##### Table of Contents



U. S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-QSB

|           |  |                                                                                  
|---------- |  | ---------------------------------------------------------------------------------
|(Mark One)
|          
|          
|          
|          
|[X]        |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|          
|          
|          
|          
|           |  | For quarterly period ended February 28, 2001                                     
|          
|          
|          
|          
|[   ]      |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT                  
|          
|          
|          
|          
|           |  | For the transition period from _____________ to _______________                  

Commission File Number 0-22182

PATRIOT SCIENTIFIC CORPORATION

(Exact name of small business issuer 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

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(Address of principal executive offices)


(858) 674-5000

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(Issuers telephone number)


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

State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date:

|                                |  |                               
|------------------------------- |  | ------------------------------
|Common Stock, $.00001 par value |  | 55,862,911                    
|                                |  |                               
|(Class)                         |  | (Outstanding at April 2, 2001)

Transitional Small Business Disclosure Format (check one): YES [   ]  NO [X]









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TABLE OF CONTENTS



|                              |                                                                                                |  |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                  
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations.
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                     
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      
|SIGNATURES                   



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PATRIOT SCIENTIFIC CORPORATIONINDEX

|                              |  |         |    |                                                                                                                               |  |      |       | 
|----------------------------- |  | ------- | -- | ----------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | 
|                              |  |         |    |                                                                                                                               |  | Page
|PART I. FINANCIAL INFORMATION
|                             
|                             
|                             
|                             
|                              |  | Item 1. |    | Financial Statements:                                                                                                        
|                             
|                             
|                             
|                             
|                              |  |         |    | Consolidated Balance Sheets as of February 28, 2001 (unaudited)
and May 31, 2000                                              |  |      | 3     | 
|                             
|                             
|                             
|                             
|                              |  |         |    | Consolidated Statements of Operations for the three and nine months
ended February 28, 2001 and February 29, 2000 (unaudited) |  |      | 4     | 
|                             
|                             
|                             
|                             
|                              |  |         |    | Consolidated Statements of Cash Flows for the nine months ended
February 28, 2001 and February 29, 2000 (unaudited)           |  |      | 5     | 
|                             
|                             
|                             
|                             
|                              |  |         |    | Notes to Consolidated Financial Statements                                                                                    |  |      | 6-9   | 
|                             
|                             
|                             
|                             
|                              |  | Item 2. |    | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                         |  |      | 10-16 | 
|                             
|                             
|                             
|                             
|PART II. OTHER INFORMATION    |  |         | 16 |                                                                                                                              
|                             
|                             
|                             
|                             
|                              |  | Item 1. |    | Legal Proceedings                                                                                                             |  |      | 16    | 
|                             
|                             
|                             
|                             
|                              |  | Item 2. |    | Changes in Securities                                                                                                         |  |      | *     | 
|                             
|                             
|                             
|                             
|                              |  | Item 3. |    | Defaults upon Senior Securities                                                                                               |  |      | *     | 
|                             
|                             
|                             
|                             
|                              |  | Item 4. |    | Submission of Matters to a Vote of Security Holders                                                                           |  |      | *     | 
|                             
|                             
|                             
|                             
|                              |  | Item 5. |    | Other Information                                                                                                             |  |      | *     | 
|                             
|                             
|                             
|                             
|                              |  | Item 6. |    | Exhibits and Reports on Form 8-K                                                                                              |  |      | 16    | 
|                             
|                             
|                             
|                             
|SIGNATURES                    |  |         | 16 |                                                                                                                              

* No information provided due to inapplicability of the item.



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##### Table of Contents















PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                     |                                                                                                                  |   |              |             |         |   |           |             |  
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------- | - | ------------ | ----------- | ------- | - | --------- | ----------- | -
|                                     |                                                                                                                  |   | February 28, |             | May 31,
|                                     |                                                                                                                  |   | 2001         |             | 2000   
|                                     |                                                                                                                  |   |              |             |        
|                                     |                                                                                                                  |   | (Unaudited) 
|ASSETS                              
|                                    
|                                    
|                                    
|                                    
|Current assets:                     
|                                    
|                                    
|                                    
|                                    
|                                     | Cash and cash equivalents                                                                                        |   | $            | 164,048     |         |   | $         | 2,100,242   |  
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts receivable, net of allowance of $25,000 and
$5,000 for uncollectible accounts (Note 1)                  |   |              | 121,308     |         |   |           | 61,152      |  
|                                    
|                                    
|                                    
|                                    
|                                     | Inventories (Note 3)                                                                                             |   |              | 272,964     |         |   |           | 71,164      |  
|                                    
|                                    
|                                    
|                                    
|                                     | Prepaid expenses                                                                                                 |   |              | 121,344     |         |   |           | 60,048      |  
|                                     |                                                                                                                  |   |              |             |         |   |           |             |  
|Total current assets                 |                                                                                                                  |   | 679,664      |             |         |   | 2,292,606 |            
|                                    
|                                    
|                                    
|                                    
|Property and equipment, net          |                                                                                                                  |   | 281,744      |             |         |   | 289,880   |            
|                                    
|                                    
|                                    
|                                    
|Patents and trademarks, net          |                                                                                                                  |   | 101,641      |             |         |   | 150,662   |            
|                                    
|                                    
|                                    
|                                    
|Note receivable (Note 6)             |                                                                                                                  |   | 80,000       |             |         |   |          |            
|                                    
|                                    
|                                    
|                                    
|Other assets                         |                                                                                                                  |   | 22,917       |             |         |   |          |            
|                                     |                                                                                                                  |   |              |             |         |   |           |             |  
|                                     |                                                                                                                  | $ | 1,165,966    |             |         | $ | 2,733,148 |            
|                                     |                                                                                                                  |   |              |             |         |   |           |             |  
|LIABILITIES AND STOCKHOLDERS EQUITY
|                                    
|                                    
|                                    
|                                    
|Current liabilities:                
|                                    
|                                    
|                                    
|                                    
|                                     | Accounts payable                                                                                                 |   | $            | 156,371     |         |   | $         | 393,150     |  
|                                    
|                                    
|                                    
|                                    
|                                     | Accrued liabilities                                                                                              |   |              | 152,495     |         |   |           | 130,116     |  
|                                     |                                                                                                                  |   |              |             |         |   |           |             |  
|Total current liabilities            |                                                                                                                  |   | 308,866      |             |         |   | 523,266   |            
|                                    
|                                    
|                                    
|                                    
|Contingency (Note 7)                
|                                    
|                                    
|                                    
|                                    
|Stockholders equity (Note 5):      
|                                    
|                                    
|                                    
|                                    
|                                     | Preferred stock, $.00001 par value; 5,000,000 shares
authorized: none outstanding                                |   |              |            |         |   |           |            |  
|                                    
|                                    
|                                    
|                                    
|                                     | Common stock, $.00001 par value; 100,000,000 shares
authorized; issued and outstanding 54,086,711 and 51,126,675 |   |              | 541         |         |   |           | 511         |  
|                                    
|                                    
|                                    
|                                    
|                                     | Additional paid-in capital                                                                                       |   |              | 35,632,243  |         |   |           | 33,559,158  |  
|                                    
|                                    
|                                    
|                                    
|                                     | Accumulated deficit                                                                                              |   |              | (34,775,684 | )       |   |           | (31,349,787 | )
|                                     |                                                                                                                  |   |              |             |         |   |           |             |  
|Total stockholders equity           |                                                                                                                  |   | 857,100      |             |         |   | 2,209,882 |            
|                                     |                                                                                                                  |   |              |             |         |   |           |             |  
|                                     |                                                                                                                  | $ | 1,165,966    |             |         | $ | 2,733,148 |            
|                                     |                                                                                                                  |   |              |             |         |   |           |             |  

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



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##### Table of Contents



PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |            |  
|------------------------------------------------------------------------------- | -------------------------------------------- | - | ------------------ | ------- | ----------------- | - | ------------ | --------- | ------------ | - | ---------- | --------- | - | - | ---------- | ---------- | -
|                                                                                |                                              |   | Three Months Ended |         | Nine Months Ended
|                                                                                |                                              |   |                    |         |                  
|                                                                                |                                              |   | February 28,       |         | February 29,      |   | February 28, |           | February 29,
|                                                                                |                                              |   | 2001               |         | 2000              |   | 2001         |           | 2000        
|                                                                                |                                              |   |                    |         |                   |   |              |           |             
|Net sales                                                                       |                                              | $ | 66,045             |         |                   | $ | 146,076      |           |              | $ | 242,769    |           |   | $ | 584,984    |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Cost of sales                                                                   |                                              |   | 107,661            |         |                   |   | 215,383      |           |              |   | 355,081    |           |   |   | 438,946    |           
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|Gross profit (loss)                                                             |                                              |   | (41,616            | )       |                   |   | (69,307      | )         |              |   | (112,312   | )         |   |   | 146,038    |           
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|Operating expenses:                                                            
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Research and development (Note 5)            |   |                    | 546,782 |                   |   |              | 2,052,514 |              |   |            | 1,628,954 |   |   |            | 2,877,523  |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Selling, general and
administrative (Note 5) |   |                    | 776,805 |                   |   |              | 2,497,316 |              |   |            | 1,726,350 |   |   |            | 3,119,095  |  
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|                                                                                |                                              |   | 1,323,587          |         |                   |   | 4,549,830    |           |              |   | 3,355,304  |           |   |   | 5,996,618  |           
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|Operating loss                                                                  |                                              |   | (1,365,203         | )       |                   |   | (4,619,137   | )         |              |   | (3,467,616 | )         |   |   | (5,850,580 | )         
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|Other income (expenses):                                                       
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Gain on sale of technology                   |   |                    |        |                   |   |              |          |              |   |            |          |   |   |            | 250,000    |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest income                              |   |                    | 12,509  |                   |   |              | 2         |              |   |            | 44,135    |   |   |            | 102        |  
|                                                                               
|                                                                               
|                                                                               
|                                                                               
|                                                                                | Interest expense                             |   |                    |        |                   |   |              | (422,934  | )            |   |            | (2,416    | ) |   |            | (1,092,362 | )
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|                                                                                |                                              |   | 12,509             |         |                   |   | (422,932     | )         |              |   | 41,719     |           |   |   | (842,260   | )         
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|Net loss                                                                        |                                              | $ | (1,352,694         | )       |                   | $ | (5,042,069   | )         |              | $ | (3,425,897 | )         |   | $ | (6,692,840 | )         
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|Basic and diluted loss
per common share                                         |                                              | $ | (0.03              | )       |                   | $ | (0.12        | )         |              | $ | (0.07      | )         |   | $ | (0.16      | )         
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           
|Weighted average number of
common shares outstanding
during the period (Note 1) |                                              |   | 53,878,508         |         |                   |   | 43,387,466   |           |              |   | 52,588,169 |           |   |   | 40,844,879 |           
|                                                                                |                                              |   |                    |         |                   |   |              |           |              |   |            |           |   |   |            |           

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



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##### Table of Contents



PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |            |           |  
|---------------------------------------------------- | ---------------------------------------------------------------------------------------- | --------------------------------------------------- |  | ----------------- |  | ----------------- | ---------- | ---------- | -------- | - | ---------- | ---------- | --------- | -
|                                                     |                                                                                          |                                                     |  | Nine Months Ended
|                                                     |                                                                                          |                                                     |  |                  
|                                                     |                                                                                          |                                                     |  | February 28, 2001 |  | February 29, 2000
|                                                     |                                                                                          |                                                     |  |                   |  |                  
|Increase
(Decrease) in Cash and Cash Equivalents    
|Operating activities:                               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net loss                                                                                 |                                                     |  |                   |  |                   | $          | (3,425,897 | )        |   | $          | (6,692,840 | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net loss
to cash used in operating activities:                 
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Amortization and depreciation                       |  |                   |  |                   |            |            | 180,529  |   |            |            | 270,233   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Provision for inventory obsolescense                |  |                   |  |                   |            |            |         |   |            |            | 100,000   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Provision for bad debts                             |  |                   |  |                   |            |            | 20,000   |   |            |            |          |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Non -cash interest expense related to
notes payable |  |                   |  |                   |            |            |         |   |            |            | 995,651   |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Non  cash compensation expense (Note 5)            |  |                   |  |                   |            |            |         |   |            |            | 3,739,267 |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Issuance of options for services                    |  |                   |  |                   |            |            | 83,629   |   |            |            |          |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Gain on sale of technology                          |  |                   |  |                   |            |            |         |   |            |            | (250,000  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Changes in:                                        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Accounts receivable                                 |  |                   |  |                   |            |            | (80,156  | ) |            |            | (133,829  | )
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Inventories                                         |  |                   |  |                   |            |            | (201,800 | ) |            |            | 3,022     |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Prepaid and other assets                            |  |                   |  |                   |            |            | (44,380  | ) |            |            | 75,950    |  
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                          | Accounts payable and accrued expenses               |  |                   |  |                   |            |            | (214,400 | ) |            |            | (774,537  | )
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Net cash used in operating activities                |                                                                                          |                                                     |  |                   |  |                   | (3,682,475 | )          |          |   | (2,667,083 | )         
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Investing activities:                               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Note receivable (Note 6)                                                                 |                                                     |  |                   |  |                   |            | (80,000    | )        |   |            |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Web site development costs                                                               |                                                     |  |                   |  |                   |            | (25,000    | )        |   |            |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of property and equipment                                                       |                                                     |  |                   |  |                   |            | (121,289   | )        |   |            | (33,014    | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of technology                                                         |                                                     |  |                   |  |                   |            |           |          |   |            | 250,000    |          
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Net cash provided by (used in) investing activities  |                                                                                          |                                                     |  |                   |  |                   | (226,289   | )          |          |   | 216,986    |           
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Financing activities:                               
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of short term notes payable                                       |                                                     |  |                   |  |                   |            |           |          |   |            | 410,000    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of accounts receivable                                                |                                                     |  |                   |  |                   |            |           |          |   |            | 142,000    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Principal payments on notes payable and
long-term debt                                   |                                                     |  |                   |  |                   |            |           |          |   |            | (720,355   | )        
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of common stock and
exercise of common stock warrants and options |                                                     |  |                   |  |                   |            | 1,972,570  |          |   |            | 5,583,925  |          
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Net cash provided by financing activities            |                                                                                          |                                                     |  |                   |  |                   | 1,972,570  |            |          |   | 5,415,570  |           
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Net increase (decrease) in cash and cash equivalents |                                                                                          |                                                     |  |                   |  |                   | (1,936,194 | )          |          |   | 2,965,473  |           
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents, beginning of period       |                                                                                          |                                                     |  |                   |  |                   | 2,100,242  |            |          |   | 35,813     |           
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Cash and cash equivalents, end of period             |                                                                                          |                                                     |  |                   |  | $                 | 164,048    |            |          | $ | 3,001,286  |           
|                                                     |                                                                                          |                                                     |  |                   |  |                   |            |            |          |   |            |           
|Supplemental Disclosure of Cash Flow Information:   
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Notes payable and accrued interest exchanged
for common stock                            |                                                     |  |                   |  |                   | $          |           |          |   | $          | 405,182    |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Issuance of options for prepaid services                                                 |                                                     |  |                   |  |                   | $          | 16,916     |          |   | $          |           |          
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash payments for interest                                                               |                                                     |  |                   |  |                   | $          | 2,416      |          |   | $          | 102,137    |          

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



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##### Table of Contents



PATRIOT SCIENTIFIC CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)

1.    BASIS OF PRESENTATION

The consolidated financial statements of Patriot Scientific Corporation (the
Company) presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-QSB and do
not include all of the information and footnotes required by generally accepted
accounting principles. These statements should be read in conjunction with the
Companys audited financial statements and notes thereto for the year ended May
31, 2000.

In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair presentation of
the results for interim periods. Operating results for the three and nine month
periods are not necessarily indicative of the results that may be expected for
the year.

Loss Per Share

The Company follows Standard of Financial Accounting Standards (SFAS) No.
128, Earnings per Share. Under SFAS No. 128, basic loss per share is
calculated as loss available to common stockholders divided by the weighted
average number of common shares outstanding. Diluted loss per share is
calculated as net loss divided by the diluted weighted average number of common
shares. The diluted weighted average number of common shares is calculated
using the treasury stock method for common stock issuable pursuant to
outstanding stock options and common stock warrants. Common stock options and
warrants of 7,101,482 and 6,422,805 for the three and nine months ended
February 28, 2001 and February 29, 2000, respectively, were not included in
diluted loss per share for the periods as the effect was antidilutive due to
the Company recording losses in each of those periods.

Sale of Accounts Receivable

The Company follows SFAS No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. SFAS No. 125 provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. A 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 may not redeem the invoices
sold previous to the invoices being greater than 90 days past due. Under SFAS
No.125, 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 the first nine months of
fiscal 2000, the Company sold approximately $178,000 of its accounts receivable
to a bank under a factoring agreement for approximately $142,000. Pursuant to
the provisions of SFAS No. 125, the Company reflected the transactions as sales
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 was 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 was based on the payment history of the accounts receivable customer. As
of February 28, 2001, there were no balances outstanding under the factoring
line.

Accounts Receivable

The Companys accounts receivable includes a past due amount of $65,606, net of
an allowance of $20,000, due from one customer. The Company is currently
pursuing legal collection of the outstanding amount. Management believes the
amount to be collectible.



6





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##### Table of Contents



Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

2.    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. 138, which requires companies to record derivatives on the balance
sheet as assets or liabilities, measured at fair market value. Gains or losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for all fiscal quarters of all
fiscal periods beginning after June 15, 2000. The Company believes the
adoption of this statement will have no material impact on its financial
statements.

In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. The Company adopted the Interpretation on July 1, 2000. The
Interpretation requires that stock options that have been modified to reduce
the exercise price be accounted for using variable accounting. The Company
repriced certain stock options on October 5, 1999 and in accordance with
generally accepted accounting principles accounted for the repriced stock
options using fixed accounting. As a result of adopting the Interpretation,
the Company is required to apply variable accounting to these options.
Accordingly, if the market price of the Companys stock increases subsequent to
July 1, 2000, it will recognize additional compensation expense that it
otherwise would not have incurred. As of February 28, 2001, there was no
additional compensation expense recorded because the market price of the
Companys common stock was lower than the price at July 1, 2000. However, the
ultimate impact cannot be determined as it is dependent on the change in the
market price of the stock from July 1, 2000 until the stock options are
exercised, forfeited or expire unexercised.

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

In March 2000, the FASB issued Emerging Issues Task Force Issue No 00-2,
Accounting for Web Site Development Costs (EITF 00-2), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred
to develop a web site based on the nature of each cost. The Company has
capitalized $25,000 in web site development costs during the current fiscal
year and amortized to expense $2,083 during the current quarter.

3.    INVENTORIES

Inventories are stated at cost (determined primarily by the weighted average
cost method which approximates cost on a first-in, first-out basis) not in
excess of market value.

Inventories at February 28, 2001 and May 31, 2000, consist of the following:

|                         |  |                   |          |              |  |   |          |  
|------------------------ |  | ----------------- | -------- | ------------ |  | - | -------- | -
|                         |  | February 28, 2001 |          | May 31, 2000
|                         |  |                   |          |             
|                         |  | (unaudited)      
|Component parts          |  | $                 | 327,100  |              |  | $ | 332,271  |  
|                        
|                        
|                        
|                        
|Work in process          |  |                   | 117,100  |              |  |   | 38,213   |  
|                        
|                        
|                        
|                        
|Finished goods           |  |                   | 167,764  |              |  |   | 39,680   |  
|                         |  |                   |          |              |  |   |          |  
|                         |  |                   | 611,964  |              |  |   | 410,164  |  
|                        
|                        
|                        
|                        
|Reserve for obsolescence |  |                   | (339,000 | )            |  |   | (339,000 | )
|                         |  |                   |          |              |  |   |          |  
|                         |  | $                 | 272,964  |              |  | $ | 71,164   |  
|                         |  |                   |          |              |  |   |          |  



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

4.    INVESTMENT AGREEMENT

In May 2000, the Company entered into an investment agreement with Swartz
Private Equity LLC (Swartz). The investment agreement entitles the Company,
at the Companys option, to issue and sell its common stock for up to an
aggregate of $30 million from time to time during a three-year period through
June 23, 2003, subject to certain conditions including (1) an effective
registration statement must be on file with the SEC registering the resale of
the common shares, and (2) a limitation on the number of common shares that can
be sold to Swartz within a 30 day time period based on the trading volume of
the stock, among others. Swartz can purchase the common stock from the Company
at a discount ranging from 7% to 10% depending on the price of the common
stock. In addition to the common stock purchased, Swartz will receive warrants
to purchase additional shares equal to 15% of the common stock at a price equal
to 110% of the market price as determined during the pricing period. The
warrant exercise price is subject to further semi-annual price adjustments if
the price of the common stock goes down. The Company had previously entered
into a similar investment agreement with Swartz.

The registration statement went effective on June 23, 2000. During the nine
months ended February 28, 2001, the Company received proceeds of $1,693,097
from the sale of 1,992,620 shares of common stock . Per the terms of the
investment agreement, the Company issued three five-year warrants for 298,893
shares of common stock exercisable initially at prices ranging from $0.9625 to
$1.562 per share. In March 2001, the Company received proceeds of $888,100
from the sale of 1,776,200 shares of common stock and issued a five-year
warrant for 266,430 shares of common stock exercisable initially at a price of
$0.737. See Note 5 for further information on the warrants.

5.    STOCKHOLDERS EQUITY

The following table summarizes equity transactions during the nine months ended
February 28, 2001:

|                                   |  |        |            |         |  |   |            | 
|---------------------------------- |  | ------ | ---------- | ------- |  | - | ---------- | 
|                                   |  | Common
|                                   |  | Shares |            | Dollars
|                                   |  |        |            |        
|Balance June 1, 2000               |  |        | 51,126,675 |         |  | $ | 33,559,669 | 
|                                  
|                                  
|                                  
|                                  
|Sale of common stock               |  |        | 1,992,620  |         |  |   | 1,693,097  | 
|                                  
|                                  
|                                  
|                                  
|Exercise of common stock warrants  |  |        | 631,416    |         |  |   | 171,954    | 
|                                  
|                                  
|                                  
|                                  
|Exercise of employee stock options |  |        | 336,000    |         |  |   | 107,520    | 
|                                  
|                                  
|                                  
|                                  
|Issuance of options for services   |  |        |           |         |  |   | 100,544    | 
|                                   |  |        |            |         |  |   |            | 
|Balance February 28, 2001          |  |        | 54,086,711 |         |  | $ | 35,632,784 | 
|                                   |  |        |            |         |  |   |            | 

At February 28, 2001, the Company had 162,500 options outstanding pursuant to
its 1992 ISO Stock Option Plan exercisable at a range of $0.32 to $1.325 per
share expiring in 2001 through 2005. The Company had 135,753 options
outstanding pursuant to its 1992 NSO Stock Option Plan exercisable at a range
of $0.18 to $1.325 per share expiring in 2001 through 2005. The Company also
had 2,379,571 options outstanding pursuant to its 1996 Stock Option Plan
exercisable at a range of $0.32 to $1.61 per share expiring in 2001 through
2005. Some of the options outstanding under these plans are not presently
exercisable and are subject to meeting vesting criteria.

On February 21, 2001, the Board of Directors approved the adoption of the 2001
Stock Option Plan (the 2001 Plan) under which the Company can issue up to
3,000,000 shares of its common stock to employees, directors and consultants of
the Company. The 2001 Plan is subject to shareholder approval at the annual
meeting to be held in October 2001. Until shareholder approval is obtained,
options granted under the 2001 Plan cannot be considered outstanding or
measurable. Upon shareholder approval, the excess of the market price of the
common stock over the exercise price of any options granted prior to approval,
will result in a charge to compensation expense. During the quarter ended
February 28, 2001, the Company granted 250,000 options under the 2001 Plan.

At February 28, 2001, the Company had warrants outstanding exercisable into
4,423,658 common shares at exercise prices ranging from $0.25 to $1.562 per
share expiring beginning in 2002 through 2005. During fiscal year 2000 and



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

the first nine months of fiscal year 2001, the Company issued 1,052,219 and
298,893 warrants to purchase common stock which are subject to repricings at
the six month anniversary of the issuance of the warrant. At each six month
anniversary date, the warrants will be repriced to the lesser of the initial
exercise price or 110% of the lowest closing bid price of the Companys common
stock for the five trading days ending on such six month anniversary date of
the date of issuance. As of February 28, 2001, a warrant to purchase 667,454
common shares of the Companys stock was repriced from $1.265 to $0.715.

Non-cash compensation expense of $3,739,267 was recorded in the third fiscal
quarter ended February 29, 2000 as a result of the Company providing employees
and directors the option of exercising their stock options using a cashless
exercise provision. Generally accepted accounting principles require that such
exercises must be recorded using variable accounting which reflects the
incremental difference between the exercise price and the market price on the
date of exercise as though it were additional compensation. Since no cash was
exchanged in the transaction, a like amount was recorded as additional paid-in
capital. For the three and nine months ended February 29, 2000, $1,588,960 and
$2,150,307 have been included in the accompanying Financial Statements under
the captions research and development and selling, general and administrative
expenses, respectively.

6.    NOTE RECEIVABLE

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

7.    CONTINGENCY

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



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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations.

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO
THE COMPANYS FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS
DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE
SUB-HEADING, FUTURE PERFORMANCE AND RISK FACTORS. SEE ALSO THE COMPANYS
ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MAY 31, 2000.

The Companys 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 its products,                            
|
| |  |  | economic conditions in its markets,                                               
|
| |  |  | the timing of orders,                                                             
|
| |  |  | the timing of expenditures in anticipation of future sales,                       
|
| |  |  | the mix of products sold by the Company,                                          
|
| |  |  | the introduction of new products,                                                 
|
| |  |  | product enhancements by the Company or its competitors,                           
|
| |  |  | response to accelerated sales and marketing programs, and                         
|
| |  |  | pricing and other competitive conditions.                                         

Results of Operations for the Three Months Ended February 28, 2001 and February
29, 2000

Net sales. Total net sales for the third fiscal quarter ended February
28, 2001 decreased 54.8% to $66,045 from $146,076 for the corresponding period
of the previous fiscal year. This decrease was due to a reduction in follow-on
shipments for the Companys matured communication products, several that are
being phased out as they approach the end of their life cycles, coupled with a
reduction in license fee income. The Company anticipates this trend in
communication product revenue to continue since many of the communication
products are approaching the end of their life cycles and its efforts are being
focused on the microprocessor product line. Microprocessor sales increased to
$25,350 for the current quarter compared to $18,469 for the corresponding
quarter of the previous fiscal year.

Cost of sales. Cost of sales as a percentage of net sales increased to
163.0% in the third fiscal quarter ended February 28, 2001 compared to 147.5%
for the corresponding period of the previous fiscal year. This increase was
due in part to the decreased current fiscal period communications product
revenue, the fixed manufacturing overhead being allocated to a smaller revenue
base which contributed to the increase in the cost of sales as a percentage of
net sales percentage and the costs of the new microprocessor development kits
which are now being provided to potential customers some of which are provided
at no cost to the customer.

Research and development expenses decreased 73.4% from $2,052,514 for the
third fiscal quarter ended February 29, 2000 to $546,782 for the third fiscal
quarter ended February 28, 2001. This decrease was due primarily to non-cash
compensation expense of $1,588,960 being recorded in the third fiscal quarter
ended February 29, 2000 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
quarter. This decrease was partially offset by a ramp up in personnel and
consulting services to introduce a new soft core version of the microprocessor
technology and the accelerated effort to complete and improve the marketability
of the Ignite I microprocessor product family during the current fiscal
quarter.

Selling, general and administrative expenses decreased 68.9% to $776,805
for the third fiscal quarter ended February 28, 2001 compared to $2,497,316 for
the third fiscal quarter ended February 29, 2000. This decrease was due
primarily to non-cash compensation expense of $2,150,307 being recorded in the
third fiscal quarter ended February 29, 2000 as a result of the Company
providing employees and directors the option of exercising their stock options



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using a cashless exercise provision compared to no similar expense in the
current fiscal quarter. This decrease was partially offset by an increase in
employment and consulting costs to support the Companys increased emphasis on
marketing the microprocessor family of products, an increase in the accounts
receivable bad debt reserve, and additional compensation and relocation costs
related to changes in several executive level positions.

Other income (expense) increased significantly for the third fiscal
quarter ended February 28, 2001 to $12,509 compared to ($422,932) for the
corresponding period of the previous fiscal year. This increase in income
resulted primarily from the recognition in the third fiscal quarter ended
February 29, 2000 of $382,059 of non-cash interest expense related to the
amortization of debt discount. Also interest expense was $40,875 for the
corresponding period of the previous fiscal year as compared to none in the
current period.

Results of Operations for the Nine months ended February 28, 2001 and February
29, 2000

Net sales. Total net sales for the nine months ended February 28, 2001
decreased 58.5% to $242,769 from $584,984 for the corresponding period of the
previous fiscal year. This decrease was due to a reduction in follow-on
shipments for the Companys matured communication products, several that are
approaching the end of their life cycles, coupled with a reduction in license
fee income. Development and sales of new communications products did not
achieve a level to replace the maturing products. The Company anticipates this
trend in communication product revenue to continue since many of the
communication products are approaching the end of their life cycles and its
efforts are being focused on the microprocessor product line. Microprocessor
sales increased slightly to $49,211 compared to $35,571 for the same period of
the previous year. This increase is the result of the revenues from initial
shipments of development kits containing the latest version of the 0.35 micron
chip.

Cost of sales. Cost of sales as a percentage of net sales increased to
146.3% in the nine months ended February 28, 2001 compared to 75.0% for the
corresponding period of the previous fiscal year. This significant increase
was due in part to the costs of the new development kits which are now being
provided to potential customers. Some of these kits are provided at no cost to
the customer. Also, in the previous fiscal year period, $163,729 of
communication product royalty revenue was recognized with no associated costs
which positively impacted the cost of sales as a percentage of net sales
percentage in the previous period. Also, as a result of the decreased activity
during the current fiscal period in the communications product revenue, the
fixed manufacturing overhead was allocated to a smaller revenue base which
contributed to the increase in the cost of sales as a percentage of net sales
percentage.

Research and development expenses decreased 43.4% from $2,877,523 for the
nine months ended February 29, 2000 to $1,628,954 for the nine months ended
February 28, 2001. This decrease was due primarily to non-cash compensation
expense of $1,588,960 being recorded in the nine months ended February 29, 2000
as a result of the Company providing employees and directors the option of
exercising their stock options using a cashless exercise provision compared to
no similar expense in the current fiscal year. This decrease was partially
offset by a ramp up in personnel and consulting services to introduce a new
soft core version of the microprocessor technology.

Selling, general and administrative expenses decreased 44.6% to
$1,726,350 for the nine months ended February 28, 2001 compared to $3,119,095
for the nine months ended February 29, 2000. This decrease was due primarily
to non-cash compensation expense of $2,150,307 being recorded during the nine
months ended February 29, 2000 as a result of the Company providing employees
and directors the option of exercising their stock options
using a cashless
exercise provision compared to no similar expense in the current fiscal year.
This decrease was partially offset by an increase in employment and consulting
costs to support the Companys increased emphasis on marketing the
microprocessor family of products, an increase in the accounts receivable bad
debt reserve, and additional compensation and relocation costs related to
changes in several executive level positions.

Other income (expense) increased significantly for the nine months ended
February 28, 2001, $41,719, compared to ($842,260) for the corresponding period
of the previous fiscal year. This increase in income resulted primarily from
the recognition in the nine months ended February 29, 2000 of $995,651 of
non-cash interest related to the amortization of debt discount offset by the
gain on sale of the gas plasma antenna technology of $250,000. Also interest
expense was $96,711 for the corresponding period of the previous fiscal year as
compared to $2,416 in the current period.



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Liquidity and Capital Resources

At February 28, 2001, the Company had working capital of $370,798 and cash
and cash equivalents of $164,048. The Company has historically funded its
operations primarily through the issuance of securities and debt financings.
Cash and cash equivalents decreased $1,936,194 during the nine months ended
February 28, 2001 due to net cash used in operations of $3,682,475, additions
to property and equipment of $121,289, web site development costs of $25,000
and the issuance of a note receivable of $80,000 to a previous officer of the
Company offset by funds generated from the exercise of warrants and options to
purchase common stock of the Company of $279,453 and the sale of common stock
under an investment agreement of $1,693,097. The net cash used in operations
is primarily a result of operating losses coupled with a reduction of accounts
payable and accrued expenses of $214,400, related to a settlement of a major
software vendor, an increase in inventory of $201,800 which was a result of
costs associated with the next generation microprocessor and related
development kits and an increase in accounts receivable of $80,156.

The Company estimates its current cash requirements to sustain its
operations for the next twelve months through February 2002 to be $4.8 million.
The Company expects that these requirements will be provided by the current
working capital of $370,798, available funds under the $30 million equity line
of credit, as discussed below, the exercise of outstanding stock options and
warrants, and anticipated increased microprocessor and license revenues. The
Companys ability to sell additional shares of common stock under the equity
line of credit is subject to limitations based on the Companys trading volume
as discussed below. The Company believes that based on historical trading
volumes that adequate cash could be provided under the equity line of credit.

The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months to continue
development of its technologies. Product introductions such as those currently
underway for the Ignite I family of microprocessor technology may require
significant inventory, product launch, marketing personnel and other
expenditures that cannot be currently estimated. Further, if expanded
development is commenced or new generations of microprocessors are accelerated
beyond their current plans, additional expenditures that the Company cannot
currently estimate, may be required. It is possible therefore, that higher
levels of expenditures may be required than the Company currently contemplates
resulting from changes in development plans or as required to support new
developments or commercialization activities or otherwise. In addition, in
February 2001, the Company entered into a five-year extension on its building
lease. The Company anticipates spending approximately $200,000 over the next
several quarters on remodeling the facility and upgrading office equipment. The
Company anticipates that, if needed, the equity line of credit and revenues
from the sale of the microprocessor and licenses of the microprocessor
technology will generate the additional resources necessary to accelerate the
marketing and production activity and upgrade its facility.

$30 Million Equity Line of Credit

Overview.On May 2, 2000, the Company entered into an investment
agreement with Swartz Private Equity, LLC. The investment agreement entitles
it to issue and sell its common stock for up to an aggregate of $30 million
from time to time during a three-year period starting June 23, 2000, the
effective date of the registration statement. This is also referred to as a
put right. During the nine months ended February 28, 2001, the Company received
proceeds of $1,693,097 from the sale of 1,992,620 shares of common stock. In
March 2001, the Company received proceeds of $888,100 from the sale of
1,776,200 shares of common stock.

Put Rights.In order to invoke a put right, the Company 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, the Company must give at least ten but not more
than twenty business days advance notice to Swartz of the date on which it
intends to exercise a particular put right and it must indicate the number of
shares of common stock it intends to sell to Swartz. At its option, the
Company may also designate a maximum dollar amount of common stock (not to
exceed $3 million) which it will sell to Swartz during the put and/or a minimum
purchase price per common share at which Swartz may purchase shares during the
put. The number of common shares sold to Swartz may not exceed 20% of the
aggregate daily reported trading volume during a period which begins on the
business day immediately following the day the Company invoked the put right
and ends on and includes the day which is twenty business days after the date
it invoked the put right.



12





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

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

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



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

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

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



| |  | the Company discovers an undisclosed material fact relevant to Swartzs investment decision;
|- |  | --------------------------------------------------------------------------------------------
| 
| |  | the registration statement registering resales of the common shares becomes ineffective; or 
| 
| |  | shares are delisted from the then primary exchange.                                         

However, the Company will be required to issue common shares equal
to the lesser of:



| |  | 20% of the daily reported trading volume of its common stock during the
pricing periods up to the applicable put cancellation date;                                   
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | the number of shares of common stock put to Swartz which when multiplied by the applicable put share price equals the
designated maximum dollar amount for the put; or
| 
| |  | 9.9% of the total amount of its common stock that would be outstanding upon completion of the put.                                                                    

Shareholder Approval.The Company may currently issue more than 20% of
its outstanding shares. If the Company becomes listed on the Nasdaq Small Cap
Market or Nasdaq National Market, then the Company must get shareholder
approval to issue more than 20% of its outstanding shares. Since the Company
is currently a bulletin board company, it does not need shareholder approval.

Termination of Investment Agreement.The Company may also terminate its
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 the Company has
concerning the investment agreement or any related agreement.

Restrictive Covenants.During the term of the investment agreement and
for a period of one-year thereafter, the Company is 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



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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. The Company is also prohibited from
entering into any private equity line type agreements similar to the investment
agreement without obtaining Swartzs prior written approval.

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

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

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. 138, which requires companies to record derivatives on the
balance sheet as assets or liabilities, measured at fair market value. Gains
or losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting changes
in fair value or cash flows. SFAS No. 133 is effective for all fiscal quarters
of all fiscal periods beginning after June 15, 2000. Management of the Company
believes the adoption of this statement will have no material impact on its
financial statements.

In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25. The Company adopted the Interpretation on July 1, 2000. The
Interpretation requires that stock options that have been modified to reduce
the exercise price be accounted for using variable accounting. The Company
repriced stock options on October 5, 1999 and in accordance with generally
accepted accounting principles accounted for the repriced stock options using
fixed accounting. As a result of adopting the Interpretation, the Company is
required to apply variable accounting to these options. Accordingly, if the
market price of the Companys stock increases subsequent to July 1, 2000, it
will recognize additional compensation expense that it otherwise would not have
incurred. As of February 28, 2001, there was no additional compensation
expense recorded because the market price of the Companys common stock was
lower than the price at July 1, 2000. However, the ultimate impact cannot be
determined as it is dependent on the change in the market price of the stock
from July 1, 2000 until the stock options are exercised, forfeited or expire
unexercised.

In December 1999, the Securities and Exchange Commission (the SEC)
issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in
Financial Statements which provides additional guidance in applying generally
accepted accounting principles to revenue recognition in financial statements.
SAB 101 is effective as of the fourth quarter of fiscal year ending May 31,
2001. Management of the Company believes the adoption of this bulletin will
have no material impact on its financial statements.

In March 2000, the FASB issued Emerging Issues Task Force Issue No 00-2,
Accounting for Web Site Development Costs (EITF 00-2), which is effective
for all such costs incurred for fiscal quarters beginning after June 30, 2000.
This Issue establishes accounting and reporting standards for costs incurred
to develop a web site based on the nature of each cost. The Company has
capitalized $25,000 in web site development costs during the current fiscal
year and amortized to expense $2,083 during the current quarter.



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Future Performance and Risk Factors

THIS REPORT CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECTS THE
COMPANYS CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL
PERFORMANCE. THE COMPANYS FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE
SUMMARIZED BELOW. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF THE DATE
HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY REVISE THESE
FORWARD-LOOKING STATEMENTS, TO REFLECT EVENTS OR CIRCUMSTANCES THAT MAY ARISE
AFTER THE DATE OF THIS REPORT.

Since the business combination with Metacomp, effective December 1996, the
Company has segregated its operations into microprocessor, communication, and
radar/antenna product lines.

The stages of development of the three major technologies is as follows:



| |  | Ignite I family of microprocessor technology. This technology is
generating minor amounts of revenue from the sale of development
boards, microprocessors and initial license fees related to the
microprocessor application. The Company runs the technology on a
0.35-micron microprocessor, which is in current production. The
Company has ported the VxWorks operating system and the Sun
Microsystems personalJava virtual machine to the microprocessor.
Although the Company anticipates the microprocessor to be its main
product line, it currently accounts for only 20% of its revenue.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | High-speed data communications. Revenue from this technology is being
generated primarily from mature communication products that are
nearing the end of their life cycles. The Company has decided to
concentrate its efforts on the Ignite I microprocessor technology and
has suspended its efforts to introduce new communication products to
the market. Although the communications product line accounted for
approximately 80% of its revenue, the Company anticipates that the
microprocessor will be its main product line in the future.                                                
| 
| |  | Radar and antenna. The Company sold the gas plasma antenna technology
in August 1999. Its radar technology has not generated any revenue
and the Company has suspended further development of this technology
in order to concentrate its resources on the Ignite I microprocessor
technology.                                                                                                                                                                                                                                                                                                     

Due to its small size and staffing overlaps among the technologies,
certain personnel work on both the microprocessor and communication
technologies from time to time.

During at least the last three years, the Company has focused the majority
of its efforts on the PSC1000 and high-speed data communications technologies.
The PSC1000 technology and its initial microprocessors, the PSC1000 family,
were targeted for the embedded controller and Java language processor
marketplaces and have recently been replaced with Ignite I microprocessor
technology which addresses the same marketplaces.

In reviewing its communication technology markets, the Company determined
that it could not effectively compete in the ISDN (which stands for integrated
services digital network, a high-speed method of transmitting data over the
Internet now primarily used in Europe) market. However, the Company continues
to sell matured communication products to a select number of customers who have
requirements for older generation products. The Company will continue to serve
this sector of the market as long as doing so is cost beneficial and is not
disruptive to its major product line, the Ignite I microprocessor technology.

The Company has experienced in the past and may experience in the future
many of the problems, delays and expenses encountered by any business in the
early stages of development, some of which are beyond the Companys control.
The Company has limited operating history, has incurred significant cumulated
losses, has only recently commenced marketing and sales of its products and has
not achieved a profitable level of operations. There can be no assurance of
future profitability. The Company may require additional funds in the future
for operations or to exploit its technologies. There can be no assurance that
any funds required in the future can be generated from operations or that such
required funds will be available from other potential sources. The lack of
additional capital could force the Company to substantially curtail or cease
operations and would therefore have a material adverse effect on the



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Companys
business. Further there can be no assurance that any such required funds, if
available, will be available on attractive terms or that they will not have a
significantly dilutive effect on the Companys existing shareholders. The
Companys technologies are in various stages of development. The Ignite I is
in the first stages of production. There can be no assurance that any of the
technologies in development can be completed to commercial exploitation due to
the inherent risks of new technology development limitations on financing,
competition, obsolescence, loss of key technical personnel and other factors.
The Companys development projects are high risk in nature, where unanticipated
technical obstacles can arise at any time and result in lengthy and costly
delays or result in determination that further development is unfeasible.
There can be no assurance that the technologies, if completed, will achieve
market acceptance sufficient to sustain the Company or achieve profitable
operations.

The Company relies primarily on patents to protect its intellectual
property rights. There can be no assurance that patents held by the Company
will not be challenged and invalidated, that patents will issue from any of the
Companys pending applications or that any claims allowed from existing or
pending patents will be sufficient in scope or strength or be issued in all
countries where the Companys products can be sold to provide meaningful
protection or commercial advantage to the Company. Competitors may also be
able to design around the Companys patents.

The Companys common shares are traded on the OTC Bulletin Board, are
thinly traded and are subject to special regulations imposed on penny stocks.
The Companys shares may experience significant price and volume volatility,
increasing the risk of ownership to investors.







PART II. OTHER INFORMATION







Item 1. Legal Proceedings

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







Item 6. Exhibits and Reports on Form 8-K

(a) None







SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|                    |                                                                                                                                                     |                       
|------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------
|                    | PATRIOT SCIENTIFIC CORPORATION                                                                                                                     
|                   
|Date: April 4, 2001 | By:                                                                                                                                                 | /s/ LOWELL W. GIFFHORN
|                    |                                                                                                                                                    
|                    | Exec. V.P. and Chief Financial Officer
        (Principal Financial and Accounting Officer and duly
authorized to sign on behalf of the Registrant)



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