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 August 31, 2007




OR




o
            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 o




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 o
            Accelerated
                filer x
            Non-accelerated
                filer o





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




Yes o
      No x




On
      October 5, 2007, 391,272,101 shares of common stock, par value $.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 August 31, 2007 (unaudited) and
                May 31,
                2007
            3Condensed
                consolidated Statements of Operations for the three months ended
                August
                31, 2007 and 2006 (unaudited)
            4Condensed
                consolidated Statements of Cash Flows for the three months ended
                August
                31, 2007 and 2006 (unaudited)
            5Notes
                to Condensed consolidated Financial Statements (unaudited)
            6-20ITEM
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            21-29ITEM
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            29ITEM
                4. Controls and Procedures
            30**PART
                II. OTHER INFORMATION**ITEM
                1. Legal Proceedings
            31ITEM
                1A. Risk Factors
            32ITEM
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            32ITEM
                3. Defaults Upon Senior Securities
            32ITEM
                4. Submission of Matters to a Vote of Security Holders
            32ITEM
                5. Other Information
            32ITEM
                6. Exhibits and Reports on Form 8-K
            33-34**SIGNATURES**








2





**PART
      I- FINANCIAL INFORMATION**




**Item
      1. Financial Statements**




**Patriot
      Scientific Corporation**


**Condensed
      Consolidated Balance Sheets**




**August
                  31, 2007**
              
              **May
                  31, 2007****ASSETS**
              
              **(Unaudited)**Current
                  assets:Cash
                  and cash equivalents
              
              $
              15,581,878
              
              $
              21,605,428Restricted
                  cash and cash equivalents
              
              
              102,613
              
              
              102,346Marketable
                  securities and short term investments
              
              
              4,696,302
              
              
              4,349,314Accounts
                  receivable
              
              
              81,520
              
              
              352,390Receivable
                  from affiliated company
              
              
              396,098
              
              
              -Note
                  receivable
              
              
              50,000
              
              
              -Inventory
              
              
              183,765
              
              
              46,361Prepaid
                  income taxes
              
              
              -
              
              
              2,070,981Deferred
                  tax assets
              
              
              926,553
              
              
              2,439,975Prepaid
                  expenses and other current assets
              
              
              300,272
              
              
              431,840Total
                  current assets
              
              
              22,319,001
              
              
              31,398,635**Property
                  and equipment, net**
              
              
              84,823
              
              
              85,518**Other
                  assets, net**
              
              
              8,190
              
              
              8,190**Investment
                  in affiliated company**
              
              
              1,683,427
              
              
              2,883,969**Patents
                  and trademarks**,
                  net of accumulated amortization of $610,451 and $607,657
              
              
              35,523
              
              
              38,317$
              24,130,964
              
              $
              34,414,629**LIABILITIES
                  AND STOCKHOLDERS’ EQUITY**Current
                  liabilities:Accounts
                  payable
              
              $
              515,875
              
              $
              934,298Accrued
                  expenses and other
              
              
              357,349
              
              
              1,086,496Income
                  taxes payable
              
              
              7,677,916
              
              
              -Total
                  current liabilities
              
              
              8,551,140
              
              
              2,020,794**Deferred
                  tax liabilities**
              
              
              753,701
              
              
              12,222,944Total
                  liabilities
              
              
              9,304,841
              
              
              14,243,738**Commitments
                  and contingencies****Minority
                  Interest**
              
              
              -
              
              
              -**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: 407,801,507
                  shares issued and 389,372,340 shares outstanding at August 31,
                  2007 and
                  406,668,661 shares issued and 393,201,134 shares outstanding at
                  May 31,
                  2007
              
              
              4,078
              
              
              4,066Additional
                  paid-in capital
              
              
              71,493,980
              
              
              72,150,581Accumulated
                  deficit
              
              
              (45,114,064
              )
              
              (43,151,678
              )Common
                  stock held in treasury, at cost - 18,429,167 shares and 13,467,527
                  shares
                  at August 31, 2007 and May 31, 2007, respectively
              
              
              (11,557,871
              )
              
              (
                  8,832,078
              )Total
                  stockholders’ equity
              
              
              14,826,123
              
              
              20,170,891$
              24,130,964
              
              $
              34,414,629





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


3




**Patriot
      Scientific Corporation**


**Condensed
      Consolidated Statements of Operations**


**(Unaudited)**





**Three
                months ended****August
                31, 2007**
            
            **August
                31, 2006**RevenuesProduct
                sales and other
            
            $
            521,369
            
            $
            26,375Cost
                of sales
            
            
            151,535
            
            
            -Gross
                profit
            
            
            369,834
            
            
            26,375Operating
                expenses:Selling,
                general and administrative
            
            
            1,958,190
            
            
            2,732,524Settlement
                and license expense
            
            
            30,000
            
            
            -Total
                operating expenses
            
            
            1,988,190
            
            
            2,732,524Operating
                loss
            
            
            (1,618,356
            )
            
            (2,706,149
            )Other
                income (expense):Interest
                and other income
            
            
            474,525
            
            
            126,767Loss
                on sale of assets
            
            
            (345
            )
            
            (543
            )Interest
                expense
            
            
            (237
            )
            
            -Gain
                on sale of subsidiary interest
            
            
            150,000
            
            
            -Equity
                in earnings (loss) of affiliated company
            
            
            (1,200,542
            )
            
            12,070,198Total
                other income (expense), net
            
            
            (576,599
            )
            
            12,196,422Income
                (loss) before income taxes
            
            
            (2,194,955
            )
            
            9,490,273Provision
                (benefit) for income taxes
            
            
            (232,569
            )
            
            3,500,000Minority
                interest
            
            
            **-**
            
            
            **-**Net
                income (loss)
            
            $
            (1,962,386
            )
            $
            5,990,273Basic
                income (loss) per common share
            
            $
            (0.01
            )
            $
            0.02Diluted
                income (loss) per common share
            
            $
            (0.01
            )
            $
            0.01Weighted
                average number of common shares outstanding - basic
            
            
            390,455,132
            
            
            368,837,051Weighted
                average number of common shares outstanding - diluted
            
            
            390,455,132
            
            
            420,646,769





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


4





**Patriot
      Scientific Corporation**


**Condensed
      Consolidated Statements of Cash Flows**


**(Unaudited)**




**Three
                months ended****August
                31, 2007**
            
            **August
                31, 2006****Operating
                activities:**Net
                income (loss)
            
            $
            (1,962,386
            )
            $
            5,990,273Adjustments
                to reconcile net income (loss) to net cash used in operating
                activities:Amortization
                and depreciation
            
            
            11,322
            
            
            10,635Expense
                related to extension of expiration date of stock options
            
            
            -
            
            
            324Non
                cash compensation relating to issuance of stock options and vesting
                of
                warrants
            
            
            282,913
            
            
            1,584,451Accrued
                interest income added to investments
            
            
            (267
            )
            
            (634
            )Equity
                in (earnings) loss of affiliated company
            
            
            1,200,542
            
            
            (12,070,198
            )Loss
                on sale of assets
            
            
            345
            
            
            543Deferred
                income taxes
            
            
            (9,955,821
            )
            
            -Gain
                on VIE sale of portion of subsidiary interest
            
            
            (150,000
            )
            
            -Reversal
                of tax effect of exercise of options
            
            
            (25,645
            )
            
            -Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (125,228
            )
            
            (4,200
            )Inventory
            
            
            (137,404
            )
            
            -Prepaid
                and other assets
            
            
            131,568
            
            
            63,668Prepaid
                income taxes
            
            
            2,070,981
            
            
            -Accounts
                payable and accrued expenses
            
            
            (1,147,570
            )
            
            (321,297
            )Accrued
                contested fee payable
            
            
            -
            
            
            (340,000
            )Income
                taxes payable
            
            
            7,677,916
            
            
            3,457,600Net
                cash used in operating activities
            
            
            (2,128,734
            )
            
            (1,628,835
            )**Investing
                activities:**Proceeds
                from sales of short-term investments
            
            
            2,725,793
            
            
            1,839,085Purchases
                of short-term investments
            
            
            (3,072,781
            )
            
            (4,314,223
            )Purchases
                of property and equipment
            
            
            (8,178
            )
            
            (5,667
            )Proceeds
                from VIE sale of portion of subsidiary interest
            
            
            100,000
            
            
            -Distributions
                from affiliated company
            
            
            -
            
            
            11,578,672Net
                cash provided by (used in) investing activities
            
            
            (255,166
            )
            
            9,097,867**Financing
                activities:**Proceeds
                from exercise of common stock warrants and options
            
            
            8,000
            
            
            65,500Repurchase
                of warrants
            
            
            (921,857
            )
            
            -Repurchase
                of common stock for treasury
            
            
            (2,725,793
            )
            
            (1,839,085
            )Net
                cash used in financing activities
            
            
            (3,639,650
            )
            
            (1,773,585
            )**Net
                increase (decrease) in cash and cash equivalents**
            
            
            (6,023,550
            )
            
            5,695,447**Cash
                and cash equivalents, beginning of period**
            
            
            21,605,428
            
            
            3,984,240**Cash
                and cash equivalents, end of period**
            
            $
            15,581,878
            
            $
            9,679,687**Supplemental
                Disclosure of Cash Flow Information:**Cash
                payments for interest
            
            $
            237
            
            $
            -Cash
                payments for income taxes
            
            $
            -
            
            $
            42,400**Supplemental
                Disclosure of Non-Cash Investing and Financing
                Activities:**Cashless
                exercise of warrants
            
            $
            -
            
            $
            30Cashless
                exercise of stock options
            
            $
            10
            
            $
            -Note
                receivable issued in connection with VIE sale of portion of subsidiary
                interest
            
            $
            50,000
            
            $
            -








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


5


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




**1.Basis
      of Presentation and
      Summary of Significant 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 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. These financial statements should be read in conjunction
      with
      our audited consolidated financial statements and notes thereto included in
      Form
      10-K for our fiscal year ended May 31, 2007.





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 presented. Operating results
      for the three month period ended August 31, 2007 are not necessarily indicative
      of the results that may be expected for the year ending May 31,
      2008.





**Basis
      of Consolidation**


The
      condensed consolidated statement of operations for the three months ended August
      31, 2006 includes our accounts and those of our majority owned subsidiaries,
      Metacomp, Inc. and Plasma Scientific Corporation. The condensed consolidated
      balance sheet at May 31, 2007 and the condensed consolidated financial
      statements as of and for the three months ended August 31, 2007 include our
      accounts, those of our majority owned subsidiaries that are not considered
      variable interest entities (“VIE”s) and all VIEs for which we are the primary
      beneficiary. All significant intercompany accounts and transactions have been
      eliminated.





**Consolidation
      of Affiliate**


In
      January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation 46, *Consolidation
      of Variable Interest Entities, an Interpretation of ARB No. 51* (“FIN
      46”). In December 2003, the FASB modified FIN 46. FIN 46 provides a new
      framework for identifying VIEs and determining when a company should include
      the
      assets, liabilities, noncontrolling interests and results of activities of
      a VIE
      in its consolidated financial statements.





A
      VIE is
      a corporation, partnership, limited liability corporation, trust or any other
      legal structure used to conduct activities or hold assets that either (1) has
      an
      insufficient amount of equity to carry out its principal activities without
      additional subordinated financial support, (2) has a group of equity owners
      that
      are unable to make significant decisions about its activities, or (3) has a
      group of equity owners that do not have the obligation to absorb losses or
      the
      right to receive returns generated by its operations.





FIN
      46
      requires a VIE to be consolidated if a party with an ownership, contractual
      or
      other financial interest in the VIE is obligated to absorb a majority of the
      risk of loss from the VIE’s activities, is entitled to receive a majority of the
      VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or
      both. A variable interest holder that consolidates the VIE is called the primary
      beneficiary. Upon consolidation, the primary beneficiary generally must
      initially record all of the VIE’s assets, liabilities, and noncontrolling
      interests at fair value and subsequently account for the VIE as if it were
      consolidated based on majority voting interest.





FIN
      46
      was effective immediately for VIEs created after January 31, 2003. The
      provisions of FIN 46, as revised, were adopted as of December 31, 2003, for
      our
      interests in all VIEs. During the quarter ended May 31, 2007, we
      consolidated Scripps Secured Data, Inc. (“SSDI”) as SSDI was deemed a VIE and we
      determined that we were the primary beneficiary of SSDI.





**Investment
      in Affiliated Company**


We
      have a
      50% interest in Phoenix Digital Solutions, LLC (see Note 4). This investment
      is
      accounted for using the equity method of accounting since the investment
      provides us the ability to exercise significant influence, but not control,
      over
      the investee. Significant influence is generally deemed to exist if we have
      an
      ownership interest in the voting stock of the investee of between 20% and 50%,
      although other factors, such





6
 
 **Patriot
          Scientific Corporation**
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**Investment
      in Affiliated Company, continued**





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 our share of net earnings or losses of the investee and
      is
      recognized in the consolidated statements of operations in the caption “Equity
      in earnings (loss) of affiliated company”.





We
      review
      our investment in affiliated company to determine whether events or changes
      in
      circumstances indicate that its carrying amount may not be recoverable. The
      primary factors we consider in our determination are the financial condition,
      operating performance and near term prospects of the investee. If the decline
      in
      value is deemed to be other than temporary, we would recognize an impairment
      loss.





**Revenue
      Recognition**


We
      recognize revenue from the sale of our product upon shipment to the customer,
      at
      which time title transfers and we have 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 we enter into a contract and provide the customer with the licensed
      technology. At this point, we have performed all of our obligations under
      contract, the rights to our technology have been transferred and no significant
      performance obligations remain.





SSDI
      recognizes revenue upon shipment of its product and recognizes revenue on its
      short-term installation contracts as time and materials costs are
      incurred.





SSDI
      maintains an agreement with a distributor which accounts for the majority of
      SSDI’s product sales. This agreement provides for a limited product warranty for
      a period of one year from the date of sale to the end user. The warranty does
      not cover damage to the product after it has been delivered to the distributor.
      SSDI’s agreement with the distributor also allows the distributor the right to
      stock rotation whereby the distributor, on a six month basis, may return product
      for replacement products of the distributor’s choosing provided that the
      aggregate price of the replacement products is equal to the price of the
      original products returned. Such stock rotations shall not exceed 10% of the
      distributor’s purchases from SSDI in the prior twelve month period for any year
      and any single rotation shall not exceed 6% of the total rotational allowance
      for that year. The first stock rotation shall not occur before February
      2008.





**Shipping
      and Handling**


Emerging
      Issues Task Force ("EITF") Issue No. 00-10, *Accounting
      for Shipping and Handling Fees and Costs* , ** requires
      shipping and handling fees billed to customers to be classified as revenue
      and
      shipping and handling costs to be classified as either cost of sales or
      disclosed in the notes to the financial statements. SSDI includes shipping
      and
      handling fees billed to customers in net sales. Shipping and handling costs
      associated with inbound freight are included in cost of sales.





**Net
      Income (Loss) Per Share**


We
      apply
      Statement of Financial Accounting Standards ("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. At August 31, 2007,
      all potential common shares related to our outstanding warrants and options
      totaling 9,820,871 shares were not included in the calculation of diluted loss
      per share as they had an anti-dilutive effect. At August 31, 2006, potential
      common shares of 135,000 related to our outstanding warrants and options were
      not included in the calculation of diluted loss per share as they had an
      anti-dilutive effect.





7


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





**Net
      Income (Loss) Per Share, continued**




**Three
                Months Ended August 31, 2007**Numerator
                (Loss)
            
            Denominator
                (Shares)
            
            Per
                Share AmountBasic
                EPS:Net
                loss
            
            $
            (1,962,386
            )
            
            390,455,132
            
            $
            (0.01
            )Diluted
                EPS:Effect
                of dilutive securities:Options
                andwarrants
            
            
            -
            
            
            -Loss
                available to common shareholders
            
            $
            (1,962,386
            )
            
            390,455,132
            
            $
            0.01






**Three
                  Months Ended August 31, 2006**Numerator
                  (Loss)
              
              Denominator
                  (Shares)
              
              Per
                  Share AmountBasic
                  EPS:Net
                  income
              
              $
              5,990,273
              
              
              368,837,051
              
              $
              0.02Diluted
                  EPS:Effect
                  of dilutive securities:Options
                  andwarrants
              
              
              -
              
              
              51,809,718Income available
                  to common shareholders
              
              $
              5,990,273
              
              
              420,646,769
              
              $
              0.01
  **Minority
      Interest**


Minority
      interest in our consolidated financial statements results from the accounting
      for the acquisition of a noncontrolling interest in SSDI. Noncontrolling
      interest represents a partially owned subsidiary’s income, losses, and
      components of other comprehensive income which should be attributed to the
      controlling and noncontrolling interests or other parties with a right or
      obligation that affects the attribution of comprehensive income or loss, on
      the
      basis of their contractual rights or obligations, if any, otherwise, on the
      basis of ownership interests.





The
      noncontrolling interest in SSDI, which we are required to consolidate as we
      are
      the primary beneficiary, has been reduced to zero due to the initial allocation
      of losses prior to the period in which we were required to consolidate. If
      a
      noncontrolling interest has been reduced to zero, the primary beneficiary must
      absorb any losses that are in excess of the value of the noncontrolling
      interest’s equity. For the period in which we are required to consolidate, March
      27, 2007 through August 31, 2007 we absorbed $165,164 of SSDI’s losses as we are
      the primary beneficiary. The noncontrolling interest in any future profits
      will
      not be presented until all prior losses have been recovered.





**Stock-Based
      Compensation**




On
      June
      1, 2006, we adopted the provisions of 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. 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*.




8
 
 **Patriot
          Scientific Corporation**
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**Stock-Based
      Compensation, continued**




In
      November 2005, FASB issued FASB Staff Position No. FAS 123R-3, *“Transition
      Election Related to Accounting for Tax Effects of Share-Based Payment
      Awards”* (“FAS
      123R-3”). We have elected to adopt the alternative transition method provided in
      FAS 123R-3. The alternative transition method includes a simplified method
      to
      establish the beginning balance of the additional paid-in capital pool (“APIC
      pool”) related to the tax effects of employee share-based compensation, which is
      available to absorb tax deficiencies recognized subsequent to the adoption
      of
      SFAS No. 123(R).




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 our condensed
      consolidated statement of operations for the three months ended August 31,
      2006
      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). Stock-based compensation expense
      recognized in our condensed consolidated statement of operations for the three
      months ended August 31, 2007 included compensation expense for share-based
      payment awards granted subsequent to May 31, 2007 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
      statements of operations 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 three months ended August 31, 2007 and 2006, of
      approximately 5% was based on historical forfeiture experience and estimated
      future employee forfeitures. The estimated pricing term of option grants for
      the
      three months ended August 31, 2007 and 2006 was five years.





***Summary
      of Assumptions and Activity***





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 our 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
      months ended August 31, 2007 and 2006 is based on the historical volatilities
      of
      our common stock. These factors could change in the future, affecting the
      determination of stock-based compensation expense in future
      periods.




9





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




**Stock-Based
      Compensation, continued**





**Three
                Months**
              **Ended**
            
            **Three
                Months**
              **Ended****August
                31, 2007**
              **(Unaudited)**
            
            **August
                31, 2006**
              **(Unaudited)**Expected
                term
            
            
            5
            years
            
            
            5
            yearsExpected
                volatility
            
            
            127
                - 128
            %
            
            
            156
            %Risk-free
                interest rate
            
            
            4.26
                - 4.96
            %
            
            
            5.00
            %Expected
                dividends
            
            
            2.82
            %
            
            
            -





A
      summary
      of option activity as of August 31, 2007 and changes during the three 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, 2007
            
            
            7,245,000
            
            $
            0.40Options
                granted
            
            
            2,225,000
            
            $
            0.48Options
                exercised
            
            
            (1,007,846
            )
            $
            0.16Options
                forfeited
            
            
            (1,017,154
            )
            $
            0.16Options
                outstanding at August 31, 2007
            
            
            7,445,000
            
            $
            0.49
            
            
            3.88
            
            $
            619,300Options
                vested and expected to vest at August 31, 2007
            
            
            7,370,000
            
            $
            0.49
            
            
            3.88
            
            $
            619,300Options
                exercisable at August 31, 2007
            
            
            5,945,000
            
            $
            0.49
            
            
            3.66
            
            $
            619,300





The
      weighted average grant date fair value of options granted during the three
      months ended August 31, 2007 and 2006 was $0.36 and $1.02 per option,
      respectively. The total intrinsic value of options exercised during the three
      months ended August 31, 2007 and 2006 was $478,750 and $40,500, respectively,
      based on the differences in market prices on the dates of exercise and the
      option exercise prices.





The
      aggregate intrinsic value represents the differences in market price at the
      close of the quarter ($0.47 per share on August 31, 2007) and the exercise
      price
      of outstanding, in the money options (those options with exercise prices below
      $0.47) on August 31, 2007.





As
      of
      August 31, 2007, there was approximately $488,415 of total unrecognized
      compensation cost related to employee stock option compensation arrangements.
      That cost is expected to be recognized on a straight-line basis over the next
      57
      months.




10





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




**Stock-Based
      Compensation, continued**




The
      following table summarizes employee stock-based compensation expense related
      to
      stock options under SFAS No. 123(R) for the three months ended August 31, 2007
      and 2006, which was recorded as follows:




**Three
                Months**
              **Ended**
            
            **Three
                Months**
              **Ended****August
                31, 2007**
            
            **August
                31, 2006**Selling,
                general and administrative expense
            
            $
            282,913
            
            $
            1,575,000





**Recent
      Accounting Pronouncements**





In
      July
      2006, the FASB 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. We adopted FIN 48 on June 1, 2007 and did not record any cumulative
      effect adjustment to retained earnings as a result of adopting FIN 48. Interest
      and penalties, if any, related to unrecognized tax benefits are recorded in
      income tax expense. As of June 1, 2007, we are subject to U.S. Federal income
      tax examinations for the tax years May 31, 1991 through May 31, 2007, and we
      are
      subject to state and local income tax examinations for the tax years May 31,
      1999 through May 31, 2007 due to the carryover of net operating losses from
      previous years.





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. We
      expect to adopt SFAS No. 157 on June 1, 2008.  We are currently assessing
      the impact the adoption of SFAS No. 157 will have on our consolidated financial
      statements.





In
      February 2007, the FASB issued SFAS No. 159, *The
      Fair Value Option for Financial Assets and Financial Liabilities* (“SFAS
      No. 159”). SFAS No. 159 permits entities to choose to measure at fair value many
      financial instruments and certain other items that are not currently required
      to
      be measured at fair value. The objective is to improve financial reporting
      by
      providing entities with the opportunity to mitigate volatility in reported
      earnings caused by measuring related assets and liabilities differently without
      having to apply complex hedge accounting provisions. SFAS No. 159 also
      establishes presentation and disclosure requirements designed to facilitate
      comparisons between entities that choose different measurement attributes for
      similar types of assets and liabilities. SFAS No. 159 does not affect
      any existing accounting literature that requires certain assets and liabilities
      to be carried at fair value. SFAS No. 159 does not establish
      requirements for recognizing and measuring dividend income, interest income,
      or
      interest expense. This Statement does not eliminate disclosure requirements
      included in other accounting standards. SFAS No. 159 is effective in
      fiscal years beginning after November 15, 2007. We are in the process of
      evaluating the provisions of the statement, but do not anticipate that the
      adoption of SFAS No. 159 will have a material impact on our consolidated
      financial statements.





11
 
  **Patriot
          Scientific Corporation**
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




**2.Inventory**





Inventory
      at August 31, 2007, consisted of raw materials of $183,765.





**3.License
      Agreements**





In
      February 2005, we entered into two separate licensing agreements with one
      customer for our 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, 2007
      and
      2006 was $6,250 and $6,250, respectively. 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 us based on sales of product using the Ignite licensed technology. In
      connection with this license agreement, we became obligated to the co-inventor
      of the patent portfolio technology, Russell H. Fish III (“Fish”), for $207,600
      pursuant to a July 2004 agreement under which we were obligated to pay a
      percentage of all patent portfolio licensing proceeds to Fish. The amount due
      under the agreement with Fish was payable in four installments of $51,900.
      Fish
      filed a lawsuit against us seeking damages and/or enforcement of the 2004
      agreement. We challenged the enforceability of the agreement by counterclaim
      in
      that action. On February 14, 2007, a settlement of the litigation was finalized.
      Terms of the settlement required us to pay $3,400,000 in cash on February 14,
      2007 and $3,000,000 on May 1, 2007, which amounted to approximately the debt
      claimed by Fish to be owed to him under the July 2004 agreement. In addition,
      the settlement required us to make a donation of $15,000 on February 14, 2007
      on
      behalf of Fish to Maasai Power and Education Project, Inc., and to 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 us, after
      excluding the first $20 million collected by Phoenix Digital after December
      1,
      2006. Our commitment to make payments to Fish related to such future license
      revenues will not exceed $2 million. A liability for gross license fees due
      of
      $20,000 is included in accrued expenses in the accompanying condensed
      consolidated balance sheet at August 31, 2007. During the three months ended
      August 31, 2007, we recorded $30,000 in settlement and license expenses relating
      to royalty payments due to the Fish parties.





**4.Investment
      in Affiliated
      Company/License Agreement**





On
      June
      7, 2005, we 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 our technology,
      pursuant to which we, TPL and Moore resolved all legal disputes between us.
      Pursuant to the Master Agreement, we and TPL entered into the Limited Liability
      Company Operating Agreement of Phoenix Digital (the “LLC Agreement”) into which
      we and Moore contributed our rights to certain of our technologies. We believe,
      based upon consultation with our 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
      our various warrant holders.





We
      and
      TPL each own 50% of the membership interests of Phoenix Digital, and each of
      us
      has 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, we and TPL agreed
      to
      establish a working capital fund for Phoenix Digital of $4,000,000, of which
      our
      contribution was $2,000,000. The working capital fund increases to a maximum
      of
      $8,000,000 as license revenues are achieved. We 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.





12
 
  **Patriot
          Scientific Corporation**
 **Notes
          to Unaudited Condensed Consolidated Financial
          Statements**




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





Neither
      we nor TPL are 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 three months ended August 31, 2007 and
      2006, Phoenix Digital paid $873,731 and $968,000, respectively, to TPL pursuant
      to this commitment.





We
      are
      accounting for our investment in Phoenix Digital under the equity method of
      accounting, and accordingly have recorded our share of Phoenix Digital’s net
      loss of $1,200,542 during the three months ended August 31, 2007 as a decrease
      in our investment and our share of Phoenix Digital’s net income of $12,070,198
      during the three months ended August 31, 2006 as an increase in our investment.
      Cash distributions of $11,578,672 received from Phoenix Digital during the
      three
      months ended August 31, 2006 have been recorded as a reduction in our
      investment. No distributions were received during the three months ended August
      31, 2007. Our investment in Phoenix Digital is $1,683,427 at August 31, 2007
      and
      has been recorded as “Investment in Affiliated Company”. We have recorded our
      share of Phoenix Digital’s net loss as “Equity in Loss of Affiliated Company” in
      the accompanying consolidated statements of operations for the three months
      ended August 31, 2007. We have recorded our share of Phoenix Digital’s net
      income as “Equity in Earnings of Affiliated Company” in the accompanying
      consolidated statements of operations for the three months ended August 31,
      2006. At August 31, 2007 we have recorded $396,098 as A/R from affiliated
      company for reimbursement due to us of legal fees and related costs for the
      patent litigation (see Note 7).





During
      the three months ended August 31, 2007 and 2006, Phoenix Digital entered into
      licensing agreements with third parties, pursuant to which it received aggregate
      proceeds of $1,500,000 and $25,749,000, respectively. During September 2007,
      Phoenix Digital entered into licensing agreements pursuant to which it received
      aggregate proceeds of $1,433,000.





The
      condensed balance sheets and statements of operations of Phoenix Digital at
      August 31, 2007 and 2006 and for the three months then ended are as follows:





**Condensed
      Balance Sheets**





ASSETS:




2007
            
            
            2006Cash
            
            $
            3,759,743
            
            $
            8,695,729Prepaid
              expenses
            
            
            135,000
            
            
            15,000Total
                assets
            
            $
            3,894,743
            
            $
            8,710,729









LIABILITIES
      AND MEMBERS’ EQUITY:





Accounts
                payable and accrued expenses
            
            $
            516,098
            
            $
            299,585Income
                taxes payable
            
            
            11,790
            
            
            -Members’
equity
            
            
            3,366,855
            
            
            8,411,144Total
                liabilities and members’ equity
            
            $
            3,894,743
            
            $
            8,710,729




13




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




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





**Condensed
      Statements of Operations**





Revenues
            
            $
            1,500,000
            
            $
            25,749,000Operating
              expenses
            
            
            3,966,543
            
            
            1,717,917Operating
                income (loss)
            
            
            (2,466,543
            )
            
            24,031,083Interest
                income
            
            
            65,460
            
            
            109,312Net
                income (loss)
            
            $
            (2,401,083
            )
            $
            24,140,395




**5.Consolidated
      Variable
      Interest Entity**





On
      February 2, 2007, we invested an aggregate of $370,000 in SSDI for 2,100,000
      shares of convertible preferred stock. This represents all of SSDI’s preferred
      stock and a 46% ownership interest in SSDI, a California corporation that
      manufactures products that protect information transmitted over secure networks.
      The investment consisted of certain assets contributed by us to SSDI valued
      at
      $250,000 and cash of $120,000. The shares are convertible at our option into
      shares of SSDI’s common stock on a one-to-one basis. The convertible preferred
      stock entitles us 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 us to a
      liquidation preference of $0.40 per share, plus an amount equal to all declared
      but unpaid dividends.





On
      March
      27, 2007, we entered into an 18 month revolving line of credit with SSDI for
      a
      maximum amount of $500,000. The line of credit matures on September 27, 2008.
      If
      we do 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.
      The
      carrying value of the collateral is approximately $328,090 at August 31, 2007.
      The creditors of SSDI do not have recourse to our other assets. On March 28,
      2007, we advanced $150,000 under terms of the agreement, on April 16, 2007
      we
      advanced $100,000 under terms of the agreement and on September 4, 2007 we
      advanced $100,000 under terms of the agreement.





The
      line
      of credit carries a floating interest rate which is defined as the prime rate
      as
      announced by Bank of America. At August 31, 2007, the interest rate on the
      note was 8.25%; On September 18, 2007, the interest rate on the note was 7.75%.
      SSDI 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.





As
      a
      result of the line of credit, we have a variable interest in SSDI, a variable
      interest entity, and we have determined that we are the primary beneficiary
      as
      we absorb more than half of the variable interest entity’s expected losses.
      FIN46, requires us to consolidate SSDI as long as we are deemed to be the
      primary beneficiary. The equity interests of SSDI not owned by us are reported
      as a minority interest in our August 31, 2007 condensed consolidated balance
      sheet. As of August 31, 2007, the noncontrolling interest in SSDI, which we
      are
      required to consolidate as we are the primary beneficiary, has been reduced
      to
      zero due to the initial allocation of losses prior to the period in which we
      were required to consolidate. If a noncontrolling interest has been reduced
      to
      zero, the primary beneficiary must absorb any losses that are in excess of
      the
      value of the noncontrolling interest’s equity. For the period in which we are
      required to consolidate, March 27, 2007 through August 31, 2007 we absorbed
      $165,164 of SSDI’s losses as we are the primary beneficiary. The noncontrolling
      interest in any future profits will not be presented until all prior losses
      have
      been recovered.





Prior
      to
      initial consolidation, we recognized a $126,746 impairment loss on our
      investment for the losses of SSDI for the period February 2007 through March
      26,
      2007.




14


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




**Consolidated
      Variable Interest Entity, continued**





Upon
      initial consolidation of the variable interest entity, on March 27, 2007,
      $251,146 of current assets, $43,199 of net property and equipment, $47,240
      of
      other assets, $98,331 of current liabilities and no minority interest were
      included on the consolidated balance sheet.





During
      the three months ended August 31, 2007, SSDI sold a membership interest in
      its
      subsidiary DataSecurus, LLC to an unrelated third party for $100,000 in cash
      and
      a $50,000 note receivable due June 2008.





**6.Stockholders’
      Equity**





During
      July 2006 we commenced our Board of Director approved stock buyback program
      in
      which we repurchase our outstanding common stock from time to time on the open
      market. As part of the program we purchased 4,961,640 and 2,075,003 shares
      of
      our common stock at an aggregate cost of $2,725,793 and $1,839,085 during the
      three months ended August 31, 2007 and 2006, respectively.





The
      following table summarizes equity transactions during the three months ended
      August 31, 2007:




Common
                Stock
            
            
            Additional
                Paid-
            
            
            AccumulatedShares
            
            
            Amounts
            
            
            in
                Capital
            
            
            Deficit
            
            
            Treasury
                StockBalance
                June 1, 2007
            
            
            393,201,134
            
            $
            4,066
            
            $
            72,150,581
            
            $
            (43,151,678
            )
            $
            (8,832,078
            )Exercise
                of warrants and options at $0.05 to $0.07 per share
            
            
            150,000
            
            
            2
            
            
            7,998
            
            
            -
            
            
            -Cashless
                exercise of options
            
            
            982,846
            
            
            10
            
            
            (10
            )
            
            -
            
            
            -Repurchase
                of warrants
            
            
            -
            
            
            -
            
            
            (921,857
            )
            
            -
            
            
            -Non-cash
                compensation
            
            
            -
            
            
            -
            
            
            282,913
            
            
            -
            
            
            -Tax
                effect of exercise of options
            
            
            -
            
            
            -
            
            
            (25,645
            )
            
            -
            
            
            -Repurchase
                of common stock for treasury
            
            
            (4,961,640
            )
            
            -
            
            
            -
            
            
            -
            
            
            (2,725,793
            )Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            (1,962,386
            )
            
            -Balance
                August 31, 2007
            
            
            389,372,340
            
            $
            4,078
            
            $
            71,493,980
            
            $
            (45,114,064
            )
            $
            (11,557,871
            )





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




As
      of
      August 31, 2007, we had 100,000 options outstanding pursuant to our 1996 Stock
      Option Plan exercisable at $0.07 per share expiring in 2009; 775,000 options
      outstanding pursuant to our 2001 Stock Option Plan exercisable at a range of
      $0.07 to $0.86 per share expiring through 2012; 3,450,000 options outstanding
      pursuant to our 2003 Stock Option Plan exercisable at a range of $0.05 to $0.49
      per share expiring through 2012; and 3,120,000 options outstanding pursuant
      to
      our 2006 Stock Option Plan exercisable at a range of $0.60 to $0.70 per share
      expiring through 2012. Some of the options outstanding under these plans are
      not
      presently exercisable and are subject to meeting vesting criteria.





During
      the three months ended August 31, 2007, a director exercised stock options
      to
      purchase 25,000 shares of common stock for proceeds of $1,750, and a director
      exercised stock options utilizing a share certification exchange procedure
      within our stock option plans to exercise 1,500,000 shares and receive 982,846
      new shares upon exercise.





During
      the quarter ended August 31, 2007, we recorded $282,913 of non cash compensation
      expense related to stock options issued and vesting of stock
      options.





As
      of
      August 31, 2007, we had warrants outstanding to purchase 9,935,915 common shares
      at exercise prices ranging from $0.05 to $1.00 per share, expiring at various
      dates through 2012. Some of those outstanding warrants were not exercisable
      as
      of August 31, 2007 as they are subject to meeting vesting criteria. During
the
      three
      months ended August 31, 2007, we issued no warrants to purchase shares of common
      stock, an investor exercised warrants to purchase 125,000 shares of common
      stock
      for proceeds of $6,250 and we repurchased 2,000,000 warrants for $921,857 under
      terms of our warrant repurchase agreement as detailed below.




15


**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 period
      ended August 31, 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.





On
      July
      19, 2007, we entered into a warrant redemption agreement with Lincoln Ventures,
      LLC, whereby at our option, we agree to redeem certain warrants representing
      the
      right to acquire an aggregate of up to 7,000,000 shares of our common stock,
      through October 2007. The warrants were redeemable in quantities not to exceed
      2,000,000 warrants in the first two calendar months and 3,000,000 in the last
      calendar month, at a price equal to the product of (a) the volume weighted
      average of the daily volume weighted average prices of our common stock for
      all
      trading days in the applicable calendar month, minus the exercise price of
      the
      warrant, multiplied by (b) the number of shares being redeemed from that
      warrant. Lincoln Ventures, LLC was prohibited from exercising any of the
      warrants as long as we remained in compliance with the agreement. Additionally,
      Lincoln Ventures, LLC was prohibited from purchasing any shares of our common
      stock on the open market during any “pricing month” defined in the agreement as
      the calendar month immediately preceding the calendar month in which we deliver
      the redemption notice to Lincoln Ventures, LLC. Subsequent to September 20,
      2007, we repurchased all of the additional warrants pursuant to the agreement
      (see Note 9).





**7.Commitments
      and
      Contingencies**





***Litigation***





*Lowell
      Giffhorn Arbitration*





On
      September 23, 2005, Lowell Giffhorn, a former executive officer
      and a former director of the Company, submitted a demand for arbitration with
      the American Arbitration Association related to the termination of
      Mr. Giffhorn's employment with the Company. Mr. Giffhorn asserts that
      the termination of his employment with the Company was unlawful, retaliatory,
      wrongful, violated public policy, violated the covenant of good faith and fair
      dealing and violated securities laws. Mr. Giffhorn 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 without
      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.





16


**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 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. (“Fujitsu”),
      Matsushita Electric Corporation of America (“MEI”), NEC Solutions (America) Inc.
      (“NEC”), Sony Electronics Inc. (“Sony”), 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,
      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. Patriot was
      subsequently joined as a party to the litigation. Litigation is not currently
      pending with regard to Fujitsu or NEC and certain of NEC’s subsidiaries as
      listed below.





On
      August
      25, 2006, ARM Ltd. and ARM, Inc. intervened as defendants, seeking a declaration
      of non-infringement of our ‘584 patent with respect to ARM processor cores
      contained within some alleged infringing chips of other defendants.





In
      February 2006, a license agreement was entered into with Fujitsu 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.





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.





A
      Claims
      Construction Hearing was held May 3, 2007 in The United States District Court
      for the Eastern District of Texas. On June 15, 2007, the court handed down
      claims construction of the patents-in-suit, the ‘336, ‘148 and ‘584 patents.
      Based on the claims construction ruling, TPL/Patriot are vigorously proceeding
      with discovery with respect to the ‘336 and ‘148 patents. However, based on the
      claims construction ruling as to the ‘584 patent claims of “instruction groups”,
      TPL/Patriot announced on August 8, 2007, a Stipulation with ARM intended to
      expedite an appeal of that claims construction. The Stipulation is a declaration
      of non-infringement by the accused ARM products with respect to the ‘584 patent.
      This is intended to bolster TPL/Patriot’s efforts in the long run to enforce
      rights under the ‘584 patent. A notice of appeal to the Federal Circuit has been
      filed with respect to the ARM Stipulation and the District Court's claims
      construction with respect to the '584 patent.





During
      the discovery phase, TPL and Patriot reached stipulations regarding
      representative chips and products to streamline the presentation of the evidence
      at trial. As such, only a portion of the accused chips and products of those
      defendants will be the subject of evidence at trial. NEC Electronics America,
      Inc. is accused in the litigation of contributory infringement by virtue of
      manufacturing chips utilized by the other defendants in accused
      products.





The
      parties proceeded to mediation September 25-26, 2007. During the mediation
      TPL
      did not reach an agreement with any of the three sets of defendants with respect
      to the issues of the lawsuit, or with respect to potential
      licensing agreements broader in scope than the claims of the litigation. Jury
      selection is scheduled to begin January 7, 2008.




17




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




**Commitments
      and Contingencies, continued**





***401(k)
      Plan***





We
      have a
      retirement plan that complies with Section 401(k) of the Internal Revenue Code.
      All employees are eligible to participate in the plan. We match 50% of each
      participant’s voluntary contributions, subject to a maximum contribution of 6%
      of the participant’s compensation. Participants vest 33% per year over a three
      year period in our contributions. Our matching contributions during the three
      months ended August 31, 2007 and 2006 were $928 and $2,562, respectively.





***Employment
      Contracts***





In
      connection with Mr. Turley’s appointment as President and Chief Executive
      Officer, and commencing on June 5, 2007, we entered into an employment
      agreement with Mr. Turley for a one-year term. Pursuant to the agreement,
      if Mr. Turley is terminated without cause, he is entitled to his then current
      salary level for the remaining term of his agreement conditional upon the
      execution of a general release.




In
      connection with Mr. Flowers’ appointment as the Chief Financial Officer,
      and commencing on September 17, 2007, we entered into an employment
      agreement with Mr. Flowers for an initial 120-day term if not terminated
      pursuant to the agreement, with an extension period of one year and on a
      continuing basis thereafter. Pursuant to the agreement, if Mr. Flowers is
      terminated without cause or resigns with good reason within the first two years
      of employment, he is entitled to receive an amount equal to his annual base
      salary for the greater of (i) 6 months or (ii) the period remaining in
      the extended one-year term. If Mr. Flowers is terminated without cause or
      resigns with good reason any time after two years of continuous employment,
      he
      is entitled to receive an amount equal to 12 months of his annual base salary.
      Mr. Flowers is also entitled to certain payments upon a change of control
      of the Company if the surviving corporation does not retain him. All such
      payments are conditional upon the execution of a general release.




***Guarantees
      and Indemnities***





We
      have
      made certain guarantees and indemnities, under which we may be required to
      make
      payments to a guaranteed or indemnified party. We indemnify our directors,
      officers, employees and agents to the maximum extent permitted under the laws
      of
      the State of Delaware and California for SSDI. In connection with our facility
      leases, we have indemnified our 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 we could be obligated
      to
      make. Historically, we have not been obligated to make any payments for these
      obligations and no liabilities have been recorded for these guarantees and
      indemnities in the accompanying consolidated balance sheets.





***Operating
      Leases***





We
      have a
      non-cancelable operating lease agreement for our Carlsbad, California office
      facility. Future minimum lease payments required under the operating lease
      are
      $96,201 and $73,710 in fiscal years ended 2008 and 2009, respectively.





SSDI
      subleases their Carlsbad, California office facility which expires in December
      2007. Future minimum lease payments required under the operating lease are
      $52,983 in the fiscal year ended 2008.





18




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




**Commitments
      and Contingencies, continued**





SSDI
      also
      leases office space in Annapolis, Maryland on a month to month basis at $750
      per
      month expiring February 2008. The lease may be terminated by either party with
      30 days notice.





***Earn-Out
      Agreement***





SSDI
      entered into an earn-out agreement with a former debt holder of Holocom
      Networks, Inc. (“Holocom Networks”) upon our contribution of the foreclosure
      sale collateral of Holocom Networks to SSDI in fiscal 2007. The agreement
      required the former debt holder to release all of his rights to any Holocom
      Networks collateral in exchange for receiving 3% of the net sales (defined
      as
      cash revenues actually received less credits or discounts and other claims
      of
      customers) of SSDI’s protected distribution system products for a period of 48
      months from the foreclosure sale date of February 2, 2007. The earn-out is
      to be
      paid each calendar quarter. A liability for payment under this agreement of
      $13,236 is included in accrued expenses in the accompanying condensed
      consolidated balance sheet at August 31, 2007.





**8.Segment
      Information**





SSDI
      began operations in February 2007 and we consolidated SSDI in our financial
      statements in March 2007. SSDI is an operating segment under FASB Statement
      No.
      131, *Disclosures
      About Segments of an Enterprise* ,
      as
      revenue is 10% or more of the total revenue of all operating segments.





SSDI
      is
      engaged in the business of developing and manufacturing network-security
      hardware for sale to government, military, and other high-security facilities.
      There is no inter-segment revenue, and the accounting policies for segment
      reporting are the same as for us as a whole.





The
“all
      other” category includes the results for Patriot Scientific
      Corporation.





Operating
      segment net revenue, operating loss and income (loss) before taxes for three
      months ended August 31, 2007 and 2006 were as follows:





2007
            
            2006Net
                revenue:SSDI
            
            $
            511,864
            
            $
            -All
                other
            
            
            9,505
            
            
            26,375Total
                net revenue
            
            $
            521,369
            
            $
            26,375Operating
                loss:SSDI
            
            $
            (145,629
            )
            $
            -All
                other
            
            
            (1,472,727
            )
            
            (2,706,149
            )Total
                operating loss
            
            $
            (1,618,356
            )
            $
            (2,706,149
            )Income
                (loss) before taxes:SSDI
            
            $
            4,749
            
            $
            -All
                other
            
            
            (2,199,704
            )
            
            9,490,273Total
                income (loss) before taxes
            
            $
            (2,194,955
            )
            $
            9,490,273




19





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




**Segment
      Information, continued**





All
      sales
      were to unaffiliated customers within the United States. During the three months
      ended August 31, 2007, one customer accounted for 73% of SSDI’s product sales
      and this same customer accounted for 19% of SSDI’s accounts receivable at
      August 31, 2007, and this same customer accounted for 81% of SSDI’s
      accounts receivable at May 31, 2007.





Operating
      segment total assets and depreciation and amortization as of and for the three
      months ended August 31, 2007 and 2006 were as follows:




2007
            
            
            2006Depreciation
                and amortization:SSDI
            
            $
            4,154
            
            $
            -


All
                other
            
            
            7,168
            
            
            10,635


Total
                depreciation and amortization
            
            $
            11,322
            
            $
            10,635







2007
            
            
            2006Total
                assets:SSDI
            
            $
            594,320
            
            $
            -All
                other
            
            
            23,536,644
            
            
            20,669,433Total
                assets
            
            $
            24,130,964
            
            $
            20,669,433




**9.Subsequent
      Events**





During
      the period September 1, 2007 through October 10, 2007, Phoenix Digital entered
      into license agreements with third parties, pursuant to which it received
      aggregate proceeds totaling $1,433,000.





On
      September 4, 2007, we repurchased 2,000,000 warrants for $799,647 pursuant
      to
      the terms of our warrant repurchase agreement with Lincoln Ventures, LLC.





On
      September 4, 2007, we advanced $100,000 to SSDI pursuant to the line of credit
      agreement. On September 18, 2007, the interest rate on the line of credit
      decreased to 7.75% in accordance with the change in the prime interest
      rate.





During
      the period September 1, 2007 through October 10, 2007, we purchased 737,181
      shares of our common stock for treasury at an aggregate cost of
      $317,128.





On
      September 13, 2007, a director exercised stock options to purchase 100,000
      shares of common stock for proceeds of $10,200.





On
      September 17, 2007, a warrant holder exercised 3,500,000 warrants on a cashless
      basis, receiving 2,536,942 shares of our common stock upon
      exercise.





On
      September 17, 2007, we granted stock options, from our 2006 Stock Option Plan
      to
      our newly-appointed chief financial officer in accordance with his employment
      contract as follows: 600,000 non-qualified stock options, subject to vesting
      provisions within the option, and 150,000 non-qualified stock options which
      fully vest on January 17, 2008.





On
      October 2, 2007, we repurchased the remaining 3,000,000 warrants for $1,039,398
      pursuant to the terms of our warrant repurchase agreement with Lincoln Ventures,
      LLC.




20




**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-K FOR THE YEAR ENDED MAY 31, 2007.
 
 **Overview**
 
 In
        June
        2005, we entered into a series of agreements with Technology Properties Limited,
        Inc. (“TPL”) and others to facilitate the pursuit of infringers of our
        intellectual property. We intend to continue our joint venture with TPL to
        pursue license agreements with infringers of our technology. We believe 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
        our principal assets and is a prudent way to achieve the desired results
        as we
        seek to obtain fair value from users of our intellectual property.
 
 During
        the fiscal year ended May 31, 2006, we finalized an agreement for the
        licensing of our technology with Intel Corporation. During the fiscal years
        ended May 31, 2006 and 2007, the joint venture entered into licensing agreements
        with Hewlett-Packard, Fujitsu, Casio, Nikkon, Sony, Seiko Epson, Pentax,
        Olympus, Kenwood, Agilent Technologies, Schneider Electric, Lexmark, NEC,
        Funai
        Electric, SanDisk, Sharp and Nokia through our joint venture entity, Phoenix
        Digital Solutions, LLC (“PDS”). During the three months ended August 31, 2007,
        PDS entered into licensing agreements with Lego Systems and Bull. We believe
        that these agreements represent validation of our position that our intellectual
        property was and is being infringed by major manufacturers and users of
        microprocessor technology. We believe the early stage agreements demonstrate
        the
        potential value of our intellectual property in that they are "arms length"
        transactions with major electronics manufacturers.
 
 **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.
  21
 Our
        consolidated variable interest entity recognizes revenue upon shipment of
        its
        product and recognizes revenue on its short-term installation contracts as
        time
        and materials costs are incurred.
 
 2. Assessment
        of Contingent Liabilities
 
 We
        are
        involved in various legal matters, disputes, and patent infringement claims
        which arise in the ordinary course 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.
 
 3. Stock
        Options and Warrants
 
 On
        June
        1, 2006, we adopted the provisions of 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. 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* .
  In
        November 2005, FASB issued FASB Staff Position No. FAS 123R-3, *“Transition
        Election Related to Accounting for Tax Effects of Share-Based Payment
        Awards”* (“FAS123R-3”). We have elected to adopt the alternative transition method
        provided in FAS 123R-3. The alternative transition method includes a simplified
        method to establish the beginning balance of the additional paid-in capital
        pool
        (“APIC pool”) related to the tax effects of employee share-based compensation,
        which is available to absorb tax deficiencies recognized subsequent to the
        adoption of SFAS No. 123(R).
  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 our condensed
        consolidated statement of operations for the three months ended August 31,
        2006
        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). Stock-based compensation expense
        recognized in our condensed consolidated statement of operations for the
        three
        months ended August 31, 2007 included compensation expense for share-based
        payment awards granted subsequent to May 31, 2007 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
        statements of operations 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 three months ended August 31, 2007 and 2006, of
        approximately 5% was based on historical forfeiture experience and estimated
        future employee forfeitures.
  Employee
        stock-based compensation expense recognized under SFAS No. 123(R) for the
        three months ended August 31, 2007 and 2006 was $282,913 and $1,575,000,
        respectively, as determined by the Black-Scholes valuation model.
 
 4. Patents
        and Trademarks
 
 We
        carry
        our patents and trademarks at cost less accumulated amortization and we amortize
        the patents over their estimated useful lives of four years. We periodically
        review the carrying value of the patents and trademarks for impairment and
        recognize impairment when the expected future benefit to be derived from
        an
        individual intangible asset is less than its carrying value.
  22
 5. Income
        Taxes
 
 We
        must
        assess the likelihood that we will be able to recover our deferred tax assets.
        If recovery is not likely, we must increase our provision for taxes by recording
        a valuation allowance against the deferred tax assets that we estimate will
        not
        ultimately be recoverable. We believe that a substantial majority of the
        deferred tax assets recorded on our balance sheet will ultimately be recovered.
        However, should there be a change in our ability to recover the deferred
        tax
        assets; the tax provision would increase in the period in which we determined
        that the recovery was not probable.
  6. Investment
          in
          Affiliated Company
 We
        have a
        50% interest in PDS. We account for our investment using the equity method
        of
        accounting since the investment provides us the ability to exercise significant
        influence, but not control, over the investee. Significant influence is
        generally deemed to exist if we have 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 our share of net earnings or losses of the investee
        and is
        recognized in the consolidated statement of operations in the caption “Equity in
        earnings of affiliated company”.
 
 We
        review
        our investment to determine whether events or changes in circumstances indicate
        that our carrying amount may not be recoverable. The primary factors we consider
        in our 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, we would recognize an impairment loss.
 
 7. Variable
        Interest Entity
 
 We
        own
        100% of the preferred stock of Scripps Secured Data, Inc. (“SSDI”). On March 27,
        2007 we entered into an 18 month revolving line of credit with SSDI for a
        maximum amount of $500,000. The line of credit caused us to have a variable
        interest in SSDI, a variable interest entity, and we have determined that
        we are
        the primary beneficiary as we absorb more than half of the variable interest
        entity’s expected losses. FIN46(R), *Consolidation
        of Variable Interest Entities,* requires
        us to consolidate SSDI as long as we are deemed to be the primary
        beneficiary.
 
 We
        reevaluate our primary beneficiary position at each of our balance sheet
        dates
        using the guidance in FIN46(R). If we are no longer deemed to be the primary
        beneficiary of the variable interest entity, we will discontinue
        consolidation.
 
 **Results
        of Operations**
 
 Our
        revenues increased from approximately $26,000 for the three months ended
        August
        31, 2006 to approximately $521,000 for the three months ended August 31,
        2007.
        Our revenue amounts do not include income of approximately $12,070,000 from
        our
        investment in Phoenix Digital Solutions, LLC for the three months ended August
        31, 2006, or loss of approximately $1,201,000 from our investment in Phoenix
        Digital Solutions, LLC for the three months ended August 31, 2007. During
        the
        three months ended August 31, 2007 we recorded sales amounting to approximately
        $512,000 by our consolidated variable interest entity, SSDI, with cost of
        sales
        amounting to approximately $152,000. During the three months ended August
        31,
        2006 and 2007, we recognized maintenance fee revenues totaling approximately
        $6,250 and $6,250 in connection with an agreement with AMD Corporation during
        the 2005 fiscal year. The agreement called for maintenance fees totaling
        $100,000 connected with a license agreement for our Ignite technology; the
        license fee revenue is being recognized as revenue evenly over the four year
        period of the license. In addition during the three months ended August 31,
        2007, we recorded sales of approximately $3,300 from the sale of microprocessor
        chips that we no longer market. Inventory associated with the sales of these
        microprocessor chips is carried at zero value. During the three months ended
        August 31, 2006, we recorded sales of approximately $20,100 relating to the
        microprocessor chips.
  23
 Selling,
        general and administrative expenses decreased from approximately $2,733,000
        for
        the three months ended August 31, 2006 to approximately $1,988,000 for the
        three
        months ended August 31, 2007. Legal expenses decreased by approximately $127,000
        for the three months ended August 31, 2007 compared with the three months
        ended
        August 31, 2006 and accounting expenses increased by approximately $70,000
        for
        the three months ended August 31, 2007 compared with the three months ended
        August 31, 2006 primarily due to fees for the audits of our affiliate,
        consolidated variable interest entity and the completion of the testing of
        our
        internal controls. 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. 123R. During the three months ended August 31, 2007,
        options were granted to our newly-appointed chief executive officer pursuant
        to
        terms of his employment contract, those option grants plus the related vesting
        on the grants resulted in non-cash compensation expense of approximately
        $170,000. On August 16, 2007 options were granted to certain employees and
        a
        newly-appointed director resulting in non-cash compensation of approximately
        $113,000. During the three months ended August 31, 2006, 1,500,000 options
        were
        granted to our then chief executive officer resulting in a non-cash compensation
        expense amounting to approximately $1,527,000. Board of director fees amounting
        to approximately $98,000 were paid during the three months ended August 31,
        2007
        as compared to $60,000 paid for the three months ended August 31, 2006. Other
        salary expenses increased by approximately $371,000 for the three months
        ended
        August 31, 2007 as compared with the three months ended August 31, 2006
        including approximately $307,000 in salaries and related expenses for SSDI
        during the three months ended August 31, 2007. Salary expenses for the parent
        company including wages, payroll taxes, employee benefits and expenses connected
        with 401(k) employer matching increased by approximately $64,000 during the
        three months ended August 31, 2007 as compared with the three months ended
        August 31, 2006. Travel and related expenses for the three months ended August
        31, 2007 increased by approximately $43,000 as expenses for SSDI of
        approximately $51,000 were combined with the decrease in travel expenses
        for the
        parent company of approximately $8,300. Consulting expenses increased by
        approximately $27,000 for the three months ended August 31, 2007 as compared
        to
        the three months ended August 31, 2006 due to one time fees for evaluations
        of
        our various technologies and expenses associated with our production of
        materials for the upcoming litigation. Offsetting the increases in selling,
        general and administrative expenses for the three months ended August 31,
        2007
        as compared to the three months ended August 31, 2006, were decreases amounting
        to approximately $55,000 for public relations expenses and $13,000 for investor
        relations expenses.
 
 Settlement
        and license expenses amounting to $30,000 were recorded for the three months
        ended August 31, 2007 relating to royalties payable resulting from an agreement
        with Fish (see Note 3 to our condensed consolidated financial statements
        for
        more information). No such expenses were recorded for the three months ended
        August 31, 2006.
 
 Our
        other
        income and expenses for the three months ended August 31, 2007 and 2006 included
        equity in the earnings and loss of PDS. The investment is accounted for in
        accordance with the equity method of accounting for investments. Our investment
        in PDS for the three months ended August 31, 2007 generated a loss after
        expenses in the amount of approximately $1,201,000 resulting from licensing
        agreements for our intellectual property with Lego Systems and Bull for one
        time
        payments. Our investment in PDS provided net income after expenses in the
        amount
        of approximately $12,070,000 for the three months ended August 31,
        2006.  Total
        other income and expense for the three months ended August 31, 2007 amounted
        to
        net other expense of approximately $577,000 compared with total other income
        and
        expense for the three months ended August 31, 2006 of net other income amounting
        to approximately $12,196,000. Interest income and other income increased
        from
        approximately $127,000 for the three months ended August 31, 2006 to
        approximately $475,000 for the three months ended August 31, 2007 as interest
        bearing account balances increased from cash received as distributions from
        our
        investment in PDS and we recognized other income of approximately $227,000
        in
        connection with our reimbursement request billings to PDS for our prior period
        legal expenses incurred in connection with the patent litigation. During
        the
        three months ended August 31, 2007, SSDI recognized $150,000 of other income
        in
        connection with the sale of a portion of its interest in Holocom MultiDomain
        Computers, LLC, now known as DataSecurus, LLC.
  24
 During
        the quarter ended August 31, 2006, we recorded a provision for income taxes
        of
        $3,500,000 related to federal and California taxes. During the quarter ended
        August 31, 2007, we recorded a benefit from income taxes of approximately
        $233,000 related to federal and California taxes. Also, during the quarters
        ended August 31, 2006, and August 31, 2007, we utilized approximately
        $34,300,000 and $5,600,000, respectively, of our available federal net operating
        loss carry-forwards. At August 31, 2007 we have utilized all of our remaining
        available federal net operating loss carry-forwards. At May 31, 2007, we
        have
        utilized all of our state net operating loss carry-forwards of approximately
        $17,822,000.
 
 We
        recorded net income for the three months ended August 31, 2006 of $5,990,273
        compared with a net loss of $1,962,386 for the three months ended August
        31,
        2007.
 
 **Liquidity
        and Capital Resources**
 
 *Liquidity*
 
 Our
        cash,
        marketable securities and short-term investment balances decreased from
        approximately $25,955,000 as of May 31, 2007 to approximately $20,278,000
        as of
        August 31, 2007. We also have restricted cash balances amounting to
        approximately $102,000 as of May 31, 2007 and approximately $103,000 as of
        August 31, 2007. Total current assets decreased from approximately $31,399,000
        as of May 31, 2007 to approximately $22,319,000 as of August 31, 2007. Total
        current liabilities amounted to approximately $2,021,000 and approximately
        $8,551,000 as of May 31, 2007 and August 31, 2007, respectively. The change
        in
        our current position as of August 31, 2007 as compared with May 31, 2007
        results
        from our utilization of cash to repurchase warrants and to purchase treasury
        stock while not receiving cash distributions from PDS during the three months
        ended August 31, 2007. Additionally, during the three months ended August
        31,
        2007, we utilized our remaining federal net operating losses for income tax
        purposes, resulting in a current tax liability of approximately $7,678,000
        and
        causing our prepaid income taxes and deferred tax assets at May 31, 2007
        to be
        reclassified to the current tax liability.
 
 *Cash
        Flows From Operating Activities*
 
 Cash
        used
        in operating activities for the three months ended August 31, 2007 was
        approximately $2,129,000 as compared with cash used in operating activities
        for
        the three months ended August 31, 2006 of approximately $1,629,000. The
        principal components of the current period amount were: our share of loss
        in our
        investee of approximately $1,201,000, change in refundable income taxes of
        approximately $2,071,000 change in income taxes payable of approximately
        $7,678,000. These increases were partially offset by: net loss of approximately
        $1,962,000, change in deferred taxes of approximately $9,956,000, and changes
        in
        accounts payable and accrued expenses of approximately $1,148,000.
 
 *Cash
        Flows From Investing Activities*
 
 Cash
        used
        in investing activities was approximately $255,000 for the three months ended
        August 31, 2007 as compared to cash provided by investing activities of
        approximately $9,098,000 for the three months ended August 31, 2006. The
        decrease was primarily due to lack of distributions received from our investment
        in affiliate. Cash used during the three months ended August 31, 2007 consisted
        of approximately $347,000 in net purchases of short-term investments and
        purchases of fixed assets of approximately $8,000. The cash used during the
        three months ended August 31, 2007 was partially offset by proceeds of $100,000
        received by SSDI for the sale of a membership interest in DataSecurus, LLC.
 
 *Cash
        Flows From Financing Activities*
 
 Cash
        used
        in financing activities for the three months ended August 31, 2007 was
        approximately $3,640,000 as compared to approximately $1,774,000 for the
        three
        months ended August 31, 2006 primarily due to payments of approximately
        $2,726,000 to repurchase shares of our common stock for treasury and warrant
        repurchases of approximately $922,000 for the three months ended August 31,
        2007. The cash used during the three months ended August 31, 2007 was partially
        offset by cash received of approximately $8,000 from the exercise of common
        stock options and warrants.
  25
 *Capital
        Resources*
 
 Our
        current position as of August 31, 2007 is expected to provide the funds
        necessary to support our operations through at least the next twelve
        months.
 
 **Contractual
        Obligations and Committments**
 
 A
        summary
        of our outstanding contractual obligations at August 31, 2007 is as
        follows:
  Contractual
                Cash
                  Obligations
              
              Total
                Amounts
                Committed
              
              1-3
                YearsOperating
                  leases - facilities
              
              $
              180,810
              
              $
              180,810
 
 **Recent
        Accounting Pronouncements**
 
 In
        July
        2006, the FASB 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. We adopted FIN 48 on June 1, 2007 and did not record any cumulative
        effect adjustment to retained earnings as a result of adopting FIN 48. Interest
        and penalties, if any, related to unrecognized tax benefits are recorded
        in
        income tax expense. As of June 1, 2007, we are subject to U.S. Federal income
        tax examinations for the tax years May 31, 1991 through May 31, 2007, and
        we are
        subject to state and local income tax examinations for the tax years May
        31,
        1999 through May 31, 2007 due to the carryover of net operating losses from
        prior years.
 
 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.
        We
        expect to adopt SFAS No. 157 on June 1, 2008.  We are currently assessing
        the impact the adoption of SFAS No. 157 will have on our consolidated financial
        statements.
 
 In
        February 2007, the FASB issued SFAS No. 159, *The
        Fair Value Option for Financial Assets and Financial Liabilities* (“SFAS
        No. 159”). SFAS No. 159 permits entities to choose to measure at fair value many
        financial instruments and certain other items that are not currently required
        to
        be measured at fair value. The objective is to improve financial reporting
        by
        providing entities with the opportunity to mitigate volatility in reported
        earnings caused by measuring related assets and liabilities differently without
        having to apply complex hedge accounting provisions. SFAS No. 159 also
        establishes presentation and disclosure requirements designed to facilitate
        comparisons between entities that choose different measurement attributes
        for
        similar types of assets and liabilities. SFAS No. 159 does not affect
        any existing accounting literature that requires certain assets and liabilities
        to be carried at fair value. SFAS No. 159 does not establish
        requirements for recognizing and measuring dividend income, interest income,
        or
        interest expense. This Statement does not eliminate disclosure requirements
        included in other accounting standards. SFAS No. 159 is effective in
        fiscal years beginning after November 15, 2007. We are in the process of
        evaluating the provisions of the statement, but do not anticipate that the
        adoption of SFAS No. 159 will have a material impact on our consolidated
        financial statements.
  26
 **Risk
        Factors**
 
 We
        urge
        you to carefully consider the following discussion of risks as well as other
        information regarding our common stock. We believe the following to be our
        most
        significant risk factors as of the date this report is being filed. The risks
        and uncertainties described below are not the only ones we face.
 
 **We
        Have Reported Substantial Income In 2006 and 2007 Which May Not Be Indicative
        Of
        Our Future Income**
 
 During
        fiscal 2007 and 2006, we entered into license agreements, directly and through
        our joint venture with Technology Properties Limited. Because of the uncertain
        nature of the negotiations that lead to license revenues, pending litigation
        with companies which we allege have infringed on our patent portfolio, the
        possibility of legislative action regarding patent rights, and the possible
        effect of new judicial interpretation of patent laws, we cannot predict the
        amount of future revenues from such agreements, or whether there will be
        future
        revenues from license agreements at all.
 
 **We
        Are Dependent Upon A Joint Venture In Which We Are A Passive Partner For
        Substantially All Of Our Income**
 
 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 our microprocessor patent portfolio. This joint venture
        has
        been the source of virtually all of our income since June of 2005. Therefore,
        in
        light of the absence of significant revenue from other sources, we 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 and data security products
        have
        resulted in limited revenues. Our other product lines are no longer being
        actively marketed, and also only generate limited and sporadic
        sales.
 
 **Our
        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. We also may not be able
        to
        develop a successful sales and marketing strategy. We also have very limited
        marketing experience. Any marketing efforts we undertake may not be successful
        and may not result in any significant sales of our products.
 
 **We
        May Experience Difficulties In The Completion Of Our 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.
  27
 **Changes
        In Our Relationships With Companies In Which We Hold Less Than A Majority
        Interest Could Change The Way We Account For Such Interests In The
        Future.**
 
 We
        hold a
        minority interest in a company (Scripps Secured Data, Inc.) to which we provide
        financing. Under the applicable provisions of accounting principles generally
        accepted in the United States of America, including FIN 46(R), we currently
        consolidate the financial statements and results of operations of this company
        into our consolidated financial statements and results of operations, and
        record
        the equity interest that we do not own as a minority interest. For our other
        investment (Phoenix Digital Solutions, LLC), accounted for under the equity
        method, we record as part of other income or expense our share of the increase
        or decrease in the equity of the company in which we have invested. It is
        possible that, in the future, our relationships and/or our interests in or
        with
        this consolidated entity and equity method investee could change. Such potential
        future changes could result in deconsolidation or consolidation of such
        entities, as the case may be, which could result in changes in our reported
        results.
 
 **We
        Have Settled A Legal Dispute Which Could Affect 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 required us to pay the co-inventor $6,400,000
        and requires us to pay up to $2,000,000 from the proceeds we receive from
        future
        licensing transactions. As of the date of this filing, we have paid $1,194,000
        of the $2,000,000 obligation for future licensing transaction proceeds required
        under the settlement agreement. These payments have resulted, and will result,
        in a reduction of our net income in the current fiscal year 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 be issued for any of our pending
        applications. Any claims allowed from existing or pending patents may not
        be of
        sufficient scope or strength to provide significant protection for our products.
        Patents may not be issued in all countries where our products can be sold
        so as
        to provide meaningful protection or any commercial advantage to us. Our
        competitors may also be able to design around our patents.
 
 Vigorous
        protection and pursuit of intellectual property rights or positions characterize
        the fiercely competitive semiconductor industry, which has resulted in
        significant and often protracted and expensive litigation. Therefore, our
        competitors 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 the Section entitled “Legal Proceedings”). Additionally, opposing
        parties in the litigation and one other person have petitioned the U. S.
        Patent
        and Trademark Office to re-examine certain of our patents. An adverse decision
        in the litigation or in the re-examination process would have a very significant
        and adverse effect on our business.
  28
 **If
        A Large Number Of Our Shares Are Sold All At Once Or In Blocks, The Market
        Price
        Of Our Shares Would Most**  **Likely
        Decline**
 
 Our
        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 Our 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 National Association
        of
        Securities Dealers (“NASD”) Over-The-Counter Bulletin (“OTC”) Board Market and
        is subject to the “penny stock rules” adopted pursuant to Section 15(g) of 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.
 
 **Our
        Share Price Could Decline As A Result Of Short Sales**
 
 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. Penny stocks which do
        not
        trade on an exchange, such as our common stock, are particularly susceptible
        to
        short sales.
 
 **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 are represented by a labor
        union,
        and we consider our relations with our employees to be good. None of our
        employees are covered by key man life insurance policies.
  **Item
        3. Quantitative and Qualitative Disclosures About Market
        Risk**
  N/A
 
 29
 
 **Item
        4. Controls and Procedures**
 
 ***Evaluation
        of Disclosure Controls and Procedures***
  As
        required by Rule 13a-15(e) under the Exchange Act, as of August 31,
        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 August 31, 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.
  30
  **PART
        II - OTHER INFORMATION**
 
 **Item
        1. Legal Proceedings**
 
 *Lowell
        Giffhorn Arbitration*
 
 On
        September 23, 2005, Lowell Giffhorn, a former executive officer
        and a former director of the Company, submitted a demand for arbitration
        with
        the American Arbitration Association related to the termination of
        Mr. Giffhorn's employment with the Company. Mr. Giffhorn asserts that
        the termination of his employment with the Company was unlawful, retaliatory,
        wrongful, violated public policy, violated the covenant of good faith and
        fair
        dealing and violated securities laws. Mr. Giffhorn 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 without
        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*
 
 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. (“Fujitsu”),
        Matsushita Electric Corporation of America (“MEI”), NEC Solutions (America) Inc.
        (“NEC”), Sony Electronics Inc. (“Sony”), 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,
        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. Patriot
        was
        subsequently joined as a party to the litigation. Litigation is not currently
        pending with regard to Fujitsu or NEC and certain of NEC’s subsidiaries as
        listed below.
 
 On
        August
        25, 2006, ARM Ltd. and ARM, Inc. intervened as defendants, seeking a declaration
        of non-infringement of our ‘584 patent with respect to ARM processor cores
        contained within some alleged infringing chips of other defendants.
 
 In
        February 2006, a license agreement was entered into with Fujitsu 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.
 
 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.
 
 A
        Claims
        Construction Hearing was held May 3, 2007 in The United States District Court
        for the Eastern District of Texas. On June 15, 2007, the court handed down
        claims construction of the patents-in-suit, the ‘336, ‘148 and ‘584 patents.
        Based on the claims construction ruling, TPL/Patriot are vigorously proceeding
        with discovery with respect to the ‘336 and ‘148 patents. However, based on the
        claims construction ruling as to the ‘584 patent claims of “instruction groups”,
        TPL/Patriot announced on August 8, 2007, a Stipulation with ARM intended
        to
        expedite an appeal of that claims construction. The Stipulation is a declaration
        of non-infringement by the accused ARM products with respect to the ‘584 patent.
        This is intended to bolster TPL/Patriot’s efforts in the long run to enforce
        rights under the ‘584 patent. A notice of appeal to the Federal Circuit has been
        filed with respect to the ARM Stipulation and the District Court's claims
        construction with respect to the '584 patent.
  31
 During
        the discovery phase, TPL and Patriot reached stipulations regarding
        representative chips and products to streamline the presentation of the evidence
        at trial. As such, only a portion of the accused chips and products of those
        defendants will be the subject of evidence at trial. NEC Electronics America,
        Inc. is accused in the litigation of contributory infringement by virtue
        of
        manufacturing chips utilized by the other defendants in accused
        products.
 
 The
        parties proceeded to mediation September 25-26, 2007. During the mediation
        TPL
        did not reach an agreement with any of the three sets of defendants with
        respect
        to the issues of the lawsuit, or with respect to potential licensing agreements
        broader in scope than the claims of the litigation. Jury selection is scheduled
        to begin January 7, 2008.
 
 **Item
        1A. Risk Factors**
 
 No
        material changes from the risk factors contained in our 10-K for the year
        ended
        May 31, 2007. Please see Part I, Item 2, above, for our risk factors.
 
 **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 4,961,640 shares of our common stock at
        an
        aggregate cost of $2,725,793 during the three months ended August 31, 2007.
 
 Following
        is a summary of all repurchases by the Company of its common stock during
        the
        three month period ended August 31, 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, 2007
              
              
              2,229,700
              
              $
              0.54
              
              
              2,229,700July
                  1 - 31, 2007
              
              
              2,570,940
              
              $
              0.56
              
              
              2,570,940August
                  1 - 31, 2007
              
              
              161,000
              
              $
              0.54
              
              
              161,000Total
              
              
              4,961,640
              
              $
              0.55
              
              
              4,961,640
   **Item
        3. Defaults Upon Senior Securities**
 
 None.
 
 **Item
        4. Submission of Matters to a Vote of Security Holders**
 
 None.
 
 **Item
        5. Other Information**
 
 None.
  32
 **Item
        6. Exhibits**
 
 Those
        exhibits marked with an asterisk (*) refer to exhibits filed herewith. The
        other
        exhibits are incorporated herein by reference, as indicated in the following
        list.
 **Exhibit No.**
                
                **Document**2.1
                
                Agreement
                    to Exchange Technology for Stock in the Company, incorporated
                    by reference
                    to Exhibit 2.1 to Form 8-K dated August 10, 1989 (Commission
                    file No. 33-23143-FW)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
                    (Commission file No. 000-22182)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 (Commission file No.
                    333-01765)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 (Commission file
                    No. 000-22182)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 (Commission file No. 000-22182)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, (Commission 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, (Commission 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 (Commission file No.
                    33-23143-FW)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 (Commission file No. 000-22182)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 (Commission file No.
                    000-22182)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 (Commission file No.
                    333-36418)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 (Commission file No.
                    333-91352)
  33
  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 (Commission file No.
                    333-115752)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 (Commission file No.
                    33-23143-FW)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 (Commission file No. 33-23143-FW)3.6
                
                Certificate
                    of Merger issued by the Colorado Secretary of State on May 12, 1992,
                    incorporated by reference to Exhibit 3.6 to Form 8-K dated
                    May 12, 1992 (Commission file No. 33-23143-FW)3.7
                
                Bylaws
                    of the Company, incorporated by reference to Exhibit 3.7 to Form 8-K
                    dated May 12, 1992 (Commission file No.
                    33-23143-FW)4.1
                
                Specimen
                    common stock certificate, incorporated by reference to Exhibit 4.1
                    Form 8-K dated May 12, 1992 (Commission file No.
                    33-23143-FW)
 4.2
              
              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 (Commission file No.
                  333-01765)4.3
              
              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 (Commission file No.
                  333-57602)4.4
              
              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 (Commission file No. 333-108489)4.5
              
              2006
                  Stock Option Plan of the Company dated March 31, 2006 incorporated by
                  reference to Exhibit 4.19 to Registration Statement on Form S-8 filed
                  June 20, 2006 (Commission file No. 333-135156)4.6
              
              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, filed on October 13, 2006 (Commission file No. 000-22182)10.1
              
              Employment
                  Agreement dated June 5, 2007 by and between the Company and James
                  Turley,
                  incorporated by reference to Exhibit 10.1 to Form 8-K filed June
                  8, 2007
                  (Commission file No. 000-22182)10.2
              
              Employment
                  Agreement dated September 17, 2007 by and between the Company and
                  Clifford
                  Flowers, incorporated by reference to Exhibit 10.1 to Form 8-K
                  filed
                  September 19, 2007 (Commission file No. 000-22182)31.1*
              
              Certification
                  of James L. Turley, CEO, pursuant to Rule
                  13a-14(a)/15d-14(a)31.2*
              
              Certification
                  of Clifford L. Flowers, CFO, pursuant to Rule
                  13a-14(a)/15d-14(a)32.1*
              
              Certification
                  of James L. Turley, CEO, pursuant to Section 1350 of Chapter 63 of
                  Title 18 of the United States Code32.2*
              
              Certification
                  of Clifford L. Flowers, CFO, pursuant to Section 1350 of Chapter
                  63 of
                  Title 18 of the United States Code
  34
 
 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:
                  October 10, 2007
              PATRIOT
                  SCIENTIFIC CORPORATION
                
                /S/
                  JAMES L. TURLEY
                James
                  L. Turley
                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/
                  JAMES L. TURLEY
                James
                  L. Turley
              President,
                  Chief Executive Officer, and Director
              October
                  10, 2007/S/
                  CLIFFORD L. FLOWERS
                Clifford
                  L. Flowers
              Chief
                  Financial Officer and Principal Accounting Officer
              October 10,
                  2007/S/
                  DAVID H. POHL
                David
                  H. Pohl
              Chairman
              October 10,
                  2007/S/
                  CARLTON M. JOHNSON
                Carlton
                  M. Johnson
              Director
              October 10,
                  2007/S/
                  GLORIA H. FELCYN
                Gloria
                  H. Felcyn
              Director
              October 10,
                  2007/S/
                  HELMUT FALK, JR.
                Helmut
                  Falk, Jr.
              Director
              October 10,
                  2007/S/
                  HARRY L. TREDENNICK
                Harry
                  L. Tredennick
              Director
              October
                  10, 2007




35