U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB/A

Amendment No. 1

(Mark One)

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED MAY 31, 2004

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to _______________

Commission File Number 0-22182

PATRIOT SCIENTIFIC CORPORATION

(Name of small business issuer in its charter)

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

6183 Paseo Del Norte, Suite 180, Carlsbad, California (Address of principal executive offices) 92011 (Zip Code)

(Issuer’s telephone number): (760) 547-2700

Securities registered under Section 12(b) of the Exchange Act: NONE

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, $.00001 par value

(Title of Class)

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 o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

Issuer’s revenues for its most recent fiscal year (May 31, 2006) was $10,309,709 (which does not include approximately $27,848,000 in income resulting from the Company’s investment in Phoenix Digital Solutions, LLC). Issuer’s net income for its most recent fiscal year (May 31, 2006) was $28,672,688.

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant on October 2, 2006 was $321,496,396 based on a closing price of $0.87 as reported on the OTC Electronic Bulletin Board system.

On October 2, 2006, 369,536,087 shares of common stock, par value $.00001 per share (the issuer’s only class of voting stock) were outstanding.

Documents Incorporated By Reference: None.

Transitional Small Business Disclosure Format (check one): YES o  NO x

EXPLANATORY NOTE

This Amendment No. 1 to the Company’s Form 10-KSB for the year ended May 31, 2004 is being filed in conjunction with our decision to restate and re-audit the audited financial statements contained in our report on Form 10-KSB for the fiscal year ended May 31, 2004 (the “2004 10-KSB”), filed with the Securities and Exchange Commission on August 19, 2004. Our board of directors determined, on September 8, 2006, that the original financial statements for the periods in question should no longer be relied upon. We have filed a Form 8-K and an amendment thereto on Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review for the restatement.

As disclosed in Item 8B in our Form 10-KSB for the year ended May 31, 2006, the Audit Committee of our Board of Directors authorized us to amend and restate our financial statements and other financial information for the year ended May 31, 2005, and the quarters ended August 31, 2005, November 30, 2005, and February 28, 2006,as a result of a change in judgment regarding (i) the accounting treatment for our previously outstanding convertible debentures and (ii) our accounting treatment of our interest in Phoenix Digital Solutions, LLC. The issue pertaining to the convertible debentures also relates to the previous years ended May 31, 2004, 2003 and 2002. See the Notes to the 2006 consolidated financial statements for more information and for significant subsequent events.

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TABLE OF CONTENTS

PART II

Item 7. Financial Statements	4
Item 8A. Controls and Procedures	4

PART III

Item 13. Exhibits 5

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PART II

ITEM 7.FINANCIAL STATEMENTS

The financial statements required by this item begin on page F-1 with the index to consolidated financial statements.

ITEM 8A.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(e) under the Exchange Act, as of May 31, 2004, the end of the period to which this annual report relates, we have carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.  Based on the evaluation of our disclosure controls and procedures as of May 31, 2004, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective due to the following two discrete issues, that pertain to material weaknesses, discussed in more detail, below.

Notwithstanding the material weaknesses discussed below, the Company's management has concluded that the consolidated financial statements included in this Annual Report on Form 10-KSB fairly present in all material respects the Company's financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States of America.

Effect of Restatement on Disclosure Controls

As disclosed in Item 8B in our Form 10-KSB for the year ended May 31, 2006, the Audit Committee of our Board of Directors authorized us to amend and restate our financial statements and other financial information for the year ended May 31, 2005, and the quarters ended August 31, 2005, November 30, 2005, and February 28, 2006,as a result of a change in judgment regarding (i) the accounting treatment for our previously outstanding convertible debentures and (ii) our accounting treatment of our interest in Phoenix Digital Solutions, LLC. The issue pertaining to the convertible debentures also relates to the previous years ended May 31, 2004, 2003, 2002. See the Notes to the 2006 consolidated financial statements for more information.

In connection with the restatement, and in light of the change in judgment which gave rise to it, our Chief Executive Officer and our Chief Financial Officer considered the effect of the error on the adequacy of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-KSB for the year ended May 31, 2004.  The certifying officers determined that disclosure controls and procedures were not effective as a consequence of the material weaknesses described below.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected.  As a result of the restatements described above, the following material weaknesses were identified in the Company's assessment of the effectiveness of disclosure controls and procedures as of May 31, 2004:

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i)The Company did not maintain effective controls over the identification of a variable conversion feature and put option embedded within its convertible debt instruments and the determination of the appropriate accounting treatment for those debt instruments.

ii)     The Company did not maintain effective controls over the accounting for its investment in Phoenix Digital, LLC and the determination of the appropriate accounting treatment for the investment.

As a result of these weaknesses, management has taken steps, including the retention of new and additional accounting personnel, and continues to monitor the controls and procedures, to ensure that the errors will not occur again and that the Company’s disclosure controls and procedures are operating at the reasonable assurance level. In addition, management has engaged our current auditors to perform a re-audit of the fiscal years ended May 31, 2005, 2004, 2003 and 2002 (including the beginning balances for 2001).

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recently completed fiscal quarter that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 13. EXHIBITS

(a) The following documents are filed as a part of this Report:

1. Financial Statements. The following consolidated financial statements and Report of Independent Registered Public Accounting Firm are included in Part II of this Report:

Report of Corbin & Company, LLP, Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of May 31, 2004, 2003 and 2002

Consolidated Statements of Operations for the Years Ended May 31, 2004, 2003 and 2002

Consolidated Statement of Stockholders’ Deficit for the Years Ended May 31, 2004, 2003 and 2002

Consolidated Statements of Cash Flows for the Years Ended May 31, 2004, 2003 and 2002

Notes to Consolidated Financial Statements

2. Exhibits. The following Exhibits are filed as part of, or incorporated by reference into, this Report:

Exhibit No.	Document
2.1	Agreement to Exchange Technology for Stock in Patriot Scientific Corporation, incorporated by reference to Exhibit 2.1 to Form 8-K dated August 10, 1989*
2.2	Assets Purchase Agreement and Plan of Reorganization dated June 22, 1994, among the Company, nanoTronics Corporation and Helmut Falk, incorporated by reference to Exhibit 10.4 to Form 8-K dated July 6, 1994*
2.2.1	Amendment to Development Agreement dated April 23, 1996 between the Company and Sierra Systems, incorporated by reference to Exhibit 2.2.1 to Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2 filed April 29, 1996*

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Exhibit No.	Document
2.3	Form of Exchange Offer dated December 4, 1996 between the Company and certain shareholders of Metacomp, Inc. incorporated by reference to Exhibit 2.3 to Form 8-K filed January 9, 1997*
2.4	Letter of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc. Tendered Pursuant to the Exchange Offer Dated December 4, 1996 incorporated by reference to Exhibit 2.4 to Form 8-K filed January 9, 1997*
3.1	Original Articles of incorporation of the Company’s predecessor, Patriot Financial Corporation, incorporated by reference to Exhibit 3.1 to registration statement on Form S-18, file no. 33-23143-FW*
3.2	Articles of Amendment of Patriot Financial Corporation, as filed with the Colorado Secretary of State on July 21, 1988, incorporated by reference to Exhibit 3.2 to registration statement on Form S-18, File No. 33-23143-FW*
3.3	Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on March 24, 1992, incorporated by reference to Exhibit 3.3 to Form 8-K dated May 12, 1992*
3.3.1	Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on April 18, 1995, incorporated by reference to Exhibit 3.3.1 to Form 10-KSB for the fiscal year ended May 31, 1995*
3.3.2	Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on June 24,1997, incorporated by reference to Exhibit 3.3.2 to Form 10-KSB for the fiscal year ended May 31, 1997, filed July 18, 1997*
3.3.3	Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on April 28, 2000, incorporated by reference to Exhibit 3.3.3 to Registration Statement on Form S-3 filed May 5, 2000*
3.3.4	Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on May 6, 2002, incorporated by reference to Exhibit 3.3.4 to Registration Statement on Form S-3 filed June 27, 2002*
3.3.5	Certificate of Amendment to the Certificate of Incorporation of the Company, as filed with the Delaware Secretary of State on October 16, 2003, incorporated by reference to Exhibit 3.3.5 to Registration Statement on Form SB-2 filed May 21, 2004*
3.4	Articles and Certificate of Merger of Patriot Financial Corporation into the Company dated May 1, 1992, with Agreement and Plan of Merger attached thereto as Exhibit A, incorporated by reference to Exhibit 3.4 to Form 8-K dated May 12, 1992*
3.5	Certificate of Merger issued by the Delaware Secretary of State on May 8, 1992, incorporated by reference to Exhibit 3.5 to Form 8-K dated May 12, 1992*
3.6	Certificate of Merger issued by the Colorado Secretary of State on May 12, 1992, incorporated by reference to Exhibit 3.6 to Form 8-K dated May 12, 1992*
3.7	Bylaws of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K dated May 12, 1992*
4.1	Specimen common stock certificate, incorporated by reference to Exhibit 4.1 Form 8-K dated May 12, 1992*

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Exhibit No.	Document
4.2	Form of Stock Purchase Warrant (Labway Corporation) dated February 29, 1996, exercisable to purchase 253,166 common shares at $1.58 per share until August 31, 1996, granted to investors in connection with an offering of securities made in reliance upon Regulation S, incorporated by reference to Exhibit 4.2 to Form 10-QSB for fiscal quarter ended February 29, 1996, filed March 15, 1996*
4.3	Form of 6% Convertible Subordinated Promissory Note due September 30, 1998 aggregating $1,500,000 to six investors incorporated by reference to Exhibit 4.3 to Form 10-QSB for fiscal quarter ended August 31, 1996, filed October 15, 1996*
4.4	Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999 aggregating $2,000,000 to two investors incorporated by reference to Exhibit 4.4 to Form 8-K dated June 16, 1997*
4.5	Form of Stock Purchase Warrant (CC Investments, LDC) dated June 2, 1997 exercisable to purchase an aggregate of 400,000 common shares at $1.69125 per share until June 2, 2002, granted to two investors in connection with the offering of securities in Exhibit 4.4 incorporated by reference to Exhibit 4.5 to Form 8-K filed June 17, 1997*
4.6	Registration Rights Agreement dated June 2, 1997 by and among the Company and CC Investments, LDC and the Matthew Fund, N.V. related to the registration of the common stock related to Exhibits 4.4 and 4.5 incorporated by reference to Exhibit 4.6 to Form 8-K filed June 17, 1997*
4.7	Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) dated June 2, 1997 exercisable to purchase an aggregate of 211,733 common shares at $1.69125 per share until June 2, 2002, granted to a group of investors in connection with the offering of securities in Exhibit 4.4 incorporated by reference to Exhibit 4.7 to Form 8-K filed June 17, 1997*
4.8	Registration Rights Agreement dated June 2, 1997 by and among the Company and Swartz Investments, LLC related to the registration of the common stock related to Exhibit 4.7 incorporated by reference to Exhibit 4.8 to Form 8-K filed June 17, 1997*
4.9	Form of 5% Convertible Term Debenture (CC Investments, LDC) due June 2, 1999 aggregating $1,000,000 to two investors incorporated by reference to Exhibit 4.9 to Form 10-KSB for the fiscal year ended May 31, 1998, filed August 19, 1998*
4.10	Form of Stock Purchase Warrant (CC Investments, LDC) dated November 24, 1997 exercisable to purchase an aggregate of 200,000 common shares at $1.50 per share until June 2, 2002, granted to two investors in connection with the offering of securities described in Exhibit 4.9 incorporated by reference to Exhibit 4.10 to Form 10-KSB for the year ended May 31, 1998, filed August 19, 1998*
4.11	Form of Warrant to Purchase Common Stock (Swartz Family Partnership, L.P.) dated November 24, 1997 exercisable to purchase an aggregate of 105,867 common shares at $1.50 per share until June 2, 2002, granted to a group of investors in connection with the offering of securities described in Exhibit 4.9 incorporated by reference to Exhibit 4.11 to Form 10-KSB for the year ended May 31, 1998, filed August 19, 1998*
4.12	Form of Warrant to Purchase Common Stock (Investor Communications Group, Inc.) dated June 16, 1997 exercisable to purchase an aggregate of 130,000 common shares at prices ranging from $2.50 to $7.50 per share until June 15, 1999 incorporated by reference to Exhibit 4.12 to Form 10-KSB for the year ended May 31, 1998, filed August 19, 1998*

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Exhibit No.	Document
4.13	Warrant to Purchase Common Stock issued to Spellcaster Telecommunications, Inc. dated April 28, 1998 exercisable to purchase an aggregate of 100,000 common shares at $1.25 per share until April 28, 2000 incorporated by reference to Exhibit 4.13 to Form 10-KSB for the year ended May 31, 1998, filed August 19, 1998*
4.14	Investment agreement dated February 24, 1999 by and between the Company and Swartz Private Equity, LLC for a maximum aggregate amount of $5,000,000 incorporated by reference to Exhibit 4.14 to Form 10-QSB/A for the fiscal quarter ended November 30, 1998, filed March 5, 1999*
4.15	Registration Rights Agreement dated February 24, 1999 by and between the Company and Swartz Private Equity, LLC related to the registration of the common stock related to Exhibit 4.14 incorporated by reference to Exhibit 4.15 to Form 10-QSB/A for the fiscal quarter ended November 30, 1998, filed March 5, 1999*
4.16	Form of Warrant to Purchase Common Stock (Swartz Private Equity, LLC) dated February 24, 1999 exercisable to purchase common shares in connection with the offering of securities in Exhibit 4.14 incorporated by reference to Exhibit 4.16 to Form 10-QSB/A for the fiscal quarter ended November 30, 1998, filed March 5, 1999*
4.17	Amended and Restated Investment Agreement dated July 12, 1999 by and between the Company and Swartz Private Equity, LLC for a maximum aggregate amount of $5,000,000 incorporated by reference to Exhibit 4.17 to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 filed July 15, 1999*
4.18	Investment Agreement dated May 2, 2000 by and between the Company and Swartz Private Equity, LLC for a maximum aggregate amount of $30,000,000 incorporated by reference to Exhibit 4.18 to Registration Statement on Form S-3 filed May 5, 2000*
4.18.1	Waiver and Agreement dated September 24, 2001 amending the Investment Agreement (1) dated May 2, 2000 by and between the Company and Swartz Private Equity, LLC for a maximum aggregate amount of $30,000,000 incorporated by reference to Exhibit 4.18.1 to Registration Statement on Form S-1 filed October 11, 2001*
4.19	2001 Stock Option Plan of the Company dated February 21, 2001 incorporated by reference to Exhibit 4.19 to Registration Statement on Form S-8 filed March 26, 2001*
4.20	Investment agreement dated September 17, 2001 by and between the Company and Swartz Private Equity, LLC for a maximum aggregate amount of $25,000,000 incorporated by reference to Exhibit 4.20 to Registration Statement on Form S-1 filed October 11, 2001*
4.21	Registration Rights Agreement dated September 17, 2001 by and between the Company and Swartz Private Equity, LLC related to the registration of the common stock related to Exhibit 4.20 incorporated by reference to Exhibit 4.21 to Registration Statement on Form S-1 filed October 11, 2001*
4.22	Warrant to Purchase Common Stock dated September 17, 2001 exercisable to purchase common shares in connection with the Offering of securities in Exhibit 4.20 incorporated by reference to Exhibit 4.22 to Registration Statement on Form S-1 filed October 11, 2001*
4.23	Financial Consulting Services Agreement between the Company and M. Blaine Riley, Randall Letcavage and Rosemary Nguyen incorporated by reference to Exhibit 4.23 to Registration Statement on Form S-8 filed January 22, 2002*

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Exhibit No.	Document
4.24	Form of 8% Convertible Debenture (Lincoln Ventures, LLC) due June 10, 2004 aggregating $1,000,000 to six investors incorporated by reference to Exhibit 4.24 to Registration Statement on Form S-3 filed June 27, 2002*
4.25	Form of Stock Purchase Warrant (Lincoln Ventures, LLC) dated June 10, 2002 exercisable to purchase an aggregate of 12,859,175 common shares at initial exercise prices ranging from $0.08616 to $0.10289 per share until June 10, 2007, granted to six investors in connection with the offering of securities described in Exhibit 4.24 incorporated by reference to Exhibit 4.25 to Registration Statement on Form S-3 filed June 27, 2002*
4.26	Form of Registration Rights Agreement (Lincoln Ventures, LLC) dated June 10, 2002 by and among the Company and six investors related to the registration of the common stock related to Exhibit 4.24 incorporated by reference to Exhibit 4.26 to Registration Statement on Form S-3 filed June 27, 2002*
4.27	2003 Stock Option Plan of the Company dated July 2, 2003 incorporated by reference to Exhibit 4.27 to Registration Statement on Form S-8 filed September 4, 2003*
4.28	Form of 8% Convertible Debenture, Stock Purchase Warrant, Registration Rights Agreement and Securities Purchase Agreement for financings entered into between September 28, 2004 and January 17, 2005 incorporated by reference to Exhibit 4.28 to Registration Statement on Form SB-2 filed February 2, 2005.*
4.29	Approval Rights Agreement and Termination of Antidilution Agreement and Addendum to Warrants dated October 10, 2006, incorporated by reference to Exhibit 4.29 to Form 10-KSB filed October 13, 2006*
10.1	1992 Incentive Stock Option Plan of the Company, incorporated by reference to Exhibit 10.1 to Form 8-K dated May 12, 1992*
10.1.1	Amendment to 1992 Incentive Stock Option Plan dated January 11, 1995, incorporated by reference to Exhibit 10.1.1 to Form S-8 filed July 17, 1996*
10.2	1992 Non-Statutory Stock Option Plan of the Company, incorporated by reference to Exhibit 10.2 to Form 8-K dated May 12, 1992*
10.2.1	Amendment to 1992 Non-Statutory Stock Option Plan dated January 11, 1995 incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal year ended May 31, 1996, filed August 16, 1996*
10.3	Lease Agreement between the Company’s subsidiary Metacomp, Inc. and Clar-O-Wood Partnership, a California limited partnership dated April 11, 1991 as amended November 11, 1992 and November 2, 1995 incorporated by reference to Exhibit 10.3 to Form 10-KSB for fiscal year ended May 31, 1997, filed July 18, 1997*
10.4	Stock Purchase Agreement dated November 29 and 30, 1995, between the Company and SEA, Ltd., incorporated by reference to Exhibit 10.4 to Form 8-K filed December 11, 1995*
10.4.1	Letter Amendment to Stock Purchase Agreement dated January 31, 1996, between the Company and SEA, Ltd., incorporated by reference to Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended February 29, 1996, filed March 15, 1996*
10.5	1995 Employee Stock Compensation Plan of the Company, incorporated by reference to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended November 30, 1995, filed December 28, 1995*

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Exhibit No.	Document
10.6	Letter Stock and Warrant Agreement dated January 10, 1996 between the Company and Robert E. Crawford, Jr., incorporated by reference to Exhibit 10.6 to Form 10-QSB for fiscal quarter ended February 29, 1996, filed March 15, 1996*
10.7	Non-Exclusive Manufacturing and Line of Credit Agreement dated February 28, 1996, between the Company and Labway Corporation, incorporated by reference to Exhibit 10.7 to Form 10-QSB for fiscal quarter ended February 29, 1996, filed March 15, 1996*
10.8	Distribution and Representation Agreement dated February 28, 1996, between the Company and Innoware, Inc., incorporated by reference to Exhibit 10.8 to Form 10-QSB for fiscal quarter ended February 29, 1996, filed March 15, 1996*
10.9	Employment Agreement dated November 20, 1995 between the Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9 to Registration Statement on Form SB-2 filed March 18, 1996*
10.9.1	First Amendment to Employment Agreement dated May 17, 1996 between the Company and Elwood G. Norris, incorporated by reference to Exhibit 10.9.1 to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 filed May 23, 1996*
10.10	Employment Agreement dated November 20, 1995 between the Company and Robert Putnam, incorporated by reference to Exhibit 10.10 to Registration Statement on Form SB-2 filed March 18, 1996*
10.11	Sales Contractual Agreement dated March 19, 1996 between the Company and Evolve Software, Inc., incorporated by reference to Exhibit 10.11 to Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2 filed April 29, 1996*
10.11.1	Two Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve Software, Inc. Providing for the Purchase of up to 50,000 Common Shares at $2.85, incorporated by reference to Exhibit 10.11.1 to Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2 filed April 29, 1996*
10.12	Employment Agreement dated as of May 8, 1996 between the Company and Michael A. Carenzo, including Schedule A - Stock Option Agreement, incorporated by reference to Exhibit 10.12 to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 filed May 23, 1996*
10.12.1	First Amendment to Employment Agreement dated as of May 8, 1996 between the Company and Michael A. Carenzo dated September 23, 1996, incorporated by reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal year ended May 31, 1997, filed July 18, 1997*
10.13	1996 Stock Option Plan of the Company dated March 25, 1996 and approved by the Shareholders on May 17, 1996, incorporated by reference to Exhibit 10.13 to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 filed May 23, 1996*
10.14	Sales Contractual Agreement dated June 20, 1996 between the Company and Compunetics Incorporated incorporated by reference to Exhibit 10.14 to Form 10-KSB for fiscal year ended May 31, 1996, filed August 16, 1996*
10.15	Sales Contractual Agreement dated July 31, 1996 between the Company and Premier Technical Sales, Inc. incorporated by reference to Exhibit 10.15 to Form  10-KSB for fiscal year ended May 31, 1996, filed August 16, 1996*

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Exhibit No.	Document
10.16	Employment Agreement dated January 1, 1997 between the Company and Norman J. Dawson incorporated by reference to Exhibit 10.16 to Form 10-KSB for fiscal year ended May 31, 1997, filed July 18, 1997*
10.17	Employment Agreement dated January 1, 1997 between the Company and Jayanta K. Maitra incorporated by reference to Exhibit 10.17 to Form 10-KSB for fiscal year ended May 31, 1997, filed July 18, 1997*
10.18	Technology License and Distribution Agreement dated June 23, 1997 between the Company and Sun Microsystems, Inc. incorporated by reference to Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31, 1997, filed July 18, 1997*
10.19	Employment Agreement dated March 23, 1999 between the Company and James T. Lunney incorporated by reference to Exhibit 10.19 to Form 10-KSB for the fiscal year ended May 31, 1998, filed August 19, 1998*
10.20	Employment Agreement dated July 28, 1997 between the Company and Phillip Morettini incorporated by reference to Exhibit 10.20 to Form 10-KSB for the fiscal year ended May 31, 1998, filed August 19, 1998*
10.21	Employment Agreement dated July 23, 1998 between the Company and Lowell W. Giffhorn incorporated by reference to Exhibit 10.21 to Form 10-KSB for the fiscal year ended May 31, 1998, filed August 19, 1998*
10.22	Secured Promissory Note dated June 12, 2000 between the Company and James T. Lunney incorporated by reference to Exhibit 10.22 to Form 10-KSB for the fiscal year ended May 31, 2000, filed August 29, 2000*
10.23	Purchase Agreement dated June 29, 2000 between the Company and 4S 37/38, LLC incorporated by reference to Exhibit 10.23 to Form 10-KSB for the fiscal year ended May 31, 2000*
10.24	Employment Agreement dated October 2, 2000 between the Company and Miklos B. Korodi incorporated by reference to Exhibit 10.24 to Form 10-QSB for the fiscal quarter ended November 30, 2000, filed January 12, 2001*
10.25	Employment Agreement dated December 1, 2000 between the Company and Richard G. Blum incorporated by reference to Exhibit 10.25 to Form 10-QSB for the fiscal quarter ended November 30, 2000, filed January 12, 2001*
10.26	Employment Agreement dated January 29, 2001 between the Company and Serge J. Miller incorporated by reference to Exhibit 10.26 to Form 10-KSB for the fiscal year ended May 31, 2001, filed August 29, 2001*
10.27	Lease Agreement dated February 23, 2001 between the Company and Arden Realty Finance IV, LLC incorporated by reference to Exhibit 10.27 to Form 10-KSB for the fiscal year ended May 31, 2001, filed August 29, 2001*
10.28	Employment Agreement dated January 1, 2001 between the Company and David H. Pohl incorporated by reference to Exhibit 10.28 to Form 10-KSB for the fiscal year ended May 31, 2001, filed August 29, 2001*

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Exhibit No.	Document
10.29	Employment Agreement dated April 26, 2001 between the Company and David H. Pohl incorporated by reference to Exhibit 10.29 to Form 10-KSB for the fiscal year ended May 31, 2001, filed August 29, 2001*
10.30	Employment Agreement dated November 17, 2001 between the Company and Lowell W. Giffhorn incorporated by reference to Exhibit 10.30 to Registration Statement on Form S-3 filed June 27, 2002*
10.31	Employment Agreement dated December 20, 2001 between the Company and Jayanta Maitra incorporated by reference to Exhibit 10.31 to Registration Statement on Form S-3 filed June 27, 2002*
10.32	Consulting Agreement dated March 7, 2002 between the Company and SDMC, Inc. incorporated by reference to Exhibit 10.32 to Registration Statement on Form S-3 filed June 27, 2002*
10.33	Employment Agreement dated January 2, 2004 between the Company and Jayanta Maitra incorporated by reference to Exhibit 10.33 to Registration statement on Form SB-2 filed May 21, 2004*
10.34	Consulting Agreement dated March 18, 2004 between the Company and SDMC, Inc. incorporated by reference to Exhibit 10.34 to Registration Statement en Form SB-2 filed May 21, 2004*
10.35	Employment Agreement dated June 1, 2004 between the Company and Patrick Nunally incorporated by reference to Exhibit 10.35 to Form 10-KSB for the fiscal year ended May 31, 2004, filed August 19, 2004*
10.36	Amendment No. 1 to Employment Agreement dated July 12, 2004 between the Company and Patrick Nunally incorporated by reference to Exhibit 10.36 to Form 10-KSB for the fiscal year ended May 31, 2004, filed August 19, 2004*
10.37	Employment Agreement dated September 1, 2004 between the Company and Lowell W. Giffhorn incorporated by reference to Exhibit 10.37 to Registration Statement on Form SB-2 filed February 2, 2005*
10.38	IGNITE License Agreement with Advanced Micro Devices, Inc., dated February 21, 2005, incorporated by reference to Exhibit 10.38 to Form 10-KSB filed October 13, 2006*
10.39	Patent Portfolio License Agreement with Advanced Micro Devices, Inc., dated February 21, 2005, incorporated by reference to Exhibit 10.39 to Form 10-KSB filed October 13, 2006*
10.40	Master Agreement, dated as of June 7, 2005, by and among the Company, Technology Properties Limited Inc., a California corporation and Charles H. Moore, an individual, incorporated by reference to Exhibit 10.40 to Form 8-K filed June 15, 2005*
10.41	Commercialization Agreement dated as of June 7, 2005 by and among the JV LLC, Technology Properties Limited Inc., a California corporation, and the Company, incorporated by reference to Exhibit 10.41 to Form 8-K filed June 15, 2005*
10.42	Limited Liability Company Operating Agreement of JV LLC, a Delaware limited liability company, dated as of June 7, 2005, incorporated by reference to Exhibit 10.42 to Form 8-K filed June 15, 2005*

12

Exhibit No.	Document
10.43	Agreement for Part-Time Employment dated August 3, 2005 between the Company and Thomas J. Sweeney, incorporated by reference to Exhibit 99.3 to Form 8-K filed August 9, 2005*
14.1	Code of Ethics for Senior Financial Officers incorporated by reference to Exhibit 14.1 to Form 10-K for the fiscal year ended May 31, 2003, filed August 29, 2003*
21.1	Subsidiaries of the small business issuer, incorporated by reference to Exhibit 21.1 to Form 10-KSB filed October 13, 2006*
31.1	Certification of David H. Pohl, CEO, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**
31.2	Certification of Thomas J. Sweeney, CFO, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002**
32.1	Certification of David H. Pohl, CEO, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
32.2	Certification of Thomas J. Sweeney, CFO, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002**
99.1	Form of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by reference to Exhibit 28.2 to registration statement on Form SB-2, file no. 33-57858*
99.2	Form of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by reference to Exhibit 28.3 to registration statement on Form SB-2, file no. 33-57858*
99.3	Form of Incentive Stock Option Agreement to the Company’s 1996 stock Option Plan (individual agreements differ as to number of shares, dates, prices and vesting), incorporated by reference to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 filed May 23, 1996*
99.4	Form of Non-Qualified Stock Option Agreement to the Company’s 1996 Stock Option Plan (individual agreement differ as to number of shares, date, prices and vesting), incorporated by reference to Pre-Effective Amendment No. 2 to Registration Statement on Form SB-2 filed May 23, 1996*
99.5	Press Release of the Company dated November 4, 1996 incorporated by reference to Exhibit 99.5 to Form 8-K filed January 9, 1997*
99.6	Form of Incentive Stock Option Agreement to the Company’s 2001 Stock Option Plan incorporated by reference to Exhibit 99.6 to Registration Statement on Form S-8 filed March 26, 2001*
99.7	Form of Non-Qualified Stock Option Agreement to the Company’s 2001 Stock Option Plan incorporated by reference to Exhibit 99.7 to Registration Statement on Form S-8 filed March 26, 2001*
99.8	Form of Incentive Stock Option Agreement to the Company’s 2003 Stock Option Plan incorporated by reference to Exhibit 99.8 to Registration Statement on Form S-8 filed September 4, 2003*
99.9	Form of Non-Qualified Stock Option Agreement to the Company’s 2003 Stock Option Plan incorporated by reference to Exhibit 99.9 to Registration Statement on Form S-8 filed September 4, 2003*

* Previously filed in indicated registration statement or report.

** Exhibit filed herewith this Annual Report on Form 10-KSB for the fiscal year ended May 31, 2004

13

Patriot Scientific Corporation
	Index to Consolidated Financial Statements
	Report of Independent Registered Public Accounting Firm	F-2
	Consolidated Balance Sheets as of May 31, 2004, 2003 and 2002	F-3
	Consolidated Statements of Operations for the Years Ended May 31, 2004, 2003 and 2002	F-4
	Consolidated Statement of Stockholders’ Deficit for the Years Ended May 31, 2004, 2003 and 2002	F-5
	Consolidated Statements of Cash Flows for the Years Ended May 31, 2004, 2003 and 2002	F-6 to F-7
	Summary of Accounting Policies	F-8 to F-12
	Notes to Consolidated Financial Statements	F-13 to F-31

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors

Patriot Scientific Corporation

We have audited the accompanying consolidated balance sheets of Patriot Scientific Corporation (the “Company”) as of May 31, 2004, 2003 and 2002, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years in the three-year period ended May 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit on its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Patriot Scientific Corporation at May 31, 2004, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the years in the three-year period ended May 31, 2004, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1, the accompanying consolidated financial statements for the years ended May 31, 2004, 2003 and 2002 have been restated.

CORBIN & COMPANY, LLP

Irvine, California

October 11, 2006

F-2

PATRIOT SCIENTIFIC CORPORATION

Consolidated Balance Sheets

	May 31,
ASSETS	2004			2003			2002
	(As restated, see NOTE 1)
Current assets:
Cash and cash equivalents	$	355,940		$	32,663		$	88,108
Marketable securities		22,646			-			-
Accounts receivable, net of allowance for doubtful accounts of $0, $10,000 and $6,000		1,225			3,866			4,797
Prepaid expenses		322,068			93,030			35,749
Total current assets		701,879			129,559			128,654
Property and equipment, net		68,389			153,530			285,488
Other assets, net		41,221			53,220			330,863
Patents and trademarks, net of accumulated amortization of $501,235, $450,926 and $400,158		114,739			128,925			189,521
	$	926,228		$	465,234		$	934,526
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Secured note payable, net of debt discount of $0, $0 and $464,273	$	-		$	635,276		$	171,003
Current portion of 8% convertible debentures, net of debt discount of $27,180, $103,121 and $0		145,320			121,879			-
Secured notes payable to stockholders		100,000			180,000			-
Accounts payable		134,600			397,180			385,255
Accrued liabilities		160,102			245,822			211,291
Current portion of capital lease obligations		8,020			6,405			5,116
Total current liabilities		548,042			1,586,562			772,665
8% Convertible debentures, net of debt discount of $2,047,966, $709,890 and $216,617		227,701			280,110			291,383
Warrant and derivative liabilities		5,872,662			3,492,561			1,441,040
Long-term portion of capital lease obligation		2,306			10,326			16,731
Total liabilities		6,650,711			5,369,559			2,521,819
Commitments and contingencies
Stockholders’ deficit:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized; none outstanding		-			-			-
Common stock, $0.00001 par value; 400,000,000, 200,000,000, and 200,000,000 shares authorized; 171,156,363, 106,547,807 and 81,465,757 shares issued and outstanding		1,712			1,066			815
Additional paid-in capital		46,457,543			41,517,464			39,594,926
Accumulated deficit		(52,183,738	)		(46,422,855	)		(41,103,034	)
Note receivable		-			-			(80,000	)
Total stockholders’ deficit		(5,724,483	)		(4,904,325	)		(1,587,293	)
	$	926,228		$	465,234		$	934,526

See accompanying report of independent registered public accounting firm,

summary of accounting policies and notes to consolidated financial statements

F-3

PATRIOT SCIENTIFIC CORPORATION

Consolidated Statements of Operations

	Years Ended May 31,
	2004			2003			2002
	(As restated, see NOTE 1)
Net sales:
Product	$	74,017		$	108,403		$	358,809
Licenses and royalties		2,400			15,500			-
Net sales		76,417			123,903			358,809
Cost of sales:
Product costs		10,472			18,660			244,547
Inventory obsolescence		-			-			149,433
Cost of sales		10,472			18,660			393,980
Gross profit (loss)		65,945			105,243			(35,171	)
Operating expenses:
Research and development		549,756			723,287			1,372,421
Selling, general and administrative		1,253,559			1,821,902			2,708,579
Operating expenses		1,803,315			2,545,189			4,081,000
Operating loss		(1,737,370	)		(2,439,946	)		(4,116,171	)
Other income (expense):
Gain on sale of technology		75,500			-			-
Loss on marketable securities		(45,354	)		-			-
Interest income		270			191			2,662
Interest expense		(4,218,452	)		(2,638,892	)		(875,555	)
Change in fair value of warrant and derivative liabilities		164,523			(241,174	)		204,720
Other expense, net		(4,023,513	)		(2,879,875	)		(668,173	)
Net loss	$	(5,760,883	)	$	(5,319,821	)	$	(4,784,344	)
Basic and diluted loss per common share	$	(0.04	)	$	(0.06	)	$	(0.07	)
Weighted average number of common shares outstanding during the period - basic and diluted		139,767,276			93,791,470			66,810,028

See accompanying report of independent registered public accounting firm,

summary of accounting policies and notes to consolidated financial statements

F-4

PATRIOT SCIENTIFIC CORPORATION

Consolidated Statements of Stockholders’ Deficit

	Common Stock				Additional			Accumulated			Stockholders’
	Shares		Amount		Paid-in Capital			Deficit			Deficit
Years Ended May 31, 2004, 2003 and 2002	As restated, see NOTE 1
Balance, June 1, 2001		57,535,411	$	575	$	37,240,503(1	)	$	(36,318,690	)	$	922,388
Issuance of common stock at $.07 to $.30 per share		4,888,680		49		879,556			-			879,605
Exercise of common stock warrants and options at $.25 to $.32 per share		241,666		3		73,830			-			73,833
Issuance of options for services		-		-		106,926			-			106,926
Issuance of common stock for services at $.09 per share		2,200,000		22		197,978			-			198,000
Exchange of notes payable at $.07 to $.09 per share		16,600,000		166		1,552,885			-			1,553,051
Value of warrants issued		-		-		440,935			-			440,935
Reclassification of warrant and derivative liabilities		-		-		(977,687	)		-			(977,687	)
Net loss		-		-		-			(4,784,344	)		(4,784,344	)
Balance, May 31, 2002		81,465,757		815		39,514,926(1	)		(41,103,034	)		(1,587,293	)
Issuance of common stock at $.03 to $.05 per share		3,765,266		38		120,312			-			120,350
Collection of note receivable		-		-		80,000			-			80,000
Issuance of common stock for services at $.04 to $.06 per share		2,780,000		28		148,772			-			148,800
Conversion of debentures plus accrued interest at $.04 to $.05 per share		18,536,784		185		836,375			-			836,560
Reclassification of warrant and derivative liabilities associated with debt conversions and warrant exercises		-		-		817,079			-			817,079
Net loss		-		-		-			(5,319,821	)		(5,319,821	)
Balance, May 31, 2003		106,547,807		1,066		41,517,464			(46,422,855	)		(4,904,325	)
Issuance of common stock at $.025 to $.034 per share		1,800,752		18		50,422			-			50,440
Exercise of warrants and options at $.0172 to $.04 per share		11,184,175		112		331,995			-			332,107
Issuance of common stock for services at $.043 to $.117 per share		1,126,496		11		59,841			-			59,852
Conversion of debentures plus accrued interest at $.017 to $.064 per share		50,497,133		505		1,757,123			-			1,757,628
Reclassification of warrant and derivative liabilities associated with debt conversions and warrant exercises		-		-		2,740,698			-			2,740,698
Net loss		-		-		-			(5,760,883	)		(5,760,883	)
Balance, May 31, 2004		171,156,363	$	1,712	$	46,457,543		$	(52,183,738	)	$	(5,724,483	)

⁽¹⁾ Additional paid-in capital included a note receivable of $80,000 and additional paid-in capital of $37,320,503 and $39,594,926 at May 31, 2001 and 2002, respectively.

See accompanying report of independent registered public accounting firm,

summary of accounting policies and notes to consolidated financial statements

F-5

PATRIOT SCIENTIFIC CORPORATION

Consolidated Statements of Cash Flows

	Years Ended May 31,
	2004			2003			2002
	(As restated, see NOTE 1)
Cash flows from operating activities:
Net loss	$	(5,760,883	)	$	(5,319,821	)	$	(4,784,344	)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization and depreciation		135,450			258,915			285,759
Provision for doubtful accounts		-			24,000			76,000
Provision for inventory obsolescence		-			-			149,433
Non-cash interest expense related to convertible debentures, notes payable and warrants		4,069,350			2,495,305			826,444
Gain on sale of technology		(75,500	)		-			-
Unrealized loss on marketable securities		45,354			-			-
Expense related to common stock, options and warrants issued for services		59,852			148,800			216,500
Change in fair value of warrant and derivative liabilities		(164,523	)		241,174			(204,720	)
Changes in operating assets and liabilities:
Accounts receivable		(18,639	)		(33,346	)		(45,973	)
Inventories		-			-			73,960
Prepaid and other assets		(217,039	)		216,195			(200,834	)
Accounts payable and accrued expenses		(149,394	)		83,016			(24,759	)
Net cash used in operating activities		(2,075,972	)		(1,885,762	)		(3,632,534	)
Cash flows from investing activities:
Collection of note receivable		-			60,000			-
Proceeds from sale of technology		7,500			-			-
Purchase of property, equipment and patents		(36,123	)		(62,194	)		(146,156	)
Net cash used in investing activities		(28,623	)		(2,194	)		(146,156	)
Cash flows from financing activities:
Proceeds from issuance of secured notes payable		12,320			180,000			1,790,000
Payments for capital lease obligations		(6,405	)		(5,116	)		(3,148	)
Proceeds from issuance of convertible debentures		2,175,000			1,507,000			508,000
Proceeds from issuance of common stock		50,440			120,350			879,605
Proceeds from exercise of common stock warrants and options		175,237			-			73,833
Proceeds from sale of accounts receivable		21,280			30,277			154,158
Net cash provided by financing activities		2,427,872			1,832,511			3,402,448
Net change in cash and cash equivalents		323,277			(55,445	)		(376,242	)
Cash and cash equivalents, beginning of year		32,663			88,108			464,350
Cash and cash equivalents, end of year	$	355,940		$	32,663		$	88,108

F-6

PATRIOT SCIENTIFIC CORPORATION

Consolidated Statements of Cash Flows

	Years Ended May 31,
Supplemental Disclosure of Cash Flow Information:	2004		2003		2002
	(As restated, see NOTE 1)
Cash paid during the year for:
Interest	$	17,220	$	15,083	$	19,719
Income taxes	$	-	$	-	$	-
Supplemental Schedule of Non-Cash Investing Activities:
Convertible debentures, notes payable and accrued interest exchanged for common stock	$	1,757,628	$	836,560	$	1,154,725
Common stock issued for prepaid services	$	-	$	-	$	198,000
Common stock, warrants and options issued for prepaid services	$	-	$	-	$	106,296
Capital lease obligation incurred for purchase of property and equipment	$	-	$	-	$	24,996
Debt discount recorded on issuance of secured notes payable and convertible debentures	$	2,898,167	$	1,740,000	$	1,005,111
Conversion of secured notes payable to debenture	$	723,167	$	-	$	-
Cancellation of secured note payable and accrued interest for exercise of warrants	$	110,707	$	-	$	-
Reclassification of warrant and derivative liabilities	$	-	$	-	$	977,687
Reclassification of warrant and derivative liabilities associated with debt conversions and warrant exercises	$	2,740,698	$	817,079	$	-

F-7

PATRIOT SCIENTIFIC CORPORATION

Summary of Accounting Policies

ORGANIZATION AND BUSINESS

Patriot Scientific Corporation (the "Company", “we”, “us” or “our”) is engaged in the development, marketing, and sale of patented microprocessor technology and the sale of high-performance high-speed data communication products.

BASIS OF PRESENTATION AND CONSOLIDATION

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of the Company, its majority owned subsidiaries, Metacomp, Inc. ("Metacomp") and Plasma Scientific Corporation. All material intercompany transactions and balances have been eliminated in consolidation.

RECLASSIFICATIONS

Certain reclassifications have been made to the 2003 and 2002 financial statements in order for them to conform to the 2004 presentation. Such reclassifications have no impact on the Company's financial position or results of operations.

FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivable.

At times, the Company’s balance of cash and certificates of deposit maintained with its bank may exceed the Federal Deposit Insurance Corporation’s (“FDIC”) insured limit of $100,000. The Company limits its exposure of loss by maintaining its cash with financially stable financial institutions. When the Company has excess cash, the Company's cash equivalents are placed in high quality money market accounts with major financial institutions and high grade short-term commercial paper. The investment policy limits the Company's exposure to concentrations of credit risk. Money market accounts are federally insured; however, commercial paper is not insured. The Company has not experienced any losses in such accounts.

Concentrations of credit risk with respect to accounts receivable are limited due to the wide variety of customers and markets which comprise the Company's customer base, as well as their dispersion across many different geographic areas. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its accounts receivable credit risk exposure is limited. Generally, the Company does not require collateral or other security to support customer receivables.

The carrying value of financial instruments including cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair value because of the immediate or short-term maturity of these instruments. With respect to secured notes payable, the carrying amounts approximate fair value due to the relative consistency in interest rates and the short term nature of the debt, with all debt maturing within two years of issuance. The fair value of the Company’s convertible debentures approximates its fair value at May 31, 2004, 2003 and 2002.

CASH EQUIVALENTS

For purposes of balance sheet classification and the statements of cash flows, the Company considers all highly liquid investments acquired with a maturity of three months or less to be cash equivalents.

MARKETABLE SECURITIES

At May 31, 2004, the Company had investments in marketable equity securities having a carrying value of $22,646. Marketable equity securities are carried at their fair value, with unrealized gains or losses reflected in the statement of operations. During the year ended May 31, 2004 the Company recognized unrealized losses related to the write down in the carrying value of the securities of approximately $45,000.

F-8

PATRIOT SCIENTIFIC CORPORATION

Summary of 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. The Company follows the provisions of the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment of Long-lived Assets." 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. The Company continuously evaluates the recoverability of its long-lived assets based on estimated future cash flows and the estimated fair value of such long-lived assets, and provides 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. Estimated future annual amortization expense arising from patents is approximately $48,000, $35,000, $23,000 and $9,000 in fiscal years 2005 through 2008, respectively. 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 individual intangible assets is less than its carrying value determined based on the provisions of SFAS No. 144 as discussed above.

REVENUE RECOGNITION

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

ADVERTISING

The Company expenses advertising costs as incurred. Advertising expenses were approximately $3,000, $3,400 and $9,000 for the years ended May 31, 2004, 2003 and 2002, respectively.

INCOME TAXES

The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are recognized for the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the combination of the tax payable for the year and the change during the year in deferred tax assets and liabilities.

F-9

PATRIOT SCIENTIFIC CORPORATION

Summary of Accounting Policies

NET LOSS PER SHARE

The Company applies SFAS No. 128, "Earnings Per Share" for the calculation of "Basic" and "Diluted" earnings (loss) per share. Basic earnings (loss) per share includes no dilution and is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflect the potential dilution of securities that could share in the earnings (loss) of an entity.

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.

SALE OF ACCOUNTS RECEIVABLE

The Company has adopted SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". 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 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 is not entitled to or obligated to repurchase or redeem the invoices before their maturity and it does 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 fiscal 2004, 2003 and 2002, the Company sold approximately $27,000, $38,000 and $193,000, respectively, of its accounts receivable to a bank under a factoring agreement for approximately $21,000, $30,000 and $154,000, respectively. Pursuant to the provisions of SFAS No. 140, the Company reflected the transaction as a sale 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. At May 31, 2004, there was no outstanding balance and $400,000 was available for future factoring of accounts receivable invoices.

STOCK-BASED COMPENSATION

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.

F-10

PATRIOT SCIENTIFIC CORPORATION

Summary of Accounting Policies

SFAS No. 123, "Accounting for Stock-Based Compensation," and SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and disclosure," require 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. SFAS No. 148 also provides for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has elected to continue to account for stock based compensation under APB No. 25.

The Company applies SFAS No. 123 in valuing options granted to consultants and estimates the fair value of such options using the Black-Scholes option-pricing model. The fair value is recorded as consulting expense as services are provided. Options granted to consultants for which vesting is contingent based on future performance are measured at their then current fair value at each period end, until vested.

Under the accounting provisions for SFAS No. 123, the Company's net loss per share would have been increased by the pro forma amounts indicated below:

	Years Ended May 31,
	2004			2003			2002
Net loss as reported	$	(5,760,883	)	$	(5,319,821	)	$	(4,784,344	)
Add:
Stock based compensation expense included in reported net loss, net of related tax effects		-			-			-
Deduct:
Total stock based method under fair value based method for all awards net of related tax effects		152,074			289,023			576,010
Pro forma net loss	$	(5,912,957	)	$	(5,608,844	)	$	(5,360,354	)
Net loss per common share, as reported - basic and diluted	$	(0.04	)	$	(0.06	)	$	(0.07	)
Net loss per common share, pro forma - basic and diluted	$	(0.04	)	$	(0.06	)	$	(0.08	)

DERIVATIVE FINANCIAL INSTRUMENTS

The Company’s derivative financial instruments consist of embedded derivatives related to the convertible debentures (see Note 5). These embedded derivatives include reset conversion features and conversion options. The Company determined that the features were embedded derivative instruments pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, and Emerging Issues Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock.” The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, as a result of entering into the debt agreements, the Company was required to classify all other non-employee warrants and options as derivative liabilities and record them at their fair values at each balance sheet date.  Any change in fair value was recorded as non-operating, non-cash income or expense at each balance sheet date.  If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company recorded a non-operating, non-cash charge.  If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company recorded non-operating, non-cash income.

F-11

PATRIOT SCIENTIFIC CORPORATION

Summary of Accounting Policies

During the years ended May 31, 2004, 2003 and 2002, the Company recognized other income (expense) of approximately $165,000, ($241,000) and $205,000, respectively, related to recording the warrant and derivative liabilities at fair value. At May 31, 2004, 2003 and 2002 there were approximately $5,873,000, $3,493,000 and $1,441,000 of warrant and derivative liabilities as the related debt instruments were not settled.

The Company’s derivative instruments were valued using a Monte Carlo simulation model incorporating the instruments’ multiple reset dates, using the following assumptions during the years ended May 31, 2004, 2003 and 2002:

	May 31, 2004	May 31, 2003	May 31, 2002
Estimated dividends	None	None	None
Expected volatility	154 - 244%	146 - 252%	137 - 201%
Risk-free interest rate	1.0 - 4.4%	1.1 - 4.3%	1.7 - 4.9%
Expected term (years)	2 - 7	2 - 7	2 - 7

RECENT ACCOUNTING PRONOUNCEMENTS

In April 2003, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 149 requires that contracts with comparable characteristics be accounted for similarly. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this statement did not impact our financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. The adoption of this statement did not impact our financial position or results of operations.

F-12

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS

During fiscal 2006, the Company determined that the manner in which it historically accounted for the reset conversion feature and embedded put option of certain of its convertible debentures issued during fiscal 2002 through fiscal 2005 (see Note 5) was not in accordance with SFAS No. 133, as amended, and EITF Issue No. 00-19. The Company determined that these features were embedded derivative instruments pursuant to SFAS No. 133. The accounting treatment of derivative financial instruments requires that the Company record the derivatives and related warrants at their fair values as of the inception date of the debt agreements and at fair value as of each subsequent balance sheet date.  In addition, under the provisions of EITF Issue No. 00-19, as a result of entering into the debt agreements, the Company was required to classify all other non-employee warrants and options as derivative liabilities and record them at their fair values at each balance sheet date.  Any change in fair value was required to be recorded as non-operating, non-cash income or expense at each balance sheet date.  If the fair value of the derivatives was higher at the subsequent balance sheet date, the Company was required to record a non-operating, non-cash charge.  If the fair value of the derivatives was lower at the subsequent balance sheet date, the Company was required to record non-operating, non-cash income.  Accordingly, in connection with the restatement adjustments, the Company has appropriately reflected the non-operating, non-cash income or expense resulting from the changes in fair value. The Company had previously not recorded the embedded derivative instruments as liabilities and did not record the related changes in fair value.

The following tables present a summary of the effects of the restatement adjustments on the Company’s consolidated balance sheets at May 31, 2004, 2003, and 2002 and the consolidated statements of operations and cash flows for the years ended May 31, 2004, 2003, and 2002:

	Consolidated Balance Sheet
As of May 31, 2004	As Previously Reported			Adjustments			As Restated
Warrant and derivative liabilities	$	-		$	5,872,662		$	5,872,662
Total liabilities	$	778,049		$	5,872,662		$	6,650,711
Additional paid-in capital	$	49,990,485		$	(3,532,942	)	$	46,457,543
Accumulated deficit	$	(49,844,018	)	$	(2,339,720	)	$	(52,183,738	)
Total stockholders’ equity(deficit)	$	148,179		$	(5,872,662	)	$	(5,724,483	)

	Statement of Operations
Year ended May 31, 2004	As Previously Reported			Adjustments			As Restated
Change in fair value of warrant and derivative liabilities	$	-		$	164,523		$	164,523
Interest expense	$	(2,443,024	)	$	(1,775,428	)	$	(4,218,452	)
Total other expense	$	(2,412,608	)	$	(1,610,905	)	$	(4,023,513	)
Net loss	$	(4,149,978	)	$	(1,610,905	)	$	(5,760,883	)
LOSS PER COMMON SHARE:
Basic	$	(0.03	)	$	(0.01	)	$	(0.04	)
Diluted	$	(0.03	)	$	(0.01	)	$	(0.04	)

	Statement of Cash Flows
Year ended May 31, 2004	As Previously Reported			Adjustments			As Restated
Net loss	$	(4,149,978	)	$	(1,610,905	)	$	(5,760,883	)
Change in fair value of warrant and derivative liabilities	$	-		$	(164,523	)	$	(164,523	)
Non-cash interest expense related to convertible debentures, notes payable and warrants	$	2,293,922		$	1,775,428		$	4,069,350

F-13

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, continued

	Consolidated Balance Sheet
As of May 31, 2003	As Previously Reported			Adjustments			As Restated
Warrant and derivative liabilities	$	-		$	3,492,561		$	3,492,561
Total liabilities	$	1,876,998		$	3,492,561		$	5,369,559
Additional paid-in capital	$	44,281,210		$	(2,763,746	)	$	41,517,464
Accumulated deficit	$	(45,694,040	)	$	(728,815	)	$	(46,422,855	)
Total stockholders’ deficit	$	(1,411,764	)	$	(3,492,561	)	$	(4,904,325	)

	Statement of Operations
Year ended May 31, 2003	As Previously Reported			Adjustments			As Restated
Change in fair value of warrant and derivative liabilities	$	-		$	(241,174	)	$	(241,174	)
Interest expense	$	(1,448,544	)	$	(1,190,348	)	$	(2,638,892	)
Total other expense	$	(1,448,353	)	$	(1,431,522	)	$	(2,879,875	)
Net loss	$	(3,888,299	)	$	(1,431,522	)	$	(5,319,821	)
LOSS PER COMMON SHARE:
Basic	$	(0.04	)	$	(0.02	)	$	(0.06	)
Diluted	$	(0.04	)	$	(0.02	)	$	(0.06	)

	Statement of Cash Flows
Year ended May 31, 2003	As Previously Reported			Adjustments			As Restated
Net loss	$	(3,888,299	)	$	(1,431,522	)	$	(5,319,821	)
Change in fair value of warrant and derivative liabilities	$	-		$	241,174		$	241,174
Non-cash interest expense related to convertible debentures, notes payable and warrants	$	1,304,957		$	1,190,348		$	2,495,305

	Consolidated Balance Sheet
As of May 31, 2002	As Previously Reported			Adjustments			As Restated
Secured note payable, net of debt discount	$	445,760		$	(274,757	)	$	171,003
Total current liabilities	$	1,047,422		$	(274,757	)	$	772,665
Convertible debentures	$	315,198		$	(23,815	)	$	291,383
Warrant and derivative liabilities	$	-		$	1,441,040		$	1,441,040
Total liabilities	$	1,379,351		$	1,142,468		$	2,521,819
Additional paid-in capital	$	41,440,101		$	(1,845,175	)	$	39,594,926
Accumulated deficit	$	(41,805,741	)	$	702,707		$	(41,103,034	)
Total stockholders’ deficit	$	(444,825	)	$	(1,142,468	)	$	(1,587,293	)

F-14

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 - RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS, continued

	Statement of Operations
Year ended May 31, 2002	As Previously Reported			Adjustments		As Restated
Change in fair value of warrant and derivative liabilities	$	-		$	204,720	$	204,720
Interest expense	$	(1,373,542	)	$	497,987	$	(875,555	)
Total other expense	$	(1,370,880	)	$	702,707	$	(668,173	)
Net loss	$	(5,487,051	)	$	702,707	$	(4,784,344	)
INCOME (LOSS) PER COMMON SHARE:
Basic	$	(0.08	)	$	0.01	$	(0.07	)
Diluted	$	(0.08	)	$	0.01	$	(0.07	)

	Statement of Cash Flows
Year ended May 31, 2002	As Previously Reported			Adjustments			As Restated
Net loss	$	(5,487,051	)	$	702,707		$	(4,784,344	)
Change in fair value of warrant and derivative liabilities	$	-		$	(204,720	)	$	(204,720	)
Non-cash interest expense related to convertible debentures, notes payable and warrants	$	1,324,431		$	(497,987	)	$	826,444

NOTE 2 - PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

	2004			2003			2002
Computer equipment and software	$	1,660,707		$	1,660,707		$	1,660,707
Furniture and fixtures		499,274			499,274			499,274
		205,594			205,594			205,594
		2,365,575			2,365,575			2,365,575
Less accumulated depreciation and amortization		(2,297,186	)		(2,212,045	)		(2,080,087	)
Net property and equipment	$	68,389		$	153,530		$	285,488

Depreciation expense was $85,141, $131,958 and $211,850 for the years ended May 31, 2004, 2003 and 2002, respectively.

NOTE 3 - NOTE RECEIVABLE

In June 2000, the Company entered into a three-year, $80,000 Secured Promissory Note Receivable with an individual who was, at the time of the issuance of the note, an executive officer of the Company. The note had an interest rate of 6% per annum with interest payments due semi-annually and the principal due at the maturity of the note. The individual pledged 100,000 shares of the Company’s common stock that he held on the date of issuance as security for this note. In April 2003, the Company negotiated an early payment discount and the individual paid $60,000 to retire this note. The balance of $20,000 was written off to bad debt expense during the year ended May 31, 2003.

F-15

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 - SECURED NOTES PAYABLE

Swartz Private Equity LLC

Effective October 9, 2001, the Company entered into a Secured Promissory Note and Agreement, as amended from time to time (the “Note Agreement”), with Swartz Private Equity LLC (“Swartz”) which provides for working capital advances. Outstanding amounts under the Note Agreement bear interest at 5% per annum and are secured by the Company’s assets.

As part of the consideration for entering into the Note Agreement, the Company agreed to issue warrants to Swartz related to each advance against the note. In connection with each advance, the Company 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 average price per share minus $0.05.

In connection with certain amendments to the Note Agreement, the Company was obligated to issue to Swartz warrants equal to 11% of the common stock issued between January 28, 2002 and March 11, 2002 and 20% of the common stock issued between March 12, 2002 and April 1, 2003 to any parties other than Swartz. After April 1, 2003, the Company is obligated to issue to Swartz warrants equal to 30% of the common stock issued to any parties other than Swartz.

In addition, in connection with the anti-dilution provision in certain amendments to the Note Agreement, the Company agreed to extend the expiration date to December 31, 2006 on certain warrants that were set to expire prior to December 31, 2006. The Company determined that the value associated with the extension of the expiration dates was insignificant. In exchange for these concessions, Swartz agreed to extend the due date of the Note Agreement to March 1, 2004 and allowed the Company to unreserve 20,007,350 shares that had been reserved for the exercise of warrants for a period the sooner of 1) March 19, 2004, or 2) 90 days after the date on which the Company’s common stock exceeded $0.375 for 10 consecutive trading days.

During the year ended May 31, 2002, the Company received advances of $1,790,000 under the Note Agreement, of which $1,154,890 was exchanged for 16,600,000 shares of the Company’s common stock during the year ended May 31, 2002. In connection with the exchange, the Company recorded the excess of the market value of the underlying 16,600,000 shares over the principal reduction as additional interest expense of $398,161 during the year ended May 31, 2002.

During fiscal 2002 and prior to the commencement of derivative accounting on April 23, 2002 (see Note 6), the Company issued warrants to purchase 12,888,150 warrants to Swartz under the Note Agreement. The Company determined the estimated relative fair value of these warrants of $780,111 using the Black-Scholes pricing model and recorded the amount as a debt discount with a corresponding amount to additional paid-in capital. The Company amortized the debt discount as additional interest expense over the term of the related debt, which resulted in amortization of $464,273 and $315,838 during the years ended May 31, 2003 and 2002, respectively.

During the years ended May 31, 2004 and 2003, the Company issued warrants to Swartz to purchase 10,042,496 and 5,355,562 shares of the Company’s common stock, respectively, under the anti-dilution provision of the Note Agreement, which were valued at $215,548 and $213,334, respectively, using a Monte Carlo simulation model. The Company recorded these amounts as additional interest expense with a corresponding amount to derivative and warrant liabilities. No warrants were issued to Swartz under the anti-dilution provision during the year ended May 31, 2002.

F-16

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 - SECURED NOTES PAYABLE, continued

On March 23, 2004, outstanding principal of $635,276 plus accrued interest of $87,891 under the Note Agreement was exchanged for an 8% convertible debenture for $723,167 with a maturity date of March 23, 2006 (see Note 5). As part of the consideration for exchanging the note for an 8% convertible debenture, we agreed to extend the expiration dates on certain outstanding warrants to April 1, 2011. The Company determined that the value associated with extending the expiration dates was insignificant.

Secured Notes Payable to Stockholders

During fiscal 2003, the Company issued an aggregate of $180,000 in notes payable to a stockholder. The notes payable bore interest at 8% per annum and were secured by the Company’s assets. In January 2004, the note payable with a balance of $200,353, which included accrued interest of $20,353, was partially used to exercise a warrant with the balance of $100,000 converted into four one-year $25,000 notes due January 9, 2005 issued to four heirs of the estate over which the stockholder is a trustee. The interest rate on the four notes is 6% and the notes are secured by the assets of the Company.

NOTE 5 - CONVERTIBLE DEBENTURES

Overview. From April 23, 2002 through May 11, 2004, we sold an aggregate of $4,913,167 of convertible debentures, ranging from 8% to 12%, to a group of twenty-four 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.

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 $0.0172 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 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.

Warrants. Concurrent with the issuance of the convertible debentures, we issued to the debenture holders warrants to purchase 63,193,632, 28,649,451 and 2,514,809 shares of our common stock during the years ended May 31, 2004, 2003 and 2002, respectively. These warrants are exercisable for five years from the date of issuance at either initial negotiated exercise prices or 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 generally subject to being reset on each six month anniversary of its issuance, however, if the warrant holder elects to have the warrant shares registered, then the exercise price is fixed at the price in effect on the date of the election.

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.

F-17

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 - CONVERTIBLE DEBENTURES, continued

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. Except for one debenture issued on March 23, 2004, 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 May 31, 2004, there have been five registration statements (designated A through E).

Security Interest. The convertible debentures are secured by our assets.

The following table presents the status, as of May 31, 2004, of our convertible debentures:

					Principal						Effective		Shares		Warrant
	Dates of		Aggregate		Balance at		Conversion Prices				Registration		Converted at		Shares
Series	Issuance		Principal		May 31, 2004		Initial		Reset		Date		May 31, 2004		Issued
A		4/23/2002-	$	1,000,000	$	25,000	$	0.08616-	$	0.04190-		10/29/2002		23,441,662		12,859,175
		6/10/2002					$	0.10289	$	0.04457
B		8/23/2002-		605,000		107,500	$	0.05126-	$	0.04381-		3/7/2003		11,620,528		11,234,835
		1/24/2003					$	0.0727	$	0.04722
C		3/24/2002-		510,000		10,000	$	0.041-	$	0.041-		6/26/2003		10,179,007		9,377,943
		6/9/2003					$	0.065	$	0.065
D		8/1/2003-		547,500		55,000	$	0.0172-	$	0.0172-		11/18/2003		23,792,720		22,455,355
		10/21/2003					$	0.048	$	0.0477
E		12/1/2003-		1,527,500		1,527,500	$	0.0267-	$	0.0267-		6/7/2004		-		30,395,392
		5/11/2004					$	0.10	$	0.10
F		3/23/2004		723,167		723,167	$	0.09	$	0.09		Not registered		-		8,035,192
Totals			$	4,913,167	$	2,448,167								69,033,917		94,357,892

F-18

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 - CONVERTIBLE DEBENTURES, continued

Convertible debentures outstanding as of May 31, is as follows:

	2004			2003			2002
Convertible debentures issued	$	4,913,167		$	2,015,000		$	508,000
Less amounts converted to common stock		(2,465,000	)		(800,000	)		-
		2,448,167			1,215,000			508,000
Less debt discount		(2,075,146	)		(813,011	)		(216,617	)
		373,021			401,989			291,383
Less current portion		(145,320	)		(121,879	)
Long-term portion	$	227,701		$	280,110		$	291,383

Future annual minimum principal payments at May 31, 2004 are as follows:

Years Ending May 31,
2005	$	172,500
2006		2,275,667
Total	$	2,448,167

The terms of the convertible debentures include certain features that considered embedded derivative financial instruments, such as the conversion feature and a reset conversion feature which provides for the conversion of the debentures into shares of the Company’s common stock at a rate which is variable. Because the debentures are not conventional convertible debt, the Company is required to record the derivative financial instruments and the warrants issued in connection with the convertible debentures at their fair values as of the issuance date of each of the debentures.

The initial fair values assigned to the embedded derivatives related to convertible debentures issued during the years ended May 31, 2004, 2003 and 2002 was $3,069,794, $1,238,822 and $177,449, respectively. The initial fair values assigned to the warrants issued in connection with the convertible debentures during the years ended May 31, 2004, 2003 and 2002 was $1,992,875, $1,139,414 and $151,448, respectively.

The Company recorded the fair value of the derivative instruments and warrants as a debt discount which will be amortized to interest expense over the term of the convertible debentures. During the years ended May 31, 2004, 2003 and 2002, the Company recorded interest expense of $1,636,032, $1,143,606 and $8,383, respectively, related to the amortization of the debt discount. If the total fair value of the derivative instruments and warrants was in excess of the proceeds received on the convertible debentures, the Company recorded the excess as additional interest expense. The Company recorded additional interest expense of $2,171,607, $638,240 and $103,897 during the years ended May 31, 2004, 2003 and 2002, respectively, related to the fair values of derivative instruments and warrants in excess of proceeds received.

Under the provisions of EITF Issue No. 00-19, the Company was required to classify all non-employee warrants and options as derivative liabilities and record them at their fair values at each balance sheet date until the related debt is settled.  On April 23, 2002, the Company reclassified the total fair value of non-employee warrants and options of $997,687 from additional paid-in capital to warrant and derivative liabilities.  Any change in fair value of the non-employee warrants and options is required to be recorded as non-operating, non-cash income or expense at each balance sheet date.

F-19

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 - CONVERTIBLE DEBENTURES, continued

During the years ended May 31, 2004 and 2003, the Company converted principal of $1,665,000 and $800,000, respectively, and related accrued interest of $92,628 and $36,560, respectively, into 50,497,133 and 18,536,784 shares of the Company’s common stock, respectively.

NOTE 6 - INVESTMENT AGREEMENTS

$30 Million Equity Line of Credit Agreement

In May 2000, we entered into an investment agreement with Swartz. The investment agreement entitled us , at our option, to issue and sell our common stock for up to an aggregate of $30 million from time to time during a three-year period, subject to certain conditions including among other items (1) an effective registration statement must be on file with the SEC registering the resale of the common shares, and (2) a limitation on the number of common shares that can be sold to Swartz within a 30 day time period based on the trading volume of the stock. Swartz 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. In May 2001, we issued 588,680 shares of common stock in excess of the required shares under the May 30, 2001 put. These shares were applied to puts subsequent to May 31, 2001 and, accordingly, were not included as issued or outstanding in the May 31, 2001 consolidated financial statements. Since the inception of the agreement through May 31, 2002, we received proceeds of $4,381,601 from the sale of 12,000,000 shares of common stock . Per the terms of the investment agreement, through May 31, 2002, 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 $0.072 to $0.132 as of May 31, 2002. None of the warrants had been exercised as of May 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. See Note 8 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.

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 - INVESTMENT AGREEMENTS, continued

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

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

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

·we have issued shares of our common stock that have been paid for by Swartz and the amount of proceeds we have received is equal to the maximum offering amount;

·the registration statement covering the resale of the shares becomes ineffective or unavailable for use;

·our common stock is not actively trading on the OTC Bulletin Board, the Nasdaq Small Cap Market, the Nasdaq National Market, the American Stock Exchange, or the New York Stock Exchange, or is suspended or delisted with respect to the trading on such market or exchange.

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

·we have announced or implemented a stock split or combination of our common stock between the advanced put notice date and the end of the pricing period;

·we have paid a common stock dividend or made any other distribution of our common stock between the advanced put notice date and the end of the pricing period;

·we have made a distribution to the holders of our common stock or of all or any portion of our assets or evidences of indebtedness between the put notice date and the end of the pricing period;

·we have consummated a major transaction (including a transaction, which constitutes a change of control) between the advance put notice date and the end of the pricing period, the registration statement covering the resale of the shares becomes ineffective or unavailable for use, or our stock becomes delisted for trading on our then primary exchange; or

·we discover the existence of facts that cause us to believe that the registration statement contains an untrue statement or omits to state a material fact.

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

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

F-21

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 6 - INVESTMENT AGREEMENTS, continued

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 in Note 5.

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. This warrant was valued on the issuance date using the Black-Scholes pricing model and the value was recorded as a debt discount.

NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT)

During fiscal 2004, the Company’s shareholders approved an increase in the authorized number of common shares from 200,000,000 to 400,000,000.

Private Stock Offerings

During fiscal 2004, 1,800,752 restricted shares of common stock were issued to a group of individual investors for $50,440 and 1,126,496 shares of common stock were issued to a vendor in satisfaction of $59,852 of trade accounts payable.

During fiscal 2003, 3,765,266 restricted shares of common stock were issued to a group of individual investors for $120,350; 2,000,000 shares of common stock were issued to a consultant in exchange for services valued at $110,000; and 400,000 shares valued at $16,000 were issued to a former executive of the Company as partial settlement of a legal action. The fair value (as determined by the quoted market price) for the consulting services and legal settlement were recorded as additional general and administrative expense during the year ended May 31, 2003. Also, during fiscal 2003, the Company issued 380,000 shares of common stock to a vendor in satisfaction of $22,800 of trade accounts payable.

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT), continued

During fiscal 2002, 2,200,000 shares of common stock were issued to an investment bank in exchange for services. The fair value (as determined by the quoted market price) of the common stock of $198,000 is being amortized over the life of the contract and $99,000 was recorded as general and administrative expense during the year ended May 31, 2002. Also, during fiscal 2002, the Company issued 800,000 shares of common stock to two individual investors for cash of $68,000.

Warrants

At May 31, 2004, the Company had warrants outstanding to purchase 121,349,420 shares of common stock at exercise prices ranging from $0.0172 to $0.65 per share expiring beginning in 2004 through 2011. During fiscal 2004, the Company issued warrants to purchase 73,436,127 shares of common stock at exercise prices ranging from $0.0172 to $0.10 per share and issued 11,079,175 shares of common stock on the exercise of warrants at exercise prices ranging from $0.0172 to $0.04 per share. In connection with the exercise of 4,102,431 warrants, the Company agreed to lower the exercise price for the warrants purchased. As a result, the Company recorded additional interest expense of $46,163 related to the beneficial exercise price.

At May 31, 2003, the Company had warrants outstanding to purchase 58,992,468 shares of common stock at exercise prices ranging from $0.033 to $1.12 per share expiring beginning in 2004 through 2008. During fiscal 2003, the Company issued warrants to purchase 35,005,013 shares of common stock at exercise prices ranging from $0.04 to $0.065 per share.

At May 31, 2002, the Company had warrants outstanding to purchase 24,477,724 common shares at exercise prices ranging from $0.048 to $1.12 per share expiring beginning in 2002 through 2007. During fiscal 2002, the Company issued warrants to purchase 23,197,201 common shares of stock at exercise prices ranging from $0.048 to $0.54 per share. Of this amount, warrants to purchase 3,113,302 common shares of stock were issued to Swartz related to the $30 million investment agreement, a warrant to purchase 900,000 common shares of stock was issued to Swartz related to the $25 million investment agreement, warrants to purchase 16,519,090 common shares of stock were issued to Swartz related to the 5% Secured Note Payable of which 3,630,940 were cancelled, a warrant to purchase 2,514,809 common shares of stock was issued to Lincoln Ventures LLC related to the first funding under the 8% Convertible Debenture and a warrant to purchase 150,000 common shares of stock was issued to a consultant. See Notes 5 and 6 for further discussion.

The following table presents the outstanding warrants at May 31:

	2004		2003		2002
Issued in conjunction with:
Convertible debentures		83,278,716		31,164,260		2,514,809
Anti-dilution agreements		15,398,058		5,355,562		-
Equity line of credit		18,765,369		18,765,369		18,765,369
Other		3,907,277		3,707,277		3,197,546
Total warrants outstanding		121,349,420		58,992,468		24,477,724

1992 Incentive Stock Option Plan (“ISO”)

The Company has an ISO Plan which expired March 20, 2002. The ISO Plan provided for grants to either full or part time employees, at the discretion of the board of directors, to purchase common stock of the Company at a price not less than the fair market value of the shares on the date of grant. In the case of a significant stockholder, the option price of the share could not be less than 110 percent of the fair market value of the share on the date of grant. Any options granted under the ISO Plan must be exercised within ten years of the date they were granted (five years in the case of a

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT), continued

significant stockholder). At May 31, 2004, options to purchase up to 17,500 shares of common stock remained outstanding and will expire in July 2004.

1992 Non-Statutory Stock Option Plan (“NSO”)

The Company has an NSO Plan which expired March 20, 2002. The NSO Plan provided, at the discretion of the board of directors, for grants to either full or part time employees, directors and consultants of the Company to purchase common stock of the Company at a price not less than the fair market value of the shares on the date of grant. Any options granted under the NSO Plan must be exercised within ten years of the date they were granted. At May 31, 2004, options to purchase up to 50,000 shares of common stock remained outstanding and will expire in 2005.

1996 Stock Option Plan

Effective March 1996, the Company adopted the 1996 Stock Option Plan, which was amended by the Stockholders in December 1997, expiring March 24, 2006, reserving for issuance 4,000,000 shares of the Company’s common stock. The 1996 Stock Option Plan provides, at the discretion of the board of directors, for grants to either full or part time employees, directors and consultants of the Company to purchase common stock of the Company at a price not less than the fair market value on the date of grant for incentive stock options or not less than 85% of the fair market value on the date of grant for non-qualified stock options. In the case of a significant stockholder, the option price of the share is not less than 110 percent of the fair market value of the shares on the date of grant. Any option granted under the 1996 Stock Option Plan must be exercised within ten years of the date they are granted (five years in the case of a significant stockholder). During the fiscal years ended May 31, 2004, 2003 and 2002, the Company granted options to purchase none, 340,500 and 1,000,000 shares of stock at market value, respectively.

2001 Stock Option Plan

Effective February 2001, the Company adopted the 2001 Stock Option Plan, expiring February 21, 2011, reserving for issuance 3,000,000 shares of the Company’s common stock. The 2001 Stock Option Plan provides, at the discretion of the board of directors, for grants to either full or part time employees, directors and consultants of the Company to purchase common stock of the Company at a price not less than the fair market value on the date of grant for incentive stock options or not less than 85% of the fair market value on the date of grant for non-qualified stock options. In the case of a significant stockholder, the option price of the share is not less than 110 percent of the fair market value of the shares on the date of grant. Any option granted under the 2001 Stock Option Plan must be exercised within ten years of the date they are granted (five years in the case of a significant stockholder). During the fiscal years ended May 31, 2004, 2003 and 2002 the Company granted options to purchase none, 875,000 and 3,145,000 shares of stock at market value, respectively.

2003 Stock Option Plan

Effective July 2003, the Company adopted the 2003 Stock Option Plan, expiring July 2, 2013, reserving for issuance 6,000,000 shares of the Company’s common stock. The 2003 Stock Option Plan provides, at the discretion of the board of directors, for grants to either full or part time employees, directors and consultants of the Company to purchase common stock of the Company at a price not less than the fair market value on the date of grant for incentive stock options or not less than 85% of the fair market value on the date of grant for non-qualified stock options. In the case of a significant stockholder, the option price of the share is not less than 110 percent of the fair market value of the shares on the date of grant. Any option granted under the 2003 Stock Option Plan must be exercised within ten years of the date they are granted (five years in the case of a significant stockholder). During the fiscal year ended May 31, 2004, the Company granted options to purchase 2,210,000 shares of stock at market value.

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT), continued

SFAS No. 123, “Accounting for Stock-Based Compensation,” requires the Company to provide pro forma information regarding net loss and net loss per share as if compensation costs for the Company’s stock option plans and other stock awards had been determined in accordance with the fair value based method prescribed in SFAS No. 123. The Company estimates the fair value of each stock award at the grant date by using the Black-Scholes option-pricing model with the following weighted-average assumptions used for the years ended May 31, 2004 and 2003 and 2002, respectively: dividend yield of zero percent for all years; expected volatility of 107% to 127%, 100% to 120% and 90%; risk-free interest rates of 2.1% to 3.9%, 2.3% to 4.3% and 3.5% to 4.8%; and expected lives of 2 to 7 years for all years.

A summary of the status of the Company’s stock option plans and warrants as of May 31, 2004, 2003 and 2002 and changes during the years ending on those dates is presented below:

	Options					Warrants
	Shares			Weighted Average Exercise Price		Shares			Weighted Average Exercise Price
Outstanding, June 1, 2001		2,577,824		$	0.92		4,961,463		$	0.42
Granted		4,145,000			0.21		23,197,201			0.09
Cancelled		(2,281,419	)		0.67		(3,630,940	)		0.10
Exercised		(191,666	)		0.32		(50,000	)		0.25
Outstanding, May 31, 2002		4,249,739			0.39		24,477,724			0.11
Granted		1,215,500			0.05		35,005,013			0.05
Cancelled		(411,239	)		0.81		(490,269	)		0.30
Exercised		-			-		-			-
Outstanding, May 31, 2003		5,054,000			0.28		58,992,468			0.06
Granted		2,210,000			0.06		73,436,127			0.05
Cancelled		(156,000	)		0.13		-			-
Exercised		(105,000	)		0.05		(11,079,175	)		0.03
Outstanding, May 31, 2004		7,003,000		$	0.21		121,349,420		$	0.05
Exercisable, May 31, 2002		2,418,072		$	0.48		24,477,724		$	0.11
Exercisable, May 31, 2003		4,138,633		$	0.29		57,992,468		$	0.06
Exercisable, May 31, 2004		5,904,434		$	0.24		120,149,420		$	0.05
Weighted average fair value of options and warrants granted during the year ended May 31, 2002				$	0.07				$	0.11
Weighted average fair value of options and warrants granted during the year ended May 31, 2003				$	0.04				$	0.05
Weighted average fair value of options and warrants granted during the year ended May 31, 2004				$	0.05				$	0.06

Included in the above table are certain options for which vesting is contingent based on various future performance measures.

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7 - STOCKHOLDERS’ EQUITY (DEFICIT), continued

The following table summarizes information about stock options and warrants outstanding at May 31, 2004:

		Outstanding						Exercisable
Range of Exercise Prices		Number Outstanding		Weighted Average Remaining Contractual Life		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
Options
$	0.0345-0.059		2,380,000		4.24	$	0.04		1,370,000	$	0.05
	0.07-0.09		1,365,500		2.96		0.08		1,526,934		0.08
	0.11-0.1325		2,340,000		2.93		0.11		2,090,000		0.11
	0.61-1.18		525,000		1.02		0.93		525,000		0.93
	1.325		392,500		1.00		1.33		392,500		1.33
$	0.03453-1.325		7,003,000		3.13		0.21		5,904,434		0.24
Warrants
$	0.0172-0.039		29,634,938		6.79		0.03		29,634,938		0.03
	0.04-0.044		39,156,429		6.26		0.04		39,156,429		0.04
	0.045-0.049		21,057,218		5.95		0.05		21,057,218		0.05
	0.05-0.094		27,793,558		6.32		0.08		26,593,558		0.08
	0.10-0.65		3,707,277		2.87		0.13		3,707,277		0.13
$	0.072-0.65		121,349,420		6.25	$	0.05		120,149,420	$	0.05

NOTE 8 - NET LOSS PER SHARE

The Company has implemented SFAS No. 128, “Earnings Per Share.” SFAS No. 128 provides for the calculation of “Basic” and “Diluted” earnings per share (“EPS”). Basic EPS includes no dilution and is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s net losses for the periods presented, cause the inclusion of potential common stock instruments outstanding to be antidilutive and, therefore, in accordance with SFAS No. 128, the Company is not required to present a diluted EPS. During the years ended May 31, 2004, 2003 and 2002, common stock options and warrants convertible or exercisable into approximately 128,352,420, 64,046,468 and 28,727,463 shares of common stock were not included in diluted loss per share as the effect was antidilutive due to the Company recording losses in each of those years.

NOTE 9 - INCOME TAXES

No provision for income taxes was recorded for the years ended May 31, 2004, 2003 and 2002 due to the significant net operating loss carryforwards.

A reconciliation of the income taxes at the federal statutory rate to the effective tax rate is as follows:

	May 31,
	2004			2003			2002
Federal income tax rate		(34	)%		34	%		(34	)%
State income tax rate, net of Federal effect		-	%		-	%		-	%
Increase (decrease) in valuation allowance and other		34	%		(34	)%		34	%
Effective income tax rate		-	%		-	%		-	%

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 9 - INCOME TAXES, continued

Deferred tax assets and liabilities reflect the net tax effect of temporary differences between the carrying amount of asset and liabilities for financial reporting purposes and amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows:

	May 31,
	2004			2003			2002
Deferred tax assets:
Net operating loss carryforwards	$	13,609,659		$	12,851,581		$	10,392,811
Accruals		1,931,639			2,167,082			2,421,478
Basis difference in fixed assets		27,972			6,814			2,749,457
Inventory and other reserves		41,446			164,240			162,527
Credits		251,142			196,467			116,735
Less: valuation allowance		(15,861,858	)		(15,386,184	)		(15,843,008	)
Net deferred tax assets	$	-		$	-		$	-

As of May 31, 2004, 2003 and 2002, valuation allowances equal to the net deferred tax asset recognized have been recorded as management has not determined that it is more likely than not that the deferred tax asset will be realized. No current tax provision was recorded for fiscal 2004, 2003 and 2002 due to reported losses. The valuation allowance increased $475,674 for the year ended May 31, 2004, decreased $456,824 for the year ended May 31, 2003 and increased $3,854,008 for the year ended May 31, 2002.

At May 31, 2004, the Company has federal net operating loss carryforwards of approximately $34,345,000 that expire during the years 2005 through 2023, at May 31, 2003 the federal net operating loss carryforwards were approximately $31,535,000 expiring 2005 through 2022, and at May 31, 2002 the federal net operating loss carryforwards were approximately $28,862,000 expiring 2005 through 2021. All losses are subject to certain limitations under the Internal Revenue Code of 1986, as amended. As such, certain federal net operating loss carryforwards may expire unused and per year availability may be subject to change of ownership limitations under Internal Revenue Code Section 382.

At May 31, 2004, the Company has state net operating loss carryforwards of approximately $20,745,000 that expire during the years 2002 through 2013, at May 31, 2003 state net operating loss carryforwards were approximately $19,061,000 expiring 2002 through 2012, and at May 31, 2002 state net operating loss carryforwards were approximately $17,458,000 expiring 2002 through 2011. The state of California suspended the utilization of net operating losses for 2002 and 2003.

NOTE 10 - PROFIT-SHARING PLAN

Effective July 1, 1993, the Company adopted a savings and profit-sharing plan that allows participants to make contributions by salary reduction pursuant to Section 401(k) of the Internal Revenue Code. At the Company’s discretion, the Company may match contributions at 20% of the employee’s contribution up to 6% of the employee’s salary. The Company contributions are vested 20% per year beginning with the first year of service. The Company made no matching contribution in fiscal 2004, 2003 or 2002.

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Litigation

In December 2003, the Company filed several lawsuits in United States District Courts against companies it contends are infringing on its patent number 5,809,336 entitled “High Performance Microprocessor Having Variable Speed Clock.” The defendants and suits are as follows:

Defendant	U.S. District Court	Case Number
Sony Corporation of America	Southern District of New York	03CV10142
Fujitsu	Northern District of California	C035787
Toshiba America, Inc.	Southern District of New York	03CV10180
NEC USA, Inc.	Eastern District of New York	CV036432
Matsushita	District of New Jersey	03CV06210

The Company is requesting the courts to enjoin the defendants from making use of our patent and is requesting damages for past infringements. In February 2004, with the consent of the defendants and the Company, the above five actions were consolidated into the Fujitsu action in the Northern District of California under case number C035787.

In February 2004, Intel Corporation filed a lawsuit against the Company in the United States District Court- Northern District of California, case number C040439, in which they are requesting a declaratory judgment that their microprocessors, used by the defendants in our consolidated suit, do not infringe the Company’s patent. The Company filed a counterclaim against Intel contending that they also are infringing on its patent, and Intel asserted an affirmative defense that the Company’s 5,809,336 patent is invalid.

Also in February 2004, the Company filed a lawsuit in the United States District Court- Northern District of California, case number C040618, against Charles H. Moore, Technology Properties Limited, and Daniel E. Leckrone. The Company is requesting the court to declare inventorship and ownership on each of its granted patents related to the suits discussed above and other unasserted claims of infringement Patriot believes it has.

The Intel lawsuit has been stayed pending the results of the Moore lawsuit.

Employment Agreements

The Company is obligated under employment contracts with certain key employees to pay severance upon termination under certain defined conditions. Generally, unless relieved of their duties for cause, the executive officers are entitled to severance pay equal to two to four months of their then current monthly salary. In the case of a change in control, generally, the executive officers are entitled to severance pay equal to twelve months of their then current monthly salary unless they continue to work for the new controlling interest in the same function as previous to the change.

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PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 - COMMITMENTS AND CONTINGENCIES, continued

Indemnities and Guarantees

During the normal course of business, the Company has made certain indemnities and guarantees under which it may be required to make payments in relation to certain transactions.  The Company indemnifies its directors, officers, employees and agents to the maximum extent permitted under the laws of the State of Delaware.  These indemnities include certain agreements with the Company's officers under which the Company may be required to indemnify such person for liabilities arising out of their employment relationship.  In connection with its facility leases, the Company has indemnified its lessors for certain claims arising from the use of the facilities. The Company granted a lien and security interest in substantially all of its assets to the bank under the accounts receivable factoring line and to investors under its notes payable and convertible debentures. The duration of these indemnities and guarantees varies and, in certain cases, is indefinite.  The majority of these indemnities and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make.  Historically, the Company has not been obligated to make significant payments for these obligations and no liabilities have been recorded for these indemnities and guarantees in the accompanying consolidated balance sheet.

Operating and Capital Leases

The Company has one capital lease at May 31, 2004.

Future minimum lease payments are as follows:

Years Ending May 31,
2005	$	9,562
2006		2,391
Total minimum lease payments		11,953
Amount representing interest		1,627
Present value of minimum lease payments	$	10,326
Total obligation	$	10,326
Less current portion		(8,020	)
Long-term portion	$	2,306

Capital leases included in fixed assets at May 31, 2004, 2003 and 2002, were $3,471, $11,803 and $20,135 net of an allowance for depreciation of $21,524, $13,192 and $4,860. Depreciation expense related to the capitalized lease was $8,332, $8,332 and $4,860 for the years ended May 31, 2004, 2003 and 2002.

The Company has a non-cancellable operating lease for its office and manufacturing facilities located in San Diego, California.

F-29

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 11 - COMMITMENTS AND CONTINGENCIES, continued

Future minimum lease payments required under the operating lease are as follows:

Years Ending May 31,	Gross Payments		Sublease Income		Net Payments
2005	$	135,454	$	70,470	$	64,984
2006		141,658		72,540		69,118
2007		23,782		12,150		11,632
Total minimum lease payments	$	300,894	$	155,160	$	145,734

Rent expense for fiscal 2004, 2003 and 2002, was $181,135, $189,423, and $147,373 respectively.

NOTE 12 - SEGMENT INFORMATION

Export Sales

The Company is engaged in one business segment, the development and marketing of microprocessor technology related products and licenses. Telecommunication products have reached the end of their life cycles and no longer provide any significant sales. During the fiscal years ended May 31, 2004, 2003 and 2002, the Company's product sales of high technology computer products and licenses were $13,615, $31,340 and $9,625 and telecommunication products and licenses were $62,802, $92,563 and $349,184.

For the purpose of allocating revenues by geographic location, the Company uses the physical location of its customers as its basis. During the fiscal years ended May 31, 2004 2003 and 2002, the Company's sales by geographic location consisted of the following:

	2004		2003		2002
Domestic sales	$	70,000	$	113,000	$	355,000
Foreign sales:
Europe		6,000		11,000		4,000
Total foreign sales		6,000		11,000		4,000
Total sales	$	76,000	$	124,000	$	359,000

The Company has no foreign assets.

F-30

PATRIOT SCIENTIFIC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 - SEGMENT INFORMATION, continued

Sales to Major Customers

During fiscal years ended May 31, 2004, 2003 and 2002, revenues from significant customers consisted of the following:

	2004					2003					2002
Customer	Sales		Percent			Sales		Percent			Sales		Percent
A	$	25,000		32.9	%	$	15,000		12.0	%	$	151,000		42.0	%
B		18,000		23.7	%		-		-			59,000		16.4	%
C		9,000		11.8	%		-		-			-		-
D		-		-			43,000		36.7	%		-		-
E		-		-			23,000		18.5	%		-		-
F		-		-			15,000		12.0	%		-		-

NOTE 13 - RELATED PARTY TRANSACTIONS

During fiscal 2002, the Company contracted with a company, which was owned by the daughter of its previous President, Chairman and CEO, for website development, marketing support and other various services. The Company paid $70,292 to the related party for these services.

During fiscal 2004, the Company sold services totaling approximately $25,000 to an entity owned by an officer.

F-31

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATED: October 16, 2006	PATRIOT SCIENTIFIC CORPORATION
		/S/ DAVID H. POHL
		David H. Pohl
		Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/S/ DAVID H. POHL David H. Pohl	President, Chief Executive Officer, and Director	October 16, 2006
/S/ THOMAS J. SWEENEY Thomas J. Sweeney	Chief Financial Officer and Principal Accounting Officer	October 16, 2006
/S/ CARLTON M. JOHNSON Carlton M. Johnson	Director	October 16, 2006
/S/ GLORIA FELCYN Gloria Felcyn	Director	October 16, 2006
/S/ HELMUT FALK, JR. Helmut Falk, Jr.	Director	October 16, 2006
/S/ JAMES L. TURLEY James L. Turley	Director	October 16, 2006