The Semiconductor Industry Association (SIA) forecasts the worldwide sales of chips to grow 28.6% in 2004 followed by a more modest growth of 4.2% in 2005. SIA is projecting a compound annual growth rate of 10.4% for the industry through 2007. More than half of the demand is with state-of-the-art chip foundries making larger silicon wafers of about 300 millimeters in diameter.

Despite a small work force, we aggressively maintain a significant core engineering capability. Last year, we completed the validation of the IGNITE soft-core in 0.18 micron technology with the D-Semi foundry in Korea. Currently, we are completing testing of silicon devices in 0.18 micron geometry from the Silterra foundry in Malaysia. Successful testing of these devices can enable library demand for the IGNITE soft-core offering.

In late 2002, PTSC announced the signing of a LOI with a Chinese semiconductor design company, as well as executing a MOU with a second company in China. Subsequently, we have expanded our efforts in China with another semiconductor design company currently evaluating the IGNITE processor for multiple consumer electronics applications. We remain in serious negotiations with one of the two companies announced in 2002 for the development of a SoC (system on chip) for a domestic (China) smart card. The challenge continues to be final financing for the Chinese company, which was spun off of a larger company early in the negotiations. We continue to be the technology of choice as they seek to secure favorable financing to bring the product to market.

The IGNITE soft-core microprocessor`s benefits of low power and Java- capable designs were validated in its selection by General Dynamics Decision Systems (GDDS) for its Software Defined Radio (SDR) proposed to the Department of Defense. In late July, GDDS was notified by the government of its competitive selection. We are awaiting further direction from GDDS.

We remain focused on commercial success through both market adoption of the IGNITE microprocessor technology and aggressive enforcement of key PTSC patents.