Reuters Company Research Patriot Scientific Corp. (PTSCE) 05 Oct 2006 Performance Rating: Outperform 1996 2006 Share Price Summary Overview Percent Price Change PTSCE S&P 500 Close Price on 10/5/06........................................... $1.00 Float (mil)........................................................... 358.300 Year to Date............................1056.98............ 8.41 Absolute Price Change on 10/5/06............................ 0.08 10 Day Average Volume (mil)................................... 1.476 One Year...................................894.01.......... 13.57 Percent Change..................................................... 7.57% 1 Day Volume Change on 10/5/06...................... 116.26% Two Years...............................2387.50.......... 18.49 Off 52-Week High...............................................-55.78% Market Capitalization (mil).........................................$360 Three Years............................ 1709.09.......... 30.83 Over 52-Week Low.......................................... 9950.51% TTM Price/Earnings................................................. 15.27 Five Years................................. 521.88.......... 26.31 Beta....................................................................... 3.617 Price/Earnings Current Fiscal Year Estimate...................NA Ten Years.................................. -48.63.......... 92.91 Table of Contents Reuters Rating ....................................... 2 Getting Acquainted .................................3 Significant Developments ........................4 Significant Developments continued ........ 4 Share Price Trends .................................5 General Sentiment ..................................6 Stock Price Rationale ..............................7 Footprints of Success ............................. 8 REUTERS COMPANY REPORT DISCLAIMER This research report is provided for informational purposes only and on the condition that it will not form the sole basis for any investment decision. 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This report was generated using a proprietary quantitative model that leverages widely accepted statistical methods and financial concepts to rank and rate a universe of more than 4700 US companies and US-listed ADRs with a market capitalization greater than $50mm based on a series of financial attributes. These ratings are not intended as an indication of how an individual's investment will perform. As used in this report, "Outperform" designates the companies that rank in the top 30% of companies covered by Reuters, "Neutral" designates the middle 40%, and the bottom 30% are designated "Underperform". All ratings are relative to the universe of companies covered by Reuters and not to any specific benchmark. © Reuters 2004. All rights reserved. This report may not be reproduced, modified, distributed or published without the prior written authorization of Reuters. Reuters and the sphere logo are the trademarks or registered trademarks of the Reuters Group of companies around the world. Reuters Composite Rating We cannot guarantee that each stock will perform in accordance with its rank. But we do believe that over the long term, stocks rated Outperform (30% of all stocks we rate) will, in the aggregate, outperform stocks rated Neutral (40% of all stocks we rate), and that stocks rated Neutral will, in the aggregate, outperform stocks rated Underperform (30%). All analysis is based on publicly available company financials, fundamental ratios, relative rankings of financial data and ratios, and observed security prices. Underperform Neutral Outperform PTSCE shares are presently rated OUTPERFORM. No forecast is made for the stock market as a whole. However, we do believe that whichever way the market moves, stocks rated OUTPERFORM have, in the aggregate, a higher probability of performing better than most others. Component Rating Fundamental Quality Outperform Neutral Under Technical Factors Outperform Neutral Under Value Catch-up Outperform Neutral Under Operational Trends Outperform Neutral Under "Under" = Underperform Component Weight Types of investment criteria differ in how useful they are for predicting future stock movement. Based on our research, the Composite Rank assumes these relative degrees of importance. Fundamental Quality 36% Technical Factors 27% Operational Trends 13% Value Catch-up 24% Technical Factors: Outperform This rating is based on analyses of share price movements over a variety of time periods. We compare performance characteristics of individual stocks with those of all the others we rate. Generally speaking, our goal is to favor up-trending shares that have experienced recent corrections and de-emphasize down-trending shares experiencing uncharacteristic periods of strength. Here is how PTSCE shares performed during the various periods we examined. Price Change Past 7 days 18.5% Past 30 days 22.1% Past 60 days 22.1% Change for Past 180 Days: -25.2% Open on 4/10/06 Close on 10/5/06 $1.33 $1.00 Change Between 60 and 30 Days Ago: 0.0% Open on 8/7/06 Close on 9/6/06 $0.82 $0.82 Change Between 180 and 60 Days Ago: -38.7% Open on 4/10/06 Close on 8/7/06 $1.33 $0.82 Change Between 180 and 90 Days Ago: -24.1% Open on 4/10/06 Close on 7/7/06 $1.33 $1.01 Fundamental Quality Component: Neutral This rating is based on characteristics traditionally associated with "good" companies. We focus on how each company measures up against others, and give careful attention to recent improvement or slippage relative to other companies. TTM = Trailing Twelve Months. Very Negative Negative Neutral Positive Very Positive TTM Return on Investment Improvement in TTM Return on Investment TTM Pretax Margin Improvement in TTM Pretax Margin Depreciation in Excess of Capital Spending Needs Issuance/Repurchase of Common Shares Common Shares Dilution Presence/Absence of Unusual Income Items Value Catch-up Component: Outperform This rating measures the extent to which the share price adequately reflects improving or eroding fundamentals, and favors shares whose prices have been slower to "catch up" to improving performance measures. TTM = Trailing Twelve Months. Very Negative Negative Neutral Positive Very Positive Price Catch-up with TTM Earnings Price Catch-up to TTM Sales Price Catch-up to TTM Free Cash Flow Price Catch-up to MRQ Book Value Operational Trends Component: Outperform This rating reflects how strong a company's recent Sales and EPS (reported as per GAAP) growth have been relative to other companies we rate. MRQ = Most Recent Quarter. TTM = Trailing Twelve Months. Very Negative Negative Neutral Positive Very Positive Most Recent Quarter EPS Growth Improvement in EPS Growth for Consecutive Quarters Improvement in EPS Growth (MRQ vs. TTM) Most Recent Quarter Sales Growth Improvement in Sales Growth (MRQ vs. TTM) Peer Comparison This section shows the comparison of key components between PTSCE and several of its peers. Company Name (Ticker) Composite Rating Fundamental Quality Technical Factors Value Catch-up Operational Trends Patriot Scienti... (PTSCE) Outperform Neutral Outperform Outperform Outperform Intel Corporation (INTC) Underperform Outperform Underperform Neutral Underperform Texas Instruments Incor... (TXN) Outperform Outperform Outperform Neutral Outperform ARM Holdings plc (ADR) (ARMHY) Underperform Neutral Underperform Outperform Neutral Patriot Scientific Corp. (OTC:PTSCE) -- Communications Equipment/Technology Reuters Company Research Performance Rating: Outperform Reuters ratings are based on a proprietary model that leverages widely accepted statistical methods and financial concepts to select attributes shown to be strong indicators of future stock price performance and applies these to rank stocks along a normal distribution curve. Ranks for Fundamental Quality, Value Catch-up, Operational Trends and Technical Factors are combined into a Composite Rating of Outperform, Neutral or Underperform. October 5, 2006 Page 2 Business Summary Patriot Scientific Corporation (PSC) develops, markets and sells microprocessors and complementary products, which enables computers and other data-processing devices to communicate. These products can be used to connect to the Internet or other telecommunication networks. PSC is the successor by merger to Patriot Financial Corporation, a Colorado corporation. The Company's business involves two technologies: ignite microprocessor (IM) technology and high-speed data communications (HSDC) technology. The Company also has a patent for special radar technology, which, if fully developed, may allow a potential licensee to penetrate the ground or structures to find various objects. The Company is developing a radar technology and sold its gas plasma antenna technology in August 1999. Contact Info Patriot Scientific Corp. is headquarted at: 10989 Via Frontera, San Diego, CA, 92127 United States (858) 674-5000 www.ptsc.com Lowell W. Giffhorn, CFO/Exec. VP/Secy. Financial Trends TTM = Trailing Twelve Months, * = Most Recent Quarter. Historic Growth Rates Fiscal Year Ending 5/31/01 5/31/02 5/31/03 5/31/04 5/31/05 TTM 3 Year 5 Year 10 Year Sales (mil) $0.3 $0.4 $0.1 $0.1 $3.0 $70.3 102.54 32.99 NA EPS (GAAP) ($0.09) ($0.08) ($0.04) ($0.03) ($0.01) $0.07 NA NA NA Dividends/Share $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 NA NA NA Book Value/Share $0.02 ($0.01) ($0.01) $0.00 $0.01 * $0.08 NA (30.03) NA Tangible Book Value/Sh. $0.01 ($0.01) ($0.01) $0.00 $0.01 * $0.08 NA (29.49) NA Cash Flow/Share ($0.09) ($0.08) ($0.04) ($0.03) ($0.01) $0.17 NA NA NA Free Cash Flow/Share ($0.10) ($0.06) ($0.02) ($0.02) ($0.00) $0.09 NA NA NA Key Ratios Historic Averages Fiscal Year Ending 5/31/01 5/31/02 5/31/03 5/31/04 5/31/05 TTM 3 Year 5 Year 10 Year % Sales Growth (52.9) 6.2 (65.5) (38.7) 3,825.0 2,256.1 1,240.3 734.8 NA % EPS Growth (45.2) (11.7) (49.5) (28.4) (59.2) 521.2 (45.7) (38.8) (5.0) % Gross Margin (60.9) (9.7) 84.7 86.8 100.0 NA 90.5 40.2 37.4 % Operating Margin (1,483.1) (1,146.5) (1,967.7) (2,286.8) 3.0 85.2 (1,417.2) (1,376.3) (866.3) % Tax Rate 0.0 0.0 0.0 0.0 0.0 3.3 0.0 0.0 0.0 % Return on Assets (232.4) (442.5) (554.8) (595.8) (115.8) 175.8 (422.1) (388.3) (316.2) % Return on Investment (317.1) (1,354.8) 629.8 1,115.6 (219.1) 366.8 508.8 (29.1) (305.1) % Return on Equity (317.1) (2,295.8) 418.8 656.6 (246.8) 179.9 276.2 (356.9) (880.7) Asset Turnover 0.2 0.3 0.2 0.1 1.3 2.2 0.5 0.4 0.6 Receivables Turnover 2.7 3.7 27.6 30.4 3.0 5,207.9 20.3 13.5 10.4 Inventory Turnover 3.7 3.5 NM NM NA NA NA NA NA Equity Information Whether you are willing to accept companies that have or don't have major shareholders with controlling ownership blocks, multiple classes of common, or convertible debt or preferred issues is a matter of individual preference. Look here for anything along these lines that might make you more or less inclined to invest in this company. Common Stock $.00001 Par, 4/06, 400M auth., 361,813,582 issd. Insiders control approx. 2% (incl. 3.7M options). 12/96, 1,272,068 shares issd. in pooling-of-interests with Metacomp, Inc. 5/92, 1-for-3 reverse stock split. Analyst Footnotes Look for accounting changes, restructurings, etc.which may affect how useful historic data is inassessing future company prospects. 5/94, Co. issd. 10M Common shares for acquisition of ShBoom Chip technology. FY'96 and FY'96-'97 Q's are restated for the 12/96 pooling-of-interests with Metacomp, Inc. Peer Comparison This table gives an indication of how Patriot Scientific Corp. stands in key respects compared with companies in the Communications Equipment Industry Company Name (Ticker) Last Fiscal Year Revenue (mil) Current Fiscal Year Projected Revenue (mil) Projected Price/Sales Operating EPS Current Fiscal Year Projected EPS P/E Based on Current Year Estimates EPS % Growth Previous 5 Years EPS % Growth Next 5 Years Patriot Scienti... (PTSCE) $3.0 NA NA ($0.01) NA NA NA NA Intel Corporation (INTC) $38,826.0 $34,939.8 3.4 $1.40 $0.78 26.5 (1.4) 12.0 Texas Instruments Incor... (TXN) $13,392.0 $14,645.1 3.3 $1.39 $1.70 18.6 (4.2) 18.2 ARM Holdings plc (ADR) (ARMHY) $434.2 $489.9 6.1 $0.17 $0.27 24.4 0.5 16.7 Patriot Scientific Corp. (OTC:PTSCE) -- Communications Equipment/Technology Reuters Company Research Getting Acquainted Start your analysis by learning what the company does, how well it does it, where it stands relative to peers, and whether aspects of the corporate structure or capitalization are bothersome to you. October 5, 2006 Page 3 Significant News Stories Mapped to Price Chart Volume (mil) 0.00 45.00 Stories A-B within this time frame. See below for details. C. Patriot Scientific Corp. Announces Licensing Agreement With Nikon ($1.07) D. Patriot Scientific Corp. Announces Share Repurchase Plan; Provides Update ... ($1.17) E. Patriot Scientific Corp. Announces Outcome of Infringement Lawsuit in Texas ($1.63) F. Patriot Scientific Corp. Announces Patent Licensing Agreement with Fujitsu; Li... ($1.40) G. Patriot Scientific Corp. Announces Dividend ($0.27) Feb'06 Mar Apr May Jun Jul Aug Sep Oct $2.14 1.48 0.82 0.17 Significant News Stories A. June 29, 2006. PENTAX Corporation Purchases Moore Microprocessor Patent (MMP) Portfolio License From Patriot Scientific Corp. Patriot Scientific Corporation announced that PENTAX Corporation has agreed to purchase a license to use the Moore Microprocessor Patent (MMP) Portfolio. Six other major system manufacturers have purchased MMP licenses this year. Patriot Scientific and The TPL Group are co-owners of the MMP Portfolio, which Alliacense, a TPL Group enterprise, exclusively manages. B. June 26, 2006. Patriot Scientific Corp. Confirms Seiko Epson Agreement To Purchase MMP License Patriot Scientific Corporation announced that Seiko Epson Corporation has agreed to purchase a license to the Moore Microprocessor Patent (MMP) Portfolio. Seiko Epson joins a stellar group of MMP portfolio system licensees that includes HP, Fujitsu, Casio, Sony and Nikon. Terms of the Seiko Epson agreement to purchase a license were not disclosed. C. June 13, 2006. Patriot Scientific Corp. Announces Licensing Agreement With Nikon Patriot Scientific Corp. announced that Nikon Corporation has purchased a license to the Moore Microprocessor Patent (MMP) Portfolio, a group of patents that enable higher performance and lower cost designs in digital systems. Terms of the Nikon license purchase were not disclosed. D. April 24, 2006. Patriot Scientific Corp. Announces Share Repurchase Plan; Provides Update on Dividend Distribution Patriot Scientific Corp. announced a plan under which it would utilize 10% or more of future licensing revenues to buy back corporate stock. The Company also announced that it has issued two cash dividends within the past two months. The second of these two dividends is being distributed today to qualified shareholders and warrant holders of record as of March 31, 2006. Upon completion of this dividend payment, the total dividends paid by Patriot so far this calendar year will be almost $25 million. E. March 17, 2006. Patriot Scientific Corp. Announces Outcome of Infringement Lawsuit in Texas Patriot Scientific Corp. announced that the U.S. District Court of Northern California has stayed the declaratory judgment actions recently filed in that court against the TPL Group, a global intellectual property management company, and Patriot Scientific, et al, by major Japanese manufacturers. F. March 2, 2006. Patriot Scientific Corp. Announces Patent Licensing Agreement with Fujitsu; Licensing Agreement Settles Patent Disputes Patriot Scientific Corp. announced that Fujitsu Limited is to purchase a license to use intellectual property protected by the Moore Microprocessor Patent (MMP) Portfolio. Patriot and The TPL Group are co-owners of the MMP Portfolio, which is being exclusively managed by Alliacense, a TPL Group enterprise. This license represents a settlement of patent disputes between Fujitsu and the owners of the MMP Portfolio. In striking this licensing agreement, Fujitsu joins Casio, Hewlett-Packard, AMD and Intel in licensing Patriot's core patents. Terms of the Fujitsu license were not disclosed. G. February 14, 2006. Patriot Scientific Corp. Announces Dividend Patriot Scientific Corp. announced that it will issue a cash dividend of $0.02 per share of common stock for shareholders and qualified warrant holders of record as of February 24, 2006. The dividend is payable March 22, 2006. Patriot Scientific Corp. (OTC:PTSCE) -- Communications Equipment/Technology Reuters Company Research Significant Developments This page lists significant news developments related to Patriot Scientific Corp. and shows how key stories may have an impact on the stock price. When looking at the chart, note the extent to which share price reactions to stories was temporary or lasting. October 5, 2006 Page 4 1 Year Price Chart with Bollinger Bands and Relative Strength Technical analysts believe a narrowing of the bands suggests a significant price movement, up or down, will soon occur. Also, many say stocks that move outside the bands and then back inside will soon move toward the opposite band. The Relative Strength Index (RSI) calculates the strength of the current price movement compared to other recent moves and may signal when a trend is unsustainable. Technical analysts also believe RSI peaks/valleys forecast changes in share price trends. 0.20 0.80 1.40 $2.00 4.15 Average Volume Oct' 05 Nov Dec Jan' 06 Feb Mar Apr May Jun Jul Aug Sep Volume (mil) Relative Strength Indicator 50% 100% Low: .01 High: 2.25 10 Year Price Chart (Monthly) 0.20 1.90 3.60 5.30 $7.00 0.02 Vol (bil) 1997 1998 1999 2000 2001 2002 2003 2004 2005 5 Year Price Chart (Monthly) 0.40 0.80 1.20 1.60 $2.00 0.04 Vol (bil) 2002 2003 2004 2005 2006 6 Month Price Chart (Daily) 0.61 0.81 1.01 1.21 1.41 $1.61 2.68 Vol (mil) May' 06 Jun Jul Aug Sep 1 Month Price Chart (Daily) 0.68 0.76 0.84 0.92 $1.00 1.60 Vol (mil) Sep' 06 Oct Patriot Scientific Corp. (OTC:PTSCE) -- Communications Equipment/Technology Reuters Company Research Share Price Trends Stock price trends depict the collective opinion of the investment community. You don't have to agree with consensus views but seeing how others feel can help you decide what to look for as you go further in your analysis. Consider it similar to reading a review before seeing a movie. October 5, 2006 Page 5 52 Week Price History 0.20 0.80 1.40 $2.00 4.14 Average Volume Oct' 05 Nov Dec Jan' 06 Feb Mar Apr May Jun Jul Aug Sep Volume (mil) 200 Day Moving Average 50 Day Moving Average Price History Calendar Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 High Price 2.31 1.36 0.71 7.38 1.12 0.16 0.11 0.20 0.29 Low Price 0.59 0.26 0.25 0.13 0.10 0.03 0.01 0.03 0.03 Year End Price 0.61 0.33 0.55 0.51 0.13 0.06 0.05 0.08 0.09 High P/E NA NA NA NA NA NA NA NA NA Low P/E NA NA NA NA NA NA NA NA NA Year End P/E NM NM NM NM NM NM NM NM NM Dividend Yield NM NM NM NM NM NM NM NM NM Price Performance When stocks significantly beat or trail the S&P 500 or the industry, investors are looking more intently at company- specific matters than general-market factors. In the two percentile rank columns, a high "Rank in Industry" coupled with a low "Industry Rank" could signify a hot stock in a cold industry. The reverse, is also noteworthy. Time Period Actual Change Percent Change vs. S&P 500 vs. Industry Rank in Industry Industry Rank 4 Week 0.19 23.6% 18.2% 14.2% 91 69 13 Week (0.02) (2.0)% (7.7)% (9.1)% 51 62 26 Week (0.24) (19.4)% (22.1)% (10.5)% 50 12 52 Week 0.89 894.0% 775.2% 813.5% 100 20 Year To Date 0.91 1,057.0% 967.2% 995.6% 100 36 BarChartKey Rank Key YTDR4 Wk. WorstRBest 1R100 Short Interest A high or increasing short interest implies that many investors expect the stock price to decline. You can treat that as a warning. Or you can disagree with the crowd and buy stocks with high short interest in anticipation of a short squeeze (a rally that occurs when short sellers rush to buy a stock, fearing losses they might incur if they wait too long). Prospects for a squeeze are indicated by high readings in the "Days to Cover" column (which tells how many days it would take for all short interest positions to be covered if recent trading volume levels persist). The risk: The bears may be right. So research other aspects of the company. Month Shares % Outstanding Percent of Float Days to Cover September 2006 NA NA NA August NA NA NA July NA NA NA June NA NA NA Insider Trading Insider buying can be seen as bullish because, presumably, their company knowledge is superior. However, insider sales are less reliable because insiders may sell for a variety of reasons that have nothing to do with their opinion of the stock. In the last 6 months, there have been no insider purchases, and there have been no insider sales. Net Change (6 months) 0 mil 6 Month Net Transactions 0 Institutional Ownership It's worthwhile to know what institutions are doing simply because their stock positions can be so large. In the short term, stocks will perform well if institutions are buying and perform poorly if institutions are selling. 5 institutions own 0.1% of the 0.36 billion common shares outstanding. This is lower than the average institutional ownership of the Communications Equipment Industry at 49.8%, and lower than the average of the S&P 500 as a whole which is 68.2%. Net Change (3 month) 0.0% Net Purchases (3 month) (0.07) mil Shares Purchased (3 month) 0.00 mil Shares Sold (3 month) 0.07 mil Patriot Scientific Corp. (OTC:PTSCE) -- Communications Equipment/Technology Reuters Company Research General Sentiment You can follow popular opinion or choose a contrarian's strategy. Either way, you should know whether the Street is bullish or bearish. Investor sentiment is typically positive when the 50-day moving average is rising, especially if it's also above the 200-day moving average. Additionally, changes in price trend can be deemed more definitive if supported by higher than normal volume. October 5, 2006 Page 6 Viewing Things In Context Many people erroneously work with valuation ratios calculated based on numbers that aren't truly representative of a company's underlying sustainable financial characteristics. Thus it's important to determine if today's sales and EPS are significantly depressed or elevated due to temporary factors such as business cycles. Higher ratios can be tolerated if sales and EPS are temporarily depressed. But if the company is experiencing unsustainable boom conditions, seek lower ratios. GAAP = Generally Accepted Accounting Principles. Fiscal Year Ending 5/31/99 5/31/00 5/31/01 5/31/02 5/31/03 5/31/04 5/31/05 5/31/06E 5/31/07E Sales/Share $0.03 $0.02 $0.01 $0.01 $0.00 $0.00 $0.01 NA NA Price/Sales NA NA NA 14.89 43.87 128.73 11.49 NA NA EPS (GAAP) ($0.11) ($0.17) ($0.09) ($0.08) ($0.04) ($0.03) ($0.01) NA NA P/E (GAAP) NA NA NA NM NM NM NM NA NA EPS (Normalized) ($0.11) ($0.18) ($0.09) ($0.08) ($0.04) ($0.03) ($0.01) NA NA P/E (Normalized) NA NA NA NM NM NM NM NA NA Dividend Yield (%) NA NA NA 0.00 0.00 0.00 0.00 NA NA Valuation Based On Growth The faster a company grows, the higher its stock's P/E can be. Contrary to popular belief, PEG (P/E over Growth Rate) need not always be 1.00 or less. But all else being equal, lower is better (and 3.00 is usually too high). Try to favor company PEGs that are lower than industry and market PEGs. In all cases, watch for very high growth estimates. If overly optimistic projections get cut, PEG would wind up being higher. FY = Fiscal Year. Price/EPS (Est.) for Current FY Price/EPS (Est.) for Next FY Long Term Growth Estimate Next FY P/E over LT Growth Patriot Scientific Corp. NA NA NA NA Communications Equipment 25.18 19.94 15.89 1.33 S&P 500 18.36 15.87 12.08 1.47 Comparative Valuation Ratios Valuation below industry or S&P 500 averages can be attractive - unless the company is materially worse in terms of quality growth prospects. Year-by-year trends in comparative valuations can give clues about company merit. Be especially on guard if comparative ratios are deteriorating over time. On the other hand, relatively low valuations that are moving toward the averages might indicate that the market is tuning in to heretofore under-appreciated company merit. FY = Fiscal Year, TTM = Trailing Twelve Months, * = Most Recent Quarter. Patriot Scientific Corp. Price/ Earnings Price/ Sales Price/ Book Price/ Cash Flow Price/ Tang. Book Price/Free Cash Flow Trailing 12 Months 15.27 5.12 * 12.92 6.48 * 13.33 11.62 FY Ending 5/31/05 NM 11.49 21.24 (13.18) 21.95 (54.47) FY Ending 5/31/04 NM 128.73 80.95 (2.44) NM (4.63) FY Ending 5/31/03 NM 43.87 (4.38) (1.50) (4.01) (2.79) FY Ending 5/31/02 NM 14.89 (14.65) (1.03) (10.26) (1.41) Bar Chart Key 2002RTTM Communications Equipment Price/ Earnings Price/ Sales Price/ Book Price/ Cash Flow Price/ Tang. Book Price/Free Cash Flow Trailing 12 Months 25.49 4.65 * 4.35 23.07 * 4.87 34.46 FY Ending 2005 32.53 6.41 5.44 25.64 4.35 34.68 FY Ending 2004 40.36 6.94 4.61 34.42 5.15 31.01 FY Ending 2003 58.14 5.40 3.84 27.46 5.41 18.50 FY Ending 2002 42.87 3.73 2.76 (4.48) 3.34 25.58 Bar Chart Key 2002RTTM S&P 500 Price/ Earnings Price/ Sales Price/ Book Price/ Cash Flow Price/ Tang. Book Price/Free Cash Flow Trailing 12 Months 20.52 2.86 * 3.91 14.46 * 7.13 31.27 FY Ending 2005 23.38 3.13 4.54 15.91 6.13 23.09 FY Ending 2004 25.33 3.26 4.26 15.97 5.81 26.18 FY Ending 2003 31.13 3.33 4.25 19.31 5.80 29.59 FY Ending 2002 27.92 3.05 4.55 16.64 5.41 26.92 Bar Chart Key 2002RTTM Dividends Dividend is the most classic basis for stockvaluation, and high dividend yields are usuallydeemed preferable. Today, with many companiesreinvesting profits back into the business, moderateor low yields can be accepted if dividends growrapidly. The main risk is that poor performance willcause the dividend to be cut or omitted. A very highpayout ratio is one warning signal. Another is ayield that is very high relative to industry peers. TTM = Trailing Twelve Months. PTSCE Industry Current Dividend Yield 6.0% 1.1% 5 Yr. Avg. Dividend Yield 0.0% 0.4% 5 Yr. Dividend Growth Rate NA (39.7)% TTM Payout Ratio 0.0% 9.3% 5 Yr. Average Payout Ratio NA 4.8% Liquid Assets Get a general sense of the extent to which the stockprice is offset by the presence of assets that can beconverted to cash immediately or in the near future. Often, these ratios will not be meaningful. Most companies are valued as ongoing businesses, rather than liquidation/buyout prospects. If you're lookingat an especially troubled company, be aware that seemingly liquid-asset windfalls can be dissipatedby continuing operating losses and/or shutdown costs. Price to ... PTSCE Industry General Working Capital 7.3 9.3 (current assets minus current liabilities) Net Working Capital 12.9 2.4 (current assets minus all liabilities) Cash (& cash equivalents) 14.1 10.8 Cash minus total debt 14.1 11.9 Cash minus all liabilities (47.4) 0.7 Patriot Scientific Corp. (OTC:PTSCE) -- Communications Equipment/Technology Reuters Company Research Stock Price Rationale Determine if the stock price is justified by: growth-based value, comparative value, liquid assets, or dividends. The better the company, (in terms of growth or quality), the higher the valuation measures can be. And if valuation ratios are extremely low, double-check to see if the company appears excessively weak. In any case, you don't have to say yes to any valuation measure - many buy shares based on other factors (e.g., growth). But if you do that, at least understand what you're doing and consider the risks. October 5, 2006 Page 7 Growth Rates (%) Investors are accustomed to looking at EPS growth. Check sales growth, too. EPS gains can't persist indefinitely without good sales growth. Do further investigation if sales trends are falling short. (A big short fall might reflect a divestiture. On the other hand, if sales growth looks too good, check to see if it's being boosted by an acquisition.) Also, compare sales growth to capital spending growth. Over a prolonged period, it's reasonable to expect capital spending growth to more or less keep pace with sales growth. If the latter is significantly higher, capital spending may have to accelerate in the next few years. % Growth Rate PTSCE Industry Sector S&P 500 Company Rank in Industry PTSCE vs. Industry PTSCE vs. Sector PTSCE vs. S&P 500 Sales Growth For Most Recent Quarter 1,941.9 27.6 22.4 16.7 100 Sales Growth For Trailing 12 Months 2,256.1 23.7 18.6 17.4 100 Sales Growth For Past 5 Years 33.0 5.6 8.8 9.5 93 Capital Spending Growth for Past 5 Years NA (2.6) 7.9 6.3 2 NA NA NA EPS Growth for Most Recent Quarter 2,073.9 44.7 13.1 15.1 98 EPS Growth for Trailing Twelve Months 521.2 29.2 22.7 22.5 NA EPS Growth for Past 5 Years NA 16.1 12.9 13.9 NA NA NA NA WorstRBest = Co. underperforming = Co. outperforming Company Quality Some companies excel in obtaining high margins (watch out for very low tax rates, which may reflect special benefits that often won't persist indefinitely) while others are highly efficient. Still others are strong in both respects. These trade-offs are balanced in the Management Effectiveness returns, which combine both factors. TTM = Trailing Twelve Months. Profitability Ratios (%) PTSCE Industry Sector S&P 500 Company Rank in Industry PTSCE vs. Industry PTSCE vs. Sector PTSCE vs. S&P 500 Gross Margin for Trailing Twelve Months NA 46.3 53.2 44.8 98 NA NA NA Gross Margin for Past 5 Years 75.1 41.6 51.4 45.0 59 Operating Margin for Trailing Twelve Months 85.2 16.0 18.3 20.4 99 Operating Margin for Past 5 Years (340.7) 0.1 12.3 19.1 79 EBITD Margin for Trailing Twelve Months 85.3 18.2 21.7 22.9 99 EBITD Margin for Past 5 Years (315.3) 3.3 16.2 20.7 4 Pretax Margin for Trailing Twelve Months 81.6 19.3 20.4 18.8 99 Pretax Margin for Past 5 Years (546.1) (0.6) 13.3 17.2 1 Net Margin for Trailing Twelve Months 78.9 13.6 14.7 13.7 99 Net Margin for Past 5 Years (546.1) (5.1) 8.3 11.6 1 Effective Tax Rate for Trailing Twelve Months 3.3 31.3 28.0 30.4 20 Effective Tax Rate for Past 5 Years NA 30.5 29.0 31.8 NA NA NA NA Efficiency Ratios (TTM) PTSCE Industry Sector S&P 500 Company Rank in Industry PTSCE vs. Industry PTSCE vs. Sector PTSCE vs. S&P 500 Asset Turnover 2.2 0.8 0.9 1.0 99 Receivables Turnover 5,207.9 8.0 8.0 10.5 83 Inventory Turnover NA 8.1 12.3 12.4 NA NA NA NA Revenue/Employee $7,030,600 $505,178 $506,356 $873,366 100 Net Income/Employee $5,548,800 $115,787 $93,214 $111,501 100 Management Effectiveness Ratios (%) PTSCE Industry Sector S&P 500 Company Rank in Industry PTSCE vs. Industry PTSCE vs. Sector PTSCE vs. S&P 500 Return on Assets for TTM 175.8 9.3 11.2 8.1 100 Return on Assets for Past 5 Years (298.4) (2.3) 6.1 6.4 4 Return on Investment for TTM 366.8 12.4 15.3 12.1 100 Return on Investment for Past 5 Years (958.3) (2.3) 8.7 10.0 31 Return on Equity for TTM 179.9 17.8 19.5 20.0 100 Return on Equity for Past 5 Years (1,585.9) (1.9) 11.9 17.9 NA WorstRBest = Co. underperforming = Co. outperforming Financial Strength Quick Ratio (cash and marketable securities divided by current liabilities) and Current Ratio (all current assets divided by current liabilities) give a sense of how readily the company could cover current obligations if the sales were to stop. Higher ratios indicate greater liquidity. Different businesses have different cash inflow-outflow characteristics, so compare companies to industry averages. Similar comparisons are relevant for debt ratios (higher ratios indicate more debt and, hence, more financial risk) and interest coverage (lower numbers signify greater risk). PTSCE Industry Sector S&P 500 Company Rank in Industry PTSCE vs. Industry PTSCE vs. Sector PTSCE vs. S&P 500 Quick Ratio 5.3 2.8 2.6 1.2 88 Current Ratio 5.3 3.4 3.1 1.8 85 Total Debt to Equity 0.0 51.4 25.2 80.7 78 Long Term Debt to Equity 0.0 47.6 21.9 63.9 86 Interest Coverage 38.4 16.1 14.5 14.5 85 WorstRBest = Co. underperforming = Co. outperforming Patriot Scientific Corp. (OTC:PTSCE) -- Communications Equipment/Technology Reuters Company Research Footprints of Success In many respects, business success requires subjective judgment. However, over time, good companies tend to leave good footprints, which become most visible when company data is compared to industry/sector/market benchmarks. That's how you see when companies perform well, not just because a rising business tide lifts all boats, but because the company is doing unique, good things. Look, too, at time-series comparisons, and take note of companies that are improving faster or suffering less than peers. October 5, 2006 Page 8