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U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended May 31, 2002
or

|      |  |                                                                                         
|----- |  | ----------------------------------------------------------------------------------------
|[   ] |  | TRANSITION REPORT PURSUANT TO 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(Exact name of registrant as specified in its charter)

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

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

(Registrants telephone number, including area code): (858) 674-5000

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

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

Indicate by check mark whether the registrant (1 ) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [ X ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant on August 26, 2002 was $4,821,423 based on a closing bid price of
$0.065 as reported on the OTC Electronic Bulletin Board system.

At August 26, 2002, 81,465,757 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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|             |                                                                                                         |  |  |  |  |  |  | 
|------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I      
|             | Item 1. DESCRIPTION OF BUSINESS                                                                        
|             | Item 2. DESCRIPTION OF PROPERTY                                                                        
|             | Item 3. LEGAL PROCEEDINGS                                                                              
|             | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II     
|             | Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS                          
|             | Item 6. SELECTED CONSOLIDATED FINANCIAL DATA                                                           
|             | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|             | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                                     
|             | Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.                                                   
|             | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE           
|PART III    
|             | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|             | Item 11. EXECUTIVE COMPENSATION                                                                        
|             | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|             | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|PART IV     
|             | Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K                              
|EXHIBIT 23.1
|EXHIBIT 23.2
|EXHIBIT 99.8
|EXHIBIT 99.9



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TABLE OF CONTENTS

|         |  |                                                                                       |  |          |    |      |  | 
|-------- |  | ------------------------------------------------------------------------------------- |  | -------- | -- | ---- |  | 
|         |  |                                                                                       |  |          |    | Page
|         |  |                                                                                       |  |          |    |     
|         |  |                                                                                       |  | PART I   |    |      |  | 
|ITEM 1.  |  | Description of Business                                                               |  |          | 3  |     
|ITEM 2.  |  | Description of Property                                                               |  |          | 14 |     
|ITEM 3.  |  | Legal Proceedings                                                                     |  |          | 14 |     
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  |          | 15 |     
|         |  |                                                                                       |  | PART II  |    |      |  | 
|ITEM 5.  |  | Market for Registrants Common Equity and
RelatedStockholder Matters                  |  |          | 15 |     
|ITEM 6.  |  | Selected Consolidated Financial Data                                                  |  |          | 15 |     
|ITEM 7.  |  | Managements Discussion and Analysis
of Financial
Condition and Results of Operations |  |          | 16 |     
|ITEM 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |          | 27 |     
|ITEM 8.  |  | Financial Statements and Supplementary Data                                           |  |          | 27 |     
|ITEM 9.  |  | Changes
in and Disagreements with Accountants on
Accounting and Financial Disclosure  |  |          | 28 |     
|         |  |                                                                                       |  | PART III |    |      |  | 
|ITEM 10. |  | Directors, Executive Officers of the Registrant                                       |  |          | 29 |     
|ITEM 11. |  | Executive Compensation                                                                |  |          | 30 |     
|ITEM 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  |          | 34 |     
|ITEM 13. |  | Certain Relationships and Related Transactions                                        |  |          | 36 |     
|         |  |                                                                                       |  | PART IV  |    |      |  | 
|ITEM 14. |  | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                      |  |          | 37 |     

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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

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




PART I




Item 1. DESCRIPTION OF BUSINESS

The Company

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

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

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

Background

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

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

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

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

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

Business

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



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

The stages of development of our technologies is as follows:



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

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| |  |  | JUICEtechnology. This technology was introduced to
address the need to conserve power in embedded applications by
varying the speed at which any microprocessor processes data. By
varying the speed of the microprocessor, battery life can be
significantly expanded thereby enhancing the users internet
experience on a variety of handheld devices including cell phones,
smart phones, pocket PCs and personal digital assistants. There
has been no revenue generated from this product as of yet.                                                                                                                           
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | High-speed data communications. Revenue from this
technology was phased out during fiscal year 2002 as a result of
the products reaching the end of their life cycles. During fiscal
2002 we initiated a last time buy program and except for minor
repeat orders have discontinued to sell this product line. We
have decided to concentrate our efforts on the Ignite
microprocessor and JUICEtechnology. Although the communications
product line accounted for approximately 97% of our fiscal year
2002 revenue, we anticipate that the Ignite microprocessor and
JUICEtechnology will be our main product lines in the future.
|
| |  |  | Radar and antenna. We sold the gas plasma antenna
technology in August 1999. Our radar technology has not generated
any revenue and we have suspended further development of this
technology in order to concentrate our resources on our Ignite and
JUICEtechnology products.                                                                                                                                                                                                                                                                                                                                                      

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

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

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

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

Java is a programming language that was originally developed for personal
digital assistant devices and television set top boxes. It was formally
announced as an object-oriented language for the Internet in May 1995 by Sun
Microsystems Inc. A large number of major computer, software, browser and
on-line service provider companies have licensed the Java language.
Accordingly, Java is a fundamental platform for Internet related applications.
A significant number of Java applications, or applets, are now available on the
Internet. These applications not only enhance web pages but also perform many
functions of traditional computer software programs. Our Ignite technology
lends itself to potential markets in which the use of Java is prevalent.

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

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

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

Our Microprocessor Technology.

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

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

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



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

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

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

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microprocessors. The Ignite family provides close integration of the
microprocessor and input/output function with the logic circuitry, thereby
providing an advanced application specific standard processor.

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

Microprocessors are generally available in 4-bit through 64-bit
architectures, which refers to the amount of data they can process. 4-bit
microprocessors are relatively inexpensive, typically less than $1.00 each.
Although they lack certain performance and features, they account for more than
40% of worldwide microcontroller volume. Also in general use today are 8-bit
architectures, generally costing $1.00 to $10.00 each and accounting for an
additional 40% of worldwide microcontroller volume. To date 16-bit, 32-bit and
64-bit architectures, with typical costs of over $10.00 each, have offered very
high performance, but are generally considered to be expensive for high-volume
embedded control applications. The use of 16-bit, 32-bit and 64-bit
architectures offers fewer internal limitations, making programming easier and
providing higher performance. Although generally more expensive per unit and
requiring more support logic and memory, these devices offer many advantages
for more sophisticated embedded control systems.

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

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

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

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

Our technology is not designed or targeted to compete with high-end
processors for use in personal computers. It is targeted for embedded control
applications. We believe that the features described above differentiate the
Ignite family from other 8-bit to 64-bit microprocessors targeted for embedded
control applications. Considering the reduced requirement for support
microprocessors, the Ignite family is intended to be available at a high volume
price that should
be price competitive with high-end 8-bit microprocessor and general 16-bit
microprocessor systems but with higher performance (speed and functional
capability). The Ignite family has been designed to allow high-speed and
high-yield fabrication using generally available wafer fabrication technology
and facilities.

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

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

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

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

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

In September 2000, we completed the VHDL soft-core version of the Ignite
microprocessor family. The hardware design inside a microprocessor, or silicon
device, can be represented as a software program. This, in essence, replaces
the old style of designing microprocessors using schematics. VHDL is the
predominant software language used to design semiconductors. In addition to
the design aspects, VHDL also contains sophisticated simulation tools that
allow the designer to simulate the functionality of the entire design before
committing to silicon. Also VHDL enables a designer to easily modify and
enhance the design. A design represented in VHDL goes through a synthesis
process

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whereby it is converted to the most basic element of a design, logical
gates. This gate level representation in turn is used with computer aided
engineering tools to translate the design into the most fundamental component
of semiconductors, transistors. The characteristics of the transistors can be
given as a library to a foundry. Therefore, a design represented in VHDL is
technology and foundry independent and can be targeted for any given transistor
geometry (such as 0.18, 0.25, or 0.35- micron) for any foundry of choice.

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

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

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

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

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

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

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

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

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

Competition. The semiconductor industry is intensely competitive and has
been characterized by price erosion, rapid technological change and foreign
competition in many markets. The industry consists of major domestic and

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international semiconductor companies, most of which have greater financial,
technical, marketing, distribution, development and other resources than ours.
The market for microprocessors and for embedded control applications is at
least as competitive.

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

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

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



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

JUICEtechnology

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

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

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

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

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

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

High Speed Data Communications Products.

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

| |                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | VME
Product Line a line of intelligent high-speed communications
engines in a virtual memory European form factor. Some of our
customers for these products included the military as well as large
satellite based data communications companies.
|
| | Atcomm2/4
Product Line an intelligent two or four channel product
that was used for high-speed data communications.                                                                                                                              

Except for minor repeat orders, we no longer are supporting this product
line. Our strategy is to sell this product line so we may concentrate our
efforts and resources on Ignite and JUICEtechnology.

Radar and Antenna Technology.

General Background. We commenced active development of our ground
penetrating radar technology in April 1992. By May 1993, we were able to
demonstrate the sensing, processing and crude visualization of images from our
technology, and by May 1994 we had completed our prototype device. Since May
1994, we have focused our efforts and limited financial resources on the
microprocessor technology and communication products, effectively suspending
development and marketing efforts related to ground penetrating radar.

Gas Antenna Technology Description.

We sold our gas plasma technology in August 1999.

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

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

Licenses, Patents, Trade Secrets and Other Proprietary Rights.We rely on
a combination of patents, copyright and trademark laws, trade secrets, software
security measures, license agreements and nondisclosure

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agreements to protect
our proprietary technologies. Our policy is to seek the issuance of patents
that we consider important to our business to protect inventions and technology
that support our microprocessor technology.

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

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

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

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



| |  |  | Sierra Systems. In June 1994, we entered into an
agreement with Sierra Systems whereby we could provide the C
programming language on the Ignite. We currently provide
development boards with the C programming language.                                                                                                                                                                                                                                                                                         
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Sun Microsystems Inc. In June 1997, we entered into an
agreement with Sun Microsystems, Inc. which enabled us to develop
and distribute products based on Suns Javas technology. In June
1998, we exercised an option under that agreement to license from
Sun, personalJava, a smaller platform on which to run Java
applications that did not include an operating system. We
determined that personalJava was better suited to the markets
available to the Ignite. We have ported personalJava to the
Ignite.
|
| |  |  | Wind River. In July 1997, we entered into an agreement
with Wind River that provided us with a license for an operating
system, VxWorks, to be used in conjunction with personalJava. We
have ported VxWorks to the Ignite.                                                                                                                                                                                                                                                                                        
|
| |  |  | Forth Inc. In July 1997, we entered into a license
agreement with Forth Inc. whereby Forth will provide software
support and operating system development tools for the Forth
programming language. Several customers are evaluating the Ignite
as a microprocessor using the Forth programming language.                                                                                                                                                                                                          

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

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

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

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

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

|               |               |  |      |   |      |  |      |    |   |  |     |    |  
|-------------- | ------------- |  | ---- | - | ---- |  | ---- | -- | - |  | --- | -- | -
|               |               |  | 2002 |   | 2001 |  | 2000
|               |               |  |      |   |      |  |     
|Domestic sales |               |  | 99   | % |      |  | 75   | %  |   |  | 65  | % 
|Foreign sales  |               |  |      |   |      |  |      |    |   |  |     |   
|               | Asia          |  |      |  | %    |  |      | 7  | % |  |     | 7  | %
|               | Europe        |  |      | 1 | %    |  |      | 6  | % |  |     | 19 | %
|               | North America |  |      |  | %    |  |      | 12 | % |  |     | 9  | %
|               |               |  |      |   |      |  |      |    |   |  |     |   
|Total sales    |               |  | 100  | % |      |  | 100  | %  |   |  | 100 | % 
|               |               |  |      |   |      |  |      |    |   |  |     |   

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

Dependence upon Single Customers.Ten percent (10%) or more of our
consolidated net sales were derived from shipments to the following customers
for the fiscal years ended May 31as follows:

|               |  |      |         |      |  |      |        |  |  |   |         | 
|-------------- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------- | 
|               |  | 2002 |         | 2001 |  | 2000
|               |  |      |         |      |  |     
|Advanced Relay |  | $    | 151,000 |      |  | $    |       |  |  | $ |        | 
|Schindler      |  |      | 59,000  |      |  |      |       |  |  |   |        | 
|Raytheon       |  |      |        |      |  |      | 88,000 |  |  |   |        | 
|SAIC           |  |      |        |      |  |      | 41,000 |  |  |   |        | 
|Spellcaster    |  |      |        |      |  |      | 40,000 |  |  |   |        | 
|Intermec       |  |      |        |      |  |      |       |  |  |   | 137,000 | 
|Sipex          |  |      |        |      |  |      |       |  |  |   | 138,000 | 
|Miel           |  |      |        |      |  |      |       |  |  |   | 127,000 | 

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

We had no backlog as of July 31, 2002 compared to less than $10,000 as of
July 31, 2001. The backlog as of July 31, 2001 was for the final orders
related to the communication products and were shipped by the end of our second
fiscal quarter which ended November 30, 2001.

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

Our future success depends in significant part upon the continued service
of our key technical and senior management personnel. The competition for
highly qualified personnel is intense, and there can be no assurance that we

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will be able to retain our key managerial and technical employees or that we
will be able to attract and retain additional highly qualified technical and
managerial personnel in the future. None of our employees is represented by a
labor union, and we consider our relations with our employees to be good. None
of our employees is covered by key man life insurance policies.

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

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




Item 2. DESCRIPTION OF PROPERTY

We have one 10,300 square foot office located at 10989 Via Frontera, San
Diego, California. The facility is leased through July 2006. In July 2002, we
sublet approximately 5,000 square feet of our facility to an independent third
party. The term of the sublease coincides with the remaining term of our
lease. The reduced floor space provides adequate and suitable facilities for
all of our corporate functions. In addition, we have one employee, who
supports the sales and marketing of our microprocessor, telecommute from her
home in West Virginia.




Item 3. LEGAL PROCEEDINGS

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

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

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

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

At a Special Meeting of Shareholders held on May 6, 2002, the following
proposal was approved:



|1. |  | Proposal to approve an amendment to our Certificate of Incorporation to
increase the number of authorized shares of our common stock, $.00001
par value, from 100,000,000 to 200,000,000.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |               |           |                  |  |  |         | 
|---------- |  | ------------- | --------- | ---------------- |  |  | ------- | 
|Votes For  |  | Votes Against |           | Votes Abstaining
|           |  |               |           |                 
|63,143,334 |  |               | 2,042,889 |                  |  |  | 163,900 | 




PART II




Item 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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

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

|                               |                |  |                |      |     |  |   |      | 
|------------------------------ | -------------- |  | -------------- | ---- | --- |  | - | ---- | 
|                               |                |  | Bid Quotations
|                               |                |  |               
|                               |                |  | High           |      | Low
|                               |                |  |                |      |    
|Fiscal Year Ended May 31, 2002 |                |  |                |      |     |  |   |     
|                               | First Quarter  |  | $              | 0.53 |     |  | $ | 0.25 | 
|                               | Second Quarter |  | $              | 0.25 |     |  | $ | 0.10 | 
|                               | Third Quarter  |  | $              | 0.15 |     |  | $ | 0.07 | 
|                               | Fourth Quarter |  | $              | 0.14 |     |  | $ | 0.07 | 
|Fiscal Year Ended May 31, 2001 |                |  |                |      |     |  |   |     
|                               | First Quarter  |  | $              | 1.72 |     |  | $ | 0.65 | 
|                               | Second Quarter |  | $              | 1.60 |     |  | $ | 0.78 | 
|                               | Third Quarter  |  | $              | 1.09 |     |  | $ | 0.49 | 
|                               | Fourth Quarter |  | $              | 0.84 |     |  | $ | 0.50 | 

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




Item 6. SELECTED CONSOLIDATED FINANCIAL DATA

You should read the selected consolidated financial data set forth below
in conjunction with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated financial statements
and the notes to those statements included elsewhere in this report. The
selected consolidated financial data set forth below for the fiscal years ended
May 31, 2002, 2001, 2000, 1999, and 1998 have been derived from our
consolidated financial statements which have been audited by Nation Smith
Hermes Diamond, independent auditors, for the year ended May 31, 2002 and BDO
Seidman, LLP, independent auditors, for the preceding four years.

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|                                                     |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |           |           | 
|---------------------------------------------------- | ----------------------------------- | ------------------------ | ---------- | ------------------- | --------- | ---- | ---------- | --------- | --------- | ---- | ---------- | --------- | --------- | - | ---------- | --------- | --------- | - | ---------- | --------- | --------- | 
|                                                     |                                     |                          |            | Years Ended May 31,
|                                                     |                                     |                          |            |                    
|                                                     |                                     |                          |            | 2002                |           | 2001 |            | 2000      |           | 1999 |            | 1998     
|                                                     |                                     |                          |            |                     |           |      |            |           |           |      |            |          
|Statements of Operations Data:                       |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|Revenue:                                             |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|                                                     | Sales                               |                          | $          | 358,809             |           |      | $          | 337,384   |           |      | $          | 716,960   |           |   | $          | 1,134,545 |           |   | $          | 1,902,874 |          
|                                                     |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |           |          
|Costs and expenses:                                  |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |          
|                                                     | Cost of sales                       |                          |            | 393,980             |           |      |            | 544,320   |           |      |            | 725,008   |           |   |            | 711,195   |           |   |            | 1,163,688 |          
|                                                     | Research and development            |                          |            | 1,372,421           |           |      |            | 2,218,433 |           |      |            | 3,170,166 |           |   |            | 2,149,361 |           |   |            | 1,607,828 |          
|                                                     | Selling, general and administrative |                          |            | 2,708,579           |           |      |            | 2,588,579 |           |      |            | 3,501,128 |           |   |            | 2,015,058 |           |   |            | 4,090,937 |          
|                                                     |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |           |          
|                                                     |                                     | Total costs and expenses |            |                     | 4,474,980 |      |            |           | 5,351,332 |      |            |           | 7,396,302 |   |            |           | 4,875,614 |   |            |           | 6,862,453 | 
|                                                     |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |           |          
|Operating loss                                       |                                     |                          | (4,116,171 | )                   |           |      | (5,013,948 | )         |           |      | (6,679,342 | )         |           |   | (3,741,069 | )         |           |   | (4,959,579 | )        
|Other income (expense), net                          |                                     |                          | (1,370,880 | )                   |           |      | 45,045     |           |           |      | (809,366   | )         |           |   | (535,387   | )         |           |   | (2,555,206 | )        
|                                                     |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |           |          
|Net loss                                             |                                     | $                        | (5,487,051 | )                   |           | $    | (4,968,903 | )         |           | $    | (7,488,708 | )         |           | $ | (4,276,456 | )         |           | $ | (7,514,785 | )        
|                                                     |                                     |                          |            |                     |           |      |            |           |           |      |            |           |           |   |            |           |           |   |            |           |          
|Basic and diluted loss per common share              |                                     | $                        | (0.08      | )                   |           | $    | (0.09      | )         |           | $    | (0.17      | )         |           | $ | (0.11      | )         |           | $ | (0.24      | )        
|Weighted average number of shares-
basic and diluted |                                     |                          | 66,810,028 |                     |           |      | 53,433,788 |           |           |      | 44,156,418 |           |           |   | 38,042,734 |           |           |   | 31,016,956 |          

|                                                 |  |         |          |      |  |      |           |      |  |      |           |  |  |   |            |   |  |   |           | 
|------------------------------------------------ |  | ------- | -------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- |  |  | - | ---------- | - |  | - | --------- | 
|                                                 |  | May 31,
|                                                 |  |        
|                                                 |  | 2002    |          | 2001 |  | 2000 |           | 1999 |  | 1998
|                                                 |  |         |          |      |  |      |           |      |  |     
|Balance Sheet Data:                              |  |         |          |      |  |      |           |      |  |      |           |  |  |   |            |   |  |   |           | 
|Cash and cash equivalents                        |  | $       | 88,108   |      |  | $    | 464,350   |      |  | $    | 2,100,242 |  |  | $ | 35,813     |   |  | $ | 602,456   | 
|Working capital (deficiency)                     |  |         | (918,768 | )    |  |      | 328,605   |      |  |      | 1,769,340 |  |  |   | (1,545,055 | ) |  |   | 1,011,329 | 
|Total assets                                     |  |         | 934,526  |      |  |      | 1,543,693 |      |  |      | 2,733,148 |  |  |   | 1,145,027  |   |  |   | 2,189,654 | 
|Long-term obligations, net of current maturities |  |         | 331,929  |      |  |      |          |      |  |      |          |  |  |   |           |   |  |   | 508,355   | 
|Total stockholders equity (deficit)             |  |         | (444,825 | )    |  |      | 922,388   |      |  |      | 2,209,882 |  |  |   | (981,234   | ) |  |   | 1,156,848 | 




Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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



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

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Critical Accounting Policies

We believe that the following represent our critical accounting policies:

Property, Equipment and Depreciation

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

Patents and Trademarks

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

Revenue Recognition

We recognize revenue on the shipment to our customers of communication
products, microprocessor integrated chips and evaluation boards. We anticipate
that in the future we will also derive revenue from fees for the transfer of
proven and reusable intellectual property components or the performance of
engineering services. We anticipate to enter into licensing agreements that
will provide licensees the right to incorporate our intellectual property
components in their products with terms and conditions that we anticipate to
vary by licensee. Generally, we anticipate these payments will include a
nonrefundable technology license fee, which will be payable upon the transfer
of intellectual property, or a nonrefundable engineering service fee, which
generally will be payable upon achievement of defined milestones. In addition,
we anticipate these agreements will include royalty payments, which will be
payable upon sale of a licensees product, and maintenance and limited support
fees. We will classify all revenue that involves the future sale of a
licensees products as royalty revenue. Royalty revenue will be generally
recognized in the quarter in which a report is received from a licensee
detailing the shipments of products incorporating our intellectual property
components (i.e., in the quarter following the sale of licensed product by the
licensee). We will classify all revenue that does not involve the future sale
of a licensees products, primarily license fees and engineering service fees
and maintenance and support fees, as contract revenue. License fees will be
recognized upon the execution of the license agreement and transfer of
intellectual property, provided no further significant performance obligations
exist and collectibility is deemed probable. Fees related to engineering
services contracts, which will be performed on a best efforts basis and for
which we will receive periodic milestone payments, will be recognized as
revenue over the estimated development period, using a cost-based percentage of
completion method. Annual maintenance and support fees, which will be renewable
by the licensee, will be classified as contract revenue and will be amortized
over the period of support, generally 12 months.

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Options

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

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

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Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. During the year ended May 31, 2002, based upon
information then available, we revised our estimates regarding the recovery of
our inventories. As a result, we increased existing reserves for obsolescence
by $111,381.

Results of Operations for the Years Ended May 31, 2002, 2001 and 2000

Our net sales in fiscal 2002, 2001 and 2000 were as follows:

|            |  |        |         |                                        |  |                   |  | 
|----------- |  | ------ | ------- | -------------------------------------- |  | ----------------- |  | 
|Fiscal Year |  | Amount |         | % Change from the Previous Fiscal Year
|            |  |        |         |                                       
|2002        |  | $      | 358,809 |                                        |  | Increase of 6.3% 
|2001        |  | $      | 337,384 |                                        |  | Decrease of 52.9%
|2000        |  | $      | 716,960 |                                        |  |                   |  | 

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

Our cost of sales in fiscal 2002, 2001 and 2000 were as follows:

|            |  |        |         |                      |  |                   |  |  |       |   |       |  
|----------- |  | ------ | ------- | -------------------- |  | ----------------- |  |  | ----- | - | ----- | -
|            |  |        |         |                      |  | % Change from the |  |  |       |  
|Fiscal Year |  | Amount |         | Previous Fiscal Year |  | % of Net Sales   
|            |  |        |         |                      |  |                  
|2002        |  | $      | 393,980 |                      |  | Decrease of 27.6% |  |  | 109.8 | %
|2001        |  | $      | 544,320 |                      |  | Decrease of 24.9% |  |  | 161.3 | %
|2000        |  | $      | 725,008 |                      |  |                   |  |  |       |   | 101.1 | %

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

Our research and development expenses in fiscal 2002, 2001 and 2000 were
as follows:

|            |  |        |           |                                        |  |                   |  | 
|----------- |  | ------ | --------- | -------------------------------------- |  | ----------------- |  | 
|Fiscal Year |  | Amount |           | % Change from the Previous Fiscal Year
|            |  |        |           |                                       
|2002        |  | $      | 1,372,421 |                                        |  | Decrease of 38.1%
|2001        |  | $      | 2,218,433 |                                        |  | Decrease of 30.0%
|2000        |  | $      | 3,170,166 |                                        |  |                   |  | 

Research and development expenses decreased during the fiscal year ended
May 31, 2002 compared to the previous fiscal year. This decrease was due
primarily to a reduction of approximately $406,000 in personnel costs, a $221,
000 reduction in the costs of outside consultants and a reduction in software
maintenance costs of $77,000. These reductions in costs were as a result of a
cost cutting program initiated during the first half of the current fiscal
year.

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

Our selling, general and administrative expenses in fiscal 2002, 2001 and
2000 were as follows:

|            |  |        |           |                                        |  |                   |  | 
|----------- |  | ------ | --------- | -------------------------------------- |  | ----------------- |  | 
|Fiscal Year |  | Amount |           | % Change from the Previous Fiscal Year
|            |  |        |           |                                       
|2002        |  | $      | 2,708,579 |                                        |  | Increase of 4.6% 
|2001        |  | $      | 2,588,579 |                                        |  | Decrease of 26.0%
|2000        |  | $      | 3,501,128 |                                        |  |                   |  | 

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

Our other income (expenses) in fiscal 2002, 2001 and 2000 were as follows:

|            |  |        |            |                                        |  |                |  | 
|----------- |  | ------ | ---------- | -------------------------------------- |  | -------------- |  | 
|Fiscal Year |  | Amount |            | % Change from the Previous Fiscal Year
|            |  |        |            |                                       
|2002        |  | $      | (1,370,880 | )                                      |  | Not meaningful
|2001        |  | $      | 45,045     |                                        |  | Not meaningful
|2000        |  | $      | ( 809,366  | )                                      |  |                |  | 

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

Liquidity and Capital Resources

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

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At May 31, 2002, we had deficit working capital of $918,768 and cash and
cash equivalents of $88,108. We have historically funded our operations
primarily through the issuance of securities and debt financings. Cash and
cash equivalents decreased $376,242 during the year ended May 31, 2002 due to
net cash used in operations of $3,632,534 and additions to property, equipment
and patents, net of $146,156 offset by funds generated primarily from the
proceeds from a note payable and convertible debenture of $2,298,000 and the
sale of common stock under an investment agreement and to individual investors
of $953,438. The net cash used in operations was $3,632,534 for the year ended
May 31, 2002 compared to $4,839,180 for the corresponding period of the
previous fiscal year. The decrease in cash required in operations was due
primarily to a $436,837 difference in net loss as adjusted to reconcile to cash
used in operating activities coupled with a $1,324,431 non-cash interest
expense related to convertible debentures, notes payable and warrants and
$326,189 difference in the cash generated and sales of inventory between the
two periods. Cash used in investing activities was $146,156 for the year ended
May 31, 2002 compared to $493,557 for the corresponding period of the previous
fiscal year. This decrease in cash required for investing activities was due
primarily to a note receivable for $80,000 coupled with corporate office
remodeling costs incurred during the corresponding period of the previous
fiscal year. Cash provided by financing activities was $3,402,448 for the year
ended May 31, 2002 compared to $3,696,845 for the corresponding period of the
previous fiscal year. This decrease was primarily the result of a smaller need
for cash as a result of cost cutting programs during the current fiscal period.

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

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



| |  |  | the additional funds received subsequent to May 31, 2002, related to
the convertible debentures of $492,000;                                                                                                                                                                                                                
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | optional amounts which may received under the convertible debentures
of $1,000,000;                                                                                                                                                                                                                                         
|
| |  |  | additional funds under the $25 million equity line of credit if we
are successful in registering additional shares of common stock,
limitations based on trading volume and market price of the common stock
allow adequate funding, and such available funding exceeds the remaining
balance of the note payable to Swartz;
|
| |  |  | proceeds from the exercise of outstanding stock options and warrants; and                                                                                                                                                                                                                                                   
|
| |  |  | additional debt and/or equity financings.                                                                                                                                                                                                                                                                                   

In addition, we have formulated additional cost reduction plans which can be
implemented if the required funds are not obtainable. We also have remaining a
$400,000 accounts receivable factoring agreement with our bank; however, we
have no eligible accounts receivable to factor as of May 31, 2002.

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

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

|                |                                            |                                                                                     |   |                                          |           |   |           | 
|--------------- | ------------------------------------------ | ----------------------------------------------------------------------------------- | - | ---------------------------------------- | --------- | - | --------- | 
|Cash available: |                                            |                                                                                     |   |                                         
|                | Cash available at May 31, 2002             |                                                                                     | $ | 88,108                                   |          
|                | Subsequent advances                        |                                                                                     |   |                                          |          
|                |                                            | Additional amounts under convertible debentures
received subsequent to May 31, 2002 |   |                                          | 492,000   |  
|                |                                            | Optional amounts under convertible
debentures                                       |   |                                          | 1,000,000 |  
|                |                                            |                                                                                     |   |                                         
|                |                                            |                                                                                     |   | Available cash under existing agreements |           |   | 1,580,108 | 
|                |                                            |                                                                                     |   |                                         
|Cash needs:     |                                            |                                                                                     |   |                                         
|                | Estimated needs                            |                                                                                     |   | 2,400,000                                |          
|                | Note payable to Swartz at November 5, 2002 |                                                                                     |   | 635,276                                  |          
|                |                                            |                                                                                     |   |                                         
|                |                                            |                                                                                     |   | Total                                    |           |   | 3,035,276 | 
|                |                                            |                                                                                     |   | Required funds from external sources     |           | $ | 1,455,168 | 
|                |                                            |                                                                                     |   |                                         

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

$25 Million Equity Line of Credit

Overview.On September 17, 2001, we entered into an investment agreement
with Swartz. The investment agreement entitles us to issue and sell our common
stock to Swartz for up to an aggregate of $25 million from time to time during
a three-year period following the effective date of the registration statement.
This is also referred to as a put right. We filed a registration statement on
Form S-1 on October 11, 2001 that was declared effective on November 5,

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2001
for 15,000,000 shares of our common stock which we issued to Swartz during the
fiscal year ended May 31, 2002. There remains approximately $24 million
available under this line conditioned on us filing one or more additional
registration statements. As of August 1, 2002, we have not filed a statement
requesting the registration of additional shares to put to Swartz under the $25
million equity line of credit.

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

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

We issued to Swartz a commitment warrant to purchase up to 900,000 shares
of our common stock concurrent with the execution of the investment agreement.
This warrant is exercisable through September 17, 2006 at an initial exercise
price of $0.22. The commitment warrant exercise price is subject to being
reset on each six month anniversary of its issuance.

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



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

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



| |  |  | we have announced or implemented a stock split or
combination of our common stock between the advanced put notice
date and the end of the pricing period;                                                                                                                                                                                                          
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we have paid a common stock dividend or made any other
distribution of our common stock between the advanced put notice
date and the end of the pricing period;                                                                                                                                                                                                    
|
| |  |  | we have made a distribution to the holders of our common
stock or of all or any portion of our assets or evidences of
indebtedness between the put notice date and the end of the
pricing period;                                                                                                                                                                  
|
| |  |  | we have consummated a major transaction (including a
transaction, which constitutes a change of control) between the
advance put notice date and the end of the pricing period, the
registration statement covering the resale of the shares becomes
ineffective or unavailable for use, or our stock becomes delisted
for trading on our then primary exchange; or

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

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

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

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

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

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

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

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

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

Secured Note Payable

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

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and ourselves,
Swartz may advance additional amounts under the amended note. Per the addendum
to the amended note, principal and interest payments are deferred until October
9, 2002.

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

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

The note is secured by our assets.

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

|                                                              |                             |  |  |           |   |   |           |          |  
|------------------------------------------------------------- | --------------------------- |  |  | --------- | - | - | --------- | -------- | -
|Advances against the note                                     |                             |  |  |           |   | $ | 1,790,000 |         
|Less amount applied against $30 million equity line of credit |                             |  |  |           |   |   | (227,800  | )       
|Less amount applied against $25 million equity line of credit |                             |  |  |           |   |   | (926,924  | )       
|Less debt discount                                            |                             |  |  |           |   |   |           |         
|                                                              | Total                       |  |  | 1,107,238 |   |   |           |          |  
|                                                              | Amount amortized to expense |  |  | (917,722  | ) |   |           | (189,516 | )
|                                                              |                             |  |  |           |   |   |           |         
|Note payable at May 31, 2002                                  |                             |  |  |           |   | $ | 445,760   |         
|                                                              |                             |  |  |           |   |   |           |         

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

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

8% Convertible Debentures

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

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

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

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

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

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

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

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

As of May 31, 2002 we issued warrants to purchase up to 2,514,809 shares
of our common stock in accordance with the convertible debenture. The warrants
issued were valued using the Black-Scholes pricing model based on the expected
fair value at issuance and the estimated fair value was also recorded as debt
discount. See Note 7 to the consolidated financial statements for discussion
of the terms of the warrants.

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

The convertible debenture is secured by our assets.

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

New Accounting Pronouncements

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

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

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

Our previous business combinations were accounted for using the
pooling-of-interests method. The pooling-of-interests method does not result in
the recognition of acquired goodwill or other intangible assets. As a result,
the adoption of SFAS No. 141 and No. 142 will not affect the results of past
acquisition transactions. However, all future business combinations will be
accounted for under the purchase method, which may result in the recognition of
goodwill and other intangible assets, some of which will be recognized through
operations, either by amortization or impairment charges, in the future. We
will be required to reassess the useful lives of our intangible assets within
the first fiscal quarter of 2003.

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

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

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

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

Tax Loss Carryforwards

As of May 31, 2002, we had approximately $28,972,000 of tax loss
carryforwards. A valuation allowance has been recorded for the net-deferred
tax asset of $13,446,000 arising primarily from tax loss carryforwards because
we cannot determine that it is more likely than not that the deferred tax asset
will be realized. See Note 10 to the Consolidated Financial Statements.




Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

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




Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The following table presents selected unaudited quarterly information for
fiscal 2002 and 2001

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|                                     |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|------------------------------------ |  | ------- | ---------- | ------- |  | ------- | ---------- | ------- |  | - | ---------- | - |  | - | ---------- | -
|                                     |  | First   |            | Second  |  | Third   |            | Fourth 
|                                     |  | Quarter |            | Quarter |  | Quarter |            | Quarter
|                                     |  |         |            |         |  |         |            |        
|Fiscal 2002:                         |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|Total revenues                       |  | $       | 314,500    |         |  | $       | 7,389      |         |  | $ | 4,620      |   |  | $ | 32,300     |  
|Operating loss                       |  |         | (1,039,217 | )       |  |         | (1,292,564 | )       |  |   | (964,703   | ) |  |   | (819,687   | )
|Net loss                             |  |         | (1,046,970 | )       |  |         | (1,558,602 | )       |  |   | (1,260,676 | ) |  |   | (1,620,803 | )
|Net loss per basic and diluted share |  | $       | (0.02      | )       |  | $       | (0.02      | )       |  | $ | (0.02      | ) |  | $ | (0.02      | )
|Fiscal 2001:                         |  |         |            |         |  |         |            |         |  |   |            |   |  |   |            |  
|Total revenues                       |  | $       | 119,101    |         |  | $       | 57,623     |         |  | $ | 66,045     |   |  | $ | 94,615     |  
|Operating loss                       |  |         | (900,412   | )       |  |         | (1,202,001 | )       |  |   | (1,365,203 | ) |  |   | (1,546,332 | )
|Net loss                             |  |         | (886,540   | )       |  |         | (1,186,663 | )       |  |   | (1,352,694 | ) |  |   | (1,543,006 | )
|Net loss per basic and diluted share |  | $       | (0.02      | )       |  | $       | (0.02      | )       |  | $ | (0.03      | ) |  | $ | (0.02      | )

Also see Part IV, Item 14(a).

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




Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

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

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

BDOs reports on the consolidated financial statements of the Company for
each of the past two years did not contain an adverse opinion or a disclaimer
of opinion, or was qualified as to any uncertainty in audit scope or accounting
principle; however the audit opinion of BDO on the Companys most recent
consolidated financial statements as of and for the period ending May 31, 2001
was modified to include an explanatory paragraph which contained a statement
that the Companys recurring losses from operations and negative cash flows
raised substantial doubt about the Companys ability to continue as a going
concern.

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

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

Effective May 20, 2002, the Company engaged Nation Smith Hermes Diamond, a
professional corporation, which is a member of the BDO Seidman Alliance
(Nation) , as its independent accountants. During the two years ended May 31,
2001 and the subsequent interim periods preceding the effective date of the
engagement of May 20,

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2002, neither the Company nor anyone on its behalf
consulted Nation regarding either the application of accounting principles to a
specified transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Companys consolidated financial
statements, nor has Nation provided to the Company a written report or oral
advice regarding such principles or audit opinion.

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




PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table and biographical summaries set forth information,
including principal occupation and business experience, about our directors
and the executive officers at August 1, 2002:

|                        |  |     |    |                      |  |                                                       |  |              
|----------------------- |  | --- | -- | -------------------- |  | ----------------------------------------------------- |  | -------------
|Name                    |  | Age |    | Position and Offices |  | Director Since                                       
|                        |  |     |    |                      |  |                                                      
|Donald R. Bernier       |  |     | 60 |                      |  | Chairman and Director                                 |  | January 1995 
|David H. Pohl           |  |     | 65 |                      |  | Director                                              |  | April 2001   
|Jeffrey Wallin          |  |     | 54 |                      |  | President and CEO                                     |  | n/a          
|Lowell W. Giffhorn      |  |     | 55 |                      |  | Executive Vice President, CFO,
Secretary and Director |  | August 1999  
|Carlton M. Johnson, Jr. |  |     | 42 |                      |  | Director                                              |  | August 2001  
|Helmut Falk, Jr.        |  |     | 46 |                      |  | Director                                              |  | December 1997
|Joey Maitra             |  |     | 52 |                      |  | Vice President Engineering                            |  | n/a          
|Patrick Nunally         |  |     | 38 |                      |  | Vice President and CTO                                |  | n/a          

Biographical Information

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

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

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

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

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

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

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

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

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

Compliance With Section 16(a) Of The Exchange Act

Section 16(a) of the Exchange Act requires our directors, executive
officers and persons who beneficially own 10% or more of a class of securities
registered under Section 12 of the Exchange Act to file reports of beneficial
ownership and changes in beneficial ownership with the Securities and Exchange
Commission. Directors, executive officers and greater than 10% shareholders are
required by the rules and regulations of the Commission to furnish us with
copies of all reports filed by them in compliance with Section 16(a).

Based solely on our review of copies of the reports we received from
persons required to make such filings and our own records, we believe that from
the period June 1, 2001 through May 31, 2002, all persons subject to the
Section 16(a) reporting requirements timely filed the required reports.




Item 11. EXECUTIVE COMPENSATION

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

30



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##### Table of Contents



SUMMARY COMPENSATION TABLE

|                   |                          |        |                          |        |                        |       |         |               |     |         |     |              |           |         |         |          |      |           |         |     |  |  |  |  | 
|------------------ | ------------------------ | ------ | ------------------------ | ------ | ---------------------- | ----- | ------- | ------------- | --- | ------- | --- | ------------ | --------- | ------- | ------- | -------- | ---- | --------- | ------- | --- |  |  |  |  | 
|                   |                          |        | Annual Cash Compensation |        | Long-Term Compensation |       |         |               |    
|                   |                          |        |                          |        |                        |       |         |               |    
|Name and           |                          | Fiscal |                          |        |                        |       |         |               |     |         |     |              |           |         |         | Repriced |      | All Other
|Principal Position |                          | Year   |                          | Salary |                        | Bonus |         | (# of Shares) |     | Options |     | Compensation
|                   |                          |        |                          |        |                        |       |         |               |     |         |     |             
|Richard G. Blum    |                          |        | 2002                     |        |                        | $     | 34,062  | (3)           |     | Nil     |     | None         |           | None    |         | None    
|                   | President and CEO (1)    |        |                          | 2001   |                        |       | $       | 128,862       | (3) |         | Nil |              |           | 325,000 |         |          | None |           | None   
|Don Bernier        |                          |        | 2002                     |        |                        | $     | 7,500   | (3)           |     | Nil     |     |              | 350,000   |         |         | None     |      | None     
|                   | CEO (2)                  |        |                          |        |                        |       |         |               |     |         |     |              |           |         |         |          |      |           |         |     |  |  |  |  | 
|Jeff Wallin        |                          |        | 2002                     |        |                        | $     | 68,800  | (3)           |     | Nil     |     |              | 1,000,000 |         |         | None     |      | None     
|                   | President and CEO (2)    |        |                          |        |                        |       |         |               |     |         |     |              |           |         |         |          |      |           |         |     |  |  |  |  | 
|Lowell W. Giffhorn |                          |        | 2002                     |        |                        | $     | 139,908 | (3)           |     | Nil     |     |              | 255,000   |         |         | None     |      | None     
|                   | Exec. V.P., CFO and Secy |        |                          | 2001   |                        |       | $       | 126,650       | (3) |         | Nil |              |           | 125,000 |         |          | None |           | None   
|                   |                          |        | 2000                     |        |                        | $     | 110,000 |               |     | Nil     |     | None         |           |         | 300,000 |          |      | None     
|Joey Maitra        |                          |        | 2002                     |        |                        | $     | 125,058 | (3)           |     | Nil     |     |              | 335,000   |         |         | None     |      | None     
|                   | VP Engineering           |        |                          | 2001   |                        |       | $       | 120,000       |     |         | Nil |              | None      |         | None    |          | None
|                   |                          |        | 2000                     |        |                        | $     | 120,000 |               |     | Nil     |     | None         |           |         | 225,000 |          |      | None     
|Patrick O. Nunally |                          |        | 2002                     |        |                        | $     | 173,046 | (3)           |     | Nil     |     |              | 250,000   |         |         | None     |      | $         | 105,000 | (4)
|                   | VP and CTO               |        |                          |        |                        |       |         |               |     |         |     |              |           |         |         |          |      |           |         |     |  |  |  |  | 



---

|(1) |  | Mr. Blum served as President and CEO from September 25, 2000
until August 5, 2001 when he was relieved of his duties. In
September 2001, an action was filed against the Company in the
Superior Court of San Diego County, California by Mr. Blum. He
contends that he was wrongfully terminated on August 5, 2001 in
violation of his employment agreement dated December 1, 2000. He
seeks damages for the alleged breach of his employment agreement, age
discrimination, as well as other related claims. Management denies
the claims and contends it exercised its business judgement for
legitimate nondiscriminatory reasons. The Company intends to
vigorously defend its position in this case. In accordance with Mr.
Blums employment agreement, the Company may be obligated to pay him
between $0 and $400,000 as severance pay.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Mr. Bernier served as CEO from August 5, 2001 until March 18,
2002 when Mr. Wallin was appointed President and CEO under a contract
entered into between the Company and SDMC, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(3) |  | Included in Mssr. Blum, Wallin, Giffhorn, Maitra and Nunally
is cash compensation of $400 per month for car allowance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|   
|   
|   
|(4) |  | Payments to Mr. Nunally for assignments to the Company of
intellectual property rights.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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

Option Grants

31



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##### Table of Contents



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

Option Grants Table for Fiscal Year Ended May 31, 2002

|                   |  |                 |           |                 |  |                  |      |            |  |                     |       |         |  |  |           |                             |  |                            |        |  |  |   |        | 
|------------------ |  | --------------- | --------- | --------------- |  | ---------------- | ---- | ---------- |  | ------------------- | ----- | ------- |  |  | --------- | --------------------------- |  | -------------------------- | ------ |  |  | - | ------ | 
|                   |  |                 |           |                 |  |                  |      |            |  |                     |       |         |  |  |           |                             |  | Potential Realizable Value
|                   |  |                 |           |                 |  | Percent of Total |      |            |  |                     |       |         |  |  |           | of Assumed Annual Rates    
|                   |  |                 |           |                 |  | Options Granted  |      |            |  |                     |       |         |  |  |           | of Stock Price Appreciation
|                   |  | Number of       |           | to Employees in |  | Exercise         |      | Expiration |  | for Option Term (1)
|Name               |  | Options Granted |           | Fiscal Year     |  | Price            |      | Date       |  | 5% ($)              |       | 10% ($)
|                   |  |                 |           |                 |  |                  |      |            |  |                     |       |        
|Jeffrey E. Wallin  |  |                 | 1,000,000 |                 |  |                  | 24.1 | %          |  | $                   | 0.090 |         |  |  | 4/8/2007  |                             |  | $                          | 24,865 |  |  | $ | 54,946 | 
|Lowell W. Giffhorn |  |                 | 255,000   |                 |  |                  | 6.2  | %          |  | $                   | 0.110 |         |  |  | 11/1/2006 |                             |  | $                          | 7,750  |  |  | $ | 17,125 | 
|Joey Maitra        |  |                 | 335,000   |                 |  |                  | 8.1  | %          |  | $                   | 0.133 |         |  |  | 1/2/2007  |                             |  | $                          | 12,310 |  |  | $ | 27,201 | 
|Donald Bernier     |  |                 | 350,000   |                 |  |                  | 8.4  | %          |  | $                   | 0.110 |         |  |  | 11/1/2006 |                             |  | $                          | 10,637 |  |  | $ | 23,505 | 
|Patrick Nunally    |  |                 | 250,000   |                 |  |                  | 6.0  | %          |  | $                   | 0.110 |         |  |  | 11/1/2006 |                             |  | $                          | 7,598  |  |  | $ | 16,789 | 
|Richard Blum       |  |                 |          |                 |  |                  |     |            |  |                     |      |         |  |  |          |                             |  | $                          |       |  |  | $ |       | 



---

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

Aggregated Option Exercises and Fiscal Year-End Option Values

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

|                   |  |                       |         |                         |  |             |         |               |  |   |   |  |  |   |   | 
|------------------ |  | --------------------- | ------- | ----------------------- |  | ----------- | ------- | ------------- |  | - | - |  |  | - | - | 
|                   |  | Number of Unexercised |         | Value of Unexercised   
|                   |  | Options Held At       |         | In-The-Money Options At
|                   |  | May 31, 2002          |         | May 31, 2002           
|                   |  |                       |         |                        
|Name               |  | Exercisable           |         | Unexercisable           |  | Exercisable |         | Unexercisable
|                   |  |                       |         |                         |  |             |         |              
|Jeffrey E. Wallin  |  |                       | 520,000 |                         |  |             | 500,000 |               |  | $ |  |  |  | $ |  | 
|Lowell W. Giffhorn |  |                       | 133,333 |                         |  |             | 246,667 |               |  | $ |  |  |  | $ |  | 
|Joey Maitra        |  |                       | 210,000 |                         |  |             | 150,000 |               |  | $ |  |  |  | $ |  | 
|Donald Bernier     |  |                       | 150,000 |                         |  |             | 275,000 |               |  | $ |  |  |  | $ |  | 
|Patrick Nunally    |  |                       | 195,000 |                         |  |             | 355,000 |               |  | $ |  |  |  | $ |  | 
|Richard Blum       |  |                       |        |                         |  |             |        |               |  | $ |  |  |  | $ |  | 

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

32



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##### Table of Contents



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

Compensation of Directors

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

Employment Contracts

The Company entered into a consulting agreement dated as of March 7, 2002,
with SDMC, Inc. whereby SDMC would provide the services of Mr. Wallin to be the
President and Chief Executive Officer. The agreement is for a term through
March 18, 2004 providing for payments of $133,200 per annum. The agreement
provides for a bonus up to 50% of the annual base consideration for the
applicable year. The agreement also provides for potential bonuses to be paid
based on the increase in the price of the Companys common stock. Should the
price of the common stock reach $0.25 for twenty consecutive days, SDMC would
receive a cash payment of $10,000, $0.40- $20,000, $0.50- $20,000, $0.60-
$30,000, $0.80- $30,000, $1.00- $50,000, $1.50- $100,000, and $2.00- $150,000.
The Company may terminate SDMCs agreement with or without cause, but
termination without cause (other than disability or death) would result in
severance payments equal to the lesser of (i) four months of the then current
compensation or (ii) the balance remaining of the current compensation for the
term of his agreement. If a change in control, as defined in the agreement,
occurs during the term of his agreement, and if Mr. Wallin refuses to accept or
voluntarily resigns from a position other than a qualified position, as that
term is defined in the agreement, then SDMC will receive a lump sum severance
payment equal to twelve months of the then current compensation. Under the
agreement, the Company granted SDMC options to purchase 1,000,000 common
shares, 500,000 vesting on March 7, 2002, 250,000 vesting on March 7, 2003 and
250,000 vesting on March 7, 2004. The Company also placed in escrow four
months of payments which shall be released to SDMC on the termination of Mr.
Wallins services for any reason other than cause or his resignation.

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

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

33



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##### Table of Contents



The Company entered into a letter of intent dated May 31, 2001 with Dr.
Nunally providing for his employment as the Chief Technical Officer of the
Company. The terms of the letter provide for a base salary of $180,000 per
annum. The letter provides for a bonus up to 50% of the annual base
consideration for the applicable year. In addition, the letter provides for
monthly payments of $4,500 for the purchase from Dr. Nunally of certain
intellectual property assets and assignment of worldwide patent rights. On
March 30, 2001, the Company entered into an agreement with Dr. Nunally
providing for additional monthly payments of $3,000 for additional intellectual
property assets.

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




Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

Security Ownership of Certain Beneficial Owners and Management

The following table
sets forth, as of August 23, 2002, the stock ownership
of each officer and director of the Company, of all officers and directors of
the Company as a group, and of each person known by the Company to be a
beneficial owner of 5% or more of its Common Stock. Except as otherwise noted,
each person listed below is the sole beneficial owner of the shares and has
sole investment and voting power over such shares. No person listed below has
any option, warrant or other right to acquire additional securities of the
Company, except as otherwise noted.

|                  |  |                    |  |                             |           |                 |  |  |      |   |  | 
|----------------- |  | ------------------ |  | --------------------------- | --------- | --------------- |  |  | ---- | - |  | 
|                  |  |                    |  | Name and Address            |           | Amount & Nature |  |  |      |  
|Title             |  | of Beneficial      |  | of Beneficial               |           | Percent        
|of Class          |  | Owner              |  | Ownership                   |           | of Class       
|                  |  |                    |  |                             |           |                
|Common stock      |  | Gloria Felcyn, CPA |  |                             | 9,111,611 | (1)             |  |  | 10.9 | %
|par value $.00001 |  | 20440 Williams Ave |  |                             |           |                 |  |  |      |  
|                  |  |                    |  | Saratoga, California 95070  |           |                 |  |  |      |   |  | 
|SAME              |  | Donald R. Bernier  |  |                             | 375,000   | (2)             |  |  | *    |  
|                  |  |                    |  | 10989 Via Frontera          |           |                 |  |  |      |   |  | 
|                  |  |                    |  | San Diego, California 92127 |           |                 |  |  |      |   |  | 
|SAME              |  | Helmut Falk, Jr    |  |                             | 124,500   | (3)             |  |  | *    |  
|                  |  |                    |  | 10989 Via Frontera          |           |                 |  |  |      |   |  | 
|                  |  |                    |  | San Diego, California 92127 |           |                 |  |  |      |   |  | 
|SAME              |  | Lowell W. Giffhorn |  |                             | 358,281   | (4)             |  |  | *    |  
|                  |  |                    |  | 10989 Via Frontera          |           |                 |  |  |      |   |  | 
|                  |  |                    |  | San Diego, California 92127 |           |                 |  |  |      |   |  | 
|SAME              |  | SDMC, Inc          |  |                             | 520,000   | (5)             |  |  | *    |  
|                  |  |                    |  | 10989 Via Frontera          |           |                 |  |  |      |   |  | 
|                  |  |                    |  | San Diego, California 92127 |           |                 |  |  |      |   |  | 

34



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##### Table of Contents



|         |  |                        |  |                             |         |                 |           |      |   |  |     |  
|-------- |  | ---------------------- |  | --------------------------- | ------- | --------------- | --------- | ---- | - |  | --- | -
|         |  |                        |  | Name and Address            |         | Amount & Nature |           |      |   | 
|Title    |  | of Beneficial          |  | of Beneficial               |         | Percent        
|of Class |  | Owner                  |  | Ownership                   |         | of Class       
|         |  |                        |  |                             |         |                
|SAME     |  | David H. Pohl          |  |                             | 325,000 | (6)             |           |      | * | 
|         |  |                        |  | 10989 Via Frontera          |         |                 |           |      |   |  |     |  
|         |  |                        |  | San Diego, California 92127 |         |                 |           |      |   |  |     |  
|SAME     |  | Patrick O. Nunally     |  |                             | 207,000 | (7)             |           |      | * | 
|         |  |                        |  | 10989 Via Frontera          |         |                 |           |      |   |  |     |  
|         |  |                        |  | San Diego, California 92127 |         |                 |           |      |   |  |     |  
|SAME     |  | Joey Maitra            |  |                             | 387,342 | (8)             |           |      | * | 
|         |  |                        |  | 10989 Via Frontera          |         |                 |           |      |   |  |     |  
|         |  |                        |  | San Diego, California 92127 |         |                 |           |      |   |  |     |  
|SAME     |  | Carlton M. Johnson, Jr |  |                             | 50,000  | (9)             |           |      | * | 
|         |  |                        |  | 10989 Via Frontera          |         |                 |           |      |   |  |     |  
|         |  |                        |  | San Diego, California 92127 |         |                 |           |      |   |  |     |  
|         |  |                        |  | All directors & officers    |         |                 |           |      |   |  |     |  
|         |  |                        |  | as a group (8 persons)      |         |                 | 2,347,123 | (10) |   |  | 2.8 | %



---

|*   |  | Less than 1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|1)  |  | As trustee of the Helmut Falk Family Trust and executor of the Helmut
Falk estate, Ms. Felcyn effectively controls the shares which were subject
to an escrow arrangement (as described in Certain Transactions below)
originally issued to nanoTronics in connection with the ShBoom technology
acquisition and shares that remain from 5,000,000 non-escrowed shares that
were originally issued to nanoTronics in connection with the ShBoom
technology acquisition and were subsequently transferred to the Helmut Falk
Family Trust. Includes 2,495,388 shares that are issuable on the conversion
of a 8% Convertible Debenture and the exercise of a warrant into shares of
common stock.
|   
|   
|   
|   
|2)  |  | Includes 150,000 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|3)  |  | Includes 90,000 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|   
|   
|   
|4)  |  | Includes 133,333 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|5)  |  | Includes 520,000 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|6)  |  | Includes 325,000 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|7)  |  | Includes 195,000 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|8)  |  | Includes 210,000 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|9)  |  | Includes 50,000 shares issuable upon the exercise of outstanding stock
options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|   
|   
|   
|10) |  | Includes 673,790 shares issued and outstanding and 1,673,333 shares
issuable upon exercise of stock options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

Equity Compensation Plan Information

35



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##### Table of Contents



|                                                           |  |                      |            |                      |  |                         |      |                     |  |                      |         | 
|---------------------------------------------------------- |  | -------------------- | ---------- | -------------------- |  | ----------------------- | ---- | ------------------- |  | -------------------- | ------- | 
|                                                           |  |                      |            |                      |  |                         |      |                     |  | Number of securities
|                                                           |  |                      |            |                      |  |                         |      |                     |  | remaining available 
|                                                           |  | Number of securities |            |                      |  |                         |      | for future issuance
|                                                           |  | to be issued upon    |            | Weighted average     |  | under equity           
|                                                           |  | exercise of          |            | exercise price of    |  | compensation plans     
|                                                           |  | outstanding options, |            | outstanding options, |  | (excluding securities  
|                                                           |  | warrants and rights  |            | warrants and rights  |  | reflected in column (a)
|Plan category                                              |  | (a)                  |            | (b)                  |  | (c)                    
|                                                           |  |                      |            |                      |  |                        
|Equity compensation plans
approved by security holders     |  |                      | 4,249,739  |                      |  | $                       | 0.39 |                     |  |                      | 653,783 | 
|Equity compensation plans not
approved by security holders |  |                      | 24,477,724 |                      |  | $                       | 0.11 |                     |  | None                
|                                                           |  |                      |            |                      |  |                         |      |                     |  |                      |         | 
|Total                                                      |  |                      | 28,727,463 |                      |  | $                       | 0.15 |                     |  |                      | 653,783 | 
|                                                           |  |                      |            |                      |  |                         |      |                     |  |                      |         | 

Common shares issuable on the exercise of stock warrants have not been
approved by the security holders and, accordingly, have been segregated in the
above table.




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

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

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

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

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



| |  |  | 3,500,000 shares were released from escrow, and
| | - |  | -----------------------------------------------

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

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

In June 2000, we entered into a three-year, $80,000 secured promissory
note receivable with James T. Lunney, a previous Chairman, President and CEO.
The note bears interest at the rate of 6% with interest payments due
semi-annually and the principal due at the maturity of the note. Mr. Lunney
pledged 100,000 shares of Patriots common stock that he held on the date of
issuance as security for this note.

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

On June 10, 2002, we issued to Gloria Felcyn, Trustee of the Helmut Falk
Family Trust, an 8% Convertible Debenture with a principal balance of $100,000
due June 10, 2004. The initial exercise price was $0.08616 and is subject to a
downward revision if the price of our stock is lower on any three month
anniversary of the debenture or on the date that a statement registering the
resale of the common stock issuable upon conversion of the debenture becomes
effective. Also, in conjunction with the debenture, we issued a five year
warrant to purchase up to 1,334,757 shares of our common stock at an initial
exercise price of $0.08616 subject to reset provisions on each six month
anniversary of the issuance of the warrant. If the price of our common stock
is in excess of $0.20 per share, Ms. Felcyn has a two year option to purchase
up to an additional $100,000 of 8% Convertible Debentures on the same terms.




PART IV




Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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



| | 1. |  | Financial Statements. The following consolidated financial
statements and supplementary information of the Company and Report of
Independent Auditors are included in Part II of this Report:
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Report of Nation Smith Hermes
Diamond, Certified Public Accountants                                                                                                                          
|
| |    |  | Report of BDO Seidman, LLP,
Certified Public Accountants                                                                                                                                     
|
| |    |  | Consolidated Balance Sheets- As of May 31, 2002 and 2001                                                                                                                                     
|
| |    |  | Consolidated Statements of Operations- Years Ended May 31, 2002,
2001 and 2000                                                                                                               
|
| |    |  | Consolidated Statement of Stockholders Equity (Deficit)- Years
Ended May 31, 2002, 2001 and 2000                                                                                            
|
| |    |  | Consolidated Statements of Cash Flows- Years Ended May 31, 2002,
2001 and 2000                                                                                                               
|
| |    |  | Notes to Consolidated Financial Statements                                                                                                                                                   
|
| | 2. |  | Exhibits. The following Exhibits are filed as part of, or
incorporated by reference into, this Report:                                                                                       

|            |     |          |  |                                                                              |  |  |  | 
|----------- | --- | -------- |  | ---------------------------------------------------------------------------- |  |  |  | 
|Exhibit No. |     | Document |  | No.                                                                         
|            |     |          |  |                                                                             
|            | 2.0 |          |  | PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. |  |  |  | 

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|            |       |          |  |                                                                                                                                                                                                                                                  |  |  |    |  
|----------- | ----- | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | -
|Exhibit No. |       | Document |  | No.                                                                                                                                                                                                                                             
|            |       |          |  |                                                                                                                                                                                                                                                 
|            | 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                                                                                                                                                           |  |  | (1 | )
|            |       |          |  | Systems, incorporated by reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1
to Registration Statement on Form SB-2 dated April 29, 1996                                                                                                 |  |  |    |  
|            | 2.3   |          |  | Form of Exchange Offer dated
December 4, 1996 between the Company and certain 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 3.3 to Form 8-K dated
May 12, 1992                                                            |  |  | (1 | )
|            | 3.3.1 |          |  | Certificate of Amendment to the
Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on April 18, 1995, incorporated by reference to
Exhibit 3.3.1 to Form 10-KSB for the fiscal year ended May 31, 1995   |  |  | (1 | )
|            | 3.3.2 |          |  | Certificate of Amendment to the
Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on June 19,1997, incorporated by reference to
Exhibit 3.3.2 to Form 10-KSB for the fiscal year ended May 31, 1997     |  |  | (1 | )
|            | 3.3.3 |          |  | Certificate of Amendment to the Certificate of Incorporation of the Company, as filed
with the Delaware Secretary of State on April 28, 2000,
incorporated by reference to Exhibit 3.3.3 to Registration Statement on Form S-3 dated
May 5, 2000 |  |  | (1 | )
|            | 3.3.4 |          |  | Certificate of Amendment to the
Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on May 6, 2002, incorporated by reference to
Exhibit 3.3.4 to Registration Statement on Form S-3 dated June 27, 2002  |  |  | (1 | )

38



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|            |     |          |  |                                                                                                                                                                                                                                                                                                  |  |  |    |  
|----------- | --- | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | -
|Exhibit No. |     | Document |  | No.                                                                                                                                                                                                                                                                                             
|            |     |          |  |                                                                                                                                                                                                                                                                                                 
|            | 3.4 |          |  | Articles and Certificate of Merger of Patriot Financial Corporation into the Company                                                                                                                                                                                                             |  |  | (1 | )
|            |     |          |  | dated May 1, 1992, with Agreement and Plan of Merger attached thereto as Exhibit A,
incorporated by reference to Exhibit 3.4 to Form 8-K dated May 12, 1992                                                                                                                                      |  |  |    |  
|            | 3.5 |          |  | Certificate of Merger issued by the Delaware Secretary of State on May 8, 1992,                                                                                                                                                                                                                  |  |  | (1 | )
|            |     |          |  | incorporated by reference to Exhibit 3.5 to Form 8-K dated May 12, 1992                                                                                                                                                                                                                          |  |  |    |  
|            | 3.6 |          |  | Certificate of Merger issued by the Colorado Secretary of State on May 12, 1992,                                                                                                                                                                                                                 |  |  | (1 | )
|            |     |          |  | incorporated by reference to Exhibit 3.6 to Form 8-K dated May 12, 1992                                                                                                                                                                                                                          |  |  |    |  
|            | 3.7 |          |  | Bylaws of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K dated May                                                                                                                                                                                                            |  |  | (1 | )
|            |     |          |  | 12, 1992                                                                                                                                                                                                                                                                                         |  |  |    |  
|            | 4.0 |          |  | INSTRUMENTS ESTABLISHING RIGHTS OF SECURITY HOLDERS.                                                                                                                                                                                                                                             |  |  |    |  
|            | 4.1 |          |  | Specimen common stock certificate, incorporated by reference to Exhibit 4.1 Form 8-K                                                                                                                                                                                                             |  |  | (1 | )
|            |     |          |  | dated May 12, 1992                                                                                                                                                                                                                                                                               |  |  |    |  
|            | 4.2 |          |  | Form of Stock Purchase Warrant (Labway Corporation) dated February 29, 1996,                                                                                                                                                                                                                     |  |  | (1 | )
|            |     |          |  | exercisable to purchase 253,166 common shares at $1.58 per share until August 31,
1996, granted to investors in connection with an offering of securities made in
reliance upon Regulation S, incorporated by reference to Exhibit 4.2 to Form 10-QSB
for fiscal quarter ended February 29, 1996 |  |  |    |  
|            | 4.3 |          |  | Form of 6% Convertible Subordinated Promissory Note due September 30, 1998 aggregating                                                                                                                                                                                                           |  |  | (1 | )
|            |     |          |  | $1,500,000 to six investors incorporated by reference to Exhibit 4.3 to Form 10-QSB
for fiscal quarter ended August 31, 1996                                                                                                                                                                     |  |  |    |  
|            | 4.4 |          |  | Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999                                                                                                                                                                                                                     |  |  | (1 | )
|            |     |          |  | aggregating $2,000,000 to two investors incorporated by reference to Exhibit 4.4 to
Form 8-K dated June 16, 1997                                                                                                                                                                                 |  |  |    |  
|            | 4.5 |          |  | Form of Stock Purchase Warrant (CC Investments, LDC) dated June 2, 1997 exercisable to                                                                                                                                                                                                           |  |  | (1 | )
|            |     |          |  | purchase an aggregate of 400,000 common shares at $1.69125 per share until June 2,
2002, granted to two investors in connection with the offering of securities in
Exhibit 4.4 incorporated by reference to Exhibit 4.5 to Form 8-K dated June 16, 1997                                          |  |  |    |  
|            | 4.6 |          |  | Registration Rights Agreement dated June 2, 1997 by and among the Company and CC                                                                                                                                                                                                                 |  |  | (1 | )
|            |     |          |  | Investments, LDC and the Matthew Fund, N.V. related to the registration of the common
stock related to Exhibits 4.4 and 4.5 incorporated by reference to Exhibit 4.6 to Form
8-K dated June 16, 1997                                                                                             |  |  |    |  
|            | 4.7 |          |  | Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) dated June                                                                                                                                                                                                            |  |  | (1 | )
|            |     |          |  | 2, 1997 exercisable to purchase an aggregate of 211,733 common shares at $1.69125 per
share until June 2, 2002, granted to a group of investors in connection with the
offering of securities in Exhibit 4.4 incorporated by reference to Exhibit 4.7 to Form
8-K dated June 16, 1997            |  |  |    |  
|            | 4.8 |          |  | Registration Rights Agreement dated June 2, 1997 by and among the Company and Swartz                                                                                                                                                                                                             |  |  | (1 | )
|            |     |          |  | 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                                                                                                                                 |  |  |    |  

39



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|            |        |          |  |                                                                                                                                                                                                                                                                                                                        |  |  |    |  
|----------- | ------ | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | -
|Exhibit No. |        | Document |  | No.                                                                                                                                                                                                                                                                                                                   
|            |        |          |  |                                                                                                                                                                                                                                                                                                                       
|            | 4.9    |          |  | Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999                                                                                                                                                                                                                                           |  |  | (1 | )
|            |        |          |  | aggregating $1,000,000 to two investors incorporated by reference to Exhibit 4.9 to
Form 10-KSB for the fiscal year ended May 31, 1998                                                                                                                                                                                 |  |  |    |  
|            | 4.10   |          |  | Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24, 1997                                                                                                                                                                                                                                           |  |  | (1 | )
|            |        |          |  | exercisable to purchase an aggregate of 200,000 common shares at $1.50 per share until
June 2, 2002, granted to two investors in connection with the offering of securities
described in Exhibit 4.9 incorporated by reference to Exhibit 4.10 to Form 10-KSB for
the year ended May 31, 1998                          |  |  |    |  
|            | 4.11   |          |  | Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) dated                                                                                                                                                                                                                                       |  |  | (1 | )
|            |        |          |  | November 24, 1997 exercisable to purchase an aggregate of 105,867 common shares at
$1.50 per share until June 2, 2002, granted to a group of investors in connection with
the offering of securities described in Exhibit 4.9 incorporated by reference to
Exhibit 4.11 to Form 10-KSB for the year ended May 31, 1998 |  |  |    |  
|            | 4.12   |          |  | Form of Warrant to Purchase Common Stock (Investor Communications Group, Inc.) dated                                                                                                                                                                                                                                   |  |  | (1 | )
|            |        |          |  | June 16, 1997 exercisable to purchase an aggregate of 130,000 common shares at prices
ranging from $2.50 to $7.50 per share until June 15, 1999 incorporated by reference to
Exhibit 4.12 to Form 10-KSB for the year ended May 31, 1998                                                                               |  |  |    |  
|            | 4.13   |          |  | Warrant to Purchase Common Stock issued to Spellcaster Telecommunications, Inc. dated                                                                                                                                                                                                                                  |  |  | (1 | )
|            |        |          |  | April 28, 1998 exercisable to purchase an aggregate of 100,000 common shares at $1.25
per share until April 28, 2000 incorporated by reference to Exhibit 4.13 to Form
10-KSB for the year ended May 31, 1998                                                                                                          |  |  |    |  
|            | 4.14   |          |  | Investment agreement dated February 24, 1999 by and between the Company and Swartz                                                                                                                                                                                                                                     |  |  | (1 | )
|            |        |          |  | Private Equity, LLC for a maximum aggregate amount of $5,000,000 incorporated by
reference to Exhibit 4.14 to Form 10-QSB/A for the fiscal quarter ended November 30,
1998                                                                                                                                             |  |  |    |  
|            | 4.15   |          |  | Registration Rights Agreement dated February 24, 1999 by and between the Company and                                                                                                                                                                                                                                   |  |  | (1 | )
|            |        |          |  | Swartz Private Equity, LLC related to the registration of the common stock related to
Exhibit 4.14 incorporated by reference to Exhibit 4.15 to Form 10-QSB/A for the
fiscal quarter ended November 30, 1998                                                                                                           |  |  |    |  
|            | 4.16   |          |  | Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC) dated February                                                                                                                                                                                                                                   |  |  | (1 | )
|            |        |          |  | 24, 1999 exercisable to purchase common shares in connection with the offering of
securities in Exhibit 4.14 incorporated by reference to Exhibit 4.16 to Form 10-QSB/A
for the fiscal quarter ended November 30, 1998                                                                                                 |  |  |    |  
|            | 4.17   |          |  | Amended and Restated Investment Agreement dated July 12, 1999 by and between the                                                                                                                                                                                                                                       |  |  | (1 | )
|            |        |          |  | Company and Swartz Private Equity, LLC for a maximum aggregate amount of $5,000,000
incorporated by reference to Exhibit 4.17 to Pre-Effective Amendment No. 2 to
Registration Statement on Form SB-2 dated July 14, 1999                                                                                              |  |  |    |  
|            | 4.18   |          |  | Investment Agreement dated April 28, 2000 by and between the Company and Swartz                                                                                                                                                                                                                                        |  |  | (1 | )
|            |        |          |  | Private Equity, LLC for a maximum aggregate amount of $30,000,000 incorporated by
reference to Exhibit 4.18 to Registration Statement on Form S-3 dated May 5, 2000                                                                                                                                                    |  |  |    |  
|            | 4.18.1 |          |  | Waiver and Agreement dated September 24, 2001 amending the Investment Agreement dated                                                                                                                                                                                                                                  |  |  | (1 | )
|            |        |          |  | April 28, 2000 by and between the Company and Swartz Private Equity, LLC for a maximum
aggregate amount of $30,000,000                                                                                                                                                                                                 |  |  |    |  

40



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|            |      |          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |    |  
|----------- | ---- | -------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | -
|Exhibit No. |      | Document |  | No.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|            |      |          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |      |          |  | incorporated by reference to Exhibit 4.18.1 to
Registration Statement on Form
S-1 dated October 11, 2001                                                                                                                                                                                                                                                                                                                                     |  |  |    |  
|            | 4.19 |          |  | 2001 Stock Option Plan of the Company
dated February 21, 2001 incorporated by reference to Exhibit 4.19 to Registration Statement on Form S-8 dated March 26, 2001                                                                                                                                                                                                                                                                           |  |  | (1 | )
|            | 4.20 |          |  | Investment agreement dated
September 17, 2001 by and between the Company and Swartz Private Equity, LLC for a maximum aggregate amount of $25,000,000 incorporated by
reference to Exhibit 4.20 to Registration Statement
on Form S-1 dated October 11, 2001                                                                                                                                                                                 |  |  | (1 | )
|            | 4.21 |          |  | Registration Rights Agreement dated September 17, 2001 by and between the Company and
Swartz Private Equity, LLC related to the registration of the common stock related to
Exhibit 4.20 incorporated by reference to Exhibit 4.21
to Registration Statement on Form S-1 dated October 11, 2001                                                                                                                                              |  |  | (1 | )
|            | 4.22 |          |  | Warrant to Purchase Common Stock dated September 17, 2001 exercisable to purchase
common shares in connection with the Offering of securities in Exhibit 4.20
incorporated by reference to Exhibit 4.22 to Registration Statement on Form S-1 dated
October 11, 2001                                                                                                                                                                         |  |  | (1 | )
|            | 4.23 |          |  | Financial Consulting Services Agreement between the Company and M. Blaine Riley,
Randall Letcavage and Rosemary Nguyen incorporated by reference to
Exhibit 4.23 to Registration Statement on Form S-8 dated January 22, 2002                                                                                                                                                                                                                |  |  | (1 | )
|            | 4.24 |          |  | Form of 8% Convertible Debenture (Lincoln Ventures, LLC) due June 10, 2004
aggregating $1,000,000 to six investors incorporated by reference to
Exhibit 4.24 to Registration Statement on Form S-3 dated June 27, 2002                                                                                                                                                                                                                       |  |  | (1 | )
|            | 4.25 |          |  | Form of Stock Purchase Warrant (Lincoln Ventures, LLC) dated June 10, 2002 exercisable
to purchase an aggregate of 12,859,175 common shares at initial
exercise prices ranging form $0.08616 to $0.10289 per share until June 10, 2007, granted to six
investors in connection with the offering of securities described in Exhibit 4.24
incorporated by reference to Exhibit 4.25 to Registration Statement on Form S-3 dated
June 27, 2002 |  |  | (1 | )
|            | 4.26 |          |  | Form of Registration Rights Agreement (Lincoln Ventures, LLC) dated June 10, 2002 by
and among the Company and six investors related to the registration
of the common stock related to Exhibit 4.24 incorporated by reference to Exhibit 4.26 to
Registration Statement on Form S-3 dated June 27, 2002                                                                                                                                     |  |  | (1 | )
|            | 10.0 |          |  | MATERIAL CONTRACTS.                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  |    |  
|            | 10.1 |          |  | 1992 Incentive Stock Option Plan of the Company, incorporated by reference to Exhibit
10.1 to Form 8-K dated May 12, 1992                                                                                                                                                                                                                                                                                                                    |  |  | (1 | )

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|            |         |          |  |                                                                                                                                                                                                                  |  |  |    |  
|----------- | ------- | -------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  | -- | -
|Exhibit No. |         | Document |  | No.                                                                                                                                                                                                             
|            |         |          |  |                                                                                                                                                                                                                 
|            | 10.1.1  |          |  | Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995, incorporated by                                                                                                                            |  |  | (1 | )
|            |         |          |  | reference to Exhibit 10.1.1 to Form S-8 dated July 17, 1996                                                                                                                                                      |  |  |    |  
|            | 10.2    |          |  | 1992 Non-Statutory Stock Option Plan of the Company, incorporated by reference to                                                                                                                                |  |  | (1 | )
|            |         |          |  | Exhibit 10.2 to Form 8-K dated May 12, 1992                                                                                                                                                                      |  |  |    |  
|            | 10.2.1  |          |  | Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995 incorporated                                                                                                                            |  |  | (1 | )
|            |         |          |  | by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal year ended May 31, 1996                                                                                                                                 |  |  |    |  
|            | 10.3    |          |  | Lease Agreement between the Companys subsidiary Metacomp, Inc. and Clar-O-Wood                                                                                                                                  |  |  | (1 | )
|            |         |          |  | Partnership, a California limited partnership dated April 11, 1991 as amended November
11, 1992 and November 2, 1995 incorporated by reference to Exhibit 10.3 to Form 10-KSB
for fiscal year ended May 31, 1997 |  |  |    |  
|            | 10.4    |          |  | Stock Purchase Agreement dated November 29 and 30, 1995, between the Company and SEA,                                                                                                                            |  |  | (1 | )
|            |         |          |  | Ltd., incorporated by reference to Exhibit 10.4 to Form 8-K dated December 11, 1995                                                                                                                              |  |  |    |  
|            | 10.4.1  |          |  | Letter Amendment to Stock Purchase Agreement dated February 21, 1996, between the                                                                                                                                |  |  | (1 | )
|            |         |          |  | Company and SEA, Ltd., incorporated by reference to Exhibit 10.4.1 to Form 10-QSB for
fiscal quarter ended 2/29/96                                                                                               |  |  |    |  
|            | 10.5    |          |  | 1995 Employee Stock Compensation Plan of the Company, incorporated by reference to                                                                                                                               |  |  | (1 | )
|            |         |          |  | Exhibit 10.5 to Form 10-QSB for fiscal quarter ended 11/30/95                                                                                                                                                    |  |  |    |  
|            | 10.6    |          |  | Letter Stock and Warrant Agreement dated January 10, 1996 between the Company and                                                                                                                                |  |  | (1 | )
|            |         |          |  | Robert E. Crawford, Jr., incorporated by reference to Exhibit 10.6 to Form 10-QSB for
fiscal quarter ended February 29, 1996                                                                                     |  |  |    |  
|            | 10.7    |          |  | Non-Exclusive Manufacturing and Line of Credit Agreement dated February 28, 1996,                                                                                                                                |  |  | (1 | )
|            |         |          |  | between the Company and Labway Corporation, incorporated by reference to Exhibit 10.7
to Form 10-QSB for fiscal quarter ended February 29, 1996                                                                  |  |  |    |  
|            | 10.8    |          |  | Distribution and Representation Agreement dated February 28, 1996, between the Company                                                                                                                           |  |  | (1 | )
|            |         |          |  | and Innoware, Inc., incorporated by reference to Exhibit 10.8 to Form 10-QSB for
fiscal quarter ended February 29, 1996                                                                                          |  |  |    |  
|            | 10.9    |          |  | Employment Agreement dated November 20, 1995 between the Company and Elwood G. Norris,                                                                                                                           |  |  | (1 | )
|            |         |          |  | incorporated by reference to Exhibit 10.9 to Registration Statement on Form SB-2 dated
March 18, 1996                                                                                                            |  |  |    |  
|            | 10.9.1  |          |  | First Amendment to Employment Agreement dated May 17, 1996 between the Company and                                                                                                                               |  |  | (1 | )
|            |         |          |  | Elwood G. Norris, incorporated by reference to Exhibit 10.9.1 to Pre-Effective
Amendment No. 2 to Registration Statement on Form SB-2 dated May 23, 1996                                                         |  |  |    |  
|            | 10.10   |          |  | Employment Agreement dated November 20, 1995 between the Company and Robert Putnam,                                                                                                                              |  |  | (1 | )
|            |         |          |  | incorporated by reference to Exhibit 10.10 to Registration Statement on Form SB-2
dated March 18, 1996                                                                                                           |  |  |    |  
|            | 10.11   |          |  | Sales Contractual Agreement dated March 19, 1996 between the Company and Evolve                                                                                                                                  |  |  | (1 | )
|            |         |          |  | Software, Inc., incorporated by reference to Exhibit 10.11 to Pre-Effective Amendment
No. 1 to Registration Statement on Form SB-2 dated April 29, 1996                                                          |  |  |    |  
|            | 10.11.1 |          |  | Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve Software, Inc                                                                                                                             |  |  | (1 | )
|            |         |          |  | Providing for the Purchase of up to 50,000 Common Shares at                                                                                                                                                      |  |  |    |  

42



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

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|            |       |          |  |                                                                                                               |  |  |    |  
|----------- | ----- | -------- |  | ------------------------------------------------------------------------------------------------------------- |  |  | -- | -
|Exhibit No. |       | Document |  | No.                                                                                                          
|            |       |          |  |                                                                                                              
|            | 10.23 |          |  | Purchase Agreement dated June 29, 2000 between the Company and 4S 37/38, LLC                                  |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.23 to Form 10-KSB for the fiscal year ended
May 31, 2000              |  |  |    |  
|            | 10.24 |          |  | Employment Agreement dated October 2, 2000 between the Company and Miklos B. Korodi                           |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.24 to Form 10-QSB for the fiscal quarter ended
November 30, 2000      |  |  |    |  
|            | 10.25 |          |  | Employment Agreement dated December 1, 2000 between the Company and Richard G. Blum                           |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.25 to Form 10-QSB for the fiscal quarter ended
November 30, 2000      |  |  |    |  
|            | 10.26 |          |  | Employment Agreement dated January 29, 2001 between the Company and Serge J. Miller                           |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.26 to Form 10-KSB for the fiscal year ended
May 31, 2001              |  |  |    |  
|            | 10.27 |          |  | Lease Agreement dated February 23, 2001 between the Company and Arden Realty Finance                          |  |  | (1 | )
|            |       |          |  | IV, LLC incorporated by reference to Exhibit 10.27 to Form 10-KSB for the fiscal year
ended May 31, 2001      |  |  |    |  
|            | 10.28 |          |  | Employment Agreement dated January 1, 2001 between the Company and David H. Pohl                              |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.28 to Form 10-KSB for the fiscal year ended
May 31, 2001              |  |  |    |  
|            | 10.29 |          |  | Employment Agreement dated April 26, 2001 between the Company and David H. Pohl                               |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.29 to Form 10-KSB for the fiscal year ended
May 31, 2001              |  |  |    |  
|            | 10.30 |          |  | Employment Agreement dated November 17, 2001 between the Company and Lowell W                                 |  |  | (1 | )
|            |       |          |  | Giffhorn incorporated by reference to Exhibit 10.30 to Registration Statement on Form
S-3 dated June 27, 2002 |  |  |    |  
|            | 10.31 |          |  | Employment Agreement dated December 20, 2001 between the Company and Jayanta Maitra                           |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.31 to Registration Statement on Form S-3 dated
June 27, 2002          |  |  |    |  
|            | 10.32 |          |  | Consulting Agreement dated March 7, 2002 between the Company and SDMC, Inc                                    |  |  | (1 | )
|            |       |          |  | incorporated by reference to Exhibit 10.32 to Registration Statement on Form S-3 dated
June 27, 2002          |  |  |    |  
|            | 23.0  |          |  | CONSENTS OF EXPERTS AND COUNSEL                                                                               |  |  |    |  
|            | 23.1  |          |  | Consent of Nation Smith Hermes Diamond, LLP independent certified public accountants                          |  |  | (2 | )
|            | 23.2  |          |  | Consent of BDO Seidman, LLP independent certified public accountants                                          |  |  | (2 | )
|            | 99.0  |          |  | Additional Exhibits.                                                                                          |  |  |    |  
|            | 99.1  |          |  | Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by reference to                             |  |  | (1 | )
|            |       |          |  | Exhibit 28.2 to registration statement on Form SB-2, file no. 33-57858                                        |  |  |    |  
|            | 99.2  |          |  | Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by reference to                             |  |  | (1 | )
|            |       |          |  | Exhibit 28.3 to registration statement on Form SB-2, file no. 33-57858                                        |  |  |    |  

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|            |      |          |  |                                                                                                                                                                                                        |  |  |    |  
|----------- | ---- | -------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  |  | -- | -
|Exhibit No. |      | Document |  | No.                                                                                                                                                                                                   
|            |      |          |  |                                                                                                                                                                                                       
|            | 99.3 |          |  | Form of Incentive Stock Option Agreement to the Companys 1996 Stock Option Plan                                                                                                                       |  |  | (1 | )
|            |      |          |  | (individual agreements differ as to number of shares, dates, prices and vesting),
incorporated by reference to Pre-Effective Amendment No. 2 to Registration Statement
on Form SB-2 dated May 23, 1996 |  |  |    |  
|            | 99.4 |          |  | Form of NonQualified Stock Option Agreement to the Companys 1996 Stock Option Plan                                                                                                                    |  |  | (1 | )
|            |      |          |  | (individual agreement differ as to number of shares, date, prices and vesting),
incorporated by reference to Pre-Effective Amendment No. 2 to Registration Statement
on Form SB-2 dated May 23, 1996   |  |  |    |  
|            | 99.5 |          |  | Press Release of the Company dated November 4, 1996 incorporated by                                                                                                                                    |  |  | (1 | )
|            |      |          |  | reference to Exhibit 99.5 to Form 8-K dated January 9, 1997                                                                                                                                            |  |  |    |  
|            | 99.6 |          |  | Form of Incentive Stock Option Agreement to the Companys 2001 Stock Option Plan                                                                                                                       |  |  | (1 | )
|            |      |          |  | incorporated by reference to Exhibit 99.6 to Registration Statement on Form S-8 filed
March 26, 2001                                                                                                   |  |  |    |  
|            | 99.7 |          |  | Form of Non-Qualified Stock Option Agreement to the Companys 2001 Stock Option Plan                                                                                                                   |  |  | (1 | )
|            |      |          |  | incorporated by reference to Exhibit 99.7 to Registration Statement on Form S-8 filed
March 26, 2001                                                                                                   |  |  |    |  
|            | 99.8 |          |  | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley                                                                                                                 |  |  | (2 | )
|            |      |          |  | Act of 2002                                                                                                                                                                                            |  |  |    |  
|            | 99.9 |          |  | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley                                                                                                                 |  |  | (2 | )
|            |      |          |  | Act of 2002                                                                                                                                                                                            |  |  |    |  



---

|(1) |  | Previously filed in indicated registration statement or report.                              
|--- |  | ---------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Exhibit filed herewith this Annual Report on Form 10-K for the fiscal
year ended May 31, 2002



|(b) |  | Financial Statement Schedules
|--- |  | -----------------------------



| |  |  | The following financial statement schedule filed herein as a part of this
report at F-37                                                                                                   
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Schedule II- Valuation and Qualifying Accounts                                                                                                                                             
|
| |  |  | All other schedules have been omitted because the information required to
be set forth therein is not applicable or is shown in the Consolidated
Financial Statements or the Notes thereto.

(c)  Reports on Form 8-K  The Company did file a report on Form 8-K on May 24,
2002, amended on Form 8K/A on June 5, 2002, announcing a change in the
Companys certifying accountant.

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##### Table of Contents



Patriot Scientific Corporation

Index to Consolidated Financial Statements

|                                                                                                         |  |  |           | 
|-------------------------------------------------------------------------------------------------------- |  |  | --------- | 
|Report
of Nation, Smith, Hermes, Diamond, Independent Certified Public Accountants                       |  |  | F-2       | 
|Report
of BDO Seidman, LLP, Independent Certified Public Accountants                                     |  |  | F-3       | 
|Consolidated Balance Sheets as of May 31, 2002 and 2001                                                  |  |  | F-4       | 
|Consolidated Statements of Operations for the Years Ended May 31, 2002, 2001 and 2000                    |  |  | F-5       | 
|Consolidated Statement of Stockholders Equity (Deficit) for the Years Ended May 31, 2002, 2001 and 2000 |  |  | F-6       | 
|Consolidated Statements of Cash Flows for the Years Ended May 31, 2002, 2001 and 2000                    |  |  | F-7       | 
|Summary of Accounting Policies                                                                           |  |  | F-8-F-14  | 
|Notes to Consolidated Financial Statements                                                               |  |  | F-15-F-36 | 
|Schedule II- Valuation and Qualifying Accounts                                                           |  |  | F-37      | 

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##### Table of Contents



Report of Independent Certified Public Accountants

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

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

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

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

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

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

/s/ Nation Smith Hermes Diamond

San Diego, California

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

F-2



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##### Table of Contents



Report of Independent Certified Public Accountants

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

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

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

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

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

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

/s/ BDO Seidman, LLP

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

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##### Table of Contents



Patriot Scientific Corporation
Consolidated Balance Sheets

|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |             |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --------- | ----------- | - | - | --------- | ----------- | -
|May 31,                                                                         |                                                                                                                                                                         | 2002 |           | 2001       
|                                                                                |                                                                                                                                                                         |      |           |            
|ASSETS(Notes 5 and 6)                                                           |                                                                                                                                                                         |      |           |             |   |   |           |            
|Current assets:                                                                 |                                                                                                                                                                         |      |           |             |   |   |           |            
|                                                                                | Cash and cash equivalents                                                                                                                                               |      | $         | 88,108      |   |   | $         | 464,350     |  
|                                                                                | Accounts receivable, net of allowance
of $6,000 and $54,000 for uncollectible accounts                                                                                  |      |           | 4,797       |   |   |           | 188,982     |  
|                                                                                | Inventories (Note 2)                                                                                                                                                    |      |           |            |   |   |           | 223,393     |  
|                                                                                | Prepaid expenses                                                                                                                                                        |      |           | 35,749      |   |   |           | 73,185      |  
|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |            
|Total current assets                                                            |                                                                                                                                                                         |      | 128,654   |             |   |   | 949,910   |            
|Property and equipment,net (Note 3)                                             |                                                                                                                                                                         |      | 285,488   |             |   |   | 423,528   |            
|Other assets,net of accumulated amortization of $20,833 and $8,333              |                                                                                                                                                                         |      | 330,863   |             |   |   | 16,667    |            
|Patents and trademarks,net of accumulated amortization
of $400,158 and $337,363 |                                                                                                                                                                         |      | 189,521   |             |   |   | 153,588   |            
|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |            
|                                                                                |                                                                                                                                                                         | $    | 934,526   |             |   | $ | 1,543,693 |            
|
|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                  |                                                                                                                                                                         |      |           |             |   |   |           |            
|Current liabilities:                                                            |                                                                                                                                                                         |      |           |             |   |   |           |            
|                                                                                | Secured note payable, net of debt discount of $189,516 (Note 5)                                                                                                         |      | $         | 445,760     |   |   | $         |            |  
|                                                                                | Accounts payable                                                                                                                                                        |      |           | 385,255     |   |   |           | 434,838     |  
|                                                                                | Accrued liabilities                                                                                                                                                     |      |           | 211,291     |   |   |           | 186,467     |  
|                                                                                | Current portion of capital lease obligation                                                                                                                             |      |           | 5,116       |   |   |           |            |  
|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |            
|Total current liabilities                                                       |                                                                                                                                                                         |      | 1,047,422 |             |   |   | 621,305   |            
|8% Convertible Debentures,net of debt discount of $192,802 (Note 6)             |                                                                                                                                                                         |      | 315,198   |             |   |   |          |            
|Long term portion of capital lease obligation                                   |                                                                                                                                                                         |      | 16,731    |             |   |   |          |            
|Commitments and contingencies(Notes 1, 8, 12 and 13)                            |                                                                                                                                                                         |      |           |             |   |   |           |            
|Stockholders equity (deficit)(Notes 5, 6, 7, 8 and 9):                         |                                                                                                                                                                         |      |           |             |   |   |           |            
|                                                                                | Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding                                                                                       |      |           |            |   |   |           |            |  
|                                                                                | Common stock, $.00001 par value; 200,000,000 and 100,000,000
shares authorized: 81,465,757 and 57,535,411 issued and
outstanding at May 31, 2002 and 2001, respectively |      |           | 815         |   |   |           | 575         |  
|                                                                                | Additional paid-in capital                                                                                                                                              |      |           | 41,440,101  |   |   |           | 37,320,503  |  
|                                                                                | Accumulated deficit                                                                                                                                                     |      |           | (41,805,741 | ) |   |           | (36,318,690 | )
|                                                                                | Note receivable (Note 4)                                                                                                                                                |      |           | (80,000     | ) |   |           | (80,000     | )
|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |            
|Total stockholders equity (deficit)                                            |                                                                                                                                                                         |      | (444,825  | )           |   |   | 922,388   |            
|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |            
|                                                                                |                                                                                                                                                                         | $    | 934,526   |             |   | $ | 1,543,693 |            
|                                                                                |                                                                                                                                                                         |      |           |             |   |   |           |            

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

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##### Table of Contents



Patriot Scientific Corporation
Consolidated Statements of Operations

|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |            |  
|------------------------------------------------------------------------------- | ----------------------------------- | ---- | ---------- | ---------- | - | ---- | ---------- | --------- | - | - | ---------- | ---------- | -
|Years Ended May 31,                                                             |                                     | 2002 |            | 2001       |   | 2000
|                                                                                |                                     |      |            |            |   |     
|Net sales (Note 14):                                                            |                                     |      |            |            |   |      |            |           |   |   |            |           
|                                                                                | Product                             |      | $          | 358,809    |   |      | $          | 336,684   |   |   | $          | 553,181    |  
|                                                                                | Licenses and royalties              |      |            |           |   |      |            | 700       |   |   |            | 163,779    |  
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Net sales                                                                       |                                     |      | 358,809    |            |   |      | 337,384    |           |   |   | 716,960    |           
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Cost of sales:                                                                  |                                     |      |            |            |   |      |            |           |   |   |            |           
|                                                                                | Product costs                       |      |            | 244,547    |   |      |            | 444,320   |   |   |            | 455,008    |  
|                                                                                | Inventory obsolescence              |      |            | 149,433    |   |      |            | 100,000   |   |   |            | 270,000    |  
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Cost of sales                                                                   |                                     |      | 393,980    |            |   |      | 544,320    |           |   |   | 725,008    |           
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Gross loss                                                                      |                                     |      | (35,171    | )          |   |      | (206,936   | )         |   |   | (8,048     | )         
|Operating expenses:                                                             |                                     |      |            |            |   |      |            |           |   |   |            |           
|                                                                                | Research and development            |      |            | 1,372,421  |   |      |            | 2,218,433 |   |   |            | 3,170,166  |  
|                                                                                | Selling, general and administrative |      |            | 2,708,579  |   |      |            | 2,588,579 |   |   |            | 3,501,128  |  
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Operating expenses                                                              |                                     |      | 4,081,000  |            |   |      | 4,807,012  |           |   |   | 6,671,294  |           
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Operating loss                                                                  |                                     |      | (4,116,171 | )          |   |      | (5,013,948 | )         |   |   | (6,679,342 | )         
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Other income (expenses):                                                        |                                     |      |            |            |   |      |            |           |   |   |            |           
|                                                                                | Gain on sale of technology          |      |            |           |   |      |            |          |   |   |            | 250,000    |  
|                                                                                | Interest income                     |      |            | 2,662      |   |      |            | 48,329    |   |   |            | 28,014     |  
|                                                                                | Interest expense (Notes 5, 6 and 7) |      |            | (1,373,542 | ) |      |            | (3,284    | ) |   |            | (1,087,380 | )
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Other income (expenses)                                                         |                                     |      | (1,370,880 | )          |   |      | 45,045     |           |   |   | (809,366   | )         
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Net loss                                                                        |                                     | $    | (5,487,051 | )          |   | $    | (4,968,903 | )         |   | $ | (7,488,708 | )         
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Basic and diluted loss
per common share (Note 9)                                |                                     | $    | (0.08      | )          |   | $    | (0.09      | )         |   | $ | (0.17      | )         
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           
|Weighted average number of
common shares outstanding
during the period (Note 9) |                                     |      | 66,810,028 |            |   |      | 53,433,788 |           |   |   | 44,156,418 |           
|                                                                                |                                     |      |            |            |   |      |            |           |   |   |            |           

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

F-5



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##### Table of Contents



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

|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  
|--------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | --------------- | --- | ------------- |  | ---------------- | ---------- | --- |  | - | ----------- | - |  | - | ---------- | -
|Years Ended May 31, 2002, 2001 and 2000                                           |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  
|                                                                                  |  | Common Stock |            |            |  |                 |     |              
|                                                                                  |  |              |            | Additional |  | Accumulated     |     | Stockholders'
|                                                                                  |  | Shares       |            | Amount     |  | Paid-in Capital |     | Deficit       |  | Equity (Deficit)
|                                                                                  |  |              |            |            |  |                 |     |               |  |                 
|Balance, June 1, 1999                                                             |  |              | 39,563,915 |            |  |                 | 396 |               |  |                  | 22,879,449 |     |  |   | (23,861,079 | ) |  |   | (981,234   | )
|Issuance of common stock at $.25 to $.98
per share (Note 7)                       |  |              | 7,014,796  |            |  |                 | 70  |               |  |                  | 4,999,930  |     |  |   |            |   |  |   | 5,000,000  |  
|Exercise of common stock warrants and
options at $.18 to $1.46 per share (Note 8) |  |              | 3,750,759  |            |  |                 | 37  |               |  |                  | 923,913    |     |  |   |            |   |  |   | 923,950    |  
|Reclassification of stock subject to
rescission at $.18 to $.20 per share         |  |              | 400,000    |            |  |                 | 4   |               |  |                  | 74,996     |     |  |   |            |   |  |   | 75,000     |  
|Non-cash compensation expense (Note 8)                                            |  |              |           |            |  |                 |    |               |  |                  | 3,739,267  |     |  |   |            |   |  |   | 3,739,267  |  
|Conversion of notes payable plus
interest at $.29 per share (Note 5)              |  |              | 397,205    |            |  |                 | 4   |               |  |                  | 116,178    |     |  |   |            |   |  |   | 116,182    |  
|Value of warrants issued (Note 8)                                                 |  |              |           |            |  |                 |    |               |  |                  | 739,037    |     |  |   |            |   |  |   | 739,037    |  
|Non-cash interest on conversion of
notes payable (Note 5)                         |  |              |           |            |  |                 |    |               |  |                  | 86,388     |     |  |   |            |   |  |   | 86,388     |  
|Net loss                                                                          |  |              |           |            |  |                 |    |               |  |                  |           |     |  |   | (7,488,708  | ) |  |   | (7,488,708 | )
|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  
|Balance, May 31, 2000                                                             |  |              | 51,126,675 |            |  |                 | 511 |               |  |                  | 33,559,158 |     |  |   | (31,349,787 | ) |  |   | 2,209,882  |  
|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  
|Issuance of common stock at $.43 to $1.05
per share (Note 8)                      |  |              | 5,411,320  |            |  |                 | 54  |               |  |                  | 3,342,143  |     |  |   |            |   |  |   | 3,342,197  |  
|Exercise of common stock warrants and
options at $.25 to $.32 per share (Note 8)  |  |              | 997,416    |            |  |                 | 10  |               |  |                  | 289,063    |     |  |   |            |   |  |   | 289,073    |  
|Issuance of options for services                                                  |  |              |           |            |  |                 |    |               |  |                  | 130,139    |     |  |   |            |   |  |   | 130,139    |  
|Issuance of note receivable (Note 4)                                              |  |              |           |            |  |                 |    |               |  |                  | (80,000    | )   |  |   |            |   |  |   | (80,000    | )
|Net loss                                                                          |  |              |           |            |  |                 |    |               |  |                  |           |     |  |   | (4,968,903  | ) |  |   | (4,968,903 | )
|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  
|Balance, May 31, 2001                                                             |  |              | 57,535,411 |            |  | $               | 575 |               |  | $                | 37,240,503 |     |  | $ | (36,318,690 | ) |  | $ | 922,388    |  
|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  
|Issuance of common stock at $.07 to $.30
per share (Notes 7 and 8)                |  |              | 4,888,680  |            |  |                 | 49  |               |  |                  | 879,556    |     |  |   |            |   |  |   | 879,605    |  
|Exercise of common stock warrants and
options at $.25 to $.32 per share (Note 8)  |  |              | 241,666    |            |  |                 | 3   |               |  |                  | 73,830     |     |  |   |            |   |  |   | 73,833     |  
|Issuance of options for services                                                  |  |              |           |            |  |                 |    |               |  |                  | 106,926    |     |  |   |            |   |  |   | 106,926    |  
|Issuance of common stock for services
at $.09 per share                           |  |              | 2,200,000  |            |  |                 | 22  |               |  |                  | 197,978    |     |  |   |            |   |  |   | 198,000    |  
|Conversion of notes payable
at $.07 to $.09 per share (Note 5)                    |  |              | 16,600,000 |            |  |                 | 166 |               |  |                  | 1,552,885  |     |  |   |            |   |  |   | 1,553,051  |  
|Value of warrants issued                                                          |  |              |           |            |  |                 |    |               |  |                  | 1,308,423  |     |  |   |            |   |  |   | 1,308,423  |  
|Net loss                                                                          |  |              |           |            |  |                 |    |               |  |                  |           |     |  |   | (5,487,051  | ) |  |   | (5,487,051 | )
|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  
|Balance, May 31, 2002                                                             |  |              | 81,465,757 |            |  | $               | 815 |               |  | $                | 41,360,101 | (1) |  | $ | (41,805,741 | ) |  | $ | (444,825   | )
|                                                                                  |  |              |            |            |  |                 |     |               |  |                  |            |     |  |   |             |   |  |   |            |  

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



---

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

F-6



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##### Table of Contents



Patriot Scientific Corporation
Consolidated Statements of Cash Flows

|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |            |           |          |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------- | ---------- | --------- | ------- | ---------- | ---------- | ------- | -------- | ---------- | ---------- | --------- | -------- | -
|Increase (Decrease) in Cash and Cash Equivalents     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Years Ended May 31,                                  |                                                                                       | 2002                                                                                     |                                       | 2001       |           | 2000   
|                                                     |                                                                                       |                                                                                          |                                       |            |           |        
|Operating activities:                                |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|                                                     | Net loss                                                                              |                                                                                          | $                                     | (5,487,051 | )         |         | $          | (4,968,903 | )       |          | $          | (7,488,708 | )        
|                                                     | Adjustments to reconcile net loss
to cash used in operating activities:               |                                                                                          |                                       |            |           |         |            |            |         |          |            |            |          
|                                                     |                                                                                       | Amortization and depreciation                                                            |                                       |            | 285,759   |         |            |            | 260,316 |          |            |            | 367,395   |         
|                                                     |                                                                                       | Provision for doubtful accounts                                                          |                                       |            | 76,000    |         |            |            | 49,000  |          |            |            | 41,919    |         
|                                                     |                                                                                       | Provision for inventory obsolescence                                                     |                                       |            | 149,433   |         |            |            | 100,000 |          |            |            | 270,000   |         
|                                                     |                                                                                       | Common stock, options and warrants issued for
services                                   |                                       |            | 99,000    |         |            |            | 119,565 |          |            |            |          |         
|                                                     |                                                                                       | Non -cash interest expense related to convertible
debentures, notes payable and warrants |                                       |            | 1,324,431 |         |            |            |        |          |            |            | 995,651   |         
|                                                     |                                                                                       | Gain on sale of technology                                                               |                                       |            |          |         |            |            |        |          |            |            | (250,000  | )       
|                                                     |                                                                                       | Non -cash compensation expense                                                           |                                       |            |          |         |            |            |        |          |            |            | 3,739,267 |         
|                                                     |                                                                                       | Changes in:                                                                              |                                       |            |           |         |            |            |         |          |            |            |           |         
|                                                     |                                                                                       |                                                                                          | Accounts receivable                   |            |           | (45,973 | )          |            |         | (242,405 | )          |            |           | (159,709 | )
|                                                     |                                                                                       |                                                                                          | Inventories                           |            |           | 73,960  |            |            |         | (252,229 | )          |            |           | (91,331  | )
|                                                     |                                                                                       |                                                                                          | Prepaid and other assets              |            |           | (83,334 | )          |            |         | (2,563   | )          |            |           | 75,150   |  
|                                                     |                                                                                       |                                                                                          | Accounts payable and accrued expenses |            |           | (24,759 | )          |            |         | 98,039   |            |            |           | (982,684 | )
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Net cash used in operating activities                |                                                                                       |                                                                                          | (3,632,534                            | )          |           |         | (4,839,180 | )          |         |          | (3,483,050 | )         
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Investing activities:                                |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|                                                     | Note receivable (Note 4)                                                              |                                                                                          |                                       |           |           |         |            | (80,000    | )       |          |            |           |          
|                                                     | Web site development costs                                                            |                                                                                          |                                       |           |           |         |            | (25,000    | )       |          |            |           |          
|                                                     | Purchase of property, equipment and patents, net                                      |                                                                                          |                                       | (146,156   | )         |         |            | (388,557   | )       |          |            | (169,116   | )        
|                                                     | Proceeds from sale of technology                                                      |                                                                                          |                                       |           |           |         |            |           |         |          |            | 250,000    |          
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Net cash (used in) provided by investing activities  |                                                                                       |                                                                                          | (146,156                              | )          |           |         | (493,557   | )          |         |          | 80,884     |           
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Financing activities:                                |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|                                                     | Proceeds from issuance of secured note payable                                        |                                                                                          |                                       | 1,790,000  |           |         |            |           |         |          |            | 410,000    |          
|                                                     | Payments for capital lease obligations                                                |                                                                                          |                                       | (3,148     | )         |         |            |           |         |          |            |           |          
|                                                     | Proceeds from issuance of convertible debentures                                      |                                                                                          |                                       | 508,000    |           |         |            |           |         |          |            |           |          
|                                                     | Principal payments on notes payable and
long-term debt                                |                                                                                          |                                       |           |           |         |            |           |         |          |            | (720,355   | )        
|                                                     | Proceeds from issuance of common stock                                                |                                                                                          |                                       | 879,605    |           |         |            | 3,342,197  |         |          |            | 5,000,000  |          
|                                                     | Proceeds from exercise of common stock warrants
and options                           |                                                                                          |                                       | 73,833     |           |         |            | 289,073    |         |          |            | 634,950    |          
|                                                     | Proceeds from sale of accounts receivable                                             |                                                                                          |                                       | 154,158    |           |         |            | 65,575     |         |          |            | 142,000    |          
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Net cash provided by financing activities            |                                                                                       |                                                                                          | 3,402,448                             |            |           |         | 3,696,845  |            |         |          | 5,466,595  |           
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Net
(decrease) increase in cash and cash equivalents |                                                                                       |                                                                                          | (376,242                              | )          |           |         | (1,635,892 | )          |         |          | 2,064,429  |           
|Cash and cash equivalents,beginning of year          |                                                                                       |                                                                                          | 464,350                               |            |           |         | 2,100,242  |            |         |          | 35,813     |           
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Cash and cash equivalents,end of year                |                                                                                       | $                                                                                        | 88,108                                |            |           | $       | 464,350    |            |         | $        | 2,100,242  |           
|                                                     |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|Supplemental Disclosure of Cash Flow Information:    |                                                                                       |                                                                                          |                                       |            |           |         |            |            |         |          |            |           
|                                                     | Convertible debentures, notes payable and accrued
interest exchanged for common stock |                                                                                          | $                                     | 1,154,725  |           |         | $          |           |         |          | $          | 405,182    |          
|                                                     | Cash payments for interest                                                            |                                                                                          |                                       | 19,719     |           |         |            |           |         |          |            | 102,137    |          
|                                                     | Common stock, warrants and options issued
for prepaid services                        |                                                                                          |                                       | 315,500    |           |         |            | 10,574     |         |          |            |           |          
|                                                     | Write-off of inventory                                                                |                                                                                          |                                       | 38,052     |           |         |            | 177,000    |         |          |            | 347,000    |          
|                                                     | Capital lease obligation                                                              |                                                                                          |                                       | 24,996     |           |         |            |           |         |          |            |           |          
|                                                     | Debt discount                                                                         |                                                                                          |                                       | 1,308,423  |           |         |            |           |         |          |            |           |          

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

F-7



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##### Table of Contents



Patriot Scientific Corporation
Summary of Accounting Policies

Organization and Business

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

Basis of Presentation and Consolidation

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

Reclassifications

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

Financial Instruments and Concentrations of Credit Risk

The Companys financial instruments that are exposed to concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable.

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

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

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

F-8



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##### Table of Contents



Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

Inventories

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

Property, Equipment and Depreciation

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

Patents and Trademarks

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

Revenue Recognition

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

F-9



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##### Table of Contents



Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

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

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

Research and Development Costs

Research and development costs are expensed as incurred.

Advertising

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

Income Taxes

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

Net Loss Per Share

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

Use of Estimates

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

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

F-10



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##### Table of Contents



Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

Sale of Accounts Receivable

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

Stock Options

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

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

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

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Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

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

Recent Accounting Pronouncements

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

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

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

Our previous business combinations were accounted for using the
pooling-of-interests method. The pooling-of-interests method does not result in
the recognition of acquired goodwill or other intangible assets. As a result,
the adoption of SFAS No. 141 and No. 142 will not affect the results of past
acquisition transactions. However, all future business combinations will be
accounted for

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Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

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

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

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

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

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

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Patriot Scientific Corporation
Summary of Accounting Policies (Continued)

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements

1. Continued Existence and Managements Plan

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

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

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



| |  |  | the additional funds received subsequent to May 31, 2002, related to
the convertible debentures of $492,000;
| | - |  | ------------------------------------------------------------------------------------------------------------
|
| |  |  | optional amounts which may received under the convertible debentures
of $1,000,000;                         

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)



| |  |  | additional funds under the $25 million equity line of credit if we
are successful in registering additional shares of common stock,
limitations based on trading volume and market price of the common stock
allow adequate funding, and such available funding exceeds the remaining
balance of the note payable to Swartz;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | proceeds from the exercise of outstanding stock options and warrants; and                                                                                                                                                                                                                                                   
|
| |  |  | additional debt and/or equity financings.                                                                                                                                                                                                                                                                                   

In addition, we have formulated additional cost reduction plans which can be
implemented if the required funds are not obtainable. We also have remaining a
$400,000 accounts receivable factoring agreement with our bank; however, we
have no eligible accounts receivable to factor as of May 31, 2002.

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

|                |                                            |                                                                                     |                                          |           |           |           | 
|--------------- | ------------------------------------------ | ----------------------------------------------------------------------------------- | ---------------------------------------- | --------- | --------- | --------- | 
|Cash available: |                                            |                                                                                     |                                          |          
|                | Cash available at May 31, 2002             |                                                                                     | $                                        | 88,108    |          
|                | Subsequent advances                        |                                                                                     |                                          |           |          
|                |                                            | Additional amounts under convertible debentures
received subsequent to May 31, 2002 |                                          |           | 492,000   |          
|                |                                            | Optional amounts under convertible
debentures                                       |                                          |           | 1,000,000 |          
|                |                                            |                                                                                     |                                          |          
|                |                                            |                                                                                     | Available cash under existing agreements |           |           | 1,580,108 | 
|                |                                            |                                                                                     |                                          |          
|Cash needs:     |                                            |                                                                                     |                                          |          
|                | Estimated needs                            |                                                                                     |                                          | 2,400,000 |          
|                | Note payable to Swartz at November 5, 2002 |                                                                                     |                                          | 635,276   |          
|                |                                            |                                                                                     |                                          |          
|                |                                            |                                                                                     | Total                                    |           |           | 3,035,276 | 
|                |                                            |                                                                                     | Required funds from external sources     |           | $         | 1,455,168 | 
|                |                                            |                                                                                     |                                          |          

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)



|2. |  | Inventories    Inventories consisted of the following:
|-- |  | ------------------------------------------------------

|                         |  |         |          |      |  |   |          |  
|------------------------ |  | ------- | -------- | ---- |  | - | -------- | -
|                         |  | May 31,
|                         |  |        
|                         |  | 2002    |          | 2001
|                         |  |         |          |     
|Component parts          |  | $       | 301,548  |      |  | $ | 343,430  |  
|Work in process          |  |         |         |      |  |   | 20,000   |  
|Finished goods           |  |         | 71,833   |      |  |   | 121,963  |  
|                         |  |         |          |      |  |   |          |  
|                         |  |         | 373,381  |      |  |   | 485,393  |  
|Reserve for obsolescence |  |         | (373,381 | )    |  |   | (262,000 | )
|                         |  |         |          |      |  |   |          |  
|                         |  | $       |         |      |  | $ | 223,393  |  
|                         |  |         |          |      |  |   |          |  



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

|                                                                                                         |  |         |           |      |  |   |           | 
|-------------------------------------------------------------------------------------------------------- |  | ------- | --------- | ---- |  | - | --------- | 
|                                                                                                         |  | May 31,
|                                                                                                         |  |        
|                                                                                                         |  | 2002    |           | 2001
|                                                                                                         |  |         |           |     
|Computer equipment and software                                                                          |  | $       | 1,660,707 |      |  | $ | 1,593,907 | 
|Furniture and fixtures                                                                                   |  |         | 499,274   |      |  |   | 493,649   | 
|Laboratory equipment                                                                                     |  |         | 205,594   |      |  |   | 205,594   | 
|                                                                                                         |  |         |           |      |  |   |           | 
|                                                                                                         |  |         | 2,365,575 |      |  |   | 2,293,150 | 
|Less accumulated depreciation and amortization                                                           |  |         | 2,080,087 |      |  |   | 1,869,622 | 
|                                                                                                         |  |         |           |      |  |   |           | 
|Net property and equipment                                                                               |  | $       | 285,488   |      |  | $ | 423,528   | 
|                                                                                                         |  |         |           |      |  |   |           | 
|Depreciation expense was $211,850, $186,621
and $283,952 for the years
ended May 31, 2002, 2001 and 2000 |  |         |           |      |  |   |           | 



|4. |  | Note Receivable
|-- |  | ---------------

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)



|5. |  | Secured Note Payable
|-- |  | --------------------

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

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

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

The note is secured by our assets.

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

|                                                              |                             |  |  |           |   |   |           |          |  
|------------------------------------------------------------- | --------------------------- |  |  | --------- | - | - | --------- | -------- | -
|Advances against the note                                     |                             |  |  |           |   | $ | 1,790,000 |         
|                                                              |                             |  |  |           |   |   |           |         
|Less amount applied against $30 million equity line of credit |                             |  |  |           |   |   | (227,800  | )       
|Less
amount applied against $25 million equity line of credit |                             |  |  |           |   |   | (926,924  | )       
|Less debt discount                                            |                             |  |  |           |   |   |           |         
|                                                              | Total                       |  |  | 1,107,238 |   |   |           |          |  
|                                                              | Amount amortized to expense |  |  | (917,722  | ) |   |           | (189,516 | )
|                                                              |                             |  |  |           |   |   |           |         
|Note payable at May 31, 2002                                  |                             |  |  |           |   | $ | 445,760   |         
|                                                              |                             |  |  |           |   |   |           |         

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

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

6. 8% Convertible Debentures

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

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

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

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

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

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

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

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

The convertible debenture is secured by our assets.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

7. Investment Agreements

$5 Million Equity Line of Credit Agreement

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

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

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

$30 Million Equity Line of Credit Agreement

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

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

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

On September 24, 2001, we entered into a waiver and agreement with Swartz
whereby Swartz was able to advance us $227,800 prior to the close of the final
put under the $30 million equity line of credit. The waiver and agreement
extended the time of the put beyond twenty days and redefined the price of the
put to be the lesser of the factor of (a) the volume weighted average price
per share, as defined by Bloomberg L.P., for each day of the put
multiplied by .70 or (b) the volume weighted average price per share minus $0.05 multiplied
by 20% of the acceptable daily volume as defined in

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

the waiver. At the discretion of Swartz the 20% daily volume limitation could
be increased up to 30% of the daily volume. In addition, the waiver included
the issuance of a purchase warrant to
purchase 2,125,000 shares of common stock at an initial exercise price of
$0.0911. The purchase warrant shares were issued to Swartz as restricted
shares subject to piggyback registration rights and are subject to repricings
on each six month anniversary if 110% of the lowest closing bid price for the
five days previous to the anniversary date is less than the initial or
subsequent reset exercise prices. See Note 8 for further information on the
warrants.

$25 Million Equity Line of Credit Agreement

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

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

We issued to Swartz a commitment warrant to purchase up to 900,000 shares of
our common stock concurrent with the execution of the investment agreement.
This warrant is exercisable through
September 17, 2006 at an initial exercise price of $0.22. The commitment
warrant exercise price is subject to being reset on each six month anniversary
of its issuance.

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



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

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



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

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

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

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

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

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

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

8. Stockholders Equity (Deficit)

Private Offerings and Warrants

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

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

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

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

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

1992 Incentive Stock Option Plan (ISO)

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

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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

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

1996 Stock Option Plan

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

2001 Stock Option Plan

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

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

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

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

|                                             |  |      |            |      |  |      |            |   |  |   |            |  
|-------------------------------------------- |  | ---- | ---------- | ---- |  | ---- | ---------- | - |  | - | ---------- | -
|                                             |  | 2002 |            | 2001 |  | 2000
|                                             |  |      |            |      |  |     
|As reported
Net loss                         |  | $    | (5,487,051 | )    |  | $    | (4,968,903 | ) |  | $ | (7,488,708 | )
|                                             |  |      |            |      |  |      |            |   |  |   |            |  
|Pro forma
Net loss                           |  | $    | (6,054,061 | )    |  | $    | (5,348,529 | ) |  | $ | (7,492,658 | )
|                                             |  |      |            |      |  |      |            |   |  |   |            |  
|As reported per share
Basic and diluted loss |  | $    | (0.08      | )    |  | $    | (0.09      | ) |  | $ | (0.17      | )
|                                             |  |      |            |      |  |      |            |   |  |   |            |  
|Pro forma per share
Basic and diluted loss   |  | $    | (0.09      | )    |  | $    | (0.10      | ) |  | $ | (0.17      | )
|                                             |  |      |            |      |  |      |            |   |  |   |            |  

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |      | 
|---------------------------------------------------------------------------------------------- | --------- |  | --------- | ---------- | -------- | - | -------- | ---- | ----- |  | ---------- | ---------- | -------- | - | ---- | ---- | 
|                                                                                               |           |  | Options   |            | Warrants
|                                                                                               |           |  |           |            |         
|                                                                                               |           |  |           |            |          |   | Weighted |      |       |  |            |            | Weighted
|                                                                                               |           |  |           |            |          |   | Average  |      |       |  |            |            | Average 
|                                                                                               |           |  |           |            |          |   | Exercise |      |       |  |            |            | Exercise
|                                                                                               |           |  | Shares    |            | Price    |   | Shares   |      | Price
|                                                                                               |           |  |           |            |          |   |          |      |      
|Outstanding, June 1, 1999                                                                      |           |  | 3,723,444 |            |          | $ | 0.83     |      |       |  | 2,141,062  |            |          | $ | 0.36 |     
|                                                                                               | Granted   |  |           | 2,856,000  |          |   |          | 0.32 |       |  |            | 4,834,009  |          |   |      | 0.40 | 
|                                                                                               | Cancelled |  |           | (3,516,251 | )        |   |          | 0.84 |       |  |            | (100,000   | )        |   |      | 1.25 | 
|                                                                                               | Exercised |  |           | (1,631,869 | )        |   |          | 0.37 |       |  |            | (2,118,890 | )        |   |      | 0.31 | 
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|Outstanding, May 31, 2000                                                                      |           |  | 1,431,324 |            |          |   | 0.38     |      |       |  | 4,756,181  |            |          |   | 0.40 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|                                                                                               | Granted   |  |           | 2,092,500  |          |   |          | 1.16 |       |  |            | 836,698    |          |   |      | 0.74 | 
|                                                                                               | Cancelled |  |           | (580,000   | )        |   |          | 0.72 |       |  |            |           |          |   |      |     | 
|                                                                                               | Exercised |  |           | (366,000   | )        |   |          | 0.32 |       |  |            | (631,416   | )        |   |      | 0.27 | 
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|Outstanding, May 31, 2001                                                                      |           |  | 2,577,824 |            |          | $ | 0.92     |      |       |  | 4,961,463  |            |          | $ | 0.42 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|                                                                                               | Granted   |  |           | 4,145,000  |          |   |          | 0.21 |       |  |            | 23,197,201 |          |   |      | 0.09 | 
|                                                                                               | Cancelled |  |           | (2,281,419 | )        |   |          | 0.67 |       |  |            | (3,630,940 | )        |   |      | 0.10 | 
|                                                                                               | Exercised |  |           | (191,666   | )        |   |          | 0.32 |       |  |            | (50,000    | )        |   |      | 0.25 | 
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|Outstanding, May 31, 2002                                                                      |           |  | 4,249,739 |            |          | $ | 0.39     |      |       |  | 24,477,724 |            |          | $ | 0.11 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|Exercisable, May 31, 2000                                                                      |           |  | 851,824   |            |          | $ | 0.32     |      |       |  | 4,756,181  |            |          | $ | 0.40 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|Exercisable, May 31, 2001                                                                      |           |  | 1,200,158 |            |          | $ | 0.68     |      |       |  | 4,961,463  |            |          | $ | 0.42 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|Exercisable, May 31, 2002                                                                      |           |  | 2,418,072 |            |          | $ | 0.48     |      |       |  | 24,477,724 |            |          | $ | 0.11 |     
|                                                                                               |           |  |           |            |          |   |          |      |       |  |            |            |          |   |      |     
|Weighted average fair value of options and warrants
granted during the year ended May 31, 2000 |           |  |           |            |          | $ | 0.22     |      |       |  |            |            |          | $ | 0.68 |     
|Weighted average fair value of options and warrants
granted during the year ended May 31, 2001 |           |  |           |            |          | $ | 0.86     |      |       |  |            |            |          | $ | 0.44 |     
|Weighted average fair value of options and warrants
granted during the year ended May 31, 2002 |           |  |           |            |          | $ | 0.07     |      |       |  |            |            |          | $ | 0.11 |     

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

|             |  |             |            |             |  |           |      |             |  |          |      |  |  |          |            |  |  |   |      | 
|------------ |  | ----------- | ---------- | ----------- |  | --------- | ---- | ----------- |  | -------- | ---- |  |  | -------- | ---------- |  |  | - | ---- | 
|             |  | Outstanding |            | Exercisable
|             |  |             |            |            
|             |  |             |            |             |  | Weighted  |      |             |  |          |      |  |  |          |            |  |  |  
|             |  |             |            |             |  | Average   |      | Weighted    |  |          |      |  |  | Weighted
|Range of     |  |             |            |             |  | Remaining |      | Average     |  |          |      |  |  | Average 
|Exercise     |  | Number      |            | Contractual |  | Exercise  |      | Number      |  | Exercise
|Prices       |  | Outstanding |            | Life        |  | Price     |      | Exercisable |  | Price   
|             |  |             |            |             |  |           |      |             |  |         
|Options      |  |             |            |             |  |           |      |             |  |          |      |  |  |          |            |  |  |   |      | 
|$0.09-0.11   |  |             | 2,600,000  |             |  |           | 4.50 |             |  | $        | 0.10 |  |  |          | 1,200,000  |  |  | $ | 0.10 | 
|0.1275-.032  |  |             | 461,000    |             |  |           | 3.64 |             |  |          | 0.18 |  |  |          | 311,000    |  |  |   | 0.21 | 
|0.60-0.69    |  |             | 320,000    |             |  |           | 1.44 |             |  |          | 0.67 |  |  |          | 300,000    |  |  |   | 0.68 | 
|1.16-1.20    |  |             | 435,000    |             |  |           | 2.48 |             |  |          | 1.18 |  |  |          | 255,000    |  |  |   | 1.19 | 
|1.325-1.615  |  |             | 433,739    |             |  |           | 2.72 |             |  |          | 1.33 |  |  |          | 352,072    |  |  |   | 1.33 | 
|             |  |             |            |             |  |           |      |             |  |          |      |  |  |          |            |  |  |   |      | 
|$0.09-1.615  |  |             | 4,249,739  |             |  |           | 3.79 |             |  | $        | 0.39 |  |  |          | 2,418,072  |  |  | $ | 0.48 | 
|            
|Warrants     |  |             |            |             |  |           |      |             |  |          |      |  |  |          |            |  |  |   |      | 
|$0.048-0.099 |  |             | 16,769,358 |             |  |           | 4.45 |             |  | $        | 0.08 |  |  |          | 16,769,358 |  |  | $ | 0.08 | 
|0.103-0.132  |  |             | 4,510,820  |             |  |           | 4.40 |             |  |          | 0.11 |  |  |          | 4,510,820  |  |  |   | 0.11 | 
|0.25         |  |             | 2,155,000  |             |  |           | 0.36 |             |  |          | 0.25 |  |  |          | 2,155,000  |  |  |   | 0.25 | 
|0.30-0.32    |  |             | 652,168    |             |  |           | 0.17 |             |  |          | 0.32 |  |  |          | 652,168    |  |  |   | 0.32 | 
|0.40-1.12    |  |             | 390,378    |             |  |           | 2.37 |             |  |          | 0.48 |  |  |          | 390,378    |  |  |   | 0.48 | 
|             |  |             |            |             |  |           |      |             |  |          |      |  |  |          |            |  |  |   |      | 
|$0.048-1.12  |  |             | 24,477,724 |             |  |           | 3.93 |             |  | $        | 0.11 |  |  |          | 24,477,724 |  |  | $ | 0.11 | 

9. Net Loss Per Share

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

10. Income TaxesThe net deferred tax asset recorded and its approximate tax
effect consisted of the following:

|                                 |  |         |            |  |  |  |  |      |  |   |            | 
|-------------------------------- |  | ------- | ---------- |  |  |  |  | ---- |  | - | ---------- | 
|                                 |  | May 31,
|                                 |  |        
|                                 |  | 2002    |            |  |  |  |  | 2001
|                                 |  |         |            |  |  |  |  |     
|Net operating loss carryforwards |  | $       | 11,030,000 |  |  |  |  |      |  | $ | 9,309,000  | 
|Purchased technology             |  |         | 470,000    |  |  |  |  |      |  |   | 519,000    | 
|Depreciation and amortization    |  |         | 1,754,000  |  |  |  |  |      |  |   | 1,982,000  | 
|Other, net                       |  |         | 192,000    |  |  |  |  |      |  |   | 179,000    | 
|                                 |  |         |            |  |  |  |  |      |  |   |            | 
|                                 |  |         | 13,446,000 |  |  |  |  |      |  |   | 11,989,000 | 
|Valuation allowance              |  |         | 13,446,000 |  |  |  |  |      |  |   | 11,989,000 | 
|                                 |  |         |            |  |  |  |  |      |  |   |            | 
|Net deferred tax asset           |  | $       |           |  |  |  |  |      |  | $ |           | 
|                                 |  |         |            |  |  |  |  |      |  |   |            | 

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

|                   |                                                                   |      |   |            |   |      |   |            |   |   |   |            |  
|------------------ | ----------------------------------------------------------------- | ---- | - | ---------- | - | ---- | - | ---------- | - | - | - | ---------- | -
|May 31,            |                                                                   | 2002 |   | 2001       |   | 2000
|                   |                                                                   |      |   |            |   |     
|                   | Federal income tax benefit computed at the Federal statutory rate |      | $ | (1,866,000 | ) |      | $ | (1,689,000 | ) |   | $ | (2,546,000 | )
|                   | State income tax benefit net of Federal benefit                   |      |   | (211,000   | ) |      |   | (298,000   | ) |   |   | (449,000   | )
|                   | Other- permanent differences                                      |      |   | 502,000    |   |      |   | 43,000     |   |   |   | (265,000   | )
|                   | Exercise of stock options using a cashless exercise provision     |      |   |           |   |      |   |           |   |   |   | (1,496,000 | )
|                   | Expiration of state net operating loss carryforwards              |      |   | 118,000    |   |      |   | 81,000     |   |   |   |           |  
|                   | Change in valuation allowance                                     |      |   | 1,457,000  |   |      |   | 1,863,000  |   |   |   | 4,756,000  |  
|                   |                                                                   |      |   |            |   |      |   |            |   |   |   |           
|Income tax benefit |                                                                   | $    |  |            |   | $    |  |            |   | $ |  |           
|                   |                                                                   |      |   |            |   |      |   |            |   |   |   |           

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

11. Profit-Sharing Plan

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

12. Contingencies

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

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

13. Commitments and Lease Obligations

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

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

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

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

|                             |  |          |         |          |  |          |         |  |  |   |         | 
|---------------------------- |  | -------- | ------- | -------- |  | -------- | ------- |  |  | - | ------- | 
|Years ending May 31,         |  |          |         |          |  |          |         |  |  |   |         | 
|                             |  | Gross    |         | Sublease |  | Net     
|                             |  | Payments |         | Income   |  | Payments
|                             |  |          |         |          |  |         
|2003                         |  | $        | 123,046 |          |  | $        | 56,250  |  |  | $ | 66,796  | 
|2004                         |  |          | 129,250 |          |  |          | 68,850  |  |  |   | 60,400  | 
|2005                         |  |          | 135,454 |          |  |          | 70,470  |  |  |   | 64,984  | 
|2006                         |  |          | 141,658 |          |  |          | 72,540  |  |  |   | 69,118  | 
|2007                         |  |          | 23,782  |          |  |          | 12,150  |  |  |   | 11,632  | 
|                             |  |          |         |          |  |          |         |  |  |   |         | 
|Total minimum lease payments |  | $        | 553,190 |          |  | $        | 280,260 |  |  | $ | 272,930 | 
|                             |  |          |         |          |  |          |         |  |  |   |         | 

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

Future minimum lease payments are as follows:

|                                        |      |   |        |       | 
|--------------------------------------- | ---- | - | ------ | ----- | 
|Year ending May 31,                     |      |   |        |      
|                                        | 2003 |   | $      | 9,562 | 
|                                        | 2004 |   |        | 9,562 | 
|                                        | 2005 |   |        | 9,562 | 
|                                        | 2006 |   |        | 2,391 | 
|                                        |      |   |        |      
|Total minimum lease payments            |      |   | 31,077 |      
|Amount representing interest            |      |   | 9,230  |      
|                                        |      |   |        |      
|Present value of minimum lease payments |      |   | 21,847 |      
|Total obligation                        |      |   | 21,847 |      
|Less current portion                    |      |   | (5,116 | )    
|                                        |      |   |        |      
|Long-term portion                       |      | $ | 16,731 |      
|                                        |      |   |        |      

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

14. Segment Information

Export Sales

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

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

|                        |               |   |         |       |      |   |         |        |  |   |         |         | 
|----------------------- | ------------- | - | ------- | ----- | ---- | - | ------- | ------ |  | - | ------- | ------- | 
|                        |               |   | 2002    |       | 2001 |   | 2000   
|                        |               |   |         |       |      |   |        
|Domestic sales          |               | $ | 355,000 |       |      | $ | 253,000 |        |  | $ | 469,000 |        
|Foreign sales:          |               |   |         |       |      |   |         |        |  |   |         |        
|                        | Europe        |   |         | 4,000 |      |   |         | 19,000 |  |   |         | 136,000 | 
|                        | North America |   |         |      |      |   |         | 40,000 |  |   |         | 64,000  | 
|                        | Asia          |   |         |      |      |   |         | 25,000 |  |   |         | 47,000  | 
|                        | Other         |   |         |      |      |   |         |       |  |   |         | 1,000   | 
|                        |               |   |         |       |      |   |         |        |  |   |         |        
|Total foreign sales     |               |   | 4,000   |       |      |   | 84,000  |        |  |   | 248,000 |        
|                        |               |   |         |       |      |   |         |        |  |   |         |        
|Total net product sales |               | $ | 359,000 |       |      | $ | 337,000 |        |  | $ | 717,000 |        
|                        |               |   |         |       |      |   |         |        |  |   |         |        

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

The Company has no foreign assets.

Sales to Major Customers

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

|         |  |       |         |      |  |      |  |         |  |       |      |   |  |   |        |         |  |       |  |  |  |  |      |         |  |   |         |  |  |  |  |  |  |  |      |  
|-------- |  | ----- | ------- | ---- |  | ---- |  | ------- |  | ----- | ---- | - |  | - | ------ | ------- |  | ----- |  |  |  |  | ---- | ------- |  | - | ------- |  |  |  |  |  |  |  | ---- | -
|         |  | 2002  |         | 2001 |  | 2000
|         |  |       |         |      |  |     
|Customer |  | Sales |         |      |  |      |  | Percent |  | Sales |      |   |  |   |        | Percent |  | Sales |  |  |  |  |      | Percent
|         |  |       |         |      |  |      |  |         |  |       |      |   |  |   |        |         |  |       |  |  |  |  |      |        
|A        |  | $     | 151,000 |      |  |      |  |         |  |       | 42.0 | % |  | $ |       |         |  |       |  |  |  |  |     |         |  | $ |        |  |  |  |  |  |  |  |     |  
|B        |  |       | 59,000  |      |  |      |  |         |  |       | 16.4 | % |  |   |       |         |  |       |  |  |  |  |     |         |  |   |        |  |  |  |  |  |  |  |     |  
|C        |  |       |        |      |  |      |  |         |  |       |     |   |  |   | 88,000 |         |  |       |  |  |  |  | 26.1 | %       |  |   |        |  |  |  |  |  |  |  |     |  
|D        |  |       |        |      |  |      |  |         |  |       |     |   |  |   | 41,000 |         |  |       |  |  |  |  | 12.2 | %       |  |   |        |  |  |  |  |  |  |  |     |  
|E        |  |       |        |      |  |      |  |         |  |       |     |   |  |   | 40,000 |         |  |       |  |  |  |  | 11.9 | %       |  |   |        |  |  |  |  |  |  |  |     |  
|F        |  |       |        |      |  |      |  |         |  |       |     |   |  |   |       |         |  |       |  |  |  |  |     |         |  |   | 138,000 |  |  |  |  |  |  |  | 19.2 | %
|G        |  |       |        |      |  |      |  |         |  |       |     |   |  |   |       |         |  |       |  |  |  |  |     |         |  |   | 137,000 |  |  |  |  |  |  |  | 19.1 | %
|H        |  |       |        |      |  |      |  |         |  |       |     |   |  |   |       |         |  |       |  |  |  |  |     |         |  |   | 127,000 |  |  |  |  |  |  |  | 17.8 | %

15. Related Party Transactions

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

16. Subsequent Events

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

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Patriot Scientific Corporation
Schedule IIValuation and Qualifying Accounts

Allowance for Doubtful Accounts

|                        |  |              |        |            |  |            |        |        |  |            |         |  |  |   |        | 
|----------------------- |  | ------------ | ------ | ---------- |  | ---------- | ------ | ------ |  | ---------- | ------- |  |  | - | ------ | 
|                        |  | Balance at   |        | Charged to |  |            |        |        |  | Balance at
|                        |  | beginning of |        | costs and  |  |            |        |        |  | end of    
|Description             |  | period       |        | expenses   |  | Deductions |        | period
|                        |  |              |        |            |  |            |        |       
|Year ended May 31, 2002 |  | $            | 54,000 |            |  | $          | 76,027 |        |  | $          | 124,027 |  |  | $ | 6,000  | 
|Year ended May 31, 2001 |  | $            | 5,000  |            |  | $          | 49,000 |        |  | $          |        |  |  | $ | 54,000 | 
|Year ended May 31, 2000 |  | $            | 22,000 |            |  | $          | 41,919 |        |  | $          | 58,919  |  |  | $ | 5,000  | 

Reserve for Inventory Obsolescence

|                        |  |              |         |            |  |            |         |        |  |            |         |  |  |   |         | 
|----------------------- |  | ------------ | ------- | ---------- |  | ---------- | ------- | ------ |  | ---------- | ------- |  |  | - | ------- | 
|                        |  | Balance at   |         | Charged to |  |            |         |        |  | Balance at
|                        |  | beginning of |         | costs and  |  |            |         |        |  | end of    
|Description             |  | period       |         | expenses   |  | Deductions |         | period
|                        |  |              |         |            |  |            |         |       
|Year ended May 31, 2002 |  | $            | 262,000 |            |  | $          | 149,433 |        |  | $          | 38,052  |  |  | $ | 373,381 | 
|Year ended May 31, 2001 |  | $            | 339,000 |            |  | $          | 100,000 |        |  | $          | 177,000 |  |  | $ | 262,000 | 
|Year ended May 31, 2000 |  | $            | 416,000 |            |  | $          | 270,000 |        |  | $          | 347,000 |  |  | $ | 339,000 | 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.

|                       |                                                                                    |                       
|---------------------- | ---------------------------------------------------------------------------------- | ----------------------
|DATED: August 27, 2002 | PATRIOT SCIENTIFIC CORPORATION                                                    
|                      
|                       | By:                                                                                | /s/ LOWELL W. GIFFHORN
|                       |                                                                                   
|                       | Lowell W. Giffhorn
Executive Vice President,
Chief Financial Officer and Secretary

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                                            |  |                                                                                                            |  |                
|------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------- |  | ---------------
|Signature                                   |  | Title                                                                                                      |  | Date           
|                                            |  |                                                                                                            |  |                
|                                           
|/s/  JEFFREY E. WALLIN

Jeffrey E. Wallin   |  | President and Chief Executive
Officer                                                                      |  | August 27, 2002
|                                           
|/s/  LOWELL W. GIFFHORN

Lowell W. Giffhorn |  | Chief Financial Officer,
Principal Financial Officer,
Principal Accounting Officer,
Secretary and Director |  | August 27, 2002
|                                           
|/s/  DAVID POHL                             |  | Director                                                                                                   |  | August 27, 2002
|                                            |  |                                                                                                            |  |                
|David Pohl                                  |  |                                                                                                            |  |                
|                                           
|/s/  CARLTON JOHNSON                        |  | Director                                                                                                   |  | August 27, 2002
|                                            |  |                                                                                                            |  |                
|Carlton Johnson                             |  |                                                                                                            |  |                
|                                           
|/s/  DONALD BERNIER                         |  | Chairman of the Board and Director                                                                         |  | August 27, 2002
|                                            |  |                                                                                                            |  |                
|Donald Bernier                              |  |                                                                                                            |  |                
|                                           
|/s/  HELMUT FALK JR.                        |  | Director                                                                                                   |  | August 27, 2002
|                                            |  |                                                                                                            |  |                
|Helmut Falk Jr.                             |  |                                                                                                            |  |                



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