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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, 2002                                              
|     
|      |  | OR                                                                                      
|     
|[   ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|     
|      |  | For the transition period fromto                                                        
|     
|      |  | 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 |  |                                   | 83,065,757 | 
|                                |  |                                   |            | 
|(Class)                         |  | (Outstanding at October 18, 2002)



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TABLE OF CONTENTS



|                                                                            |                                                                                                |                                            |  |  |  |  |  | 
|--------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I- FINANCIAL INFORMATION                                              
|                                                                            | Item 1. Financial Statements                                                                  
|                                                                            |                                                                                                | CONSOLIDATED BALANCE SHEETS               
|                                                                            |                                                                                                | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                                            |                                                                                                | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                                            |                                                                                                | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                                            | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                                                                            | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             
|PART II. OTHER INFORMATION                                                 
|                                                                            | Item 1. Legal Proceedings                                                                     
|                                                                            | Item 6. Exhibits and Reports on Form 8-K                                                      
|SIGNATURES                                                                 
|CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|EXHIBIT 99.8                                                               
|EXHIBIT 99.9                                                               



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PATRIOT SCIENTIFIC CORPORATION
INDEX

|                                                                         |  |                                                                                               |                                                                                                       |  |       |      | 
|------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------- |  | ----- | ---- | 
|                                                                         |  |                                                                                               |                                                                                                       |  | Page 
|                                                                         |  |                                                                                               |                                                                                                       |  |      
|PART I. FINANCIAL INFORMATION                                            |  |                                                                                               |                                                                                                       | 
|                                                                        
|                                                                         |  | Item 1. Financial Statements:                                                                 |                                                                                                       |  |       |     
|                                                                        
|                                                                         |  |                                                                                               | Consolidated Balance Sheets as of August 31, 2002 (unaudited)
and May 31, 2002                        |  |       | 3    | 
|                                                                        
|                                                                         |  |                                                                                               | Consolidated Statements of Operations for the three months
ended August 31, 2002 and 2001 (unaudited) |  |       | 4    | 
|                                                                        
|                                                                         |  |                                                                                               | Consolidated Statements of Cash Flows for the three months ended
August 31, 2002 and 2001 (unaudited) |  |       | 5    | 
|                                                                        
|                                                                         |  |                                                                                               | Notes to Unaudited Consolidated Financial Statements                                                  |  |       | 6-18 | 
|                                                                        
|                                                                         |  | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                       |  | 19-29 |     
|                                                                        
|                                                                         |  | Item 3. Quantitative and Qualitative Disclosure About Market Risk                             |                                                                                                       |  | 29    |     
|                                                                        
|PART II. OTHER INFORMATION                                               |  |                                                                                               | 30                                                                                                    | 
|                                                                        
|                                                                         |  | Item 1. Legal Proceedings                                                                     |                                                                                                       |  | 30    |     
|                                                                         |  | Item 2. Changes in Securities                                                                 |                                                                                                       |  | *     |     
|                                                                         |  | Item 3. Defaults upon Senior Securities                                                       |                                                                                                       |  | *     |     
|                                                                         |  | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                       |  | *     |     
|                                                                         |  | Item 5. Other Information                                                                     |                                                                                                       |  | *     |     
|                                                                         |  | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                       |  | 30    |     
|                                                                        
|SIGNATURES                                                               |  |                                                                                               | 31                                                                                                    | 
|                                                                        
|CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 |  |                                                                                               | 32-33                                                                                                 | 

* No information provided due to inapplicability of the item.

2



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PART I- FINANCIAL INFORMATION




Item 1. Financial Statements




PATRIOT SCIENTIFIC CORPORATION
CONSOLIDATED BALANCE SHEETS

|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  
|------------------------------------------------------------- | ---------------------------- | ------------------------------------------------------------------------------------------------- | --------- | ----------- | ----------- | ------- | --------- | - | ----------- | -
|                                                              |                              |                                                                                                   |           | August 31,  |             | May 31,
|                                                              |                              |                                                                                                   |           | 2002        |             | 2002   
|                                                              |                              |                                                                                                   |           |             |             |        
|                                                              |                              |                                                                                                   |           | (Unaudited) |             |         |           |  
|ASSETS (Notes 4 and 5)                                       
|Current assets:                                               |                              |                                                                                                   |           |             |             |         |           |  
|                                                              |                              | Cash and cash equivalents                                                                         |           | $           | 14,424      |         |           | $ | 88,108      |  
|                                                              |                              | Accounts receivable, net of allowance
of $6,000 and $6,000 for uncollectible accounts             |           |             | 6,608       |         |           |   | 4,797       |  
|                                                              |                              | Prepaid expenses                                                                                  |           |             | 44,400      |         |           |   | 35,749      |  
|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  
|Total current assets                                          |                              |                                                                                                   | 65,432    |             |             |         | 128,654   |  
|Property and equipment, net                                   |                              |                                                                                                   | 252,498   |             |             |         | 285,488   |  
|Other assets, net                                             |                              |                                                                                                   | 241,857   |             |             |         | 330,863   |  
|Patents and trademarks, net                                   |                              |                                                                                                   | 183,317   |             |             |         | 189,521   |  
|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  
|                                                              |                              | $                                                                                                 | 743,104   |             |             | $       | 934,526   |  
|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                        
|Current liabilities:                                          |                              |                                                                                                   |           |             |             |         |           |  
|                                                              |                              | Note payable, net of unamortized debt discount
of $86,781 and $189,516 (Notes 3 and 4)            |           | $           | 548,495     |         |           | $ | 445,760     |  
|                                                              |                              | Accounts payable                                                                                  |           |             | 343,612     |         |           |   | 385,255     |  
|                                                              |                              | Accrued liabilities                                                                               |           |             | 159,760     |         |           |   | 211,291     |  
|                                                              |                              | Current portion of capital lease obligation                                                       |           |             | 5,411       |         |           |   | 5,116       |  
|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  
|Total current liabilities                                     |                              |                                                                                                   | 1,057,278 |             |             |         | 1,047,422 |  
|8% Convertible Debentures, net of debt discount of $1,046,751 |                              |                                                                                                   | 53,249    |             |             |         | 315,198   |  
|                                                              | and $192,802 (Notes 3 and 5) |                                                                                                   |           |             |             |         |           |   |            
|Long term portion of capital lease obligation                 |                              |                                                                                                   | 15,262    |             |             |         | 16,731    |  
|Commitments and contingencies (Notes 3, 6, 7 and 9)           |                              |                                                                                                   |           |             |             |         |           |  
|Stockholders deficit: (Note 7)                               |                              |                                                                                                   |           |             |             |         |           |  
|                                                              |                              | Preferred stock, $.00001 par value; 5,000,000 shares
authorized none outstanding                  |           |             |            |         |           |   |            |  
|                                                              |                              | Common stock, $.00001 par value; 200,000,000 shares
authorized; issued and outstanding 81,465,757 |           |             | 815         |         |           |   | 815         |  
|                                                              |                              | Additional paid-in capital                                                                        |           |             | 42,445,682  |         |           |   | 41,440,101  |  
|                                                              |                              | Accumulated deficit                                                                               |           |             | (42,749,182 | )       |           |   | (41,805,741 | )
|                                                              |                              | Note receivable                                                                                   |           |             | (80,000     | )       |           |   | (80,000     | )
|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  
|Total stockholders deficit                                   |                              |                                                                                                   | (382,685  | )           |             |         | (444,825  | )
|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  
|                                                              |                              | $                                                                                                 | 743,104   |             |             | $       | 934,526   |  
|                                                              |                              |                                                                                                   |           |             |             |         |           |   |             |  

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,
|                                                                                |                                     |   | 2002               |          | 2001      
|                                                                                |                                     |   |                    |          |           
|Net sales                                                                       |                                     | $ | 39,889             |          |            | $ | 314,500    |        
|Cost of sales                                                                   |                                     |   | 4,909              |          |            |   | 204,169    |        
|                                                                                |                                     |   |                    |          |            |   |            |        
|Gross profit                                                                    |                                     |   | 34,980             |          |            |   | 110,331    |        
|Operating expenses:                                                             |                                     |   |                    |          |            |   |            |        
|                                                                                | Research and development            |   |                    | 209,287  |            |   |            | 495,808 |  
|                                                                                | Selling, general and
administrative |   |                    | 487,101  |            |   |            | 653,740 |  
|                                                                                |                                     |   |                    |          |            |   |            |        
|                                                                                |                                     |   | 696,388            |          |            |   | 1,149,548  |        
|                                                                                |                                     |   |                    |          |            |   |            |        
|Operating loss                                                                  |                                     |   | (661,408           | )        |            |   | (1,039,217 | )      
|                                                                                |                                     |   |                    |          |            |   |            |        
|Other income (expenses):                                                        |                                     |   |                    |          |            |   |            |        
|                                                                                | Interest income                     |   |                    | 175      |            |   |            | 305     |  
|                                                                                | Interest expense                    |   |                    | (282,208 | )          |   |            | (8,058  | )
|                                                                                |                                     |   |                    |          |            |   |            |        
|                                                                                |                                     |   | (282,033           | )        |            |   | (7,753     | )      
|                                                                                |                                     |   |                    |          |            |   |            |        
|Net loss                                                                        |                                     | $ | (943,441           | )        |            | $ | (1,046,970 | )      
|                                                                                |                                     |   |                    |          |            |   |            |        
|Basic and diluted loss
per common share                                         |                                     | $ | (0.01              | )        |            | $ | (0.02      | )      
|                                                                                |                                     |   |                    |          |            |   |            |        
|Weighted average number of
common shares outstanding
during the period (Note 1) |                                     |   | 81,465,757         |          |            |   | 58,743,825 |        
|                                                                                |                                     |   |                    |          |            |   |            |        

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, 2002    |            | August 31, 2001
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                
|Decrease in Cash and Cash Equivalents             |                                                                         |                                                                                         |                                          |           |         |                    |            |                
|Operating activities:                             |                                                                         |                                                                                         |                                          |           |         |                    |            |                
|                                                  | Net loss                                                                |                                                                                         | $                                        | (943,441  | )       |                    | $          | (1,046,970      | )     
|                                                  | Adjustments to reconcile net loss
to cash used in operating activities: |                                                                                         |                                          |           |         |                    |            |                 |       
|                                                  |                                                                         | Amortization and depreciation                                                           |                                          |           | 53,695  |                    |            |                 | 60,107 |         
|                                                  |                                                                         | Provision for doubtful accounts                                                         |                                          |           |        |                    |            |                 | 5,000  |         
|                                                  |                                                                         | Non-cash interest expense related to convertible
debentures, notes payable and warrants |                                          |           | 254,367 |                    |            |                 |       |         
|                                                  |                                                                         | Changes in:                                                                             |                                          |           |         |                    |            |                 |        |         
|                                                  |                                                                         |                                                                                         | Accounts receivable                      |           |         | (13,688            | )          |                 |        | (262,290 | )
|                                                  |                                                                         |                                                                                         | Inventories                              |           |         |                   |            |                 |        | 71,931   |  
|                                                  |                                                                         |                                                                                         | Prepaid expenses and other assets        |           |         | 77,230             |            |                 |        | (15,187  | )
|                                                  |                                                                         |                                                                                         | Accounts payable and accrued liabilities |           |         | (93,174            | )          |                 |        | (235,566 | )
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|Net cash used in operating activities             |                                                                         |                                                                                         | (665,011                                 | )         |         |                    | (1,422,975 | )              
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|Investing activities:                             |                                                                         |                                                                                         |                                          |           |         |                    |            |                
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|                                                  | Purchase of property, equipment and patents                             |                                                                                         |                                          | (11,376   | )       |                    |            | (9,845          | )     
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|Financing activities:                             |                                                                         |                                                                                         |                                          |           |         |                    |            |                
|                                                  | Proceeds from the issuance of convertible debentures                    |                                                                                         |                                          | 592,000   |         |                    |            |                |       
|                                                  | Proceeds from the issuance of common stock                              |                                                                                         |                                          |          |         |                    |            | 776,604         |       
|                                                  | Principal payments for capital lease obligations                        |                                                                                         |                                          | (1,174    | )       |                    |            |                |       
|                                                  | Proceeds from sales of accounts receivable                              |                                                                                         |                                          | 11,877    |         |                    |            | 148,116         |       
|                                                  | Proceeds from exercise of common stock
warrants and options             |                                                                                         |                                          |          |         |                    |            | 73,833          |       
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|Net cash provided by financing activities         |                                                                         |                                                                                         | 602,703                                  |           |         |                    | 998,553    |                
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|Net decrease in cash and cash equivalents         |                                                                         |                                                                                         | (73,684                                  | )         |         |                    | (434,267   | )              
|Cash and cash equivalents, beginning of period    |                                                                         |                                                                                         | 88,108                                   |           |         |                    | 464,350    |                
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|Cash and cash equivalents, end of period          |                                                                         | $                                                                                       | 14,424                                   |           |         | $                  | 30,083     |                
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       
|Supplemental Disclosure of Cash Flow Information: |                                                                         |                                                                                         |                                          |           |         |                    |            |                
|                                                  | Cash payments for interest                                              |                                                                                         | $                                        | 3,172     |         |                    | $          |                |       
|                                                  | Warrants and options issued for prepaid services                        |                                                                                         | $                                        |          |         |                    | $          | 37,500          |       
|                                                  | Cancellation of options issued for prepaid services                     |                                                                                         | $                                        |          |         |                    | $          | 10,574          |       
|                                                  | Debt discount                                                           |                                                                                         | $                                        | 1,005,581 |         |                    | $          |                |       
|                                                  |                                                                         |                                                                                         |                                          |           |         |                    |            |                 |       

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

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PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements of Patriot Scientific Corporation
(Patriot) presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America. These statements
should be read in conjunction with our audited consolidated financial
statements and notes thereto for the year ended May 31, 2002.

In the opinion of management, the interim consolidated 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 periods are not necessarily indicative of the results that may be
expected for the year.

Loss Per Share

We follow Standard of Financial Accounting Standards (SFAS) No. 128,
Earnings per Share. Under SFAS No. 128, basic loss per share is calculated
as loss available to common stockholders divided by the weighted average number
of common shares outstanding. Diluted loss per share is calculated as net loss
divided by the diluted weighted average number of common shares. The diluted
weighted average number of common shares is calculated using the treasury stock
method for common stock issuable pursuant to outstanding stock options and
common stock warrants. Common stock options and warrants of 42,515,180 and
7,785,923 for the three months ended August 31, 2002 and 2001, 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. See Notes
5 and 7 for discussion of commitments to issue additional shares of common
stock and warrants.

Sale of Accounts Receivable

We follow SFAS No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, a replacement of SFAS No. 125.
SFAS No. 140 provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. A
$400,000 factoring line we 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 are not entitled to or obligated to
repurchase or redeem the invoices before their maturity and we do not have the
ability to unilaterally cause the bank to return the invoices. 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 2003, we sold $14,846 of our accounts receivable to a bank under the
factoring agreement for $11,877. 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. As of August 31, 2002, there were no qualifying
accounts receivable invoices available to factor resulting in no balance
outstanding under the factoring line and $400,000 remaining available for
future factoring of accounts receivable invoices.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

Reclassifications

Certain items in the unaudited August 31, 2001 consolidated financial
statements have been reclassified to conform to the current presentation.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, amended by
SFAS No. 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 consolidated 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. The
adoption of this statement had no material impact on our consolidated financial
statements.

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

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

7



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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

2003. The adoption of this statement had no material impact on our
consolidated financial statements.

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

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

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

3. CONTINUED EXISTENCE AND MANAGEMENTS PLAN

Our consolidated financial statements are presented on the going concern basis,
which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. Our ability to continue as a
going concern is contingent upon our obtaining sufficient financing to sustain
our operations. We incurred a net loss of $943,441, $5,487,051 and $4,968,903
and negative cash flow from operations of $665,011, $3,632,534 and $4,839,180
in the three months ended August 31, 2002 and the years ended May 31, 2002 and
2001, respectively. At August 31, 2002, we had deficit working capital of
$991,846 and cash and cash equivalents of $14,424. We have historically funded
our operations primarily through the issuance of securities and debt
financings. Cash and cash equivalents decreased $73,684 during the three
months ended August 31, 2002.

We estimate our current cash requirements to sustain our operations for the
next twelve months through August 2003 to be $2.4 million. Since we are no
longer supporting the communications product line, we are assuming that there
will be no communications product revenue. We have a note payable to Swartz
Private Equity, LLC

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

(Swartz) of $635,276 at August 31, 2002 which was originally due in October
2002 and subsequent to the end of the quarter has been extended to January
2003. We also have convertible debentures with a group of investors as of
August 31, 2002 aggregating $1,175,000. At the option of the debenture
holders, they may purchase additional debentures up to $1 million at any time
during the next two years as long as the price of our common stock is in excess
of $0.20 per share. In addition to limitations based on trading volume and
market price of the common stock, our ability to obtain equity financing under
the $25 million equity line of credit (see Note 6 to the unaudited consolidated
financial statements) is dependent on our having registered shares of our
common stock to sell to Swartz. As of August 31, 2002, we do not have any
registered shares to sell to Swartz.

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



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

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

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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

|                |                                                                                      |                                      |   |           |           | 
|--------------- | ------------------------------------------------------------------------------------ | ------------------------------------ | - | --------- | --------- | 
|Cash available: |                                                                                      |                                      |   |          
|                | Cash available at August 31, 2002                                                    |                                      | $ | 14,424    |          
|                | Proceeds received from the issuance of debt
and equity subsequent to August 31, 2002 |                                      |   | 265,000   |          
|                |                                                                                      |                                      |   |           |          
|                |                                                                                      | Total                                |   |           | 279,424   | 
|                |                                                                                      |                                      |   |           |          
|Cash needs:     |                                                                                      |                                      |   |          
|                | Estimated needs                                                                      |                                      |   | 2,400,000 |          
|                | Note payable to Swartz at January 9, 2003                                            |                                      |   | 635,276   |          
|                |                                                                                      |                                      |   |           |          
|                |                                                                                      | Total                                |   |           | 3,035,276 | 
|                |                                                                                      |                                      |   |           |          
|                |                                                                                      | Required funds from external sources |   | $         | 2,755,852 | 
|                |                                                                                      |                                      |   |           |          

As shown above, we need to obtain $2,755,852. Any additional funding under the
existing $25 million equity line of credit is dependent on many factors.
However, there can be no assurance that any funds required during the next
twelve months or thereafter can be generated from sales of common stock under
the existing $25 million equity line of credit or that we will be able to
secure additional debt or equity financing. The lack of additional capital
could force us to substantially curtail or cease operations and would,
therefore, have a material adverse effect on our business. Further, there can
be no assurance that we will be able to timely receive shareholder approval to
increase the number of authorized shares or that required funds, if available,
will be available on attractive terms or that they will not have a
significantly dilutive effect on our existing shareholders. As such, there is
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from our possible
inability to continue as a going concern.

4. SECURED NOTE PAYABLE

On March 12, 2002, we replaced and superceded a previously issued Secured
Promissory Note with Swartz with an Amended Secured Promissory Note and
Agreement with an effective date of October 9, 2001 and an Addendum to Amended
Secured Promissory Note dated March 12, 2002. The amended note, which
originally was to mature on October 9, 2002, has been extended to January 2003
and amounts outstanding under the note bear interest at the rate of 5% per
annum. Upon mutual agreement between Swartz and us, Swartz may advance
additional amounts under the amended note. Per the addendum to the amended
note, principal and interest payments are deferred until January, 2003.

As part of the consideration for entering into the above amended note, we
agreed to issue warrants to Swartz related
to each advance against the note. In connection with each advance, we issued
to Swartz a warrant to purchase a number of shares of common stock equal to the
amount of the advance multiplied by 8.25 at an initial exercise price equal to
the lesser of (a) the factor of the average of the volume weighted average
price per share, as defined by Bloomberg L.P., for each trading day in the
period beginning on the date of the previous advance and ending on the trading
day immediately preceding the date of the current advance multiplied by .70 or
(b) the volume weighted

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

average price per share minus $0.05. In addition, if after March 12, 2002, we
issue common stock to any parties other than Swartz, we are obligated to issue
to Swartz warrants equal to 20% of the common stock so issued. The amended
note also gives to Swartz the right of first refusal and rights to participate
in subsequent debt or equity transactions entered into by us through March 15,
2003.

As of August 31, 2002 we issued warrants to purchase up to 12,823,468 shares of
our common stock in accordance with the amended note agreements. The warrants
issued were valued using the Black-Scholes pricing model based on the expected
fair value at issuance and the estimated fair value was also recorded as debt
discount. See Note 7 to the consolidated financial statements for discussion
of the terms of the warrants

The note is secured by our assets.

All debt discounts are to be amortized as additional interest expense over the
term of the note payable. As of August 31, 2002, $1,107,238 had been reflected
as debt discount of which $917,722 and $102,735 was amortized to interest
expense during the year ended May 31, 2002 and the three months ended August
31, 2002, respectively.

|                                                              |  |                             |  |  |            |   |           |   |          |  
|------------------------------------------------------------- |  | --------------------------- |  |  | ---------- | - | --------- | - | -------- | -
|Advances against the note                                     |  |                             |  |  |            | $ | 1,790,000 |  
|Less amount applied against $30 million equity line of credit |  |                             |  |  |            |   | (227,800  | )
|Less amount applied against $25 million equity line of credit |  |                             |  |  |            |   | (926,924  | )
|Less debt discount                                            |  |                             |  |  |            |   |           |  
|                                                              |  | Total                       |  |  | 1,107,238  |   |           |   |          |  
|                                                              |  | Amount amortized to expense |  |  | (1,020,457 | ) |           |   | ( 86,781 | )
|                                                              |  |                             |  |  |            |   |           |  
|Note payable at August 31, 2002                               |  |                             |  |  |            | $ | 548,495   |  
|                                                              |  |                             |  |  |            |   |           |  

On November 9, 2001, an offset of $227,800 from the sale of 2,500,000 shares of
common stock was applied against the final put under the $30 million equity
line of credit discussed below.

On May 30, 2002, an offset of $926,924 from the sale of 14,100,000 shares of
common stock was applied against the first put under the $25 million equity
line of credit discussed below.

5. 8% CONVERTIBLE DEBENTURES

Overview.From April 23, 2002 through August 23, 2002, we sold an aggregate of
$1,175,000 of 8% convertible debentures to a group of six investors of which
$75,000 was received subsequent to August 31, 2002. The convertible
debentures entitle the debenture holder to convert the principal and unpaid
accrued interest into our common stock for two years from the date of closing.
In addition, the debenture holders received warrants exercisable into a number
of our common shares.

Number of Shares Debentures May Be Converted Into.The debentures can be
converted into a number of our common shares at conversion prices that
initially equaled $0.0727 to $0.10289 per share.

Resets of Conversion Price and Conversion Shares.A reset date occurs on each
three month anniversary of the closing date of each debenture and on the date
the registration statement filed in June 2002 becomes effective. If the volume
weighted average price for our common stock for the ten days previous to the
reset date is less than the conversion price in effect at the time of the reset
date, then the number of common shares issuable to the selling shareholder on
conversion will be increased. If the conversion price is reset, the debenture
can be converted into a number of our common shares based on the following
calculation: the amount of the debenture plus any unpaid accrued interest
divided by the reset conversion price which shall equal the volume weighted
average price for our common stock for the ten days previous to the reset date.
On July 23, 2002, its three month anniversary, the conversion price for a
debenture dated April 23, 2002 in an amount of $225,000 was reset to $0.06629
from an initial conversion price of $0.10289.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

Warrants.Concurrent with the issuance of the convertible debentures, we issued
to the debenture holders warrants to purchase up to 15,626,849 shares of our
common stock. These warrants are exercisable for five years from the date of
issuance at initial exercise prices equal to 115% of the volume weighted
average price for our common stock for the ten days previous to the debenture
date. The warrant exercise price is subject to being reset on each six month
anniversary of its issuance.

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

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

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

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

Registration Rights and Waiver. We are responsible for registering the resale
of the shares of our common stock which will be issued on the conversion of the
debentures. As of October 16, 2002, a registration statement initially filed
in June 2002 and subsequently amended in August 2002 has not been declared
effective by the Securities and Exchange Commission. The debenture holders
have provided waivers extending the effective registration deadline to December
1, 2002 before we would be liable for late registration penalties.

As of August 31, 2002 we issued warrants to purchase up to 15,626,849 shares of
our common stock in accordance with the convertible debentures. The warrants
issued were valued using the Black-Scholes pricing model based on the expected
fair value at issuance and the estimated fair value was also recorded as debt
discount. See Note 7 to the consolidated financial statements for discussion
of the terms of the warrants.

All debt discounts are to be amortized as additional interest expense over the
term of the convertible debenture. As of August 31, 2002, $829,110 has been
reflected as debt discount of which $94,415 and $8,383 was amortized to
interest expense during the three months ended August 31, 2002 and the year
ended May 31, 2002, respectively.

In addition, the convertible debentures contain beneficial conversion features.
Such features require us to allocate the proceeds received to both the
warrants and the debt and to calculate an intrinsic value for the debt portion
if the per share price allocated to debt is less than the fair market per share
price as of the first date the debenture is sold. Accordingly, during the
quarter ended August 31, 2002, we recorded $345,890 to additional paid in
capital to reflect the intrinsic value of the convertible debentures that
closed on April 23, June 10 and August 23, 2002. The intrinsic value of the
beneficial conversion feature of the convertible debenture is amortized to
non-cash interest expense over the life of the convertible debenture.
Accordingly, we amortized to non-cash interest expense $25,451 during the three
months ended August 31, 2001.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

The convertible debentures are secured by our assets.

|                                                                                 |                             |  |  |           |   |   |         |            |  
|-------------------------------------------------------------------------------- | --------------------------- |  |  | --------- | - | - | ------- | ---------- | -
|Convertible debenture dated April 23, 2002                                       |                             |  |  |           |   | $ | 225,000 |           
|Convertible debentures dated June 10, 2002                                       |                             |  |  |           |   |   | 775,000 |           
|Convertible debenture dated August 23, 2002                                      |                             |  |  |           |   |   | 175,000 |           
|Less amounts still due under the August 23, 2002 debenture as of
August 31, 2002 |                             |  |  |           |   |   | (75,000 | )         
|Less debt discount                                                               |                             |  |  |           |   |   |         |           
|                                                                                 | Total                       |  |  | 1,175,000 |   |   |         |            |  
|                                                                                 | Amount amortized to expense |  |  | (128,249  | ) |   |         | (1,046,751 | )
|                                                                                 |                             |  |  |           |   |   |         |           
|Convertible debentures at August 31, 2002                                        |                             |  |  |           |   | $ | 53,249  |           
|                                                                                 |                             |  |  |           |   |   |         |           

6. INVESTMENT AGREEMENTS

$5 Million Equity Line of Credit Agreement

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

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

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

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

An additional 1,052,219 shares of common stock at exercise prices ranging
initially from $0.341 to $1.265 are issuable to Swartz upon the exercise of
warrants issued under the investment agreement. The warrants contain a reset
provision which may reduce the exercise price if the price, as defined in the
agreement, is lower on any subsequent six month anniversary. As a result of
the reset provision, the exercise prices have been reduced to a range of $0.066
to $0.077 as of August 31, 2002. None of the warrants had been exercised as
of August 31, 2002.

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

$30 Million Equity Line of Credit Agreement

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

The registration statement went effective on June 23, 2000 and we received a
total of $4,381,601 from the sale of 12,000,000 shares of common stock . Per
the terms of the investment agreement, we issued ten five-year warrants for
1,800,000 shares of common stock exercisable initially at prices ranging from
$0.091 to $1.562. The warrants contain a reset provision which may reduce the
exercise price if the price, as defined in the agreement, is lower on any
subsequent six month anniversary. As a result of the reset provision, the
exercise prices have been reduced to a range of $0.066 to $0.132 as of August
31, 2002. None of the warrants had been exercised as of August 31, 2002.

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

On September 24, 2001, we entered into a waiver and agreement with Swartz
whereby Swartz was able to advance us $227,800 prior to the close of the final
put under the $30 million equity line of credit. The waiver and agreement
extended the time of the put beyond twenty days and redefined the price of the
put to be the lesser of the factor of (a) the volume weighted average price
per share, as defined by Bloomberg L.P., for each day of the put multiplied by
     .70 or (b) the volume weighted average price per share minus $0.05 multiplied
by 20% of the acceptable daily volume as defined in the waiver. At the
discretion of Swartz the 20% daily volume limitation could be increased up to
30% of the daily volume. In addition, the waiver included the issuance of a
purchase warrant to purchase 2,125,000 shares of common stock at an initial
exercise price of $0.0911. The purchase warrant shares were issued to Swartz
as restricted shares subject to piggyback registration rights and are subject
to repricings on each six month anniversary if 110% of the lowest closing bid
price for the five days previous to the anniversary date is less than the
initial or subsequent reset exercise prices. As a result of the reset
provision, the exercise price has been reduced to $0.0858 as of August 31,
2002. None of the warrants had been exercised as of August 31, 2002.
See Note 7 for further information on the warrants.

$25 Million Equity Line of Credit Agreement

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

Put Rights.In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the
common shares which may be issued as a consequence of the invocation of that
put right. Additionally, we must give at least ten but not more than twenty
business days advance notice to Swartz of

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

the date on which we intend to exercise a particular put right, and we must
indicate the number of shares of common stock we intend to sell to Swartz. At
our option, we may also designate a maximum dollar amount of common stock (not
to exceed $3 million) which we will sell to Swartz during the put and/or a
minimum purchase price per
common share at which Swartz may purchase shares during the put. The number of
common shares sold to Swartz
may not exceed 20% of the aggregate daily reported trading volume during each
of two consecutive ten business day periods beginning on the business day
immediately following the day we invoked the put right.

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

We issued to Swartz a commitment warrant to purchase up to 900,000 shares of
our common stock concurrent with the execution of the investment agreement.
This warrant is exercisable through September 17, 2006 at an initial exercise
price of $0.22. The commitment warrant exercise price is subject to being
reset on each six month anniversary of its issuance. As a result of the reset
provision, the exercise price has been reduced to $0.1111 as of August 31,
2002. None of the warrants had been exercised as of August 31, 2002.

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 should not apply to the put:



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

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

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

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

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

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

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

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

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

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

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

7. STOCKHOLDERS DEFICIT

The following table summarizes equity transactions during the three months
ended August 31, 2002:

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

|                                                                 |  |        |            |         |  |   |            | 
|---------------------------------------------------------------- |  | ------ | ---------- | ------- |  | - | ---------- | 
|                                                                 |  | Common |            |         |  |  
|                                                                 |  | Shares |            | Dollars
|                                                                 |  |        |            |        
|Balance June 1, 2002                                             |  |        | 81,465,757 |         |  | $ | 41,440,916 | 
|Non-cash interest and debt discount
related to warrants (Note 5) |  |        |           |         |  |   | 1,005,581  | 
|                                                                 |  |        |            |         |  |   |            | 
|Balance August 31, 2002                                          |  |        | 81,465,757 |         |  | $ | 42,446,497 | 
|                                                                 |  |        |            |         |  |   |            | 

At August 31, 2002, we had 17,500 options outstanding pursuant to our 1992 ISO
Stock Option Plan exercisable at $1.325 per share expiring in 2005; 50,000
options outstanding pursuant to our 1992 NSO Stock Option Plan
exercisable at $1.325 per share expiring in 2005; 2,154,405 options outstanding
pursuant to our 1996 Stock Option Plan exercisable at a range of $0.07 to $1.41
per share expiring beginning in 2002 through 2007; and 2,305,000 options
outstanding pursuant to our 2001 Stock Option Plan exercisable at a range of
$0.07 to $0.70 per share expiring beginning in 2002 through 2007.

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

At August 31, 2002, we had warrants outstanding exercisable into 37,988,275
common shares at exercise prices ranging from $0.048 to $1.12 per share
expiring beginning in 2002 through 2007. During the three months ended August
31, 2002, we issued warrants to purchase 13,747,358 shares of common stock
which 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. During the three months ended August 31, 2002, warrants to
purchase 5,678,285 shares of common stock with initial or reset exercise
prices ranging from $0.0755 to $0.1320 have been repriced to exercise prices
ranging from $0.066 to $0.077.

In December 2001, we entered into a series of agreements with iCapital
Corporation (iCapital) and several principals of iCapital whereby they will
provide consulting services through December 2002 to help structure financing,
provide innovative capital resources, identify and assist with merger and
acquisition opportunities and advise us on other strategic decisions. In
January 2002, based on meeting several performance criteria, we issued to
iCapital and the principals of iCapital 2,200,000 shares of our common stock as
compensation for the consulting
services. During our previous fiscal year, we recorded $198,000, the value of
the common stock on the day it was issued, as a prepaid expense and additional
paid-in capital of which, during the three months ended August 31, 2002, we
amortized to expense $49,500 as non-cash compensation.

8. NOTE RECEIVABLE

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

9. LEGAL PROCEEDINGS

In January 1999, we were sued in the Superior Court of San Diego County,
California by the Fish Family Trust, a co-inventor of the original ShBoom
technology. The suit also named as defendants nanoTronics and Gloria Felcyn on
behalf of the Falk Family Trust. The suit sought a judgment for damages, a
rescission of the Technology Transfer Agreement and a restoration of the
technology to the co-inventor. In March 1999, we joined with nanoTronics and
Gloria Felcyn and filed our response and cross-complaint against the Fish
Family Trust. In

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Patriot Scientific Corporation
Notes to Consolidated Financial Statements (Continued)

November 2000, the judge issued a summary ruling in favor of the defendants on
all counts. The Fish Family Trust filed an appeal in January 2001.
Management believes that it is unlikely that the appellate court will overturn
the trial courts ruling and that the resolution of the appeal process will
have no impact on our financial position, income or cash flows.

In September 2001, an action was filed against us in the Superior Court of San
Diego County, California by Richard G. Blum, our former Chairman, President and
Chief Executive Officer. Mr. Blum contends that he was wrongfully terminated
on August 5, 2001 in violation of his employment agreement dated December 1,
2000. He seeks damages for the alleged breach of his employment agreement, age
discrimination, as well as other related claims.

Management denies Mr. Blums claims and contends it exercised its business
judgment for legitimate nondiscriminatory reasons. In accordance with his
employment agreement, we may be obligated to pay him between $0 and $400,000 as
severance pay. We intend to vigorously defend our position in this case.

In October 2001, an action was filed against us in the Superior Court of San
Diego County, California by Daniel Beach, a former marketing and sales
consultant whose contract we terminated in August 2001. Mr. Beach contends
that we breached both a written and an oral contract, that we did not perform
on certain promises, and that we made false and misleading representations in
addition to other claims. In August 2002, we entered into a settlement
agreement with Mr. Beach whereby we agreed to pay him $50,000 over five months.
This liability had been recorded in our consolidated financial statements
during our previous fiscal year.

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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-K
FOR THE YEAR ENDED MAY 31, 2002.

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 will 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                                                                                                                                                   

Critical Accounting Policies

We believe that the following represent our critical accounting policies:

Property, Equipment and Depreciation

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

Patents and Trademarks

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

Revenue Recognition

We recognize revenue on the shipment to our customers of communication
products, microprocessor integrated chips and evaluation boards. We anticipate
that in the future we will also derive revenue from fees for the transfer of
proven and reusable intellectual property components or the performance of
engineering services. We anticipate to enter into licensing agreements that
will provide licensees the right to incorporate our intellectual property
components in their products with terms and conditions that we anticipate to
vary by licensee. Generally,

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

Research and Development Costs

Research and development costs are expensed as incurred.

Stock Options

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

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

Use of Estimates

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

Results of Operations for the Three Months Ended August 31, 2002 and August 31,
2001

Net sales. Total net sales for the first fiscal quarter ended August 31, 2002
decreased 87.3% to $39,889 from $314,500 for the corresponding period of the
previous fiscal year. This decrease was due to the final buys on our matured
communication products having been substantially completed the previous fiscal
year. 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, 2002. We anticipate
that future revenue will be derived from up front license fees and royalties as
a result of the shift in focus to the commercialization of our microprocessor
and related technology intellectual property. Previously we focused primarily
on the sale of silicon products. We cannot estimate when significant revenue
will be generated from the microprocessor technology.

Cost of sales. Cost of sales as a percentage of net sales decreased to 12.3%
in the first fiscal quarter ended August 31, 2002 compared to 64.9% for the
corresponding period of the previous fiscal year. This significant decrease
was due to minor sales during the first quarter of 2003 not having associated
costs due to having previously written off the communication product line
inventory. The write-down of the inventory to zero during the previous

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fiscal year was a result of not being able to find a buyer for the
communication product line and our decision to focus future company revenue on
the sale of licenses and intellectual property related to our microprocessor
technology versus the sale of microprocessor silicon and related products. The
winding down of the communication product line did not impair any of our other
assets. Also, as a result of eliminating the communication product line,
overhead expenses charged to cost of sales the previous fiscal year are now
being charged to general and administrative expenses.

Research and development expenses decreased 57.8% from $495,808 for the first
fiscal quarter ended August 31, 2001 compared to $209,287 for the first fiscal
quarter ended August 31, 2002. This decrease was due to a reduction in
consulting services compared to the previous fiscal year related to the
development of a new soft core version of the microprocessor technology in the
amount of $70,589 and a reduction in payroll expense as a result of downsizing
the department by six individuals during the second and third fiscal quarters
of the previous fiscal year in an amount of $199,676.

Selling, general and administrative expenses decreased 25.5% to $487,101 for
the first fiscal quarter ended August 31, 2002 compared to $653,740 for the
first fiscal quarter of the previous fiscal year. This decrease was due
primarily to a reduction in executive, marketing and sales personnel in the
amount of $188,911 as a result of downsizing the company during the second and
third fiscal quarters of the previous fiscal year partially offset by an
increase in professional fees related to financings and litigation.

Other expenses for the first fiscal quarter ended August 31, 2002, were
$282,033 compared to other expenses of $7,753 for the corresponding period of
the previous fiscal year. This change resulted primarily from the recognition
of non-cash interest expense of $254,367 related to the amortization of the
debt discount associated with the issuance of warrants under a secured note
payable and convertible debentures coupled with interest expense of $27,841
related to the note and debentures.

Income Taxes

Deferred income taxes are provided for temporary differences in recognizing
certain income and expense items for financial and tax reporting purposes.
Deferred tax assets consist primarily of income tax benefits from net operating
loss carry-forwards. A valuation allowance has been recorded to fully offset
the deferred tax asset as it is more likely than not that the assets will not
be utilized. The valuation allowance increased approximately $161,000 in the
first three months of 2003, from $13,446,000 at May 31, 2002 to $13,607,000 at
August 31, 2002.

Liquidity and Capital Resources

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

At August 31, 2002, we had deficit working capital of $991,846 and cash and
cash equivalents of $14,424. We have historically funded our operations
primarily through the issuance of securities and debt financings. Cash and
cash equivalents decreased $73,684 during the three months ended August 31,
2002 due to net cash used in operations of $665,011 offset by funds generated
primarily from the issuance of convertible debentures of $592,000. The net
cash used in operations was $665,011 for the three months ended August 31, 2002
compared to $1,422,975 for the corresponding period of the previous fiscal
year. The decrease in cash required in operations was due primarily to a
$346,484 reduction in net loss as adjusted to reconcile to cash used in
operating activities coupled with a $248,602 reduction in cash used to support
increased accounts receivable and $142,392 increase in cash used to pay down
accounts payable and accrued expenses between the two periods. Cash used in
investing activities was $11,376 for the three months ended August 31, 2002
compared to $9,845 for the corresponding period of the previous fiscal year.
Cash provided by financing activities was $602,703 for the three months ended
August 31, 2002 compared to $998,553 for the corresponding period of the
previous fiscal year. This decrease was primarily the result of a reduced
issuance of common stock of $776,604 partially offset by an increase in the
issuance of convertible debentures of $592,000 during the current fiscal period
compared to the corresponding period of the previous fiscal year.

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We estimate our current cash requirements to sustain our operations for the
next twelve months through August 2003 to be $2.4 million. Since we are no
longer supporting the communications product line, we are assuming that there
will be no communications product revenue. We have a note payable to Swartz
Private Equity, LLC (Swartz) of $635,276 at August 31, 2002 which was
originally due in October 2002 and subsequent to the end of the quarter has
been extended to January 2003. We also have convertible debentures with a
group of investors as of August 31, 2002 aggregating $1,175,000. At the option
of the debenture holders, they may purchase additional debentures up to $1
million at any time during the next two years as long as the price of our
common stock is in excess of $0.20 per share. In addition to limitations based
on trading volume and market price of the common stock, our ability to obtain
equity financing under the $25 million equity line of credit (see Note 6 to the
unaudited consolidated financial statements) is dependent on our having
registered shares of our common stock to sell to Swartz. As of August 31,
2002, we do not have any registered shares to sell to Swartz.

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



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

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

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

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

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|                |                                                                                      |                                      |   |           |           | 
|--------------- | ------------------------------------------------------------------------------------ | ------------------------------------ | - | --------- | --------- | 
|Cash available: |                                                                                      |                                      |   |          
|                | Cash available at August 31, 2002                                                    |                                      | $ | 14,424    |          
|                | Proceeds received from the issuance of debt
and equity subsequent to August 31, 2002 |                                      |   | 265,000   |          
|                |                                                                                      |                                      |   |           |          
|                |                                                                                      | Total                                |   |           | 279,424   | 
|                |                                                                                      |                                      |   |           |          
|Cash needs:     |                                                                                      |                                      |   |          
|                | Estimated needs                                                                      |                                      |   | 2,400,000 |          
|                | Note payable to Swartz at January 9, 2003                                            |                                      |   | 635,276   |          
|                |                                                                                      |                                      |   |           |          
|                |                                                                                      | Total                                |   |           | 3,035,276 | 
|                |                                                                                      |                                      |   |           |          
|                |                                                                                      | Required funds from external sources |   | $         | 2,755,852 | 
|                |                                                                                      |                                      |   |           |          

As shown above, we need to obtain $2,755,852. Any additional funding under the
existing $25 million equity line of credit is dependent on many factors.
However, there can be no assurance that any funds required during the next
twelve months or thereafter can be generated from sales of common stock under
the existing $25 million equity line of credit or that we will be able to
secure additional debt or equity financing. The lack of additional capital
could force us to substantially curtail or cease operations and would,
therefore, have a material adverse effect on our business. Further, there can
be no assurance that we will be able to timely receive shareholder approval to
increase the number of authorized shares or that required funds, if available,
will be available on attractive terms or that they will not have a
significantly dilutive effect on our existing shareholders. As such, there is
substantial doubt about our ability to continue as a going concern. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from our possible
inability to continue as a going concern.

$25 Million Equity Line of Credit

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

Put Rights.In order to invoke a put right, we must have an effective
registration statement on file with the SEC registering the resale of the
common shares which may be issued as a consequence of the invocation of that
put

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right. Additionally, we must give at least ten but not more than twenty
business days advance notice to Swartz of the date on which we intend to
exercise a particular put right, and we must indicate the number of shares of
common stock we intend to sell to Swartz. At our option, we may also designate
a maximum dollar amount of common stock (not to exceed $3 million) which we will sell to Swartz during the put
and/or a minimum purchase price per
common share at which Swartz may purchase shares during the put. The number of
common shares sold to Swartz may not exceed 20% of the aggregate daily reported
trading volume during each of two consecutive ten business day periods
beginning on the business day immediately following the day we invoked the put
right.

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

We issued to Swartz a commitment warrant to purchase up to 900,000 shares of
our common stock concurrent with the execution of the investment agreement.
This warrant is exercisable through September 17, 2006 at an initial exercise
price of $0.22. The commitment warrant exercise price is subject to being
reset on each six month anniversary of its issuance. As a result of the reset
provision, the exercise price has been reduced to $0.1111 as of August 31,
2002. None of the warrants had been exercised as of August 31, 2002.

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 should not apply to the put:



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

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

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

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

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

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

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

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

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

8% Convertible Debentures

Overview.From April 23, 2002 through August 23, 2002, we sold an aggregate of
$1,175,000 of 8% convertible debentures to a group of six investors. The
convertible debentures entitle the debenture holder to
convert the principal and unpaid accrued interest into our common stock for two
years from the date of closing. In addition, the debenture holder received
warrants exercisable into a number of our common shares.

Number of Shares Debentures May Be Converted Into.The debentures can be
converted into a number of our common shares at conversion prices that
initially equaled $0.0727 to $0.10289 per share.

Resets of Conversion Price and Conversion Shares.A reset date occurs on each
three month anniversary of the closing date of each debenture and on the date
the registration statement filed in June 2002 becomes effective. If the volume
weighted average price for our common stock for the ten days previous to the
reset date is less than the

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conversion price in effect at the time of the reset date, then the number of
common shares issuable to the selling shareholder on conversion will be
increased. If the conversion price is reset, the debenture can be converted
into a number of our common shares based on the following calculation: the
amount of the debenture plus any unpaid accrued interest divided by the reset
conversion price which shall equal the volume weighted average price for our
common stock for the ten days previous to the reset date. On July 23, 2002,
its three month anniversary, the
conversion price for a debenture dated April 23, 2002 in an amount of $225,000
was reset to $0.06629 from an initial conversion price of $0.10289.

Warrants.Concurrent with the issuance of the convertible debentures, we issued
to the debenture holders warrants to purchase up to 15,626,849 shares of our
common stock. These warrants are exercisable for five years from the date of
issuance at initial exercise prices equal to 115% of the volume weighted
average price for our common stock for the ten days previous to the debenture
date. The warrant exercise price is subject to being reset on each six month
anniversary of its issuance.

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

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

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

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

Registration Rights and Waiver. We are responsible for registering the resale
of the shares of our common stock which will be issued on the conversion of the
debentures. As of October 16, 2002, a registration statement initially filed
in June 2002 and subsequently amended in August 2002 has not been declared
effective by the Securities and Exchange Commission. The debenture holders
have provided waivers extending the effective registration deadline to December
1, 2002 before we would be liable for late registration penalties.

As of August 31, 2002 we issued warrants to purchase up to 15,626,849 shares of
our common stock in accordance with the convertible debentures. The warrants
issued were valued using the Black-Scholes pricing model based on the expected
fair value at issuance and the estimated fair value was also recorded as debt
discount. See Note 7 to the consolidated financial statements for discussion
of the terms of the warrants.

All debt discounts are to be amortized as additional interest expense over the
term of the convertible debenture. As of August 31, 2002, $829,110 has been
reflected as debt discount of which $94,415 and $8,383 was amortized to
interest expense during the three months ended August 31, 2002 and the year
ended May 31, 2002, respectively.

In addition, the convertible debentures contain beneficial conversion features.
Such features require us to allocate the proceeds received to both the
warrants and the debt and to calculate an intrinsic value for the debt portion
if the

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per share price allocated to debt is less than the fair market per share price
as of the first date the debentures may be converted. Accordingly, during the
quarter ended August 31, 2002, we recorded $345,890 to additional paid in
capital to reflect the intrinsic value of the convertible debentures that
closed on April 23, June 10 and August 23, 2002. The intrinsic value of the
beneficial conversion feature of the convertible debenture is amortized to
non-cash interest expense over the life of the convertible debenture.
Accordingly, we amortized to non-cash interest expense
$25, 451 during the three months ended August 31, 2002.

The convertible debentures are secured by our assets.

|                                                                                 |                             |  |  |           |   |   |         |            |  
|-------------------------------------------------------------------------------- | --------------------------- |  |  | --------- | - | - | ------- | ---------- | -
|Convertible debenture dated April 23, 2002                                       |                             |  |  |           |   | $ | 225,000 |           
|Convertible debentures dated June 10, 2002                                       |                             |  |  |           |   |   | 775,000 |           
|Convertible debenture dated August 23, 2002                                      |                             |  |  |           |   |   | 175,000 |           
|Less amounts still due under the August 23, 2002 debenture as of
August 31, 2002 |                             |  |  |           |   |   | (75,000 | )         
|Less debt discount                                                               |                             |  |  |           |   |   |         |           
|                                                                                 | Total                       |  |  | 1,175,000 |   |   |         |            |  
|                                                                                 | Amount amortized to expense |  |  | (128,249  | ) |   |         | (1,046,751 | )
|                                                                                 |                             |  |  |           |   |   |         |           
|Convertible debentures at August 31, 2002                                        |                             |  |  |           |   | $ | 53,249  |           
|                                                                                 |                             |  |  |           |   |   |         |           

New Accounting Pronouncements

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

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after adoption of SFAS No. 142. The adoption of this statement had no material
impact on our consolidated financial statements.

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

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

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

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

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

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

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CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE OF THIS REPORT.

Since the business combination with Metacomp, effective December 1996, we have
segregated our operations into microprocessor, communication, and radar/antenna
product lines.

The status of these three major technologies is as follows:



| |  |  | Ignite I microprocessor technology. This technology is generating minor
amounts of revenue from the sale of
evaluation boards, microprocessors and initial license fees related to the
intellectual property. We have ported the VxWorks operating system and the
Sun Microsystems personalJava virtual machine to the microprocessor.
Although we anticipate the sales of licenses and royalties from the
microprocessor technology will be our main product line, it currently
accounted for only 11% of our revenue for the three months ended August 31,
2002.                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 previous fiscal year. Although minimal shipments of
communications product accounted for 89% of the revenue shipped during
the first three months ended August 31, 2002, future revenue will come
from our microprocessor technologies.
|
| |  |  | Radar and antenna. We sold the gas plasma antenna technology in August
1999. Our radar technology has not generated any revenue and we have
suspended further development of this technology in order to concentrate
our resources on the Ignite I microprocessor technology.                                                                                                                                                                                                                                                                                                                           

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

We have experienced in the past and may experience in the future many of the
problems, delays and expenses encountered by any business in the early stages
of development, some of which are beyond our control. We have had limited
operating history, have incurred significant cumulated losses, have only
recently commenced marketing and sales of our products and have not achieved a
profitable level of operations. There can be no assurance of future
profitability. We may require additional funds in the future for operations or
to exploit our technologies. There can be no assurance that any funds required
in the future can be generated from operations or that such required funds will
be available from other potential sources. The lack of additional capital
could force us to substantially curtail or cease operations and would therefore
have a material adverse effect on our business. Further there can be no
assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significantly dilutive effect on
our existing shareholders. Our technologies are in various stages of
development. There can be no assurance that any of the technologies in
development can be completed to commercial exploitation due to the inherent
risks of new technology development limitations on financing, competition,
obsolescence, loss of key technical personnel and other factors. Our
development projects are high risk in nature, where unanticipated technical
obstacles can arise at any time and result in lengthy and costly delays or
result in determination that further development is unfeasible. There can be
no assurance that the technologies, if completed, will achieve market
acceptance sufficient to sustain us or achieve profitable operations.

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

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

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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.

As of August 31, 2002, our notes payable and convertible debentures to
corporations and individuals totaling $1.7 million bore interest at fixed
rates of 5% to 8%. Our capital lease obligation totaling $20,673 is discounted
at a fixed rate of interest of 22.7%.




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, income or cash flows.

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

In October 2001, an action was filed against us in the Superior Court of San
Diego County, California by Daniel Beach, a former marketing and sales
consultant whose contract we terminated in August 2001. Mr. Beach contends
that we breached both a written and an oral contract, that we did not perform
on certain promises, and that we made false and misleading representations in
addition to other claims. In August 2002, we entered into a settlement
agreement with Mr. Beach whereby we agreed to pay him $50,000 over five months
which liability had been recorded in the consolidated financial statements as
of May 31, 2002.




Item 6. Exhibits and Reports on Form 8-K

| |     |                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------
| | (a) | Exhibits                                                                                                 
|
| |     | 99.8    Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
| |     | 99.9    Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
| | (b) | Reports on Form 8-K  NONE                                                                                

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SIGNATURES

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

|                       |  |                                |  |                                                                                                     
|---------------------- |  | ------------------------------ |  | ----------------------------------------------------------------------------------------------------
|                       |  | PATRIOT SCIENTIFIC CORPORATION
|Date: October 18, 2002 |  | By:                            |  | /s/ LOWELL W. GIFFHORN                                                                              
|                       |  |                                |  |                                                                                                     
|                       |  |                                |  | Executive Vice President and
Chief Financial Officer                                                
|                       |  |                                |  | (Principal Financial and
Accounting Officer and duly
authorized to sign on behalf
of the Registrant)

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CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Patriot Scientific
Corporation (the Issuer) for the period ended August 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the Report), I,
Jeffrey E. Wallin, Chief Executive Officer of the Issuer, certify that:



| | 1. |  | I have reviewed the report being filed;                                                                                                                                                                                                                                                                 
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by the report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the issuer as of, and for, the periods presented in the
report;                       
|
| | 4. |  | I and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the issuer and
have:                                                                                                   

|   |  |                                                                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the issuer,
including its consolidated subsidiaries, is made known to them by
others within those entities, particularly during the period in
which the periodic reports are being prepared;
|  
|b. |  | evaluated the effectiveness of the issuers disclosure
controls and procedures as of a date within 90 days prior to the
filing date of the report (the Evaluation Date); and                                                                                                               
|  
|c. |  | presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based on
their evaluation as of the Evaluation Date;                                                                                                                             



| | 5. |  | I and the other certifying officers have disclosed, based on their
most recent evaluation, to the issuers auditors and the audit
committee of issuers board of directors (or persons performing the
equivalent function):
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the issuers
ability to record, process, summarize and report financial data
and have identified for the issuers auditors any material
weaknesses in internal controls; and
|  
|b. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
issuers internal controls; and                                                                                                                                    



| | 6. |  | I and the other certifying officers have indicated in the report
whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of their most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |                                                                        
| |  | -----------------------------------------------------------------------
| |  | /S/ JEFFREY E. WALLIN                                                  
| |  |                                                                        
| |  | Name: Jeffrey E. Wallin
Title: President and CEO
Date: October 18, 2002

32



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##### Table of Contents






CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of Patriot Scientific
Corporation (the Issuer) for the period ended August 31, 2002, as filed with
the Securities and Exchange Commission on the date hereof (the Report), I,
Lowell W. Giffhorn, Chief Financial Officer of the Issuer, certify that:



| | 1. |  | I have reviewed the report being filed;                                                                                                                                                                                                                                                                 
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, the report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by the report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in the report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the issuer as of, and for, the periods presented in the
report;                       
|
| | 4. |  | I and the other certifying officers are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the issuer and
have:                                                                                                   

|   |  |                                                                                                                                                                                                                                                                                              
|-- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a. |  | designed such disclosure controls and procedures to
ensure that material information relating to the issuer,
including its consolidated subsidiaries, is made known to them by
others within those entities, particularly during the period in
which the periodic reports are being prepared;
|  
|b. |  | evaluated the effectiveness of the issuers disclosure
controls and procedures as of a date within 90 days prior to the
filing date of the report (the Evaluation Date); and                                                                                                               
|  
|c. |  | presented in the report their conclusions about the
effectiveness of the disclosure controls and procedures based on
their evaluation as of the Evaluation Date;                                                                                                                             



| | 5. |  | I and the other certifying officers have disclosed, based on their
most recent evaluation, to the issuers auditors and the audit
committee of issuers board of directors (or persons performing the
equivalent function):
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                       
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|d. |  | all significant deficiencies in the design or operation
of internal controls which could adversely affect the issuers
ability to record, process, summarize and report financial data
and have identified for the issuers auditors any material
weaknesses in internal controls; and
|  
|e. |  | any fraud, whether or not material, that involves
management or other employees who have a significant role in the
issuers internal controls; and                                                                                                                                    



| | 6. |  | I and the other certifying officers have indicated in the report
whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls
subsequent to the date of their most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |                                                                          
| |  | -------------------------------------------------------------------------
| |  | /S/ LOWELL W. GIFFHORN                                                   
| |  |                                                                          
| |  | Name: Lowell W. Giffhorn
Title: Exec. V.P. and CFO
Date: October 18, 2002

33