<PAGE>   1

                    U. S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

(Mark One)
[X]     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

        For quarterly period ended November 30, 1999
                                   -----------------

[ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

        For the transition period from _____________ to _______________

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

                         PATRIOT SCIENTIFIC CORPORATION
        (Exact name of small business issuer as specified in its charter)

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

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

                                 (858) 674-5000
                           ---------------------------
                           (Issuer's telephone number)

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

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

Common Stock, $.00001 par value                     43,057,220
-------------------------------          ---------------------------------
            (Class)                      (Outstanding at January 10, 2000)

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


<PAGE>   2

                         PATRIOT SCIENTIFIC CORPORATION
                                      INDEX


<TABLE>
<CAPTION>
                                                                                       Page
<S>                                                                                    <C>
PART I. FINANCIAL INFORMATION

        Item 1. Financial Statements:

               Consolidated Balance Sheets as of November 30, 1999 (unaudited)
                 and May 31, 1999                                                      3

               Consolidated Statements of Operations for the three and six
                 months ended November 30, 1999 and 1998 (unaudited)                   4

               Consolidated Statements of Cash Flows for the six months ended
                 November 30, 1999 and 1998 (unaudited)                                5

               Notes to Consolidated Financial Statements                              6-11

        Item 2. Management's Discussion and Analysis of Financial Condition
                 and Results of Operations                                             12


PART II. OTHER INFORMATION                                                             18

        Item 1. Legal Proceedings                                                      18
        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                                       *


SIGNATURES                                                                             18
</TABLE>

        * No information provided due to inapplicability of the item.



                                       2
<PAGE>   3

PART I- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                         PATRIOT SCIENTIFIC CORPORATION
                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                               November 30,             May 31,
                                                                                   1999                  1999
                                                                              -------------          ------------
                                                                               (Unaudited)
<S>                                                                           <C>                    <C>
                             ASSETS
Current assets:
      Cash and cash equivalents                                               $    165,846           $     35,813
      Accounts receivable, net of allowance
        of $22,000 for uncollectible accounts                                       16,655                 85,362
      Retained receivable due from factor (Note 1)                                   6,293                      -
      Inventories (Note 3)                                                         201,860                249,833
      Prepaid expenses                                                             106,411                135,198
                                                                              ------------           ------------

Total current assets                                                               497,065                506,206

Property and equipment, net                                                        343,343                448,764

Patents and trademarks, net                                                        152,057                190,057
                                                                              ------------           ------------
                                                                              $    992,465           $  1,145,027
                                                                              ============           ============

              LIABILITIES AND STOCKHOLDERS' DEFICIT

Current liabilities:
      Notes payable (Note 4)                                                  $    523,548           $    355,274
      Related party notes payable (Note 4)                                         175,000                175,000
      Accounts payable                                                           1,270,338              1,196,553
      Accrued liabilities                                                          169,168                140,083
      Accrued past due payroll taxes (Note 1)                                      414,275                182,996
      Capital lease obligations                                                        197                  1,355
                                                                              ------------           ------------

Total current liabilities                                                        2,552,526              2,051,261

Contingencies (Notes 5 and 9)

Common stock subject to rescission (Note 5)                                        384,736                 75,000

Stockholders' deficit (Note 6):
      Preferred stock, $.00001 par value; 5,000,000 shares
        authorized: none outstanding                                                     -                      -
      Common Stock, $.00001 par value; 60,000,000 shares
        authorized; issued and outstanding 39,594,915 and 39,563,915                   396                    396
      Additional paid-in capital                                                23,566,667             22,879,449
      Accumulated deficit                                                      (25,511,860)           (23,861,079)
                                                                              ------------           ------------
Total stockholders' deficit                                                     (1,944,797)              (981,234)
                                                                              ------------           ------------
                                                                              $    992,465           $  1,145,027
                                                                              ============           ============
</TABLE>

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


                                       3
<PAGE>   4

                         Patriot Scientific Corporation
                      Consolidated Statements of Operations
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                  Three months Ended                           Six months Ended
                                                    November 30,                                  November 30,
                                         -----------------------------------           -----------------------------------
                                             1999                   1998                   1999                   1998
                                         ------------           ------------           ------------           ------------
<S>                                      <C>                    <C>                    <C>                    <C>
Net sales                                $    239,884           $    230,905           $    438,908           $    836,497

Cost of sales                                  96,953                190,420                223,563                569,898
                                         ------------           ------------           ------------           ------------

Gross profit                                  142,931                 40,485                215,345                266,599

Operating expenses:
     Research and development                 391,619                453,497                825,019              1,155,489
     Selling, general and
       administrative                         276,065                734,904                621,779              1,362,675
                                         ------------           ------------           ------------           ------------
                                              667,684              1,188,401              1,446,798              2,518,164
                                         ------------           ------------           ------------           ------------
Operating loss                               (524,753)            (1,147,916)            (1,231,453)            (2,251,565)
                                         ------------           ------------           ------------           ------------
Other income (expenses):
     Gain on sale of technology                     -                      -                250,000                      -
     Interest income                                2                    130                    100                  3,719
     Interest expense                         (29,481)                (5,616)               (55,836)                (6,485)
     Non-cash interest expense
       related to notes payable
       (Notes 4 and 7)                       (347,771)              (151,856)              (613,592)              (299,802)
                                         ------------           ------------           ------------           ------------
                                             (377,250)              (157,342)              (419,328)              (302,568)
                                         ------------           ------------           ------------           ------------
Net loss                                 $   (902,003)          $ (1,305,258)          $ (1,650,781)          $ (2,554,133)
                                         ============           ============           ============           ============

Basic and diluted loss
     per common share                    $      (0.02)          $      (0.04)          $      (0.04)          $      (0.07)
                                         ============           ============           ============           ============

Weighted average number of
  common shares outstanding
  during the period (Note 1)               39,585,245             36,246,178             39,580,532             36,661,601
                                         ============           ============           ============           ============
</TABLE>

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


                                       4
<PAGE>   5

                         PATRIOT SCIENTIFIC CORPORATION
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

<TABLE>
<CAPTION>
                                                                 Six Months Ended November 30,
                                                                       1999               1998
<S>                                                             <C>                <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating activities:
      Net loss                                                  $(1,650,781)       $(2,554,133)
      Adjustments to reconcile net loss
        to cash used in operating activities:
          Amortization and depreciation                             176,435            160,469
          Non-cash interest expense related to
              convertible notes                                           -            314,472
          Non-cash interest expense related to warrants             613,592                  -
          Amortization of debt issuance costs                             -             48,000
          Non-cash compensation expense                                   -            445,000
      Gain on sale of technology                                   (250,000)                 -
          Changes in:
             Accounts receivable                                    (73,293)           315,634
             Retained receivable due from factoring                  (6,293)                 -
              Inventories                                            47,973              9,890
              Prepaid and other assets                               28,787           (166,097)
              Accounts payable and accrued expenses                 347,831            829,397
                                                                -----------        -----------
Net cash used in operating activities                              (765,749)          (597,368)
                                                                -----------        -----------
Investing activities:
      Purchase of property and equipment                            (33,014)          (273,096)
      Proceeds from sale of technology                              250,000                  -
                                                                -----------        -----------
Net cash provided by (used in) investing activities                 216,986           (273,096)
                                                                -----------        -----------
Financing activities:
      Proceeds from issuance of short term notes payable            335,000            102,500
      Proceeds from issuance of common stock under the
        investment agreement subject to recision                    193,554                  -
      Principal payments on notes payable and
        long-term debt                                               (1,158)            (1,068)
      Proceeds from factoring                                       142,000                  -
      Proceeds from issuance of common stock
        and exercise of common stock warrants and options             9,400            205,931
                                                                -----------        -----------
Net cash provided by financing activities                           678,796            307,363
                                                                -----------        -----------

Net increase (decrease) in cash and cash equivalents                130,033           (563,101)

Cash and cash equivalents, beginning of period                       35,813            602,456
                                                                -----------        -----------

Cash and cash equivalents, end of period                        $   165,846        $    39,355
                                                                -----------        -----------
Supplemental Disclosure of Cash Flow Information:
      Notes  and accrued interest exchanged for
        common stock                                            $   116,182        $   575,642
      Cash payments for interest                                     15,272              6,485
      Unamortized debt discount                                     234,452                  -
----------------------------------------------------------------------------------------------
</TABLE>

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




                                       5
<PAGE>   6

                         PATRIOT SCIENTIFIC CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)

1. BASIS OF PRESENTATION

The consolidated financial statements of Patriot Scientific Corporation ("the
Company") presented herein have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-QSB and do
not include all of the information and footnotes required by generally accepted
accounting principles. These statements should be read in conjunction with the
Company's audited financial statements and notes thereto for the year ended May
31, 1999.

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

LOSS PER SHARE

The Company has implemented 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, common stock warrants, and debt convertible into common stock.
Common stock options and warrants of 1,474,226 and 155,032 for the three months
and 1,463,240 and 180,617 for the six months ended November 30, 1999 and 1998,
respectively, and debt convertible into none and 496,089 for the six months
ended November 30, 1999 and 1998, respectively, were not included in diluted
loss per share for the periods as the effect was antidilutive due to the Company
recording losses in each of those periods.

In addition, for the quarter ended November 30, 1998, 2,000,000 shares of common
stock in escrow as of November 30, 1998 were not considered outstanding for
diluted loss per share because theses shares were subject to an earnout
agreement which had not yet been met.

SALE OF ACCOUNTS RECEIVABLE

The Company has adopted SFAS No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("SFAS 125"). SFAS 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. A factoring line
established by the Company with a bank enables the Company to sell selected
accounts receivable invoices to the bank with full recourse against the Company.
These transactions qualify for a sale of assets since (1) the Company has
transferred all of its right, title and interest in the selected accounts
receivable invoices to the bank, (2) the bank may pledge, sell or transfer the
selected accounts receivable invoices, and (3) the Company has no effective
control over the selected accounts receivable invoices since it may not redeem
the invoices sold previous to the invoices being greater than 90 days past due.
Under SFAS 125, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. During the first six months of
fiscal 2000, the Company sold approximately $178,000 of its accounts receivable
to a bank under a factoring agreement for approximately $142,000. Pursuant to
the provisions of SFAS 125, the Company reflected the transactions as sales of
assets and established an accounts receivable from the bank for the retained
amount less the costs of the transaction and less any anticipated future loss in
the value of the retained asset. The retained amount is equal to 20% of the
total accounts receivable invoice sold to the bank less 1% of the total invoice
as an administrative fee and 1.75% per month of the total outstanding accounts
receivable invoices as a finance fee. The estimated future loss reserve for each
receivable included in the estimated value of the retained asset is based on the
payment history of the accounts receivable customer. As of November 30, 1999,
the retained amount less the liability for fees and anticipated losses was
$6,293.



                                       6
<PAGE>   7

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

MANAGEMENT'S PLAN

At November 30, 1999, the Company had a working capital deficit of $2,055,461,
cash and cash equivalents of $165,846, and was delinquent to the Internal
Revenue Service for approximately $358,000 and various states for approximately
$56,000 in past due payroll taxes. The Company has funded its operations
primarily through the issuance of securities and debt financings.

The Company's current cash requirements to sustain its operations for the next
twelve months are estimated to be $1,600,000. The Company expects that these
requirements will be provided by:

        Internally:

-      sales of accounts receivables under a factoring agreement established
       with its bank, and

-      sales of licenses and/or intellectual property, and

        Externally:

-      during periods in which draw limitations restrict the amount of funds
       available under the investment agreement as discussed in Note 8,
       short-term debt instruments with individual and institutional investors,
       and

-      during periods in which draws under the investment agreement support the
       Company's cash requirements, draws against the investment agreement.


The puts under the investment agreement are subject to common stock trading
volume limitations and registration of the securities. The registration
statement went effective October 5, 1999. Proceeds of $193,554 from the initial
put under the investment agreement were received in November 1999. After the end
of the current fiscal quarter, the Company received additional proceeds of
$456,868.

Previously, the Company had anticipated receiving funds from a kiosk order that
the Company's customer had with the Mexican Department of Tourism. On several
occasions product shipments had been rescheduled pending the receipt of those
funds. The Company's customer has notified it that the kiosks will no longer be
purchased by the Mexican Department of Tourism and that the customer is trying
to find an alternative purchaser. There can be no assurance that an alternative
purchaser for the kiosks can be found by the Company's customer.

The Company anticipates that it may require additional equipment, fabrication,
components and supplies during the next twelve months to continue development of
its technologies. Product introductions such as those currently underway for
communication products and the PSC1000 may require significant inventory,
product launch, marketing personnel and other expenditures that the Company can
not currently estimate. Further, if expanded development is commenced or new
generations of microprocessors are accelerated beyond the Company's current
plans, additional expenditures, that it can not currently estimate, may be
required. It is possible therefore, that higher levels of expenditures may be
required than are currently contemplated resulting from changes in development
plans or as required to support new developments or commercialization activities
or otherwise.

There can be no assurance that any funds required during the next twelve months
or thereafter can be generated from operations or, if such required funds are
not internally generated, that funds will be available from external sources
such as debt or equity financings or other potential sources. The lack of
additional capital could force the Company to substantially curtail or cease
operations and would, therefore, have a material adverse effect on its business.
Further, there can be no assurance that any such required funds, if available,
will be available on attractive terms or that they will not have a significantly
dilutive effect on the Company's existing shareholders.



                                       7
<PAGE>   8

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2.  RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 133, "Accounting for Derivative Instruments and 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 is effective for fiscal periods beginning after June 15, 2000. Management
believes the adoption of this statement will have no material impact on the
Company's financial statements.

3. INVENTORIES

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

Inventories at November 30, 1999 and May 31, 1999, consist of the following:

<TABLE>
<CAPTION>
                           November 30, 1999   May 31, 1999
<S>                        <C>                 <C>
Component parts                $ 412,334        $ 449,582
Work in process                   93,262           93,262
Finished goods                   112,264          122,989
                               ---------        ---------
                                 617,860          665,833
Reserve for obsolescence        (416,000)        (416,000)
                               ---------        ---------
                               $ 201,860        $ 249,833
                               =========        =========
</TABLE>

4. NOTES PAYABLE

As of November 30, 1999, the Company has short term loans aggregating $933,000
with a group of individual investors, one of which is a major shareholder in the
Company. Of this amount, $335,000 was issued during the first two fiscal
quarters of 2000. The original terms of the loans are typically for four months
with interest rates of 10% and maturity dates ranging from December 29, 1999 to
April 4, 2000.

In addition to the interest accruing on the loans, warrants exercisable for
three years, for an aggregate of 5,120,251 common shares of the Company were
issued to investors at exercise prices ranging from $.25 to $.59 which was equal
to the market price of the common stock on the date of the issuances. During the
six months ended November 30, 1999, warrants to purchase 1,338,342 common shares
of the Company were issued related to the $335,000 short term loans placed
during the six months and warrants to purchase 2,103,447 common shares of the
Company were issued to the individual investors to extend the due dates of their
short term loans. These warrants were valued using the Black-Scholes model and a
value of $924,218 was reflected as a discount to the debt and is being amortized
over the life of the debt. In the first six months of fiscal 2000, $613,592 of
the debt discount has been amortized and reflected as non-cash interest expense.
The short term notes have been discounted to reflect the valuation of the
warrants as follows:



                                       8
<PAGE>   9

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                                             Interest
                                                   Amount      Rate            Due Dates
                                              -------------  ----------  ----------------------
<S>                                           <C>            <C>         <C>
            Notes due to a related party      $    175,000      10%      December 18, 1999 to
                                                                           February 17, 2000
            Notes due to individuals               758,000      10%      December 29, 1999 to
                                                                           April 4, 2000
                                              -------------
                                                   933,000
            Less unamortized debt discount
              related to valuation of warrants     234,452
                                              -------------
                                              $    698,548
                                              =============
</TABLE>

5. COMMON STOCK SUBJECT TO RESCISSION

In April 1999, the Company sold 400,000 shares of its common stock to two
individuals for an aggregated amount of $75,000; in June 1999, the Company
issued 397,205 shares of its common stock to an institutional investor upon the
conversion of a short term note plus accrued interest in the amount of $116,182;
in November 1999, the Company issued 780,460 shares of its common stock under
the investment agreement for $193,554; and in December 1999, the Company issued
1,784,640 shares of its common stock under the investment agreement for $456,
868. The Company also issued warrants for 117,069 and 267,696 shares of its
common stock related to the November 1999 and the December 1999 puts under the
investment agreement. These sales occurred after the filing of a registration
statement for the public resale of shares sold under the investment agreement;
and, therefore, the Company may have violated Section 5 of the Securities Act of
1933 as described in Note 8. As the shares may have been sold in violation of
Section 5, the investors, at their option, may have the right, for a one year
period after the purchase of the common stock, to rescind their purchases of
common stock. Therefore, the above shares of common stock which were outstanding
as of November 30, 1999 are reported separately from stockholders' deficit in
the accompanying consolidated balance sheet. At the conclusion of the recision
period, these shares will be reclassified to stockholders' equity (deficit).

6. STOCKHOLDERS' EQUITY

The following table summarizes equity transactions during the three months ended
November 30, 1999:

<TABLE>
<CAPTION>
                                                               Common
                                                               Shares            Dollars
<S>                                                          <C>               <C>
Balance June 1, 1999                                          39,563,915       $22,879,845
Exercise of stock options                                         31,000             9,400
Value of warrants issued in connection with
  debt recorded to additional paid-in capital (Note 4)                 -           677,818
                                                             -----------       -----------
Balance November 30, 1999                                     39,594,915       $23,567,063
                                                             ===========       ===========
</TABLE>

A total of 5,000,000 shares of the Company's common stock was issued as a
contingent cost of the Company's acquisition of its ShBoom technology in 1994.
As such, when the escrowed shares were earned, they were charged to compensation
costs. The terms of the escrow arrangement provided for an earnout formula of
500,000 shares for each $500,000 of revenues earned by the Company during the
period from June 1, 1994 through May 31, 1999. At May 31, 1999, 1,500,000
contingent shares not earned were returned to the Company and canceled.

During the six months ended November 30, 1998, 1,000,000 shares were earned as a
result of the arrangement and $445,000 was charged to compensation costs in that
period. At November 30, 1999, 1,500,000 additional shares remain in escrow that
have been earned and charged to compensation costs but have not been released
pending the outcome of a lawsuit between the Company, nanoTronics and the Fish
Family Trust as discussed in Note 9. Upon the resolution of the lawsuit, the
remaining shares held in escrow will either be released to the Falk Family
Trust, used either partially or in their entirety as a means of settling the
lawsuit, or be returned to the Company.



                                       9
<PAGE>   10

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

At November 30, 1999, the Company had 165,000 options outstanding pursuant to
its 1992 ISO Stock Option Plan exercisable at $0.32 per share expiring beginning
2000 through 2001. The Company had 470,753 options outstanding pursuant to its
1992 NSO Stock Option Plan exercisable at a range of $0.18 to $0.32 per share
expiring beginning 2000 through 2002. The Company also had 2,500,000 options
outstanding pursuant to its 1996 Stock Option Plan exercisable at a range of
$0.32 to $1.46 per share expiring beginning in 2000 through 2004. Some of the
options outstanding under these plans are not presently exercisable and are
subject to meeting vesting criteria. Of the above options which were
outstanding, 2,706,000 were repriced on October 5, 1999 to the then current
market price of $0.32.

At November 30, 1999, the Company had warrants outstanding exercisable into
5,699,920 common shares at exercise prices ranging from $0.25 to $1.25 per share
expiring beginning in 2000 through 2004.

7. 5% CONVERTIBLE TERM DEBENTURES

In 1997, the Company issued to a limited number of investors for cash an
aggregate of $3,000,000 of unsecured 5% Convertible Term Debentures
("Debentures") and Stock Purchase Warrants ("Warrants") with a right to purchase
an aggregate 917,600 shares of common stock, par value $.00001 per share, at
exercise prices ranging initially from $1.50 to $1.69125 per share which were
subsequently reduced to from $0.36 to $0.4375 per share.

As of May 31, 1999, the Debentures had been fully converted into 6,069,345
common shares of the Company. In addition, as of May 31, 1999, the investors had
exercised warrants to purchase 555,000 common shares of the Company.

Convertible debt instruments which were convertible at a discount to market were
accounted for by treating such discount as additional interest expense. The
Company computed the amount of the discount based on the difference between the
conversion price and fair value of the underlying common stock on the dates the
Debentures were issued. During the six months ended November 30, 1998, $147,946
was expensed under the caption "Non-cash interest expense."

8. INVESTMENT AGREEMENT

In February 1999, the Company entered into an investment agreement with Swartz
Private Equity LLC ("Swartz"). The investment agreement entitles the Company, at
the Company's option, to issue and sell its common stock for up to an aggregate
of $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 can be sold to
Swartz within a 30 day time period based on the trading volume of the stock,
among others. Swartz may 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 will receive warrants to purchase
an additional 15% of the common stock equal to 110% of the market price as
determined during the pricing period, subject to further semi-annual 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
requires Swartz, after the Company puts 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 and the Company
received proceeds of $193,554 from the sale of 780,460 shares of common stock as
a result of the initial put in November 1999. The Company received additional
proceeds of $456,868 from the sale of 1,784,640 shares of common stock as a
result of a second put in December 1999. Per the terms of the investment
agreement, the Company issued a five year warrant for 117,069



                                       10
<PAGE>   11

PATRIOT SCIENTIFIC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

shares of common stock exercisable at a price of $0.341 related to the November
1999 put and an additional five year warrant for 267,696 shares of common stock
exercisable at a price of $0.352 related to the December 1999 put.

In April 1999, the Company sold 400,000 shares of its common stock to two
individuals for an aggregated amount of $75,000; in June 1999, the Company
issued 397,205 shares of its common stock to an institutional investor upon the
conversion of a short term note plus accrued interest in the amount of $116,182;
and in November 1999, the Company issued 780,460 shares of its common stock
under the investment agreement for $193,554. These sales occurred after the
filing of a registration statement by the Company and, therefore, by making
these sales the Company may have violated Section 5 of the Securities Act of
1933. 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. By entering into the amended and
restated investment agreement, the Company completed its sale of common stock to
Swartz. Since this private sale to Swartz occurred after the Company filed its
registration statement, the Company may have sold securities to Swartz in
violation of Section 5 of the Securities Act of 1933, and each placement of
shares with Swartz in the future under the investment agreement may be a
separate violation of Section 5. Consequently, the two individual investors, the
institutional investor and Swartz may have the right to rescind these purchases
of common stock for a one year period after the purchase of the common stock. In
addition, the Company and certain officers and directors of the Company may be
subject to civil and criminal penalties for potential violation of either or
both Section 5 of the Securities Act of 1933 and applicable state law as a
result of these sales. Management believes that the possibility of damages
related to these potential violations of Section 5 of the Securities Act of 1933
is remote and that such potential violations will have no material impact on the
Company's financial statements. See Note 5 for further discussion.

9. CONTINGENCY

In October 1998, the Company was sued in the District Court for Travis County,
Texas 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 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. The Company had the suit removed to the United States District
Court for the Western District of Texas, Austin Division, and requested the
Federal District Court to dismiss the suit based on lack of minimum contacts
with Texas or, in the alternative, to transfer the case to the Southern District
of California. In January 1999, the Federal District Court dismissed the suit
for lack of subject matter and personal jurisdiction. The Fish Family Trust then
refiled the suit in the Superior Court of San Diego County, California seeking
remedies similar to the Federal District Court dismissed action. In March 1999,
the Company joined with nanoTronics and Gloria Felcyn and filed its response and
cross-complaint against the Fish Family Trust. The judge for the suit is
considering arguments by the plaintiff's and defendants' attorneys to determine
if the suit can be decided by a summary judgment or whether the suit needs to go
to trial. A trial that was scheduled for December 1999 has been continued
subject to the judge's decision. The Company and the other defendants continue
to vigorously contest the plaintiff's allegations. It is reasonably possible
that the outcome of these matters may result in a material liability for the
Company. Management does not believe, at this stage of the case, that it is
possible to estimate the outcome of the litigation or a range of reasonably
possible losses that might result from the suit.



                                       11
<PAGE>   12

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO THE
COMPANY'S FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING,
"FUTURE PERFORMANCE AND RISK FACTORS." SEE ALSO THE COMPANY'S ANNUAL REPORT ON
FORM 10-KSB FOR THE YEAR ENDED MAY 31, 1999.

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

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

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED NOVEMBER 30, 1999 AND 1998

        Net sales. Total net sales for the second fiscal quarter ended November
30, 1999 increased 3.9% to $239,884 from $230,905 for the corresponding period
of the previous fiscal year. Of this increase, $89,300 was due to an increase in
communication product royalties and $25,000 in microprocessor license fees
offset by a reduction in follow-on shipments for the Company's matured
communication products several of which are approaching the end of their life
cycles. Development and sales of new communications products have not achieved a
level to replace the maturing products. The Company anticipates this trend in
communication product revenue to continue since many of the communication
products are approaching the end of their life cycles and its efforts are being
focused on the microprocessor product line. In addition, during the second
fiscal quarter of 1999 the Company recognized sales of $56,000 related to the
non-recurring engineering efforts on the kiosk application.

        Cost of sales. Cost of sales as a percentage of net sales decreased to
40.4% in the second fiscal quarter ended November 30, 1999 compared to 82.5% for
the corresponding period of the previous fiscal year. This significant
improvement was a result of the royalty and license fee revenue during the
second fiscal quarter of 2000 did not add costs to the cost of sales. Also, the
profit margins on the kiosk order revenue recognized during the second fiscal
quarter of 1999 were lower than normal profit margins resulting in a higher cost
of sales percentage for that period.

        Research and development expenses decreased 13.6% from $453,497 for the
second fiscal quarter ended November 30, 1998 to $391,619 for the second fiscal
quarter ended November 30, 1999. This decrease was due primarily to a reduction
in costs related to licensed software support and update fees.

        Selling, general and administrative expenses decreased 62.4% to $276,065
for the second fiscal quarter ended November 30, 1999 compared to $734,904 for
the second fiscal quarter ended November 30, 1998. This decrease was due
primarily to no compensation costs related to the earnout from escrowed shares
during the second fiscal quarter ended November 30, 1999 compared to
compensation costs of $22 0,000 for the corresponding period of the previous
fiscal year, a reduction in personnel costs for the second quarter ended
November 30, 1999 and a reduction in expenses related to financings.

Other income (expense) increased by 139.8% to ($377,250) for the second fiscal
quarter ended November 30, 1999 compared to ($157,342) for the corresponding
period of the previous fiscal year. This increase resulted primarily



                                       12
<PAGE>   13

from the recognition in the second fiscal quarter ended November 30, 1999 of
$347,771 of non-cash interest related to the amortization of the debt discount
as discussed in Note 4 compared to $151,856 of non-cash interest related to the
discount on convertible term debentures for the corresponding period of the
previous fiscal year.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED NOVEMBER 30, 1999 AND 1998

        Net sales. Total net sales for the six months ended November 30, 1999
decreased 47.5% to $438,908 from $836,497 for the corresponding period of the
previous fiscal year. Of this decrease, $253,000 was due to a decrease in
follow-on shipments for the Company's matured communication products several of
which are approaching the end of their life cycles. Development and sales of new
communications products have not achieved a level to replace the maturing
products. The Company anticipates this trend in communication product revenue to
continue since many of the communication products are approaching the end of
their life cycles and its efforts are being focused on the microprocessor
product line. In addition, during the six months ended November 30, 1998 the
Company recognized sales of $211,000 related to the non-recurring engineering
efforts on the kiosk application. These decreases were partially offset by an
increase in communications product line royalties and license fees from the
microprocessor product line.

        Cost of sales. Cost of sales as a percentage of net sales decreased to
50.9% in the six months ended November 30, 1999 compared to 68.1% for the
corresponding period of the previous fiscal year. This significant improvement
was a result of the royalty and license fee revenue during the six months ended
November 30, 1999 did not add costs to the cost of sales. Also, the profit
margins on the kiosk order revenue recognized during the six months ended
November 30, 1998 were lower than normal profit margins resulting in a higher
cost of sales percentage for that period.

        Research and development expenses decreased 28.6% from $1,155,489 for
the six months ended November 30, 1998 to $825,019 for the six months ended
November 30, 1999. This decrease was due primarily to a reduction in costs
related to licensed software support and update fees and a reduction in the
costs related to porting software to the microprocessor.

        Selling, general and administrative expenses decreased 54.4% to $621,779
for the six months ended November 30, 1999 compared to $1,362,675 for the six
months ended November 30, 1998. This decrease was due primarily to no
compensation costs related to the earnout from escrowed shares during the second
fiscal quarter ended November 30, 1999 compared to compensation costs of
$445,000 for the corresponding period of the previous fiscal year, a reduction
in personnel costs for the six months ended November 30, 1999 and a reduction in
expenses related to financings.

        Other income (expense) increased by 38.6% to ($419,328) for the six
months ended November 30, 1999 compared to ($302,568) for the corresponding
period of the previous fiscal year. This increase resulted primarily from the
recognition in the six months ended November 30, 1999 of $613,592 of non-cash
interest related to the amortization of the debt discount as discussed in Note 4
compared to $299,802 of non-cash interest related to the discount on convertible
term debentures for the corresponding period of the previous fiscal year
partially offset by the gain of $250,000 on the sale of the gas plasma antenna
technology during the six months ended November 30, 1999.

LIQUIDITY AND CAPITAL RESOURCES

        At November 30, 1999, the Company had a working capital deficit of
$2,055,461, cash and cash equivalents of $165,846, and was delinquent to the
Internal Revenue Service for approximately $358,000 and various states for
$56,000 in past due payroll taxes. The Company has funded its operations
primarily through the issuance of securities and debt financings. Cash and cash
equivalents increased $130,033 during the six months ended November 30, 1999.
The net cash used in operating activities was $373,749, additions to property
and equipment were $33,014, and funds generated from debt and equity financings
were $536,796. During the six months ended November 30, 1999, accounts
receivable decreased $62,414. Accounts payable and accrued expenses increased
$347,831.

        The Company's current cash requirements to sustain its operations for
the next twelve months through August 2000 are estimated to be $1,600,000.
Management of the Company expects that these requirements will be provided by:



                                       13
<PAGE>   14

        Internally:

-       sales of accounts receivables under a factoring agreement established
        with its bank, and
-       sales of licenses and/or intellectual property, and

        Externally:

-       during periods in which draw limitations restrict the amount of funds
        available under the investment agreement as discussed in Note 8,
        short-term debt instruments with individual and institutional investors,
        and
-       during periods in which draws under the investment agreement support the
        Company's cash requirements, draws against the investment agreement.

        In February 1999, the Company entered into an investment agreement with
Swartz. The investment agreement entitles the Company, at its 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 can be sold to Swartz within a 30 day time
period based on the trading volume of the stock, among other factors. Swartz may
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 will receive warrants to purchase an additional 15% of the
common stock equal to 110% of the market price on the last day of the purchasing
period, subject to further semi-annual 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 its common stock. The amended and restated investment agreement
requires Swartz, after the Company put shares of common stock to it, to purchase
its 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 puts under the investment agreement are subject to common stock
trading volume limitations and registration of the securities. The registration
statement went effective October 5, 1999. Proceeds of $193,554 from the initial
put under the investment agreement were received in November 1999. After the end
of the current fiscal quarter, the Company received additional proceeds of
$456,868.

        Previously, the Company had anticipated receiving funds from a kiosk
order that the Company's customer had with the Mexican Department of Tourism. On
several occasions product shipments had been rescheduled pending the receipt of
those funds. The Company's customer has notified it that the kiosks will no
longer be purchased by the Mexican Department of Tourism and that the customer
is trying to find an alternative purchaser. There can be no assurance that an
alternative purchaser for the kiosks can be found by the Company's customer.

        In addition, the Company sold the gas plasma antenna technology for an
up-front fee of $250,000 in August 1999, has a $500,000 factoring agreement with
its bank and has renegotiated and extended the scheduled maturity dates for
short-term notes. Management of the Company believes that additional financing
could be obtained if the $5,000,000 financing is not completed. However, no
assurance can be given that it will, in fact, be able to obtain additional
financing or that the terms of such financing will be favorable to the Company.

        The Company anticipates that it may require additional equipment,
fabrication, components and supplies during the next twelve months to continue
development of its technologies. Product introductions such as those currently
underway for communication products and the PSC1000 may require significant
inventory, product launch, marketing personnel and other expenditures that the
Company can not currently estimate. Further, if expanded development is
commenced or new generations of microprocessors are accelerated beyond its
current plans, additional expenditures, that the Company can not currently
estimate, may be required. It is possible therefore, that higher levels of
expenditures may be required than the Company currently contemplates resulting
from changes in development plans or as required to support new developments or
commercialization activities or otherwise.

        Based on the current fiscal year's rate of cash operating expenditures
and current plans, the Company anticipates a need for additional cash to meet
its requirements for the next twelve months. There can be no assurance that any
funds required during the next twelve months or thereafter can be generated from
operations or, if such required funds are not internally generated, that funds
will be available from external sources such as debt or equity financings or



                                       14
<PAGE>   15

other potential sources. The lack of additional capital could force the Company
to substantially curtail or cease operations and would, therefore, have a
material adverse effect on its 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 its existing
shareholders.

POTENTIAL VIOLATION OF SECTION 5 OF THE SECURITIES ACT

        In April 1999, the Company sold 400,000 shares of its common stock to
two individuals for an aggregated amount of $75,000; in June 1999, the Company
issued 397,205 shares of its common stock to an institutional investor upon the
conversion of a short term note plus accrued interest in the amount of $116,182;
in November 1999, the Company issued 780,460 shares of its common stock under
the investment agreement for $193,554; and in December 1999, the Company issued
1,784,640 shares of its common stock under the investment agreement for $456,
868. The Company also issued warrants for 117,069 and 267,696 shares of its
common stock related to the November 1999 and the December 1999 puts under the
investment agreement. These sales occurred after the filing of a registration
statement for the public resale of shares sold under the investment agreement;
and, therefore, by making these sales the Company may have violated Section 5 of
the Securities Act. 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 its common stock. The amended and restated investment
agreement requires Swartz, after the Company puts shares of common stock to it,
to purchase its 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. By entering into the amended and
restated investment agreement, the Company completed its sale of common stock to
Swartz. Since this private sale to Swartz occurred after the Company filed its
registration statement, the Company may have sold securities to Swartz in
violation of Section 5 of the Securities Act and each placement of shares with
Swartz in the future under this investment agreement may be a separate violation
of Section 5. Consequently, the two individual investors, the institutional
investor and Swartz may have the right to rescind these purchases of common
stock for one year after the purchase of the common stock. In addition, Patriot
and certain officers and directors of Patriot may be subject to civil and
criminal penalties for potential violation of either or both Section 5 of the
Securities Act and applicable state law as a result of these sales. Management
believes that the possibility of damages related to these potential violations
of the Securities Act is remote and that such potential violations will have no
material impact on its financial statements. See Note 8 to the Consolidated
Financial Statements.

NEW ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" which requires companies to
record derivatives on the balance sheet as assets or liabilities, measured at
fair market value. Gains or losses resulting from changes in the values of those
derivatives would be accounted for depending on the use of the derivative and
whether it qualifies for hedge accounting. The key criterion for hedge
accounting is that the hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows. SFAS No. 133 is
effective for fiscal periods beginning after June 15, 2000. The Company believes
the adoption of this statement will have no material impact on its financial
statements.

YEAR 2000 COMPLIANCE

        Many existing computer programs use only two digits to identify a year
in the date field, with the result that data referring to the year 2000 and
subsequent years may be misinterpreted by these programs. If present in the
computer applications of a company or third parties (such as customers,
financial institutions, and suppliers) and not corrected, this problem may cause
computer applications to fail or to create erroneous results and could cause a
disruption in operations and have an adverse effect on a company's business and
results of operations.

        The Company adopted a formal plan to evaluate its readiness for the Year
2000 and to address any deficiencies. The plan encompassed:



                                       15
<PAGE>   16

-       information technology (IT) systems,
-       non-IT systems,
-       its products, and
-       systems of third parties, including distributors and key suppliers.

        INFORMATION TECHNOLOGY. The principal computer systems that the Company
used for financial accounting, manufacturing, inventory control, purchasing,
sales administration, engineering, and other business functions were not Year
2000 compliant. The Company purchased a replacement system in July 1999 that was
fully functional as of October 1, 1999. The cost of this new system was
approximately $30,000.

        NON-IT SYSTEMS. The Company completed an evaluation of telephone
systems, manufacturing equipment, facility heating and cooling systems, and
other non-IT systems for Year 2000 readiness and took remedial action as
necessary.

        ITS PRODUCTS. The Company completed a series of tests, utilizing
industry standards, of the electronics systems of its products, including those
product lines no longer being manufactured but remaining in use at customer
sites. Its review determined that the products should continue to operate
according to specifications after December 31, 1999.

        KEY VENDORS AND SUPPLIERS. The Company completed a survey of its key
vendors and suppliers to assess their plans for bringing any non-compliant
systems into Year 2000 compliance.

        Other than the replacement computer system discussed above,
substantially all of the effort to evaluate its Year 2000 readiness was made
using internal personnel, and therefore incremental expenses were less than
$50,000. The Company did not incur any material expenses in connection with its
evaluation of non-IT systems. The Company has not incurred any material expenses
to date in connection with the evaluation of its products and the status of its
vendors and suppliers with respect to Year 2000 issues. The Company does not
anticipate material expenses in the future.

        The Company's Year 2000 readiness plan has performed satisfactorily
subsequent to December 31, 1999. Due to the complexity and pervasiveness of the
Year 2000 issue, and in particular the uncertainty regarding the Year 2000
compliance programs of third parties, no assurances can be given that the Year
2000 problem will continue to perform satisfactorily. However, the Company does
not anticipate any material adverse effects on its business or its results from
operations.



                                       16
<PAGE>   17

FUTURE PERFORMANCE AND RISK FACTORS

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

        Since the business combination with Metacomp, effective December 1996,
the Company has segregated its operations into microprocessor, communication,
and radar/antenna product lines. However, synergistic technical and other
resources can and will be deployed across all three lines.

        Product revenues have been primarily from communication products. The
communication products are specifically designed to fill both the high speed
data as well as the video conferencing requirements of the Internet.

        The microprocessor continues to be the Company's primary development
focus. The Company has completed development of a 0.35 micron version of the
PSC1000 which has resulted in increased processing speed and performance. In
addition, the Company is running the Sun Microsystems's Java OS on the PSC1000.
The PSC1000 executes Java very efficiently, and is the price/performance leader
in the Java processor marketplace. This enhancement is expected to increase
potential market opportunities in areas such as TV set top boxes, smart phones,
PDAs, network computers, and other Internet related products.

        The Company sold its gas plasma antenna technology in August 1999.

        The Company is focusing its sales efforts on original equipment
manufacturers, system integrators, and Internet service providers for both the
microprocessor and communication products.

        The Company has experienced in the past and may experience in the future
many of the problems, delays and expenses encountered by any business in the
early stages of development, some of which are beyond the Company's control. The
Company has limited operating history, has incurred significant cumulated
losses, has only recently commenced marketing and sales of its products and has
not achieved a profitable level of operations. There can be no assurance of
future profitability. The Company may require additional funds in the future for
operations or to exploit its technologies. There can be no assurance that any
funds required during the next twelve months or thereafter can be generated from
operations or that such required funds will be available from the aforementioned
or other potential sources. The lack of additional capital could force the
Company to substantially curtail or cease operations and would therefore have a
material adverse effect on the Company's business. Further there can be no
assurance that any such required funds, if available, will be available on
attractive terms or that they will not have a significantly dilutive effect on
existing shareholders of the Company. The Company's technologies are in various
stages of development. The Company's CyberShark(TM) digital modem and certain
communication products have been developed to the point of production of
marketable product and the PSC1000 is in the first stages of production. There
can be no assurance that any of the technologies in development can be completed
to commercial exploitation due to the inherent risks of new technology
development limitations on financing, competition, obsolescence, loss of key
technical personnel and other factors. The Company's development projects are
high risk in nature, where unanticipated technical obstacles can arise at any
time and result in lengthy and costly delays or result in determination that
further development is unfeasible. There can be no assurance that the
technologies, if completed, will achieve market acceptance sufficient to sustain
the Company or achieve profitable operations.

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

        The Company acquired its ShBoom technology pursuant to a chain of
agreements and there is uncertainty regarding royalty payments, if any, and
indemnification from prior parties. The Company does not believe it is obligated
to pay any royalties on aspects of the ShBoom technology specified in prior
agreements between nanoTronics



                                       17
<PAGE>   18

Corporation and previous inventors. The Company believes, should there be
royalties due to previous inventors, that the obligation is that of nanoTronics.
The Company could become subject to unindemnified claims relating to any failure
by nanoTronics to pay such royalties, if due. Also the Company could become
liable for up to $1,250,000 to nanoTronics under certain indemnification
provisions.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        In October 1998, the Company was sued in the District Court for Travis
County, Texas 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 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. The Company had the suit removed to the United States District
Court for the Western District of Texas, Austin Division, and requested the
Federal District Court to dismiss the suit based on lack of minimum contacts
with Texas or, in the alternative, to transfer the case to the Southern District
of California. In January 1999, the Federal District Court dismissed the suit
for lack of subject matter and personal jurisdiction. The Fish Family Trust then
refiled the suit in the Superior Court of San Diego County, California seeking
remedies similar to the Federal District Court dismissed action. In March 1999,
the Company joined with nanoTronics and Gloria Felcyn and filed its response and
cross-complaint against the Fish Family Trust. The judge for the suit is
considering arguments by the plaintiff's and defendants' attorneys to determine
if the suit can be decided by a summary judgment or whether the suit needs to go
to trial. A trial that was scheduled for December 1999 has been continued
subject to the judge's decision. The Company and the other defendants continue
to vigorously contest the plaintiff's allegations. It is reasonably possible
that the outcome of these matters may result in a material liability for the
Company. Management does not believe, at this stage of the case, that it is
possible to estimate the outcome of the litigation or a range of reasonably
possible losses that might result from the suit.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits - NONE

(b) Reports on Form 8-K - NONE


                                   SIGNATURES

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

                                       PATRIOT SCIENTIFIC CORPORATION


Date: January 14, 2000                 By: /s/ LOWELL W. GIFFHORN
                                           -----------------------
                                           Chief Financial Officer

                                           (Principal Financial and
                                           Accounting Officer and duly
                                           authorized to sign on behalf
                                           of the Registrant)

                                       18