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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-Q

(Mark One)



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

| |                                             
| | --------------------------------------------
| | For quarterly period ended November 30, 2001

OR



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

| |                                                                   
| | ------------------------------------------------------------------
| | For the transition period from  _______________ to _______________

| |                               
| | ------------------------------
| | Commission File Number 0-22182

PATRIOT SCIENTIFIC CORPORATION(Exact name of registrant as specified in its charter)

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

10989 Via Frontera, San Diego, California 92127

---

(Address of principal executive offices, ZIP Code)


(858) 674-5000

---

(Registrants telephone number, including area code)


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

Indicate 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 |  |  | 68,375,897                        | 
|                                |  |  |                                   | 
|(Class)                         |  |  | (Outstanding at January 14, 2002)





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TABLE OF CONTENTS



|                              |                                                                                                |                                                   |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------------- |  |  |  |  |  | 
|PART I- FINANCIAL INFORMATION
|                              | Item 1. Financial Statements                                                                  
|                              |                                                                                                | CONSOLIDATED BALANCE SHEETS                      
|                              |                                                                                                | CONSOLIDATED STATEMENTS OF OPERATIONS            
|                              |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|                              |                                                                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS       
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                              | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             
|PART II. OTHER INFORMATION   
|                              | Item 1. Legal Proceedings                                                                     
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      
|SIGNATURES                   



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PATRIOT SCIENTIFIC CORPORATION
INDEX

|                              |  |         |  |                                                                                                                        |  |      
|----------------------------- |  | ------- |  | ---------------------------------------------------------------------------------------------------------------------- |  | -----
|                              |  |         |  |                                                                                                                        |  | Page 
|PART I. FINANCIAL INFORMATION |  |        
|                             
|                              |  | Item 1. |  | Financial Statements:                                                                                                  |  |      
|                             
|                              |  |         |  | Consolidated Balance Sheets as of November 30, 2001 (unaudited)
and May 31, 2001                                       |  | 3    
|                             
|                              |  |         |  | Consolidated Statements of Operations for the three months and
six months ended November 30, 2001 and 2000 (unaudited) |  | 4    
|                             
|                              |  |         |  | Consolidated Statements of Cash Flows for the six months ended
November 30, 2001 and 2000 (unaudited)                  |  | 5    
|                             
|                              |  |         |  | Notes to Unaudited Consolidated Financial Statements                                                                   |  | 6-14 
|                             
|                              |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                  |  | 15-25
|                             
|                              |  | Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk                                                              |  | 25   
|                             
|PART II. OTHER INFORMATION    |  | 25     
|                             
|                              |  | Item 1. |  | Legal Proceedings                                                                                                      |  | 25   
|                              |  | 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                                                                                       |  | 25   
|                             
|SIGNATURES                    |  | 26     



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|* |  | No information provided due to inapplicability of the item.
|- |  | -----------------------------------------------------------

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PART I- FINANCIAL INFORMATION
Item 1. Financial Statements

PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                            |                                                                                                                  |   |         |             |              |   |           |             |   |  | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | - | ------- | ----------- | ------------ | - | --------- | ----------- | - |  | 
|                                            |                                                                                                                  |   |         |             | November 30, |   | May 31,  
|                                            |                                                                                                                  |   |         |             | 2001         |   | 2001     
|                                            |                                                                                                                  |   |         |             | (Unaudited)  |   |          
|ASSETS (Note 5)                            
|Current assets:                             |                                                                                                                  |   |         |             |              |   |           |            
|                                            | Cash and cash equivalents                                                                                        |   | $       | 42,793      |              |   | $         | 464,350     |  
|                                            | Accounts receivable, net of allowance
of $124,600 and $54,000 for uncollectible accounts                         |   |         | 7,472       |              |   |           | 188,982     |  
|                                            | Inventories (Note 4)                                                                                             |   |         |            |              |   |           | 223,393     |  
|                                            | Prepaid expenses                                                                                                 |   |         | 113,410     |              |   |           | 73,185      |  
|                                            |                                                                                                                  |   |         |             |              |   |           |            
|Total current assets                        |                                                                                                                  |   | 163,675 |             |              |   | 949,910   |            
|Property and equipment, net                 |                                                                                                                  |   | 416,056 |             |              |   | 423,528   |            
|Other assets, net                           |                                                                                                                  |   | 70,306  |             |              |   | 16,667    |            
|Patents and trademarks, net (Note 5)        |                                                                                                                  |   | 122,192 |             |              |   | 153,588   |            
|                                            |                                                                                                                  |   |         |             |              |   |           |            
|                                            |                                                                                                                  | $ | 772,229 |             |              | $ | 1,543,693 |            
|                                            |                                                                                                                  |   |         |             |              |   |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY       
|Current liabilities:                        |                                                                                                                  |   |         |             |              |   |           |            
|                                            | Notes payable, net of unamortized debt discount
of $287,182 (Note 5)                                             |   | $       | 150,018     |              |   | $         |            |  
|                                            | Accounts payable                                                                                                 |   |         | 376,331     |              |   |           | 434,838     |  
|                                            | Accrued liabilities                                                                                              |   |         | 196,647     |              |   |           | 186,467     |  
|                                            | Current portion of capital lease obligation                                                                      |   |         | 4,572       |              |   |           |            |  
|                                            |                                                                                                                  |   |         |             |              |   |           |            
|Total current liabilities                   |                                                                                                                  |   | 727,568 |             |              |   | 621,305   |            
|Long term capital lease obligation          |                                                                                                                  |   | 19,432  |             |              |   |          |            
|Commitments (Notes 5, 6, 7, 9, and 10)      |                                                                                                                  |   |         |             |              |   |           |            
|Stockholders equity (Notes 5, 6, 7 and 8): |                                                                                                                  |   |         |             |              |   |           |            
|                                            | 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 66,086,457 and 57,535,411 |   |         | 661         |              |   |           | 575         |  
|                                            | Additional paid-in capital                                                                                       |   |         | 39,028,830  |              |   |           | 37,320,503  |  
|                                            | Accumulated deficit                                                                                              |   |         | (38,924,262 | )            |   |           | (36,318,690 | )
|                                            | Note receivable (Note 8)                                                                                         |   |         | (80,000     | )            |   |           | (80,000     | )
|                                            |                                                                                                                  |   |         |             |              |   |           |            
|Total stockholders equity                  |                                                                                                                  |   | 25,229  |             |              |   | 922,388   |            
|                                            |                                                                                                                  |   |         |             |              |   |           |            
|                                            |                                                                                                                  | $ | 772,229 |             |              | $ | 1,543,693 |            
|                                            |                                                                                                                  |   |         |             |              |   |           |            

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

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PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |           |  
|------------------------------------------------------------------------------- | ----------------------------------- | - | ------------------ | -------- | ---------------- | - | ------------ | ------- | ------------ | - | ---------- | --------- | - | - | ---------- | --------- | -
|                                                                                |                                     |   | Three Months Ended |          | Six Months Ended
|                                                                                |                                     |   | November 30,       |          | November 30,     |   | November 30, |         | November 30,
|                                                                                |                                     |   | 2001               |          | 2000             |   | 2001         |         | 2000        
|Net sales                                                                       |                                     | $ | 7,389              |          |                  | $ | 57,623       |         |              | $ | 321,889    |           |   | $ | 176,724    |          
|Cost of sales:                                                                  |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|                                                                                | Product costs                       |   |                    | 36,409   |                  |   |              | 113,214 |              |   |            | 240,578   |   |   |            | 247,420   |  
|                                                                                | Inventory obsolescence              |   |                    | 149,433  |                  |   |              |        |              |   |            | 149,433   |   |   |            |          |  
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|Cost of sales                                                                   |                                     |   | 185,842            |          |                  |   | 113,214      |         |              |   | 390,011    |           |   |   | 247,420    |          
|Gross loss                                                                      |                                     |   | (178,453           | )        |                  |   | (55,591      | )       |              |   | (68,122    | )         |   |   | (70,696    | )        
|Operating expenses:                                                             |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|                                                                                | Research and development            |   |                    | 375,439  |                  |   |              | 527,310 |              |   |            | 871,247   |   |   |            | 1,082,172 |  
|                                                                                | Selling, general and
administrative |   |                    | 738,672  |                  |   |              | 619,100 |              |   |            | 1,392,412 |   |   |            | 949,545   |  
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|                                                                                |                                     |   | 1,114,111          |          |                  |   | 1,146,410    |         |              |   | 2,263,659  |           |   |   | 2,031,717  |          
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|Operating loss                                                                  |                                     |   | (1,292,564         | )        |                  |   | (1,202,001   | )       |              |   | (2,331,781 | )         |   |   | (2,102,413 | )        
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|Other income (expenses):                                                        |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|                                                                                | Interest income                     |   |                    | 58       |                  |   |              | 17,007  |              |   |            | 363       |   |   |            | 31,626    |  
|                                                                                | Interest expense                    |   |                    | (266,096 | )                |   |              | (1,669  | )            |   |            | (274,154  | ) |   |            | (2,416    | )
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|                                                                                |                                     |   | (266,038           | )        |                  |   | 15,338       |         |              |   | (273,791   | )         |   |   | 29,210     |          
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|Net loss                                                                        |                                     | $ | (1,558,602         | )        |                  | $ | (1,186,663   | )       |              | $ | (2,605,572 | )         |   | $ | (2,073,203 | )        
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|Basic and diluted loss
per common share                                         |                                     | $ | (0.02              | )        |                  | $ | (0.02        | )       |              | $ | (0.04      | )         |   | $ | (0.04      | )        
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          
|Weighted average number of
common shares outstanding
during the period (Note 1) |                                     |   | 62,761,554         |          |                  |   | 52,654,165   |         |              |   | 60,741,712 |           |   |   | 51,953,575 |          
|                                                                                |                                     |   |                    |          |                  |   |              |         |              |   |            |           |   |   |            |          

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

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PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |            |         |          |  
|------------------------------------------------- | ----------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------------------------------------- | ---------- | ----------------- | ------- | ----------------- | ---------- | ------- | -------- | -
|                                                  |                                                                         |                                                                                        |                                       |            | Six Months Ended 
|                                                  |                                                                         |                                                                                        |                                       |            | November 30, 2001 |         | November 30, 2000
|Increase (Decrease) in Cash and Cash Equivalents  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Operating activities:                             |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|                                                  | Net loss                                                                |                                                                                        | $                                     | (2,605,572 | )                 |         | $                 | (2,073,203 | )      
|                                                  | Adjustments to reconcile net loss
to cash used in operating activities: |                                                                                        |                                       |            |                   |         |                   |            |        
|                                                  |                                                                         | Amortization and depreciation                                                          |                                       |            | 121,464           |         |                   |            | 110,547 |         
|                                                  |                                                                         | Provision for doubtful accounts                                                        |                                       |            | 70,600            |         |                   |            |        |         
|                                                  |                                                                         | Provision for inventory obsolescence                                                   |                                       |            | 149,433           |         |                   |            |        |         
|                                                  |                                                                         | Issuance of options for services                                                       |                                       |            |                  |         |                   |            | 47,691  |         
|                                                  |                                                                         | Non-cash interest expense related to warrants and
settlement of debt with common stock |                                       |            | 261,068           |         |                   |            |        |         
|                                                  |                                                                         | Changes in:                                                                            |                                       |            |                   |         |                   |            |         |         
|                                                  |                                                                         |                                                                                        | Accounts receivable                   |            |                   | (43,248 | )                 |            |         | (46,445  | )
|                                                  |                                                                         |                                                                                        | Inventories                           |            |                   | 73,960  |                   |            |         | (196,231 | )
|                                                  |                                                                         |                                                                                        | Prepaid and other assets              |            |                   | (53,190 | )                 |            |         | (72,910  | )
|                                                  |                                                                         |                                                                                        | Accounts payable and accrued expenses |            |                   | (48,327 | )                 |            |         | (351,642 | )
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Net cash used in operating activities             |                                                                         |                                                                                        | (2,073,812                            | )          |                   |         | (2,582,193        | )         
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Investing activities:                             |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|                                                  | Note receivable (Note 8)                                                |                                                                                        |                                       |           |                   |         |                   | (80,000    | )      
|                                                  | Web site development costs                                              |                                                                                        |                                       |           |                   |         |                   | (25,000    | )      
|                                                  | Purchase of property and equipment                                      |                                                                                        |                                       | (51,348    | )                 |         |                   | (61,506    | )      
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Net cash used in investing activities             |                                                                         |                                                                                        | (51,348                               | )          |                   |         | (166,506          | )         
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Financing activities:                             |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|                                                  | Proceeds from the issuance of short term notes payable                  |                                                                                        |                                       | 665,000    |                   |         |                   |           |        
|                                                  | Proceeds from the issuance of common stock                              |                                                                                        |                                       | 811,604    |                   |         |                   | 1,562,844  |        
|                                                  | Payments for capital lease obligations                                  |                                                                                        |                                       | (992       | )                 |         |                   |           |        
|                                                  | Proceeds from sales of accounts receivable                              |                                                                                        |                                       | 154,158    |                   |         |                   |           |        
|                                                  | Proceeds from exercise of common stock
warrants and options             |                                                                                        |                                       | 73,833     |                   |         |                   | 159,453    |        
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Net cash provided by financing activities         |                                                                         |                                                                                        | 1,703,603                             |            |                   |         | 1,722,297         |           
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Net decrease in cash and cash equivalents         |                                                                         |                                                                                        | (421,557                              | )          |                   |         | (1,026,402        | )         
|Cash and cash equivalents, beginning of period    |                                                                         |                                                                                        | 464,350                               |            |                   |         | 2,100,242         |           
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Cash and cash equivalents, end of period          |                                                                         | $                                                                                      | 42,793                                |            |                   | $       | 1,073,840         |           
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|Supplemental Disclosure of Cash Flow Information: |                                                                         |                                                                                        |                                       |            |                   |         |                   |           
|                                                  | Cash payments for interest                                              |                                                                                        | $                                     | 11,656     |                   |         | $                 | 2,416      |        
|                                                  | Warrants and options issued for prepaid services                        |                                                                                        | $                                     | 57,500     |                   |         | $                 | 23,258     |        
|                                                  | Capital lease obligation                                                |                                                                                        | $                                     | 24,996     |                   |         | $                 |           |        
|                                                  | Cancellation of options issued for prepaid services                     |                                                                                        | $                                     | 10,574     |                   |         | $                 |           |        
|                                                  | Issuance of shares of common stock in payment
of notes payable          |                                                                                        | $                                     | 227,800    |                   |         | $                 |           |        
|                                                  | Debt discount                                                           |                                                                                        | $                                     | 351,000    |                   |         | $                 |           |        
|                                                  |                                                                         |                                                                                        |                                       |            |                   |         |                   |           

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

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PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements of Patriot Scientific Corporation
(Patriot) presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with our audited financial statements and notes
thereto for the year ended May 31, 2001.

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

Loss Per Share

We follow 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 13,450,923 and
7,598,899 for the three and six months ended November 30, 2001 and 2000,
respectively, were not included in diluted loss per share for the periods as
the effect was antidilutive due to our recording losses in each of those
periods. As discussed in Note 5, subsequent to November 30, 2001, we issued an
interim warrant to purchase 3,630,940 shares of our common stock. See Notes 5
and 10 for discussion of commitments to issue additional shares of common stock
and warrants.

Sale of Accounts Receivable

We follow SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125.
SFAS No. 140 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
factoring line we have established with a bank enables us to sell selected
accounts receivable invoices to the bank with full recourse against us. These
transactions qualify for a sale of assets since (1) we have transferred all of
our rights, 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) we have no effective control over the selected
accounts receivable invoices since we may not redeem the invoices sold previous
to the invoices being greater than 90 days past due. Under SFAS
No. 140, after
a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes
liabilities when extinguished. During the first six months of fiscal 2002, we
sold $192,697 of our accounts receivable to a bank under a factoring agreement
for $154,158. Pursuant to the provisions of SFAS No. 140, we reflected the
transactions as sales of assets and established a receivable from the bank for
the retained amount less the costs of the transactions 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 invoices sold to the bank less 1% of
the total invoices 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. We collected the entire retained amount in November 2001, and there
was no allowance for future losses. As of November 30, 2001, there was no
balances outstanding under the factoring line and $400,000 was available for
future factoring of accounts receivable invoices.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

Reclassifications

Certain items in the unaudited November 30, 2000 financial statements have been
reclassified to conform to the current presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 requires that those long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or in discontinued operations.
Therefore, discontinued operations will no longer be measured at net realizable
value or include amounts for operating losses that have not yet occurred.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, is to be applied
prospectively.

3. MANAGEMENTS PLAN

Our consolidated financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Our ability to continue as a
going concern is contingent upon our obtaining sufficient financing to sustain
our operations. We incurred a net loss of $2,605,572, $4,968,903 and
$7,488,708 and negative cash flow from operations of $2,073,812, $4,839,180 and
$3,483,050 in the six months ended November 30, 2001 and the years ended May
31, 2001 and 2000, respectively. At November 30, 2001, we had deficit working
capital of $563,893 and cash and cash equivalents of $42,793. We have
historically funded our operations primarily through the issuance of securities
and debt financings. Cash and cash equivalents decreased $421,557 during the
six months ended November 30, 2001.

We estimate our current cash requirements to sustain our operations for the
next twelve months through November 2002 to be $2.8 million. Since we are
attempting to sell the communications product line, we are assuming that there
will be no communications product revenue beyond what was recognized during our
first two fiscal quarters of 2002 that ended on November 30, 2001. In addition
to limitations based on trading volume and market price of the common stock,
our ability to obtain equity financing under the $25 million equity line of
credit (see Note 6) is dependent on our having registered an adequate number of
shares to sell to Swartz Private Equity, LLC (Swartz). As of November 30,
2001, we have 14,100,000 registered shares remaining to sell to Swartz under
the registration statement that became effective on November 5, 2001. At the
current market price and assuming adequate market volume, we estimate that we
will need to register additional shares under the current registration
statement by May 2002. We will need to get shareholder approval to increase
the authorized number of shares to be able to accomplish the additional share
registration. The terms of the $25 million equity line of credit, including
limitations on the amount of shares that can be sold to Swartz based on the
trading volume and market price of the common stock, may not provide funds
sufficient to meet our cash requirements. On November 5, 2001, we entered into
a secured note payable with Swartz whereby Swartz is able to advance us monies
previous to the close of the next put. As of November 30, 2001, we have
received an aggregate of $665,000 principal against this note of which, on
November 9, 2001, $227,800 was applied from the final put under the $30 million
equity line of credit (see Note 6). Subsequent to November 30, 2001, we have
received an additional $500,000 against the note which may be applied against
the first and future puts under the $25 million equity line of credit. Also
on November 5, 2001, we entered into a waiver and agreement with Swartz whereby
Swartz is able to advance us multiple funds previous to the close of the first
put under the $25 million equity line of credit. Subsequent to November 30,
2001, we entered into two additional similar waivers with Swartz under which we
are committed to put and Swartz is committed to purchase, subject to volume
limitations, up to 7.5 million shares of our common stock. These waivers are
discussed further in Note 6. In order to meet our cash requirements, we may
need to receive additional advances from Swartz, secure short-term debt,
private placement debt and/or equity financings with individual or
institutional investors. In addition to the cost reduction plan implemented
during the second fiscal quarter, including the reduction in personnel, we may
need to make additional cost reductions if our cash requirements cannot be met
from external sources. Based on the above assumptions, we expect that the $2.8
million requirement will be provided by available funds under the $25 million
equity line of credit, as discussed above and below, $500,000 of which was
funded subsequent to the quarter ended
November 30, 2001; proceeds from the exercise of outstanding stock options and
warrants; and additional debt and/or equity financings. In addition, we have
formulated additional cost reduction plans which can be implemented if the
required funds are not obtainable. We also have remaining a $400,000 accounts
receivable factoring agreement with our bank.

Although we anticipate our future revenue to be derived primarily from the sale
of licenses and royalties, we may require additional equipment, fabrication,
components and supplies during the next twelve months to support potential
customer requirements and further develop our technologies. Product
introductions such as those currently underway
for the Ignite I and JUICEtechnology may require significant product launch,
marketing personnel and other expenditures that cannot be currently estimated.
Further, if expanded development is commenced or new generations of
microprocessor technology is accelerated beyond current plans, additional
expenditures we cannot currently

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

estimate, may be required. It is possible therefore, that higher levels of
expenditures may be required than we currently contemplate resulting from
changes in development plans or as required to support new developments or
commercialization activities or otherwise.

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

4. INVENTORIES

Inventories were stated at cost (determined primarily by the weighted average
cost method which approximated cost on a first-in, first-out basis) not in
excess of market value. Due to the winding down of revenue from the
communications product line and the shift in emphasis to the sale of
microprocessor intellectual property through the issuance of licenses as
opposed to the sale of silicon based microprocessors and related products, as
of November 30, 2001, we have set up a reserve for obsolescence for the
remaining inventory balance.

Inventories at November 30, 2001 and May 31, 2001, consisted of the following:

|                         |  |                   |          |              |  |   |          |  
|------------------------ |  | ----------------- | -------- | ------------ |  | - | -------- | -
|                         |  | November 30, 2001 |          | May 31, 2001
|                         |  | (unaudited)       |          |             
|Component parts          |  | $                 | 303,348  |              |  | $ | 343,430  |  
|Work in process          |  |                   |         |              |  |   | 20,000   |  
|Finished goods           |  |                   | 108,085  |              |  |   | 121,963  |  
|                         |  |                   |          |              |  |   |          |  
|                         |  |                   | 411,433  |              |  |   | 485,393  |  
|Reserve for obsolescence |  |                   | (411,433 | )            |  |   | (262,000 | )
|                         |  |                   |          |              |  |   |          |  
|                         |  | $                 |         |              |  | $ | 223,393  |  
|                         |  |                   |          |              |  |   |          |  

5. NOTE PAYABLE

On November 5, 2001, we entered into a Secured Promissory Note with Swartz.
The note matures on November 5, 2002. The initial amount of the note was
$565,000 and bears interest at the rate of 5% per annum. Upon mutual agreement
between Swartz and ourselves, Swartz may advance additional amounts under the
note. Interest payments are due monthly starting January 1, 2002 and are to be
paid in cash. Principal amounts equal to at least 20% of the
dollar trading volume for our common stock for the twenty trading day period
immediately preceding the date of such payment are due monthly starting January
1, 2002 and may be paid by an offset against amounts due to us from Swartz as a
result of common shares put to Swartz under the $25 million equity line of
credit as discussed below. The January 1, 2002 payment was waived until the
conclusion of the put in effect on that date. On November 9, 2001, an offset
of $227,800 was applied against the final put under the $30 million equity line
of credit discussed below. Also during November, we received an additional
advance of $100,000 resulting in a balance due of $437,200 at November 30,
2001. Subsequent to the quarter ended November 30, 2001, we received
additional advances accumulating $500,000. The note is secured by our assets.

Also on November 5, 2001, we entered into a waiver and agreement with Swartz
whereby Swartz is able to advance us multiple funds previous to the close of
the first put under a $25 million equity line of credit as discussed in Note 6.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

Under this waiver, we are committed to put, subject to volume limitations, up
to 2.5 million shares of our common stock. Pursuant to the waiver, we agreed
to issue additional purchase warrant shares to be equal to the number of shares
issued under the first put. Under the waiver, the purchase warrant shares will
be issued to Swartz as restricted shares subject to piggyback registration
rights and are subject to repricings on each six month anniversary if 110% of
the lowest closing bid price for the five days previous to the anniversary date
is less than the initial or subsequent reset exercise prices. On January 7,
2002, we issued an interim warrant to purchase 3,630,940 shares, that included
these 2.5 million shares, of our common stock at an exercise price of $.10 per
common share which is exercisable at the earlier of ninety days or the close of
the first put under the $25 million equity line of credit. As of November 30,
2001, the 2.5 million warrants to be issued to Swartz were valued based on the
fair value of the subsequently issued warrant using the Black-Scholes pricing
model and the estimated fair value was recorded as debt discount to be
amortized over the estimated projected term of the note payable. See Note 6
for discussion of the terms of the warrant. Also in connection with closing
the $25 million equity line of credit, we issued to Swartz a commitment warrant
to purchase 900,000 shares of our common stock as discussed further in Note 6.
This warrant was valued on the issuance date using the Black-Scholes pricing
model and the value was recorded as a debt discount to be amortized as
additional interest expense over the projected term of the note payable. As of
November 30, 2001, $351,000 has been reflected as debt discount of which
$63,818 was amortized to interest expense during the three and six months ended
November 30, 2001.

On November 9, 2001, $227,800 from the sale of 2,500,000 shares of common stock
was applied as a principal reduction for this note. This was the last put
under the $30 million equity line of credit. The $197,250 excess of the market
value of the underlying 2,500,000 shares of common stock over the principal
reduction of $227,800 was recorded as additional interest expense.

6. INVESTMENT AGREEMENTS

$30 Million Equity Line of Credit Agreement

In May 2000, we entered into an investment agreement with Swartz. The
investment agreement entitled us , at our option, to issue and sell our common
stock for up to an aggregate of $30 million from time to time during a
three-year period through June 23, 2003, subject to certain conditions
including among other items (1) an effective registration statement must be on
file with the SEC registering the resale of the common shares, and (2) a
limitation on the number of common shares that can be sold to Swartz within a
30 day time period based on the trading volume of the stock. Swartz purchased
the common stock from us at a discount. If the market price was less than
$1.00 per share, the discount was $.10 per share; if the market price was
between $1.00 to $1.99 per share, the discount was 10%; and if the market price
was $2.00 or greater, the discount was 7%. In addition to the common stock
purchased, Swartz received warrants to purchase an additional 15% of the common
stock equal to 110% of the market price as determined during the pricing
period, subject to further semi-annual price adjustments if the price of our
common stock goes down.

The registration statement went effective on June 23, 2000. Since the
inception of the agreement through November 30, 2001, we received proceeds of
$4,381,601 from the sale of 12,000,000 shares of common stock . Per the terms
of the investment agreement, through November 30, 2001, we issued eight
five-year warrants for 1,200,000 shares of common stock exercisable initially
at prices ranging from $0.26 to $1.562.

On September 24, 2001, we entered into a waiver and agreement with Swartz
whereby Swartz was able to advance us $227,800 previous to the close of the
final put under the $30 million equity line of credit. The waiver and
agreement extended the time of the put beyond twenty days and redefined the
price of the put to be the lesser of the factor of (a) the volume weighted
average price per share, as defined by Bloomberg L.P., for each day of the put
multiplied by .70 or (b) the volume weighted average price per share minus
$0.05 multiplied by 20% of the acceptable daily volume as defined in the
waiver. At the discretion of Swartz the 20% daily volume limitation could be
increased up to 30% of the daily volume. In addition, the waiver included the
issuance of a purchase warrant to purchase 2,125,000 shares of
common stock at an initial exercise price of $0.0911. The purchase warrant
shares were issued to Swartz as restricted shares subject to piggyback
registration rights and are subject to repricings on each six month anniversary
if 110%

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

of the lowest closing bid price for the five days previous to the anniversary
date is less than the initial or subsequent reset exercise prices. See Note 7
for further information on the warrants.

$25 Million Equity Line of Credit Agreement

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

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

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

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

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



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

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



| |  |  | we have announced or implemented a stock split or
combination of our common stock between the advanced put notice
date and the end of the pricing period;                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we have paid a common stock dividend or made any other
distribution of our common stock between the advanced put notice
date and the end of the pricing period;                                  
|
| |  |  | we have made a distribution to the holders of our common
stock or of all or any portion of our assets or evidences of
indebtedness between the put notice date and the end of the
pricing period;

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)



| |  |  | control between the advance put notice date and the end
of the pricing period;                                                                                                     
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the registration statement covering the resale of the
shares becomes ineffective or unavailable for use, or our stock
becomes delisted for trading on our then primary exchange; or
|
| |  |  | we discover the existence of facts that cause us to
believe that the registration statement contains an untrue
statement or omits to state a material fact.                        

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

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

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

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

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

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

Waiver and Agreement.On November 5, 2001, December 6, 2001, and January 2,
2002, we entered into three waivers and agreements with Swartz whereby Swartz
is able to advance us multiple funds, $937,200 as of January 14, 2002, previous
to the close of the first put of up to 7.5 million shares of common stock under
this $25 million equity line of credit. The waivers and agreements extended
the time of the put beyond twenty days and redefined the price of the put to be
the lesser of the factor of (a) the volume weighted average price per share,
as defined by Bloomberg L.P., for each day of the put multiplied by .70 or (b)
the volume weighted average price per share minus $0.05 multiplied by 20% of
the acceptable daily volume as defined in the waiver. At the discretion of
Swartz the 20% daily volume limitation may be increased up to 30% of the daily
volume. In addition, the waivers included the commitment to issue additional
purchase warrant shares to be equal to the number of shares issued under the
first put. Under these waivers, the purchase warrant shares will be issued to
Swartz as restricted shares subject to piggyback registration rights and are
subject to repricings on each six month anniversary if 110% of the lowest
closing bid price for the five days previous to the anniversary date is less
than the initial or subsequent reset exercise prices. On January 7, 2002, we
issued an interim warrant to purchase 3,630,940 shares of our common stock at
an exercise price of $0.10. The interim warrant is exercisable the earlier of
90 days or the close of the first put under the $25 million equity line of
credit. If the first put has not closed within the 90 days, Swartz may
exercise the interim warrant and any exercised shares will be deducted from the
final warrant related to the first put. If the first put closes prior to 90
days, the interim warrant will be exchanged for a new warrant.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

7. STOCKHOLDERS EQUITY

The following table summarizes equity transactions during the six months ended
November 30, 2001:

|                                                                    |  |        |            |         |  |   |            |  
|------------------------------------------------------------------- |  | ------ | ---------- | ------- |  | - | ---------- | -
|                                                                    |  | Common |            |         |  |  
|                                                                    |  | Shares |            | Dollars
|Balance June 1, 2001                                                |  |        | 57,535,411 |         |  | $ | 37,321,078 |  
|Warrants and options issued for services                            |  |        |           |         |  |   | 57,500     |  
|Cancellation of options issued for prepaid services                 |  |        |           |         |  |   | (10,574    | )
|Non-cash interest and unamortized debt discount
related to warrants |  |        |           |         |  |   | 548,250    |  
|Issuance of common stock                                            |  |        | 8,309,380  |         |  |   | 1,039,404  |  
|Exercise of common stock warrants and options                       |  |        | 241,666    |         |  |   | 73,833     |  
|                                                                    |  |        |            |         |  |   |            |  
|Balance November 30, 2001                                           |  |        | 66,086,457 |         |  | $ | 39,029,491 |  
|                                                                    |  |        |            |         |  |   |            |  

At November 30, 2001, we had 82,500 options outstanding pursuant to our 1992
ISO Stock Option Plan exercisable at $1.325 per share expiring in 2005; 135,753
options outstanding pursuant to our 1992 NSO Stock Option Plan exercisable at a
range of $0.18 to $1.325 per share expiring beginning in 2001 through 2005;
1,682,905 options outstanding pursuant to our 1996 Stock Option Plan
exercisable at a range of $0.32 to $1.41 per share expiring beginning in 2001
through 2005; and 2,475,000 options outstanding pursuant to our 2001 Stock
Option Plan exercisable at a range of $0.11 to $0.70 per share expiring in
2006.

Some of the options outstanding under these plans are not presently exercisable
and are subject to meeting vesting criteria.

The 2001 Stock Option Plan was approved by our shareholders at our annual
meeting on October 11, 2001. The market price of our stock on October 11,
2001, the measurement date, was $0.17. As the exercise prices of the options
under the 2001 Stock Option Plan granted before the approval date exceeded the
market value of our stock on the measurement date, there will be no
compensation recorded for the grants.

At November 30, 2001, we had warrants outstanding exercisable into 9,074,765
common shares at exercise prices ranging from $0.09 to $1.12 per share
expiring beginning in 2002 through 2006. During the six months ended November
30, 2001, we issued warrants to purchase 4,163,302 shares of common stock of
which warrants to purchase 4,013,302 shares of common stock are subject to
repricings at the six month anniversary of the issuance of the warrant. At
each anniversary date the warrants will be repriced to the lesser of the
initial exercise price or 110% of the lowest closing bid price of our common
stock for the five trading days ending on such six month anniversary date of
the date of issuance. As of November 30, 2001, warrants to purchase 1,596,221
shares of common stock with initial exercise prices ranging from $0.34 to
$1.09 have been repriced to exercise prices ranging from $0.11 to $0.35.

As of November 30, 2001, as a result of the trading volume of our common
stock, Swartz was committed under the waiver agreements to the $25 million
equity line of credit (see Note 6) to purchase at least 1,720,700 shares of
our common stock which have been reflected as outstanding at November 30,
2001. As of January 14, 2002, as a result of the trading volume of our common
stock, Swartz is committed to purchase at least 2,289,400 additional shares of
our common stock under the waiver agreements to the $25 million equity line of
credit.

See Notes 5 and 6 for discussion of warrants issued subsequent to November 30,
2001 and commitments to issue additional warrants.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

8. NOTE RECEIVABLE

In June 2000, we 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 Patriot. On September 25, 2000, he requested and was
relieved of his duties as an executive officer and director of Patriot. 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 our common
stock that he held on the date of issuance as security for this note.

9. LEGAL PROCEEDINGS

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

A former employee has filed a claim in arbitration seeking the right to
exercise terminated options. Management believes that the claim has no merit
and will have no impact on our financial position or cash flows.

In September 2001, an action was filed against us in the Superior Court of San
Diego County, California by Richard G. Blum, our former Chairman, President and
Chief Executive Officer. Mr. Blum contends that he was wrongfully terminated
on August 5, 2001 in violation of his employment agreement dated December 1,
2000. He seeks damages for the alleged breach of his employment agreement, age
discrimination, as well as other related claims. Management
denies Mr. Blums claims and contends it exercised its business judgement for
legitimate nondiscriminatory reasons. In accordance with his employment
agreement, we may be obligated to pay him between $0 and $368,000 as severance
pay. We intend to vigorously defend our position in this case.

In October 2001, an action was filed against us in the Superior Court of San
Diego County, California by Daniel Beach, a former marketing and sales
consultant whose contract we terminated in August 2001. Mr. Beach contends
that we breached both a written and an oral contract, that we did not perform
on certain promises, and that we made false and misleading representations in
addition to other claims. Management denies Mr. Beachs claims and we intend
to vigorously defend our position in this case.

10. SUBSEQUENT EVENT

In December 2001, we entered into a series of agreements with iCapital
Corporation and several principals of iCapital Corporation whereby they will
provide consulting services over the next twelve months to help structure
financing, provide innovative capital resources, identify and assist with
merger and acquisition opportunities and advise us on other strategic
decisions. Based on meeting several performance criteria, iCapital and the
principals of iCapital will receive up to 2,200,000 shares of our common stock
as compensation for the consulting services. As of January 14, 2002, no shares
had been issued under the agreements.

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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
OUR 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 OUR ANNUAL REPORT ON FORM
10-KSB FOR THE YEAR ENDED MAY 31, 2001.

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



| |  |  | Our major product line has had limited revenues                                                                                                                                             
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have incurred significant losses and may continue to do so                                                                                                                               
|
| |  |  | Our independent certified public accountants have added an
explanatory paragraph to their opinion in which they expressed
substantial doubt about our ability to continue as a going concern
|
| |  |  | The price and the trading volume of our common stock have an
effect on the amount of capital we can raise                                                                                   
|
| |  |  | We will require additional financing                                                                                                                                                        
|
| |  |  | We may need to increase our authorized shares                                                                                                                                               
|
| |  |  | Large block sales of our stock may decrease the price of our stock                                                                                                                          
|
| |  |  | We may be impacted as a result of terrorism                                                                                                                                                 
|
| |  |  | Our products may not be completed on time                                                                                                                                                   
|
| |  |  | The market in which we operate is highly competitive                                                                                                                                        
|
| |  |  | Protection of our intellectual property is limited; there is a risk of claims for infringement                                                                                              
|
| |  |  | Our products are dependent on the Internet and Java                                                                                                                                         
|
| |  |  | Our stock is subject to penny-stock rules                                                                                                                                                   

Results of Operations for the Three Months Ended November 30, 2001 and November
30, 2000

Net sales. Total net sales for the second fiscal quarter ended November
30, 2001 decreased 87.2% to $7,389 from $57,623 for the corresponding period of
the previous fiscal year. This decrease was due to the final buys on our
matured communication products having been substantially completed. We
informed our customers that we would no longer be manufacturing these products
after this last buy opportunity and are attempting to find a buyer for this
group of products. We are currently expending our efforts on marketing and
sale of our microprocessor technology. The microprocessor technology generated
minimal revenue during the second fiscal quarter ended November 30, 2001. We
anticipate that future revenue will be derived from up front license fees and
royalties as a result of the shift in focus to the commercialization of our
microprocessor and related technology intellectual property. Previously we
focused primarily on the sale of silicon products. We cannot estimate when
significant revenue will be generated from the microprocessor technology.

Cost of sales. Cost of sales as a percentage of net sales increased to
2515.1% in the second fiscal quarter ended November 30, 2001 compared to 196.5%
for the corresponding period of the previous fiscal year. This significant
increase was due to the decrease in net sales as a result of the last buy of
communication products as discussed above coupled with a write-down in
inventory of $149,433. The write-down of the inventory to zero is a result of
not being able to find a buyer for the communication product line and our
decision to focus future company revenue on the sale of licenses and
intellectual property related to our microprocessor technology versus the sale
of microprocessor silicon and related products. The winding down of the
communication product line does not impair any of our other assets. Also, as a
result of decreased activity 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 for the quarter ended November 30, 2001.

Research and development expenses decreased 28.8% from $527,310 for the
second fiscal quarter ended November 30, 2000 compared to $375,439 for the
second fiscal quarter ended November 30, 2001. This decrease was due to a
reduction in consulting services compared to the previous fiscal year related
to the development of a new soft

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core version of the microprocessor technology
in the amount of $84,116, a reduction in payroll expense as a result of
downsizing the department by four individuals during the second fiscal
quarter in an amount of $20,210, a reduction in the maintenance fees for
support of the Java virtual machine and tool expense related thereto in the
amount of $25,835, and a general reduction in expenses related to the reduced
sales activities.

Selling, general and administrative expenses increased 19.3% to $738,672
for the second fiscal quarter ended November 30, 2001 compared to $619,100 for
the second fiscal quarter ended November 30, 2000. This increase was due
primarily to an increase in legal, accounting and shareholder expenses related
to our annual meeting, filing of a registration statement and responding to
several lawsuits filed against us during the second quarter in an aggregate
amount of $187,519 and an increase in the reserve for doubtful accounts
receivable of $65,600; offset partially by a reduction in personnel and
consulting costs related to executive, marketing and sales activities in the
amount of $114,991 as a result of downsizing the company during the second
fiscal quarter; and a general reduction in expenses related to the reduced
sales activities.

Other expense for the second fiscal quarter ended November 30, 2001,
$266,038, compared to other income of $15,338 for the corresponding period of
the previous fiscal year. This change resulted primarily from the recognition
of non-cash interest expense of $63,818 related to the amortization of the debt
discount associated with the issuance of warrants under a secured note payable
and the equity line of credit and additional interest expense of $197,250
related to the excess of the market price over the carrying value of the common
shares sold to Swartz for which the proceeds were applied to the note payable
balance (see Note 5) in the second fiscal quarter ended November 30, 2001
compared to the recognition of $17,007 of interest income during the
corresponding period of the previous fiscal year.

Results of Operations for the Six Months Ended November 30, 2001 and November
30, 2000

Net sales. Total net sales for the first six months ended November 30,
2001 increased 82.1% to $321,889 from $176,724 for the corresponding period of
the previous fiscal year. This increase was due to the final buys on our
matured communication products. We informed our customers that we would no
longer be manufacturing these products after this last buy opportunity and are
attempting to find a buyer for this group of products. We are currently
expending our efforts on marketing and sale of our microprocessor technology.
The microprocessor technology generated minimal revenue during the first six
months ended November 30, 2001. We anticipate that future revenue will be
derived from up front license fees and royalties as a result of the shift in
focus to the commercialization of our microprocessor and related technology
intellectual property. Previously we focused primarily on the sale of silicon
products. We cannot estimate when significant revenue will be generated from
the microprocessor technology.

Cost of sales. Cost of sales as a percentage of net sales decreased to
121.2% for the six months ended November 30, 2001 compared to 140.0% for the
corresponding period of the previous fiscal year. This decrease was due to the
significant increase in net sales as a result of the last buy of communication
products as discussed above partially offset by a write-down in inventory of
$149,433. The write-down of the inventory to zero is a result of not being
able to find a buyer for the communication product line and our decision to
focus future company revenue on the sale of licenses and intellectual property
related to our microprocessor technology versus the sale of microprocessor
silicon and related products.

Research and development expenses decreased 19.5% from $1,082,172 for the
six months ended November 30, 2000 compared to $871,247 for the six months
ended November 30, 2001. This decrease was due primarily to a reduction in
consulting services compared to the previous fiscal year related to the
development of a new soft core version of the microprocessor technology in an
amount of $126,381, a reduction in the maintenance fees for support of the Java
virtual machine and tool expense related thereto in the amount of $60,321, and
a general reduction in expenses related to the reduced sales activities.

Selling, general and administrative expenses increased 46.6% to
$1,392,412 for the six months ended November 30, 2001 compared to $949,545 for
the six months ended November 30, 2000. This increase was due to an increase
in personnel costs related to executive, marketing and sales activities
including several new employee positions in an amount of $163,270; an increase
in legal, accounting and shareholder expenses related to our annual meeting,
filing of a registration statement and responding to several lawsuits filed
against us during the six months

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ended November 30, 2001 in an aggregate amount
of $212,414; an increase in the reserve for doubtful accounts receivable of
$70,600; and a reduction in consulting expenses in an amount of $34,499.

Other expense for the six months ended November 30, 2001, $273,791,
compared to other income of $29,210 for the corresponding period of the
previous fiscal year. This change resulted primarily from the recognition of
non-cash interest expense of $63,818 related to the amortization of the debt
discount associated with the issuance of warrants under the secured note
payable and equity line of credit and additional interest expense of $197,250
related to the excess of the market price over the carrying value of the common
shares sold to Swartz for which the proceeds were applied to the note payable
balance (see Note 5) in the six months ended November 30, 2001 compared to the
recognition of $31,626 of interest income during the corresponding period of
the previous fiscal year.

Liquidity and Capital Resources

In connection with their report on our consolidated financial statements
as of and for the year ended May 31, 2001, BDO Seidman, LLP, our independent
certified public accountants, expressed substantial doubt about our ability to
continue as a going concern because of recurring net losses and negative cash
flow from operations.

At November 30, 2001, we had deficit working capital of $563,893
 and cash and cash equivalents of $42,793. We have historically funded our operations primarily through the issuance
 of securities and debt financings. Cash and cash equivalents decreased $421,557 during the six months ended
November 30, 2001 due to net cash used in operations of $2,073,812 and additions to property, equipment
and patents, net of $51,348 offset by funds generated primarily from the exercise of warrants and options to
purchase common stock of $73,833, proceeds from a note payable of $665,000 and the sale of common stock under
an investment agreement of $811,604. The net cash used in operations was $2,073,812 for the six months ended
November 30, 2001 compared to $2,582,193 for the corresponding period of the previous fiscal year. The
decrease in cash required in operations was due primarily to a $303,315 difference in the pay-down of
accounts payable coupled with a $270,191 difference in the cash generation and use of inventory between
the two periods. Cash used in investing activities was $51,348 for
the six months ended November 30, 2001
compared to $166,506 for the corresponding period of the previous fiscal year. This decrease in cash
required for investing activities was due primarily to a note receivable for $80,000 coupled with web
site development of $25,000 incurred during the corresponding period of the previous fiscal year.
Cash provided by financing activities was approximately the same at $1,703,603 for the six months
ended November 30, 2001 compared to $1,722,297 for the corresponding period of the previous fiscal year.

We estimate our current cash requirements to sustain our operations for
the next twelve months through November 2002 to be $2.8 million. Since we are
attempting to sell the communications product line, we are assuming that there
will be no communications product revenue beyond what was recognized during our
first two fiscal quarters of 2002 that ended on November 30, 2001. In addition
to limitations based on trading volume and market price of the common stock,
our ability to obtain equity financing under the $25 million equity line of
credit (see Note 6 to the unaudited consolidated financial statements) is
dependent on our having registered an adequate number of shares to sell to
Swartz Private Equity, LLC (Swartz). As of November 30, 2001, we have
14,100,000 registered shares remaining to sell to Swartz under the registration
statement that became effective on November 5, 2001. At the current market
price and assuming adequate market volume, we estimate that we will need to
register additional shares under the current registration statement by May
2002. We will need to get shareholder approval to increase the authorized
number of shares to be able to accomplish the additional share registration.
The terms of the $25 million equity line of credit, including limitations on
the amount of shares that can be sold to Swartz based on the trading volume and
market price of the common stock, may not provide funds sufficient to meet our
cash requirements. On November 5, 2001, we entered into a secured note payable
with Swartz whereby Swartz is able to advance us monies previous to the close
of the next put. As of November 30, 2001, we have received an aggregate of
$665,000 principal against this note of which, on November 9, 2001, $227,800
was applied from the final put under the $30 million equity line of credit (see
Note 6 to the unaudited consolidated financial statements). Subsequent to
November 30, 2001, we have received an additional $500,000 against the note
which may be applied against the first and future puts under the $25 million
equity line of credit. Also on November 5, 2001, we entered into a waiver and
agreement with Swartz whereby Swartz is able to advance us multiple funds
previous to the close of the first put under the $25 million equity line of
credit. Subsequent to November 30, 2001, we entered into two additional
similar waivers with Swartz

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under which we are committed to put and Swartz is
committed to purchase, subject to volume limitations, up to 7.5 million shares
of our common stock. These waivers are discussed further in Note 6 to the
unaudited consolidated financial statements. In order to meet our cash
requirements, we may need to receive additional advances from Swartz, secure
short-term debt, private placement debt and/or equity financings with
individual or institutional investors. In addition to the cost reduction plan
implemented during the second fiscal quarter, including the reduction in
personnel, we may need to make additional cost reductions if our cash
requirements cannot be met from external sources. Based on the above
assumptions, we expect
that the $2.8 million requirement will be provided by available funds under the
$25 million equity line of credit, as discussed above and below, $500,000 of
which was funded subsequent to the quarter ended
November 30, 2001; proceeds from the exercise of outstanding stock options and
warrants; and additional debt and/or equity financings. In addition, we have
formulated additional cost reduction plans which can be implemented if the
required funds are not obtainable. We also have remaining a $400,000 accounts
receivable factoring agreement with our bank.

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

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

$30 Million Equity Line of Credit

Overview.On May 2, 2000, we entered into an investment agreement with
Swartz Private Equity, LLC. The investment agreement entitled us to issue and
sell our 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 to register 13.8 million shares, including 1.8 million
shares reserved for the issuance of common stock upon the exercise of warrants.
This is also referred to as a put right. During the fiscal year ended May 31,
2001, we received proceeds of $3,342,197 from the sale of 5,411,320 shares of
common stock and during the first six months of our fiscal year 2002, which
ended November 30, 2001, we sold 6,588,680 shares of common stock for
$1,039,404 of which $227,800 was applied to related debt. See below discussion
for further information on the subsequent $25 million equity line of credit.

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

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business day immediately
following the day we invoked the put right and ends on and includes the day
which is twenty business days after the date we invoked the put right.

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

On September 24, 2001, we entered into an amended agreement with Swartz
whereby Swartz was able to advance us multiple funds previous to the close of
the next put. The waiver extended the time of the put beyond twenty days and
redefined the price of the put to be the lesser of the factor of (a) the
volume weighted average price per share, as defined by Bloomberg L.P., for each
day of the put multiplied by .70 or (b) the volume weighted average price per
share minus $0.05 multiplied by 20% of the acceptable daily volume as defined
in the waiver. If the number of shares necessary to support the advances turned
out to be greater than the number of registered shares remaining under the $30
million equity line of credit, then the excess shares were to be issued to
Swartz as restricted shares subject to piggyback registration rights. In
addition, the waiver included the issuance of additional purchase warrant
shares to be equal to the number of shares issued. If the number of purchase
warrant shares turned out to be greater than the number of registered shares
related to warrants remaining under the $30 million equity line of credit, then
the excess purchase warrant shares were to be issued to Swartz as restricted
shares subject to piggyback registration rights and are subject to repricings
on each six month anniversary if 110% of the lowest closing bid price for the
five days previous to the anniversary date is less than the initial or
subsequent reset exercise prices. The final put under this equity line of
credit was closed on November 9, 2001 by applying $227,800 against the advances
and issuing a warrant to purchase 2,125,000 restricted shares of our common
stock at an initial exercise price of $0.091 subject to repricings as discussed
above.

Warrants.Within five business days after the end of each pricing period,
we were 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
initially equaled 110% of the closing bid price on the put date for the
applicable put. The warrants have semi-annual reset provisions which may
reduce the exercise price. Each warrant was immediately exercisable and has a
term beginning on the date of issuance and ending five years thereafter.

Limitations and Conditions Precedent to Our Put Rights.Swartz was not
required to acquire and pay for any common shares with respect to any
particular put for which:



| |  |  | we have announced or implemented a stock split or combination of our common stock;                                                                                                  
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | we have paid a common stock dividend;                                                                                                                                               
|
| |  |  | we have made a distribution of our common stock or of all
or any portion of our assets between the put notice date and the
date the particular put closes; or                       
|
| |  |  | we have 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 were prohibited from engaging in
short sales of our common stock unless they have received a put notice and the
amount of shares involved in a short sale does not exceed the number of shares
specified in the put notice.

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



| |  |  | we discover 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.                                        

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However, we were required to issue common shares equal to the lesser of:



| |  |  | 20% of the daily reported trading volume of our 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 our common stock that would be
outstanding upon completion of the put.                                                                    

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

Termination of Investment Agreement.We may also terminate our right to
initiate further puts or terminate the investment agreement by providing Swartz
with notice of such intention to terminate; however, any such termination will
not affect any other rights or obligations we have concerning the investment
agreement or any related agreement. The investment agreement effectively
terminated with conclusion of the final put on November 9, 2001.

Restrictive Covenants.During the term of the investment agreement and
for a period of one-year thereafter, we are prohibited from certain
transactions. These include the issuance of any debt or equity securities in a
private transaction which are convertible or exercisable into shares of common
stock at a price based on the trading price of the common stock at any time
after the initial issuance of such securities or with a fixed conversion or
exercise price subject to adjustment. We are 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 us in any private transaction which
closes on or prior to six months after the termination of the investment
agreement.

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

$25 Million Equity Line of Credit

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

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

The price Swartz will pay for each share of common stock sold in a put is
equal to the lesser of (i) the market price for each of the two consecutive ten
business day periods beginning on the business day immediately following the
day we invoked the put right minus $0.10, or (ii) X% of the market price for
each of the two ten day periods, where, X is equal to 90% if the market price
is below $2.00 and 93% if market price is equal to or greater than $2.00.

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Market price is defined as the lowest closing bid price for the common stock
during each of the two consecutive ten business day periods. However, the
purchase price may not be less than the designated minimum per share price, if
any, that we indicated in our notice.

For example, suppose for our first put we provide a put notice to Swartz,
and that we set the threshold price at $0.10 per share, below which we will not
sell any shares to Swartz during the pricing periods. Suppose further that the
total daily trading volume for the 20 trading days immediately preceding the
put date is 2,400,000 shares with no block trades which exceeds X shares,
where X equals the lesser of 100,001 shares or 25% of that days Trading
Volume. Under these hypothetical numbers, the maximum amount of shares that
could be sold to Swartz is as follows:



| |  |  | the total trading volume for the 20 days prior to our put
notice (2,400,000 shares) multiplied by 20% equals 480,000
| | - |  | --------------------------------------------------------------------------------------------------------------------

If the total daily trading volume for the 20 trading days during the actual
pricing periods was greater than 2,400,000 (like our example that follows) then
the maximum amount of shares that could be sold will be 480,000.

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

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



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

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



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

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

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

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must get shareholder
approval to issue more than 20% of our outstanding shares. Since we are
currently a bulletin board company, we do not need shareholder approval.

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

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

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

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

Waiver and Agreement. On November 5, 2001, December 6, 2001, and January
2, 2002, we entered into three waivers and agreements with Swartz whereby
Swartz is able to advance us multiple funds, $937,200 as of January 14, 2002,
previous to the close of the first put of up to 7.5 million shares of common
stock under this $25 million equity line of credit. The waivers and agreements
extended the time of the put beyond twenty days and redefined the price of the
put to be the lesser of the factor of (a) the volume weighted average price
per share, as defined by Bloomberg L.P., for each day of the put multiplied by
     .70 or (b) the volume weighted average price per share minus $0.05 multiplied
by 20% of the acceptable daily volume as defined in the waiver. At the
discretion of Swartz the 20% daily volume limitation may be increased up to 30%
of the daily volume. In addition, the waivers included the commitment to issue
additional purchase warrant shares to be equal to the number of shares issued
under the first put. Under these waivers, the purchase warrant shares will be
issued to Swartz as restricted shares subject to piggyback registration
rights and are subject to repricings on each six month anniversary if 110% of
the lowest closing bid price for the five days previous to the anniversary date
is less than the initial or subsequent reset exercise prices. On January 7,
2002, we issued an interim warrant to purchase 3,630,940 shares of our common
stock at an exercise price of $0.10. The interim warrant is exercisable the
earlier of 90 days or the close of the first put under the $25 million equity
line of credit. If the first put has not closed within the 90 days, Swartz may
exercise the interim warrant and any exercised shares will be deducted from the
final warrant related to the first put. If the first put closes prior to 90
days, the interim warrant will be exchanged for a new warrant.

Note Payable

On November 5, 2001, we entered into a Secured Promissory Note with Swartz.
The note matures on November 5, 2002. The initial amount of the note was
$565,000 and bears interest at the rate of 5% per annum. Upon mutual agreement
between Swartz and ourselves, Swartz may advance additional amounts under the
note. Interest payments are due monthly starting January 1, 2002 and are to be
paid in cash. Principal amounts equal to at least 20% of the
dollar trading volume for our common stock for the twenty trading day period
immediately preceding the date of such payment are due monthly starting January
1, 2002 and may be paid by an offset against amounts due to us from Swartz as a
result of common shares put to Swartz under the $25 million equity line of
credit as discussed below. The January 1, 2002 payment was waived until the
conclusion of the put in effect on that date. On November 9, 2001, an offset
of $227,800 was applied against the final put under the $30 million equity line
of credit discussed below. Also during November, we received an additional
advance of $100,000 resulting in a balance due of $437,200 at November 30,
2001. Subsequent to the quarter ended November 30, 2001, we received
additional advances accumulating $500,000. The note is secured by our assets.

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New Accounting Pronouncements

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

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

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

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

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

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

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Future Performance and Risk Factors

THIS REPORT CONTAINS A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT OUR
CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE. OUR
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. WE UNDERTAKE 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, we
have segregated our operations into microprocessor, communication, and
radar/antenna product lines.

The status of these three major technologies is as follows:



| |  | Ignite I microprocessor technology. This technology is generating minor
amounts of revenue from the sale of evaluation boards, microprocessors and
initial license fees related to the intellectual property. We have ported
the VxWorks operating system and the Sun Microsystems personalJava virtual
machine to the microprocessor. Although we anticipate the sales of
licenses and royalties from the microprocessor technology will be our main
product line, it currently accounted for less than 1% of our revenue for the
three months ended November 30, 2001.                                                                                                
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | High-speed data communications. Revenue from this technology was
generated primarily from mature communication products that completed
their life cycles. We have decided to concentrate our efforts on the
Ignite I microprocessor technology and have discontinued the sale of
communication products subsequent to the last buys that were shipped
during the six months ended November 30, 2001. We are currently
attempting to sell this product line. Although the communications
product line accounted for almost all of the revenue shipped during the
first six months ended November 30, 2001, future revenue will come from
our microprocessor technologies.
| 
| |  | Radar and antenna. We sold the gas plasma antenna technology in August
1999. Our radar technology has not generated any revenue and we have
suspended further development of this technology in order to concentrate
our resources on the Ignite I microprocessor technology.                                                                                                                                                                                                                                                                                                                                                                                           

During at least the last three years, we have focused the majority of our
efforts on the Ignite I microprocessor technology. This technology is targeted
for the embedded controller and Java language processor marketplaces.

We have 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 our control. We have had
limited operating history, have incurred significant cumulated losses, have
only recently commenced marketing and sales of our products and have not
achieved a profitable level of operations. There can be no assurance of future
profitability. We may require additional funds in the future for operations or
to exploit our 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 us to substantially curtail or cease operations and would therefore
have a material adverse effect on our business. Further there can be no
assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significantly dilutive effect on
our existing shareholders. Our technologies are in various stages of
development. 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. Our
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 us or achieve profitable operations.

We rely primarily on patents to protect our intellectual property rights.
There can be no assurance that patents held by us will not be challenged and
invalidated, that patents will issue from any of our pending applications

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or that any claims allowed from existing or pending patents will be sufficient in
scope or strength or be issued in all countries where our products can be sold
to provide meaningful protection or commercial advantage to us. Competitors
may also be able to design around our patents.

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




Item 3. Quantitative and Qualitative Disclosure About Market Risk

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




PART II. OTHER INFORMATION




Item 1. Legal Proceedings

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

A former employee has filed a claim in arbitration seeking the right to
exercise terminated options. Management believes that the claim has no merit
and will have no impact on our financial position or cash flows.

In September 2001, an action was filed against us in the Superior Court of
San Diego County, California by Richard G. Blum, our former Chairman, President
and Chief Executive Officer. Mr. Blum contends that he was wrongfully
terminated on August 5, 2001 in violation of his employment agreement dated
December 1, 2000. He seeks damages for the alleged breach of his employment
agreement, age discrimination, as well as other related claims. Management
denies Mr. Blums claims and contends it exercised its business judgement for
legitimate nondiscriminatory reasons. In accordance with his employment
agreement, we may be obligated to pay him between $0 and $368,000 as severance
pay. We intend to vigorously defend our position in this case.

In October 2001, an action was filed against us in the Superior Court of
San Diego County, California by Daniel Beach, a former marketing and sales
consultant whose contract we terminated in August 2001. Mr. Beach contends
that we breached both a written and an oral contract, that we did not perform
on certain promises, and that we made false and misleading representations in
addition to other claims. Management denies Mr. Beachs claims and we intend
to vigorously defend our position in this case.




Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits  NONE

(b)  Reports on Form 8-K  NONE

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

|                       |                                                                                                                                                                         |                       
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------
|                       | PATRIOT SCIENTIFIC CORPORATION                                                                                                                                         
|                      
|Date: January 22, 2002 | By:                                                                                                                                                                     | /s/ LOWELL W. GIFFHORN
|                       |                                                                                                                                                                        
|                       | President, Executive Vice President and
Chief Financial Officer*
 
(Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)



|* |  | In August 2001, the Board of Directors appointed Donald Bernier as Chairman
of the Board and Chief Executive
Officer and appointed Lowell W. Giffhorn, Miklos B. Korodi and Serge J.
Miller to serve jointly as the President.
In November 2001, Mr. Miller was relieved of his duties and David H.
Pohl was appointed to serve jointly with Mr. Giffhorn and Mr. Korodi
as President.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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