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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, 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 August 31, 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 |  | 61,865,757                      
|                                |  |                                 
|(Class)                         |  | (Outstanding atOctober 16, 2001)





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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     
|                              |                                                                                                | 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 4. Submission Of Matters To A Vote Of Security Holders                                   
|                              | 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 August 31, 2001 (unaudited)
and May 31, 2001                        |    |       | 3    | 
|                             
|                              |                                                                                               | Consolidated Statements of Operations for the three months ended
August 31, 2001 and 2000 (unaudited) |    |       | 4    | 
|                             
|                              |                                                                                               | Consolidated Statements of Cash Flows for the three months ended
August 31, 2001 and 2000 (unaudited) |    |       | 5    | 
|                             
|                              |                                                                                               | Notes to Unaudited Consolidated Financial Statements                                                  |    |       | 6-13 | 
|                             
|                              | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                       |    | 14-22 |     
|                             
|                              | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             |                                                                                                       |    | 22    |     
|                             
|PART II. OTHER INFORMATION    |                                                                                               |                                                                                                       | 22 |      
|                             
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                       |    | 22    |     
|                              | Item 2. Changes in Securities                                                                 |                                                                                                       |    | *     |     
|                              | Item 3. Defaults upon Senior Securities                                                       |                                                                                                       |    | *     |     
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                       |    | 22    |     
|                              | Item 5. Other Information                                                                     |                                                                                                       |    | *     |     
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                       |    | 23    |     
|                             
|SIGNATURES                    |                                                                                               |                                                                                                       | 23 |      

* No information provided due to inapplicability of the item.

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##### Table of Contents









PART I- FINANCIAL INFORMATION

Item 1. Financial Statements





PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                  |   |             |             |         |   |           |             |  
|---------------------------------------- | ---------------------------------------------------------------------------------------------------------------- | - | ----------- | ----------- | ------- | - | --------- | ----------- | -
|                                         |                                                                                                                  |   | August 31,  |             | May 31,
|                                         |                                                                                                                  |   | 2001        |             | 2001   
|                                         |                                                                                                                  |   |             |             |        
|                                         |                                                                                                                  |   | (Unaudited) |             |         |   |          
|ASSETS                                   |                                                                                                                  |   |             |             |         |   |           |            
|Current assets:                          |                                                                                                                  |   |             |             |         |   |           |            
|                                         | Cash and cash equivalents                                                                                        |   | $           | 30,083      |         |   | $         | 464,350     |  
|                                         | Accounts receivable, net of allowance
of $59,000 and $54,000 for uncollectible accounts                          |   |             | 298,156     |         |   |           | 188,982     |  
|                                         | Inventories (Note 4)                                                                                             |   |             | 151,462     |         |   |           | 223,393     |  
|                                         | Prepaid expenses                                                                                                 |   |             | 115,298     |         |   |           | 73,185      |  
|                                         |                                                                                                                  |   |             |             |         |   |           |            
|Total current assets                     |                                                                                                                  |   | 594,999     |             |         |   | 949,910   |            
|Property and equipment, net              |                                                                                                                  |   | 392,090     |             |         |   | 423,528   |            
|Other assets, net                        |                                                                                                                  |   | 13,541      |             |         |   | 16,667    |            
|Patents and trademarks, net              |                                                                                                                  |   | 137,890     |             |         |   | 153,588   |            
|                                         |                                                                                                                  |   |             |             |         |   |           |            
|                                         |                                                                                                                  | $ | 1,138,520   |             |         | $ | 1,543,693 |            
|                                         |                                                                                                                  |   |             |             |         |   |           |            
|LIABILITIES AND STOCKHOLDERS EQUITY     |                                                                                                                  |   |             |             |         |   |           |            
|Current liabilities:                     |                                                                                                                  |   |             |             |         |   |           |            
|                                         | Accounts payable                                                                                                 |   | $           | 217,661     |         |   | $         | 434,838     |  
|                                         | Accrued liabilities                                                                                              |   |             | 168,078     |         |   |           | 186,467     |  
|                                         |                                                                                                                  |   |             |             |         |   |           |            
|Total current liabilities                |                                                                                                                  |   | 385,739     |             |         |   | 621,305   |            
|Commitments (Notes 5, 6, 8 and 9)        |                                                                                                                  |   |             |             |         |   |           |            
|Stockholders equity (Notes 5, 6 and 7): |                                                                                                                  |   |             |             |         |   |           |            
|                                         | 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 60,365,757 and 57,535,411 |   |             | 604         |         |   |           | 575         |  
|                                         | Common stock to be issued (Note 5)                                                                               |   |             | 100,000     |         |   |           |            |  
|                                         | Additional paid-in capital                                                                                       |   |             | 38,097,837  |         |   |           | 37,320,503  |  
|                                         | Accumulated deficit                                                                                              |   |             | (37,365,660 | )       |   |           | (36,318,690 | )
|                                         | Note receivable (Note 7)                                                                                         |   |             | (80,000     | )       |   |           | (80,000     | )
|                                         |                                                                                                                  |   |             |             |         |   |           |            
|Total stockholders equity               |                                                                                                                  |   | 752,781     |             |         |   | 922,388   |            
|                                         |                                                                                                                  |   |             |             |         |   |           |            
|                                         |                                                                                                                  | $ | 1,138,520   |             |         | $ | 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
|                                                                                |                                     |   |                   
|                                                                                |                                     |   | August 31,         |         | August 31,
|                                                                                |                                     |   | 2001               |         | 2000      
|                                                                                |                                     |   |                    |         |           
|Net sales                                                                       |                                     | $ | 314,500            |         |            | $ | 119,101    |        
|Cost of sales                                                                   |                                     |   | 204,169            |         |            |   | 134,206    |        
|                                                                                |                                     |   |                    |         |            |   |            |        
|Gross profit (loss)                                                             |                                     |   | 110,331            |         |            |   | (15,105    | )      
|Operating expenses:                                                             |                                     |   |                    |         |            |   |            |        
|                                                                                | Research and development            |   |                    | 495,808 |            |   |            | 554,862 |  
|                                                                                | Selling, general and
administrative |   |                    | 653,740 |            |   |            | 330,445 |  
|                                                                                |                                     |   |                    |         |            |   |            |        
|                                                                                |                                     |   | 1,149,548          |         |            |   | 885,307    |        
|                                                                                |                                     |   |                    |         |            |   |            |        
|Operating loss                                                                  |                                     |   | (1,039,217         | )       |            |   | (900,412   | )      
|                                                                                |                                     |   |                    |         |            |   |            |        
|Other income (expenses):                                                        |                                     |   |                    |         |            |   |            |        
|                                                                                | Interest income                     |   |                    | 305     |            |   |            | 14,619  |  
|                                                                                | Interest expense                    |   |                    | (8,058  | )          |   |            | (747    | )
|                                                                                |                                     |   |                    |         |            |   |            |        
|                                                                                |                                     |   | (7,753             | )       |            |   | 13,872     |        
|                                                                                |                                     |   |                    |         |            |   |            |        
|Net loss                                                                        |                                     | $ | (1,046,970         | )       |            | $ | (886,540   | )      
|                                                                                |                                     |   |                    |         |            |   |            |        
|Basic and diluted loss
per common share                                         |                                     | $ | (0.02              | )       |            | $ | (0.02      | )      
|                                                                                |                                     |   |                    |         |            |   |            |        
|Weighted average number of
common shares outstanding
during the period (Note 1) |                                     |   | 58,743,825         |         |            |   | 51,260,601 |        
|                                                                                |                                     |   |                    |         |            |   |            |        

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)

|                                                  |                                                                         |                                 |                                       |            |                    |          |            |          |        |          |  
|------------------------------------------------- | ----------------------------------------------------------------------- | ------------------------------- | ------------------------------------- | ---------- | ------------------ | -------- | ---------- | -------- | ------ | -------- | -
|                                                  |                                                                         |                                 |                                       |            | Three Months Ended
|                                                  |                                                                         |                                 |                                       |            |                   
|                                                  |                                                                         |                                 |                                       |            | August 31,         |          | August 31,
|                                                  |                                                                         |                                 |                                       |            | 2001               |          | 2000      
|                                                  |                                                                         |                                 |                                       |            |                    |          |           
|Increase (Decrease) in Cash and Cash Equivalents  |                                                                         |                                 |                                       |            |                    |          |            |         
|Operating activities:                             |                                                                         |                                 |                                       |            |                    |          |            |         
|                                                  | Net loss                                                                |                                 | $                                     | (1,046,970 | )                  |          | $          | (886,540 | )     
|                                                  | Adjustments to reconcile net loss
to cash used in operating activities: |                                 |                                       |            |                    |          |            |          |       
|                                                  |                                                                         | Amortization and depreciation   |                                       |            | 60,107             |          |            |          | 57,133 |         
|                                                  |                                                                         | Provision for doubtful accounts |                                       |            | 5,000              |          |            |          |       |         
|                                                  |                                                                         | Changes in:                     |                                       |            |                    |          |            |          |        |         
|                                                  |                                                                         |                                 | Accounts receivable                   |            |                    | (262,290 | )          |          |        | (45,992  | )
|                                                  |                                                                         |                                 | Inventories                           |            |                    | 71,931   |            |          |        | (146,508 | )
|                                                  |                                                                         |                                 | Prepaid and other assets              |            |                    | (15,187  | )          |          |        | (95,815  | )
|                                                  |                                                                         |                                 | Accounts payable and accrued expenses |            |                    | (235,566 | )          |          |        | (243,008 | )
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Net cash used in operating activities             |                                                                         |                                 | (1,422,975                            | )          |                    |          | (1,360,730 | )       
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Investing activities:                             |                                                                         |                                 |                                       |            |                    |          |            |         
|                                                  | Note receivable (Note 7)                                                |                                 |                                       |           |                    |          |            | (80,000  | )     
|                                                  | Purchase of property and equipment                                      |                                 |                                       | (9,845     | )                  |          |            | (46,282  | )     
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Net cash used in investing activities             |                                                                         |                                 | (9,845                                | )          |                    |          | (126,282   | )       
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Financing activities:                             |                                                                         |                                 |                                       |            |                    |          |            |         
|                                                  | Proceeds from the issuance of common stock                              |                                 |                                       | 776,604    |                    |          |            |         |       
|                                                  | Proceeds from sales of accounts receivable                              |                                 |                                       | 148,116    |                    |          |            |         |       
|                                                  | Proceeds from exercise of common stock
warrants and options             |                                 |                                       | 73,833     |                    |          |            | 64,395   |       
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Net cash provided by financing activities         |                                                                         |                                 | 998,553                               |            |                    |          | 64,395     |         
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Net decrease in cash and cash equivalents         |                                                                         |                                 | (434,267                              | )          |                    |          | (1,422,617 | )       
|Cash and cash equivalents, beginning of period    |                                                                         |                                 | 464,350                               |            |                    |          | 2,100,242  |         
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Cash and cash equivalents, end of period          |                                                                         | $                               | 30,083                                |            |                    | $        | 677,625    |         
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         
|Supplemental Disclosure of Cash Flow Information: |                                                                         |                                 |                                       |            |                    |          |            |         
|                                                  | Warrants issued for prepaid services                                    |                                 | $                                     | 37,500     |                    |          | $          |         |       
|                                                  | Cancellation of options issued for prepaid services                     |                                 |                                       | 10,574     |                    |          |            |         |       
|                                                  |                                                                         |                                 |                                       |            |                    |          |            |         

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 generally accepted
accounting principles. 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 month period 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 7,785,923 and
6,854,399 for the three months ended August 31, 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 Notes 5 and 8, we issued 1,125,000 warrants subsequent to August
31, 2001.

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 three months of fiscal 2002,
we sold $185,145 of our accounts receivable to a bank under a factoring
agreement for $148,116. 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 September
2001, and there was no allowance for future losses. As of August 31, 2001, the
retained balance equaled $14,468 and $331,000 was available for future
factoring of accounts receivable invoices.

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Patriot Scientific Corporation

Notes to Consolidated Financial Statements (Continued)


Accounts Receivable

Our accounts receivable includes a past due amount of $65,606, net of an
allowance of $20,000, due from one customer. We have initiated a collection
lawsuit for the outstanding amount. We believe that we will prevail in
collection of the entire amount due.

Reclassifications

Certain items in the unaudited August 31, 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.

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Patriot Scientific Corporation

Notes to Consolidated Financial Statements (Continued)


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.

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 $4,968,903 and $7,488,708 and
negative cash flow from operations of $4,839,180 and $3,483,050 in the years
ended May 31, 2001 and 2000, respectively. At August 31, 2001, we had working
capital of $209,260 and cash and cash equivalents of $30,083. We have
historically funded our operations primarily through the issuance of securities
and debt financings. Cash and cash equivalents decreased $434,267 during the
current fiscal quarter.

We estimate our current cash requirements to sustain our operations for the
next twelve months through August 2002 to be $3.5 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 fiscal quarter of 2002 that ended on August 31, 2001. In addition to
limitations based on trading volume and market price of the common stock, our
ability to obtain equity financing under the $30 million equity line of credit
is dependent on our having registered an adequate number of shares to sell to
Swartz. As of September 30, 2001, we have only 2,500,000 registered shares
remaining to sell to Swartz under the registration statement that became
effective in June 2000. At the current market price and assuming adequate
market volume, in December 2001 we estimate we will run out of registered
shares related to the registration statement that went effective in June 2000.
We have, therefore, negotiated with Swartz a new $25 million equity line of
credit with terms and language that we believe is acceptable to the Securities
and Exchange Commission (SEC). We believe that the registration statement
will become effective in time to continue funding under the $25 million equity
line of credit without any interruptions. 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 are
similar to the previous $30 million equity line of credit. Based on the
current price and the trading volume of our common stock, there would be
$250,000 available under the $30 million equity line of credit which would not
be sufficient to meet our cash requirements. On September 24, 2001, we entered
into an amendment agreement with Swartz whereby Swartz was able to advance us
$215,000 previous to the close of the next put. Also, based on the current
price and the trading volume of our common stock, we estimate there will be
$320,000 available through August 31, 2002 under the $25 million equity line of
credit assuming the registration statement is effective in December 2001. 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, we have
formulated a cost reduction plan which can be initiated to reduce our cash
requirements, if necessary. Based on the above assumptions, we expect that the
$3.5 million requirement will be provided by current working capital of
$209,260; available funds under the $30 million and $25 million equity lines of
credit estimated to be $570,000, as discussed above and below, $215,000 of
which was funded during September, 2001; proceeds from the exercise of
outstanding stock options and warrants; and additional debt and/or equity
financings. In addition, we have formulated a cost reduction plan 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.

We anticipate that we may require additional equipment, fabrication, components
and supplies during the next twelve months to continue development of our
technologies. Product introductions such as those currently underway for the
Ignite I and JUICEtechnology may require significant inventory, product launch,
marketing personnel and other expenditures that cannot be currently estimated.
Further, if expanded development is commenced or new generations of
microprocessors are accelerated beyond their current plans, additional
expenditures 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. In
addition, in February 2001, we entered into a five year extension on our
building lease.

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Patriot Scientific Corporation

Notes to Consolidated Financial Statements (Continued)


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 $30 million or the new $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 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. 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 are stated at cost (determined primarily by the weighted average
cost method which approximates cost on a first-in, first-out basis) not in
excess of market value.

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

|                         |  |                 |          |              |  |   |          |  
|------------------------ |  | --------------- | -------- | ------------ |  | - | -------- | -
|                         |  | August 31, 2001 |          | May 31, 2001
|                         |  |                 |          |             
|                         |  | (unaudited)     |          |             
|Component parts          |  | $               | 304,377  |              |  | $ | 343,430  |  
|Work in process          |  |                 |         |              |  |   | 20,000   |  
|Finished goods           |  |                 | 109,085  |              |  |   | 121,963  |  
|                         |  |                 |          |              |  |   |          |  
|                         |  |                 | 413,462  |              |  |   | 485,393  |  
|Reserve for obsolescence |  |                 | (262,000 | )            |  |   | (262,000 | )
|                         |  |                 |          |              |  |   |          |  
|                         |  | $               | 151,462  |              |  | $ | 223,393  |  
|                         |  |                 |          |              |  |   |          |  

5.      INVESTMENT AGREEMENT

In May 2000, we entered into an investment agreement with Swartz Private
Equity LLC (Swartz). The investment agreement entitles 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
can purchase the common stock from us at a discount. If the market price is
less than $1.00 per share, the discount is $.10 per share; if the market price
is between $1.00 to $1.99 per share, the discount is 10%; and if the market
price is $2.00 or greater, the discount is 7%. In addition to the common
stock purchased, Swartz will receive 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 August 31, 2001, we received proceeds of
$4,118,801 from the sale of 8,000,000 shares of common stock . Included in the
total proceeds is $100,000 that Swartz advanced to us that was applied to a put
that closed after August 31, 2001. Per the terms of the investment agreement,
through August 31, 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. See Note 6 for further information on the warrants.

Subsequent to August 31, 2001, we received additional proceeds of $35,000 from
Swartz and issued 1,500,000 shares of common stock and 225,000 warrants
exercisable initially at $0.297 per share for the put that closed after August
31, 2001.

On September 24, 2001, we entered into an amended agreement with Swartz whereby
Swartz is able to advance us multiple funds previous to the close of the next
put. The amendment extended the time of the put beyond twenty days

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Patriot Scientific Corporation

Notes to Consolidated Financial Statements (Continued)


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 turns
out to be greater than the number of registered shares remaining under the $30
million equity line of credit, then the excess shares will 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
turns 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 will be issued to Swartz as restricted shares subject
to piggyback registration rights. As of October 18, 2001, we have received
$315,000 as advances against this put.

6.      STOCKHOLDERS EQUITY

The following table summarizes equity transactions during the three months
ended August 31, 2001:

|                                                           |  |        |            |         |  |   |            |  
|---------------------------------------------------------- |  | ------ | ---------- | ------- |  | - | ---------- | -
|                                                           |  | Common |            |         |  |  
|                                                           |  | Shares |            | Dollars
|                                                           |  |        |            |        
|Balance June 1, 2001                                       |  |        | 57,535,411 |         |  | $ | 37,321,078 |  
|Warrants issued for services                               |  |        |           |         |  |   | 37,500     |  
|Cancellation of options issued for prepaid services        |  |        |           |         |  |   | (10,574    | )
|Issuance of common stock                                   |  |        | 2,588,680  |         |  |   | 676,604    |  
|Advance against put in process at August 31, 2001 (Note 5) |  |        |           |         |  |   | 100,000    |  
|Exercise of common stock warrants and options              |  |        | 241,666    |         |  |   | 73,833     |  
|                                                           |  |        |            |         |  |   |            |  
|Balance August 31, 2001                                    |  |        | 60,365,757 |         |  | $ | 38,198,441 |  
|                                                           |  |        |            |         |  |   |            |  

At August 31, 2001, we had 132,500 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;
2,067,905 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 650,000 options outstanding pursuant to our 2001 Stock Option
Plan, subject to shareholder approval, exercisable at a range of $0.60 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 grants
under the 2001 Stock Option Plan exceeded the market value of our stock, there
will be no compensation recorded for the grants.

At August 31, 2001, we had warrants outstanding exercisable into 5,449,765
common shares at exercise prices ranging from $0.25 to $1.12 per share
expiring beginning in 2002 through 2006. During fiscal year 2001 and the
three months ended August 31, 2001, we issued warrants to purchase 538,302
shares of common stock of which 388,302 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 August 31, 2001, warrants to purchase 966,347
shares of common stock with initial exercise prices ranging from $0.96 to
$1.56 have been repriced to exercise prices ranging from $0.35 to $0.72.

See Notes 5 and 8 for discussion of warrants issued subsequent to August 31,
2001.

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Patriot Scientific Corporation

Notes to Consolidated Financial Statements (Continued)


7.      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.

8.      $25 MILLION EQUITY LINE OF CREDIT AGREEMENT

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

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 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:

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Patriot Scientific Corporation

Notes to Consolidated Financial Statements (Continued)




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

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

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

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.

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Patriot Scientific Corporation

Notes to Consolidated Financial Statements (Continued)


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.

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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 August 31, 2001 and August 31,
2000

Net sales. Total net sales for the first fiscal quarter ended August 31,
2001 increased 164.1% to $314,500 from $119,101 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 fiscal
quarter ended August 31, 2001. 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
64.9% in the first fiscal quarter ended August 31, 2001 compared to 112.7% for
the corresponding period of the previous fiscal year. This significant
decrease was due to the significant increase in net sales as a result of the
last buy of communication products as discussed above. Also, for the previous
fiscal year, 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 August 31, 2000.

Research and development expenses decreased 10.6% from $554,862 for the
first fiscal quarter ended August 31, 2000 compared to $495,808 for the first
fiscal quarter ended August 31, 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
coupled with a reduction in the maintenance fees for support of the Java
virtual machine.

Selling, general and administrative expenses increased 97.8% to $653,740
for the first fiscal quarter ended August 31, 2001 compared to $330,445 for the
first fiscal quarter ended August 31, 2000. This increase was due primarily to
an increase in personnel and consulting costs related to executive, marketing
and sales activities including several new employee positions.

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Other expense for the first fiscal quarter ended August 31, 2001, $7,753,
compared to other income of $13,872 for the corresponding period of the
previous fiscal year. This change resulted primarily from the recognition of
interest expense of $8,058 in the first fiscal quarter ended August 31, 2001
compared to the recognition of $14,619 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 August 31, 2001, we had working capital of $209,260 and cash and cash
equivalents of $30,083. We have historically funded our operations primarily
through the issuance of securities and debt financings. Cash and cash
equivalents decreased $434,267 during the current fiscal quarter due to net
cash used in operations of $1,422,975 and additions to property, equipment and
patents, net of $9,845 offset by funds generated primarily from the exercise
of warrants and options to purchase common stock of $73,833 and the sale of
common stock under an investment agreement of $776,604. The net cash used in
operations is primarily a result of operating losses coupled with an increase
in accounts receivable of $262,290 related to the increased revenue during the
current fiscal quarter and an decrease of accounts payable and accrued expenses
of $235,566. As of August 31, 2001, we had approximately 28%, $85,606, in
accounts receivable from one customer against whom we have initiated a
collection lawsuit. We have set up a reserve of $20,000 related to the
collection effort. We believe that we will prevail in collection of the entire
amount due.

We estimate our current cash requirements to sustain our operations for
the next twelve months through August 2002 to be $3.5 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 fiscal quarter of 2002 that ended on August 31, 2001. In addition to
limitations based on trading volume and market price of the common stock, our
ability to obtain equity financing under the $30 million equity line of credit
is dependent on our having registered an adequate number of shares to sell to
Swartz. As of October 18, 2001, we have only 2,500,000 registered shares
remaining to sell to Swartz under the registration statement that became
effective in June 2000. At the current market price and assuming adequate
market volume, in December 2001 we estimate we will run out of registered
shares related to the registration statement that went effective in June 2000.
We have, therefore, negotiated with Swartz a new $25 million equity line of
credit with terms and language that we believe is acceptable to the Securities
and Exchange Commission (SEC). We believe that the registration statement
will become effective in time to continue funding under the $25 million equity
line of credit without any interruptions. 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 are
similar to the previous $30 million equity line of credit. Based on the
current price and the trading volume of our common stock, there would be
$250,000 available under the $30 million equity line of credit which would not
be sufficient to meet our cash requirements. On September 24, 2001, we entered
into an amendment agreement with Swartz whereby Swartz was able to advance us
$315,000 previous to the close of the next put. Also, based on the current
price and the trading volume of our common stock, we estimate there will be
$320,000 available through August 31, 2002 under the $25 million equity line of
credit assuming the registration statement is effective in December 2001. 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, we have
formulated a cost reduction plan which can be initiated to reduce our cash
requirements, if necessary. Based on the above assumptions, we expect that the
$3.5 million requirement will be provided by current working capital of
$209,260; available funds under the $30 million and $25 million equity lines of
credit estimated to be $570,000, as discussed above and below, $215,000 of
which was funded during September 2001; proceeds from the exercise of
outstanding stock options and warrants; and additional debt and/or equity
financings. In addition, we have formulated a cost reduction plan 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.

We anticipate that we may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development
of our technologies. Product introductions such as those currently underway for
the Ignite I and JUICEtechnology may require significant inventory, product
launch, marketing personnel and other expenditures that cannot be currently
estimated. Further, if expanded development is commenced or new generations of

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microprocessors are accelerated beyond their 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. In addition, in February 2001, we entered into a
five year extension on our building lease.

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 $30 million or the new $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 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. 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 entitles 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. During the first four months of our fiscal year 2002 which
ended September 30, 2001, we received proceeds of $811,604 from the sale of
4,088,680 shares of common stock. See below discussion for further information
and proposed $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 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 turns
out to be greater than the number of registered shares remaining under the $30
million equity line of credit, then the excess shares will 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
turns 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

16



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will be issued to Swartz as restricted shares subject to piggyback
registration rights. As of October 18, 2001, we have received $315,000 as
advances against this put.

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

Limitations and Conditions Precedent to Our Put Rights.Swartz is 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 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.

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.                                        

However, we will be 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.

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.

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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.

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.
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;                                                        

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| |  |  | 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 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 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 and a right of participation for any equity 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.

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,

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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 run the technology on a 0.35-micron microprocessor,
which is in current production. 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 August 31, 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 first fiscal quarter ended August 31, 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 fiscal quarter ended August 31, 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. The Ignite I is in the first stages of production. There can be
no assurance that any of the technologies in development can be completed to
commercial exploitation due to the inherent risks of new technology development
limitations on financing, competition, obsolescence, loss of key technical
personnel and other factors. 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 or
that any claims allowed from existing or pending patents will be sufficient in
scope or strength or be issued in all countries where

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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 4. Submission Of Matters To A Vote Of Security Holders

At our fiscal 2001 Annual Meeting of Shareholders held on October 11,
2001, the following members, constituting all the members, were elected to the
Board of Directors: Donald R. Bernier, Lowell W. Giffhorn, Carlton Johnson,
David Pohl and Helmut Falk Jr.

The following proposals were approved at our Annual Meeting of Shareholders:



|1. |  | Proposal to approve our 2001 Stock Option Plan
|-- |  | ----------------------------------------------

|           |  |               |           |                  |  |  |         | 
|---------- |  | ------------- | --------- | ---------------- |  |  | ------- | 
|Votes For  |  | Votes Against |           | Votes Abstaining
|           |  |               |           |                 
|52,184,372 |  |               | 2,998,357 |                  |  |  | 245,695 | 

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|2. |  | Appointment of BDO Seidman, LLP as our Independent Auditors
|-- |  | -----------------------------------------------------------

|           |  |               |         |                  |  |  |         | 
|---------- |  | ------------- | ------- | ---------------- |  |  | ------- | 
|Votes For  |  | Votes Against |         | Votes Abstaining
|           |  |               |         |                 
|54,879,179 |  |               | 220,163 |                  |  |  | 271,582 | 



|3. |  | Election of Directors
|-- |  | ---------------------

|                   |  |           |            |                |  |  |           | 
|------------------ |  | --------- | ---------- | -------------- |  |  | --------- | 
|Director           |  | Votes For |            | Votes Withheld
|                   |  |           |            |               
|Donald Bernier     |  |           | 53,043,557 |                |  |  | 3,071,317 | 
|                  
|Lowell W. Giffhorn |  |           | 53,070,457 |                |  |  | 3,044,417 | 
|                  
|Carlton Johnson    |  |           | 53,054,907 |                |  |  | 3,059,967 | 
|                  
|David Pohl         |  |           | 53,085,057 |                |  |  | 3,029,817 | 
|                  
|Helmut Falk Jr.    |  |           | 54,346,502 |                |  |  | 2,994,167 | 
|                  

| | Write-in votes were also cast for Brian Boyajian (1,617,597) and Clifford
Kroener (40,000).
| | -------------------------------------------------------------------------------------------




Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits  NONE    
|--- |  | -------------------
|   
|(b) |  | Reports on Form 8-K

A Report on Form 8-K was filed on August 10, 2001 related to a change in
our Chairman of the Board of Directors, Chief Executive Officer and President
effective August 5, 2001.




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: October 22, 2001 | 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.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23