          Second Quarter                                    $1.78      $1.00
          Third Quarter                                     $1.15      $ 0.53
          Fourth Quarter                                    $1.36      $ 0.72

        Fiscal Year Ended May 31, 1997
          First Quarter                                     $3.50      $1.75
          Second Quarter                                    $2.44      $1.12
          Third Quarter                                     $1.83      $0.94
          Fourth Quarter                                    $1.62      $0.97
</TABLE>

        The Company had approximately 226 shareholders of record as of May 31,
1998. At August 14, 1998, there were 38,248,110 shares of Common Stock issued
and outstanding. The Company has never paid a cash dividend on its Common Stock
and does not expect to pay one in the foreseeable future.

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

        The Company's results of operations have and may continue to be subject
to significant variations. The results for a particular period may vary due to a
number of factors, including the overall state of the semiconductor and
communications segments of the economy, the development status of and demand for
the Company's products, 


                                       19
<PAGE>   20

economic conditions in the Company's markets, the timing of orders, the timing
of expenditures in anticipation of future sales, the mix of products sold by the
Company, the introduction of new products and product enhancements by the
Company or its competitors and pricing and other competitive conditions.

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

RESULTS OF OPERATIONS

Net sales. Total net sales for the fiscal year ended May 31, 1998 increased 3.0%
to $1,902,874 from $1,847,421 for the fiscal year ended May 31, 1997. This
increase was due primarily to the initial sales for the microprocessor and
radar/antenna product lines.

Cost of sales. Cost of sales as a percentage of net sales increased to 61.2% in
fiscal 1998 compared to 54.3% in fiscal 1997. This increase in the cost of sales
percentage was a result of a write down in inventory values related to the
obsolescence of components and finished parts of the older product lines being
phased out.

Research and development expenses increased 17.5% from $1,367,937 in fiscal 1997
to $1,607,828 for fiscal 1998. This increase was due primarily to an increase in
licensed software support and update fees.

Selling, general and administrative expenses increased 43.3% from $1,723,751 in
fiscal 1997 to $2,470,937 in fiscal 1998. This increase was due primarily to the
costs of two financings, which financings were in the total amount of
$3,000,000, an increase in personnel costs related to the Company's addition of
two executives, one marketing and one financial, the compensation costs related
to the release from escrow of 500,000 shares of common stock as discussed in
Note 4 to the consolidated financial statements, and the increase in marketing
costs related to introducing the Company's products to the marketplace.

Amortization of purchased ShBoom technology was $612,333 for fiscal 1997. The
technology was totally amortized during fiscal year 1997 and, accordingly, there
was no corresponding expense for the comparable period of fiscal year 1998.

Other income (expense) was significantly higher for fiscal 1998 as a result of
the non-cash interest related to the discount on the convertible term debentures
as discussed in Note 5 to the consolidated financial statements and the interest
on the same notes.

An extraordinary income item of $1,779,457 was included in fiscal 1997. This
item was the result of the discharge of debts by Metacomp in July, 1996 as a
result of their successful completion of their Chapter 11 case.


LIQUIDITY AND CAPITAL RESOURCES

        At May 31, 1998, working capital was $1,011,329 and cash and cash
equivalents totaled $602,456. The Company has funded its operations primarily
through the issuance of securities. Cash and cash equivalents increased $124,781
during fiscal year 1998. Net cash used in operating activities of $2,423,080 and
additions to property and equipment of $417,225 were offset by the net proceeds
from a new issuance of convertible debt in the amount of $2,720,000 and the
proceeds from stock option exercises of $247,807. Of the convertible debt
amount, $2,445,000 was subsequently converted into common shares of the Company.

        The Company's liquidity for the next twelve months is anticipated to be
supplemented by sales, including sales derived from a major contract for a DVD
controller card in a kiosk application, and licensing of PSC1000
microprocessors.


                                       20
<PAGE>   21

        The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months to continue
development of the Company's technologies. Product introductions such as those
currently underway for communication products and the PSC1000 microprocessor may
require significant inventory and other expenditures not presently estimable by
management. Further, if expanded development is commenced or new generations of
microprocessors or radar are accelerated beyond current plans, additional
expenditures, not currently estimable by management, may be required. It is
possible therefore, that higher levels of expenditures may be required than
currently contemplated by management resulting from changes in development plans
or as required to support new developments or commercialization activities or
otherwise.

        Based on the potential rate of cash operating expenditures and current
plans, management anticipates the cash requirements for the next twelve will be
satisfied by improved product sales, the sale of additional Company equity
securities, debt financing and/or the sale or licensing of certain of the
Company's technologies. There can be no assurance that any future funds required
will be generated from operations or from the aforementioned or other potential
sources. The lack of additional capital could force the Company to substantially
curtail or cease operations and would therefore have a material adverse effect
on the Company's business. Further, there can be no assurance that any such
required funds, if available, will be available on attractive terms or that they
will not have a significantly dilutive effect on existing shareholders of the
Company.

TAX LOSS CARRYFORWARDS

        As of May 31, 1998, the Company has approximately $8,677,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net deferred tax
asset of $4,131,000 arising primarily from tax loss carryforwards because
management can not determine that it is more likely than not that the deferred
tax asset will not be realized. See Note 8 to the Consolidated Financial
Statements.

YEAR 2000 COMPLIANCE

        The Company, like most owners of computer software, will be required to
modify significant portions of its software so that it will function properly in
the year 2000. Preliminary estimates of the total costs to be incurred by the
Company to resolve this problem range from $20,000 to $30,000. Since the Company
mainly uses third party "off-the-shelf" software, it does not anticipate a
problem in resolving the year 2000 problem in a timely manner. Maintenance or
modification costs will be expensed as incurred, while the costs of new software
will be capitalized and amortized over the software's useful life.

NEW ACCOUNTING PRONOUNCEMENTS

        The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income, its components and accumulated balances.
Comprehensive income is defined to include all changes in equity except those
resulting from investments by owners and distributions to owners. Among other
disclosures, SFAS No. 130 requires that all items that are required to be
recognized under current accounting standards as components of comprehensive
income be reported in a financial statement that displays with the same
prominence as other financial statements. SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.

        SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and require comparative information for
earlier years to be restated. Because of the recent issuance of the standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of the
standards.


                                       21
<PAGE>   22

        In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.

        In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal periods beginning after June 15, 1999. Management believes
the adoption of this statement will have no material impact on the Company's
financial statements.

FOURTH QUARTER ADJUSTMENTS

The Company recorded in the fourth quarter certain adjustments relative to
non-cash interest expense related to convertible debt and associated debenture
costs and a write-down of inventory due to obsolescence amounting to an
aggregate of $2,100,000 which are discussed in Notes 5 and 6 to the
consolidated financial statements. Of the aggregate amount, $1,000,000 and
$1,100,000 related to the third and fourth quarters, respectively. The Company
plans to file an amended Form 10-QSB for the quarter ended February 28, 1998.


ITEM 7. FINANCIAL STATEMENTS

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

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

        None



                                    PART III

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

IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS

        The current directors and executive officers of the Registrant, their
ages, positions held in the Company and duration as such, are as follows:

<TABLE>
<CAPTION>
      NAME                    AGE               POSITION AND OFFICES          DIRECTOR SINCE
<S>                            <C>      <C>                                     <C>
Elwood G. Norris               59       Chairman and Director                   August 1989
James T. Lunney                43       President, CEO and Director              April 1998
Donald R. Bernier              56       Director                               January 1995
Michael A. Carenzo             57       Director                                  June 1996
Norman J. Dawson               57       Vice President, General Manager
                                         and Director                          January 1997
Helmut Falk, Jr                42       Director                              December 1997
Richard D. McDaniel            73       Director                              December 1995
</TABLE>


                                       22
<PAGE>   23

<TABLE>
<CAPTION>
NAME                         AGE         POSITION AND OFFICES            DIRECTOR SINCE
<S>                           <C>      <C>                               <C>
Lowell W. Giffhorn            51       Chief Financial Officer                n/a
Jayanta K. Maitra             48       Vice President Engineering             n/a
Philip Morettini              41       Vice President Sales & Marketing       n/a
Robert Putnam                 40       Secretary                              n/a
</TABLE>

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


BIOGRAPHICAL INFORMATION

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

        JAMES T. LUNNEY. Mr. Lunney has been the President and Chief Executive
Officer since March, 1998 and was appointed as a director in April, 1998. From
February, 1997 to March, 1998, he was the President of Signal Processing
Systems, a San Diego manufacturer of signal processing technologies. From
November, 1992 to February, 1997, he was Manager of Production Programs and Vice
President and Business Area Manager for Signal Processing which until August,
1996 was a division of Scientific Atlanta before it was acquired by Global
Associates Ltd. Previously, he held various managerial positions with GE
Aerospace, Defense Systems Division and Ordnance Systems Division. In 1977, he
obtained a B.S. in Electrical Engineering from Worcester Polytechnic Institute.

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

        MICHAEL A. CARENZO. Mr. Carenzo was the President and CEO of the Company
from June 1996 to March 1998. He continues to be a director of the Company.
Previously, he was a Senior Partner of CADWA Associates, a management consulting
group from July 1994 to December 1996. From February 1992 to June 1994, he
served as President and Director of Datakey Inc., a Minnesota public company
engaged in semiconductor-based manufacturing of portable memory devices. Prior
to February 1992, Mr. Carenzo served 22 years with the DuPont Co. Mr. Carenzo is
a 1966 graduate of American International College where he received a B.S.
degree in Business.

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

        HELMUT FALK, JR. For the past five years, Dr. Falk has been the Director
of Anesthesia for the Johnson Memorial Hospital in Franklin, Indiana. Dr. Falk
received his D.O. from the College of Osteopathic Medicine of the Pacific in
1987 and his B.S. in Biology from the University of California, Irvine in 1983.
Dr. Falk is the son of the late Helmut Falk, who was the sole shareholder of
nanoTronics and the Chairman and Chief Executive Officer of the 


                                       23
<PAGE>   24

Company until his death in July, 1995. Dr. Falk is also an heir in the Helmut
Falk Estate which is the beneficial owner of the Company's shares held by the
Helmut Falk Family Trust and nanoTronics Corporation.

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

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

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

        PHILIP MORETTINI. Mr. Morettini has been the Vice President of Sales and
Marketing since July, 1997. From September, 1995 to April, 1997, he was the
President and CEO of Adept Computer Solutions, a San Diego software company.
From December, 1993 to September, 1995, he was the principal in his own
management consulting firm and from March, 1990 to September, 1993, he held
several positions, including Division Manager, for Horizons Technology, a San
Diego software and services company. Previously, he held various marketing and
product development positions with Spectragraphics and Hewlett-Packard. In 1981
Mr. Morettini received a M.B.A. degree from the University of Detroit, and in
1979 he obtained a B.S. in Engineering form the University of Illinois.

        ROBERT PUTNAM. Mr. Putnam has been the Secretary and Treasurer of the
Company since 1989 and was a director of the Company from 1989 to April 1998.
Since 1988 he has served as Secretary of NCI. Since 1984 he has been a director
of ATC, where he served as Secretary/Treasurer from 1984 and as President and
CEO from February 1994 until September 1997. He received a B.A. degree in Mass
Communication/Advertising from Brigham Young University in 1983. Mr. Putnam
devotes only part-time services to the Company.


GENERAL CONFLICTS OF INTEREST

        Conflicts of interest now exist and will continue to exist between the
Company and certain of its officers and directors due to the fact that certain
officers and directors have other employment or business interests to which they
devote attention. The Company has not established policies or procedures for the
resolution of current or potential conflicts of interest between the Company and
its management or management-affiliated entities. There can be no assurance that
members of management will resolve all conflicts of interest in the Company's
favor.

        It is conceivable that the respective areas of interest of the Company,
ATC and NCI could overlap or conflict. The Company believes that, although each
of the three corporations is involved in the electronics industry, their
respective areas of focus, products and technology are sufficiently distinct
that no conflict in business lines or 


                                       24
<PAGE>   25

executive loyalties will result. Therefore, no steps have been taken to resolve
possible conflicts among the Company, ATC, and NCI; and any such conflicts,
should they arise, will be addressed at the appropriate time.

SPECIAL CONFLICTS OF INTEREST

        Robert Putnam also acts as Secretary of NCI and ATC. Both of these
companies are effectively controlled by Elwood Norris. The possibility exists
that these other relationships could affect Mr. Putnam's independence as an
officer of the Company.

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

INDEMNIFICATION OF OFFICERS, DIRECTORS AND OTHERS

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

EXCLUSION OF DIRECTOR LIABILITY

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

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

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

        Based solely on its review of copies of the reports it has received from
persons required to make such filings and its own records, the Company believes
that from the period June 1, 1997 through July 15, 1998, all persons subject to
the Section 16(a) reporting requirements timely filed the required reports.


                                       25
<PAGE>   26

ITEM 10. EXECUTIVE COMPENSATION

        There is shown below information concerning the compensation of the
Company's chief executive officers and each of the other four most highly
compensated executive officers whose salary and bonus exceeded $100,000 (each a
"Named Officer") for the fiscal years ended May 31, 1996, 1997 and 1998.


                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                            Annual Cash Compensation                 Long-Term Compensation
                           -------------------------                 ----------------------
      Name and             Fiscal                                   Options        All Other
Principal Position          Year      Salary     Bonus           (# of Shares)  Compensation(7)
------------------         ------     ------     -----           -------------  ---------------

<S>                         <C>      <C>          <C>            <C>                <C>
James T. Lunney             1998     $ 26,385     Nil            350,000 shares     None
President and CEO (1)

Michael A. Carenzo          1998     $164,133     Nil            525,691 shares     None
President and CEO (2)       1997     $138,000     Nil            900,000 shares     None

Elwood G. Norris            1996     $ 60,693     Nil            50,000 shares      None
President and CEO (3)

Helmut Falk                 1996     $  9,231     Nil            None               None
President and CEO (4)

Norman J. Dawson            1998     $114,169     Nil            425,000            None
Vice President and          1997     $128,483     Nil            533,953            $4,241
General Manager (5)                                                            
                                                                               
Jayanta K. Maitra           1998     $104,500     Nil            485,753            None
Vice President              1997     $118,700     Nil            535,753            $2,874
Engineering (6)                                                         
</TABLE>

        (1) Mr. Lunney has served as President and CEO since March 23, 1998.

        (2) Mr. Carenzo served as President and CEO from June 1, 1996 to March
        1998 when Mr. James T. Lunney was appointed President and CEO.

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

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

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

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

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


                                       26
<PAGE>   27

        The Company maintains employee benefits that are generally available to
all Company employees, including medical, dental and life insurance benefits and
a 401(k) retirement savings plan. There was no Company matching contributions
under the 401(k) plan to the Named Officers during the fiscal year ended May 31,
1998.

OPTION GRANTS

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

             OPTION GRANTS TABLE FOR FISCAL YEAR ENDED MAY 31, 1998

<TABLE>
<CAPTION>
                                                 Percent of Total
                         Number of               Options Granted           Exercise        Expiration
        Name          Options Granted       to Employees in Fiscal Year      Price            Date
        ----          ---------------       ---------------------------    --------        ----------
<S>                        <C>                         <C>                 <C>             <C>  
James T. Lunney            350,000                     23.2%               $   0.86        2/22/2003
Michael A. Carenzo          50,000                      3.3%               $   0.59        1/26/2003
Elwood G. Norris            50,000                      3.3%               $   0.59        1/26/2003
Norman J. Dawson            50,000                      3.3%               $   0.59        1/26/2003
Jayanta K. Maitra           25,000                      1.7%               $   0.59        1/26/2003
</TABLE>

AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END VALUES

        Shown below is information on exercises of stock options and fiscal
year-end values pursuant to the Company's 1996 and 1992 Stock Option Plans to
the Named Officers reflected in the Summary Compensation Table shown above.

          AGGREGATED OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                      Number of Unexercised       Value of Unexercised  
                                                         Options Held At         In-The-Money Options At
                          Shares                           May 31, 1998              May 31, 1998(1)   
                       Acquired        Value               ------------              ---------------
Name                  on Exercise     Realized     Exercisable   Unexercisable  Exercisable Unexercisable
----                  -----------     --------     -----------   -------------  ----------- -------------
<S>                       <C>          <C>           <C>            <C>               <C> 
Michael A. Carenzo        40,200       $53,466       525,691             --           $8,000  $  -
Norman J. Dawson          54,600       $61,666        50,000        375,000           $  -    $  -
Elwood G. Norris              --            --       100,000             --           $8,000  $  -
James T. Lunney               --            --       116,667        233,333           $  -    $  -
Jayanta Maitra                --            --       110,753        375,000           $24,379 $  -
</TABLE>

(1) Based on the last sale price at the close of business on the last trading
day of the fiscal year of $.75.

        The Company has not awarded stock appreciation rights to any employee of
the Company and has no long-term incentive plans, as that term is defined in SEC
regulations (other than a $50,000 demonstration bonus payable to Mr. Norris upon
successful demonstration of a prototype GPR device meeting specified performance
criteria, see "Certain Transactions").

        During the fiscal year ended May 31, 1998, pursuant to Mr. Dawson's and
Mr. Mairta's Employment Contracts, the Board of Directors of the Company
cancelled 75,000 previously granted stock options to each and reset the vesting
schedule on an additional 75,000 previously granted stock options to each as a
result of the Company not meeting certain performance goals. As a result of Mr.
Carenzo's resignation in March, 1998, 337,500 previously granted stock options
were cancelled. The Company has no defined benefit or actuarial plans covering
any person.


                                       27
<PAGE>   28

COMPENSATION OF DIRECTORS

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

EMPLOYMENT CONTRACTS

        Mr. Norris may be entitled to future compensation pursuant to agreements
described in "Certain Transactions". The Company has an employment agreement
dated November 20, 1995 and amended on July 14, 1997 with Mr. Norris, the
Company's Chairman, for a three year term providing for a base salary of
$31,500. The Company may terminate Mr. Norris' employment with or without cause,
but termination without cause (other than disability or death) would result in a
lump sum severance payment of 24 months salary. Likewise upon a change in
control, as defined in the agreement, Mr. Norris may elect to terminate
employment and obtain a lump sum severance payment of 24 months salary.

        The Company entered into an employment agreement dated as of February
23, 1998 and approved by the Company's directors on March 24, 1998, with Mr.
Lunney providing for his employment as President and CEO effective March 23,
1998. The agreement is for a three year term providing for a base salary of
$130,000 per annum for the first year with an increase in the second year to at
least $140,000 per annum. The base salary may be increased at the discretion of
the Board of Directors. The agreement provides for a guaranteed bonus of 25% at
the end of the first year or on certain changes in control as defined in the
agreement. During subsequent years, Mr. Lunney is eligible for a bonus equal to
25% of the base salary conditioned on Mr. Lunney meeting certain objectives
established by the Board of Directors. In addition, the agreement provides a
$600 per month car allowance. The Company may terminate Mr. Lunney's employment
with or without cause, but termination without cause (other than disability or
death) would result in a lump sum severance payment ranging, depending on length
of service, from six to twelve months salary plus any prorated earned bonuses.
Also, upon a change of control, as defined in the agreement, Mr. Lunney may
elect to terminate employment and obtain a lump sum severance payment equal to
the base salary for the remaining months of the agreement. The Company has
granted Mr. Lunney options to purchase 350,000 common shares, 116,667 vesting on
March 23, 1998 and the balance vesting equally at the end of twelve and
twenty-four months from the date of the agreement subject to earlier vesting in
the event of a change in control of the Company.

        The Company entered into an employment agreement dated as of July 28,
1997 and approved by the Company's directors on August 18, 1997, with Mr.
Morettini providing for his employment as Vice President of Sales and Marketing.
The agreement is for a three year term providing for a base salary of $110,000
per annum for the first year and not less than $110,000 per annum during the
second and third years of the agreement. The base salary may be increased at the
discretion of the Board of Directors. The agreement provides for a bonus up to
50% of the annual base consideration for the applicable year. The Company may
terminate Mr. Morettini's employment with or without cause, but termination
without cause (other than disability or death) would result in a lump sum
severance payment equal to four months of the then current base salary. If
within twelve months of a change in control, as defined in the agreement, Mr.
Morettini's employment is terminated for other than cause or if Mr. Morettini
refuses to accept or voluntarily resigns from a position other than a qualified
position, as that term is defined in the agreement, then he will receive a lump
sum severance payment equal to twelve months of his then current salary. Under
the agreement, the Company granted Mr. Morettini options to purchase 300,000
common shares, 30,000 vesting on July 28, 1997 and the balance vesting one-third
per year starting July 28, 1998, subject to certain performance standards.
Options may vest earlier subject to the discretion of the Board of Directors.

        The Company entered into an employment agreement dated as of July 23,
1998 with Mr. Giffhorn providing for his employment as the Chief Financial
Officer. The agreement is for a three year term providing for a base salary of
$110,000 per annum for the first year and not less than $110,000 per annum
during the second and third years of the agreement. The base salary may be
increased at the discretion of the Board of Directors. The agreement provides
for a bonus up to 50% of the annual base consideration for the applicable year.
The Company may terminate Mr. Giffhorn's employment with or without cause, but
termination without cause (other than disability or death) would result in a
lump sum severance payment equal to four months of the then current base salary.
If within twelve months 


                                       28
<PAGE>   29

of a change in control, as defined in the agreement, Mr. Giffhorn's employment
is terminated for other than cause or if Mr. Giffhorn refuses to accept or
voluntarily resigns from a position other than a qualified position, as that
term is defined in the agreement, then he will receive a lump sum severance
payment equal to twelve months of his then current salary.

        The Company entered into an employment agreement dated January 1, 1997
with Mr. Dawson providing for his employment as Vice President and General
Manager. The agreement is for a three year term providing for a base salary of
$120,000 per year with an increase in the second and third years as recommended
by the President and Chief Executive Officer and approved by the Board of
Directors. The agreement provides for incentive bonuses in certain instances of
up to 50% of the total yearly base compensation. The Company may terminate Mr.
Dawson's employment with or without cause, but termination without cause (other
than disability or death) during either of the first two years of the agreement
would result in a lump sum severance payment equal to twelve months salary. The
Company originally granted Mr. Dawson under the agreement options to purchase
500,000 common shares, 50,000 vesting on December 26, 1996 and the balance
vesting one-third per year starting December 31, 1997 subject to certain
performance standards. As a result of not meeting the performance standards, the
Board of Directors cancelled 75,000 of such options and reset the vesting date
on an additional 75,000 options from December 31, 1997 to December 31, 1998.
Options may vest earlier subject to the discretion of the Board of Directors.

        The Company entered into an employment agreement dated January 1, 1997
with Mr. Maitra providing for his employment as Vice President of Engineering.
The agreement is for a three year term providing for a base salary of $104,400
per year with an increase in the second and third years as recommended by the
President and Chief Executive Officer and approved by the Board of Directors.
Mr. Maitra's salary was increased to $120,000 for the second year. The agreement
provides for incentive bonuses in certain instances of up to 50% of the total
yearly base compensation. The Company may terminate Mr. Maitra's employment with
or without cause, but termination without cause (other than disability or death)
during the first year of the agreement would result in a lump sum severance
payment equal to twelve months salary. The Company originally granted Mr. Maitra
under the agreement options to purchase 500,000 common shares, 50,000 vesting on
December 26, 1996 and the balance vesting one-third per year starting December
31, 1997 subject to certain performance standards. As a result of not meeting
the performance standards, the Board of Directors cancelled 75,000 of such
options and reset the vesting date on an additional 75,000 options from December
31, 1997 to December 31, 1998. Options may vest earlier subject to the
discretion of the Board of Directors.


ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table sets forth, as of July 13, 1998, the stock ownership
of each officer and director of the Company, of all officers and directors of
the Company as a group, and of each person known by the Company to be a
beneficial owner of 5% or more of its Common Stock. Except as otherwise noted,
each person listed below is the sole beneficial owner of the shares and has sole
investment and voting power over such shares. No person listed below has any
option, warrant or other right to acquire additional securities of the Company,
except as otherwise noted.

<TABLE>
<CAPTION>
                             Name and Address               Amount & Nature
 Title                        of Beneficial                  of Beneficial     Percent
of Class                          Owner                        Ownership       of Class
--------                          -----                        ---------       --------
<S>                   <C>                                    <C>                <C>  
Common stock          Gloria Felcyn, CPA                     9,092,535   (1)     23.0%
par value             14395 Saratoga Ave., Suite 110
$.00001               Saratoga, California 95070

SAME                  Helmut Falk Family Trust               4,592,535   (3)     11.6%
                      Gloria Felcyn, Trustee
                      14395 Saratoga Ave., Suite 110
                      Saratoga, California 95070
</TABLE>


                                       29
<PAGE>   30

<TABLE>
<CAPTION>
                             Name and Address               Amount & Nature
 Title                        of Beneficial                  of Beneficial      Percent
of Class                          Owner                        Ownership        of Class
--------                          -----                        ---------        --------
<S>                   <C>                                    <C>                 <C>  
SAME                  Elwood G. Norris                      4,572,500   (4)      11.6%
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  nanoTronics Corporation               4,500,000   (2)      11.4%
                      attn: Gloria Felcyn, CPA
                      14395 Saratoga Ave., Suite 110
                      Saratoga, California 95070


SAME                  Richard D. McDaniel                   1,000,000   (4)(5)(6) 2.5%
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  Michael A. Carenzo                      525,691   (7)       1.3%
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  Jayanta K. Maitra                       298,095   (4)       *
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  Norman J. Dawson                        163,929   (4)       *
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  Donald R. Bernier                       125,000   (4)       *
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  Philip Morettini                        121,000   (4)       *
                      10989 Via Frontera
                      San Diego, California 92127
 
SAME                  Lowell W. Giffhorn                      120,000   (7)       *
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  James T. Lunney                         116,667   (7)       *
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  Robert Putnam                            75,000   (4)       *
                      10989 Via Frontera
                      San Diego, California 92127

SAME                  Helmut Falk, Jr.                         50,000   (7)       *
                      10989 Via Frontera
                      San Diego, California 92127

                      All directors & officers              7,167,882   (8)      18.1%
                       as a group (11 persons)
</TABLE>


                                       30
<PAGE>   31

      * Less than 1%.

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

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

      3 These shares remain from 5,000,000 non-escrowed originally issued shares
      plus 500,000 shares released from escrow and issued to nanoTronics in
      connection with the ShBoom technology acquisition. These shares were
      subsequently transferred to the Helmut Falk Family Trust.

      4 For each of Messrs. Norris and McDaniel the amount includes 100,000
      shares, for each of Mssrs. Bernier, Dawson and Putnam the amount includes
      50,000 shares, for Mr. Maitra the amount includes 110,753 shares, and for
      Mr. Morettini the amount includes 120,000 shares issuable upon the
      exercise of immediately exercisable outstanding stock options granted
      pursuant to the 1996 and 1992 Stock Option Plans.

      5 Includes 900,000 common shares held by Sea Ltd., a corporation through
      which Mr. McDaniel may direct certain investment powers.

      6 Mr. McDaniel is pursuing a claim against the Falk estate based on a
      written agreement with Mr. Falk pursuant to which he believes he is
      entitled to 5% of Patriot common shares (representing 275,000 shares held
      outside of escrow and 225,000 shares held in escrow for a total of 500,000
      common shares) held by nanoTronics (see Notes 2 and 3). Representatives of
      nanoTronics have advised the Company that they believe Mr. McDaniel's
      claim relates only to an interest in nanoTronics and that he therefore has
      no direct interest in nanoTronics' Patriot common shares until and if the
      claim is resolved. The additional 500,000 shares claimed by Mr. McDaniel
      are not included in Mr. McDaniel's holdings described herein since he
      cannot presently exert investment or voting control over the shares and
      there can be no assurance he will prevail in his claim.

      7 Consists entirely of shares issuable upon the exercise of outstanding
      stock options.

      8 Includes 5,774,771 shares issued and outstanding and 1,393,111 shares
      issuable upon exercise of stock options.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        There were no transactions, or series of transactions, during fiscal
1997 or 1998, nor are there any currently proposed transactions, or series of
transactions, to which the Company is a party, in which the amount exceeds
$60,000, and in which to the knowledge of the Company any director, executive
officer, nominee, five percent or greater shareholder, or any member of the
immediate family of any of the foregoing persons, have or will have any direct
or indirect material interest other than described below.

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

        nanoTronics was formed in 1991 and acquired certain base technology for
a RISC-based (Reduced Instruction Set Computing) 32-bit microprocessor
integrated on a single microprocessor with merged stack/register architecture
from the co-inventor of the technology. nanoTronics expended in excess of $1.9
million (unaudited) while engaged in further development of that technology and
produced from the basic architecture an enhanced microprocessor
(ShBoom-architecture microprocessor). In connection with the acquisition, the
Company also acquired certain fixed 


                                       31
<PAGE>   32

assets including a Sun Sparc 2 Work Station and various terminals, peripheral
devices and software. A majority of the expenditures by nanoTronics consisted of
microprocessor and related software development costs. The result of these
efforts was a successful initial fabrication of the microprocessor in early 1994
demonstrating technical feasibility of the ShBoom architecture. nanoTronics also
expended funds on the preparation and prosecution of patent applications.

        The shares were issued to nanoTronics of which Falk was the sole
shareholder. Although 4,500,000 of the shares issued remain subject to the terms
of an earnout escrow, as more fully described below, all of the shares are
issued for the purpose of dividends and voting. Prior to the transaction, Mr.
Falk was not affiliated person with the Company. At the time of issuance, the
10,000,000 common shares represented approximately 36% of the total issued and
outstanding shares of the Company.

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

        Pursuant to the terms of the Purchase Agreement, 5,000,000 of the common
shares were issued to nanoTronics pursuant to an earnout escrow arrangement as a
contingent purchase price. The terms of the escrow arrangement, as defined in
the Purchase Agreement, provide for the release from escrow of 500,000 common
shares for each $500,000 of Patriot revenues commencing June 1, 1994 and ending
May 31, 1999. The Purchase Agreement also provides for a release of shares in
the event of other major corporate events, including a sale of substantially all
the assets of the Company, certain mergers, combinations or consolidations,
certain tender offers and upon a liquidation or dissolution. Any shares not
earned by May 31, 1999 would be canceled. The shares may be sold, assigned or
transferred within the escrow arrangement but would still be subject to the
escrow terms. As of May 31, 1998, 500,000 shares have been released from escrow,
an additional 2,000,000 shares may have been earned but remain in escrow pending
the outcome of continuing discussions between the Company, nanoTronics and one
of the co-inventors of the technology, and 2,500,000 shares are held in escrow
contingent on the future revenue of the Company.

        In March 1998, the Company received a draft complaint prepared on behalf
of the co-inventor of the ShBoom technology naming as defendants the Company,
nanoTronics, and Gloria Felcyn, as trustee of the Helmut Falk Family Trust.
Among other things, the complaint alleged that the transfer of the technology by
nanoTronics to the Company was made with an intent to defraud the co-inventor
and without receiving a reasonably equivalent value in exchange. The first cause
of action sought, among other things, a declaration from the San Diego County
Superior Court that the Company and nanoTronics are obligated to pay royalties
to the co-inventor and that the Assets Purchase Agreement was fraudulent as to
the co-inventor. The second cause of action sought rescission of the Technology
Transfer Agreement and restitution of the ShBoom technology to the co-inventor.
The third cause of action sought to impose a constructive trust on the Company
in favor of the co-inventor. The Company disputes each of these claims on the
basis that the only consideration due from nanoTronics to the co-inventor has
been tendered in full, that the Asset Purchase Agreement was not fraudulent, and
that the equitable remedies of recission and restitution are not available given
the Company's investment in the development of the ShBoom technology. The
Company continues to be liable however, under its indemnification in favor of
nanoTronics, for up to $1,250,000 of costs if a court of competent jurisdiction
determines that nanoTronics is liable to the co-inventor for cash royalties
based on sales by the Company of products incorporating the ShBoom technology.

        In April 1998, the Company, nanoTronics, and the co-inventor entered
into an agreement to toll any applicable statutes of limitations for a period of
up to one year for the purpose of attempting to resolve the claim.

        In June 1998, the Company, nanoTronics, and the co-inventor entered into
a nonbinding agreement in principle to settle the dispute in consideration of
mutual full releases and the Company assigning patents on the ShBoom technology
back to the co-inventor in exchange for the co-inventor granting a fully-paid,
worldwide, subliceneable license to use the ShBoom technology patents exclusive
in the Company's existing and future fields of use. In addition, nanoTronics
agreed to release any obligation of the Company to deliver a number of shares of
the Company's stock pursuant to the Assets Purchase Agreement, which stock will
be retired. Settlement documentation has been exchanged between the parties,
although disputes remain concerning terms contained within the documents. The
Company is unable at this time to determine whether such disputes will be
resolved.


                                       32
<PAGE>   33

        The Company has granted certain registration and information rights with
respect to the shares issued to nanoTronics, such rights being assignable to
Falk and the co-inventor (who has certain rights to become a shareholder in
nanoTronics). The Company has been advised that nanoTronics has been liquidated
with the 10,000,000 shares being transferred to the Helmut Falk Family Trust
which is entitled to the same registration rights. The Company is obligated to
use its best efforts to effect a registration upon written request up to two
times subject to certain limitations. The Company is also obligated to include
the shares, subject to certain limitations, in any underwriting and in any other
registration filed by the Company. The Company registered 500,000 of these
shares on a Form SB-2 registration that became effective September 11, 1997.

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

        In June 1996, the Company appointed Compunetics Incorporated, a private
company controlled by Mr. Bernier, as its exclusive ShBoom microprocessor
representative to the three major U.S. auto producers.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

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

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exh.No.                              Document                                              No.
-------                              --------                                              ---
<S>     <C>                                                                               <C>
  2.0   PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.

  2.1   Agreement to Exchange Technology for Stock in Patriot Scientific
        Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K
        dated August 10, 1989                                                              (1)
                                                                                     
  2.2   Assets Purchase Agreement and Plan of Reorganization dated June 22,          
        1994, among the Company, nanoTronics Corporation and Helmut Falk,            
        incorporated by reference to Exhibit 10.4 to Form 8-K dated July 6, 1994           (1)
                                                                                     
  2.2.1 Amendment to Development Agreement dated April 23, 1996                 
        between the Company and Sierra Systems, incorporated by                      
        reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1 to               
        Registration Statement on Form SB-2 dated April 29, 1996                           (1)
                                                                               
  2.3   Form of Exchange Offer dated December 4, 1996 between the Company and
        certain shareholders of Metacomp, Inc. incorporated by reference to
        Exhibit 2.3 to Form 8-K dated January 9, 1997                                      (1)

  2.4   Letter of Transmittal to Accompany Shares of Common Stock of Metacomp,
        Inc. Tendered Pursuant to the Exchange Offer Dated December 4, 1996
        incorporated by reference to Exhibit 2.4 to Form 8-K dated January 9,
        1997                                                                               (1)

  3.0   ARTICLES AND BYLAWS.

  3.1   Original Articles of Incorporation of the Company's predecessor,
        Patriot Financial Corporation, incorporated by reference to
</TABLE>


                                       33
<PAGE>   34

<TABLE>
<S>     <C>                                                                               <C>
        Exhibit 3.1 to registration statement on Form S-18, file no.
        33-23143-FW                                                                        (1)
                                                                                         
  3.2   Articles of Amendment of Patriot Financial Corporation, as filed                 
        with the Colorado Secretary of State on July 21, 1988, incorporated              
        by reference to Exhibit 3.2 to registration statement on Form S-18,              
        File No. 33-23143-FW                                                               (1)
                                                                                         
  3.3   Certificate of Incorporation of the Company, as filed with the                   
        Delaware Secretary of State on March 24, 1992, incorporated by                   
        reference to Exhibit 3.1 to Form 8-K dated May 12, 1992                            (1)
                                                                                         
  3.3.1 Certificate of Amendment to the Certificate of Incorporation         
        of the Company, as filed with the Delaware Secretary of State
        on April 18, 1995, incorporated by reference to Exhibit 3.3.1
        to Form 10-KSB for the fiscal year ended May 31, 1995                              (1)

 3.3.2  Certificate of Amendment to the Certificate of Incorporation
        of the Company, as filed with the Delaware Secretary of State
        on June 19,1997, incorporated by reference to Exhibit 3.3.2
        to Form 10-KSB for the fiscal year ended May 31, 1997                              (1)

  3.4   Articles and Certificate of Merger of Patriot Financial Corporation
        into the Company dated May 1, 1992, with Agreement and Plan of
        Merger attached thereto as Exhibit A, incorporated by reference to
        Exhibit 3.2 to Form 8-K dated May 12, 1992                                         (1)

  3.5   Certificate of Merger issued by the Delaware Secretary of State on
        May 8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
        dated May 12, 1992                                                                 (1)

  3.6   Certificate of Merger issued by the Colorado Secretary of State on
        May 12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
        dated May 12, 1992                                                                 (1)

  3.7   Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
        Form 8-K dated May 12, 1992                                                        (1)

  4.0   INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.

  4.1   Specimen common stock certificate, incorporated by reference to
        Exhibit 4.1 Form 8-K dated May 12, 1992                                            (1)

  4.2   Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
        1996, exercisable to purchase 253,166 common shares at $1.58 per share
        until August 31, 1996, granted to investors in connection with an
        offering of securities made in reliance upon Regulation S, incorporated
        by reference to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended 2/29/96        (1)
        

  4.3   Form of 6% Convertible Subordinated Promissory Note due September 30,
        1998 aggregating $1,500,000 to six investors incorporated by reference
        to Exhibit 4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996             (1)
        

4.4     Form of 5% Convertible Term Debenture (CC Investments, LDC) due
</TABLE>


                                       34
<PAGE>   35

<TABLE>
<S>     <C>                                                                               <C>
        June 2, 1999 aggregating $2,000,000 to two investors incorporated
        by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997                        (1)

4.5     Form of Stock Purchase Warrant (CC Investments, LDC) dated
        June 2, 1997 exercisable to purchase an aggregate of 400,000 common
        shares at $1.69125 per share until June 2, 2002, granted to two investors
        in connection with the offering of securities in Exhibit 4.4 incorporated
        by reference to Exhibit 4.5 to Form 8-K dated June 16, 1997                        (1)


4.6     Registration Rights Agreement dated June 2, 1997 by and among
        the Company and CC Investments, LDC and the Matthew Fund, N.V.
        related to the registration of the common stock related to Exhibits
        4.4 and 4.5 incorporated by reference to Exhibit 4.6 to Form 8-K
        dated June 16, 1997                                                                (1)

4.7     Form of Warrant to Purchase Common Stock (Swartz Family
        Partnership, L.P.) dated June 2, 1997 exercisable to purchase an
        aggregate of 211,733 common shares at $1.69125 per share until
        June 2, 2002, granted to a group of investors in connection with
        the offering of securities in Exhibit 4.4 incorporated by reference to
        Exhibit 4.7 to Form 8-K dated June 16, 1997                                        (1)

4.8     Registration Rights Agreement dated June 2, 1997 by and among the
        Company and Swartz Investments, LLC related to the registration of
        the common stock related to Exhibit 4.7 incorporated by reference to
        Exhibit 4.8 to Form 8-K dated June 16, 1997                                        (1)

4.9     Form of 5% Convertible Term Debenture (CC Investments, LDC) due
        June 2, 1999 aggregating $1,000,000 to two investors                               (2)

4.10    Form of Stock Purchase Warrant (CC Investments, LDC) dated
        November 24, 1997 exercisable to purchase an aggregate of 200,000 common
        shares at $1.50 per share until June 2, 2002, granted to two investors
        in connection with the offering of securities in Exhibit 4.9                       (2)

4.11    Form of Warrant to Purchase Common Stock (Swartz Family
        Partnership, L.P.) dated November 24, 1997 exercisable to purchase an
        aggregate of 105,867 common shares at $1.50 per share until
        June 2, 2002, granted to a group of investors in connection with
        the offering of securities in Exhibit 4.9                                          (2)

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                                                                (2)

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                              (2)

10.0    MATERIAL CONTRACTS.

10.1    1992 Incentive Stock Option Plan of the Company, incorporated
        by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992                        (1)
</TABLE>


                                       35
<PAGE>   36
<TABLE>
<S>     <C>                                                                               <C>
10.1.1  Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
        incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
        1996                                                                               (1)

10.2    1992 Non-Statutory Stock Option Plan of the Company, incorporated by
        reference to Exhibit 10.2 to Form 8-K dated May 12, 1992                           (1)
                                                                       
10.2.1  Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
        incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
        year ended May 31, 1996                                                            (1)

10.3    Lease Agreement between the Company's subsidiary Metacomp, Inc. and
        Clar-O-Wood Partnership, a California limited partnership dated April
        11, 1991 as amended November 11, 1992 and November 2, 1995, incorporated
        by reference to Exhibit 10.3 to Form 10-KSB for the fiscal year ended
        May 31, 1997                                                                       (1)

10.4    Stock Purchase Agreement dated November 29 and 30, 1995,
        between the Company and SEA, Ltd., incorporated by reference
        to Exhibit 10.4 to Form 8-K dated December 11, 1995                                (1)

10.4.1  Letter Amendment to Stock Purchase Agreement dated February 21,
        1996, between the Company and SEA, Ltd., incorporated by reference
        to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96                  (1)

10.5    1995 Employee Stock Compensation Plan of the Company, incorporated by
        reference to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended 11/30/95         (1)
        

10.6    Letter Stock and Warrant Agreement dated January 10, 1996 between the
        Company and Robert E. Crawford, Jr., incorporated by reference to
        Exhibit 10.6 to Form 10-QSB for fiscal quarter ended 2/29/96                       (1)

10.7    Non-Exclusive Manufacturing and Line of Credit Agreement dated
        February 28, 1996, between the Company and Labway Corporation,
        incorporated by reference to Exhibit 10.7 to Form 10-QSB for
        fiscal quarter ended 2/29/96                                                       (1)

 10.8   Distribution and Representation Agreement dated February 28,
        1996, between the Company and Innoware, Inc., incorporated by
        reference to Form 10-QSB for fiscal quarter ended 2/29/96                          (1)

 10.9   Employment Agreement dated November 20, 1995 between the
        Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9
        to Registration Statement on Form SB-2 dated March 18, 1996                        (1)

 10.9.1 First Amendment to Employment Agreement dated May 17, 1996 between the
        Company and Elwood G. Norris, incorporated by reference to Exhibit
        10.9.1 to Pre-Effective Amendment No. 2 to Registration Statement on
        Form SB-2 dated May 23, 1996                                                       (1)

 10.10  Employment Agreement dated November 20, 1995 between the
        Company and Robert Putnam, incorporated by reference to Exhibit 10.10
        to Registration Statement on Form SB-2 dated March 18, 1996                        (1)

 10.11  Sales Contractual Agreement dated March 19, 1996 between the
</TABLE>


                                       36
<PAGE>   37

<TABLE>
<S>     <C>                                                                               <C>
        Company and Evolve Software, Inc., incorporated by reference to
        Exhibit 10.11 to Pre-Effective Amendment No. 1 to Registration
        Statement on Form SB-2 dated April 29, 1996                                       (1)

10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
        Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
        at $2.85, incorporated by reference to Pre-Effective Amendment No. 1 to
        Registration Statement on Form SB-2 dated April 29, 1996                          (1)

10.12   Employment Agreement dated as of May 8, 1996 between the Company and
        Michael A. Carenzo, including Schedule A - Stock Option Agreement,
        incorporated by reference to Pre-Effective Amendment No. 2 to
        Registration Statement on Form SB-2 dated May 23, 1996                            (1)



10.12.1 First Amendment to Employment Agreement dated May 8, 1996 between the
        Company and Michael A. Carenzo dated September 23, 1996, incorporated by
        reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended
        May 31, 1997                                                                      (1)

10.13   1996 Stock Option Plan of the Company dated March 25, 1996 and approved
        by the Shareholders on May 17, 1996, incorporated by reference to
        Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
        dated May 23, 1996                                                                (1)

10.14   Sales Contractual Agreement dated June 20, 1996 between the Company
        and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
        Form 10-KSB for fiscal year ended May 31, 1996                                    (1)

10.15   Sales Contractual Agreement dated July 31, 1996 between the Company and
        Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
        Form 10-KSB for fiscal year ended May 31, 1996                                    (1)

10.16   Employment Agreement dated January 1, 1997 between the  Company and
        Norman J. Dawson, incorporated by reference to Exhibit 10.16 to Form 10-KSB
        for the fiscal year ended May 31, 1997                                            (1)

10.17   Employment Agreement dated January 1, 1997 between the
        Company and Jayanta K. Maitra, incorporated by reference to Exhibit 10.17
        to Form 10-KSB for the fiscal year ended May 31, 1997                             (1)

10.18   Technology License and Distribution Agreement dated June 23, 1997
        between the Company and Sun Microsystems, Inc., incorporated by reference
        to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997            (1)

10.19   Employment Agreement dated March 23, 1998 between the Company
        and James Lunney                                                                  (2)

10.20   Employment Agreement dated July 28, 1997 between the Company
        and Philip Morettini                                                              (2)

10.21   Employment Agreement dated July 23, 1998 between the Company
        and Lowell W. Giffhorn                                                            (2)
</TABLE>


                                       37
<PAGE>   38

<TABLE>
<S>     <C>                                                                               <C>
 23.0   CONSENTS OF EXPERTS AND COUNSEL.

 23.1   Consent of BDO Seidman, LLP                                                       (2)

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

 99.0   ADDITIONAL EXHIBITS.

 99.1   Form of ISO Plan Option (Gaspar) dated May 29, 1992,
        incorporated by reference to Exhibit 28.2 to registration
        statement on Form SB-2, file no. 33-57858                                         (1)

 99.2   Form of NSO Plan Option (Berlin) dated May 29, 1992,
        incorporated by reference to Exhibit 28.3 to registration
        statement on Form SB-2, file no. 33-57858                                         (1)

 99.3   Form of Incentive Stock Option Agreement to the Company's 1996 Stock
        Option Plan (individual agreements differ as to number of shares, dates,
        prices and vesting), incorporated by reference to Pre-Effective
        Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
        1996                                                                              (1)

99.4    Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
        Option Plan (individual agreement differ as to number of shares, date,
        prices and vesting), incorporated by reference to Pre-Effective
        Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
        1996                                                                              (1)

99.5    Press Release of the Company dated November 4, 1996 incorporated by
        reference to Exhibit 99.5 to Form 8-K dated January 9, 1997                       (1)


        (1) Previously filed in indicated registration statement or report.
        (2) Exhibit filed herewith this Annual Report on Form 10-KSB for the fiscal year ended May 31, 1998
</TABLE>

(b) The Company filed a report on Form 8-K on February 27, 1998.


                                       38
<PAGE>   39

Patriot Scientific Corporation

Index to Consolidated Financial Statements



<TABLE>
<S>                                                                                                 <C>
           Reports of Independent Certified Public Accountants..................................    F-2-
                                                                                                    F-3

           Consolidated Balance Sheet as of May 31, 1998........................................    F-4

           Consolidated Statements of Operations for the Years Ended
                     May 31, 1998 and 1997......................................................    F-5

           Consolidated Statements of Stockholders' Equity for the Years
                     Ended May 31, 1998 and 1997................................................    F-6

           Consolidated Statements of Cash Flows for the Years ended
                     May 31, 1998 and 1997......................................................    F-7

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

           Notes to Consolidated Financial Statements...........................................    F-12 -
                                                                                                    F-23
</TABLE>



                                      F-1
<PAGE>   40






REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the accompanying consolidated balance sheet of Patriot
Scientific Corporation as of May 31, 1998 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the two
year period ended May 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The consolidated
financial statements give retroactive effect to the merger of Patriot Scientific
Corporation and Metacomp, Inc., which has been accounted for as a pooling of
interests as described in Note 1 to the consolidated financial statements. As
discussed in Note 1 to the consolidated financial statements, we did not audit
the financial statements of Metacomp, Inc., the Company's majority owned
subsidiary for its fiscal year ended July 31, 1996, of which total revenues of
$239,501 are included in the consolidated financial statements for the year
ended May 31, 1997. In addition, we did not audit the extraordinary item of
$1,741,700 as discussed in Notes 1 and 11 to the consolidated financial
statements. Those statements were audited by other auditors whose report has
been furnished to us, and our opinion, insofar as it relates to the amounts
incurred for Metacomp, Inc. for the year ended May 31, 1997 is based solely on
the report of such other auditors.

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

In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above, present fairly, in all
material respects, the financial position of Patriot Scientific Corporation as
of May 31, 1998, and the results of their operations and their cash flows for
each of the years in the two year period ended May 31, 1998 in conformity with
generally accepted accounting principles.


/s/ BDO Seidman, LLP

Denver, Colorado
July 17, 1998



                                      F-2
<PAGE>   41

           (Harlan & Boettger Certified Public Accountants Letterhead)





               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

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

We have audited the balance sheet of METACOMP, Inc. a California Corporation, as
of July 31, 1996, and the related statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

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


/s/ Harlan & Boettger

San Diego, California
December 17, 1996



                                      F-3
<PAGE>   42

                         PATRIOT SCIENTIFIC CORPORATION
                           CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
May 31,                                                                                1998
                                                                                   ------------
<S>                                                                                <C>         
ASSETS

CURRENT ASSETS:
        Cash and cash equivalents                                                  $    602,456
        Accounts receivable, net of allowance
          of $5,000 for uncollectible accounts                                          593,542
        Inventories (Note 2)                                                            230,417
        Prepaid expenses                                                                109,365
                                                                                   ------------
Total current assets                                                                  1,535,780

PROPERTY AND EQUIPMENT, net (Note 3)                                                    453,211

OTHER ASSETS:
        Patents and trademarks, net                                                     196,942
        Other                                                                             3,721
                                                                                   ------------
Total other assets                                                                      200,663
                                                                                   ------------
                                                                                   $  2,189,654
                                                                                   ============
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
        Accounts payable                                                           $    391,184
        Accrued liabilities                                                             131,088
        Current portion-capital lease obligations (Note 10)                               2,179
                                                                                   ------------
Total current liabilities                                                               524,451
                                                                                   ------------

LONG-TERM LIABILITIES:
        Capital lease obligations (Note 10)                                               1,355
        5% Convertible term debentures (Note 5)                                         507,000
                                                                                   ------------
Total liabilities                                                                     1,032,806
                                                                                   ------------

COMMITMENTS AND CONTINGENCIES (Note 10)

STOCKHOLDERS' EQUITY (Notes 6, 9 and 11):
        Preferred stock, $.00001 par value; 5,000,000 shares
          authorized: none outstanding                                                       --
        Common Stock, $.00001 par value; 40,000,000 shares
          authorized: issued and outstanding 37,880,776                                     379
        Additional paid-in capital                                                   18,396,092
        Accumulated deficit                                                         (17,239,623)
                                                                                   ------------
Total stockholders' equity                                                            1,156,848
                                                                                   ------------
                                                                                   $  2,189,654
                                                                                   ============
</TABLE>

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



                                      F-4
<PAGE>   43

                         PATRIOT SCIENTIFIC CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                               (SEE NOTE 1)
Years Ended May 31,                                                                    1998                   1997
                                                                                   ------------           ------------
<S>             <C>                                                                <C>                    <C>         
Net sales (Note 12)                                                                $  1,902,874           $  1,847,421

Cost of sales                                                                         1,163,688              1,003,445
                                                                                   ------------           ------------

Gross profit                                                                            739,186                843,976

Operating expenses:
     Research and development                                                         1,607,828              1,367,937
     Selling, general and
       administrative                                                                 2,470,937              1,723,751
     Amortization                                                                            --                612,333
                                                                                   ------------           ------------
                                                                                      4,078,765              3,704,021
                                                                                   ------------           ------------
Operating loss                                                                       (3,339,579)            (2,860,045)
                                                                                   ------------           ------------
Other income (expenses):
     Interest income                                                                     61,610                 39,302
     Interest expense                                                                   (24,370)               (30,491)
     Non-cash interest expense
       related to convertible
       notes (Note 5)                                                                (2,592,446)              (392,015)
                                                                                   ------------           ------------
                                                                                     (2,555,206)              (383,204)
                                                                                   ------------           ------------
Net loss before extraordinary
     item                                                                            (5,894,785)            (3,243,249)

Extraordinary income (Note 11)                                                               --              1,779,457
                                                                                   ------------           ------------

Net loss                                                                           $ (5,894,785)          $ (1,463,792)
                                                                                   ============            ===========
Basic and diluted income (loss) per
common share (Note 7):
     Before extraordinary item                                                     $      (0.20)          $      (0.12)
     Extraordinary income                                                                    --                   0.07
                                                                                   ------------           ------------
Basic and diluted (loss)
     per common share                                                              $      (0.20)          $      (0.05)
                                                                                   ============            ===========

Weighted average number of
  common shares outstanding
  during the period (Note 7)                                                         30,079,456             27,188,255
                                                                                   ============            ===========
</TABLE>



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



                                      F-5
<PAGE>   44

                         PATRIOT SCIENTIFIC CORPORATION
          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (See Note 1)

Years Ended May 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                       Common Stock               Additional                             Total
                                               -----------------------------       Paid-in         Accumulated       Stockholders' 
                                                  Shares           Amount          Capital           Deficit             Equity
                                               ------------     ------------     ------------      ------------      ------------

<S>                                            <C>              <C>              <C>               <C>               <C>         
Balance, June 1, 1996                            30,985,257     $        310     $ 10,151,024      $ (8,139,346)     $  2,011,988

Exercise of warrants at $1.58
  per share                                         154,883                2          239,499                --           239,501
Common stock issued for services
  at $1.28 per share                                 22,600               --           28,927                --            28,927
Exercise of stock options at $.18 to
  $.625 per share                                   380,486                4          165,857                --           165,861
Non-cash interest expense related to
  convertible notes recorded to
  additional paid-in capital (Note 6)                    --               --          375,000                --           375,000
Non-cash compensation expense (Note 6)                   --               --          291,180                --           291,180
Conversion of 6% Convertible
  Subordinated Notes plus interest
  at $.85 to $1.27 per share (Note 6)             1,525,103               15        1,517,000                --         1,517,015
Adjustment for Metacomp Inc. 
  pooling of interests from year-
  end change (Note 1)                                    --               --               --        (1,741,700)       (1,741,700)
Net loss                                                 --               --               --        (1,463,792)       (1,463,792)
                                               ------------     ------------     ------------      ------------      ------------
Balance, May 31, 1997                            33,068,329              331       12,768,487       (11,344,838)        1,423,980
                                               ============     ============     ============      ============      ============

Common stock released from escrow
  for purchased technology at $.75
  per share (Note 4)                                     --               --          375,000                             375,000
Exercise of stock options at $.18 to
  $.875 per share                                   478,854                5          247,802                             247,807
Non-cash interest expense related to
  convertible notes recorded to additional
  paid-in capital (Note 5)                               --               --        2,018,111                           2,018,111
Unamortized debt issuance costs
  related to convertible notes                           --               --         (114,100)                           (114,100)
Conversion of 5% Convertible
  term debentures plus interest
  at $.50 to $1.09 per share (Note 5)             4,333,593               43        2,523,292                           2,523,335
Value of warrants issued (Note 6)                        --               --          577,500                             577,500
Net loss                                                 --               --               --        (5,894,785)       (5,894,785)
                                               ------------     ------------     ------------      ------------      ------------
Balance, May 31, 1998                            37,880,776     $        379     $ 18,396,092      $(17,239,623)     $  1,156,848
                                               ============     ============     ============      ============      ============
</TABLE>

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



                                      F-6
<PAGE>   45

                         PATRIOT SCIENTIFIC CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years Ended May 31,                                                                     1998             1997
                                                                                    -----------      -----------
<S>                                                                                 <C>              <C>
OPERATING ACTIVITIES:
       Net loss                                                                     $(5,894,785)     $(1,463,792)
       Adjustments to reconcile net loss
         to cash used in operating activities:
           Adjustment for Metacomp Inc. pooling of
             interests from year-end change (Note 1)                                         --       (1,741,700)
           Amortization and depreciation                                                341,072          836,692
           Provision for doubtful accounts                                               41,761            5,000
           Provision for inventory obsolescence                                         203,000          162,000
           Common stock and warrants issued for services                                 33,500           28,927
           Non -cash interest expense related to
               convertible notes                                                      2,096,446          392,015
           Non-cash interest expense related to warrants                                496,000               --
           Amortization of debt issuance costs                                          140,000           45,000
           Non -cash compensation expense                                               375,000          291,180
           Changes in:
              Accounts receivable                                                      (375,183)         (65,719)
               Inventories                                                               96,116          (80,377)
               Prepaid and other assets                                                   7,940          (23,163)
               Accounts payable and accrued expenses                                     16,053          (74,231)
                                                                                    -----------      -----------
Net cash used in operating activities                                                (2,423,080)      (1,688,168)
                                                                                    -----------      -----------
INVESTING ACTIVITIES -
       Purchase of property, equipment and patents                                     (417,225)        (238,447)
FINANCING ACTIVITIES:
       Principal payments on notes payable and
         long-term debt                                                                  (2,721)        (320,016)
       Proceeds from issuance of common stock
         and exercise of common stock warrants
         and options                                                                    247,807          405,362
       Proceeds from issuance of convertible notes                                    3,000,000        1,500,000
       Payments for debenture costs                                                    (280,000)         (45,000)
                                                                                    -----------      -----------
Net cash provided by financing activities                                             2,965,086        1,540,346
                                                                                    -----------      -----------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                    124,781         (386,269)

CASH AND CASH EQUIVALENTS, beginning of year                                            477,675          863,944
                                                                                    -----------      -----------

CASH AND CASH EQUIVALENTS, end of year                                              $   602,456      $   477,675
                                                                                    ===========      ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
       Convertible notes  and accrued interest
         exchanged for common stock                                                 $ 2,409,236      $ 1,500,000
       Cash payments for interest                                                           383           30,491
                                                                                    -----------      -----------
</TABLE>

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



                                      F-7
<PAGE>   46

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES

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

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

As described in Note 1, effective December 26, 1996, the Company acquired 96.9%
of the common stock of Metacomp. The business combination was accounted for as a
pooling of interests and, accordingly, the Company's financial statements have
been presented to include the results of Metacomp as though the business
combination occurred as of June 1, 1995. The minority interest is not shown
separately in the Consolidated Financial Statements as it is not material.

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

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

Concentrations of credit risk with respect to accounts receivable are limited
due to the wide variety of customers and markets which comprise the Company's
customer base, as well as their dispersion across many different geographic
areas. The Company routinely assesses the financial strength of its customers
and, as a consequence, believes that its accounts receivable credit risk
exposure is limited. Generally, the Company does not require collateral or other
security to support customer receivables. As of May 31, 1998, the Company had
approximately 35% and 27% in accounts receivable from two customers.

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

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



                                      F-8
<PAGE>   47

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful life of three to five years using the straight line method.
Property and equipment is assessed periodically for impairment. The amount of
impairment, if any, is charged to operations.

PURCHASED TECHNOLOGY
In accordance with the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 4, "Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method", purchased
semiconductor microprocessor technology that is determined to have alternative
future uses is capitalized at cost. Effective June 1, 1994, the Company began
amortizing such technology using the straight-line method over its estimated
useful life of three years (See Note 4). As of May 31, 1998, the purchased
technology was fully amortized.

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

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

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

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

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

NET LOSS PER SHARE
At May 31, 1998, the Company implemented SFAS No. 128, "Earnings Per Share."
SFAS No. 128 provides for the calculation of "Basic" and "Diluted" earnings per
share. Basic earnings per share includes no dilution and is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an entity,
similar to fully diluted earnings per share. All prior earnings per share data
has been restated to reflect the



                                      F-9
<PAGE>   48

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

requirements of SFAS No.128. The adoption of SFAS No. 128 had no effect on the
Company's previously reported earnings per share.

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

During the quarter ended May 31, 1998, based upon information then available,
the Company revised its estimates regarding the recovery of certain inventories.
As a result, the Company increased existing reserves for obsolescence by
approximately $203,000.

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 130 establishes standards for reporting and display of comprehensive income,
its components and accumulated balances. Comprehensive income is defined to
include all changes in equity except those resulting from investments by owner
and distributions to owners. Among other disclosures, SFAS No. 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
displays with the same prominence as other financial statements. SFAS No. 131
supersedes SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS No. 131 establishes standards on the way that public companies
report financial information about operating segments in annual financial
statements and requires reporting of selected information about operating
segments in interim financial statements issued to the public. It also
establishes standards for disclosure regarding 



                                      F-10
<PAGE>   49

PATRIOT SCIENTIFIC CORPORATION
SUMMARY OF ACCOUNTING POLICIES (CONTINUED)

products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.

SFAS 130 and 131 are effective for financial statements for periods beginning
after December 15, 1997 and require comparative information for earlier years to
be restated. Because of the recent issuance of the standards, management has
been unable to fully evaluate the impact, if any, the standards may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of these standards.

In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" which standardizes the disclosure
requirements for pensions and other postretirement benefits and requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis. SFAS No. 132 is effective
for years beginning after December 15, 1997 and requires comparative information
for earlier years to be restated, unless such information is not readily
available. Management believes the adoption of this statement will have no
material impact on the Company's financial statements.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal periods beginning after June 15, 1999. Management believes
the adoption of this statement will have no material impact on the Company's
financial statements.

RECLASSIFICATIONS
Certain items included in the 1997 financial statements have been reclassified
to conform to the current year presentation.



                                      F-11
<PAGE>   50

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ACQUISITION OF METACOMP, INC. COMMON STOCK

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

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

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

Net income (loss)
        Patriot                                                         $(1,202,485)
        Metacomp before extraordinary income                                 40,706
        Metacomp extraordinary income                                     1,779,457
                                                                        -----------
        Pro forma net income                                                617,678
        Merger costs and expenses                                           (30,000)
        Interest income                                                      (6,000)
        Interest expense                                                     15,625
                                                                        -----------
        Net income, as reported                                         $   597,303
                                                                        -----------

Basic income per common share
        As reported                                                     $      0.02
        Pro forma                                                       $      0.02
Merger costs and expenses consisted of legal and accounting fees 
</TABLE>



                                      F-12
<PAGE>   51

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.   INVENTORIES    Inventories at May 31, 1998 consisted of the following:

<TABLE>
<S>                                                                           <C>              
                    Component parts                                           $         418,502
                    Work in process                                                      60,136
                    Finished goods                                                      116,779
                                                                              ------------------
                                                                                        595,417
                    Reserve for obsolescence                                           (365,000)
                                                                              ------------------
                                                                              $         230,417
                                                                              ==================
</TABLE>

3.    PROPERTY AND  Property and equipment consisted of the following at May
      EQUIPMENT     31, 1998:

<TABLE>
<S>                                                                                         <C>                    
                    Computer equipment and software                                         $             1,101,418
                    Furniture and fixtures                                                                  286,732
                    Laboratory equipment                                                                    197,534
                                                                                            -----------------------

                                                                                                          1,585,684

                    Less accumulated depreciation and amortization                                        1,132,473
                                                                                            -----------------------
                    Net property and equipment                                              $               453,211
                                                                                            =======================
                    Depreciation expense was approximately $281,130
                    and $184,055 for the years ended May 31, 1998
                    and 1997.

                    At May 31, 1998, property and equipment
                    includes certain equipment under capital lease
                    agreements with an original cost of $36,427 and
                    accumulated depreciation of $28,084.
</TABLE>


4. PURCHASED TECHNOLOGY

SEMICONDUCTOR MICROPROCESSOR TECHNOLOGY

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



                                      F-13
<PAGE>   52


PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The cost of this technology of $1,875,000 was based upon the estimated current
fair market value of the 5,000,000 non-contingent shares of the Company's common
stock issued under this agreement and was amortized over its estimated useful
life of three years. The remaining 5,000,000 shares issued for this technology
were subject to an earnout escrow arrangement. As such, when the escrowed shares
are earned, they are charged to compensation in a manner similar to a variable
stock option plan. The terms of the escrow arrangement provide for the release
from escrow of 500,000 shares for each $500,000 of revenues earned by the
Company during the period from June 1, 1994 through May 31, 1999. Additionally,
this agreement also provides for the release of these shares upon the occurrence
of certain defined major corporate events. Any of the contingent shares not
released by May 31, 1999 would be returned to the Company and canceled.

During the year ended May 31, 1998, 500,000 shares were released from escrow and
$375,000 was charged to compensation costs. At May 31, 1998, 4,500,000 shares
remain in escrow of which 2,000,000 shares may have been earned but remain in
escrow pending the outcome of continuing discussions between the Company, the
seller of the ShBoom Technology and one of the co-inventors of the technology as
discussed in Note 14 to the Consolidated Financial Statements.

RADAR TECHNOLOGY

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

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

Additionally, under the terms of the agreement to acquire the GPR technology,
the director is to be paid a royalty equal to 2.5% of all gross revenues
received from the GPR technology, up to a maximum of $400,000. The director also
is to receive a $50,000 bonus upon the successful demonstration of a working
prototype of the technology meeting specified performance criteria. As of May
31, 1998, no amounts were due under this agreement; however, an advance of
$17,000 against the royalty was paid at the inception of the agreement.

5.5% CONVERTIBLE TERM DEBENTURES

In June 1997, the Company issued to a limited number of investors for cash an
aggregate of $2,000,000 of unsecured 5% Convertible Term Debentures due June 2,
1999 ("Debentures") and Stock Purchase Warrants ("Warrants") with a right to
purchase an aggregate 611,733 shares of common stock, par value $.00001 per
share, at an exercise price of $1.69125. In November 1997, 



                                      F-14
<PAGE>   53

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

the Company issued to the same investors for cash an aggregate of $1,000,000 of
Debentures due June 2, 1999 and Warrants with a right to purchase an aggregate
305,867 shares of common stock, par value $.00001 per share, at an exercise
price of $1.50. The principal and interest amount of each Debenture may, at the
election of the holder, be converted in whole or in part and from time to time
into fully paid and nonassessable shares of common stock, $.00001 par value, of
the Company, at a price which is the lower of (i) $1.1646 per share or (ii)
depending on the number of days the Debentures have been held after June 2,
1997, from 75% to 91% of the average of the closing bid prices for the common
stock for the ten consecutive trading days ending on the trading day immediately
preceding such conversion date. If the Debentures have not been converted into
common shares of the Company by June 2, 1999, under certain conditions, the
Debentures will automatically be converted into shares of the common stock of
the Company. As of May 31, 1998, $2,445,000 of the Debentures and $78,335 of the
accrued interest thereon had been converted into 4,333,593 common shares of the
Company.

Convertible debt instruments which are convertible at a discount to market are
accounted for by treating such discount as additional interest expense. The
Company computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the dates the
Debentures were issued. The Company recorded $2,018,111 of additional paid-in
capital for the discount related to the embedded interest in the Debentures
during fiscal 1998. The same amount, $2,018,111, was expensed for fiscal 1998
and is included under the caption "Non-cash interest expense related to
convertible notes" in the accompanying Consolidated Statements of Operations.

The warrants to purchase 917,600 shares of common stock were valued at $544,000.
Such amount was originally recorded as a reduction of the carrying amount of the
Debentures with an offset to Paid-In Capital. The discount is amortized as
additional interest expense over the term of the Debentures. In the fourth
quarter of fiscal 1998, $496,000 had been recorded as interest expense. The
balance of $48,000 is reflected as a reduction of the Debenture balance of
$555,000.

6. STOCKHOLDERS' EQUITY

PRIVATE OFFERINGS AND WARRANTS

During fiscal 1997, a total of 154,883 shares of the Company's common stock were
issued upon the exercise of outstanding warrants which had been issued in fiscal
1996. The net proceeds from the exercise were $239,501.

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



                                      F-15
<PAGE>   54

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Notes plus accrued interest had been converted into 1,525,103 shares of common
stock of the Company.

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

During fiscal 1998, the Company issued warrants to purchase 1,147,600 common
shares of stock with exercise prices ranging from $1.25 to $7.50 per share. All
warrants were outstanding at May 31, 1998. Included in this amount are warrants
to purchase 917,600 common shares related to the Debentures discussed in Note 5
to the Consolidated Financial Statements. The Company valued warrants issued in
fiscal 1998 at $577,500.

1992 INCENTIVE STOCK OPTION PLAN ("ISO")

The Company has an ISO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The ISO Plan provides for grants
to either full or part time employees, at the discretion of the Board of
Directors, options to purchase common stock of the Company at a price not less
than the fair market value of the shares on the date of grant. In the case of a
significant stockholder, the option price of the share is not less than 110
percent of the fair market value of the share on the date of grant. Any options
granted under the ISO Plan must be exercised within ten years of the date they
were granted (five years in the case of a significant stockholder).

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

The Company has an NSO Plan, expiring May 20, 2002, reserving for issuance
750,000 shares of the Company's common stock. The NSO Plan provides for grants
to either full or part time employees, at the discretion of the Board of
Directors, options to purchase common stock of the Company at a price not less
than the fair market value of the shares on the date of grant. Any options
granted under the NSO Plan must be exercised within ten years of the date they
were granted.

1995 EMPLOYEE STOCK COMPENSATION PLAN ("ESC")

Effective October 1995, the Company adopted the ESC Plan, expiring September 30,
1998, reserving for issuance 250,000 shares of the Company's common stock. The
ESC Plan provides for compensation awards of the Company's common stock to
employees (as defined), at the discretion of the Board of Directors. During
fiscal 1997, the Company issued 22,600 shares of common stock under the Plan
recording compensation expense of $28,927 for awards valued at an estimated fair
market value of $1.28 per share. During fiscal 1998, no shares were issued under
this plan. As of May 31, 1998, 32,400 shares remain available for granting under
this plan.



                                      F-16
<PAGE>   55

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1996 STOCK OPTION PLAN

Effective March 1996, the Company adopted the 1996 Stock Option Plan, which was
amended by the Stockholders in December 1997, expiring March 24, 2006, reserving
for issuance 4,000,000 shares of the Company's common stock. The 1996 Stock
Option Plan provides for grants to either full or part time employees, at the
discretion of the Board of Directors, options to purchase common stock of the
Company at a price not less than the fair market value on the date of grant for
incentive stock options or not less than 85% of the fair market value on the
date of grant for non-qualified stock options. In the case of a significant
stockholder, the option price of the share is not less than 110 percent of the
fair market value of the shares on the date of grant. Any option granted under
the 1996 Stock Option Plan must be exercised within ten years of the date they
are granted (five years in the case of a significant stockholder). During the
fiscal year ended May 31, 1997, the Company issued options to purchase 1,713,000
shares of stock under the non-qualified provisions of the plan at an exercise
price of 85% of the fair market value on the date of grant and recorded
corresponding non-cash compensation in the amount of $291,180. During the fiscal
year ended May 31, 1998, the Company issued options to purchase 1,511,000 shares
of stock at market value.

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

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



                                      F-17
<PAGE>   56

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                                                          1998                  1997
                                                                                      -------------        -------------
<S>                                                                                   <C>                  <C>           
As reported
     Net loss before extraordinary item                                               $  (5,894,785)       $  (3,243,249)
     Extraordinary item                                                                          --            1,779,457
                                                                                      -------------        -------------
     Net loss                                                                         $  (5,894,785)       $  (1,463,792)
                                                                                      =============        =============

Pro forma
     Net loss before extraordinary item                                               $  (6,831,147)       $  (3,735,409)
     Extraordinary item                                                                          --            1,779,457
                                                                                      -------------        -------------
     Net loss                                                                         $  (6,831,147)       $  (1,955,952)
                                                                                      =============        =============

As reported per share
     Basic loss before extraordinary item                                             $       (0.20)       $       (0.12)
     Extraordinary item                                                                          --                 0.07
                                                                                      -------------        -------------
     Basic loss                                                                       $       (0.20)       $       (0.05)
                                                                                      =============        =============

Pro forma per share
     Basic loss before extraordinary item                                             $       (0.23)       $       (0.14)
     Extraordinary item                                                                          --                 0.07
                                                                                      -------------        -------------
     Basic loss                                                                       $       (0.23)       $       (0.07)
                                                                                      =============        =============
</TABLE>

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



                                      F-18
<PAGE>   57


PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

A summary of the status of the Company's stock option plans and warrants as of
May 31, 1998 and 1997 and changes during the years ending on those dates is
presented below:


<TABLE>
<CAPTION>
                                                           1998                         1997
                                                   -----------------------      -----------------------
                                                                  Weighted                      Weighted
                                                                   Average                      Average
                                                                  Exercise                      Exercise
                                                   Shares          Price         Shares          Price
                                                   ------          -----         ------          -----
<S>                                              <C>              <C>           <C>             <C>  
Outstanding, beginning of year                    4,123,331        $1.24        3,077,775        $1.08
      Granted                                     2,658,600         1.39        1,940,000         1.36
      Cancelled                                  (1,059,407)        1.11         (362,375)        2.01
      Exercised                                    (478,854)        0.52         (532,069)        0.76
                                                 ----------        -----        ---------        -----
Outstanding, end of year                          5,243,670        $1.26        4,123,331        $1.24
                                                 ==========        =====        =========        =====

Exercisable, end of year                          3,430,836        $1.32        1,526,332        $0.85
                                                 ==========        =====        =========        =====


Weighted average fair value of options
      and warrants granted during the year                         $0.61                         $0.68
                                                 ==========        =====        =========        =====
</TABLE>


The following table summarizes information about stock options and warrants
outstanding at May 31, 1998:

<TABLE>
<CAPTION>
                                                Outstanding                              Exercisable
                                 -----------------------------------------       ---------------------------
                                                    Weighted
                                                     Average      Weighted                           Weighted
             Range of                               Remaining     Average                             Average
             Exercise             Number           Contractual    Exercise        Number             Exercise
              Prices            Outstanding           Life         Price        Exercisable           Price
          -------------          ---------             ---        --------       ---------          --------
<S>                             <C>                <C>            <C>           <C>                 <C>     
          $ 0.18 - 0.37            519,379             2.48       $   0.32         511,379          $   0.32
            0.50 - 0.59            545,000             4.18           0.57         425,000              0.57
            0.80 - 1.17          2,024,691             4.11           1.16         765,691              0.81
            1.25 - 1.76          1,594,600             3.68           1.52       1,237,100              1.56
            2.28 - 2.50            460,000             1.50           2.31         391,666              2.31
            5.00 - 7.50            100,000             0.93           6.25         100,000              6.25
          -------------          ---------             ----       --------       ---------          --------
          $ 0.18 - 7.50          5,243,670             4.23       $   1.26       3,430,836          $   1.32
          -------------          ---------             ----       --------       ---------          --------
</TABLE>



                                      F-19
<PAGE>   58

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7.     EARNINGS (LOSS) PER SHARE

In February 1997, SFAS No. 128, "Earnings per Share," was issued, which required
the Company to change the method used to calculate earnings per share. Under
SFAS No. 128, basic earnings (loss) per share is calculated as income (loss)
available to common stockholders divided by the weighted average number of
common shares outstanding. Diluted earnings (loss) per share is calculated as
net income (loss) divided by the diluted weighted average number of common
shares. The diluted weighted average number of common shares is calculated using
the treasury stock method for common stock issuable pursuant to outstanding
stock options, common stock warrants, and debt convertible into common stock.
Common stock options of 880,989 and 1,438,980 and debt convertible into
1,748,134 and 160,118 common shares of stock were not included in diluted
earnings (loss) per share in 1998 or 1997, respectively, as the effect was
antidilutive due to the Company recording losses in each of those years.

In addition, 2,000,000 shares of common stock in diluted escrow that may have
been earned as of May 31, 1998 were not considered outstanding for diluted 
earnings (loss) per share because the Company is currently negotiating whether
they will be released. See Note 14 to the Consolidated Financial Statements.

Options and warrants to purchase 2,989,604 shares of common stock at exercise
prices from $0.80 to $7.50 per share were outstanding at May 31, 1998 but were
not included in the computation of diluted earnings (loss) per share because the
exercise prices were greater than the average market price of the common shares.
Options and warrants to purchase 822,750 shares of common stock at exercise
prices from $1.37 to $2.30 per share were outstanding at May 31, 1997 but were
not included in the computation of diluted earnings (loss) per share because the
exercise prices were greater than the average market price of the common shares.

8. INCOME TAXES     As of May 31, 1998, the net
                    deferred tax asset recorded and its
                    approximate tax effect consisted of the
                    following:

<TABLE>
<S>                                                             <C>                
                    Net operating loss carryforwards            $         2,950,000
                    Purchased technology                                    566,000
                    Depreciation and amortization                           279,000
                    Warrants valuation                                      180,000
                    Other, net                                              156,000
                                                                -------------------
                                                                          4,131,000
                    Valuation allowance                                   4,131,000
                                                                -------------------
                    Net deferred tax asset                      $                 -
                                                                ===================
</TABLE>

As of May 31, 1998, a valuation allowance equal to the net deferred tax asset
recognized has been recorded, as Management has not determined that it is more
likely than not that the deferred tax



                                      F-20
<PAGE>   59

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

asset will be realized. No current tax provision was recorded for fiscal 1998
and 1997 due to reported losses.

At May 31, 1998, the Company has net operating loss carryforwards of
approximately $8,677,000 that expire through 2013 and are subject to certain
limitations under the Internal Revenue Code of 1986, as amended.

9.  PROFIT-SHARING PLAN

Effective July 1, 1993, the Company adopted a savings and profit-sharing plan
that allows participants to make contributions by salary reduction pursuant to
Section 401(k) of the Internal Revenue Code. At the Company's discretion, the
Company may match contributions at 20% of the employee's contribution up to 6%
of the employee's salary. The Company contributions are vested 20% per year
beginning with the first year of service. The Company's contributions to the
plan were $642 in fiscal 1997. The Company made no matching contribution in
fiscal 1998. 

10. COMMITMENT AND CAPITAL    The Company, through its subsidiary, Metacomp, 
    LEASE OBLIGATIONS         entered into an eight year operating lease for its
                              office and manufacturing facilities located in San
                              Diego, California.

                              The Company also leases a copier, computers, and 
                              test equipment at interest rates between (4-18%). 
                              Future minimum lease payments required under the 
                              operating and capital leases are as follows:

<TABLE>
<CAPTION>
                                                                                  Operating            Capital Leases
                                                                              -----------------       -----------------
<S>                                                                           <C>                     <C>              
                              1999                                            $          96,940       $           2,387
                              2000                                                       16,190                   1,393
                                                                              -----------------       -----------------
                              Total minimum lease payments                              113,130                   3,780

                              Less amount representing interest                               -                     246
                                                                              -----------------       -----------------

                              Present value of net minimum
                                lease payments                                          113,130                   3,534

                              Less current portion                                            -                   1,355
                                                                              -----------------       -----------------

                              Total                                           $         113,130       $           2,179
                                                                              =================       =================
</TABLE>

   Rent expense for fiscal 1998 and 1997 was $85,120 and $80,371,respectively.



                                      F-21
<PAGE>   60

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11.  EXTRAORDINARY INCOME

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

In 1990, Metacomp filed a Chapter 11 bankruptcy petition. In 1991, the
Bankruptcy Court confirmed Metacomp's plan of reorganization which provided for
60 monthly payments to creditors with minimum payments averaging $23,400 per
month or larger depending on operating results. As of July 1996, the unsecured
creditors were paid approximately 13% of their approved claims and the


balance was discharged. One secured creditor was scheduled to be paid in full as
part of the plan of reorganization. As of July 31, 1996, this secured creditor
had a remaining balance of $312,306. The Company paid to this secured creditor a
remaining balance of $252,306 plus accrued interest in conjunction with the
business combination with Metacomp.

12.  SALES INFORMATION

EXPORT SALES

During the fiscal year ended May 31, 1998, the Company's foreign sales were less
than 10% of total sales. During the fiscal year ended May 31, 1997, the
Company's sales by geographic area consisted of the following:


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

                               Foreign sales:
                                 Canada                                  244,000
                                 Other                                   175,000
                                                                      ----------
                                         Total foreign sales             419,000
                                                                      ----------
                               Total net product sales                $1,847,000
                                                                      ==========
</TABLE>

The Company has no foreign assets 



                                      F-22
<PAGE>   61

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

SALES TO MAJOR CUSTOMERS

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

<TABLE>
<CAPTION>
                              1998                              1997
                              ----                              ----

          Customer     Sales            Percent        Sales             Percent
          --------     -----            -------        -----             -------
<S>                  <C>                <C>           <C>                <C>  
          A          $578,000            30.3%        $473,000            25.6%
          B          $478,000            25.1%        $472,000            25.5%
          C                --            --           $212,000            11.5%
          D          $207,000            10.9%              --            --
</TABLE>

13.  FOURTH QUARTER ADJUSTMENTS

The Company recorded in the fourth quarter certain adjustments relative to
non-cash interest expense related to convertible debt and associated debenture
costs and a write-down of inventory due to obsolescence amounting to an
aggregate of $2,100,000 which are discussed in Notes 5 and 6 to the Consolidated
Financial Statements. Of the aggregate amount, $1,000,000 and $1,100,000 related
to the third and fourth quarters, respectively. The Company plans to file an
amended Form 10-QSB for the quarter ended February 28, 1998.

14.  SUBSEQUENT EVENT

In June 1998, the Company, the seller of the ShBoom technology and the
co-inventor entered into a nonbinding agreement in principle to settle the
dispute in consideration of mutual releases and the Company assigning patents on
the ShBoom technology back to the co-inventor in exchange for the co-inventor
granting a fully-paid, worldwide, sublicensable license to use the ShBoom
technology patents exclusive in the Company's existing and future fields of use.
In addition, nanoTronics agreed to release any obligation of the Company to
deliver a number of shares of the Company's stock pursuant to the original
acquisition agreement as discussed in Note 4 to the Consolidated Financial
Statements. Any stock not delivered will be retired. Settlement documentation
has been exchanged between the parties, although disputes remain concerning
terms contained within the documents. The Company is unable at this time to
determine whether such disputes will be resolved. The Company's Consolidated
Financial Statements do not include any adjustments that might result from the
outcome of this uncertainty.


                                      F-23
<PAGE>   62

                                   SIGNATURES

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

                                    PATRIOT SCIENTIFIC CORPORATION

                                    August 17, 1998


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

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

<TABLE>
<CAPTION>
             Signature                         Title                              Date

<S>                                <C>                                        <C> 
      /s/JAMES T. LUNNEY           President, Director, Chief Executive       August 17, 1998
      ------------------            Officer
      James T. Lunney                


      /s/LOWELL W. GIFFHORN        Chief Financial Officer, Principal         August 17, 1998
      ---------------------         Financial Officer and Principal  
      Lowell W. Giffhorn            Accounting  Officer            
                                    


      /s/ELWOOD G. NORRIS          Chairman and Director                      August 17, 1998
      -------------------
      Elwood G. Norris


      /s/MICHAEL A. CARENZO        Director                                   August 17, 1998
      ---------------------
      Michael A. Carenzo


      /s/NORMAN J. DAWSON          Vice President, General Manager           August 17, 1998
      -------------------           and Director
      Norman J. Dawson              



      /s/DONALD BERNIER            Director                                  August 17, 1998
      -----------------
      Donald Bernier



      /s/HELMUT FALK JR.           Director                                  August 17, 1998
      ------------------
      Helmut Falk Jr.



      /s/RICHARD D. MCDANIEL       Director                                  August 17, 1998
      ----------------------
      Richard D. McDaniel
</TABLE>

<PAGE>   63

--------------------------------------------------------------------------------

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                             EXHIBITS TO FORM 10-KSB


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


         For fiscal year ended May 31, 1998 Commission File No. 0-22182



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

--------------------------------------------------------------------------------


                                      EX-1
<PAGE>   64
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
Exh.No.                              Document                                              No.
-------                              --------                                              ---
<S>     <C>                                                                               <C>
  2.0   PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION.

  2.1   Agreement to Exchange Technology for Stock in Patriot Scientific
        Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K
        dated August 10, 1989                                                              (1)
                                                                                     
  2.2   Assets Purchase Agreement and Plan of Reorganization dated June 22,          
        1994, among the Company, nanoTronics Corporation and Helmut Falk,            
        incorporated by reference to Exhibit 10.4 to Form 8-K dated July 6, 1994           (1)
                                                                                     
  2.2.1 Amendment to Development Agreement dated April 23, 1996                 
        between the Company and Sierra Systems, incorporated by                      
        reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1 to                
        Registration Statement on Form SB-2 dated April 29, 1996                           (1)
                                                                               
  2.3   Form of Exchange Offer dated December 4, 1996 between the Company and
        certain shareholders of Metacomp, Inc. incorporated by reference to
        Exhibit 2.3 to Form 8-K dated January 9, 1997 (1)

  2.4   Letter of Transmittal to Accompany Shares of Common Stock of Metacomp,
        Inc. Tendered Pursuant to the Exchange Offer Dated December 4, 1996
        incorporated by reference to Exhibit 2.4 to Form 8-K dated January 9,
        1997 (1)

  3.0   ARTICLES AND BYLAWS.

  3.1   Original Articles of Incorporation of the Company's predecessor,
        Patriot Financial Corporation, incorporated by reference to
        Exhibit 3.1 to registration statement on Form S-18, File no.
        33-23143-FW                                                                        (1)
                                                                                         
  3.2   Articles of Amendment of Patriot Financial Corporation, as filed                 
        with the Colorado Secretary of State on July 21, 1988, incorporated              
        by reference to Exhibit 3.2 to registration statement on Form S-18,              
        File No. 33-23143-FW                                                               (1)
                                                                                         
  3.3   Certificate of Incorporation of the Company, as filed with the                   
        Delaware Secretary of State on March 24, 1992, incorporated by                   
        reference to Exhibit 3.1 to Form 8-K dated May 12, 1992                            (1)
                                                                                         
  3.3.1 Certificate of Amendment to the Certificate of Incorporation         
        of the Company, as filed with the Delaware Secretary of State
        on April 18, 1995, incorporated by reference to Exhibit 3.3.1
        to Form 10-KSB for the fiscal year ended May 31, 1995                              (1)

 3.3.2  Certificate of Amendment to the Certificate of Incorporation
        of the Company, as filed with the Delaware Secretary of State
        on June 19,1997, incorporated by reference to Exhibit 3.3.2
        to Form 10-KSB for the fiscal year ended May 31, 1997                              (1)
</TABLE>


                                      EX-2
<PAGE>   65

<TABLE>
<S>     <C>                                                                               <C>
  3.4   Articles and Certificate of Merger of Patriot Financial Corporation
        into the Company dated May 1, 1992, with Agreement and Plan of
        Merger attached thereto as Exhibit A, incorporated by reference to
        Exhibit 3.2 to Form 8-K dated May 12, 1992                                         (1)

  3.5   Certificate of Merger issued by the Delaware Secretary of State on
        May 8, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K
        dated May 12, 1992                                                                 (1)

  3.6   Certificate of Merger issued by the Colorado Secretary of State on
        May 12, 1992, incorporated by reference to Exhibit 3.4 to Form 8-K
        dated May 12, 1992                                                                 (1)

  3.7   Bylaws of the Company, incorporated by reference to Exhibit 3.5 to
        Form 8-K dated May 12, 1992                                                        (1)

  4.0   INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.

  4.1   Specimen common stock certificate, incorporated by reference to
        Exhibit 4.1 Form 8-K dated May 12, 1992                                            (1)

  4.2   Form of Stock Purchase Warrant (Labway Corporation) dated February 29,
        1996, exercisable to purchase 253,166 common shares at $1.58 per share
        until August 31, 1996, granted to investors in connection with an
        offering of securities made in reliance upon Regulation S, incorporated
        by reference to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended 2/29/96        (1)

  4.3   Form of 6% Convertible Subordinated Promissory Note due September 30,
        1998 aggregating $1,500,000 to six investors incorporated by reference
        to Exhibit 4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996             (1)

  4.4   Form of 5% Convertible Term Debenture (CC Investments, LDC) due
        June 2, 1999 aggregating $2,000,000 to two investors incorporated
        by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997                        (1)
  
  4.5   Form of Stock Purchase Warrant (CC Investments, LDC) dated
        June 2, 1997 exercisable to purchase an aggregate of 400,000 common
        shares at $1.69125 per share until June 2, 2002, granted to two investors
        in connection with the offering of securities in Exhibit 4.4 incorporated
        by reference to Exhibit 4.5 to Form 8-K dated June 16, 1997                        (1)
  
  
  4.6   Registration Rights Agreement dated June 2, 1997 by and among
        the Company and CC Investments, LDC and the Matthew Fund, N.V.
        related to the registration of the common stock related to Exhibits
        4.4 and 4.5 incorporated by reference to Exhibit 4.6 to Form 8-K                      
        dated June 16, 1997                                                                (1)

  4.7   Form of Warrant to Purchase Common Stock (Swartz Family
        Partnership, L.P.) dated June 2, 1997 exercisable to purchase an
        aggregate of 211,733 common shares at $1.69125 per share until
        June 2, 2002, granted to a group of investors in connection with
</TABLE>


                                      EX-3
<PAGE>   66

<TABLE>
<S>     <C>                                                                               <C>
        the offering of securities in Exhibit 4.4 incorporated by reference to
        Exhibit 4.7 to Form 8-K dated June 16, 1997                                        (1)

4.8     Registration Rights Agreement dated June 2, 1997 by and among the
        Company and Swartz Investments, LLC related to the registration of
        the common stock related to Exhibit 4.7 incorporated by reference to
        Exhibit 4.8 to Form 8-K dated June 16, 1997                                        (1)

4.9     Form of 5% Convertible Term Debenture (CC Investments, LDC) due
        June 2, 1999 aggregating $1,000,000 to two investors                               (2)

4.10    Form of Stock Purchase Warrant (CC Investments, LDC) dated
        November 24, 1997 exercisable to purchase an aggregate of 200,000 common
        shares at $1.50 per share until June 2, 2002, granted to two investors
        in connection with the offering of securities in Exhibit 4.9                       (2)

4.11    Form of Warrant to Purchase Common Stock (Swartz Family
        Partnership, L.P.) dated November 24, 1997 exercisable to purchase an
        aggregate of 105,867 common shares at $1.50 per share until
        June 2, 2002, granted to a group of investors in connection with
        the offering of securities in Exhibit 4.9                                          (2)

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 (2)

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                              (2)

10.0    MATERIAL CONTRACTS.

10.1    1992 Incentive Stock Option Plan of the Company, incorporated
        by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992                        (1)

10.1.1  Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995,
        incorporated by reference to Exhibit 10.1.1 to Form S-8 dated July 17,
        1996                                                                               (1)

10.2    1992 Non-Statutory Stock Option Plan of the Company, incorporated by
        reference to Exhibit 10.2 to Form 8-K dated May 12, 1992                           (1)

10.2.1  Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
        incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
        year ended May 31, 1996 (1)

10.3    Lease Agreement between the Company's subsidiary Metacomp, Inc. and
        Clar-O-Wood Partnership, a California limited partnership dated April
        11, 1991 as amended November 11, 1992 and November 2, 1995, incorporated
        by reference to Exhibit 10.3 to Form 10-KSB for the fiscal year ended
        May 31, 1997                                                                       (1)

10.4    Stock Purchase Agreement dated November 29 and 30, 1995,
        between the Company and SEA, Ltd., incorporated by reference
        to Exhibit 10.4 to Form 8-K dated December 11, 1995                                (1)
</TABLE>


                                      EX-4
<PAGE>   67

<TABLE>
<CAPTION>
<S>     <C>                                                                               <C>
10.4.1  Letter Amendment to Stock Purchase Agreement dated February 21,
        1996, between the Company and SEA, Ltd., incorporated by reference
        to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended 2/29/96                  (1)

10.5    1995 Employee Stock Compensation Plan of the Company, incorporated by
        reference to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended 11/30/95         (1)

10.6    Letter Stock and Warrant Agreement dated January 10, 1996 between the
        Company and Robert E. Crawford, Jr., incorporated by reference to
        Exhibit 10.6 to Form 10-QSB for fiscal quarter ended 2/29/96                       (1)

10.7    Non-Exclusive Manufacturing and Line of Credit Agreement dated
        February 28, 1996, between the Company and Labway Corporation,
        incorporated by reference to Exhibit 10.7 to Form 10-QSB for
        fiscal quarter ended 2/29/96                                                       (1)

10.8    Distribution and Representation Agreement dated February 28,
        1996, between the Company and Innoware, Inc., incorporated by
        reference to Form 10-QSB for fiscal quarter ended 2/29/96                          (1)

10.9    Employment Agreement dated November 20, 1995 between the
        Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9
        to Registration Statement on Form SB-2 dated March 18, 1996                        (1)

10.9.1  First Amendment to Employment Agreement dated May 17, 1996 between the
        Company and Elwood G. Norris, incorporated by reference to Exhibit
        10.9.1 to Pre-Effective Amendment No. 2 to Registration Statement on
        Form SB-2 dated May 23, 1996                                                       (1)

10.10   Employment Agreement dated November 20, 1995 between the
        Company and Robert Putnam, incorporated by reference to Exhibit 10.10
        to Registration Statement on Form SB-2 dated March 18, 1996                        (1)

10.11   Sales Contractual Agreement dated March 19, 1996 between the
        Company and Evolve Software, Inc., incorporated by reference to
        Exhibit 10.11 to Pre-Effective Amendment No. 1 to Registration
        Statement on Form SB-2 dated April 29, 1996                                       (1)

10.11.1 Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
        Software, Inc. Providing for the Purchase of up to 50,000 Common Shares
        at $2.85, incorporated by reference to Pre-Effective Amendment No. 1 to
        Registration Statement on Form SB-2 dated April 29, 1996 (1)

10.12   Employment Agreement dated as of May 8, 1996 between the Company and
        Michael A. Carenzo, including Schedule A - Stock Option Agreement,
        incorporated by reference to Pre-Effective Amendment No. 2 to
        Registration Statement on Form SB-2 dated May 23, 1996 (1)

10.12.1 First Amendment to Employment Agreement dated May 8, 1996 between the
        Company and Michael A. Carenzo dated September 23, 1996, incorporated by
        reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended
        May 31, 1997                                                                      (1)
</TABLE>


                                      EX-5
<PAGE>   68

<TABLE>
<CAPTION>
<S>     <C>                                                                               <C>
10.13   1996 Stock Option Plan of the Company dated March 25, 1996 and approved
        by the Shareholders on May 17, 1996, incorporated by reference to
        Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2
        dated May 23, 1996                                                                (1)

10.14   Sales Contractual Agreement dated June 20, 1996 between the Company
        and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to
        Form 10-KSB for fiscal year ended May 31, 1996                                    (1)

10.15   Sales Contractual Agreement dated July 31, 1996 between the Company and
        Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to
        Form 10-KSB for fiscal year ended May 31, 1996                                    (1)

10.16   Employment Agreement dated January 1, 1997 between the
        Company and Norman J. Dawson, incorporated by reference to Exhibit 10.16
        to Form 10-KSB for the fiscal year ended May 31, 1997                             (1)

10.17   Employment Agreement dated January 1, 1997 between the
        Company and Jayanta K. Maitra, incorporated by reference to Exhibit 10.17
        to Form 10-KSB for the fiscal year ended May 31, 1997                             (1)

10.18   Technology License and Distribution Agreement dated June 23, 1997
        between the Company and Sun Microsystems, Inc., incorporated by reference
        to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997            (1)

10.19   Employment Agreement dated March 23, 1998 between the Company
        and James Lunney                                                                  (2)

10.20   Employment Agreement dated July 28, 1997 between the Company
        and Philip Morettini                                                              (2)

10.21   Employment Agreement dated July 23, 1998 between the Company
        and Lowell W. Giffhorn                                                            (2)

23.0    CONSENTS OF EXPERTS AND COUNSEL.

23.1    Consent of BDO Seidman, LLP                                                       (2)

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

99.0    ADDITIONAL EXHIBITS.

99.1    Form of ISO Plan Option (Gaspar) dated May 29, 1992,
        incorporated by reference to Exhibit 28.2 to registration
        statement on Form SB-2, file no. 33-57858                                         (1)

99.2    Form of NSO Plan Option (Berlin) dated May 29, 1992,
        incorporated by reference to Exhibit 28.3 to registration
        statement on Form SB-2, file no. 33-57858                                         (1)

99.3    Form of Incentive Stock Option Agreement to the Company's 1996 Stock
        Option Plan (individual agreements differ as to number of shares, dates,
        prices and vesting), incorporated by reference to Pre-Effective
        Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
        1996                                                                              (1)
</TABLE>


                                      EX-6
<PAGE>   69

<TABLE>
<CAPTION>
<S>     <C>                                                                               <C>
99.4    Form of NonQualified Stock Option Agreement to the Company's 1996 Stock
        Option Plan (individual agreement differ as to number of shares, date,
        prices and vesting), incorporated by reference to Pre-Effective
        Amendment No. 2 to Registration Statement on Form SB-2 dated May 23,
        1996                                                                              (1)

99.5    Press Release of the Company dated November 4, 1996 incorporated by
        reference to Exhibit 99.5 to Form 8-K dated January 9, 1997                       (1)


        (1) Previously filed in indicated registration statement or report.

        (2) Exhibit filed herewith this Annual Report on Form 10-KSB for the fiscal year ended May 31, 1998
</TABLE>

                                      EX-7