Dear Patriot Scientific Corporation Shareholder:

Financial Performance. Fiscal 2007 was more than just a good year for Patriot Scientific Corporation, it was a record-breaking year. At the end of May we posted the best financial results in Patriot’s 20-year history. The income recognized from our patent-licensing activity nearly doubled to $49 million and the Company’s net profit was $23.7 million, or $0.06 per fully diluted share.

Our cash position also improved dramatically, growing by a factor of nearly 5 times. We now have over $21 million in the bank, compared to just under $4 million at the end of fiscal 2006. Our exceptionally strong financial performance puts us in a much better position to acquire other companies, technologies, rights, or equipment going forward.

Warrants Repurchased. By the time of the shareholders’ meeting we will have bought back all the remaining outstanding warrants held by Lincoln Ventures. This action, which we announced on July 24, eliminates the last of the warrants held by Swartz and Lincoln since they became long-term supporters and shareholders of Patriot Scientific.

Shares Repurchased. Over the course of fiscal year 2007 we’ve spent over $8.8 million repurchasing shares of the Company. To date we’ve acquired more than 18 million of our own shares under a program that began back in July of 2006 when the management and the Board of Directors felt that our stock was undervalued in the market and that this would be a prudent use of corporate funds. We’ve suspended share repurchases for a while because I no longer believe this is the best use of the company’s cash at this time. Although we still believe our shares are undervalued, I strongly believe we can put that money to better and more profitable use elsewhere.

Dividends. In a similar vein, Patriot Scientific has paid out three dividends over the past two years, most recently a $0.02/share dividend on April 9, 2007. As before, the management and the Board of Directors will reconsider the topic of dividends at regular intervals, but at this time I believe the Company’s assets can be put to better use creating a revenue stream that would be in addition to the proceeds that already flow from licensing.

     

Licensing Activity. Since February of 2007 we’ve welcomed seven new licenses in as many months, including Nokia, Sharp, SanDisk, Bull, the LEGO Group, DMP Electronics, and Denso Wave. Our momentum is increasing and the future looks very bright, indeed.

Management Changes. Since our last shareholders’ meeting we’ve gained a new CEO, a new CFO, and a new member of the Board of Directors.

On June 5 I was appointed the Company’s president and Chief Executive Officer, succeeding David Pohl. I’m thankful to the Board of Directors and the shareholders for their trust and confidence as we begin a new chapter in the company’s growth.

Clifford Flowers joined the Company on September 17 as Chief Financial Officer, succeeding Thomas J. Sweeney. Cliff’s public-company experience with software and technology companies will be key assets as we evaluate potential acquisition candidates and eventually integrate their operations into our own.

Taking over as head of our Technology Committee is Nick Tredennick, PhD. Dr. Tredennick is a well-known Silicon Valley technology expert and entrepreneur with a string of successful products and companies on his resume. Nick adds an invaluable measure of experience, know-how, and expertise to Patriot Scientific Corporation as we move forward.

Press and Analyst Activity. Over the past few months we’ve invigorated the Company’s press and analyst outreach, conducting several print and broadcast interviews with the business and financial press. We’re beginning to see the fruits of this labor in more “column inches” and a clearer understanding of Patriot Scientific Corporation and its unique business proposition. We’ve even secured a regular monthly column in one of the industry’s biggest monthly publications, Electronic Business.

On the financial side, we’ve also engaged with a new independent research firm, which will significantly increase our visibility and coverage among the investment community. We look forward to their initial coverage of our Company later this year.

Patriot Scientific Corporation has been named to the San Diego Technology Fast 50, sponsored by Deloitte & Touche LLP. This awards recognizes Patriot Scientific as one of the 50 fastest-growing companies in the San Diego area.

Subsidiary Activities. Business continues to improve at Holocom Networks, the network- and data-security firm in which we hold an interest. On July 20 we announced that Holocom Networks had sold its interest in its multi-domain computer business (now called DataSecurus) to Pilot Power Group, a transaction that simultaneously relieved Holocom Networks of these non-core assets and put that business into good hands.

Patent Litigation. As previously reported, Patriot Scientific Corporation is party to a patent-infringement litigation pending in the Federal District Court in the Eastern District of Texas. The TPL Group and Patriot Scientific are plaintiffs seeking damages from various electronics-manufacturing companies named as defendants who are alleged to be infringing on one or more patents in the portfolio jointly owned by Patriot Scientific Corporation and the TPL Group. The petitions for relief included requests that the court issue permanent injunctions against the sale by defendants of products produced without licenses to use our patented technology.

     

In February a license agreement was entered into with one of the defendants, NEC Corporation, including certain NEC subsidiaries. In connection with the transaction four of the five NEC defendants, excluding NEC Electronics America Inc., were dismissed from the lawsuit.

On June 15 an important claims-construction (“Markman”) hearing was held in Marshall, Texas. The purpose of a Markman hearing is to define and clarify the exact definition of technical terms included in the patents in suit before the trial begins. The result of this hearing was quite favorable and broadly confirmed the strength of our patent portfolio. The hearing definitively established and clarified the meaning to be assigned to the claims within the patents. We’re quite encouraged by this result.

On September 13 a motion to simplify the patent-infringement trial was granted. This motion helped the Company two ways. It removed ARM Holdings as an intervener in the current litigation, and it allows us to appeal a portion of the Markman interpretation of the ’584 patent before waiting until the end of the trial.

A three-day pre-trial mediation is currently scheduled for September 25–27, and the trial date has been moved to January.

Summary. The fiscal year 2007 has been very good to Patriot Scientific and I’m more convinced than ever that we’ve got fantastic opportunities ahead of us. I look forward to sharing this good news with you at our shareholders’ meeting in October.

 

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Licensing revenues doubled to $49 million

 

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Cash position has grown five-fold over previous fiscal year

 

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Signed seven new patent license agreements in as many months

 

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New President and Chief Executive Officer

 

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New Chief Financial Officer

 

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New head of the Technology Committee

 

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Retired all outstanding warrants at Lincoln Ventures

 

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Repurchased $8.8 million worth of PTSC stock

 

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Paid out another dividend to shareholders

 

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Began aggressively pursuing acquisition candidates

 

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Sold non-core assets of DataSecurus to Pilot Power Group

Sincerely,

James L. Turley

President and CEO