UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


Washington,
      D.C. 20549 ****





**FORM
      10-Q**




(Mark
      One)




[X]
            QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934





For
      the
      quarterly period ended February 28, 2007




OR




[_]
            TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                EXCHANGE ACT OF 1934




For the transition period from ___________ to ____________




Commission
      File Number 0-22182




**PATRIOT
      SCIENTIFIC CORPORATION**


(Exact
      name of registrant as specified in its charter)





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





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





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





Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
      during the preceding 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 [   ]




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
                accelerated filer [
                  ]
            Accelerated
                filer [  
]
            Non-accelerated
                filer
                [X]





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).




Yes
      [   ]No
      [X]




On
      April
      18, 2007, 390,092,696 shares of common stock, par value $0.00001 per share
      (the
      issuer’s only class of voting stock) were outstanding.







**INDEX**





**Page****PART
                I. FINANCIAL INFORMATION**ITEM
                1. Financial StatementsCondensed
                Consolidated Balance Sheets as of February 28, 2007 (unaudited) and
                May
                31, 2006
            3Unaudited
                Condensed Consolidated Statements of Operations for the three and
                nine
                months ended February 28, 2007 and 2006
            4Unaudited
                Condensed Consolidated Statements of Cash Flows for the nine months
                ended
                February 28, 2007 and 2006
            5-6Notes
                to Unaudited Condensed Consolidated Financial Statements
            7-27ITEM
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            28-37ITEM
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            37ITEM
                4. Controls and Procedures
            37**PART
                II. OTHER INFORMATION**ITEM
                1. Legal Proceedings
            38-39ITEM
                1A. Risk Factors
            39-41ITEM
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            41-42ITEM
                3. Defaults Upon Senior Securities
            42ITEM
                4. Submission of Matters to a Vote of Security Holders
            42ITEM
                5. Other Information
            42ITEM
                6. Exhibits
            42-49**SIGNATURES**











2




**PART
      I- FINANCIAL INFORMATION**





**Item
      1. Financial
      Statements**





**Patriot
      Scientific Corporation**


**Condensed
      Consolidated**  **Balance
      Sheets**


**February
                  28, 2007**
              
              **May
                  31, 2006****ASSETS**
              
              **(Unaudited)**Current
                  assets:Cash
                  and cash equivalents
              
              $
              15,388,002
              
              $
              3,984,240Restricted
                  cash and cash equivalents
              
              
              102,220
              
              
              100,320Marketable
                  securities and short term investments
              
              
              3,614,992
              
              
              3,518,879Accounts
                  receivable
              
              
              16,786
              
              
              4,113Prepaid
                  income taxes
              
              
              1,081,627
              
              
              -Deferred
                  tax assets
              
              
              2,380,925
              
              
              -Prepaid
                  expenses and other current assets
              
              
              171,778
              
              
              407,418Total
                  current assets
              
              
              22,756,330
              
              
              8,014,970**Property
                  and equipment, net**
              
              
              54,281
              
              
              64,006**Other
                  assets**
              
              
              8,190
              
              
              8,190**Investments
                  in affiliated companies**
              
              
              5,304,628
              
              
              3,952,914**Patents
                  and trademarks**,
                  net of accumulated amortization of $601,304 and $584,387
              
              
              14,670
              
              
              31,587$
              28,138,099
              
              $
              12,071,667**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              348,423
              
              $
              695,323Accrued
                  expenses and other
              
              
              376,533
              
              
              154,730Accrued
                  contingency fee payable
              
              
              -
              
              
              394,063Accrued
                  settlement fee payable
              
              
              3,000,000
              
              
              -Total
                  current liabilities
              
              
              3,724,956
              
              
              1,244,116**Deferred
                  tax liabilities**
              
              
              4,828,063
              
              
              -Total
                  liabilities
              
              
              8,553,019
              
              
              1,244,116**Commitments
                  and contingencies****Stockholders’
                  equity:**Preferred
                  stock, $0.00001 par value; 5,000,000 shares authorized: none
                  outstanding
              
              
              -
              
              
              -Common
                  stock, $0.00001 par value: 500,000,000 shares authorized: 389,447,145
                  shares issued and 378,668,118 shares outstanding at February 28,
                  2007 and
                  366,199,765 shares issued and outstanding at May 31, 2006
              
              
              3,894
              
              
              3,661Additional
                  paid-in capital
              
              
              72,025,107
              
              
              69,551,981Accumulated
                  deficit
              
              
              (45,002,257
              )
              
              (58,728,091
              )Common
                  stock held in treasury, at cost -10,779,027 shares and no shares
                  as of
                  February 28, 2007 and May 31, 2006, respectively
              
              
              (7,441,664
              )
              
              -Total
                  stockholders’ equity
              
              
              19,585,080
              
              
              10,827,551$
              28,138,099
              
              **$**
              12,071,667




*See
      accompanying notes to unaudited condensed consolidated financial
      statements.*


3


**Patriot
      Scientific Corporation**


**Condensed
      Consolidated Statements of Operations**


**(Unaudited)**


**Three
                  Months Ended**
              
              **Nine
                  Months Ended****February
                  28,**
                **2007**
              
              **February
                  28,**
                **2006**
              
              **February
                  28,**
                **2007**
              
              **February
                  28,**
                **2006****(As
                  restated,**
                **see
                  Note 2)**
              
              
              
              **(As
                  restated,**
                **see
                  Note 2)**Revenues:Licenses
                  and royalties
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              10,000,000Other
              
              
              22,175
              
              
              276,800
              
              
              67,050
              
              
              297,07222,175
              
              
              276,800
              
              
              67,050
              
              
              10,297,072Cost
                  of goods sold
              
              
              -
              
              
              103,351
              
              
              -
              
              
              103,351Gross
                  profit
              
              
              22,175
              
              
              173,449
              
              
              67,050
              
              
              10,193,721Operating
                  expenses:Research
                  and development
              
              
              -
              
              
              27,304
              
              
              -
              
              
              225,564Selling,
                  general and administrative
              
              
              1,445,857
              
              
              697,455
              
              
              5,914,803
              
              
              2,517,189Settlement
                  and license expense
              
              
              304,337
              
              
              -
              
              
              6,604,337
              
              
              1,918,054Total
                  operating expenses
              
              
              1,750,194
              
              
              724,759
              
              
              12,519,140
              
              
              4,660,807Operating
                  income (loss)
              
              
              (1,728,019
              )
              
              (551,310
              )
              
              (12,452,090
              )
              
              5,532,914Other
                  income (expense):Unrealized
                  loss on marketable securities
              
              
              -
              
              
              (64
              )
              
              -
              
              
              (1,201
              )Interest
                  and other income
              
              
              191,437
              
              
              78,089
              
              
              499,335
              
              
              171,737Loss
                  on extinguishment of debt
              
              
              -
              
              
              (445,427
              )
              
              -
              
              
              (445,427
              )Loss
                  on sale of assets
              
              
              -
              
              
              -
              
              
              (543
              )
              
              -Interest
                  expense
              
              
              -
              
              
              (202,810
              )
              
              -
              
              
              (516,324
              )Change
                  in fair value of warrant and derivative liabilities
              
              
              -
              
              
              (4,717,891
              )
              
              -
              
              
              (2,456,736
              )Equity
                  in earnings of affiliated company
              
              
              11,656,603
              
              
              29,327,829
              
              
              30,401,594
              
              
              28,607,664Impairment
                  of note receivable
              
              
              (339,551
              )
              
              -
              
              
              (339,551
              )
              
              -Total
                  other income, net
              
              
              11,508,489
              
              
              24,039,726
              
              
              30,560,835
              
              
              25,359,713Income
                  before income taxes
              
              
              9,780,470
              
              
              23,488,416
              
              
              18,108,745
              
              
              30,892,627Provision
                  for income taxes
              
              
              162,911
              
              
              -
              
              
              4,382,911
              
              
              -Net
                  income
              
              $
              9,617,559
              
              $
              23,488,416
              
              $
              13,725,834
              
              $
              30,892,627Basic
                  income per common share
              
              $
              0.03
              
              $
              0.08
              
              $
              0.04
              
              $
              0.10Diluted
                  income per common share
              
              $
              0.02
              
              $
              0.06
              
              $
              0.03
              
              $
              0.08Weighted
                  average number of common shares outstanding-basic
              
              
              381,031,577
              
              
              307,933,709
              
              
              374,711,954
              
              
              300,839,387Weighted
                  average number of common shares outstanding-diluted
              
              
              410,747,949
              
              
              404,508,397
              
              
              416,327,140
              
              
              397,730,530




*See
      accompanying notes to unaudited condensed consolidated financial
      statements.*


4


**Patriot
      Scientific Corporation**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**




**Nine
                  months ended****February
                  28, 2007**
              
              **February
                  28, 2006**(As
                  restated, see Note 2)**Operating
                  activities:**Net
                  income
              
              $
              13,725,834
              
              $
              30,892,627Adjustments
                  to reconcile net income to net cash provided by (used in) operating
                  activities:Amortization
                  and depreciation
              
              
              31,927
              
              
              44,584Non-cash
                  interest expense related to convertible debentures, notes payable
                  and
                  warrants
              
              
              -
              
              
              412,879Expense
                  related to extension of expiration date of stock options
              
              
              324
              
              
              125,000Net
                  gain related to warrant re-pricing, reconveyance and
                  issuance
              
              
              -
              
              
              (538,208
              )Loss
                  on extinguishment of debt
              
              
              -
              
              
              445,427Non-cash
                  compensation relating to issuance and vesting of stock options
                  and vesting
                  of warrants
              
              
              2,359,035
              
              
              -Accrued
                  interest income added to investments
              
              
              (1,900
              )
              
              (19,469
              )Equity
                  in earnings of affiliated company
              
              
              (30,401,594
              )
              
              (28,607,664
              )Impairment
                  of note receivable
              
              
              339,551
              
              
              -Unrealized
                  loss on marketable securities
              
              
              -
              
              
              1,201Loss
                  on disposal of fixed assets
              
              
              543
              
              
              -Issuance
                  of stock
              
              
              -
              
              
              207,869Change
                  in fair value of warrant and derivative liabilities
              
              
              -
              
              
              2,456,736Deferred
                  taxes
              
              
              2,447,138
              
              
              -Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (12,673
              )
              
              (27,496
              )Prepaid
                  expenses and other assets
              
              
              235,640
              
              
              34,266Prepaid
                  income taxes
              
              
              (1,081,627
              )
              
              -Licenses
                  receivable
              
              
              -
              
              
              1,500,000Accounts
                  payable and accrued expenses
              
              
              (125,097
              )
              
              48,321Accrued
                  contested fee payable
              
              
              (394,063
              )
              
              -Accrued
                  settlement fee payable
              
              
              3,000,000
              
              
              -Net
                  cash provided by (used in) operating activities
              
              
              (9,876,962
              )
              
              6,976,073**Investing
                  activities:**Purchases
                  of marketable securities
              
              
              (7,537,777
              )
              
              (4,327,786
              )Proceeds
                  from sales of marketable securities
              
              
              7,441,664
              
              
              862,209Purchases
                  of property and equipment
              
              
              (5,828
              )
              
              (56,126
              )Purchases
                  of restricted investments
              
              
              -
              
              
              (50,000
              )Payment
                  for security deposit
              
              
              -
              
              
              (8,190
              )Proceeds
                  from sale of restricted investments
              
              
              -
              
              
              203,210Investment
                  in affiliated company
              
              
              (120,000
              )
              
              (2,000,000
              )Issuance
                  of note receivable
              
              
              (589,551
              )
              
              -Distributions
                  from affiliated company
              
              
              29,419,880
              
              
              10,115,574Net
                  cash provided by investing activities
              
              
              28,608,388
              
              
              4,738,891**Financing
                  activities:**Principal
                  payments on secured notes payable
              
              
              **-**
              
              
              (100,000
              )Payments
                  on capital lease obligations
              
              
              **-**
              
              
              (2,306
              )Proceeds
                  from exercise of common stock warrants and options
              
              
              114,000
              
              
              678,994Repurchase
                  of warrants
              
              
              -
              
              
              (252,420
              )Repurchase
                  of common stock for treasury
              
              
              (7,441,664
              )
              
              -Net
                  cash provided by (used in) financing activities
              
              
              (7,327,664
              )
              
              324,268**Net
                  increase in cash and cash equivalents**
              
              
              11,403,762
              
              
              12,039,232**Cash
                  and cash equivalents, beginning of period**
              
              
              3,984,240
              
              
              591,426**Cash
                  and cash equivalents, end of period**
              
              $
              15,388,002
              
              $
              12,630,658**Supplemental
                  Disclosure of Cash Flow Information:**Cash
                  payments for interest
              
              $
              -
              
              $
              2,843Cash
                  payments for income taxes
              
              $
              3,017,400
              
              $
              -




5


**Patriot
      Scientific Corporation**


**Condensed
      Consolidated Statements of Cash Flows, continued**


**(Unaudited)**




**Nine
                  months ended****February
                  28, 2007**
              
              **February
                  28, 2006****Supplemental
                  Disclosure of Non-Cash Investing and Financing
                  Activities:**Dividend
                  declared but not paid
              
              $
              -
              
              $
              8,114,378Convertible
                  debentures, notes payable and accrued interest exchanged for common
                  stock
              
              $
              -
              
              $
              999,037Reclassification
                  of derivative liabilities associated with debt conversions and
                  warrant
                  exercises
              
              $
              -
              
              $
              5,021,353Reclassification
                  of warrant and derivative liabilities at settlement date
              
              $
              -
              
              $
              6,743,935Cashless
                  exercise of warrants
              
              $
              225
              
              $
              260Fair
                  market value of assets received in collection of note receivable
                  and
                  subsequently contributed forpreferred
                  stock of affiliate
              
              $
              250,000
              
              $
              -






*See
      accompanying notes to unaudited condensed consolidated financial
      statements*


6
 **Patriot
          ScientificCorporation**


**Notes
        to Unaudited Condensed Consolidated Financial Statements**
  1. Basisof
      Presentationand
      Summary ofSignificant
      Accounting Policies





The
      unaudited condensed consolidated financial statements of Patriot Scientific
      Corporation (the “Company”, “we”, “us” or “our”) presented herein have been
      prepared pursuant to the rules and regulations of the Securities and Exchange
      Commission (“SEC”) for quarterly reports on Form 10-Q and do not include all of
      the information and footnotes required by accounting principles generally
      accepted in the United States of America for complete financial statements.
      These financial statements should be read in conjunction with our audited
      consolidated financial statements and notes thereto included the Company’s
      annual report on Form 10-KSB for the fiscal year ended May 31,
      2006.





In
      the
      opinion of management, the interim condensed consolidated financial statements
      reflect all adjustments of a normal recurring nature necessary for a fair
      presentation of the results for the interim periods. Operating results for
      the
      nine month period ended February 28, 2007 are not necessarily indicative of
      the
      results that may be expected for the year ending May 31, 2007.





**Reclassifications**


Certain
      reclassifications have been made to the 2006 financial statements in order
      for
      them to conform to the 2007 presentation. Such reclassifications have no impact
      on the Company’s financial position or results of operations.





**Investments
      in Affiliated Companies**


The
      Company has a 50% interest in Phoenix Digital Solutions, LLC (“Phoenix Digital”)
      (see Note 5). This investment is accounted for using the equity method of
      accounting since the investment provides the Company the ability to exercise
      significant influence, but not control, over the investee. Significant influence
      is generally deemed to exist if the Company has an ownership interest in the
      voting stock of the investee of between 20% and 50%, although other factors,
      such as representation on the investee’s Board of Directors, are considered in
      determining whether the equity method of accounting is appropriate. Under the
      equity method of accounting, the investment, originally recorded at cost, is
      adjusted to recognize the Company’s share of net earnings or losses of the
      investee and is recognized in the condensed consolidated statement of operations
      in the caption “Equity in earnings of affiliated company.”





The
      Company owns 100% of the preferred stock of Scripps Secured Data, Inc. (“SSDI”)
      (see Note 5). This investment is accounted for at cost since the Company does
      not have the ability to exercise significant influence over the operating and
      financial policies of SSDI.





**Derivative
      Financial Instruments**


In
      connection with the issuance of certain convertible debentures (see Note 6),
      the
      terms of the debentures included an embedded reset conversion feature which
      provided for a conversion of the debentures into shares of the Company's common
      stock at a rate which was determined to be variable. The Company determined
      that
      the reset conversion feature was an embedded derivative instrument and that
      the
      conversion option was an embedded put option pursuant to Statement of Financial
      Accounting Standards (“SFAS”) No. 133, *Accounting
      for Derivative Instruments and Hedging Activities* ,
      as
      amended, and Emerging Issues Task Force (“EITF”) Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* .
      The
      accounting treatment of derivative financial instruments required that the
      Company record the derivatives and related warrants at their fair values as
      of
      the inception date of the convertible debenture agreements and at fair value
      as
      of each subsequent balance sheet date.  In addition, under the provisions
      of EITF Issue No. 00-19, as a result of entering into the convertible debenture
      agreements, the Company was required to classify all other non-employee warrants
      as derivative liabilities and record them at their fair values at each balance
      sheet date.  Any change in fair value was recorded as non-operating,
      non-cash income or expense at each balance sheet date.  If the fair value
      of the derivatives was higher at the subsequent balance sheet date, the Company
      recorded a non-operating, non-cash charge.  If the fair
      value of the derivatives was lower at the subsequent balance sheet date, the
      Company recorded non-operating, non-cash income.





7
 
  Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**


**Derivative
      Financial Instruments, continued**




During
      the three month periods ended February 28, 2007 and 2006, the Company recognized
      other expense of $0 and $4,717,891, respectively, related to recording the
      warrant and derivative liabilities at fair value. During the nine month periods
      ended February 28, 2007 and 2006, the Company recognized other expense of $0
      and
      $2,456,736, respectively, related to recording the warrant and derivative
      liabilities at fair value. At February 28, 2007, there are no derivative
      liabilities since the related variable debt instruments were settled in full
      during fiscal 2006. At the settlement date, the remaining warrant liabilities
      with a value of approximately $6,744,000 were reclassified to additional paid-in
      capital.





The
      Company’s derivative instruments were valued using a Monte Carlo simulation
      model incorporating the instruments’ multiple reset dates. The following
      assumptions were used for valuing the embedded derivatives during the nine
      month
      period ended February 28, 2006:




Estimated
                dividends
            
            
            NoneExpected
                volatility
            
            
            101
                - 229%Risk-free
                interest rate
            
            
            3.5
                - 5.1%Expected
                term (years)
            
            
            2
                - 7





**Revenue
      Recognition**


The
      Company recognizes revenue from the sale of its product upon shipment to the
      customer, at which time title transfers and the Company has no further
      obligations. Fees for maintenance or support are recorded on a straight-line
      basis over the underlying period of performance. Revenue from technology license
      agreements is recognized at the time the Company enters into a contract and
      provides the customer with the licensed technology. At this point, the Company
      has performed all of its obligations under contract, the rights to the Company’s
      technology have been transferred and no significant performance obligations
      remain.





**Net
      Income Per Share**


The
      Company applies SFAS No. 128, *Earnings
      Per Share* ,
      for the
      calculation of "Basic" and "Diluted" earnings per share. Basic earnings per
      share includes no dilution and is computed by dividing income available to
      common stockholders by the weighted average number of common shares outstanding
      for the period. Diluted earnings per share reflects the potential dilution
      of
      securities that could share in the earnings of an entity. For the three and
      nine
      months ended February 28, 2007, shares of 3,495,000 and 330,000, respectively,
      related to the Company’s outstanding warrants and options were not included in
      the calculation of diluted income per share as they had an anti-dilutive effect.
      For the three and nine months ended February 28, 2006, 375,000 and 1,925,000
      potentially dilutive common shares, respectively, related to the Company’s
      outstanding warrants and options were not included in the calculation of diluted
      income per share as they had an anti-dilutive effect.




8





Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial Statements**


**Net
      Income Per Share, continued**


**Three
                    Months Ended February 28, 2007**Numerator
                    (Income)
                
                Denominator
                    (Shares)
                
                Per
                    Share AmountBasic
                    EPS:Net
                    income
                
                
                
                
                $
                9,617,559
                
                
                381,031,577
                
                $
                0.03Diluted
                    EPS:Effect
                    of dilutive securities:Options
                    andwarrants
                
                
                
                
                
                -
                
                
                29,716,372Income
                    available to common stockholders
                
                
                
                
                $
                9,617,559
                
                
                410,747,949
                
                $
                0.02


****Three
                Months Ended February 28, 2006****
              **As
                restated (See Note 2)**Numerator
                (Income)
            
            Denominator
                (Shares)
            
            Per
                Share AmountBasic
                EPS:Net
                income
            
            
            
            
            $
            23,488,416
            
            
            307,933,709
            
            $
            0.08Diluted
                EPS:Convertible
                debentures interest
            
            
            
            
            
            12,640Effect
                of dilutive securities:Convertible
                debentures
            
            
            
            
            
            -
            
            
            20,557,895Options
                and warrants
            
            
            
            
            
            -
            
            
            76,016,793Income
                available to common stockholders
            
            
            
            
            $
            23,501,056
            
            
            404,508,397
            
            $
            0.06




**Nine
                Months Ended February 28, 2007**Numerator
                (Income)
            
            Denominator
                (Shares)
            
            Per
                Share AmountBasic
                EPS:Net
                income
            
            
            
            
            $
            13,725,834
            
            
            374,711,954
            
            $
            0.04Diluted
                EPS:Effect
                of dilutive securities:Options
                andwarrants
            
            
            
            
            
            -
            
            
            41,615,186Income
                available to common stockholders
            
            
            
            
            $
            13,725,834
            
            
            416,327,140
            
            $
            0.03




9




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**





**Net
      Income Per Share, continued**





****Nine
                Months Ended February 28, 2006****
              **As
                restated (See Note 2)**Numerator
                (Income)
            
            Denominator
                (Shares)
            
            Per
                Share AmountBasic
                EPS:Net
                income
            
            
            
            
            $
            30,892,627
            
            
            300,839,387
            
            $
            0.10Diluted
                EPS:Convertible
                debentures interest
            
            
            
            
            
            42,716Effect
                of dilutive securities:Convertible
                debentures
            
            
            
            
            
            -
            
            
            22,179,305Options
                and warrants
            
            
            
            
            
            -
            
            
            74,711,838Income
                available to common stockholders
            
            
            
            
            $
            30,935,343
            
            
            397,730,530
            
            $
            0.08




**Stock-Based
      Compensation**




***Change
      in Accounting Principle***




Effective
      June 1, 2006, the Company adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      which
      establishes standards for the accounting of transactions in which an entity
      exchanges its equity instruments for goods or services, primarily focusing
      on
      accounting for transactions where an entity obtains employee services in
      share-based payment transactions. SFAS No. 123(R) requires a public entity
      to measure the cost of employee services received in exchange for an award
      of
      equity instruments, including stock options, based on the grant-date fair value
      of the award and to recognize it as compensation expense over the period the
      employee is required to provide service in exchange for the award, usually
      the
      vesting period. SFAS No. 123(R) supersedes the Company’s previous accounting
      under Accounting Principles Board Opinion (“APB”) No. 25, *Accounting
      for Stock Issued to Employees* ,
      for the
      period beginning June 1, 2006. In March 2005, the SEC issued Staff Accounting
      Bulletin (“SAB”) No. 107, *Share-Based
      Payment* ,
      relating to SFAS No. 123(R). The Company has applied the provisions of SAB
      No.
      107 in its adoption of SFAS No. 123(R). Stock-based awards to non-employees
      are
      accounted for using the fair value method in accordance with SFAS No. 123, *Accounting
      for Stock Based Compensation.*




The
      Company adopted SFAS No. 123(R) using the modified prospective transition
      method, which requires the application of the accounting standard as of
      June 1, 2006, the first day of the Company’s fiscal year 2007. The
      Company’s condensed consolidated financial statements as of and for the nine
      months ended February 28, 2007 reflect the impact of adopting SFAS No. 123(R).
      In accordance with the modified prospective transition method, the Company’s
      condensed consolidated financial statements for prior periods have not been
      restated to reflect, and do not include, the impact of SFAS No. 123(R). SFAS
      No.
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in the Company’s condensed
      consolidated statement of operations. Prior to the adoption of SFAS No. 123(R),
      the Company accounted for stock-based awards to employees and directors using
      the intrinsic value method in accordance with APB No. 25 as allowed under SFAS
      No. 123. Under the intrinsic value method, no employee stock-based compensation
      expense had been recognized in the




10




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**Stock-Based
      Compensation, continued**




Company’s
      condensed consolidated statements of operations, other than as related to option
      grants to employees and directors below the fair market value of the underlying
      stock at the date of grant.




Stock-based
      compensation expense recognized during the period is based on the value of
      the
      portion of share-based payment awards that is ultimately expected to vest during
      the period. Stock-based compensation expense recognized in the Company’s
      condensed consolidated statement of operations for the nine months ended
      February 28, 2007 included compensation expense for share-based payment awards
      granted prior to, but not yet vested as of May 31, 2006 based on the grant
      date fair value estimated in accordance with the pro forma provisions of SFAS
      No. 123 and compensation expense for the share-based payment awards granted
      subsequent to May 31, 2006 based on the grant date fair value estimated in
      accordance with the provisions of SFAS No. 123(R). As stock-based compensation
      expense recognized in the condensed consolidated statement of operations for
      the
      nine months ended February 28, 2007 is based on awards ultimately expected
      to
      vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires
      forfeitures to be estimated at the time of grant and revised, if necessary,
      in
      subsequent periods if actual forfeitures differ from those estimates. The
      estimated average forfeiture rate for the nine months ended February 28,
      2007, of approximately 5% was based on historical forfeiture experience and
      estimated future employee forfeitures. The estimated pricing term of option
      grants for the nine months ended February 28, 2007 was five years. In the
      Company’s pro forma information required under SFAS No. 123 for the periods
      prior to fiscal 2007, the Company accounted for forfeitures as they
      occurred.





***Summary
      of Assumptions and Activity***




The
      following table illustrates the effect on net income and net income per share
      for the three and nine months ended February 28, 2006 as if the Company had
      applied the fair value recognition provisions of SFAS No. 123 to options granted
      under the Company's stock option plans. For purposes of this pro forma
      disclosure, the fair value of the options is estimated using the Black-Scholes
      option-pricing model and amortized on a straight-line basis to expense over
      the
      options' vesting period:




**Three
                Months Ended**
            
            **Nine
                Months Ended****February
                28, 2006**
              **(Unaudited)**
            
            **February
                28, 2006**
              **(Unaudited)**(As
                restated see Note 2)
            
            (As
                restated see Note 2)Net
                income - as reported
            
            $
            23,488,416
            
            $
            30,892,627Add:
                Share-based employee compensation included in net income, net of
                tax
                effects
            
            
            -
            
            
            -Deduct:
                Share-based employee compensation expense determined under fair valuemethod,
                net of tax effects
            
            
            28,028
            
            
            210,278Net
                income - pro forma
            
            $
            23,460,388
            
            $
            30,682,349Net
                income per common share - as reportedBasic
            
            $
            0.08
            
            $
            0.10Diluted
            
            $
            0.06
            
            $
            0.08Net
                income per common share - pro formaBasic
            
            $
            0.08
            
            $
            0.10Diluted
            
            $
            0.06
            
            $
            0.08




11




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**Stock-Based
      Compensation, continued**





The
      fair
      value of stock-based awards to employees and directors is calculated using
      the
      Black-Scholes option pricing model, even though this model was developed to
      estimate the fair value of freely tradable, fully transferable options without
      vesting restrictions, which differ significantly from the Company’s stock
      options. The Black-Scholes model also requires subjective assumptions, including
      future stock price volatility and expected time to exercise, which greatly
      affect the calculated values. The expected term of options granted is derived
      from historical data on employee exercises and post-vesting employment
      termination behavior. The risk-free rate selected to value any particular grant
      is based on the U.S. Treasury rate that corresponds to the pricing term of
      the
      grant effective as of the date of the grant. The expected volatility for the
      three and nine months ended February 28, 2007 and 2006 is based on the
      historical volatilities of the Company’s common stock. These factors could
      change in the future, affecting the determination of stock-based compensation
      expense in future periods.





**Three
                Months**
              **Ended**
            
            **Nine
                Months**
              **Ended**
            
            **Three
                Months**
              **Ended**
            
            **Nine
                Months**
              **Ended****February
                28, 2007 (Unaudited)**
            
            **February
                28, 2007 (Unaudited)**
            
            **February
                28, 2006**
              **(Unaudited)**
            
            **February
                28, 2006**
              **(Unaudited)**Expected
                term
            
            
            5
                years
            
            
            5
                years
            
            
            5
                yrs
            
            
            5
                yearsExpected
                volatility
            
            
            146%
            
            
            146
                - 156%
            
            
            115%
            
            
            115
                - 128%Risk-free
                interest rate
            
            
            4.78%
            
            
            4.78
                - 5.00%
            
            
            4.59%
            
            
            3.72
                - 4.59%Expected
                dividends
            
            
            -
            
            
            -
            
            
            -
            
            
            -





A
      summary
      of option activity as of February 28, 2007 and changes during the nine months
      then ended, is presented below:





**Shares**
            
            **Weighted**
              **Average**
              **Exercise**
              **Price**
            
            **Weighted**
              **Average**
              **Remaining
                Contractual**
              **Term**
              **(Years)**
            
            **Aggregate**
              **Intrinsic**
              **Value**Options
                outstanding at June 1, 2006
            
            
            5,460,000
            
            $
            0.34Options
                granted
            
            
            2,800,000
            
            $
            0.39Options
                exercised
            
            
            (515,000
            )
            $
            0.08Options
                expired
            
            
            (500,000
            )
            $
            0.09Options
                outstanding and exercisable atFebruary
                28, 2007
            
            
            7,245,000
            
            $
            0.40
            
            
            3.21
            
            $
            2,085,200




The
      aggregate intrinsic value set forth in the above table represents the total
      pre-tax intrinsic value, based on the Company’s closing stock price of $0.67 as
      of February 28, 2007, and assumes all optionees had exercised their options
      as
      of that date.




12




Patriot Scientific Corporation
 **Notes
            to Unaudited Condensed Consolidated Financial
            Statements**




**Stock-Based
      Compensation, continued**




The
      weighted average grant date fair value of options granted during the nine months
      ended February 28, 2007 was $0.91 per option. The total intrinsic value of
      options exercised during the nine months ended February 28, 2007 was
      $290,100.




As
      of
      February 28, 2007, there was no unrecognized compensation cost related to
      employee and director stock option compensation arrangements. The total fair
      value of shares vested during the nine months ended February 28, 2007 was
      approximately $2,356,000.





As
      a
      result of adopting SFAS No. 123(R) on June 1, 2006, the Company’s income
      before provision for income taxes and net income for the three months ended
      February 28, 2007 was approximately $586,000 and $352,000 lower, respectively,
      than if it had continued to account for share-based compensation under
      APB No. 25. The Company’s income before income taxes and net income
      for the nine months ended February 28, 2007 was approximately $886,000 and
      $532,000 lower than if it had continued to account for share-based compensation
      under APB No. 25. Basic and diluted net income per share for the three
      and nine months ended February 28, 2007 were not affected by the adoption of
      SFAS No. 123(R).




The
      following table summarizes employee stock-based compensation expense related
      to
      stock options under SFAS No. 123(R) for the three and nine months ended February
      28, 2007, which was allocated as follows:




**Three
                Months**
              **Ended**
            
            **Nine
                Months**
              **Ended****February
                28,**
              **2007**
            
            **February
                28,**
              **2007**Employee
                stock-based compensation expense included in:Selling,
                general and administrative
            
            $
            586,000
            
            $
            2,356,000




**Recent
      Accounting Pronouncements**




In
      July
      2006, the Financial Accounting Standards Board issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* (“FIN
      48”). This interpretation clarifies the application of SFAS No. 109, *Accounting
      for Income Taxes* ,
      by
      defining criteria that an individual tax position must meet for any part of
      the
      benefit of that position to be recognized in a company’s financial statements
      and also provides guidance on measurement, derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. FIN 48 is effective for fiscal years beginning after December 15,
      2006. The Company expects to adopt FIN 48 on June 1, 2007. The Company is
      currently assessing the impact the adoption of FIN 48 will have on its condensed
      consolidated financial position and results of operations.





In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”).  SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principals and expands
      disclosures about fair value measurements.  The statement does not require
      new fair value measurements, but is applied to the extent that other accounting
      pronouncements require or permit fair value measurements.  The statement
      emphasizes that fair value is a market-based measurement that should be
      determined based on the assumptions that market participants would use in
      pricing an asset or liability.  Companies that have assets and liabilities
      measured at fair value will be required to disclose information that enables
      the
      users of its financial statements to access the inputs used to develop those
      measurements.  The reporting entity is encouraged, but not required, to
      combine the fair value information disclosed under this statement with the
      fair
      value information disclosed under other accounting pronouncements.  SFAS
      No. 157 is effective for fiscal years beginning after November 15, 2007. The
      Company expects to adopt SFAS No. 157 on June 1, 2008.  The Company is in
      the process of evaluating the provisions of the statement, but does
      not anticipate
      that the adoption of SFAS No. 157 will have a material impact on the Company’s
      consolidated financial statements.





13
 
  Patriot Scientific Corporation
 **Notes
              to Unaudited Condensed Consolidated Financial
              Statements**


**Recent
      Accounting Pronouncements** **, continued**




In
      September 2006, the SEC staff issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* .
      SAB No.
      108 was issued in order to eliminate the diversity in practice surrounding
      how
      public companies quantify financial statement misstatements. SAB No. 108
      requires that registrants quantify errors using both a balance sheet and income
      statement approach and evaluate whether either approach results in a misstated
      amount that, when all relevant quantitative and qualitative factors are
      considered, is material. The adoption of this statement is not expected to
      have
      a material impact on the Company’s consolidated financial condition or results
      of operations.





**2.Restatement
      of Previously
      Issued Financial Statements**





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





In
      addition, the Company determined the manner in which it accounted for its
      interest in Phoenix Digital was not in accordance with appropriate accounting
      literature. Beginning in June 2005, the Company accounted for its interest
      in
      Phoenix Digital as a variable interest entity, as defined in FASB Interpretation
      46(R). Accordingly, the accounts and transactions of Phoenix Digital were
      consolidated with those of the Company and the ownership interest of the other
      member of Phoenix Digital was presented as a minority interest in the condensed
      consolidated financial statements of the Company for the six month period ended
      November 30, 2005. The Company has reassessed its accounting for its interest
      in
      Phoenix Digital and after further consideration of FIN 46(R) and other
      authoritative literature, has corrected its accounting policy to account for
      its
      interest in Phoenix Digital in accordance with the equity method of accounting
      for investments, as the Company did not have a controlling financial interest
      in
      Phoenix Digital and determined that it was not the primary beneficiary of the
      relationship.





The
      following tables present a summary of the effects of the restatement adjustments
      on the Company's condensed consolidated statements of operations and cash flows
      for the three and nine month periods ended February 28, 2006: ****





14





Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**Restatement
      of Previously Issued Financial Statements, continued**





Condensed
                Consolidated Statement of OperationsThree
                months ended February 28, 2006
            
            As
                Previously
              Reported
            
            Adjustments
            
            As
                RestatedRevenue
                - licenses and royalties
            
            $
            60,000,000
            
            $
            (60,000,000
            )
            $
            -Total
                revenue
            
            $
            60,276,800
            
            $
            (60,000,000
            )
            $
            276,800Gross
                profit
            
            $
            60,173,449
            
            $
            (60,000,000
            )
            $
            173,449Selling
                , general and administrative expense
            
            $
            2,093,604
            
            $
            (1,396,149
            )
            $
            697,455Total
                operating expense
            
            $
            2,120,908
            
            $
            (1,396,149
            )
            $
            724,759Operating
                income (expense)
            
            $
            58,052,541
            
            $
            (58,603,851
            )
            $
            (551,310
            )Other
                income
            
            $
            129,896
            
            $
            (51,807
            )
            $
            78,089Interest
                expense
            
            $
            (868,121
            )
            $
            665,311
            
            $
            (202,810
            )Loss
                on extinguishment of debt
            
            $
            (1,260,688
            )
            $
            815,261
            
            $
            (445,427
            )Change
                in fair value of warrant andderivative
                liabilities
            
            $
            -
            
            $
            (4,717,891
            )
            $
            (4,717,891
            )Equity
                in earnings of affiliated company
            
            $
            -
            
            $
            29,327,829
            
            $
            29,327,829Total
                other income (expense)
            
            $
            (1,998,977
            )
            $
            26,038,703
            
            $
            24,039,726Income
                before minority interest in income ofconsolidated
                entity and income taxes
            
            $
            56,053,564
            
            $
            (32,565,148
            )
            $
            23,488,416Minority
                interest in loss of consolidated entity
            
            $
            (29,327,829
            )
            $
            29,327,829
            
            $
            -Income
                before income taxes
            
            $
            26,725,735
            
            $
            (3,237,319
            )
            $
            23,488,416Provision
                for income taxes
            
            $
            (1,840,000
            )
            $
            1,840,000
            
            $
            -Net
                income
            
            $
            24,885,735
            
            $
            (1,397,319
            )
            $
            23,488,416INCOME
                PER COMMON SHARE:Basic
            
            $
            0.08
            
            $
            -
            
            $
            0.08Diluted
            
            $
            0.06
            
            $
            -
            
            $
            0.06






Condensed
                Consolidated Statement of OperationsNine
                months ended February 28, 2006
            
            As
                Previously
              Reported
            
            Adjustments
            
            As
                RestatedRevenue
                - licenses and royalties
            
            $
            70,000,000
            
            $
            (60,000,000
            )
            $
            10,000,000Total
                revenue
            
            $
            70,297,072
            
            $
            (60,000,000
            )
            $
            10,297,072Gross
                profit
            
            $
            70,193,721
            
            $
            (60,000,000
            )
            $
            10,193,721Selling
                , general and administrative expense
            
            $
            5,393,015
            
            $
            (2,875,826
            )
            $
            2,517,189Settlement
                and license expense
            
            $
            3,855,132
            
            $
            (1,937,078
            )
            $
            1,918,054Total
                operating expense
            
            $
            9,473,711
            
            $
            (4,812,904
            )
            $
            4,660,807Operating
                income
            
            $
            60,720,010
            
            $
            (55,187,096
            )
            $
            5,532,914Other
                income
            
            $
            264,271
            
            $
            (92,534
            )
            $
            171,737Interest
                expense
            
            $
            (1,181,635
            )
            $
            665,311
            
            $
            (516,324
            )Loss
                on extinguishment of debt
            
            $
            (1,260,688
            )
            $
            815,261
            
            $
            (445,427
            )Change
                in fair value of warrant andderivative
                liabilities
            
            $
            -
            
            $
            (2,456,736
            )
            $
            (2,456,736
            )Equity
                in earnings of affiliated company
            
            $
            -
            
            $
            28,607,664
            
            $
            28,607,664Total
                other income (expense)
            
            $
            (2,179,253
            )
            $
            27,538,966
            
            $
            25,359,713Income
                before minority interest in income ofconsolidated
                entity and income taxes
            
            $
            58,540,757
            
            $
            (27,648,130
            )
            $
            30,892,627Minority
                interest in loss of consolidated entity
            
            $
            (28,607,664
            )
            $
            28,607,664
            
            $
            -Income
                before income taxes
            
            $
            29,933,093
            
            $
            959,534
            
            $
            30,892,627




15


Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**Restatement
      of Previously Issued Financial Statements, continued**





Condensed
                Consolidated Statement of OperationsNine
                months ended February 28, 2006
            
            As
                Previously
              Reported
            
            Adjustments
            
            As
                Restated





Provision
                for income taxes
            
            $
            (1,880,000
            )
            $
            1,880,000
            
            $
            -Net
                income
            
            $
            28,053,093
            
            $
            2,839,534
            
            $
            30,892,627INCOME
                PER COMMON SHARE:Basic
            
            $
            0.09
            
            $
            0.01
            
            $
            0.10Diluted
            
            $
            0.07
            
            $
            0.01
            
            $
            0.08








Condensed
                Consolidated Statement of Cash FlowsNine
                months ended February 28, 2006
            
            As
                Previously
              Reported
            
            Adjustments
            
            As
                RestatedNet
                income
            
            $
            28,053,093
            
            $
            2,839,534
            
            $
            30,892,627Equity
                in earnings of affiliated company
            
            $
            -
            
            $
            (28,607,664
            )
            $
            (28,607,664
            )Change
                in fair value of warrant andderivative
                liabilities
            
            $
            -
            
            $
            2,456,736
            
            $
            2,456,736Net
                gain related to warrant re-pricing, reconveyanceand
                issuance
            
            $
            -
            
            $
            (538,208
            )
            $
            (538,208
            )Loss
                on extinguishment of debt
            
            $
            1,260,688
            
            $
            (815,261
            )
            $
            445,427Non-cash
                compensation related to issuance of stockoptions
                and vesting of warrants
            
            $
            150,013
            
            $
            (150,013
            )
            $
            -Common
                stock issued for services and other
            
            $
            -
            
            $
            207,869
            
            $
            207,869Non-cash
                interest expense related to convertibledebentures,
                notes payable and warrants
            
            $
            1,136,047
            
            $
            (723,168
            )
            $
            412,879Expense
                related to warrant repricing and issuance
            
            $
            1,522,492
            
            $
            (1,522,492
            )
            $
            -Expense
                related to extension of expiration date ofstock
                options
            
            $
            -
            
            $
            125,000
            
            $
            125,000Income
                of consolidated entity allocated to minorityinterest
            
            $
            28,607,664
            
            $
            (28,607,664
            )
            $
            -Changes
                in licenses receivable
            
            $
            (32,100,000
            )
            $
            33,600,000
            
            $
            1,500,000Changes
                in accounts payable and accrued liabilities
            
            $
            2,060,510
            
            $
            (2,012,189
            )
            $
            48,321








Condensed
                Consolidated Statement of Cash FlowsNine
                months ended February 28, 2006
            
            As
                Previously
              Reported
            
            Adjustments
            
            As
                RestatedNet
                cash provided by operations
            
            $
            30,723,593
            
            $
            (23,747,520
            )
            $
            6,976,073Investment
                in affiliated company
            
            $
            -
            
            $
            (2,000,000
            )
            $
            (2,000,000
            )Distributions
                from affiliated company
            
            $
            -
            
            $
            10,115,574
            
            $
            10,115,574Net
                cash (used in) provided by investing activities
            
            $
            (3,376,683
            )
            $
            8,115,574
            
            $
            4,738,891Minority
                interest investment in consolidated entity
            
            $
            2,000,000
            
            $
            (2,000,000
            )
            $
            -Distributions
                of joint venture partner
            
            $
            (9,783,985
            )
            $
            9,783,985
            
            $
            -Net
                cash (used in) provided by financing activities
            
            $
            (7,459,717
            )
            $
            7,783,985
            
            $
            324,268Net
                increase in cash and cash equivalents
            
            $
            19,887,193
            
            $
            (7,847,961
            )
            $
            12,039,232Cash
                and cash equivalents, end of period
            
            $
            20,478,619
            
            $
            (7,847,961
            )
            $
            12,630,658




16




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**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 agreement is expected to be provided over a period not
      to
      exceed four years. Maintenance revenue recognized during the three months ended
      August 31, 2006 was $6,250. 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 amounted
      to
      $2,000,000. 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
      licensing proceeds to the co-inventor. The amount due was payable in four
      installments of $51,900. The co-inventor of the patent portfolio technology
      filed a lawsuit against the Company seeking damages and/or enforcement of a
      2004
      agreement (see Note 8). On
      February 14, 2007, a settlement of the litigation was finalized. Terms of the
      settlement require the Company to pay $3,400,000 in cash on February 14, 2007
      and $3,000,000 on May 1, 2007, make a donation of $15,000 on February 14, 2007
      on behalf of Russell H. Fish III to Maasai Power and Education Project, Inc.,
      and pay Fish the equivalent of 4% of 50% of the next $100 million of gross
      license fees as they are collected by Phoenix Digital and as distributions
      are
      made to Patriot, after excluding the first $20 million collected by Phoenix
      Digital after December 1, 2006. Patriot's commitment to make payments to Fish
      related to such future license revenues will not exceed $2 million. At February
      28, 2007, the Company has accrued the May 1, 2007 payment of $3,000,000 as
      a
      settlement fee payable. A liability for gross license fees due of approximately
      $244,000 is included in accrued expenses at February 28, 2007. During the three
      and nine month periods ended February 28, 2007, the Company recorded
      approximately $304,000 and $6,604,000 related to settlement and license
      expenses.





**4.Note
      Receivable**





On
      November 22, 2006, Patriot Scientific Corporation (the “Company”) entered into a
      Revolving Line of Credit Facility Agreement (the “Line of Credit Agreement”)
      with Holocom Networks (“Holocom”) which provided for borrowings of up to
      $700,000 under a revolving line of credit extended by the Company to Holocom.
      On
      November 22, 2006, the Company advanced Holocom $350,000 and further advanced
      an
      additional $230,000 during the three months ended February 28, 2007. Borrowings
      under the Line of Credit Agreement were used by Holocom for its operating cash
      flow needs. The borrowings bore interest at the prime rate, as announced by
      Bank
      of America, plus 2% per annum, and interest-only payments were due monthly.
      Pursuant to the terms of the Line of Credit Agreement, all unpaid principal
      and
      accrued and unpaid interest was due February 22, 2007. Borrowings under the
      Line
      of Credit Agreement were collateralized by substantially all of the assets
      of
      Holocom.




During
      the quarter ended February 28, 2007, the Company determined that the outstanding
      borrowings under the Line of Credit Agreement of $589,551, which included
      accrued interest and late fees of $9,551, were uncollectible as Holocom was
      unable to make the required interest payments. As a result, the Company
      foreclosed on the assets of Holocom. At the foreclosure sale, the Company
      acquired the patents, trademarks, equipment, inventory, and certain other
      collateral of Holocom pursuant to the terms of a Security Agreement entered
      into
      between the Company and Holocom in connection with the Line of Credit
      Agreement.




The
      Company originally accounted for its loan receivable, and related accrued
      interest, due from Holocom at cost. In accordance with SFAS No. 114, *Accounting
      by Creditors for Impairments of a Loan* ,
      based
      on current information and events, the Company determined that it was unable
      to
      collect all amounts due from Holocom according to the contractual terms of
      the
      Line of Credit Agreement. As a result, the Company determined that the
      loan
      receivable was impaired. Accordingly, the Company recorded an impairment loss
      of
      $339,551 during the three months ended February 28, 2007. The impairment loss
      was determined based on an independent valuation of the assets of Holocom
      acquired in the foreclosure sale and management’s analysis of the fair value of
      such assets at time of acquisition.




17
 
  Patriot Scientific Corporation
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**


**Note
      Receivable, continued**




The
      fair
      value of the assets acquired in foreclosure of $250,000 was contributed to
      a
      newly formed entity, Scripps Secured Data, Inc. (“SSDI”), which will
      manufacture, market, and sell the former raceway product line previously sold
      by
      Holocom (see Note 5).





**5.Investments
      in Affiliated
      Companies/License Agreement**





On
      June
      7, 2005, the Company entered into a Master Agreement (the “Master Agreement”)
      with Technology Properties Limited Inc., a California corporation (“TPL”), and
      Charles H. Moore (“Moore”), the co-inventor of certain of the Company’s
      technology, pursuant to which the Company and Moore resolved all legal disputes
      between them. Pursuant to the Master Agreement, the Company and TPL entered
      into
      the Limited Liability Company Operating Agreement of Phoenix Digital Solutions,
      LLC (the “LLC Agreement”) into which the Company and Moore contributed their
      rights to certain of the Company’s technologies. 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 Phoenix Digital from stockholders or any parties other than its
      various warrant holders.





The
      Company and TPL each own 50% of the membership interests of Phoenix Digital,
      and
      each have the right to appoint one member of the three-member management
      committee. The two appointees are required to select a mutually acceptable
      third
      member of the management committee. Pursuant to the LLC Agreement, the Company
      and TPL agreed to establish a working capital fund for Phoenix Digital 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 TPL are obligated to fund future working capital
      requirements at the discretion of the management committee of Phoenix Digital
      in
      order to maintain working capital of not more than $8,000,000. Neither the
      Company nor TPL is required to contribute more than $2,000,000 in any fiscal
      year. Distributable cash and allocation of profits and losses will be allocated
      to the members in the priority defined in the LLC Agreement. Phoenix Digital
      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 Phoenix Digital)
      for supporting efforts to secure licensing agreements by the other member on
      behalf of Phoenix Digital. During the nine months ended February 28, 2006 and
      2007, Phoenix Digital paid $500,000 and $2,934,075, respectively, to TPL
      pursuant to this commitment.





The
      Company is accounting for its investment in Phoenix Digital under the equity
      method of accounting, and accordingly has recorded its 50% share of Phoenix
      Digital’s net income of $30,401,594 during the nine months ended February 28,
      2007 as an increase in its investment. Cash distributions of $29,419,880
      received from Phoenix Digital during the nine months ended February 28, 2007
      have been recorded as a reduction in the Company’s investment. The Company’s
      investment in Phoenix Digital is $4,934,628 at February 28, 2007 and has been
      recorded as “Investment in Affiliated Company”. The Company has recorded its 50%
      share of Phoenix Digital’s net income as “Equity in Earnings of Affiliated
      Company” in the accompanying condensed consolidated statements of operations for
      the three and nine months ended February 28, 2007 and 2006.





Concurrently
      with forming Phoenix Digital, 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 Phoenix Digital,
      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.




18




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**Investment
      in Affiliated Companies/License Agreement, continued**




The
      Company also granted new warrants and agreed to re-price 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 LLC Agreement. The
      Company granted a warrant to TPL 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, February 22, 2006 and
      March 1, 2006 the rights to acquire the remaining 700,000 share increments vested
      as
      the Company’s stock price reached $0.50, $0.75 and $1.00, 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 re-priced were valued using a Monte Carlo simulation model and the
      following assumptions: volatility of 101% to 229%, no dividends, risk-free
      interest rates of approximately 3.5% to 5.1%, and contractual terms ranging
      from
      two to seven years. The fair value of the warrants issued and re-priced in
      excess of previously recorded expense was approximately $83,000 and the fair
      value of the re-conveyed warrants was approximately $622,000. These amounts,
      together with the direct, incremental cash costs previously described, are
      recorded as an expense and included in settlement and license expense in the
      nine months ended February 28, 2006.





During
      the nine months ended February 28, 2007, Phoenix Digital entered into licensing
      agreements with third parties, pursuant to which it received aggregate proceeds
      of $64,869,000. License proceeds of $2,920,000 relating to an additional license
      agreement signed in February 2007 were received in March 2007. Phoenix Digital
      has recorded this amount as a license fee receivable.





The
      condensed balance sheet and statement of income of Phoenix Digital at February
      28, 2007 and for the nine months then ended are as follows:




**Condensed
              Balance
              Sheet**ASSETS:Cash
            
            $
            7,500,220License
                fees receivable
            
            
            2,920,000Prepaid
                expenses
            
            
            15,000Total
                assets
            
            $
            10,435,220LIABILITIES
                AND MEMBERS’ EQUITY:Accounts
                payable
            
            $
            629,934Income
                tax payable
            
            
            11,790Members’
equity
            
            
            9,793,496Total
                liabilities and members’ equity
            
            $
            10,435,220




19




Patriot Scientific Corporation
 **Notes
            to Unaudited Condensed Consolidated Financial
            Statements**


**Investment
      in Affiliated Companies/License Agreement, continued**




**Condensed
                Statement of
                Income**Revenues
              
              $
              67,788,985Operating
                    expenses
              
              
              7,295,104Operating
                  income
              
              
              60,493,881Interest
                  income
              
              
              309,308Net
                  income
              
              $
              60,803,189




On
      February 2, 2007, the Company invested an aggregate of $370,000 in convertible
      preferred stock, representing all of the issued preferred stock and a 46%
      ownership interest, of and in SSDI, a California corporation that manufactures
      products that protect information transmitted over secure networks. The
      investment consisted of certain assets contributed by the Company to SSDI valued
      at $250,000 and cash of $120,000. The investment is represented by 2,100,00
      shares of convertible preferred stock, and the shares are convertible at the
      Company’s option into shares of SSDI’s common stock on a one-to-one basis. The
      convertible preferred stock entitles the Company to receive non-cumulative
      dividends at the per annum rate of $0.04 per share, when and if declared by
      the
      Board of Directors of SSDI. The investment in SSDI’s convertible preferred stock
      also entitles the Company to a liquidation preference of $0.40 per share, plus
      an amount equal to all declared but unpaid dividends.





The
      Company reviewed the Preferred Stock Purchase Agreement and related agreements
      to determine whether the Company’s convertible preferred stock investment in
      SSDI was in substance an investment in common stock pursuant to EITF No. 02-14, *Whether
      an Investor Should Apply the Equity Method of Accounting to Investments Other
      Than Common Stock* .
      The
      Company determined that, because the liquidation preference is substantive,
      the
      subordination characteristics of the preferred stock are not substantially
      similar to the subordination characteristics of SSDI’s common stock. The Company
      also evaluated its voting rights pursuant to other agreements with SSDI and,
      when considered together with the guidance in EITF No. 02-14, believes that
      it
      does not have the ability to exercise significant influence over SSDI. As a
      result, the Company accounts for its investment in SSDI at cost.





The
      Company reviews its investments in affiliated companies to determine whether
      events or changes in circumstances indicate that its carrying amount may not
      be
      recoverable. The primary factors the Company considers in its determination
      are
      the financial condition, operating performance and near term prospects of the
      investee. If a decline in value is deemed to be other than temporary, the
      Company would recognize an impairment loss.





**6.Convertible
      Debentures**





From
      fiscal 2002 through fiscal 2005, the Company raised approximately $5,400,000
      through the issuance of convertible debentures, having stated interest rates
      ranging from 8% to 12%, to a limited group of investors. The convertible
      debentures entitled the debenture holders to convert the principal, and any
      accrued interest thereon, into shares of the Company’s common stock for up to
      two years from the date of issuance.




The
      debentures were initially convertible into shares of common stock at conversion
      prices ranging from approximately $0.02 to $0.10 per share. The debentures
      contained provisions which allowed for the conversion rate to be reset on a
      periodic basis based on a comparison of the market price of the Company's common
      stock to the conversion price of the debentures. On those measurement dates
      where the market price was less than the conversion rate, a new conversion
      rate
      was set based on a weighted average of the market price for the ten days prior
      to the reset measurement date.




20




Patriot Scientific Corporation
 **Notes
            to Unaudited Condensed Consolidated Financial Statements**


**Convertible
      Debentures , continued**




Concurrent
      with the issuance of the convertible debentures, the Company issued to the
      debenture holders warrants to purchase shares of the Company's common stock.
      These warrants are exercisable for five years from the date of issuance at
      either initial negotiated exercise prices or prices equal to 115% of the volume
      weighted average price for our common stock for the ten days previous to the
      debenture date. The warrant exercise price is generally subject to being reset
      on each six-month anniversary of its issuance; however, if the warrant holder
      elects to have the warrant shares registered, then the exercise price is fixed
      at the price in effect on the date of the election.




The
      terms
      of the convertible debentures included certain features that were considered
      embedded derivative financial instruments, such as the conversion feature and
      a
      reset conversion feature which provided for a conversion of the debentures
      into
      shares of the Company’s common stock at a rate which was determined to be
      variable. Because the debentures were not conventional convertible debt, the
      Company was also required to record the related warrants at their fair values.




During
      the nine months ended February 28, 2006, the value of the warrant and derivative
      liabilities increased by $2,456,736, which is reflected as a component of other
      income (expense) in the accompanying condensed consolidated statements of
      operations.





During
      the three months ended February 28, 2006, the Company entered into two reset
      agreements with the debenture holders to fix the conversion price of the then
      outstanding debentures at their current price. The Company determined that
      one
      of the debt modifications did not result in a debt extinguishment under EITF
      Issue No. 96-19, *Debtor’s Accounting for a Modification or Exchange of Debt
      Instruments* ,
      or EITF
      Issue No. 05-7, *Accounting for Modifications to Conversion Options Embedded in Debt Instruments
      and Related Issues* .
      In
      connection with the reset agreement of one of the outstanding debentures, the
      Company issued 7,000,000 warrants to the debenture holder as consideration
      for
      entering into the reset agreement. The Company determined that the issuance
      of
      the warrants, in connection with the reset agreement, resulted in a debt
      extinguishment under EITF Issue No. 96-19. Accordingly, the Company recorded
      the
      fair value of the warrants issued of $445,427 as a loss on extinguishment of
      debt in the accompanying consolidated statement of operations for the three
      and
      nine months ended February 28, 2006.




During
      the nine months ended February 28, 2006, holders of debentures with a principal
      balance of $880,667 converted their debentures, together with accrued interest
      thereon of approximately $119,000, into 30,819,187 shares of the Company's
      common stock.




As
      of May
      31, 2006, all outstanding debentures were repaid or converted into shares of
      the
      Company’s common stock. As a result of the settlement of the remaining
      debentures during 2006, the Company reclassified $6,743,935 related to the
      fair
      values of all outstanding warrants at the date of settlement to additional
      paid-in capital.




21




Patriot Scientific Corporation
 **Notes
            to Unaudited Condensed Consolidated Financial
            Statements**


**Convertible
      Debentures, continued**





The
      following table presents the status and activity of the Company’s convertible
      debentures as of May 31, 2006:




Conversion
                PricesSeries
            
            Dates
                of
              Issuance
            
            Original
              Principal
            
            Principal
              Balanceat
              May31,2006
            
            Initial
            
            Reset
            
            Effective
              Registration
              Date
            
            Shares
              Converted
              as
                of
              May
                31, 2006
            
            Warrant
              Shares
                IssuedA
            
            
            4/23/02-
            
            $
            1,000,000
            
            $
            -
            
            $
            0.08616-
            
            $
            0.04190-
            
            
            10/29/2002
            
            
            24,099,548
            
            
            12,859,1756/10/02
            
            
            
            
            
            
            
            
            0.10289
            
            
            0.04457B
            
            
            8/23/02-
            
            
            605,000
            
            
            -
            
            
            0.05126-
            
            
            0.04381-
            
            
            3/7/2003
            
            
            14,777,350
            
            
            11,234,8351/24/03
            
            
            
            
            
            
            
            
            0.0727
            
            
            0.04722C
            
            
            3/24/02-
            
            
            510,000
            
            
            -
            
            
            0.041-
            
            
            0.041-
            
            
            6/26/2003
            
            
            10,470,554
            
            
            9,377,9436/9/03
            
            
            
            
            
            
            
            
            0.065
            
            
            0.065D
            
            
            8/1/03-
            
            
            547,500
            
            
            -
            
            
            0.0172-
            
            
            0.0172-
            
            
            11/18/2003
            
            
            25,178,803
            
            
            22,455,35510/21/03
            
            
            
            
            
            
            
            
            0.048
            
            
            0.0477E
            
            
            12/1/03-
            
            
            1,527,500
            
            
            -
            
            
            0.0267-
            
            
            0.0267-
            
            
            6/7/2004
            
            
            46,794,618
            
            
            30,395,3925/11/04
            
            
            
            
            
            
            
            
            0.10
            
            
            0.10F
            
            
            3/23/04
            
            
            723,168
            
            
            -
            
            
            0.09
            
            
            0.09
            
            
            Not
                Registered
            
            
            20,877,430
            
            
            8,035,192G
            
            
            9/28/04-
            
            
            232,500
            
            
            -
            
            
            0.016710-
            
            
            0.01670-
            
            
            5/22/2006
            
            
            8,267,358
            
            
            8,259,6781/17/05
            
            
            
            
            
            
            
            
            0.04
            
            
            0.04G
            
            
            11/17/04-
            
            
            257,500
            
            
            -
            
            
            0.016710-
            
            
            0.01670-
            
            
            Not
                Registered
            
            
            14,107,672
            
            
            13,431,13711/18/04
            
            
            
            
            
            
            
            
            0.04
            
            
            0.04$
            5,403,168
            
            
            -
            
            
            
            
            
            
            
            
            
            
            
            164,573,333
            
            
            116,048,707





No
      convertible debentures or warrants in connection with convertible debentures
      were issued during the year ended May 31, 2006.





The
      Company recorded the fair value of the derivative instruments and warrants
      as a
      debt discount which was amortized to interest expense over the term of the
      convertible debentures. During the nine months ended February 28, 2006, the
      Company recorded interest expense of $412,879 related to the amortization of
      the
      debt discount.





**7.Stockholders’
      Equity**





During
      July 2006, the Company commenced its Board of Director approved stock buyback
      program in which the Company repurchases its outstanding common stock from
      time
      to time on the open market. As part of the program the Company purchased
      10,779,027 shares of its common stock at an aggregate cost of $7,441,664 during
      the nine months ended February 28, 2007.





22




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**
 **Stockholders’
          Equity, continued**





The
      following table summarizes equity transactions during the nine months ended
      February 28, 2007:




Common
                StockShares
            
            Amounts
            
            Additional
              Paid-in
                Capital
            
            Accumulated
              Deficit
            
            Treasury
                StockBalance
                June 1, 2006
            
            
            366,199,765
            
            $
            3,661
            
            $
            69,551,981
            
            $
            (58,728,091
            )
            $
            -Exercise
                of warrants and options at $0.02 to $0.40 per share
            
            
            787,500
            
            
            8
            
            
            113,992
            
            
            -
            
            
            -Cashless
                exercise of warrants
            
            
            22,459,880
            
            
            225
            
            
            (225
            )
            
            -
            
            
            -Extension
                of stock options previously issued to a consultant
            
            
            -
            
            
            -
            
            
            324
            
            
            -
            
            
            -Non-cash
                compensation
            
            
            -
            
            
            -
            
            
            2,359,035
            
            
            -
            
            
            -Repurchase
                of common stock for treasury
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,441,664
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            13,725,834
            
            
            -Balance
                February 28, 2007
            
            
            389,447,145
            
            $
            3,894
            
            $
            72,025,107
            
            $
            (45,002,257
            )
            $
            (7,441,664
            )





***Stock
      Options*** ***and Warrant Activity***




As
      of
      February 28, 2007, 100,000 options were outstanding pursuant to our 1996 Stock
      Option Plan exercisable at $0.07 per share expiring in 2009; 475,000 options
      were outstanding pursuant to our 2001 Stock Option Plan exercisable at a range
      of $0.07 to $0.86 per share expiring through 2011; 2,050,000 options were
      outstanding pursuant to our 2003 Stock Option Plan exercisable at a range of
      $0.05 to $0.17 per share expiring through 2011; and 3,120,000 options were
      outstanding pursuant to our 2006 Stock Option Plan exercisable at a range of
      $0.60 to $0.70 per share expiring through 2012.





During
      the quarter ended August 31, 2006, we issued options to acquire 1,500,000 shares
      of our common stock at a per share price of $0.17 to an officer outside of
      the
      above referenced plans.





During
      the quarter ended November 30, 2006, we issued options to acquire 230,000 shares
      of our common stock at a per share price of $0.86 to employees pursuant to
      the
      2001 Stock Option Plan.





During
      the quarter ended February 28, 2007, we issued options to acquire 1,070,000
      shares of our common stock at a per share price of $0.60 to directors and
      employees pursuant to the 2006 Stock Option Plan.





During
      the nine months ended February 28, 2007, directors exercised stock options
      to
      purchase 515,000 shares of common stock for aggregate proceeds of $41,750.





During
      the nine months ended February 28, 2007, we recorded $2,359,035 of non cash
      compensation expense related to stock options issued and vesting of stock
      options and warrants previously granted.





As
      of
      February 28, 2007, we had warrants outstanding to purchase 29,906,015 common
      shares at exercise prices ranging from $0.02 to $1.00 per share, expiring at
      various dates through 2012. Some of these outstanding warrants were not
      exercisable as of February 28, 2007 as they are subject to meeting vesting
      criteria. During the nine months ended February 28, 2007, we issued no warrants
      to purchase shares of common stock, investors exercised warrants to purchase
      272,500 shares of common stock for proceeds of $72,250 and investors exercised
      warrants of 22,732,380 to purchase 22,459,880 shares of common stock on a
      cashless basis.





23




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**





**Stockholders’
      Equity, continued**





In
      connection with a previous debt agreement, the Company entered into an
      Antidilution Agreement (the “Antidilution Agreement”) with Swartz Private
      Equity, LLC (“Swartz”) wherein the Company was obligated to issue to Swartz
      warrants equal to 11% of the common stock issued between January 28, 2002 and
      March 11, 2002, 20% of the common stock issued between March 12, 2002 and April
      1, 2003, and after April 1, 2003, 30% of the common stock issued to any parties
      other than Swartz. There were no warrants issued during the three month periods
      ended August 31, 2006 and 2005, nor were warrants issued during September 2006,
      in connection with the Antidilution agreement. On October 10, 2006, the Company
      entered into an Approval Rights Agreement and Termination of Antidilution
      Agreement and Addendum to Warrants (the “Termination Agreement”) with Swartz to
      terminate the Antidilution Agreement. In consideration for entering into the
      Termination Agreement, the Company agrees to obtain Swartz’s written approval at
      least 30 days prior to entering into (i) any acquisition of any business entity
      or asset of any kind where the aggregate number of shares of common stock and
      derivative securities (on a fully diluted basis) issued as consideration for
      the
      acquisition equals or exceeds 10% of the number of shares of common stock of
      the
      Company outstanding at the time of the acquisition (on a fully diluted basis)
      or
      (ii) any acquisition (regardless of size) by the Company of any business entity
      or asset of any kind that is not unanimously approved by the Company’s board of
      directors.





**8.Commitments
      and
      Contingencies**





***Litigation***





*Patriot
      Scientific Corporation v. Russell Fish*




On
      April
      6, 2006, we filed a declaratory relief lawsuit against Russell Fish and The
      Fish
      Family Trust in the United States District Court for the Southern District
      of
      California.  As a consequence of licensing agreements entered into by or on
      behalf of Patriot, by Patriot's previous management, Mr. Fish presented demands
      for payment by us under his July 2004 agreement related to the Inventorship
      Litigation.  We contended that Mr. Fish had been paid all sums that may
      have been owed to him.  Our action sought declaratory relief that no
      further sums were owed to Mr. Fish.  Also, on April 6, 2006, Fish and,
      later, Robert Anderson, allegedly as trustee of The Fish Family Trust, filed
      a
      lawsuit against the Company in the District Court of Dallas County, Texas. 
The case was subsequently removed to the United States District Court for the
      Northern District of Texas.  The lawsuit was based on an alleged breach of
      the contract entered into on July 27, 2004 and sought enforcement of the
      contract or damages.  The California action was transferred to the Northern
      District of Texas.  Mediation commenced on September 11, 2006.  On
      February 14, 2007, a settlement of this litigation was finalized. Terms of
      the
      settlement require the Company to pay $3,400,000 in cash on February 14, 2007
      and $3,000,000 on May 1, 2007, make a donation of $15,000 on February 14, 2007
      on behalf of Russell H. Fish III to Maasai Power and Education Project, Inc.,
      and pay Fish the equivalent of 4% of 50% of the next $100 million of gross
      license fees as they are collected by Phoenix Digital and as distributions
      are
      made to Patriot, after excluding the first $20 million collected by Phoenix
      Digital after December 1, 2006. Patriot's commitment to make payments to Fish
      related to such future license revenues will not exceed $2 million.





*Lowell
      Giffhorn Arbitration*




On
      September 23, 2005, Lowell Giffhorn, a former executive officer
      and a former director of Patriot, 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 has demanded damages of
      approximately $4,500,000 (excluding claims for punitive damages and attorneys
      fees). The Company denies the allegations and
      believes the claims to be frivolous and totally devoid of merit. The Company
      has
      retained litigation counsel and intends to vigorously defend the claims. The
      amount, if any, of ultimate liability with respect to the foregoing cannot
      be
      determined. Despite the inherent uncertainties of litigation, the Company at
      this time does not believe that Mr. Giffhorn's claim will have a material
      adverse impact on its financial condition, results of operations, or cash
      flows.




24




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**


**Commitments
      and Contingencies, continued**




*Patent
      Litigation*




Pursuant
      to the joint venture that the Company entered into in June 2005 TPL (in
      settlement of inventorship/ownership litigation between the parties, and in
      return for a 50-50 sharing of net licensing and enforcement revenues), the
      Company granted TPL the complete and exclusive right to enforce and license
      its
      microprocessor patent portfolio. The Company then dismissed its patent
      infringement claims against Fujitsu Computer Systems, Inc.; Matsushita Electric
      Corporation of America; NEC Solutions (America) Inc.; Sony Electronics Inc.;
      and
      Toshiba America Inc., and certain related entities of these **** defendants which had been pending in the Federal District Court for the Northern
      District of California. Thereafter, TPL, on behalf of the TPL/Patriot joint
      venture and Patriot, filed patent infringement actions against certain of the
      foregoing defendants (except Sony) and their related entities in the Federal
      District Court for the Eastern District of Texas, which litigation is currently
      pending. Litigation is not currently pending with regard to Fujitsu or NEC
      and
      certain of NEC’s subsidiaries as listed below.





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. A Claims Construction Hearing is scheduled
      for May 3, 2007 in The United States District Court for the Eastern District
      of
      Texas.




In
      February 2007, a license agreement was entered into with: NEC Corporation,
      NEC
      Corporation of America, Inc., NEC Display Solutions of America, Inc. and NEC
      Unified Solutions, Inc. In connection with that transaction, the above named
      defendants, excluding NEC Electronics America, Inc., were dismissed from the
      lawsuit.





***Profit
      Sharing Plan***





The
      Company has a savings and profit-sharing plan that allows participants to make
      contributions by salary reduction pursuant to Section 401(k) of the Internal
      Revenue Code. At the Company’s discretion, the Company may match contributions
      at 20% of the employee’s contribution up to 6% of the employee’s salary. The
      Company contributions are vested 20% per year beginning with the first year
      of
      service. The Company made no matching contributions to the plan in fiscal 2006.
      On December 31, 2005, the Company terminated the plan.





***401(k)
      Plan***





In
      January 2006, the Company adopted a retirement plan that complies with Section
      401(k) of the Internal Revenue Code. All employees are eligible to participate
      in the plan. The Company matches 50% of each participant’s voluntary
      contributions, subject to a maximum contribution of 6% of the participant’s
      compensation. Participants fully vest in the Company’s contributions after three
      years of vesting service. On April 1, 2007 an amendment was made to the
      Company’s 401(k) plan allowing vesting to take place evenly over the three year
      vesting service period. The Company’s matching contributions for the nine months
      ended February 28, 2007 were $8,237.





25




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**   **Commitments
          and Contingencies, continued**




***Employment
      Contract***





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. Further, the Company agreed
      to accelerate the vesting of all outstanding options held by the officer and
      to
      extend their term to June 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 $4,500,000 (see above). The
      Company believes the claim is without merit and intends to vigorously defend
      itself. ****





***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 condensed consolidated balance
      sheets.




**9.Subsequent
      Events**





During
      the period March 1, 2007 through April 20, 2007, Phoenix Digital entered into
      license agreements with third parties, with proceeds totaling $22,140,000.





On
      March
      5, 2007, the Company received proceeds of $100,000 from an investor who
      exercised warrants to purchase 1,000,000 shares of common
      stock.





On
      March
      20, 2007, an investor exercised warrants of 10,702,243 to purchase 10,424,578
      shares of common stock on a cashless basis.





In
      a
      press release dated February 22, 2007, the Company announced dividends of $0.02
      per share to shareholders and qualified warrant holders of record as of March
      6,
      2007. The dividend of $8,114,774 was paid on April 9, 2007. In the same press
      release, the Company announced the Board of Directors semi-annual dividend
      policy contingent upon the financial condition of the Company, other possible
      applications of available resources, and relevant business
      considerations.





On
      March
      27, 2007, the Company entered into an 18 month revolving line of credit with
      SSDI for a maximum amount of $500,000. If the Company does not provide notice
      to
      SSDI at least 90 days prior to the maturity date, the maturity date
      automatically extends 12 months. The line of credit is collateralized by all
      assets presently owned or hereafter acquired by SSDI. On March 28, 2007, the
      Company advanced $150,000 under terms of the agreement, and on April 16, 2007
      the Company advanced $100,000 under terms of the agreement.




26




Patriot Scientific Corporation
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**


**Subsequent
      Events, continued**





The
      line
      carries a floating interest rate which is defined as the prime rate as announced
      by Bank of America. At March 31, 2007, the interest rate on the note was 8.25%.
      The borrower is required to make minimum monthly payments on the line consisting
      of unpaid and accrued interest on the first day of the month following the
      initial advance.





27





**Item
      2.Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations**





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, 2006.





**Overview**





During
      the fiscal years ended May 31, 2005 and May 31, 2006, the Company entered into
      agreements for the licensing of its technology with Advanced Micro Devices
      Inc.
      ("AMD") and Intel Corporation, among the largest of the microprocessor
      manufacturers. During the 2006 fiscal year, the Company entered into licensing
      agreements with Hewlett-Packard, Fujitsu and Casio through its joint venture
      entity, Phoenix Digital. Additional licensing agreements for the use of the
      Company’s technology were signed through its joint venture entity during the
      nine months ended February 28, 2007. We believe that these 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 the value of the Company's intellectual
      property in that they are "arms length" transactions with major electronics
      manufacturers.





In
      June
      2005, the Company entered into a series of agreements with Technology Properties
      Limited, Inc. (“TPL”) and others to facilitate the pursuit of infringers of its
      intellectual property. The Company intends to continue its joint venture with
      TPL to pursue license agreements with infringers of its technology. Management
      believes that utilizing the option of working through TPL, as compared to
      creating and using a Company licensing team for those activities, avoids a
      competitive devaluation of the Company’s principal assets and is a prudent way
      to achieve the desired results as the Company seeks to obtain fair value from
      users of its intellectual property.




RESTATEMENT
      OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS




On
      September 8, 2006, the Company determined that the manner in which it had
      accounted for the reset conversion feature and embedded put option of certain
      of
      its convertible debentures was not in accordance with Statement of Financial
      Accounting Standards (“SFAS”) No. 133, *Accounting
      For Derivative Instruments and Hedging Activities* ,
      as
      amended, and Emerging Issues Task Force (“EITF”) Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* .
      The
      Company determined that the reset conversion feature was an embedded derivative
      instrument and that the conversion option was an embedded put option pursuant
      to
      SFAS No. 133. The accounting treatment of derivative financial instruments
      required that the Company record the derivatives and related warrants at their
      fair values as of the inception date of the convertible debenture agreements
      and
      at fair value as of each subsequent balance sheet date.  In addition, under
      the provisions of EITF No. 00-19, as a result of entering into the convertible
      debenture agreements, the Company was required to classify all other
      non-employee warrants as derivative liabilities and record them at their fair
      values at each balance sheet date.  Any change in fair value was required
      to be recorded as non-operating, non-cash income or expense at each balance
      sheet date.  If the fair value of the derivatives was higher at the
      subsequent balance sheet date, the Company was required to record a
      non-operating, non-cash charge.  If the fair value of the derivatives was
      lower at the subsequent balance sheet date, the Company was required to record
      non-operating, non-cash income.  Accordingly, in connection with its
      restatement adjustments, the Company has appropriately reflected the
      non-operating, non-cash income or expense resulting from changes in fair value.
      The Company had previously not recorded the embedded derivative instruments
      as a
      liability and did not record the related changes in fair value. The Company
      did
      not have any derivative instruments at May 31, 2006 as all derivative
      instruments were settled prior to May 31, 2006.





28


In
      addition, the Company determined the manner in which it accounted for its
      interest in Phoenix Digital was not in accordance with appropriate accounting
      literature. Beginning in June 2005, the Company accounted for its interest
      in
      Phoenix Digital as a variable interest entity, as defined in FASB Interpretation
      46(R). Accordingly, the accounts and transactions of Phoenix Digital were
      consolidated with those of the Company and the ownership interest of the other
      member of Phoenix Digital was presented as a minority interest in the condensed
      consolidated financial statements of the Company for the periods August 31,
      2005, November 30, 2005 and February 28, 2006. The Company has reassessed its
      accounting for its interest in Phoenix Digital and after further consideration
      of FIN 46(R) and other authoritative literature, has corrected its accounting
      policy to account for its interest in Phoenix Digital in accordance with the
      equity method of accounting for investments, as the Company did not have a
      controlling financial interest in Phoenix Digital and determined that it was
      not
      the primary beneficiary of the relationship.





Based
      on
      the foregoing, the Company’s Board of Directors determined that the Company was
      required to restate its financial results for the year ended May 31, 2005 and
      for the three month periods ended August 31, 2005, November 30, 2005 and
      February 28, 2006.




See
      Note
      2 to the accompanying condensed consolidated financial statements included
      in
      this Quarterly Report on Form 10-Q for a summary of the effects of the
      restatement adjustments on the Company's condensed consolidated financial
      statements. The information provided in this Management's Discussion and
      Analysis of Financial Condition and Results of Operations reflects the effect
      of
      the restatement adjustments.





**Critical
      Accounting Policies and Estimates**





Our
      condensed 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 condensed 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 agreement;
      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.





29





3. Stock
      Options and Warrants





We
      account for equity issuances to non-employees in accordance with Statement
      of
      Financial Accounting Standards ("SFAS") No. 123, *Accounting
      for Stock Based Compensation* ,
      and
      Emerging Issues Task Force ("EITF") Issue No. 96-18, *Accounting
      for Equity Instruments that are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods and Services* .
      All
      transactions in which goods or services are the consideration received for
      the
      issuance of equity instruments are accounted for based on the fair value of
      the
      consideration received or the fair value of the equity instrument issued,
      whichever is more reliably measurable. The measurement date used to determine
      the fair value of the equity instrument issued is the earlier of the date on
      which the third-party performance is complete or the date on which it is
      probable that performance will occur.





Prior
      to
      June 1, 2006, we accounted for stock-based compensation issued to employees
      using the intrinsic value method of accounting prescribed by Accounting
      Principles Board ("APB") Opinion No. 25, *Accounting
      for Stock Issued to Employees* and
      related pronouncements. Under this method, compensation expense was recognized
      over the respective vesting period based on the excess, on the date of grant,
      of
      the fair value of our common stock over the grant price, net of forfeitures.
      Deferred stock-based compensation was amortized on a straight-line basis over
      the vesting period of each grant.





On
      June 1, 2006, we adopted SFAS No. 123(R), *Share-Based
      Payment* ,
      which
      requires the measurement and recognition of compensation expense for all
      share-based payment awards made to our employees and directors related to our
      stock option plans based on estimated fair values. We adopted SFAS
      No. 123(R) using the modified prospective transition method, which requires
      the application of the accounting standard as of June 1, 2006, the first day
      of
      our fiscal year 2007. Our condensed consolidated financial statements as of
      and
      for the nine months ended February 28, 2007 reflect the impact of adopting
      SFAS
      No. 123(R). In accordance with the modified prospective transition method,
      our consolidated financial statements for prior periods have not been restated
      to reflect, and do not include, the impact of SFAS No. 123(R). The value of
      the portion of the award that is ultimately expected to vest is recognized
      as
      expense over the requisite service periods in our consolidated statement of
      operations. As stock-based compensation expense recognized in the condensed
      consolidated statement of operations for the nine months ended February 28,
      2007
      is based on awards ultimately expected to vest, it has been reduced for
      estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated
      at the time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. The estimated average forfeiture rate
      for the nine months ended February 28, 2007 of 5% was based on historical
      forfeiture experience and estimated future employee forfeitures. In our pro
      forma information required under SFAS No. 123 for the periods prior to
      fiscal 2007, we accounted for forfeitures as they occurred .





Employee
      stock-based compensation expense recognized under SFAS No. 123(R) for the
      nine months ended February 28, 2007 was approximately $2,356,000, determined
      by
      the Black-Scholes valuation model.





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 previous to its maturity date, any
      debt discount not previously amortized is expensed to non-cash interest.
      A s
      of May
      31, 2006, the debt discount has been fully amortized as the debt instruments
      were settled prior to May 31, 2006.





30




5. Derivative
          Financial Instruments




In
      connection with the issuance of certain convertible debentures, the terms of
      the
      debentures included a reset conversion feature which provided for a conversion
      of the debentures into shares of the Company's common stock at a rate which
      was
      determined to be variable. The conversion option was therefore deemed to be
      an
      embedded put option pursuant to SFAS No. 133, *Accounting
      For Derivative Instruments and Hedging Activities* ,
      as
      amended, and EITF Issue No. 00-19, *Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company's Own Stock* .
      The
      Company determined that the reset conversion feature was an embedded derivative
      instrument and that the conversion option was an embedded put option pursuant
      to
      SFAS No. 133. The accounting treatment of derivative financial instruments
      required that the Company record the derivatives and related warrants at their
      fair values as of the inception date of the convertible debenture agreements
      and
      at fair value as of each subsequent balance sheet date.  In addition, under
      the provisions of EITF No. 00-19, as a result of entering into the convertible
      debenture agreements, the Company was required to classify all other
      non-employee warrants as derivative liabilities and record them at their fair
      values at each balance sheet date.  Any change in fair value was recorded
      as non-operating, non-cash income or expense at each balance sheet date. 
If the fair value of the derivatives was higher at the subsequent balance sheet
      date, the Company recorded a non-operating, non-cash charge.  If the fair
      value of the derivatives was lower at the subsequent balance sheet date, the
      Company recorded non-operating, non-cash income. As of May 31, 2006, the Company
      does not have any outstanding derivative instruments as the related debt
      instruments were settled prior to May 31, 2006.





6. 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.





7. Income
      Taxes





The
      Company must assess the likelihood that it will be able to recover its deferred
      tax assets. If recovery is not likely, the Company must increase its provision
      for taxes by recording a valuation allowance against the deferred tax assets
      that the Company estimates will not ultimately be recoverable. The Company
      believes that a substantial majority of the deferred tax assets recorded on
      its
      balance sheet will ultimately be recovered. However, should there be a change
      in
      the Company’s ability to recover the deferred tax assets, the tax provision
      would increase in the period in which the Company determined that the recovery
      was not probable.




8. Investment
        in Affiliated Companies


The
      Company has a 50% interest in Phoenix Digital. This investment is accounted
      for
      using the equity method of accounting since the investment provides the Company
      the ability to exercise significant influence, but not control, over the
      investee. Significant influence is generally deemed to exist if the Company
      has
      an ownership interest in the voting stock of the investee of between 20% and
      50%, although other factors, such as representation on the investee’s Board of
      Directors, are considered in determining whether the equity method of accounting
      is appropriate. Under the equity method of accounting, the investment,
      originally recorded at cost, is adjusted to recognize the Company’s share of net
      earnings or losses of the investee and is recognized in the condensed
      consolidated statement of operations in the caption “Equity in earnings of
      affiliated company”.





The
      Company owns 100% of the preferred stock of Scripps Secured Data, Inc. (“SSDI”)
      This investment is accounted for at cost as the investment is in preferred
      shares which do not share in the earnings of SSDI and the Company does not
      have
      the ability to the
      ability to exercise significant influence over SSDI.





The
      Company reviews its investments in affiliated companies to determine whether
      events or changes in circumstances indicate that its carrying amount may not
      be
      recoverable. The primary factors the Company considers in its determination
      are
      the financial condition, operating performance and near term prospects of the
      investee. If a decline in value is deemed to be other than temporary, the
      Company would recognize an impairment loss.





31


**Results
      of Operations**





*Comparison
      of the Nine Months Ended February 28, 2007 and Nine Months Ended February 28,
      2006.*





In
      June
      2005, we entered into an agreement with Intel Corporation licensing our
      intellectual property for a one-time payment of $10,000,000. The license revenue
      was recognized in the quarter ended August 31, 2005. During the nine month
      period ended February 28, 2007 no such agreement was signed by the Company.
      In
      connection with entering into the agreement with Intel Corporation, we entered
      into an agreement with the co-owner of our patented technologies, through which
      we settled all legal disputes between us and agreed to jointly pursue others
      who
      have infringed upon our joint rights. Future licensing agreements for the use
      of
      the Company’s technology are being made through a joint venture entity that is
      accounted for in accordance with the equity method of accounting for investments
      and, accordingly, the financial results of the joint venture are being recorded
      in the other income section of the Company’s condensed consolidated statement of
      operations. Product sales amounting to approximately $297,000 and $67,000 were
      also recorded in the nine month periods ended February 28, 2006 and 2007,
      respectively, 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 for the nine months ended February 28, 2006 consists of payments made
      to subcontractors for materials and labor in connection with the product sales.
      For the nine months ended February 28, 2007, no such costs were incurred on
      the
      product sales. Total revenues amounted to approximately $10,297,000 and $67,000
      for the nine months ended February 28, 2006 and 2007, respectively.





Research
      and development expenses decreased from approximately $226,000 for the nine
      months ended February 28, 2006 to zero for the nine months ended February 28,
      2007. Presently, we do not expect to replace recently discontinued “in house”
research and development operations. However, the Company may utilize
      consultants and other outsourced contractors for research and development
      activities in future periods.





Selling,
      general and administrative expenses increased from approximately $2,517,000
      for
      the nine months ended February 28, 2006 to approximately $5,915,000 for the
      nine
      months ended February 28, 2007. Legal and accounting related expenses increased
      by approximately $1,003,000 for the nine months ended February 28, 2007 compared
      with the nine months ended February 28, 2006 related to legal and accounting
      matters in connection with the restatement of the Company’s financial statements
      for the fiscal years 2005, 2004, 2003 and 2002, as well as the quarterly reports
      for the periods ended August 31, 2005, November 30, 2005 and February 28, 2006
      and the Company’s required compliance with Sarbanes-Oxley procedures. Legal
      expenses related to a dispute with a former executive officer as well as other
      legal proceedings involving the interests of a co-inventor of a portion of
      the
      Company’s technology and other legal matters contributed to the increase in
      legal expenses for the nine months ended February 28, 2007. Salary costs and
      related expenses included non-cash expenses associated with the fair value
      of
      options granted during the period in accordance with SFAS No. 123(R). On
      June 5, 2006, 1,500,000 options were granted to the chief executive officer
      of
      the Company resulting in non-cash compensation expense amounting to
      approximately $1,527,000. On October 23, 2006, 230,000 options were granted
      to
      employees resulting in non-cash compensation expense of approximately $184,000.
      On February 9, 2007, 1,070,000 options were granted to employees and directors
      resulting in non-cash compensation expense of approximately $584,000. Additional
      non-cash compensation for the nine months ended February 28, 2007 amounted
      to
      $61,000 for vesting of employee stock options in accordance with SFAS No 123(R).
      No such compensation expense was incurred for the nine months ended February
      28,
      2006. Public and investor relations expenses increased by approximately $197,000
      for the nine months ended February 28, 2007 as compared with the nine months
      ended February 28, 2006 as a result of a change in the Company’s public
      relations firm and one time contracts with investor relations consultants.
      Other
      salary expenses increased by approximately $167,000 for the nine months ended
      February 28, 2007 as compared with the nine months ended February 28, 2006
      due
      to bonuses and 401(k) employer matching of which no such expense was incurred
      for the nine months ended February 28, 2006. Insurance expense increased by
      approximately $110,000 for the nine months ended February 28, 2007 as compared
      with the nine months ended February 28, 2006 primarily as a result of increased
      costs of directors and officers insurance coverage. Travel and related expenses
      increased approximately $19,000 for the nine months ended February 28, 2007
      as
      compared with the nine months ended February 28, 2006 due to increased travel
      to
      attend various lawsuit mediations. Decreases in expenses were recorded for
      the
      nine months ended February 28, 2007 as compared with the nine months ended
      February 28, 2006 for rent, office supplies, patent enforcement expenses,
      website, marketing, utilities and for other expenses in the approximate amounts
      of $38,000, $12,000, $74,000, $22,000, $20,000, $8,000 and $280,000,
      respectively.





32


Settlement
      and license expenses amounting to approximately $1,918,000 were recorded during
      the three months ended August 31, 2005 in connection with the agreements
      involving the formation of a joint venture 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 $82,000 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. Offsetting
      the non-cash expenses were non-cash benefits to the Company from the
      reconveyance of warrants, amounting to approximately $622,000. During the nine
      months ended February 28, 2007, the Company recorded $6,604,000 of settlement
      and license expense relating to the mediation agreement with Fish (see Note
      8
      for more information).





Other
      income and expenses for the Company for the nine months ended February 28,
      2007
      included equity in the earnings of Phoenix Digital. The investment is accounted
      for in accordance with the equity method of accounting for investments. The
      Company’s investment in the joint venture for the nine months ended February 28,
      2007 provided income after expenses in the amount of approximately $30,402,000
      resulting from licensing agreements for our intellectual property with Sony,
      Nikon, Seiko Epson, Pentax, Olympus, Kenwood, Agilent, Lexmark, Schneider
      Electric, NEC Corporation and its selected subsidiaries and Funai Electric
      for
      one time payments. The Company’s investment in the joint venture provided net
      income after expenses in the amount of approximately $28,608,000 for the nine
      months ended February 28, 2006. Total other income and expense for the nine
      months ended February 28, 2007 amounted to net other income of approximately
      $30,561,000 compared with total other income and expense for the nine months
      ended February 28, 2006 of net other income amounting to approximately
      $25,360,000. Changes in the fair value of warrant and derivative liabilities
      amounted to net other expense for the nine months ended February 28, 2006 of
      approximately $2,457,000 with no corresponding amount for the nine months ended
      February 28, 2007 as all convertible debt had been retired in prior fiscal
      periods. Non-cash adjustments to interest expense for the nine months ended
      February 28, 2006 amounted to expenses of approximately $413,000 resulting
      from
      amortization of debt discount and conversion of the remaining debentures. During
      the nine months ended February 28, 2006 the Company recorded a loss on debt
      extinguishment of $445,000 related to the 7,000,000 warrants issued to a
      debenture holder as consideration for entering into the reset agreements.
      Interest income and other income increased from approximately $172,000 for
      the
      nine months ended February 28, 2006 to approximately $499,000 for the nine
      months ended February 28, 2007 as interest bearing account balances increased
      from license revenues. During the nine months ended February 28, 2007 the
      Company recorded an impairment charge on the value of its note receivable from
      Holocom Networks, Inc. of approximately $340,000. (see Note 4 for more
      information).





During
      the nine months ended February 28, 2007, the Company recorded a provision for
      income taxes of $4,382,911 related to federal and state taxes. Also, during
      the
      nine months ended February 28, 2006 and 2007, the Company utilized approximately
      $3,000,000 and $32,000,000, respectively, of its available federal net operating
      loss carry-forwards and approximately $3,000,000 and $16,700,000,
      respectively, of its available state net operating loss carry-forwards to
      offset its taxable income arising in the respective quarters.





33


The
      Company recorded net income (as restated) for the nine months ended February
      28,
      2006 of $30,892,627 compared with net income of $13,725,834 for the nine months
      ended February 28, 2007.





*Comparison
      of the Three Months Ended February 28, 2007 and Three Months Ended February
      28,
      2006.*





In
      June
      2005, we entered into an agreement with Intel Corporation licensing our
      intellectual property for a one-time payment of $10,000,000. During the three
      month periods ended February 28, 2007 and 2006, no such agreement was signed
      by
      the Company. In connection with entering into the agreement with Intel
      Corporation, we entered into an agreement with the co-owner of our patented
      technologies, through which we settled all legal disputes between us and agreed
      to jointly pursue others who have infringed upon our joint rights. Future
      licensing agreements for the use of the Company’s technology are being made
      through a joint venture entity that is accounted for in accordance with the
      equity method of accounting for investments and, accordingly, the financial
      results of the joint venture are being recorded in the Other Income section
      of
      the Company’s Condensed consolidated Statement of Operations. Product sales
      amounting to approximately $277,000 and $22,000 were also recorded in the three
      month periods ended February 28, 2006 and 2007, respectively, 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 for the three months ended
      February 28, 2006 consists of payments made to subcontractors for materials
      and
      labor in connection with the product sales. For the three months ended February
      28, 2007, no such costs were incurred on the product sales. Total revenues
      amounted to approximately $277,000 and $22,000 for the three months ended
      February 28, 2006 and 2007, respectively.





Research
      and development expenses decreased from approximately $27,000 for the three
      months ended February 28, 2006 to zero for the three months ended February
      28,
      2007. Presently, we do not expect to replace recently discontinued “in house”
research and development operations. However, the Company may utilize
      consultants and other outsourced contractors for research and development
      activities in future periods.





Selling,
      general and administrative expenses increased from approximately $697,000 for
      the three months ended February 28, 2006 to approximately $1,446,000 for the
      three months ended February 28, 2007. Legal and accounting related expenses
      increased by approximately $211,000 for the three months ended February 28,
      2007
      compared with the three months ended February 28, 2006 related to legal and
      accounting matters in connection with the restatement of the Company’s financial
      statements for the fiscal years 2005, 2004, 2003 and 2002, as well as the
      quarterly reports for the periods ended August 31, 2005, November 30, 2005
      and
      February 28, 2006 and the Company’s required compliance with Sarbanes-Oxley
      procedures. Legal expenses related to a dispute with a former executive officer
      as well as other legal proceedings involving the interests of a co-inventor
      of a
      portion of the Company’s technology and other legal matters contributed to the
      increase in legal expenses for the three months ended February 28, 2007. Salary
      costs and related expenses included non-cash expenses associated with the fair
      value of options granted during the period in accordance with SFAS
      No. 123(R). On February 9, 2007, 1,070,000 options were granted to
      employees and directors resulting in non-cash compensation expense of
      approximately $584,000. Additional non-cash compensation for the three months
      ended February 28, 2007 amounted to approximately $2,000 for vesting of employee
      stock options in accordance with SFAS 123(R). No such compensation expense
      was
      incurred for the three months ended February 28, 2006. Payments of Board of
      Director fees increased by approximately $67,000 for the three months ended
      February 28, 2007 as compared to the three months ended February 28, 2006 due
      to
      the initiation of monthly director payments in the third quarter of fiscal
      2006.
      Insurance expenses increased by approximately $38,000 for the three months
      ended
      February 28, 2007 as compared with the three months ended February 28, 2006
      primarily as a result of increased costs of directors and officers insurance
      coverage. Decreases in expenses were recorded for the three months ended
      February 28, 2007 as compared with the three months ended February 28, 2006
      for
      rent, office supplies, website, marketing, and for sundry expenses in the
      approximate amounts of $49,000, $7,000, $22,000, $15,000, and $61,000,
      respectively.





During
      the three months ended February 28, 2007, the Company recorded $304,000 of
      settlement and license expense relating to the mediation agreement with Fish.
      The amount consists of an accrual for February 2007 royalties of approximately
      $244,000 to be paid by March 31, 2007, the $15,000 payment to Maasai Power
      and
      Light and an adjustment of the contingency payable to the actual amount of
      $3,000,000 due by May 1, 2007 (see Note 8 for more information).





34


Other
      income and expenses for the Company for the three months ended February 28,
      2007
      included equity in the earnings of Phoenix Digital. The investment is accounted
      for in accordance with the equity method of accounting for investments. The
      Company’s investment in the joint venture for the three months ended February
      28, 2007 provided income after expenses in the amount of approximately
      $11,657,000 resulting from licensing agreements for our intellectual property
      with Lexmark, Schneider Electric, NEC Corporation and its selected subsidiaries
      and Funai Electric for one time payments. The Company’s investment in the joint
      venture provided net income after expenses in the amount of approximately
      $29,328,000 for the three months ended February 28, 2006. Total other income
      and
      expense for the three months ended February 28, 2007 amounted to net other
      income of approximately $11,508,000 compared with total other income and expense
      for the three months ended February 28, 2006 of net other income amounting
      to
      approximately $24,040,000. Changes in the fair value of warrant and derivative
      liabilities amounted to net other expense for the three months ended February
      28, 2006 of approximately $4,718,000 with no corresponding amount for the three
      months ended February 28, 2007 as all convertible debt had been retired in
      prior
      fiscal periods. Non-cash adjustments to interest expense for the three months
      ended February 28, 2006 amounted to expenses of approximately $190,000 resulting
      from amortization of debt discount and conversion of the remaining debentures.
      During the three months ended February 28, 2006 the Company recorded a loss
      on
      debt extinguishment of $445,000 related to the 7,000,000 warrants issued to
      a
      debenture holder as consideration for entering into the reset agreements.
      Interest income and other income increased from approximately $78,000 for the
      three months ended February 28, 2006 to approximately $191,000 for the three
      months ended February 28, 2007 as interest bearing account balances increased
      from license revenues. During the three months ended February 28, 2007, the
      Company recorded an impairment charge on the value of its note receivable from
      Holocom Networks, Inc. of approximately $340,000. (see Note 4 for more
      information).





The
      Company recorded net income (as restated) for the three months ended February
      28, 2006 of $23,488,416 compared with net income of $9,617,559 for the three
      months ended February 28, 2007.





**Liquidity
      and Capital Resources**





The
      Company’s cash, marketable securities and short-term investment balances
      increased from approximately $7,503,000 as of May 31, 2006 to approximately
      $19,003,000 as of February 28, 2007. We also hold restricted cash in savings
      accounts amounting to approximately $100,000 as of May 31, 2006 and
      approximately $102,000 as of February 28, 2007. Total current assets increased
      from approximately $8,015,000 as of May 31, 2006 to approximately $22,756,000
      as
      of February 28, 2007. Total current liabilities increased from approximately
      $1,244,000 as of May 31, 2006 to approximately $3,725,000 as of February 28,
      2007.





During
      the nine month periods that ended February 28, 2006 and 2007 the Company
      generated net cash flows of approximately $12,039,000 and $11,404,000,
      respectively. However, during recent years we have relied upon financing
      activities to provide the funds necessary for the Company's operations including
      sales of common stock, the issuance of convertible debentures and notes payable
      and related conversions and exercises of common stock warrants. We believe
      that
      the Company will be able to avoid such methods of financing operations for
      the
      foreseeable future.





During
      the nine month period ended February 28, 2007 we repurchased 10,779,027 shares
      of our common stock at an aggregate cost of $7,441,664 through the Company’s
      stock repurchase program.





In
      a
      press release dated February 22, 2007, the Company announced dividends of $0.02
      per share to shareholders and qualified warrant holders of record as of March
      6,
      2007. The dividend of $8,114,774 was paid on April 9, 2007. In the same press
      release, the Company announced the Board of Directors semi-annual dividend
      policy contingent upon the financial condition of the Company, other possible
      applications of available
      resources, and relevant business considerations.





35


We
      believe the Company's current position as of February 28, 2007 will provide
      the
      funds necessary to support the Company's operations for the next 12
      months.





A
      summary
      of our outstanding contractual obligations at February 28, 2007 is as
      follows:





Contractual
              Cash
                Obligations
            
            Total
                Amounts
              Committed
            
            Less
                than 1
              Year
            
            1-3
              YearsOperating
                  lease - facilities
            
            $
            193,788
            
            $
            95,508
            
            $
            98,280




**Recent
      Accounting Pronouncements**




On
      June
      1, 2006, we adopted Statement of Financial Accounting Standards No. 123
      (revised 2004), *Share-Based
      Payment* (“SFAS
      123(R)”), which requires the measurement and recognition of compensation expense
      for all share-based payment awards made to our employees and directors based
      on
      estimated fair values. We adopted SFAS 123(R) using the modified prospective
      transition method, which requires the application of the accounting standard
      as
      of June 1, 2006, the first day of our fiscal year 2007. Our condensed
      consolidated financial statements as of and for the nine months ended February
      28, 2007 reflect the impact of SFAS 123(R). In accordance with the modified
      prospective transition method, our condensed consolidated financial statements
      for prior periods have not been restated to reflect, and do not include, the
      impact of SFAS 123(R). The value of the portion of the award that is ultimately
      expected to vest is recognized as an expense over the requisite service periods
      in our condensed consolidated statement of operations. Prior to the adoption
      of
      SFAS 123(R), we accounted for stock-based awards to employees and directors
      using the intrinsic value method in accordance with APB 25 as allowed under
      Statement of Financial Accounting Standards No. 123, *Accounting
      for Stock-Based Compensation* (“SFAS
      123”). As stock-based compensation expense recognized in the condensed
      consolidated statement of operations for the first quarter of fiscal 2007 is
      based on awards ultimately expected to vest, it has been reduced for estimated
      forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimated. We estimated forfeitures to be 5% of the options
      issued.




Stock-based
      compensation expense recognized under SFAS 123(R) for the nine months ended
      February 28, 2007 was approximately $2,356,000, determined by the Black-Scholes
      valuation model, and consisting of stock-based compensation expense related
      to
      employee and director stock options and also vesting of options previously
      granted. See Note 1 to the condensed consolidated financial statements for
      additional information.




In
      July
      2006, the Financial Accounting Standards Board issued Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes - an interpretation of FASB Statement No.
      109* (“FIN
      48”). This interpretation clarifies the application of SFAS No. 109, *Accounting
      for Income Taxes* ,
      by
      defining criteria that an individual tax position must meet for any part of
      the
      benefit of that position to be recognized in a company’s financial statements
      and also provides guidance on measurement, derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure and
      transition. FIN 48 is effective for fiscal years beginning after December 15,
      2006. The Company expects to adopt FIN 48 on June 1, 2007. The Company is
      currently assessing the impact the adoption of FIN 48 will have on its condensed
      consolidated financial position and results of operations.




In
      September 2006, the FASB issued SFAS No. 157, *Fair
      Value Measurements* (“SFAS
      No. 157”).  SFAS No. 157 defines fair value, establishes a framework for
      measuring fair value in generally accepted accounting principals and expands
      disclosures about fair value measurements.  The statement does not require
      new fair value measurements, but is applied to the extent that other accounting
      pronouncements require or permit fair value measurements.  The statement
      emphasizes that fair value is a market-based measurement that should be
      determined based on the assumptions that market participants would use in
      pricing an asset or liability.  Companies that have assets and liabilities
      measured at fair value will be required to disclose information that enables
      the
      users of its financial statements to access the inputs used to develop those
      measurements.  The reporting entity is encouraged, but not required, to
      combine the fair value information disclosed under this statement with the
      fair
      value information disclosed under other accounting pronouncements.  SFAS
      No. 157 is effective for fiscal years beginning after November 15, 2007. The
      Company expects to adopt SFAS No. 157 on June 1, 2008.  The Company is in
      the process of evaluating the provisions of the statement, but does not
      anticipate that the adoption of SFAS No. 157 will have a material impact on
      the
      Company’s consolidated financial statements.





36


In
      September 2006, the SEC staff issued SAB No. 108, *Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statements* .
      SAB No.
      108 was issued in order to eliminate the diversity in practice surrounding
      how
      public companies quantify financial statement misstatements. SAB No. 108
      requires that registrants quantify errors using both a balance sheet and income
      statement approach and evaluate whether either approach results in a misstated
      amount that, when all relevant quantitative and qualitative factors are
      considered, is material. The adoption of this statement is not expected to
      have
      a material impact on the Company’s consolidated financial condition or results
      of operations.





**Item
      3.Quantitative and
      Qualitative Disclosures About Market Risk**




N/A





**Item
      4.Controls and
      Procedures**





***Evaluation
      of Disclosure Controls and Procedures***




As
      required by Rule 13a-15(e) under the Exchange Act, as of February 28,
      2007, 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
      Chief Executive Officer and our Chief Financial Officer.




Disclosure
      controls and procedures are controls and other procedures that are designed
      to
      ensure that information required to be disclosed in our report filed or
      submitted under the Exchange Act is recorded, processed, summarized and
      reported, within the time periods specified in the Securities and Exchange
      Commission’s rules and forms. Disclosure controls and procedures include,
      without limitation, controls and procedures designed to ensure that information
      required to be disclosed in our reports filed under the Exchange Act is
      accumulated and communicated to management, including the Chief Executive
      Officer and Chief Financial Officer as appropriate, to allow timely decisions
      regarding required disclosure. Management recognizes that any controls and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving their objectives, and management necessarily
      applies its judgment in evaluating the cost-benefit relationship of possible
      controls and procedures.  Based on the evaluation of our disclosure
      controls and procedures as of February 28, 2007, our Chief Executive
      Officer and Chief Financial Officer concluded that, as of such date, our
      disclosure controls and procedures were effective.




***Changes
      in Internal Control over Financial Reporting***




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




37


**PART
      II- OTHER INFORMATION**





**Item
      1.Legal Proceedings**





*Patriot
      Scientific Corporation v. Russell Fish*




On
      April
      6, 2006, we filed a declaratory relief lawsuit against Russell Fish and The
      Fish
      Family Trust in the United States District Court for the Southern District
      of
      California.  As a consequence of licensing agreements entered into by or on
      behalf of Patriot, by Patriot's previous management, Mr. Fish presented demands
      for payment by us under his July 2004 agreement related to the Inventorship
      Litigation.  We contended that Mr. Fish had been paid all sums that may
      have been owed to him.  Our action sought declaratory relief that no
      further sums were owed to Mr. Fish.  Also, on April 6, 2006, Fish and,
      later, Robert Anderson, allegedly as trustee of The Fish Family Trust, filed
      a
      lawsuit against the Company in the District Court of Dallas County, Texas. 
The case was subsequently removed to the United States District Court for the
      Northern District of Texas.  The lawsuit was based on an alleged breach of
      the contract entered into on July 27, 2004 and sought enforcement of the
      contract or damages.  The California action was transferred to the Northern
      District of Texas.  Mediation commenced on September 11, 2006.  On
      February 14, 2007, a settlement of this litigation was finalized. Terms of
      the
      settlement require the Company to pay $3,400,000 in cash on February 14, 2007
      and $3,000,000 on May 1, 2007, make a donation of $15,000 on February 14, 2007
      on behalf of Russell H. Fish III to Maasai Power and Education Project, Inc.,
      and pay Fish the equivalent of 4% of 50% of the next $100 million of gross
      license fees as they are collected by Phoenix Digital and as distributions
      are
      made to Patriot, after excluding the first $20 million collected by Phoenix
      Digital after December 1, 2006. Patriot's commitment to make payments to Fish
      related to such future license revenues will not exceed $2 million.





*Lowell
      Giffhorn Arbitration*




On
      September 23, 2005, Lowell Giffhorn, a former executive officer
      and a former director of Patriot, 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 has demanded damages of
      approximately $4,500,000 (excluding claims for punitive damages and attorneys
      fees). The Company denies the allegations and believes the claims to be
      frivolous and totally devoid of merit. The Company has retained litigation
      counsel and intends to vigorously defend the claims. The amount, if any, of
      ultimate liability with respect to the foregoing cannot be determined. Despite
      the inherent uncertainties of litigation, the Company at this time does not
      believe that Mr. Giffhorn's claim will have a material adverse impact on
      its financial condition, results of operations, or cash flows.




*Patent
      Litigation Patent Litigation*




Pursuant
      to the joint venture that the Company entered into in June 2005 with TPL (in
      settlement of inventorship/ownership litigation between the parties, and in
      return for a 50-50 sharing of net licensing and enforcement revenues), the
      Company granted TPL the complete and exclusive right to enforce and license
      its
      microprocessor patent portfolio. The Company then dismissed its patent
      infringement claims against Fujitsu Computer Systems, Inc.; Matsushita Electric
      Corporation of America; NEC Solutions (America) Inc.; Sony Electronics Inc.;
      and
      Toshiba America Inc., and certain related entities of these **** defendants which had been pending in the Federal District Court for the Northern
      District of California. Thereafter, TPL, on behalf of the TPL/Patriot joint
      venture and Patriot, filed patent infringement actions against certain of the
      foregoing defendants (except Sony) and their related entities in the Federal
      District Court for the Eastern District of Texas, which litigation is currently
      pending. Litigation is not currently pending with regard to Fujitsu or NEC
      and
      certain of NEC’s subsidiaries as listed below.





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. A Claims Construction Hearing is scheduled
      for May 3, 2007 in The United States District Court for the Eastern District
      of
      Texas.





38


In
      February 2007, a license agreement was entered into with: NEC Corporation,
      NEC
      Corporation of America, Inc., NEC Display Solutions of America, Inc. and NEC
      Unified Solutions, Inc. In connection with that transaction, the above named
      defendants, excluding NEC Electronics America, Inc., were dismissed from the
      lawsuit.





**Item
      1A.Risk
      Factors**





We
      urge
      you to carefully consider the following discussion of risks as well as other
      information contained in this Form 10-Q. The following are what we believe
      to be
      all our material risks. Additional risks and uncertainties not presently known
      to us or that we currently deem immaterial also may impair our business
      operations.





Patriot
      Has Reported Substantial Revenue In 2006 and 2007 Which May Not Be Indicative
      Of
      Our Future Revenue Trends




During
      fiscal 2006 and the first three quarters of fiscal 2007, the Company entered
      into license agreements, directly and through our joint venture with Technology
      Properties Limited, that generated aggregate license revenues of approximately
      $138,000,000. Because of the uncertain nature of the negotiations that lead
      to
      license revenues, we cannot predict the amount of future revenues from such
      agreements, or whether there will be future revenues from license agreements
      at
      all.





**Patriot
      Is Dependent Upon A Joint Venture In Which It Is A Passive Partner For
      Substantially All Of Its** Revenues




In
      June
      of 2005, we entered into a joint venture with Technology Properties Limited,
      pursuant to which Technology Properties Limited is responsible for the licensing
      and enforcement of Patriot’s microprocessor patent portfolio. This joint venture
      has been the source of virtually all of Patriot’s revenues since June of 2005.
      Therefore, in light of the absence of revenue from other sources, Patriot should
      be regarded as entirely dependent on the success or failure of the licensing
      and
      prosecution efforts of Technology Properties Limited on behalf of the joint
      venture. Sales of our microprocessor products have resulted in limited revenues.
      Our other product lines are no longer being actively marketed, and also generate
      only limited and sporadic sales.




**Patriot’s
      Limited Sales And** Marketing **Capabilities Have Affected Our Revenue**




We
      currently have limited marketing capabilities and may need to hire additional
      sales and marketing personnel. We may not be able to recruit, train, or retain
      qualified personnel to sell and market our products and may not be able to
      develop a successful sales and marketing strategy. We also have very limited
      marketing experience. Any marketing efforts undertaken by us may not be
      successful and may not result in any significant sales of our
      products.




**Patriot
      May Experience Difficulties In The Completion Of Its Development Stage
      Products**




Our
      technologies and products are in various stages of development. We do not
      currently have in-house development personnel, nor have we retained independent
      researchers. Therefore, our development stage products may not be completed
      on a
      timely basis or at all. Additionally, even if we do recommence our development
      activities, our development stage products may not be completed due to the
      inherent risks of new product and technology development, limitations on
      financing, competition, obsolescence, the absence or loss of key personnel
      and
      other factors. Although we have licensed some of our technology at its current
      stage of development, we may not continue to be able to do so and any revenues
      generated from licensing may not be sufficient to support operations at their
      current level. Also, unanticipated technical obstacles can arise at any time
      and
      result in lengthy and costly delays or in a determination that further
      development is not feasible.




39


**Patriot
      Has Settled A Legal Dispute Which Could Impact Our Future Results Of Operations
      And Working Capital Position**




We
      were
      sued by a co-inventor of the technology underlying our microprocessor patent
      portfolio with regard to proceeds we received as a consequence of recently
      signed license agreements. On February 14, 2007, we finalized a settlement
      of
      this litigation. This settlement requires us to pay the co-inventor $6,400,000
      ($3,400,000 of which has already been paid) and up to $2,000,000 from the
      proceeds we receive from future licensing transactions. These payments have
      resulted, and will result, in a reduction of our net income in the current
      quarter and future quarters until our obligations under the settlement have
      been
      fulfilled.




**A
      Successful Challenge To The Proprietary Nature Of Our Intellectual Property
      Would Have A Significant And Adverse Effect On Us**




A
      successful challenge to our ownership of our technology or the proprietary
      nature of our intellectual property would materially damage our business
      prospects. 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. patents, one
      European patent, and one Japanese patent issued. Any issued patent may be
      challenged and invalidated. Patents may not issue from 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 and others may assert that our technologies or products infringe
      on
      their patents or proprietary rights. Persons we believe are infringing our
      patents are vigorously defending their actions and have asserted that our
      patents are invalid. Problems with patents or other rights could increase the
      cost of our products or delay, preclude new product development and
      commercialization by us, and limit future license revenue. If infringement
      claims against us are deemed valid or if our infringement claims are
      successfully opposed, 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. We are currently involved
      in
      patent litigation in the United States District Court for the Eastern District
      of Texas (see “Legal Proceedings”). Additionally, re opposing parties in the
      litigation and one other person have petitioned the Patent and Trademark Office
      to re examine certain of our patents. An adverse decision in the ligitation
      or
      in the re examination process would have a very significant and adverse effect
      on our business.




**If
      A Large Number Of Patriot Shares Are Sold All At Once Or In Blocks, The Market
      Price Of Our Shares Would** Most **Likely Decline**




Our
      warrant holders are not restricted in the price at which they can sell common
      stock acquired through the exercise of warrants. 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
      exercise of our warrants represent a significant portion of our fully-diluted
      capitalization.




**The
      Market For Patriot’s Stock** Is **Subject To Rules Relating To Low-Priced Stock (“Penny Stock”) Which May Limit
      Our Ability To Raise Capital**




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” on
      behalf of 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 raise additional capital if we decide to do so.




40


**Our
      Share Price Could Decline As A Result Of Short Sales**




The
      downward pressure on the price of our common stock as our warrant holders
      exercise their warrants and sell material amounts of common stock could
      encourage short sales by the warrant 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, intends to buy stock
      to
      cover his sale at a later date. If the price of the stock goes down, the seller
      will profit to the extent of the difference between the price at which he
      originally sold it less his later purchase price. 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.




Our
      Future Success Depends In Significant Part Upon The Continued Services Of Our
      Key Senior Management




Our
      future success depends in significant part upon the continued services of our
      key senior management personnel. The competition for highly qualified personnel
      is intense, and we may not be able to retain our key managerial employees or
      attract and retain additional highly qualified technical and managerial
      personnel in the future. None of our employees is represented by a labor union,
      and we consider our relations with our employees to be good. None of our
      employees is covered by key man life insurance policies.




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





On
      April
      28, 2006 the Company’s Board of Directors authorized a stock repurchase program.
      We commenced the program in July 2006 and plan to repurchase outstanding shares
      of our common stock on the open market from time to time. As part of the
      program, we purchased 10,779,027 shares of our common stock at an aggregate
      cost
      of $7,441,664 during the nine months ended February 28, 2007.





Following
      is a summary of all repurchases by the Company of its common stock during the
      nine month period ended February 28, 2007:




**Period**
            
            **Total**
              **Number
                of**
              **Shares**
              **Purchased**
            
            **Average**
              **Price
                Paid**
              **per
                Share**
            
            **Total
                Number of**
              **Shares
                Purchased as**
              **Part
                of Publicly**
              **Announced
                Plans or Programs**June
                1 - 30, 2006
            
            
            -
            
            $
            -
            
            
            -July
                1 - 31, 2006
            
            
            2,075,003
            
            $
            0.89
            
            
            2,075,003August
                1 - 31, 2006
            
            
            -
            
            $
            -
            
            
            -September
                1 - 30, 2006
            
            
            1,199,824
            
            $
            0.78
            
            
            1,199,824October
                1 - 31, 2006
            
            
            1,000,000
            
            $
            0.80
            
            
            1,000,000November
                1 - 30, 2006
            
            
            600,000
            
            $
            0.75
            
            
            600,000December
                1 - 31, 2006
            
            
            3,041,500
            
            $
            0.63
            
            
            3,041,500January
                1 - 31, 2007
            
            
            1,923,700
            
            $
            0.52
            
            
            1,923,700February
                1 - 28, 2007
            
            
            939,000
            
            $
            0.55
            
            
            939,000Total
            
            
            10,779,027
            
            $
            0.69
            
            
            10,779,027





41





*Issuance
      of Common Stock*





During
      the nine months ended February 28, 2007, investors exercised warrants to
      purchase 272,500 shares of common stock for proceeds of $72,250 and investors
      exercised warrants of 22,732,380 to purchase 22,459,880 shares of common stock
      on a cashless basis.





During
      the nine months ended February 28, 2007, directors exercised stock options
      to
      purchase 515,000 shares of common stock for proceeds of $41,750.





**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**




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




**Exhibit No.**
            **Document**2.1
            Agreement
                to Exchange Technology for Stock in Patriot Scientific Corporation,
                incorporated by reference to Exhibit 2.1 to Form 8-K dated
                August 10, 1989*2.2
            Assets
                Purchase Agreement and Plan of Reorganization dated June 22, 1994,
                among the Company, nanoTronics Corporation and Helmut Falk, incorporated
                by reference to Exhibit 10.4 to Form 8-K dated July 6,
                1994*2.2.1
            Amendment
                to Development Agreement dated April 23, 1996 between the Company and
                Sierra Systems, incorporated by reference to Exhibit 2.2.1 to
                Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2
                filed April 29, 1996*2.3
            Form
                of Exchange Offer dated December 4, 1996 between the Company and
                certain shareholders of Metacomp, Inc. incorporated by reference
                to
                Exhibit 2.3 to Form 8-K filed January 9, 1997*2.4
            Letter
                of Transmittal to Accompany Shares of Common Stock of Metacomp, Inc.
                Tendered Pursuant to the Exchange Offer Dated December 4, 1996
                incorporated by reference to Exhibit 2.4 to Form 8-K filed
                January 9, 1997*3.1
            Original
                Articles of incorporation of the Company’s predecessor, Patriot
                Financial Corporation, incorporated by reference to Exhibit 3.1 to
                registration statement on Form S-18, file no. 33-23143-FW*3.2
            Articles of
                Amendment of Patriot Financial Corporation, as filed with the Colorado
                Secretary of State on July 21, 1988, incorporated by reference to
                Exhibit 3.2 to registration statement on Form S-18, File
                No. 33-23143-FW*3.3
            Certificate
                of Incorporation of the Company, as filed with the Delaware Secretary
                of
                State on March 24, 1992, incorporated by reference to
                Exhibit 3.3 to Form 8-K dated May 12,
                1992*




42




**Exhibit No.**
            **Document**3.3.1
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on April 18, 1995, incorporated
                by reference to Exhibit 3.3.1 to Form 10-KSB for the fiscal year
                ended May 31, 1995*3.3.2
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on June 24,1997, incorporated by
                reference to Exhibit 3.3.2 to Form 10-KSB for the fiscal year
                ended May 31, 1997, filed July 18, 1997*3.3.3
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed with the Delaware Secretary of State on April 28, 2000,
                incorporated by reference to Exhibit 3.3.3 to Registration Statement
                on Form S-3 filed May 5, 2000*3.3.4
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on May 6, 2002, incorporated by
                reference to Exhibit 3.3.4 to Registration Statement on Form S-3
                filed June 27, 2002*3.3.5
            Certificate
                of Amendment to the Certificate of Incorporation of the Company,
                as filed
                with the Delaware Secretary of State on October 16, 2003,
                incorporated by reference to Exhibit 3.3.5 to Registration Statement
                on Form SB-2 filed May 21, 2004*3.4
            Articles and
                Certificate of Merger of Patriot Financial Corporation into the Company
                dated May 1, 1992, with Agreement and Plan of Merger attached thereto
                as Exhibit A, incorporated by reference to Exhibit 3.4 to Form
                8-K dated May 12, 1992*3.5
            Certificate
                of Merger issued by the Delaware Secretary of State on May 8, 1992,
                incorporated by reference to Exhibit 3.5 to Form 8-K dated
                May 12, 1992*Certificate
                of Merger issued by the Colorado Secretary of State on May 12, 1992,
                incorporated by reference to Exhibit 3.6 to Form 8-K dated
                May 12, 1992*3.7
            Bylaws
                of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K
                dated May 12, 1992*4.1
            Specimen
                common stock certificate, incorporated by reference to Exhibit 4.1
                Form 8-K dated May 12, 1992*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*




43




**Exhibit No.**
            **Document**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*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*




44




**Exhibit No.**
            **Document**4.18.1
            Waiver
                and Agreement dated September 24, 2001 amending the Investment
                Agreement (1) dated May 2, 2000 by and between the Company and
                Swartz Private Equity, LLC for a maximum aggregate amount of $30,000,000
                incorporated by reference to Exhibit 4.18.1 to Registration Statement
                on Form S-1 filed October 11, 2001*4.19
            2001
                Stock Option Plan of the Company dated February 21, 2001 incorporated
                by reference to Exhibit 4.19 to Registration Statement on Form S-8
                filed March 26, 2001*4.20
            Investment
                agreement dated September 17, 2001 by and between the Company and
                Swartz Private Equity, LLC for a maximum aggregate amount of $25,000,000
                incorporated by reference to Exhibit 4.20 to Registration Statement
                on Form S-1 filed October 11, 2001*4.21
            Registration
                Rights Agreement dated September 17, 2001 by and between the Company
                and Swartz Private Equity, LLC related to the registration of the
                common
                stock related to Exhibit 4.20 incorporated by reference to
                Exhibit 4.21 to Registration Statement on Form S-1 filed
                October 11, 2001*4.22
            Warrant
                to Purchase Common Stock dated September 17, 2001 exercisable to
                purchase common shares in connection with the Offering of securities
                in
                Exhibit 4.20 incorporated by reference to Exhibit 4.22 to
                Registration Statement on Form S-1 filed October 11,
                2001*4.23
            Financial
                Consulting Services Agreement between the Company and M. Blaine
                Riley, Randall Letcavage and Rosemary Nguyen incorporated by reference
                to
                Exhibit 4.23 to Registration Statement on Form S-8 filed
                January 22, 2002*4.24
            Form
                of 8% Convertible Debenture (Lincoln Ventures, LLC) due June 10, 2004
                aggregating $1,000,000 to six investors incorporated by reference
                to
                Exhibit 4.24 to Registration Statement on Form S-3 filed
                June 27, 2002*4.25
            Form
                of Stock Purchase Warrant (Lincoln Ventures, LLC) dated June 10, 2002
                exercisable to purchase an aggregate of 12,859,175 common shares
                at
                initial exercise prices ranging from $0.08616 to $0.10289 per share
                until
                June 10, 2007, granted to six investors in connection with the
                offering of securities described in Exhibit 4.24 incorporated by
                reference to Exhibit 4.25 to Registration Statement on Form S-3 filed
                June 27, 2002*4.26
            Form
                of Registration Rights Agreement (Lincoln Ventures, LLC) dated
                June 10, 2002 by and among the Company and six investors related to
                the registration of the common stock related to Exhibit 4.24
                incorporated by reference to Exhibit 4.26 to Registration Statement
                on Form S-3 filed June 27, 2002*4.27
            2003
                Stock Option Plan of the Company dated July 2, 2003 incorporated by
                reference to Exhibit 4.27 to Registration Statement on Form S-8 filed
                September 4, 2003*4.28
            Form
                of 8% Convertible Debenture, Stock Purchase Warrant, Registration
                Rights
                Agreement and Securities Purchase Agreement for financings entered
                into
                between September 28, 2004 and January 17, 2005 incorporated by
                reference to Exhibit 4.28 to Registration Statement on Form SB-2
                filed February 2, 2005.*4.29
            Approval
                Rights Agreement and Termination of Antidilution Agreement and Addendum
                to
                Warrants dated October 10, 2006, incorporated by reference to
                Exhibit 4.29 to Form 10-KSB for the fiscal year ended May 31,
                2006*10.1
            1992
                Incentive Stock Option Plan of the Company, incorporated by reference
                to
                Exhibit 10.1 to Form 8-K dated May 12,
                1992*10.1.1
            Amendment
                to 1992 Incentive Stock Option Plan dated January 11, 1995,
                incorporated by reference to Exhibit 10.1.1 to Form S-8 filed
                July 17, 1996*




45




**Exhibit No.**
            **Document**10.2
            1992
                Non-Statutory Stock Option Plan of the Company, incorporated by reference
                to Exhibit 10.2 to Form 8-K dated May 12,
                1992*10.2.1
            Amendment
                to 1992 Non-Statutory Stock Option Plan dated January 11, 1995
                incorporated by reference to Exhibit 10.2.1 to Form 10-KSB for fiscal
                year ended May 31, 1996, filed August 16, 1996*10.3
            Lease
                Agreement between the Company’s subsidiary Metacomp, Inc. and Clar-O-Wood
                Partnership, a California limited partnership dated April 11, 1991 as
                amended November 11, 1992 and November 2, 1995 incorporated by
                reference to Exhibit 10.3 to Form 10-KSB for fiscal year ended
                May 31, 1997, filed July 18, 1997*10.4
            Stock
                Purchase Agreement dated November 29 and 30, 1995, between the
                Company and SEA, Ltd., incorporated by reference to Exhibit 10.4 to
                Form 8-K filed December 11, 1995*10.4.1
            Letter
                Amendment to Stock Purchase Agreement dated January 31, 1996, between
                the Company and SEA, Ltd., incorporated by reference to
                Exhibit 10.4.1 to Form 10-QSB for fiscal quarter ended
                February 29, 1996, filed March 15, 1996*10.5
            1995
                Employee Stock Compensation Plan of the Company, incorporated by
                reference
                to Exhibit 10.5 to Form 10-QSB for fiscal quarter ended
                November 30, 1995, filed December 28, 1995*10.6
            Letter
                Stock and Warrant Agreement dated January 10, 1996 between the
                Company and Robert E. Crawford, Jr., incorporated by reference to
                Exhibit 10.6 to Form 10-QSB for fiscal quarter ended
                February 29, 1996, filed March 15, 1996*10.7
            Non-Exclusive
                Manufacturing and Line of Credit Agreement dated February 28, 1996,
                between the Company and Labway Corporation, incorporated by reference
                to
                Exhibit 10.7 to Form 10-QSB for fiscal quarter ended
                February 29, 1996, filed March 15, 1996*10.8
            Distribution
                and Representation Agreement dated February 28, 1996, between the
                Company and Innoware, Inc., incorporated by reference to Exhibit 10.8
                to Form 10-QSB for fiscal quarter ended February 29, 1996, filed
                March 15, 1996*10.9
            Employment
                Agreement dated November 20, 1995 between the Company and Elwood G.
                Norris, incorporated by reference to Exhibit 10.9 to Registration
                Statement on Form SB-2 filed March 18, 1996*10.9.1
            First
                Amendment to Employment Agreement dated May 17, 1996 between the
                Company and Elwood G. Norris, incorporated by reference to
                Exhibit 10.9.1 to Pre-Effective Amendment No. 2 to Registration
                Statement on Form SB-2 filed May 23, 1996*10.10
            Employment
                Agreement dated November 20, 1995 between the Company and Robert
                Putnam, incorporated by reference to Exhibit 10.10 to Registration
                Statement on Form SB-2 filed March 18, 1996*10.11
            Sales
                Contractual Agreement dated March 19, 1996 between the Company and
                Evolve Software, Inc., incorporated by reference to Exhibit 10.11 to
                Pre-Effective Amendment No. 1 to Registration Statement on Form SB-2
                filed April 29, 1996*10.11.1
            Two
                Year Stock Purchase Warrant dated March 19, 1996 Granted to Evolve
                Software, Inc. Providing for the Purchase of up to 50,000 Common
                Shares at
                $2.85, incorporated by reference to Exhibit 10.11.1 to Pre-Effective
                Amendment No. 1 to Registration Statement on Form SB-2 filed
                April 29, 1996*10.12
            Employment
                Agreement dated as of May 8, 1996 between the Company and
                Michael A. Carenzo, including Schedule A - Stock Option
                Agreement, incorporated by reference to Exhibit 10.12 to
                Pre-Effective Amendment No. 2 to Registration Statement on
                Form SB-2 filed May 23,
                1996*




46




**Exhibit No.**
            **Document**10.12.1
            First
                Amendment to Employment Agreement dated as of May 8, 1996 between the
                Company and Michael A. Carenzo dated September 23, 1996, incorporated
                by reference to Exhibit 10.12.1 to Form 10-KSB for the fiscal
                year ended May 31, 1997, filed July 18, 1997*10.13
            1996
                Stock Option Plan of the Company dated March 25, 1996 and approved by
                the Shareholders on May 17, 1996, incorporated by reference to
                Exhibit 10.13 to Pre-Effective Amendment No. 2 to Registration
                Statement on Form SB-2 filed May 23, 1996*10.14
            Sales
                Contractual Agreement dated June 20, 1996 between the Company and
                Compunetics Incorporated incorporated by reference to Exhibit 10.14
                to Form 10-KSB for fiscal year ended May 31, 1996, filed
                August 16, 1996*10.15
            Sales
                Contractual Agreement dated July 31, 1996 between the Company and
                Premier Technical Sales, Inc. incorporated by reference to
                Exhibit 10.15 to Form  10-KSB for fiscal year ended May 31,
                1996, filed August 16, 1996*10.16
            Employment
                Agreement dated January 1, 1997 between the Company and
                Norman J. Dawson incorporated by reference to Exhibit 10.16 to
                Form 10-KSB for fiscal year ended May 31, 1997, filed July 18,
                1997*10.17
            Employment
                Agreement dated January 1, 1997 between the Company and
                Jayanta K. Maitra incorporated by reference to Exhibit 10.17 to
                Form 10-KSB for fiscal year ended May 31, 1997, filed
                July 18, 1997*10.18
            Technology
                License and Distribution Agreement dated June 23, 1997 between the
                Company and Sun Microsystems, Inc. incorporated by reference to
                Exhibit 10.18 to Form 10-KSB for the fiscal year ended May 31,
                1997, filed July 18, 1997*10.19
            Employment
                Agreement dated March 23, 1999 between the Company and James T.
                Lunney incorporated by reference to Exhibit 10.19 to Form 10-KSB for
                the fiscal year ended May 31, 1998, filed August 19,
                1998*10.20
            Employment
                Agreement dated July 28, 1997 between the Company and Phillip
                Morettini incorporated by reference to Exhibit 10.20 to
                Form 10-KSB for the fiscal year ended May 31, 1998, filed
                August 19, 1998*10.21
            Employment
                Agreement dated July 23, 1998 between the Company and Lowell W.
                Giffhorn incorporated by reference to Exhibit 10.21 to
                Form 10-KSB for the fiscal year ended May 31, 1998, filed
                August 19, 1998*10.22
            Secured
                Promissory Note dated June 12, 2000 between the Company and
                James T. Lunney incorporated by reference to Exhibit 10.22 to
                Form 10-KSB for the fiscal year ended May 31, 2000, filed
                August 29, 2000*10.23
            Purchase
                Agreement dated June 29, 2000 between the Company and 4S 37/38, LLC
                incorporated by reference to Exhibit 10.23 to Form 10-KSB for the
                fiscal year ended May 31, 2000*10.24
            Employment
                Agreement dated October 2, 2000 between the Company and
                Miklos B. Korodi incorporated by reference to Exhibit 10.24 to
                Form 10-QSB for the fiscal quarter ended November 30, 2000, filed
                January 12, 2001*10.25
            Employment
                Agreement dated December 1, 2000 between the Company and
                Richard G. Blum incorporated by reference to Exhibit 10.25 to
                Form 10-QSB for the fiscal quarter ended November 30, 2000, filed
                January 12, 2001*




47




**Exhibit No.**
            **Document**10.26
            Employment
                Agreement dated January 29, 2001 between the Company and Serge J.
                Miller incorporated by reference to Exhibit 10.26 to Form 10-KSB
                for the fiscal year ended May 31, 2001, filed August 29,
                2001*10.27
            Lease
                Agreement dated February 23, 2001 between the Company and Arden
                Realty Finance IV, LLC incorporated by reference to Exhibit 10.27 to
                Form 10-KSB for the fiscal year ended May 31, 2001, filed
                August 29, 2001*10.28
            Employment
                Agreement dated January 1, 2001 between the Company and David H.
                Pohl incorporated by reference to Exhibit 10.28 to Form 10-KSB
                for the fiscal year ended May 31, 2001, filed August 29,
                2001*10.29
            Employment
                Agreement dated April 26, 2001 between the Company and David H.
                Pohl incorporated by reference to Exhibit 10.29 to Form 10-KSB for
                the fiscal year ended May 31, 2001, filed August 29,
                2001*10.30
            Employment
                Agreement dated November 17, 2001 between the Company and
                Lowell W. Giffhorn incorporated by reference to Exhibit 10.30 to
                Registration Statement on Form S-3 filed June 27,
                2002*10.31
            Employment
                Agreement dated December 20, 2001 between the Company and Jayanta
                Maitra incorporated by reference to Exhibit 10.31 to Registration
                Statement on Form S-3 filed June 27, 2002*10.32
            Consulting
                Agreement dated March 7, 2002 between the Company and SDMC, Inc.
                incorporated by reference to Exhibit 10.32 to Registration Statement
                on Form S-3 filed June 27, 2002*10.33
            Employment
                Agreement dated January 2, 2004 between the Company and Jayanta
                Maitra incorporated by reference to Exhibit 10.33 to Registration
                statement on Form SB-2 filed May 21, 2004*10.34
            Consulting
                Agreement dated March 18, 2004 between the Company and SDMC, Inc.
                incorporated by reference to Exhibit 10.34 to Registration Statement
                en Form SB-2 filed May 21, 2004*10.35
            Employment
                Agreement dated June 1, 2004 between the Company and Patrick Nunally
                incorporated by reference to Exhibit 10.35 to Form 10-KSB for the
                fiscal year ended May 31, 2004, filed August 19,
                2004*10.36
            Amendment
                No. 1 to Employment Agreement dated July 12, 2004 between the
                Company and Patrick Nunally incorporated by reference to
                Exhibit 10.36 to Form 10-KSB for the fiscal year ended May 31,
                2004, filed August 19, 2004*10.37
            Employment
                Agreement dated September 1, 2004 between the Company and Lowell W.
                Giffhorn incorporated by reference to Exhibit 10.37 to Registration
                Statement on Form SB-2 filed February 2, 2005*10.38
            IGNITE
                License Agreement with Advanced Micro Devices, Inc., dated
                February 21, 2005, incorporated by reference to Exhibit 10.38 to
                Form 10-KSB for the fiscal year ended May 31, 2006*10.39
            Patent
                Portfolio License Agreement with Advanced Micro Devices, Inc., dated
                February 21, 2005, incorporated by reference to Exhibit 10.39 to
                Form 10-KSB for the fiscal year ended May 31, 2006*10.40
            Master
                Agreement, dated as of June 7, 2005, by and among the Company,
                Technology Properties Limited Inc., a California corporation and
                Charles
                H. Moore, an individual, incorporated by reference to Exhibit 10.40
                to Form 8-K filed June 15, 2005*10.41
            Commercialization
                Agreement dated as of June 7, 2005 by and among the JV LLC,
                Technology Properties Limited Inc., a California corporation, and
                the
                Company, incorporated by reference to Exhibit 10.41 to Form 8-K filed
                June 15, 2005*




48




**Exhibit No.**
            **Document**10.42
            Limited
                Liability Company Operating Agreement of JV LLC, a Delaware limited
                liability company, dated as of June 7, 2005, incorporated by
                reference to Exhibit 10.42 to Form 8-K filed June 15,
                2005*10.43
            Agreement
                for Part-Time Employment dated August 3, 2005 between the Company and
                Thomas J. Sweeney, incorporated by reference to Exhibit 99.3 to Form
                8-K filed August 9, 2005*14.1
            Code
                of Ethics for Senior Financial Officers incorporated by reference
                to
                Exhibit 14.1 to Form 10-K for the fiscal year ended May 31,
                2003, filed August 29, 2003*31.1
            Certification
                of David H. Pohl, CEO, pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002**31.2
            Certification
                of Thomas J. Sweeney, CFO, pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002**32.1
            Certification
                of David H. Pohl, CEO, pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002**32.2
            Certification
                of Thomas J. Sweeney, CFO, pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002**99.1
            Form
                of ISO Plan Option (Gaspar) dated May 29, 1992, incorporated by
                reference to Exhibit 28.2 to registration statement on
                Form SB-2, file no. 33-57858*99.2
            Form
                of NSO Plan Option (Berlin) dated May 29, 1992, incorporated by
                reference to Exhibit 28.3 to registration statement on
                Form SB-2, file no. 33-57858*99.3
            Form
                of Incentive Stock Option Agreement to the Company’s 1996 stock Option
                Plan (individual agreements differ as to number of shares, dates,
                prices
                and vesting), incorporated by reference to Pre-Effective Amendment
                No. 2 to Registration Statement on Form SB-2 filed May 23,
                1996*99.4
            Form
                of Non-Qualified Stock Option Agreement to the Company’s 1996 Stock Option
                Plan (individual agreement differ as to number of shares, date, prices
                and
                vesting), incorporated by reference to Pre-Effective Amendment No. 2
                to Registration Statement on Form SB-2 filed May 23,
                1996*99.5
            Press
                Release of the Company dated November 4, 1996 incorporated by
                reference to Exhibit 99.5 to Form 8-K filed January 9,
                1997*99.6
            Form
                of Incentive Stock Option Agreement to the Company’s 2001 Stock Option
                Plan incorporated by reference to Exhibit 99.6 to Registration
                Statement on Form S-8 filed March 26, 2001*99.7
            Form
                of Non-Qualified Stock Option Agreement to the Company’s 2001 Stock Option
                Plan incorporated by reference to Exhibit 99.7 to Registration
                Statement on Form S-8 filed March 26, 2001*99.8
            Form
                of Incentive Stock Option Agreement to the Company’s 2003 Stock Option
                Plan incorporated by reference to Exhibit 99.8 to Registration
                Statement on Form S-8 filed September 4, 2003*99.9
            Form
                of Non-Qualified Stock Option Agreement to the Company’s 2003 Stock Option
                Plan incorporated by reference to Exhibit 99.9 to Registration
                Statement on Form S-8 filed September 4,
                2003**
            Previously filed in indicated registration statement
                or
                report.**
            Exhibit filed
                herewith this Quarterly Report on Form 10-Q for the quarterly period
                ended November 30, 2006.





49




SIGNATURES




Pursuant
      to the requirements of the Securities Exchange Act of 1934, the registrant
      has
      duly caused this report to be signed on its behalf by the undersigned thereunto
      duly authorized.




DATED:
                April 20, 2007
            PATRIOT
                SCIENTIFIC CORPORATION
              
              /S/
                DAVID H. POHL
              
              David
                H. Pohl
              Chief
                Executive Officer





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




Signature
            
            Title
            
            Date/S/
              DAVID H. POHLDavid
                H. Pohl
            
            President,
                Chief Executive Officer, and Director
            
            April
                20, 2007/S/
                THOMAS J. SWEENEY
            
            Chief
                Financial Officer and Principal Accounting Officer
            
            April
                20, 2007Thomas
                J. Sweeney/S/
                CARLTON M. JOHNSON
            
            Director
            
            April
                20, 2007Carlton
                M. Johnson/S/
              GLORIA H. FELCYNGloria
                H. Felcyn
            
            Director
            
            April
                20, 2007Helmut
                Falk, Jr.
            
            Director
            
            April
                20, 2007James
                L. Turley
            
            Director
            
            April
                20, 2007




50