**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549





**FORM
      10-QSB**


(Mark
      One)





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





For
      quarterly period ended February 28, 2006





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





For
      the
      transition period from _____________ to _______________





*Commission
      File Number 0-22182*





**PATRIOT
      SCIENTIFIC CORPORATION**





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




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







6183
      Paseo Del Norte, Suite 180, Carlsbad, California 92011


(Address
      of principal executive offices)





(760)
      547-2700


(Issuer’s
      telephone number)





10989
      Via Frontera, San Diego, California 92127


(Former
      address of principal executive offices)





Check
      whether the issuer (1) filed all reports 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





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No x





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




Common
                Stock, $.00001 par
                value
            
            361,813,582(Class)
            
            (Outstanding
                at April 17,
                2006)







Transitional
      Small Business Disclosure Format (Check one): Yes o No x




1




**PATRIOT
      SCIENTIFIC CORPORATION**





**INDEX**




**Page****PART
                I. FINANCIAL INFORMATION**ITEM
                1. Financial StatementsConsolidated
                Balance Sheets as of February 28, 2006 (unaudited) and May 31, 2005
            3Consolidated
                Statements of Operations for the three and nine months ended February
                28,
                2006 and 2005 (unaudited)
            4Consolidated
                Statements of Cash Flows for the nine months ended February 28, 2006
                and
                2005 (unaudited)
            5Notes
                to Unaudited Consolidated Financial Statements
            6-12ITEM
                2. Management’s Discussion and Analysis or Plan of
                Operation
            13-21ITEM
                3. Controls and Procedures
            21**PART
                II. OTHER INFORMATION**ITEM
                1. Legal Proceedings
            22-24ITEM
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            *ITEM
                3. Defaults Upon Senior Securities
            *ITEM
                4. Submission of Matters to a Vote of Security Holders
            *ITEM
                5. Other Information
            *ITEM
                6. Exhibits and Reports on Form 8-K
            25-28**SIGNATURES**
            29







*
      No
      information provided due to inapplicability of the item.





2




**PART
      I- FINANCIAL INFORMATION**





**Item
      1. Financial Statements**





**Patriot
      Scientific Corporation**


**Consolidated**  **Balance
      Sheets**


February
                28, 2006
            
            May
                31, 2005**ASSETS**
            
            
            (Unaudited)Current
                Assets:Cash
                and cash equivalents (including $7,847,962 held by a consolidated
                entity
                at February 28, 2006)
            
            $
            20,478,619
            
            $
            591,426Restricted
                cash and cash equivalents
            
            
            50,011
            
            
            -Marketable
                securities and short term investments
            
            
            4,179,796
            
            
            697,524Restricted
                short term investment
            
            
            -
            
            
            201,648Licenses
                receivable
            
            
            34,100,000
            
            
            2,000,000Accounts
                receivable
            
            
            27,496
            
            
            -Prepaid
                expenses and other current assets
            
            
            111,383
            
            
            121,758Total
                current assets
            
            
            58,947,305
            
            
            3,612,356**Property
                and equipment**,
                net of accumulated depreciation of $110,412 and $1,085,703
            
            
            59,036
            
            
            21,376**Other
                assets**
            
            
            8,190
            
            
            23,891**Patents
                and trademarks**,
                net of accumulated amortization of $575,681 and $549,563
            
            
            40,293
            
            
            66,411$
            59,054,824
            
            $
            3,724,034**LIABILITIES,
                MINORITY INTEREST, AND STOCKHOLDERS’ EQUITY**Current
                liabilities:Line
                of credit
            
            $
            -
            
            $
            100,000Current
                portion of convertible debentures, net of debt discount of $301,320
                at May
                31, 2005
            
            
            -
            
            
            421,847Accounts
                payable
            
            
            277,203
            
            
            268,458Accrued
                liabilities
            
            
            558,549
            
            
            505,153Dividends
                payable
            
            
            8,114,378
            
            
            -Accrued
                income taxes payable
            
            
            1,880,000
            
            
            -Current
                portion of capital lease obligation
            
            
            -
            
            
            2,306Accrued
                contested fee payable
            
            
            346,000
            
            
            346,000Total
                current liabilities
            
            
            11,176,130
            
            
            1,643,764**Convertible
                Debentures**,
                net of debt discount of $111,559 at May 31, 2005
            
            
            -
            
            
            45,942Total
                liabilities
            
            
            11,176,130
            
            
            1,689,706**Minority
                interest in equity of consolidated entity**
            
            
            20,823,679
            
            
            -**Commitments
                and contingencies****Stockholders’
                equity:**Preferred
                stock, $.00001 par value; 5,000,000 shares authorized: none
                outstanding
            
            
            -
            
            
            -Common
                stock, $.00001 par value: 500,000,000 shares authorized: 349,336,560
                and
                280,492,013 issued and outstanding
            
            
            3,494
            
            
            2,805Additional
                paid-in capital
            
            
            59,650,374
            
            
            54,569,091Accumulated
                deficit
            
            
            (32,598,853
            )
            
            (52,537,568
            )Total
                stockholders’ equity
            
            
            27,055,015
            
            
            2,034,328$
            59,054,824
            
            $
            3,724,034





*See
      accompanying notes to unaudited consolidated financial
      statements.*


3




**Patriot
      Scientific Corporation**


**Consolidated
      Statements of Operations**


**(Unaudited)**








Three
                Months Ended
            Nine
                Months EndedFebruary
                28, 2006
            
            
            February
                28, 2005
            
            
            February
                28, 2006
            
            
            February
                28, 2005Revenues:Licenses
                and royalties
            
            $
            60,000,000
            
            $
            2,951,850
            
            $
            70,000,000
            
            $
            2,973,148Other
            
            
            276,800
            
            
            -
            
            
            297,072
            
            
            -60,276,800
            
            
            2,951,850
            
            
            70,297,072
            
            
            2,973,148Cost
                of goods sold
            
            
            103,351
            
            
            -
            
            
            103,351
            
            
            -Gross
                profit
            
            
            60,173,449
            
            
            2,951,850
            
            
            70,193,721
            
            
            2,973,148Operating
                expenses:Research
                and development
            
            
            27,304
            
            
            53,955
            
            
            225,564
            
            
            236,296Selling,
                general and administrative
            
            
            2,093,604
            
            
            1,085,575
            
            
            5,393,015
            
            
            1,858,528Settlement
                and license expense
            
            
            -
            
            
            -
            
            
            3,855,132
            
            
            -2,120,908
            
            
            1,139,530
            
            
            9,473,711
            
            
            2,094,824Operating
                income
            
            
            58,052,541
            
            
            1,812,320
            
            
            60,720,010
            
            
            878,324Other
                income (expense):Unrealized
                loss onmarketable
                securities
            
            
            (64
            )
            
            (2,281
            )
            
            (1,201
            )
            
            (14,500
            )Other
                income
            
            
            129,896
            
            
            9,800
            
            
            264,271
            
            
            57,552Interest
                expense
            
            
            (868,121
            )
            
            (1,160,972
            )
            
            (1,181,635
            )
            
            (2,442,101
            )Loss
                on debt extinguishment
            
            
            (1,260,688
            )
            
            -
            
            
            (1,260,688
            )
            
            -(1,998,997
            )
            
            (1,153,453
            )
            
            (2,179,253
            )
            
            (2,399,049
            )Income
                (loss) before minority interest in
              income
                of consolidated entity and
              income
                taxes
            
            
            56,053,564
            
            
            658,867
            
            
            58,540,757
            
            
            (1,520,725
            )Minority
                interest in income of
              consolidated
                entity
            
            
            (29,327,829
            )
            
            -
            
            
            (28,607,664
            )
            
            -Income
                (loss) before income taxes
            
            
            26,725,735
            
            
            658,867
            
            
            29,933,093
            
            
            (1,520,725
            )Provision
                for income taxes
            
            
            1,840,000
            
            
            -
            
            
            1,880,000
            
            
            -Net
                income (loss)
            
            $
            24,885,735
            
            $
            658,867
            
            $
            28,053,093
            
            $
            (1,520,725
            )Basic
                income (loss) per common share
            
            $
            0.08
            
            $
            -
            
            $
            0.09
            
            $
            (0.01
            )Diluted
                income (loss) per common share
            
            $
            0.06
            
            $
            -
            
            $
            0.07
            
            $
            (0.01
            )Weighted
                average number of common
              shares
                outstanding-basic
            
            
            307,933,709
            
            
            232,871,373
            
            
            300,839,387
            
            
            204,784,881Weighted
                average number of common
              shares
                outstanding-diluted
            
            
            404,508,397
            
            
            312,637,842
            
            
            397,730,530
            
            
            204,784,881




*See
      accompanying notes to unaudited consolidated financial
      statements.*







4


**Patriot
      Scientific Corporation**


**Consolidated
      Statements of Cash Flows**


**(Unaudited)**


-


Nine
                Months EndedFebruary
                28, 2006
            
            February
                28, 2005**Operating
                activities:**Net
                income (loss)Adjustments
                to reconcile net income (loss) to net cash provided by (used in)
                operating
                activities:
            
            $
            28,053,093
            
            $
            (1,520,725
            )Amortization
                and depreciation
            
            
            44,584
            
            
            70,944Non-cash
                compensation
            
            
            150,013
            
            
            59,674Non-cash
                interest expense related to convertible debentures, notes payable
                and
                warrants
            
            
            1,136,047
            
            
            2,322,975Loss
                on extinguishment of debt
            
            
            1,260,688
            
            
            -Unrealized
                loss on marketable securities
            
            
            1,201
            
            
            14,415Common
                stock issued for services and other
            
            
            -
            
            
            58,800Expense
                related to warrant repricing and issuance
            
            
            1,522,492
            
            
            -Accrued
                interest income added to investments
            
            
            (19,469
            )
            
            -Income
                of consolidated entity allocated to minority interest
            
            
            28,607,664
            
            
            -Changes
                in:Accounts
                receivable
            
            
            (27,496
            )
            
            802Prepaid
                and other assets
            
            
            34,266
            
            
            219,714Licenses
                receivable
            
            
            (32,100,000
            )
            
            (2,750,000
            )Accounts
                payable and accrued expenses
            
            
            2,060,510
            
            
            577,968Net
                cash provided by (used in) operating activities
            
            
            30,723,593
            
            
            (945,433
            )**Investing
                activities:**Purchase
                of marketable securities
            
            
            (4,327,786
            )
            
            (200,000
            )Proceeds
                from sale of marketable securities
            
            
            862,209
            
            
            -Purchase
                of property and equipment
            
            
            (56,126
            )
            
            -Purchase
                of restricted investments
            
            
            (50,000
            )
            
            -Payment
                for security deposit
            
            
            (8,190
            )
            
            -Proceeds
                from sale of restricted investments
            
            
            203,210
            
            
            -Net
                cash used in investing activities
            
            
            (3,376,683
            )
            
            (200,000
            )**Financing
                activities:**Principal
                payments on secured notes payable
            
            
            (100,000
            )
            
            (100,000
            )Deferred
                maintenance
            
            
            -
            
            
            100,000Proceeds
                from the issuance of convertible debentures
            
            
            -
            
            
            490,000Proceeds
                from the issuance of common stock
            
            
            -
            
            
            453,250Minority
                interest investment in consolidated entity
            
            
            2,000,000
            
            
            -Payments
                for capital lease obligations
            
            
            (2,306
            )
            
            (5,843
            )Proceeds
                from exercise of common stock warrants and options
            
            
            678,994
            
            
            706,414Repurchase
                of warrants
            
            
            (252,420
            )
            
            -Distributions
                of joint venture partner
            
            
            (9,783,985
            )
            
            -Net
                cash provided by (used in) financing activities
            
            
            (7,459,717
            )
            
            1,643,821**Net
                increase in cash and cash equivalents**
            
            
            19,887,193
            
            
            498,388**Cash
                and cash equivalents,**beginning
                of period
            
            
            591,426
            
            
            355,940**Cash
                and cash equivalents, end of period*****(1)***
            
            $
            20,478,619
            
            $
            854,328*(1)
                Included in cash at February 28, 2006 is $7,847,962 held by a consolidated
                entity*
              *which
                amount can only be used for the operations of that
                entity.***Supplemental
                Disclosure of Cash Flow Information:**Cash
                payments for interest
            
            **$**
            **2,843**
            
            $
            12,994Convertible
                debentures and accrued interest exchanged for common stock
            
            **$**
            **999,037**
            
            $
            2,065,780Dividend
                declared but not paid
            
            **$**
            **8,114,378**
            
            $
            -





*See
      accompanying notes to unaudited consolidated financial
      statements.*





5


**Patriot
      Scientific Corporation**


**Notes
      to Unaudited Consolidated Financial Statements**





**1.**
            **Basis
                of Presentation**





The
      unaudited consolidated financial statements of Patriot Scientific Corporation
      (the “Company”, “we” or “us”) presented herein have been prepared pursuant to
      the rules of the Securities and Exchange Commission for quarterly reports on
      Form 10-QSB and do not include all of the information and footnotes required
      by
      accounting principles generally accepted in the United States of America. These
      statements should be read in conjunction with our audited consolidated financial
      statements and notes thereto included in Form 10-KSB for the year ended May
      31,
      2005.





In
      the
      opinion of management, the interim consolidated financial statements reflect
      all
      adjustments of a normal recurring nature necessary for a fair statement of
      the
      results for interim periods. Additionally, during the quarter ended August
      31,
      2005, the Company entered into certain nonrecurring transactions related to
      the
      PTSC/TPL Master Agreement (defined in Note 4), which are more fully described
      in
      Note 4. Operating results for the three and nine month periods ended February
      28 2006 are
      not necessarily indicative of the results that may be expected for the year
      ending May 31, 2006.





**Earnings
      (Loss) Per Share**




We
      follow
      Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per
      Share.” Under SFAS No. 128, basic income (loss) per share is calculated as
      income (loss) available to common stockholders divided by the weighted average
      number of common shares outstanding. Diluted income (loss) per share is
      calculated as net income (loss) available to common stockholders divided by
      the
      diluted weighted average number of common shares outstanding. The diluted
      weighted average number of common shares is calculated using the treasury stock
      method for common stock issuable pursuant to outstanding stock options and
      common stock warrants and the if-converted method for convertible debentures.
      For the three and nine month periods ended February
      28 ,
      2006 ,
      potential common shares of 96,574,688 and 96,891,142, respectively, from our
      stock options, warrants and convertible debentures, were included in the
      determination of diluted earnings per share.





**Restricted
      Cash and Cash Equivalents**





Restricted
      cash and cash equivalents at February 28, 2006, consist of two savings accounts
      required to be held as collateral for corporate credit card
      accounts.





**Stock
      Options**





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.





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 (loss) 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 Opinion 25. See “Recent Accounting Pronouncements”.




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.




6





Had
      the
      Company employed the accounting provisions for SFAS No. 123, the Company’s
      reported net income (loss) and basic and diluted income (loss) per share would
      have been changed by the pro forma amounts indicated below:





Three
                Months Ended
            
            Nine
                Months EndedFebruary
                28,
            
            
            February
                28,
            
            February
                28,
            
            
            February
                28,2006
            
            
            2005
            
            2006
            
            
            2005Net
                income (loss)-as reported
            $
            24,885,735
            
            $
            658,867
            
            $
            28,053,093
            
            $
            (1,520,725
            )Pro
                forma compensation expense
            
            (28,028
            )
            
            (102,100)
            
            
            (210,278
            )
            
            (109,020
            )Net
                income (loss)-pro forma
            $
            24,857,707
            
            $
            556,767
            
            $
            27,842,815
            
            $
            (1,629,745
            )As
                reported per share:Basic
            $
            0.08
            
            $
            -
            
            $
            0.09
            
            $
            (0.01
            )Diluted
            $
            0.06
            
            $
            -
            
            $
            0.07
            
            $
            (0.01
            )Pro
                forma per share:Basic
            $
            0.08
            
            $
            -
            
            $
            0.09
            
            $
            (0.01
            )Diluted
            $
            0.06
            
            $
            -
            
            $
            0.07
            
            $
            (0.01
            )





**2.**
            **Recent
                Accounting Pronouncements**





In
      December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS
      123R, “Share Based Payment”. This statement replaces SFAS No. 123 and supersedes
      APB Opinion 25. SFAS No. 123R requires that the cost of share-based payment
      transactions (including those with employees and non-employees) be recognized
      as
      compensation based on the estimated fair value of the equity instrument awarded.
      SFAS No. 123R applies to all share-based payment transactions in which an entity
      acquires goods or services by issuing (or offering to issue) its shares,
      options, or other equity instruments or by incurring liabilities in amounts
      based on the price of the entity’s shares or other equity instruments, or that
      require (or may require) settlement by the issuance of an entity’s shares or
      other equity instruments. This statement applies to all new awards granted
      during the fiscal year beginning after December 15, 2005 and to previous awards
      that are modified or cancelled after such date. The Company has not yet fully
      evaluated the effect of adopting SFAS No. 123R on its consolidated financial
      statements.





In
      December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets,”
an amendment of APB Opinion No. 29, “Accounting for Nonmmonetary Transaction.”
SFAS No. 153 is based on the principle that exchanges of nonmonetary assets
      should be measured based on the fair market value of the assets exchanged.
      SFAS
      No. 153 eliminates the exception of nonmonetary exchanges of similar productive
      assets and replaces it with a general exception for exchanges of nonmonetary
      assets that do not have commercial substance. SFAS 153 is effective for
      nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005.
      The
      Company does not believe that the provisions of SFAS No. 153 will have a
      material impact on its consolidated financial statements.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20, “Accounting Changes,” and FASB Statement No.
      3, “Reporting Accounting Changes in Interim Financial Statements,” and changes
      the requirements for the accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application to prior periods'
      financial statements of changes in accounting principle, unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS No. 154 is effective for accounting changes and
      correction of errors made in fiscal years beginning after December 15, 2005.
      Early adoption is permitted for accounting changes and correction of errors
      made
      in fiscal years beginning after the date SFAS No. 154 was issued. At the present
      time, the Company does not believe that adoption of SFAS No. 154 will have
      a
      material effect on its consolidated financial statements.




7


**3.**
            **License
                Agreements**





In
      February 2005, the Company entered into two separate licensing agreements with
      one customer for the Company's patent portfolio and Ignite microprocessor
      technology. The aggregate amount of the two licenses was $3,050,000, of which
      $2,950,000 was for licensing fees and $100,000 was for maintenance services.
      Maintenance under the agreements is expected to be provided over a period not
      to
      exceed four years. The payment terms of the agreements required aggregate
      payments of $300,000 at the time of execution, three quarterly payments of
      $750,000 each on April 1, August 15, and November 15, 2005 and one final payment
      of $500,000 on February 15, 2006. The $500,000 payment due on February 15,
      2006,
      was paid in March 2006. Total payments received in fiscal 2005 amounted to
      $1,050,000 and total payments received in fiscal 2006, as of February 28, 2006,
      amounted to $1,500,000. The agreements also provide for the future payment
      of
      royalties to the Company based on sales of product using the Ignite licensed
      technology. In connection with this license agreement, the Company became
      obligated to the former co-inventor of the patent portfolio technology for
      $207,600 pursuant to a July 2004 agreement under which the Company was obligated
      to pay a percentage of licensed proceeds to the co-inventor. The amount due
      was
      payable in four installments of $51,900; $51,900 remains outstanding at February
      28 ,
      2006,
      and is included in accrued liabilities. The Company has reviewed the potential
      obligation for future payments to the co-inventor of the patent portfolio
      technology in connection with entering into license agreements. The Company
      believes, based upon consultation with its legal counsel, that it has no further
      obligation to the co-inventor and has not provided an accrual for such an
      amount. The Company is aware of a lawsuit filed by the co-inventor of the patent
      portfolio technology against the Company. The Company intends to vigorously
      defend itself in this matter; however, it is possible that were the Company
      not
      to prevail in the suit, the ultimate amount payable to such co-inventor of
      the
      Ignite technology could be significant.





Also,
      in
      conjunction with entering into these license agreements, as well as other
      license agreements (See Note 4), the legal advisor who had previously assisted
      the Company in its intellectual property negotiations, has asserted a claim
      against the Company for amounts which the advisor believes it is entitled.
      The
      Company is contesting the matter; the outcome of this matter is currently
      unknown. Based on its current assessment of the matter, the Company has accrued
      a liability of $346,000 as of February
      28 ,
      2006 in
      connection with the February, 2005 licensing agreements. The Company intends
      to
      vigorously defend itself in this matter; however, it is possible that, were
      the
      Company not to prevail in the suit, the ultimate amount payable to such legal
      advisor could be significantly higher than the current accrued liability.





**4.**
            **Creation
                of Consolidated Limited Liability Company/License
                Agreement**





In
      June
      2005, the Company entered into an agreement (the “PTSC/TPL Master Agreement”)
      with the co-inventor of certain of the Company’s technology pursuant to which
      the Company and the co-inventor resolved all legal disputes between them. As
      a
      result of the agreement, the Company formed a new limited liability company
      (the
“JV LLC”) with the co-inventor into which both parties contributed their rights
      to the technologies. The Company received a 50% interest in the JV LLC. The
      Company believes, based upon consultation with its attorneys, it was not
      required by applicable law or other existing agreements to obtain approval
      for
      the contribution of the license rights to the JV LLC from stockholders or any
      parties other than its various warrant holders. Both the Company and the JV
      LLC
      agreed to establish a working capital fund for the JV LLC of $4,000,000, of
      which the Company’s contribution was $2,000,000. The working capital fund
      increases to a maximum of $8,000,000 as license revenues are achieved. The
      Company and the other member of the JV LLC are obligated to fund future working
      capital requirements at the discretion of the JV LLC management committee,
      in
      order to maintain working capital of not more than $8,000,000. Neither the
      Company nor the other member of the JV LLC are required to contribute more
      than
      $2,000,000 in any fiscal year. For accounting purposes the newly formed entity
      is considered to be a variable interest entity, as defined in FIN 46R, for
      which
      the Company is considered to be the primary beneficiary. Accordingly, the
      accounts and transactions of the JV LLC have been consolidated with those of
      the
      Company and the other member of the JV LLC’s interest in the JV LLC has been
      presented as a minority interest in the consolidated financial statements of
      the
      Company as of and for the three and nine month periods ended February
      28 ,
      2006.
      The JV LLC has committed to pay a quarterly amount ranging between $500,000
      and
      $1,000,000 (based upon a percentage of the working capital fund balance of
      the
      JV LLC) for supporting efforts to secure licensing agreements by the other
      member on behalf of the JV LLC. During the nine months ended February 28,
      2006, the JV LLC paid $1,500,000 to the other member pursuant to this
      commitment. At February
      28 ,
      2006,
      the JV LLC’s sole asset was approximately $7,800,000 in cash. Although this
      amount is reported together with the Company’s cash balances in the consolidated
      balance sheet as of February
      28 ,
      2006,
      the Company does not have the ability to control the JV LLC and this cash is
      not
      available for use by the Company. The JV LLC reported net income for the three
      and nine month periods ended February
      28 ,
      2006 of
      approximately $58,600,000 and $57,200,000, respectively.





Concurrently
      with forming the JV LLC, the Company entered into a license agreement with
      a
      third party pursuant to which it received $10,000,000, which amount was recorded
      as license revenue during the quarter ended August 31, 2005. In connection
      with
      entering into the license agreement and forming the JV LLC, the Company incurred
      various cash and non-cash expenses. Direct, incremental cash costs incurred
      with
      the transactions included $170,000 paid to a committee of the Company’s board of
      directors for their efforts in consummating the transactions, approximately
      $1,328,000 paid to certain of the Company’s warrant holders to obtain their
      approval of the agreement and release of their lien and blocking rights.
      Additionally, $960,000 was paid to the former co-inventor of the technology.
      As
      more fully discussed in Note 3, a former legal advisor of the Company may assert
      a success fee against the Company based upon proceeds received by the Company
      under this license agreement. No amount has been accrued for this contingency
      as
      the Company believes the probability of any amount being paid to the advisor
      for
      this license agreement is remote. The Company believes, based upon consultation
      with its attorneys, it was not required by applicable law or other existing
      agreements to obtain approval for the contribution of the license rights to
      the
      JV LLC from stockholders or any parties other than its various warrant
      holders.





8


The
      Company also granted new warrants and agreed to reprice other outstanding
      warrants in order to obtain the necessary approvals from certain security
      interest holders as well as to obtain the release of their security interests
      in
      the Company’s intellectual property, and to finalize the limited liability
      company agreement. The Company granted a warrant to the other member of the
      JV
      LLC to acquire up to 3,500,000 shares of the Company’s common stock at a per
      share price of $0.125. The warrant has a term of seven years. At the date of
      grant, the right to acquire 1,400,000 common shares vested. The right to acquire
      the remaining 2,100,000 shares will vest in 700,000 increments only upon the
      Company’s common stock attaining a per share stock price of $0.50, $0.75 and
      $1.00. On February 21, 2006, the right to acquire 700,000 shares of the
      Company’s common stock pursuant to the warrant vested and on February 22, 2006,
      the right to acquire an additional 700,000 shares of the Company’s common stock
      pursuant to the warrant vested as the Company’s stock price reached $0.50 and
      $0.75, respectively. As additional consideration to the warrant holders for
      providing approval for the transaction, the Company agreed to reset the per
      share exercise price of approximately 35,000,000 warrants to $0.015 for which
      the warrant holders also conveyed other warrants to acquire 12,000,000 shares
      back to the Company. Further, the Company issued additional warrants to acquire
      approximately 290,000 shares of the Company’s common stock at a per share price
      of $0.03. The warrants issued and repriced were valued using the Black-Scholes
      method and the following assumptions: volatility of 123%, no dividends, risk
      free interest rates of approximately 4%, and contractual terms ranging from
      five
      to seven years. The value of the warrants issued and repriced in excess of
      the
      current value of the warrants reconveyed and the value of the warrants
      previously expensed was approximately $1,397,000, which amount, together with
      the direct, incremental cash costs previously described,
      is recorded as an expense and included in settlement and license
      expense in the nine month period ended February 28, 2006.





On
      January 24, 2006, the JV LLC entered into a license agreement with a third
      party, pursuant to which it received $26,400,000 and on February 21, 2006 and
      February 24, 2006, the JV LLC entered into license agreements with third parties
      for $2,000,000 and $31,600,000, respectively. The JV LLC recorded all of the
      license revenue from these agreements during the quarter ended February 28,
      2006. As of February 28, 2006, the Company recorded licenses receivable of
      $33,600,000. The Company received a cash distribution from the joint venture
      of
      $10,115,574 in January 2006.





**5.**
            **Convertible
                Debentures**





During
      the three months ended February
      28 ,
      2006,
      the balance of outstanding convertible debentures of $748,168 and accrued
      interest of $112,359, were converted into 22,523,398 shares of the Company's
      common stock. During the three months ended August 31, 2005, holders of
      debentures having a principal balance of $132,500 converted their debentures,
      together with accrued interest thereon of $6,040, into 8,295,789 shares of
      the
      Company's common stock. No debentures were converted during the three month
      period ended November 30, 2005.





As
      discussed in Note 6, the Company entered into reset agreements with the
      debenture holders to fix the conversion price of the then oustanding debentures
      at its current level. In
      connection with the reset agreement of one of the debentures, the Company
      recorded a debt discount of $723,168 related to a beneficial conversion feature
      at the date of the modification
      of the conversion rate feature. The Company determined that the debt modification
      did not result in a debt extinguishment. During the three month period ended
      February 28, 2006, the Company amortized the entire amount of the debt discount
      to interest expense upon the conversion of the related debenture into shares
      of
      the Company's
      common stock.


In
        connection with the reset agreement of the other outstanding debenture, the
        Company issued 7,000,000 warrants to the debenture holder as consideration
        of
        entering into the reset
        agreement. The Company has determined that the issuance of the warrants in connection
        with the reset agreement resulted in a debt extinguishment under EITF No. 96-19,
        "Debtor's Accounting for a Modification or Exchange of Debt Instruments",
        and EITF
        No.
        05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments
        and Related Issues." Accordingly, the Company has recorded the fair value of
        the
        warrants issued of $1,260,688 as a loss of debt extinguishment in the
        accompanying consolidated statement of operations for the three month period
        ended February
        28, 2006.


9




**6.**
            **Stockholders’
                Equity**





The
      following table summarizes equity transactions during the nine months ended February
      28 ,
      2006:




CommonShares
            
            
            AmountBalance
                June 1, 2005
            280,492,013
            
            $
            54,571,896Exercise
                of common stock options
            2,636,522
            
            
            208,337Exercise
                of common stock warrants
            8,728,544
            
            
            470,657Cashless
                exercise of common stock warrants
            26,035,294
            
            
            -Stock
                  issued on conversion of
                debentures
                  and accrued interest
            30,819,187
            
            
            999,037Stock
                issued to co-inventor of technology
            625,000
            
            
            81,250Effect
                of modifying convertible debt
            -
            
            
            723,168Issuance
                of common stock warrants in connection with new
              venture/license
                agreement
            -
            
            
            556,675Extension
                of term of warrants previously issued to consultant
            -
            
            
            125,000Effect
                of repricing and conveyance in connection with new
              venture/license
                agreement
            -
            
            
            840,816Repurchase
                of warrants
            -
            
            
            (252,420
            )Issuance
                of warrants in connection with revisions to warrant
                agreements
              and
                waivers
            -
            
            
            1,260,688Issuance
                of warrants to a consultant
            -
            
            
            68,764Balance
                February 28, 2006
            349,336,560
            
            $
            59,653,868




**Stock
      Option** **Activity**




At February
      28 ,
      2006,
      we had 829,478 options outstanding pursuant to our 1996 Stock Option Plan
      exercisable at prices ranging from $0.04 to $1.18 per share expiring through
      2010; 1,070,000 options outstanding pursuant to our 2001 Stock Option Plan
      exercisable at prices ranging from $0.04 to $0.13 per share expiring through
      2010; and 3,250,000 options outstanding pursuant to our 2003 Stock Option Plan
      exercisable at prices ranging from $0.04 to $0.17 per share expiring through
      2011. Some of the options outstanding under these plans are not presently
      exercisable and are subject to vesting criteria.





During
      the nine months ended February 28, 2006, we issued options to acquire 1,350,000
      shares of our common stock at a per share price of $0.16 and options to acquire
      200,000 shares of our common stock at a per share price of $0.17 to members
      of
      our board of directors. During the nine months ended February 28, 2006,
      options to purchase 2,636,522 shares of our common stock, were exercised for
      proceeds of $208,337.





**Warrants**





At
      February 28, 2006, we had warrants outstanding exercisable into 68,943,590
      common shares at exercise prices ranging from $0.015 to $0.65 per share,
      expiring through 2012. Some of those outstanding warrants were not exercisable
      as of February 28, 2006 as they are subject to meeting vesting criteria. During
      the nine months ended February 28, 2006, we issued warrants to purchase
      12,457,049 shares of common stock, had investors exercise warrants to purchase
      8,728,544 shares of common stock for proceeds of $470,657 and we had investors
      exercise warrants of 28,540,769 to purchase 26,035,294 shares of common stock
      on
      a cashless basis. During the nine months ended February 28, 2006, the Company
      cancelled warrants to purchase 13,366,727 shares of our common stock. Included
      in the aforementioned warrants issued during the nine months ended February
      28,
      2006 were warrants to purchase 200,000 shares of common stock issued to a
      consultant. The value of these warrants of $68,764 was recorded as an expense
      during the nine months ended February 28, 2006. The Company repriced other
      warrants to purchase approximately 35,000,000 common shares to $0.015 during
      the
      nine months ended February 28, 2006 (Note 4).





10


Effective
      January 11, 2006, the Company entered into a warrant redemption agreement with
      a
      warrant holder, whereby at the Company's option, the Company agreed to redeem
      certain warrants representing the right to acquire an aggregate of up to
      10,000,000 shares of the Company's common stock, through April 2006. The
      warrants may be redeemed in quantities not to exceed 2,000,000 warrants in
      any
      one calendar month, at a price equal to the product of (a) the volume weighted
      average of the daily volume weighted average prices of the Company's common
      stock for all trading days in the applicable calendar month, minus the exercise
      price of the warrant, multiplied by (b) the number of shares being redeemed
      from
      that warrant. On February 3, 2006, the Company agreed to redeem 2,000,000
      warrants for $252,420 and has recorded a liability for that amount at February
      28, 2006. Payment for the redemption occurred in March 2006.





Effective
      February 9, 2006, the Company entered into “Reset Agreements” with certain
      warrant holders and received waivers from the warrant holders with regard to
      certain terms of certain warrants held by the warrant holders. Under the terms
      of the Reset Agreements, the Company and the warrant holders agreed to amend
      the
      terms of (i) each of the warrants of the Company held by the warrant holders
      such that the exercise price of the warrants is no longer subject to downward
      resets based on the trading price of the common stock of the Company, and (ii)
      each of the debentures of the Company held by the warrant holders such that
      the
      conversion price of the debentures is fixed at its current level. No additional
      expense was required for the modification of the exercise price of the warrants
      since the new fixed price of the warrants was equal to the original exercise
      price at dateof issuance or was equal to the then reset price in effect for
      which the Company had previously recognized an expense for the modification
      (Note 4). The Company recognized additional interest expense of $723,168 in
      connection with the reset of the conversion price of the debentures (Note
      5). Under the terms of the Reset Agreements, the Company and the warrant
      holders also agreed to amend all of the agreements entered into between the
      Company and the warrant holders that limit the ability of the warrant holders
      to
      be the beneficial owner of more than 4.99% of the common stock of the Company
      to
      be amended to provide that the warrant holders may not, through the exercise
      of
      warrants, the conversion of debentures, or otherwise, be the beneficial owner
      of
      more than 9.99% of the common stock of the Company.





Under
      the
      terms of the waiver agreements, the warrant holders agreed to amend their rights
      under the terms of certain warrants held by each of them to receive a payment
      in
      the event of a payment of a dividend by the Company. Prior to entering into
      the
      waiver agreements, if at any time after the issuance date of the subject
      warrants, the Company made any distributions to holders of its common stock,
      the
      warrant holders would be entitled to receive a payment equal to the amount
      of
      such distribution which would have been payable to them had they owned the
      shares of common stock issuable upon exercise of the subject warrants as of
      the
      record date for the distribution. Under the terms of the waiver agreement,
      if
      the market price of the Company's common stock on the record date for a
      distribution is greater than or equal to $0.15 per share, the payment to the
      warrant holders would be reduced to the amount which would be payable to the
      warrant holders had they engaged in a cashless exercise of the subject warrants
      as of the record date for the distribution. In consideration for entering into
      the agreements, the Company issued warrants for the right to acquire 7,000,000
      shares of the Company’s common stock to one warrant holder and recognized a
      loss on debt extinguishment of $1,260,688 (Note 5).





**Common
      Stock**





On
      July
      22, 2005, 625,000 shares of common stock valued at $0.13 per share (based on
      the
      fair value on the date of issuance) were issued to the co-inventor of certain
      technology. The Company recorded an expense of $81,250 in connection with the
      issuance of these shares.


During
        February 2006, the Company announced a dividend of $0.02 per share of common
        stock for stockholders of record and qualified warrant holders as of February
        24, 2006.
        The
        dividend resulted in an accrued liability of $8,114,378 as of February 28, 2006.
        The
        Company paid such amount in March 2006. In March 2006, the Company announced
        a dividend of $0.04 per share of common stock for stockholders of record
        and qualified
        warrant holders as of March 31, 2006. The dividend of approximately $16,584,000
        is expected to be paid in April 2006.


**7.**
            **Income
                taxes**





During
      the nine months ended February
      28 ,
      2006,
      the Company recorded a $1,880,000 provision for income taxes which relates
      to
      Federal alternative minimum tax and California state tax. Deferred  income
      taxes are provided for the difference in the treatment of certain income and
      expense items for financial and tax reporting purposes. Deferred tax assets
      consist principally of income tax benefits arising from the Company’s Federal
      net operating loss carry-forwards and the excess of the tax basis of fixed
      and
      intangible assets over the book basis. During the nine months ended February
      28 ,
      2006,
      the Company utilized approximately $33,400,000 of its available Federal net
      operating loss carry-forwards to offset its taxable income arising during the
      nine month period ended February
      28 ,
      2006.
      At February
      28 ,
      2006
      and May 31, 2005 a valuation allowance of approximately $2,100,000 and
      $14,700,000, respectively, which amounts are equal to the Company’s net
      deferred tax assets at those dates, has been recorded, as management has not
      determined that it is more likely than not that the benefit from the deferred
      tax asset will be realized.





At February
      28 ,
      2006,
      the Company has Federal net operating loss carry-forwards of approximately
      $900,000 that expire through 2025. Annual usage of these net operating loss
      carryforwards may be limited in the future due to changes in our
      stockholders.




11


**8.**
            **Commitments
                and Contingencies**





During
      the quarter ended August 31, 2005, the Company terminated two of its officers,
      each of whom had an employment contract with the Company. One of the officers
      agreed to accept as severance approximately $150,000 and to have the maturity
      date of options held by him extended for one year. Approximately $27,300 remains
      outstanding to him at February
      28 ,
      2006.
      Further, the Company agreed to accelerate the vesting of all outstanding options
      held by the officer and to extend their term to September 2006. The Company
      recorded an expense of approximately $125,000 related to this option
      modification in the quarter ended August 31, 2005.





The
      Company has not reached an agreement with the other officer; however, it accrued
      approximately $50,000 during the three month period ended August 31, 2005 for
      amounts which it believes may be due to this individual. The former officer
      has
      filed a complaint against the Company seeking arbitration and claiming he is
      owed approximately $1,500,000. The Company believes the claim is without merit
      and intends to vigorously defend itself.





The
      Company is aware of a lawsuit filed by the co-inventor of the patent
      porfolio technology against the Company for potential obligations for
      future payments to the co-inventor of the patent portolio technology
      in connection with entering into licensing agreements. The Company intends
      to
      vigorously defend itself in this matter; however, it is possible that were
      the
      Company not to prevail in the suit, the ultimate amount payable to such
      co-inventor of the patent porfolio technology could be significant.





Also,
      in
      conjunction with entering into these license agreements, as well as other
      license agreements (See Note 4), the legal advisor who had previously assisted
      the Company in its negotiations, has asserted a claim against the Company for
      amounts which the advisor believes it is entitled. The Company is contesting
      the
      matter; the outcome of this matter is currently unknown. Based on its current
      assessment of the matter, the Company has accrued a liability of $346,000 as
      of February
      28 ,
      2006.
      The Company intends to vigorously defend itself in this matter; however, it
      is
      possible that, were the Company not to prevail in the suit, the ultimate amount
      payable to such legal advisor could be significantly higher than the current
      accrued liability.





Guarantees
      and Indemnities - The
      Company has made certain guarantees and indemnities, under which it may be
      required to make payments to a guaranteed or indemnified party. The Company
      indemnifies its directors, officers, employees and agents to the maximum extent
      permitted under the laws of the State of Delaware. In connection with its
      facility leases, the Company has indemnified its lessors for certain claims
      arising from the use of the facilities. The duration of the guarantees and
      indemnities varies, and in many cases is indefinite. These guarantees and
      indemnities 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 any payments for these obligations and no liabilities
      have been recorded for these guarantees and indemnities in the accompanying
      consolidated balance sheets.




12




**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation.**





THE
      FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR
      FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
      CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY
      OF
      FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, “RISK FACTORS”
SEE ALSO OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MAY 31,
      2005.





**OVERVIEW**





During
      the third quarter of the fiscal year ended May 31, 2005, and in the first three
      quarters of fiscal 2006, the Company entered into agreements for the licensing
      of its technology with Advanced Micro Devices Inc. (“AMD”), Intel Corporation,
      Hewlett Packard Company, Casio Computer Company and Fujitsu, Inc. respectively,
      among the largest of the microprocessor manufacturers. We believe these license
      agreements represent validation of the Company’s position that its intellectual
      property was and is being infringed by major manufacturers of microprocessor
      technology. Also, we believe the agreements demonstrate value of the Company’s
      intellectual property based upon “arms length” transactions with major
      electronics manufacturers.





In
      June
      2005, the Company entered into a series of agreements with TPL and others to
      facilitate the pursuit of infringers, many of which are large scale, of its
      intellectual property. It is the intention of management that the recently
      signed license agreements will be used as a starting point to work toward more
      favorable terms in future negotiations. Management believes that utilizing
      the
      option of working through TPL, as compared to creating and using a Company
      licensing team for those activities, is a prudent way to achieve the desired
      results as the Company seeks to obtain fair value from the users of its
      intellectual property.





The
      Company continues to evaluate the development, marketing and sale of
      microprocessors, the technology behind the microprocessors and complementary
      products which enable computers and other data processing devices to
      communicate. These products can be used to connect to the Internet or other
      telecommunications networks





**CRITICAL
      ACCOUNTING POLICIES AND ESTIMATES**





Our consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America, which
      require us to make estimates and judgments that significantly affect the
      reported amounts of assets, liabilities, revenues and expenses, and related
      disclosure of contingent assets and liabilities. Actual results could differ
      from those estimates, and such differences could affect the results of
      operations reported in future periods. We believe the following critical
      accounting policies affect our most significant estimates and judgments used
      in
      the preparation of our consolidated financial statements.





1.
            Revenue
                Recognition





Accounting for
      revenue recognition is complex and affected by interpretations of guidance
      provided by several sources, including the Financial Accounting Standards Board
      (“FASB”) and the Securities and Exchange Commission (“SEC”). This guidance is
      subject to change. We follow the guidance established by the SEC in Staff
      Accounting Bulletin No. 104, as well as generally accepted criteria for revenue
      recognition, which require that, before revenue is recorded, there is persuasive
      evidence of an arrangement, the fee is fixed or determinable, collection is
      reasonably assured, and delivery to our customer has occurred. Applying these
      criteria to certain of our revenue arrangements requires us to carefully analyze
      the terms and conditions of our license agreements. Revenue from our technology
      license agreements is generally recognized at the time we enter into a contract
      and provide our customer with the licensed technology. We believe that this
      is
      the point at which we have performed all of our obligations under the
      agreements; however, this remains a highly interpretive area of accounting
      and
      future license agreements may result in a different method of revenue
      recognition. Fees for maintenance or support of our licenses are recorded on
      a
      straight-line basis over the underlying period of performance.





2.
            Assessment
                of Contingent Liabilities





We
      are
      involved in various legal matters, disputes, and patent infringement claims
      which arise in the ordinary conduct of our business. We accrue for estimated
      losses at the time when we can make a reliable estimate of such loss and it
      is
      probable that it has been incurred. By their very nature, contingencies are
      difficult to estimate. We continually evaluate information related to all
      contingencies to determine that the basis on which we have recorded our
      estimated exposure is appropriate and properly disclosed.





13


3.
            Stock
                Options and Warrants





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.





Statement of
      Financial Accounting Standards (“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 Opinion 25.





The
      Company applies SFAS No. 123 in valuing options granted to consultants and
      others and estimates the fair value of such options using the Black-Scholes
      option-pricing model. The fair value is recorded as expense as services are
      provided or other obligations are incurred. 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. The Black-Scholes
      model requires the use of various inputs, including volatility of our stock,
      duration of the warrant, and interest rates, over which we use our judgment.
      Given that we have recorded significant non-cash expenses related to the
      issuance of our warrants to third-parties, including the nine months ended
      February 28, 2006, our estimation of the value of warrants issued remains a
      critical component of our financial statements.





4.
            Debt
                Discount





We have
      issued warrants as part of our convertible debentures and other financings.
      We
      value the warrants using the Black-Scholes pricing model based on expected
      fair
      value at issuance and the estimated fair value is recorded as debt discount.
      The
      debt discount is amortized to non-cash interest over the life of the debenture
      assuming the debenture will be held to maturity, which is normally two years.
      If
      the debenture is converted to common stock prior to its maturity date, any
      debt
      discount not previously amortized is expensed to non-cash interest.





5.
            Patents
                and Trademarks





Patents and
      trademarks are carried at cost less accumulated amortization and are amortized
      over their estimated useful lives of four years. 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 an individual intangible
      asset is less than its carrying value.





6.
            Income
                Taxes





Deferred
      income taxes are provided for by recognizing temporary differences in certain
      income and
      expense items for financial and tax reporting purposes. Deferred tax assets
      consist primarily of income tax benefits from net operating loss carry-forwards.
      A valuation allowance has been recorded to fully offset the deferred tax asset
      as it is more likely than not that the assets will not be utilized. We have
      historically provided a valuation allowance equal to 100% of our net deferred
      tax asset. In spite of the net income recorded by us during the nine months
      ended February 28, 2006, we do not believe that we have ample evidence of
      overcoming the “more likely than not” criteria established by generally accepted
      accounting principles. We will continue to monitor our financial operating
      results, and other factors, to determine when, if ever, we meet this
      criteria.





7.
            Accounting
                for Limited Liability Company





During the
      quarter ended August 31, 2005, we entered into a newly formed limited liability
      company with a third party. Although we do not control the limited liability
      company from a voting interest standpoint, we consider the limited liability
      company to be a variable interest entity, as that term is defined under
      accounting principles generally accepted in the United States of America (FIN
      46(R)), and under such definition and interpretation of FIN 46(R), we are
      required to consolidate the results of the limited liability company with our
      own.





14


**RESULTS
      OF OPERATIONS**





*Comparison
      of the Nine Months Ended February 28, 2006 and Nine Months Ended February 28,
      2005.*





During
      the third quarter of fiscal year 2006, our joint venture limited liability
      company signed agreements licensing our intellectual property with Hewlett
      Packard, Fujitsu and Casio for one time payments totaling $60,000,000. In June
      2005, we entered into an agreement with Intel Corporation licensing our
      intellectual property for a one time payment of $10,000,000. These license
      revenues were recognized during the nine months ended February 28, 2006. It
      is
      not possible to predict when, if ever, we will again be successful in obtaining
      future license agreements. For the nine months ended February 28, 2005 license
      revenue consisted of approximately $2,950,000 from our one time licensing
      agreement with AMD. Product sales amounting to approximately $297,000 were
      also
      recorded in the nine month period ended February 28, 2006 in connection with
      communications products that are no longer marketed by the Company. Inventory
      associated with the sales of these communications products is carried at zero
      value. Cost of sales of approximately $103,000 consists of payments made to
      subcontractors for materials and labor in connection with the product sales.
      For
      the nine months ended February 28, 2005 the Company had no such product sales.





Research and
      development expenses amounted to approximately $226,000 for the nine months
      ended February 28, 2006 and approximately $236,000 for the nine months ended
      February 28, 2005. Expenses related to salaries, benefits, training and other
      employee expenses declined approximately $61,000 resulting from staff
      reductions. Consulting and related support expenses increased from approximately
      $12,500 during the nine months ended February 28, 2005 to approximately $65,000
      for the nine months ended February 28, 2006, as research and development
      activities moved to outside contractors. Costs of components, supplies and
      equipment increased by approximately $5,000 for the nine months ended February
      28, 2006 as compared with the nine months ended February 28, 2005 connected
      with
      product development and support of the Ignite product line. Depreciation for
      fixed assets associated with research and development activities declined from
      approximately $8,000 for the nine months ended February 28, 2005 to less than
      $500 for the nine months ended February 28, 2006, as equipment became fully
      depreciated and was not replaced.





Selling ,
      general
      and administrative expenses increased from approximately $1,859,000 for the
      nine
      months ended February 28, 2005 to approximately $5,393,000 for the nine months
      ended February 28, 2006. Legal and accounting related expenses increased by
      approximately $541,000 for the nine months ended February 28, 2006 compared
      with
      the nine months ended February 28, 2005 related to legal matters in connection
      with intellectual property and formation of a limited liability company, the
      license agreement with Intel Corporation, and legal issues related to former
      employees and other corporate matters. In addition, salary costs increased
      approximately $505,000 for the nine months ended February 28, 2006 compared
      with
      the nine months ended February 28, 2005 as a result of changes in management
      personnel that included accrued severance costs. Other increases for the nine
      months ended February 28, 2006 as compared with the nine months ended February
      28, 2005 included public relations and consultant expenses of approximately
      $124,000, insurance expenses of approximately $56,000 and travel expenses of
      approximately $55,000. Non cash general expenses of approximately $69,000 were
      recognized in connection with recording the issuance of warrants using the
      Black-Scholes method. Offsetting these increases were decreases in legal
      contingency fees of approximately $554,000, decreases in patent enforcement
      expenses of approximately $187,000. Finally, our newly created limited liability
      company, which we have consolidated since its creation in June 2005, incurred
      $1,500,000 in expenses paid to the other member of the limited liability
      company, as part of the quarterly fee to be paid to the other member in
      accordance with our limited liability company agreement and approximately
      $1,377,000 in legal and other operational expenses.





Settlement and
      license expenses amounting to approximately $3,855,000 were recorded during
      the
      nine months ended February 28, 2006 in connection with the agreements involving
      the formation of a limited liability company and, separately, a license
      agreement with Intel Corporation. The expenses consisted of both cash and
      non-cash elements related to incremental, direct costs of completing the
      transactions. In connection with the transactions, it was necessary for the
      Company to obtain the consent of certain debenture and warrant holders. The
      necessary consents, together with certain warrants held by the debenture holders
      and the release of their security interests in our intellectual property, were
      obtained in exchange for cash, new warrants and repriced warrants. The expenses
      resulted primarily from cash payments to debt holders of approximately
      $1,300,000, to co-owners of various intellectual property assets of
      approximately $960,000 and to a committee of the Company's board of directors
      of
      approximately $170,000. Non-cash expenses totaled approximately $1,400,000
      and
      resulted primarily from the incremental value of the effect of repricing various
      warrants and granting other warrants in excess of the expense previously
      recognized for warrants granted to these security holders, as well as the value
      of the warrants reconveyed to the Company.





15




Other income
      and expense items for the Company amounted to a net expense of approximately
      $2,399,000 for the nine months ended February 28, 2005 and decreased to a net
      expense of approximately $2,179,253 for the nine months ended February 28,
      2006.
      Other income for the nine months ended February 28, 2005 primarily resulted
      from
      a one-time settlement with a subtenant amounting to approximately $47,000.
      For
      the nine months ended February 28, 2006 other income primarily resulted from
      interest and dividends in the amount of approximately $262,000. Cash and
      non-cash interest expense declined from approximately $2,442,000 for the nine
      months ended February 28, 2005 to approximately $1,182,000 for the nine months
      ended February 28, 2006 as the amortization of debt discount has declined and
      the remaining debentures were converted during the nine months ended February
      28, 2006. The value of debt discount features recorded upon the issuance of
      a
      debenture is expensed as non-cash interest over the term of the debt. However,
      as the debentures are converted into common stock, any remaining balance of
      debt
      discount is recognized as non-cash interest in that period. Non-cash interest
      expense decreased from approximately $2,323,000 for the nine months ended
      February 28, 2005 to approximately $413,000 for the nine months ended February
      28, 2006. The Company charged approximately $723,000 to interest expense to
      record the beneficial conversion features of debentures converted to shares. During the nine months ended February 28, 2006, the
      Company
      recorded a loss on debt extinguishment of $1,260,688 related to the 7,000,000
      warrants issued to a debenture holder as consideration for entering into the
      reset agreements.




During the nine
      months ended February 28, 2006, the Company recorded a provision for income
      taxes of $1,880,000 related to Federal alternative minimum tax and California
      state tax. Also, during the nine months ended February 28, 2006, the Company
      utilized approximately $33,400,000 of its available net operating loss
      carry-forwards to offset its taxable income arising in the quarter.





The Company
      recorded net income for the nine months ended February 28, 2006 of approximately
      $28,053,000 compared with a net loss of approximately $1,521,000 for the nine
      months ended February 28, 2005.





*Comparison
      of the Three Months Ended February 28, 2006 and Three Months Ended February
      28,
      2005.*





During
      the three months ended February 28, 2006, our joint venture limited liability
      company signed agreements licensing our intellectual property with Hewlett
      Packard, Fujitsu and Casio for one time payments totaling $60,000,000. It is
      not
      possible to predict when, if ever, we will again be successful in obtaining
      future license agreements. For the three months ended February 28, 2005 license
      revenue consisted of approximately $2,950,000 from our one time licensing
      agreement with AMD. P roduct
      sales amounting to approximately $277,000 were recorded in the three-month
      period ended February 28, 2006 in connection with communications products that
      are no longer marketed by the Company .
      Inventory associated with the sales of these communications products is carried
      at zero value. Cost of sales of approximately $103,000 consists of payments
      made
      to subcontractors for materials and labor in connection with the product sales.
      For the three months ended February 28, 2005 the Company had no such product
      sales.




Research and
      development expenses amounted to approximately $27,000 for the three months
      ended February 28, 2006 and approximately $54,000 for the three months ended
      February 28, 2005. The total costs of salaries and related expenses amounted
      to
      approximately $47,500 for the three months ended February 28, 2005 and there
      were no salaries and related expenses for the three months ended February 28,
      2006 due to the staffing reductions. Consulting and related support expenses
      increased from approximately $3,700 during the three months ended February
      28,
      2005 to approximately $27,000 for the three months ended February 28, 2006
      as
      research and development activities moved to outside contractors. Depreciation
      for fixed assets associated with research and development activities amounted
      to
      approximately $2,800 for the three months ended February 28, 2005 and was not
      present in the three months ended February 28, 2006, as equipment became fully
      depreciated and was not replaced.





Selling ,
      general
      and administrative expenses increased from approximately $1,086,000 for the
      three months ended February 28, 2005 to approximately $2,094,000 for the three
      months ended February 28, 2006. Legal and accounting related expenses increased
      by approximately $65,000 for the three months ended February 28, 2006 compared
      with the three months ended February 28, 2005 related to legal matters connected
      with intellectual property and legal issues related to former employees and
      other corporate matters as well as increases in audit and accounting related
      fees from outside firms. In addition, salary costs increased approximately
      $52,000 for the three months ended February 28, 2006 compared with the three
      months ended February 28, 2005 as a result of changes in management personnel.
      Other increases for the three months ended February 28, 2006, as compared with
      the three months ended February 28, 2005, included rent expense of approximately
      $26,000 as the company accrued the liability for the remaining term of the
      lease
      on its former offices, website expense of approximately $22,000 as the company
      redesigned its website, insurance expenses of approximately $18,000 and travel
      related expense of approximately $20,000. Non cash general expenses of
      approximately $69,000 were recognized in connection with recording issuance
      of
      warrants using the Black-Scholes method. Offsetting these increases were
      decreases in legal contingency fees of approximately $554,000, patent
      enforcement expenses of approximately $120,000, and marketing expenses of
      approximately $10,000. Finally, our newly created limited liability company,
      which we have consolidated since its creation in June 2005, incurred $500,000
      in
      expenses paid to the other member of the limited liability company, as part
      of
      the quarterly fee to be paid to the other member in accordance with our limited
      liability company agreement and approximately $89,000 in legal and other
      operational expenses.





16


Other income
      and expense items for the Company amounted to a net expense of approximately
      $1,153,000 for the three months ended February 28, 2005 and decreased to a
      net
      expense of approximately $738,000 for the three months ended February 28, 2006.
      Other income for the three months ended February 28, 2006 primarily resulted
      from interest and dividend income in the amount of approximately $128,000.
      Other
      income amounted to approximately $9,800 during the three months ended February
      28, 2005. Interest expense declined from approximately $1,161,000 for the three
      months ended February 28, 2005 to approximately $868,000 for the three months
      ended February 28, 2006, resulting primarily from a decline in non-cash interest
      from approximately $1,130,000 to approximately $132,000 for the respective
      three
      month periods as the amortization of debt discount declined and the remaining
      debentures were converted. The value of debt discount features recorded upon
      the
      issuance of a debenture is expensed as non-cash interest over the term of the
      debt. However, as the debentures are converted into common stock, any remaining
      balance of debt discount is recognized as non-cash interest in that period.
      The
      Company charged approximately $723,000 to interest expense to record the
      beneficial conversion features of debentures converted to shares. During the three months ended February 28, 2006, the Company
      recorded a loss on debt extinguishment of $1,260,688 related to the 7,000,000
      warrants issued to a debenture holder as consideration for entering into the
      reset agreements.




The Company
      recorded net income for the three months ended February 28, 2006 of
      approximately $24,886,000 compared with net income of approximately $659,000
      for
      the three months ended February 28, 2006.





**LIQUIDITY
      AND CAPITAL RESOURCES**





The
      Company's cash, marketable securities and short-term investment balances
      increased from approximately $1,289,000 as of May 31, 2005 to approximately
      $24,658,000 as of February 28, 2006. As of February 28, 2006, we held two
      savings accounts which were restricted as collateral for our corporate credit
      cards and we held a short-term certificate of deposit amounting to approximately
      $202,000 as of May 31, 2005, which was restricted as collateral on our line
      of
      credit. Total current assets increased from approximately $3,612,000 as of
      May
      31, 2005 to approximately $58,947,000 as of February 28, 2006. The increase
      in
      current assets results primarily from funds received and due from license fee
      agreements through our joint venture limited liability company. As of the filing
      date of this statement all license fees receivable have been received by the
      Company. Total current liabilities increased from approximately $1,644,000
      as of
      May 31, 2005 to approximately $11,176,000 as of February 28, 2006. The
      improvement in the current position of the Company primarily resulted from
      the
      license agreements obtained by our joint venture limited liability company
      and
      with Intel Corporation which were recorded during the nine months ended February
      28, 2006. Included within both our cash and current assets totals at February
      28, 2006 is approximately $7,848,000 of cash, which is held by our joint venture
      limited liability company, which we consolidate for accounting purposes. As
      this
      cash has been invested by both us and the other member into this entity, its
      use
      is limited to the operations of the limited liability company.





During the nine
      months ended February 28, 2006, the Company’s operating activities generated
      approximately $30,724,000 of cash. The Company's net income, adjusted for
      non-cash expense items, primarily resulted from the license agreements obtained
      by our joint venture limited liability company and with Intel Corporation.
      The
      Company's operating activities used cash amounting to approximately $945,000
      during the nine months ended February 28, 2005, primarily due to the Company's
      net loss as adjusted for non-cash expense items.





Investing
      cash flows consisted primarily of proceeds of investments sold, payment for
      investments acquired and capital expenditures. The Company used approximately
      $3,377,000 in net cash for investing activities during the nine months ended
      February 28, 2006 compared to $200,000 for the nine months ended February 28,
      2005. The increase in cash used in investing activities primarily resulted
      from
      the purchase of marketable securities.





17


Cash
      used
      in financing activities consisted primarily of our joint venture limited
      liability company’s distribution to the other member of approximately
      $9,784,000. The Company used approximately $7,460,000 in net cash for financing
      activities for the nine months ended February 28, 2006 compared to receiving
      approximately $1,644,000 in net cash for the nine months ended February 28,
      2005. Cash was provided by the exercise of common stock warrants and options
      amounting to approximately $679,000 during the nine months ended February 28,
      2006 and approximately $706,000 during the nine months ended February 28, 2005.
      Additionally, cash in the amount of approximately $943,000 was provided by
      issuance of convertible debentures and common stock during the nine months
      ended
      February 28, 2005. No such transactions occurred during the nine months ended
      February 28, 2006.





Included in
      financing activities is $2,000,000 invested by the other member into a limited
      liability company, which we consolidate for financial reporting purposes. The
      limited liability company was created for the purposes of jointly pursuing
      infringers of our technologies. In connection with the creation of the limited
      liability company, both the other member and we have committed to funding the
      operations of the limited liability company, if necessary, up to an additional
      $4,000,000, with no more than $2,000,000 being required in any one year. The
      limited liability company agreement provides that the other member is to be
      paid
      a quarterly amount ranging between $500,000 and $1,000,000 (based upon a
      percentage of the working capital fund balance of the limited liability company)
      on a quarterly basis by the limited liability company for services performed
      by
      the other member.





In
      February, 2006, the Company announced a dividend of $0.02 per share of common
      stock for stockholders of record and qualified warrant holders as of February
      24, 2006. The dividend resulted in an accrued liability amounting to $8,114,378
      as of February 28, 2006. In March 2006 the Company announced a dividend of
      $0.04
      per share of common stock for stockholders of record and qualified warrant
      holders as of March 31, 2006. The dividend is expected to result in a use of
      cash funds amounting to approximately $16,584,000 to be paid from net cash
      provided by operating activities.





The
      Company’s current working capital position as of February 28, 2006, is expected
      to provide the funds necessary to support the Company’s operations for the next
      12 months. During the nine months ended February 28, 2006, we incurred
      significant cash and non-cash expenses related to the TPL and limited liability
      company transactions, which we expect to be of a nonrecurring nature. Given
      the
      unpredictable nature of our revenue stream, we have attempted to curb other
      non-strategic expenses. The Company is currently assessing various strategies
      to
      pursue in the future, which may include, among other things, expanding our
      commitment to research and development or making acquisitions of other
      technologies.





During recent
      years we have relied upon financing activities to provide the funds necessary
      for the Company’s operations including the sale of common stock and the issuance
      of debentures and notes payable for cash. In addition, we have issued stock
      and
      warrants and options for the purchase of the Company’s common stock in return
      for services. Although we have entered into various license agreements in fiscal
      2006 that have resulted in our reporting significant revenue, there can be
      no
      assurance that we will be able to achieve profitable operations in the future.
      Should the funds generated from these agreements be insufficient to fund our
      operations, we may be forced to curtail our operations or seek additional
      external funding. There can be no assurance that additional funding would be
      available to us or, if it is available, that it would be on terms favorable
      to
      us.





**RECENT
      ACCOUNTING PRONOUNCEMENTS**





In
      December 2004, the FASB issued SFAS 123R, “Share Based Payment.” This statement
      replaces SFAS No. 123 and supersedes APB Opinion 25. SFAS No. 123R requires
      that
      the cost of share-based payment transactions (including those with employees
      and
      non-employees) be recognized as compensation based on the estimated fair value
      of the equity instrument awarded. SFAS No. 123R applies to all share-based
      payment transactions in which an entity acquires goods or services by issuing
      (or offering to issue) its shares, options, or other equity instruments or
      by
      incurring liabilities in amounts based on the price of the entity’s shares or
      other equity instruments, or that require (or may require) settlement by the
      issuance of an entity’s shares or other equity instruments. This statement
      applies to all new awards granted during the fiscal year beginning after
      December 15, 2005 and to previous awards that are remodified or cancelled after
      such date. The Company has not yet fully evaluated the effect of adopting SFAS
      No. 123R on its financial statements.





18


In
      December 2004, the FASB issued SFAS No. 153, “Exchange of Nonmonetary Assets,”
an amendment of APB Opinion No. 29, “Accounting for Nonmonetary Transaction.”
SFAS No. 153 is based on the principle that exchanges of nonmonetary assets
      should be measured based on the fair market value of the assets exchanged.
      SFAS
      No. 153 eliminates the exception of nonmonetary exchanges of similar productive
      assets and replaces it with a general exception for exchanges of nonmonetary
      assets that do not have commercial substance. SFAS 153 is effective for
      nonmonetary asset exchanges in fiscal periods beginning after June 15, 2005.
      The
      Company does not believe that the provisions of SFAS No. 153 will have a
      material impact on its financial statements.





In
      May
      2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
which replaces APB Opinion No. 20,
“Accounting Changes,” and FASB Statement No. 3, “Reporting Accounting Changes in
      Interim Financial Statements,” and changes the requirements for the accounting
      for and reporting of a change in accounting principle. SFAS No. 154 requires
      retrospective application to prior periods' financial statements of changes
      in
      accounting principle, unless it is impracticable to determine either the
      period-specific effects or the cumulative effect of the change. SFAS No. 154
      is
      effective for accounting changes and correction of errors made in fiscal years
      beginning after December 15, 2005. Early adoption is permitted for accounting
      changes and correction of errors made in fiscal years beginning after the date
      SFAS No. 154 was issued. At the present time, the Company does not believe
      that
      adoption of SFAS No. 154 will have a material effect on its financial
      statements.





**RISK
      FACTORS**





You should
      consider the following discussion of risks as well as other information
      regarding our common stock. The risks and uncertainties described below are
      not
      the only ones, as additional risks and uncertainties not presently known to
      us
      or that we currently deem immaterial also may impair our business operations.
      If
      any of the following risks actually occur, our business could be harmed.





**WE
      ARE CURRENTLY INVOLVED IN A LEGAL DISPUTES WHICH COULD IMPACT OUR FUTURE RESULTS
      OF OPERATIONS AND WORKING CAPITAL**





We are
      currently in a dispute with a former legal advisor, pursuant to which the legal
      advisor is asserting a claim against the proceeds we received under our recently
      signed license agreements. We believe that the advisor's claim lacks merit.
      However, if we do not prevail in this dispute, the amount payable to such legal
      advisor could affect our business and operations. In addition, if we are
      required to litigate this matter, or otherwise settle the matter outside of
      court, the cost of resolving this matter may impact our future reported results
      of operations and consume a significant amount of cash.





Additionally,
      the Company has just been notified that it is being sued by a co-inventor of
      the
      patent portfolio technology relating to proceeds we received under our recently
      signed license agreements. We believe that the co-inventor’s claim lacks merit,
      a claim which the company disputes and which the company intends to defend
      vigorously. Should we not prevail in this dispute, the amount payable to the
      co-inventor could affect our business and operations. In addition, if we are
      required to litigate this matter, or otherwise settle the matter outside of
      court, the cost of resolving this matter may impact our future reported results
      of operations and consume a significant amount of cash.





**RELATED
      TO OUR BUSINESS**





**WE
      HAVE A HISTORY OF LOSSES, EXPECTS FUTURE LOSSES AND MAY NOT ACHIEVE
      OR**


**SUSTAIN
      ANNUAL PROFITABILITY**





We have a
      history of reported losses. For the fiscal years ended May 31, 2005 and 2004,
      we
      reported net losses of approximately $2,700,000 and $4,100,000, respectively.
      These losses have resulted primarily from significant costs associated with
      the
      development of our products, costs associated with the marketing of those
      products office overhead, and the interest charges and expenses related to
      equity and debt financings. Although we have entered into various license
      agreements in fiscal 2006, which have resulted in our reporting significant
      revenue, there can be no assurance that we will be able to achieve sustained
      profitable operations in the future. Should the funds generated from these
      agreements be insufficient to fund our operations, we may be forced to curtail
      our operations or seek additional external funding. There can be no assurance
      that additional funding would be available to us or, if it is available, that
      it
      would be on terms favorable to us.





19




**RELATED
      TO OUR INDUSTRY**





**OUR
      LIMITED ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY MAY INADVERTENTLY ADVERSELY
      AFFECT OUR ABILITY TO COMPETE**





A
      successful challenge to our ownership of our technology could materially damage
      our business prospects. Our technologies may infringe upon the proprietary
      rights of others. Licenses required by us from others may not be available
      on
      commercially reasonable terms, if at all. We rely on a combination of patents,
      trademarks, copyrights, trade secret laws, confidentiality procedures and
      licensing arrangements to protect our intellectual property rights. We currently
      have eight U.S., one European and one Japanese patents issued. Any issued patent
      may be challenged and invalidated. Patents may not be issued for any of our
      pending applications. Any claims allowed from existing or pending patents may
      not be of sufficient scope or strength to provide significant protection for
      our
      products. Patents may not be issued in all countries where our products can
      be
      sold so as to provide meaningful protection or any commercial advantage to
      us.
      Our competitors may also be able to design around our patents.





Vigorous protection and pursuit of intellectual property rights or positions characterize
      the fiercely competitive semiconductor industry, which has resulted in
      significant and often protracted and expensive litigation. Therefore, our
      competitors may assert that our technologies or products infringe on their
      patents or proprietary rights. Problems with patents or other rights could
      increase the cost of our products or delay or preclude new product development
      and commercialization by us. If infringement claims against us are deemed valid,
      we may not be able to obtain appropriate licenses on acceptable terms, or at
      all. Litigation could be costly and time-consuming but may be necessary to
      protect our future patent and/or technology license positions or to defend
      against infringement claims. (See our discussion of Legal Proceedings below.)
      We
      did not develop the technology, which is the basis for our products. This
      technology, which was originally known as the ShBoom technology, was acquired
      through a series of agreements from one of two co- inventors. We have been,
      and
      may again be, subject to claims from such prior parties related to the
      technology. Such parties may also attempt to exploit the technology
      independently of our rights to do so. The asset purchase agreement and plan
      of
      reorganization between us, nanoTronics Corporation and Helmut Falk was the
      agreement under which we acquired the basic ShBoom technology. The agreement
      also contained a number of warranties and indemnities related to the ownership
      of the technology and other matters. We believe nanoTronics Corporation has
      been
      liquidated and, due to Mr. Falk’s death in July 1995, our ability to obtain
      satisfaction for any future claims as a result of a breach of the agreement
      may
      be limited.





**RELATED
      TO OUR DEBT AND EQUITY OFFERINGS AND SHARE PRICE WE MAY NOT BE ABLE TO OBTAIN
      ADDITIONAL CAPITAL TO FUND OUR OPERATIONS WHEN NEEDED**





A
      lack of
      additional funding could force us to substantially curtail or cease our
      operations, which would have a material adverse effect on our business. Our
      ability to raise additional funds under the debenture agreement is subject
      to
      certain conditions. These conditions include the effectiveness of a registration
      statement covering the resale of the shares sold on the conversion of the
      debentures or the exercise of the warrants issued concurrently with the
      debentures. There can be no assurance that any future funds required will be
      generated from operations or from other potential sources. Further, any such
      required funds may only be available on unattractive terms and may significantly
      dilute the value of our existing shares.





**IF
      A LARGE NUMBER OF OUR SHARES ARE SOLD ALL AT ONCE OR IN BLOCKS, THE MARKET
      PRICE
      OF OUR SHARES WOULD MOST LIKELY DECLINE**





Our
      debenture holders are not restricted in the price at which they can sell common
      stock acquired through the conversion of the debentures or exercise of warrants
      issued with the debentures. Shares sold at a price below the current market
      price at which the common stock is trading may cause the market price to
      decline. The shares of common stock that are issuable on the conversion of
      debentures or exercise of the warrants issued concurrently with the debentures
      represent a significant portion of our outstanding shares. Should the price
      of
      our stock drop, the number of common shares issuable on the conversion of these
      debentures would be subject to reset provisions, which would substantially
      increase the number of common shares to be issued. To the extent the debenture
      holders, and stockholders of currently outstanding common stock, convert and
      sell their common stock, the common stock price may decrease due to the
      additional shares in the market. This could allow remaining debenture holders
      to
      convert their convertible debentures into even greater amounts of common stock,
      the sales of which would further depress the stock price. Accordingly, we do
      not
      know the exact number of shares that will be issued on the conversions of the
      debentures.





20


In addition ,
      at the
      option of the debenture holder, interest accruing at the annual rate of 8%
      can
      be converted into shares of our common stock at the same time and at the same
      conversion price as the principal portion of the debenture. Should the debenture
      holders accumulate interest, a larger number of shares would be issued on
      conversion; and if the price of the common stock declines, the reset provisions,
      which allow greater amounts of shares to be issued, would also be in effect
      for
      the interest portion of the debenture.





As
      of the
      quarter ended February 28, 2006, we have no outstanding debentures and do not
      anticipate any further debenture financing in the future.





**IF
      A LARGE NUMBER OF OUR SHARES ARE SOLD ALL AT ONCE OR IN BLOCKS, THE MARKET
      PRICE
      OF OUR SHARES WOULD MOST LIKELY DECLINE**





Our common stock is
      currently listed for trading in the NASD Over-The-Counter Bulletin Board Market
      and is subject to the “penny stock rules” adopted pursuant to Section 15(g) of
      the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In
      general, the penny stock rules apply to non-NASDAQ or non-national stock
      exchange companies whose common stock trades at less than $5.00 per share or
      which have tangible net worth of less than $5,000,000 ($2,000,000 if the company
      has been operating for three or more years). Such rules require, among other
      things, that brokers who trade “penny stock” to persons other than “established
      customers” complete certain documentation, make suitability inquiries of
      investors and provide investors with certain information concerning trading
      in
      the security, including a risk disclosure document, quote information, broker’s
      commission information and rights and remedies available to investors in penny
      stocks. Many brokers have decided not to trade “penny stock” because of the
      requirements of the penny stock rules, and as a result, the number of
      broker-dealers willing to act as market makers in such securities is limited.
      The “penny stock rules,” therefore, may have an adverse impact on the market for
      our common stock and may affect our ability to attract competitive
      funding.





**OUR
      SHARE PRICE COULD BE LOWERED AS A RESULT OF SHORT SALES**





The downward pressure
      on the price of our common stock as the debenture holders convert and sell
      material amounts of common stock could encourage short sales by the debenture
      holders or others. When an investor sells stock that he does not own, it is
      known as a short sale. The seller, anticipating that the price of the stock
      will
      go down, will buy the stock at a later date. If the price of the stock goes
      down, the seller will profit to the extent of the difference between the amount
      the seller originally sold it for less the amount the seller later had to pay
      to
      buy it. Short sales enable the seller to profit in a down market. Short sales
      could place significant downward pressure on the price of our common
      stock.





**ON
      A SIGNIFICANT DROP IN THE PRICE OF OUR STOCK, WE COULD BE SUBJECT TO A CHANGE
      IN
      CONTROL**





There
      is
      a possibility that a significant number of shares, the exact number of which
      we
      do not know, of our common stock could be issued on the conversion of the
      debentures. This possibly could result in a change in control of our Company.
      Such a change in control could have a material adverse effect on our operations
      and business plans. We are unable to determine the impact such a change in
      control could have on our Company.





**Item
      3. Controls and Procedures**





As required
      by Rule 13a-15(e) under the Exchange Act, as of February 28, 2006, the end
      of
      the period to which this quarterly report relates, we have carried out an
      evaluation of the effectiveness of the design and operation of our disclosure
      controls and procedures. This evaluation was carried out under the supervision
      and with the participation of our management, including our President and our
      Chief Financial Officer. Based upon that evaluation, our President and Chief
      Financial Officer concluded that the disclosure controls and procedures are
      effective.





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 SEC’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
      President and Chief Executive Officer as appropriate, to allow timely decisions
      regarding required disclosure.





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.


21




**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





In December
      2003, Patriot Scientific Corporation, a Delaware corporation (hereinafter
      referred to as the “Company,” “we” or “us”), filed several lawsuits in United
      States District Courts against companies we contend are infringing on our 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
              NumberSony Corporation of America
            
            Southern District of New York
            
            03CV10142Fujitsu
            
            Northern District of
              California
            
            C035787Toshiba America, Inc.
            
            Southern District of New York
            
            03CV10180NEC USA, Inc.
            
            Eastern District of New York
            
            CV036432Matsushita
            
            District of New Jersey
            
            03CV06210




The Company
      was requesting that the courts enjoin the defendants from making use of our
      patent and requested damages for past infringements. In February 2005, with
      the
      consent of the defendants, 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 (“Intel”) filed a lawsuit against us in the United
      States District Court- Northern District of California, case number C040439,
      in
      which they requested a declaratory judgment that their microprocessors, used
      by
      the defendants in our consolidated suit, do not infringe our patent. We filed
      a
      counterclaim against Intel contending that they also are infringing on our
      patent, and Intel asserted an affirmative defense that our 5,809,336 patent
      is
      invalid.





In
      February 2004, the Company filed a lawsuit (the “Inventorship Litigation”) in
      the United States District Court- Northern District of California, case number
      C040618, against TPL, Charles H. Moore, an individual (“Moore” and together with
      the Company and TPL, the “Parties”), and Daniel E. Leckrone, an individual.
      Counterclaims were filed seeking a declaration from the Court that the
      inventors, as stated in the original patent filings, were the inventors of
      the
      respective patents.





On
      June
      7, 2005, the Company entered into a master agreement (the “PTSC/TPL Master
      Agreement”) by and among the Company, TPL and Moore. Moore and TPL were parties
      to certain lawsuits filed by the Company alleging infringement of certain
      microprocessor science and design patents (“Patents”) and a lawsuit filed by the
      Company alleging claims for declaratory judgment for determination and
      correction of inventorship of the Patents. The transactions described in the
      PTSC/TPL Master Agreement and related agreements form a part of the settlement
      or dismissal of the Inventorship Litigation.





Pursuant
      to the PTSC/TPL Master Agreement, the Parties have agreed, in pertinent part,
      as
      follows:





(a)
      The
      Company entered into a patent license agreement (the “Intel License”) with
      Intel, pursuant to which the Company licensed certain rights in the Patents
      to
      Intel.





(b)
      The
      Company and TPL will cause certain of their respective interests in the Patents
      to be licensed to a limited liability company that will be owned 50% by the
      Company and 50% by TPL (the “JV LLC”).





(c)
      The
      JV LLC will engage TPL to commercialize the Patents pursuant to a
      Commercialization Agreement among the JV LLC, TPL and the Company (the
“Commercialization Agreement”).





22


(d)
      The
      Parties will settle or cause to be dismissed all litigation among them pursuant
      to a stipulated final judgment, including the Inventorship
      Litigation.





On
      June
      7, 2005, in connection with the PTSC/TPL Master Agreement, the Company entered
      into the Commercialization Agreement by and among the JV LLC, TPL and the
      Company. Pursuant to the Commercialization Agreement, the JV LLC has granted
      to
      TPL the exclusive right to grant licenses and sub-licenses of the Patents and
      to
      pursue claims against violators of the Patents.





The
      Parties executed and filed a stipulated final judgment in the Inventorship
      Litigation, which provided for a dismissal of the
      Company's third amended complaint and final judgment in favor of TPL and Moore
      on their counterclaims.





In
      October 2005 we dismissed the infringement claims above. Pursuant to the rights
      afforded to TPL under the PTSC/TPL Master Agreement, TPL filed patent
      infringement claims in the Eastern District of Texas on October 24, 2005,
      against various Japanese manufacturers. This new complaint set forth broader
      theories of infringement than those we had initiated in the Northern District
      of
      California, including with respect to more products and with respect to claims
      related to the “336,” “584” and “148” patents (all part of the 1989 patent
      applications of Russell Fish and Charles Moore).





The
      infringement defendants in the Texas action filed five new declaratory relief
      actions in the Northern District of California on November 28, 2005 against
      TPL,
      the Company, and Moore asking that Court to declare that they are not infringing
      on our patents and/or that the patents are not valid. Those defendants attempted
      to have their claims declared to be administratively “related” to the action we
      dismissed in October but their attempt has not succeeded. We recently joined
      with TPL in Motions to Dismiss or Transfer the declaratory relief actions
      discussed above to the Eastern District of Texas, where we expect the patent
      infringement litigation will be handled more expeditiously. The court in the
      Northern District of California subsequently granted the motion of TPL and
      the
      Company to stay the proceedings in California. The court deferred to the
      decision to be made by the court in Texas. In February, 2006, a license
      agreement was entered into with Fujitsu Corporation regarding the Company’s
      patent portfolio and in connection with that transaction, litigation involving
      Fujitsu and TPL and the Company in both California and Texas was
      dismissed.





Additional
      Litigation:




Beatie and
        Osborne, LLP v. Patriot Scientific Corporation, et al., is an
        action by a New York law firm, Beatie and Osborn (“BandO”) that formerly
        represented the Company in patent infringement litigation commenced by the
        Company against certain various microprocessor chip manufacturers in the
        Northern District of California. This patent infringement litigation is still
        pending except with regard to Intel and Fujitsu Corporation. In addition,
        BandO
        represented the Company in the Inventorship Litigation. BandO undertook such
        representation of the Company on a contingency fee basis and had previously
        reached an agreement with the Company with respect to transmission of
        anticipated litigation costs in connection with those underlying litigation
        matters. BandO is believed to presently hold in its trust account approximately
        $210,000 of the Company’s funds advanced for litigation costs, and BandO claims
        it is entitled to be reimbursed approximately $240,000 in litigation costs.
        The
        Company disputes BandO’s claim to those litigation costs.





On
      March
      8, 2005, BandO was disqualified by United States District Judge Jeremy Fogel
      in
      the Inventorship Litigation. BandO subsequently withdrew from representation
      of
      the Company in the patent infringement litigation. On April 12, 2006, the United
      States Court of Appeals upheld the disqualification ruling by Judge
      Fogel.





BandO
      initiated litigation in the Supreme Court of New York on or about June 8, 2005,
      claiming breach of contract, quantum meruit and
      unjust enrichment, and alleging claims against the Company and former Company
      representatives Jeffery Wallin and Lowell Giffhorn, for fraud and interference
      with the contractual relationship. BandO claims a contingency fee under the
      terms of its contingency fee agreement, with respect to licensing agreements
      entered and possibly to be entered into by the Company. The Company denies
      past,
      present or future liability to BandO, and intends to vigorously defend this
      action.





The
      Company caused a removal of the action to the United States District Court
      for
      the Southern District of New York, and has filed a motion to have the litigation
      transferred to California. A decision is expected by the District Court this
      upcoming quarter. Discovery has yet to be commenced in the New York litigation.
      However, the Company has claimed that the disqualification of BandO in the
      Inventorship Litigation and its withdrawal from the patent infringement
      litigation has caused a forfeiture of any rights of BandO to a contingency
      fee.
      Further, the Company is evaluating commencing a legal malpractice claim against
      BandO that the Company believes will exceed the claims asserted by BandO. As
      for
      the agreement regarding costs and fees, the Company hopes to show that BandO
      breached the terms of the agreement and is not entitled to any costs from the
      escrow. This assumes, for the sake of argument, that BandO would have any right
      to the funds in escrow as a result of Judge Fogel's Order disqualifying BandO
      on
      various grounds, including violation of the California Rules of Professional
      Responsibility.





23


Litigation
      is inherently uncertain and while the Company believes that the claims brought
      by BandO do not have merit, especially in light
      of the disqualification previously described, there can be no assurances that
      the resolution of the matter will not negatively impact the Company’s financial
      position or its results of operations in the future.





On
      September 23, 2005, Lowell Giffhorn, a former executive officer and a current
      director of the Company submitted a demand for arbitration with the American
      Arbitration Association related to the termination of Mr. Giffhorn’s employment
      with the Company. Mr. Giffhorn asserts that the termination of his employment
      with the Company was unlawful, retaliatory, wrongful, violated public policy,
      violated the covenant of good faith and fair dealing and violated securities
      laws. Mr. Giffhorn is seeking damages of $1,500,000 in connection with his
      claims. The Company intends to vigorously defend itself with regard to these
      claims. Despite the inherent uncertainties of litigation, the Company does
      not
      believe that the foregoing will have a material adverse impact on its financial
      condition, results of operations, or cash flows.





On
      April
      6, 2006, the Company filed a lawsuit in the U. S. District Court for the
      Southern District of California against Russell H. Fish (“Fish”) and others
      associated with The Fish Family Trust for declaratory relief that the July
      27,
      2004 contract between the parties to the lawsuit relating to the Company's
      patent litigation and licensing program relating to the Company's patent
      litigation and licensing program is unenforceable because (i) it calls for
      payments that violate the law and various ethical rules governing the practice
      of law, (ii) it lacks consideration, (iii) frustration of purpose, and/or (iv)
      non-performance by Fish and performance by the Company of all obligations under
      the contract.





On
      April
      12, 2006, Fish and Robert Anderson, as trustee of The Fish Family Trust, filed
      a
      lawsuit against the Company in the District Court of Dallas County, Texas.
      The
      lawsuit is based on an alleged breach of the contract entered into on July
      27,
      2004 and seeks enforcement of the contract or damages.





**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds**


None.





**Item
      3. Defaults Upon Senior Securities**


None.





**Item
      4. Submission of Matters to a Vote of Security Holders**


None.





**Item
      5. Other Information**


None.





**Item
      6. Exhibits and Reports on Form 8-K**





Those
      exhibits marked with an asterisk (*) refer to exhibits filed herewith. The
      other
      exhibits are incorporated herein by reference, as indicated in the following
      list.




**Exhibit
                No.**
            
            **Description**(2.0)
            
            **PLAN
                OF PURCHASE, SALE, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
                SUCCESSION**(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(3.0)
            
            **ARTICLES
                AND BYLAWS**




24





**Exhibit
                No.**
            
            **Description**(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(3.3.6)
            
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on November 14, 2005, incorporated
                by
                reference to Exhibit 3.3.6 to Form 10-QSB for the period ended November
                30, 2005, filed January 23, 2006.(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(4.0)
            
            **INSTRUMENTS
                DEFINING THE RIGHTS OF SECURITY HOLDER, INCLUDING
                INDENTURES**(4.1)
            
            Specimen
                common stock certificate, incorporated by reference to Exhibit 4.1
                Form
                8-K dated May 12, 1992




25




**Exhibit
                No.**
            
            **Description**(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




26




**Exhibit
                No.**
            
            **Description**(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
                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(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




27




**Exhibit
                No.**
            **Description**(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)
            Agreement
                with Regard to Exercise Price Resets and 4.99% Limitation by and
                between
                the Company and
              Lincoln
                Ventures, LLC entered into as of February 9, 2006, incorporated by
                reference to Exhibit 4.29 on Form 8-K filed February 17,
                2006(4.30)
            Agreement
                with Regard to Exercise Price Resets and 4.99% Limitation by and
                between
                the Company and
              Swartz
                Private Equity, LLC entered into as of February 9, 2006, incorporated
                by
                reference to Exhibit 4.29 on Form 8-K filed February 17,
                2006(4.31)
            Waiver
                and Agreement by and between the Company and Lincoln Ventures, LLC,
                entered into as of February 9, 2006, incorporated by reference to
                Exhibit
                4.29 on Form 8-K filed February 17, 2006(4.32)
            Waiver
                and Agreement by and between the Company and Swartz Private Equity,
                LLC,
                entered into as of February 9, 2006, incorporated by reference to
                Exhibit
                4.29 on Form 8-K filed February 17, 2006(4.33)
            Warrant
                to Purchase Common Stock of the Company issued to Lincoln Ventures,
                LLC,
                incorporated by reference to Exhibit 4.29 on Form 8-K filed February
                17,
                2006(10.1)*
            Agreement
                dated July 27, 2004, by and among the Company, Russell H. Fish, III
                and
                The Fish Family Trust regarding patent litigation, licensing and
                proceeds(31.0)
            **RULE
                13a-14(a)/15d-14(a) CERTIFICATIONS**(31.1)*
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) under the
                Securities Exchange Act of 1934(31.2)*
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) under the
                Securities Exchange Act of 1934(32.0)
            **SECTION
                1350 CERTIFICATIONS**(32.1)*
            Certification
                of Chief Executive Officer pursuant to 18 U.S.C. §1350, as adopted
                pursuant to §906 of the Sarbanes-Oxley Act of 2002(32.2)*
            Certification
                of Chief Financial Officer pursuant to 18 U.S.C. §1350, as adopted
                pursuant to §906 of the Sarbanes-Oxley Act of
                2002





28


**SIGNATURES**





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








**PATRIOT
      SCIENTIFIC CORPORATION**




Date: *April
              19, 2006*
            By:
            /s/ *THOMAS
              J. SWEENEY**Thomas
              J. Sweeney,**Chief
              Financial Officer*





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


29