	August 31, 2012			May 31, 2012
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	4,424,934		$	4,699,174
Restricted cash and cash equivalents		20,940			20,913
Current portion of marketable securities		2,111,070			2,907,106
Prepaid expenses and other current assets		175,985			225,077
Current assets of discontinued operations		2,017			7,273
Total current assets		6,734,946			7,859,543

Marketable securities, net of current portion		194,155			229,045
Property and equipment, net		7,409			7,536
Non-current assets of discontinued operations		42,000			42,000
Total assets	$	6,978,510		$	8,138,124

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	26,062		$	239,546
Accrued expenses and other		52,298			64,643
Income taxes payable		5,078			2,513
Total current liabilities		83,438			306,702

Cumulative losses in excess of investment in affiliated company		711,142			740,824
Total liabilities		794,580			1,047,526

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized: none outstanding		–			–
Common stock, $0.00001 par value: 600,000,000 shares authorized: 438,167,618 shares issued and 405,575,249 shares outstanding at August 31, 2012 and 438,167,618 shares issued and 405,735,958 shares outstanding at May 31, 2012		4,381			4,381
Additional paid-in capital		77,330,935			77,330,935
Accumulated deficit		(56,789,876	)		(55,897,464	)
Common stock held in treasury, at cost – 32,592,369 shares and 32,431,660 shares at August 31, 2012 and May 31, 2012, respectively		(14,361,510	)		(14,347,254	)
Total stockholders’ equity		6,183,930			7,090,598
Total liabilities and stockholders’ equity	$	6,978,510		$	8,138,124

See accompanying notes to unaudited condensed consolidated financial statements

Patriot Scientific Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended Nine Months Ended
February 29, 2012 February 28, 2011 February 29, 2012 February 28, 2011
Operating expenses:
Selling, general and administrative $ 623,375 $ 538,906 $ 1,546,836 $ 2,197,953
Total operating expenses 623,375 538,906 1,546,836 2,197,953

Other income (expense):
Interest and other income 44,668 86,017 92,976 104,597
Interest expense - - - (20,810 )
Recovery of loan loss - 1,013,151 - 1,013,151
Realized gain (loss) on sale of marketable securities - 47,860 - (600,879 )
Equity in earnings (loss) of affiliated company (105,000 ) 2,300,912 (632,551 ) 825,074
Total other income (expense), net (60,332 ) 3,447,940 (539,575 ) 1,321,133

Income (loss) from continuing operations before income taxes (683,707 ) 2,909,034 (2,086,411 ) (876,820 )

Provision (benefit) for income taxes (4,304 ) 3,483,746 (1,104 ) 1,971,457

Loss from continuing operations (679,403 ) (574,712 ) (2,085,307 ) (2,848,277 )

Loss from discontinued operations, net (566,722 ) (5,074,297 ) (1,229,268 ) (6,300,661 )

Net loss $ (1,246,125 ) $ (5,649,009 ) $ (3,314,575 ) $ (9,148,938 )

Basic loss per common share:
Loss from continuing operations $ - $ - $ (0.01 ) $ (0.01 )
Loss from discontinued operations $ - $ (0.01 ) $ - $ (0.01 )
Net loss $ - $ (0.01 ) $ (0.01 ) $ (0.02 )

Diluted loss per common share:
Loss from continuing operations $ - $ - $ (0.01 ) $ (0.01 )
Loss from discontinued operations $ - $ (0.01 ) $ - $ (0.01 )
Net loss $ - $ (0.01 ) $ (0.01 ) $ (0.02 )

Weighted average number of common shares outstanding-basic 403,247,828 405,013,021 403,826,335 405,355,673

Weighted average number of common shares outstanding-diluted 403,247,828 405,013,021 403,826,335 405,355,673

	Three months ended
	August 31, 2012			August 31, 2011
Operating expenses:
Selling, general and administrative	$	392,062		$	472,085
Total operating expenses		392,062			472,085

Other income (expense):
Interest and other income		4,265			3,621
Realized recovery on marketable securities		55,873			39,005
Equity in loss of affiliated company		(557,068	)		(300,283	)
Total other expense, net		(496,930	)		(257,657	)

Loss from continuing operations before income taxes		(888,992	)		(729,742	)

Provision for income taxes		2,565			1,600

Loss from continuing operations		(891,557	)		(731,342	)

Loss from discontinued operations, net		(855	)		(332,627	)

Net loss	$	(892,412	)	$	(1,063,969	)

Basic and diluted loss per common share:
Loss from continuing operations	$	–		$	–
Loss from discontinued operations	$	–		$	–
Net loss	$	–		$	–

Weighted average number of common shares outstanding – basic and diluted		402,796,509			404,333,621

See accompanying notes to unaudited condensed consolidated financial statements

Patriot Scientific Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended
	August 31, 2012				August 31, 2011

Operating activities:
Net loss	$	(892,412	)		$	(1,063,969	)
Less: Net loss from discontinued operations		(855	)			(332,627	)
		(891,557	)			(731,342	)
Adjustments to reconcile net loss before discontinued operations to net cash used in operating activities:
Depreciation		666				798
Accrued interest income added to investments		(2,438	)			(2,357	)
Equity in loss of affiliated company		557,068				300,283
Realized recovery on sale of marketable securities		(55,873	)			(39,005	)
Changes in operating assets and liabilities:
Receivable from affiliated company		–				(97,923	)
Prepaid expenses and other current assets		49,092				54,203
Income taxes payable		2,565				401,641
Accounts payable and accrued expenses		(225,829	)			(222,491	)
Net cash used in operating activities of continuing operations		(566,306	)			(336,193	)
Net cash provided by (used in) operating activities of discontinued operations		4,401				(258,688	)
Net cash used in operating activities		(561,905	)			(594,881	)

Investing activities:
Proceeds from sales of marketable securities		2,263,210				529,005
Purchases of marketable securities		(1,374,000	)			(3,004,000	)
Purchase of property and equipment		(539	)	��		–
Investment in affiliated company		(586,750	)			–
Net cash provided by (used in) investing activities		301,921				(2,474,995	)

Financing activities:
Repurchase of common stock for treasury		(14,256	)			(47,556	)
Net cash used in financing activities		(14,256	)			(47,556	)

Net decrease in cash and cash equivalents		(274,240	)			(3,117,432	)
Cash and cash equivalents, beginning of period		4,699,174				8,453,665
Cash and cash equivalents, end of period	$	4,424,934			$	5,336,233

Supplemental Disclosure of Cash Flow Information:
Cash receipts from income tax refunds	$	–			$	400,042

Nine months ended
February 29, 2012 February 28, 2011

Operating activities:
Net loss $ (3,314,575 ) $ (9,148,938 )
Less: loss from discontinued operations (1,229,268 ) (6,300,661 )
(2,085,307 ) (2,848,277 )
Adjustments to reconcile net loss before discontinued operations to net cash provided by (used in) operating activities:
Depreciation 2,394 7,147
Share-based compensation relating to issuance of stock options - 56,379
Accrued interest income added to investments and notes receivable (4,092 ) (11,841 )
Equity in (earnings) loss of affiliated company 632,551 (825,074 )
Realized loss on sale of marketable securities - 600,879
Loss on sale of assets 736 1,719
Deferred income taxes - 1,884,351
Recovery of loan loss - (1,013,151 )
Changes in operating assets and liabilities:
Receivable from affiliated company 1,135,136 (1,097,573 )
Prepaid expenses and other current assets 159,544 154,620
Income taxes payable (1,281,576 ) 89,823
Accounts payable and accrued expenses (266,753 ) (538,320 )
Net cash used in operating activities of continuing operations (1,707,367 ) (3,539,318 )
Net cash provided by operating activities of discontinued operations 19,373 18,276
Net cash used in operating activities (1,687,994 ) (3,521,042 )

Investing activities:
Proceeds from sales of marketable securities 1,225,000 4,961,226
Purchases of marketable securities (2,549,000 ) (1,225,000 )
Reclassification of marketable securities to cash and cash equivalents 1,227,809 -
Repayment of note receivable - 2,016,246
Purchase of property and equipment (1,996 ) (3,894 )
Investment in affiliated company (100,000 ) -
Distributions from affiliated company - 807,806
Net cash (used in) provided by investing activities of continuing operations (198,187 ) 6,556,384
Net cash provided by investing activities of discontinued operations - 125,000
Net cash (used in) provided by investing activities (198,187 ) 6,681,384

Financing activities:
Repurchase of common stock for treasury (101,777 ) (113,401 )
Tax effect of expiration/cancellation/exercise of stock options - (2,715 )
Payment on note payable - (3,122,144 )
Net cash used in financing activities (101,777 ) (3,238,260 )

Net decrease in cash and cash equivalents (1,987,958 ) (77,918 )
Cash and cash equivalents, beginning of period 8,453,665 10,340,110
Cash and cash equivalents, end of period $ 6,465,707 $ 10,262,192

Supplemental Disclosure of Cash Flow Information:
Cash payments for interest $ - $ 137,785
Cash receipts from income tax refunds $ 907,588 $ -

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Reversal of unrealized loss charged to other comprehensive income at May 31, 2010 adjusted for deferred tax benefit due to recognition of loss in current period $ - $ (246,994 )

See accompanying notes to unaudited condensed consolidated financial statements.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

~~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”, “PTSC”, “Patriot”, “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 unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in our Report on Form 10-K for our fiscal year ended May 31, ~~2011.~~

2012.

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 period presented. Operating results for the ~~nine~~three month period ended ~~February 29,~~August 31, 2012 are not necessarily indicative of the results that may be expected for the year ending May 31, ~~2012.~~

2013.

Subsequent events have been evaluated through the issuance date of these financial statements.

Basis of Consolidation

The condensed consolidated balance sheets at ~~February 29,~~August 31, 2012 and May 31, ~~2011~~2012 include our accounts and those of our wholly owned subsidiary Patriot Data Solutions Group, Inc. (“PDSG”) which includes Crossflo Systems, Inc. (“Crossflo”), and our inactive subsidiary Plasma Scientific Corporation. All significant intercompany accounts and transactions have been eliminated.

The condensed consolidated statement of operations for the three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011 ~~and the nine months ended February 29, 2012~~ includes our accounts, and those of our wholly owned subsidiary PDSG which includes Crossflo, and our inactive subsidiary Plasma Scientific Corporation. All significant intercompany accounts and transactions have been eliminated.

PDSG is being presented as discontinued operations in the ~~condensed~~ consolidated statements of operations for all periods presented. See “Discontinued ~~Operations and Assets Held for Sale”~~Operations” below for additional information.

The condensed consolidated statement of operations for the nine months ended February 28, 2011 includes our accounts, and those of our wholly owned subsidiary PDSG which includes Crossflo, the business line of Vigilys (until August 2010) and our inactive subsidiary Plasma Scientific Corporation. All significant intercompany accounts and transactions have been eliminated.

Reclassification

Certain amounts presented in the prior periods’ condensed consolidated financial statements related to discontinued operations have been reclassified to conform to the current period’s presentation.

Discontinued Operations and Assets Held for Sale

On February 17, 2012, our board of directors authorized management to sell the assets of PDSG due to the inability of PDSG to meet its business plan and continuing projected negative cash flows. In accordance with authoritative guidance we have classified the assets, liabilities, operations and cash flows of PDSG as discontinued operations for all periods presented. ~~We are in~~During March 2012, we entered into an interim agreement with the ~~process~~purchaser of ~~negotiating~~the assets of PDSG which required the purchaser to pay PDSG $93,450 to subsidize the April 2012 expenses of PDSG during the sale transaction negotiations. On April 30, 2012, we negotiated a sale transaction ~~pursuant to~~in which we ~~would sell~~sold substantially all of the assets of PDSG in exchange for a royalty on PDSG revenues for a period of three years. InAt August 31, 2012, the ~~event that we are unable to consummate~~loss on the asset sale transaction by May 11, 2012, it is anticipated that we will cease PDSG operations as of such date with closure costs consisting primarily of payroll related expenses estimated at approximately $350,000. Based on preliminary ~~estimates of the sales proceeds, we have reduced the carrying value of the net assets~~ of PDSG byis approximately ~~$14,600 at February 29, 2012.~~$10,500.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Discontinued Operations and Assets Held for Sale (continued)

Summarized operating results of discontinued operations for the three ~~and nine~~ months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011 are as follows:

Three Months Ended Nine Months Ended
February 29, 2012 February 28, 2011 February 29, 2012 February 28, 2011
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ (2,279 ) $ 109,857 $ 179,871 $ 276,687
Loss before income taxes $ (566,722 ) $ (426,508 ) $ (1,229,268 ) $ (2,033,494 )

~~Included in loss from discontinued operations, net are income tax expenses of $4,647,789 and $4,267,167~~

	August 31, 2012			August 31, 2011
Revenues	$	–		$	134,563
Gross profit (loss)	$	–		$	101,479
Operating loss from discontinued operations	$	(1,387	)	$	(333,136	)
Other income from discontinued operations	$	–		$	509
Gain on sale of discontinued operations	$	532		$	–
Loss before income taxes	$	(855	)	$	(332,627	)
Loss from discontinued operations	$	(855	)	$	(332,627	)

PDSG activity for the three ~~and nine~~ months ended ~~February 28, 2011.~~

August 31, 2012 consists of operating expenses for: insurance, taxes and bank fees offset by PDSG royalty revenues.

The following table summarizes the carrying amount at ~~February 29,~~August 31, 2012 and May 31, ~~2011~~2012 of the major classes of assets and liabilities of PDSG classified as discontinued operations:

February 29, 2012 May 31, 2011
(Unaudited)
Current assets:
Accounts receivable $ - $ 187,465
Work-in-process - 30,581
Other current assets 27,955 39,975
$ 27,955 $ 258,021

Long-lived assets:
Property and equipment, net $ - $ 8,146
Other 47,623 80,768
$ 47,623 $ 88,914

Current liabilities:
Accounts payable and accrued liabilities $ 231,379 $ 165,322
Deferred revenue - 50,502
$ 231,379 $ 215,824

Non-current liabilities:
Other $ - $ 3,240

On March 27, 2012, we executed an interim agreement with the potential purchaser of the assets of PDSG. The interim agreement requires the purchaser to fund the operations of PDSG including the lease renewal beginning with the month of April 2012 and continuing until the transaction is closed or until three full days after advising us that the transaction will not go forward in order to hold open the proposed sale transaction while the terms of the purchase agreement are being finalized. We expect the sale transaction to close on or around April 30, 2012 and no later than May 11, 2012.

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

	August 31, 2012		May 31, 2012
Current assets:
Other current assets	$	2,017	$	7,273
	$	2,017	$	7,273

Long-lived assets:
Other	$	42,000	$	42,000
	$	42,000	$	42,000

Liquidity and Management’s Plans

Cash shortfalls currently experienced by Phoenix Digital Solutions, LLC (“PDS”) will have an adverse effect on our liquidity. ~~Although we presently do not have any contractual commitments to fund any cash requirements (see Note 3), in December 2011, March 2012 and April~~During fiscal 2012 we contributed ~~$200,000, $150,000 and $150,000, respectively,~~$650,000 in additional capital to PDS, in order to fund a portion of a legal retainer. During the three months ended August 31, 2012 we and TPL each contributed $586,750 to fund the remaining portions of the legal retainer ~~discussed below. TPL satisfied its December 2011 capital contribution via an in-kind contribution by forfeiting amounts otherwise due it from PDS,~~ and ~~contributed cash to satisfy~~ the ~~March 2012 and April 2012 capital funding.~~operations of PDS. We ~~may determine~~have determined that it is in the best interests of the MMP licensing program that we provide our 50% share of capital ~~to provide~~ for ~~legal retainer payments in~~ the ~~event~~operating expenses of PDS as license revenues received by PDS are insufficient to meet these needs.

Our current liquid cash resources as of ~~February 29,~~August 31, 2012, are expected to provide the funds necessary to support our operations through at least the next twelve months. The cash flows from our interest in PDS represent our only significant source of cash generation. In the event of a continued decrease or interruption in MMP Portfolio licensing we will incur a significant reduction to our cash position. It is highly unlikely that we would be able to obtain any additional sources of financing to supplement our cash and short-term investment position of ~~$8,527,188~~$6,536,004 at ~~February 29~~August 31, 2012. In December 2011, TPL engaged new litigation counsel on behalf of PDS, and committed PDS to paying an initial retainer in the amount of $2,400,000, payable in monthly installments from December 2011 through August 2012. The $200,000, $150,000 and $150,000 that we contributed to PDS referred to above, was used to pay the first, half of the fourth and half of the fifth, installments of such retainer. The remaining balance of the retainer will either be funded by PDS from licensing revenues or, in the event that PDS does not have the funds to pay one or more installments of the retainer, we expect that we and TPL will contribute additional capital to PDS to fund such installments. The newly retained counsel will continue the Northern California cases to trial after the claims construction hearing.

While we do not have any contractual commitments and do not presently intend to fund any cash requirements of TPL and/or PDS other than the aforementioned legal retainer payments, given PDS’s current financial condition and/or the need to ensure TPL’s (and Alliacense’s) on-going efforts on behalf of PDS, we may determine, based on multiple factors including recommendations from patent litigation counsel, that providing additional funding to either PDS and/or TPL is in our and our stockholders’ best interests in order to support the continued licensing of the MMP Portfolio. Any additional funding provided to TPL by PDS would be in exchange for additional services and/or concessions to existing contracts.

In the event that we provide funding to PDS that is not reciprocated by TPL, which could result in our having a larger ownership percentage in PDS, we may determine that we have controlling financial interest in PDS, in which case, we would be required to consolidate PDS in our consolidated financial statements. If we determine that it is appropriate to consolidate PDS, we would measure the assets, liabilities and noncontrolling interests of PDS at their fair values at the date that we have the controlling financial interest.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Investments in Marketable Securities

We determine the appropriate classification of our investments at the time of purchase and reevaluate such designation at each balance sheet date. Our investments in marketable securities have been classified and accounted for as available-for-sale based on management’s investment intentions relating to these securities. Available-for-sale marketable securities are stated at fair market value. Unrealized gains and losses, net of deferred taxes, are recorded as a component of other comprehensive income (loss). We follow the authoritative guidance to assess whether our investments with unrealized loss positions are other than temporarily impaired. Realized gains and losses and declines in fair value judged to be other than temporary are determined based on the specific identification method and are reported in other income (expense), net in the condensed consolidated statements of operations.

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Investment in Affiliated Company

We review our investment in PDS to determine whether events or changes in circumstances indicate that the 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 PDS. If the decline in value is deemed to be other than temporary, we would recognize an impairment loss.

We have a 50% interest in PDS (see Note 3). As of the date of this filing, PDS is a variable interest entity (“VIE”) of which we are not the primary beneficiary and therefore we do not consolidate PDS’ financial statements with our own as we cannot direct the licensing activity of TPL on behalf of PDS.

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 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 which is presented in the condensed consolidated statements of operations in the caption “Equity in loss of affiliated company” and also is adjusted by contributions to and distributions from PDS.

~~During the nine months ended February 29, 2012, our share of loss in~~

PDS exceeds our investment in PDS by $1,543,237. We presently do not have a contractual obligation to fund any cash requirements of PDS (see Note 3) and accordingly we have not recorded the excess loss on our consolidated financial statements, which is a change in our policy of accounting for PDS. We will not record our excess loss in PDS unless we guarantee the obligations of PDS or are otherwise committed to provide further financial support for PDS. Under the equity method of accounting, we only recognize losses from PDS up to our carrying amount of the investment and advances. Once the investment balance is reduced to $0, we discontinue recognizing losses until such time that our share of future net income reported by PDS equals our share of net losses not recognized during the period the equity method was suspended.

~~Comprehensive Income (Loss)~~

~~Comprehensive income (loss) includes unrealized gains and losses which are excluded from the condensed consolidated statements of operations.~~

~~Revenue Recognition~~

~~Revenue~~recognizes revenue from technology license agreements ~~is recognized~~ at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), obligations under the license agreement are satisfied, and the ~~customer~~realization of revenue is ~~provided with~~assured which is generally upon the ~~licensed technology, if applicable.~~

~~PDSG sold software and services to end users primarily through relationships with systems integrators and prime contractors. PDSG recognized revenue~~ in accordance with authoritative guidance for the software industry. PDSG’s revenue was derived primarily from the following sources: (i) software licensing, (ii) related professional services, and (iii) post contract customer support (“PCS”) agreements. PCS agreements typically include software updates, on a when and if available basis, telephone and Internet access to technical support personnel. Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the termreceipt of the ~~support period.~~license proceeds. PDS may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones are met.

As of August 31, 2012 and May 31, 2012, our share of loss in PDS exceeds our investment in PDS by $711,142 and $740,824, respectively. Such amounts have been recorded as “Cumulative losses in excess of investment in affiliated company” on our condensed consolidated balance sheets at August 31, 2012 and May 31, 2012, due to our and TPL’s intent to fund the working capital requirements of PDS.

At August 31, 2012 and May 31, 2012, our investment in PDS is presented as a liability pursuant to accounting principles generally accepted in the U.S. In the event our investment in PDS was to reflect an asset balance, we would review our investment in an affiliated company to determine whether events or changes in circumstances indicate that an asset carrying amount may not be recoverable. The primary factors we would 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

PDS recognizes revenue from technology license agreements at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), obligations under the license agreement are satisfied, and the realization of revenue is assured which is generally upon the receipt of the license proceeds.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Revenue Recognition (continued)

PDS may at times enter into license agreements whereby contingent revenues are recognized revenue based on progress towards contract completion measured by actual hours incurred in relation to the estimate of total expected hours. PDSG measured these revenues by applying the contract-specific estimated percentage of completion to the total contract amount for software and professional services. PDSG routinely updated the estimates of future hours for agreements in process and reported any cumulative effects of such adjustments in current operations. PDSG immediately recognized any loss expected on these contracts when it is projected that loss was probable.

~~We allocated PDSG’s revenues to all deliverables based on their relative selling price using a specific hierarchy. The hierarchy was~~ as ~~follows: vendor-specific objective evidence (“VSOE”), third-party evidence of selling price (“TPE”)~~one or best estimate of selling price (“BESP”). When a sale involved multiple elements, PDSG allocated the entire fee from the arrangement to each respective element based on VSOE of fair value and recognized ~~revenue when each element’s revenue recognition criteria were~~more contractual milestones are met. VSOE of fair value for each element was established based on the price charged when the same element was sold separately. PDSG had established VSOE for its CDX software licenses and PCS based on historical stand-alone sales to third parties or from the stated renewal rates contained in the customer contracts. PCS was recognized on a straight-line basis over the support period.

PDSG had not yet demonstrated VSOE for the professional services that were rendered in conjunction with its software license sales. In accordance with the hierarchy we would attempt to establish the selling price of professional services using TPE. PDSG’s product contains significant differentiation such that the comparable pricing of products with similar functionality could not be obtained. PDSG was typically not able to obtain TPE for professional services.

When we were unable to establish selling prices using VSOE or TPE, we used BESP. The objective of BESP is to determine the price at which PDSG would transact a sale if professional services were sold on a stand-alone basis. BESP is generally used for offerings that are not typically sold on a stand-alone basis or for highly customized offerings which is the case with PDSG’s professional services deliverable.

~~Research and Development~~

~~Research and development costs were expensed as incurred and primarily included payroll and related benefit costs and contractor fees.~~

Net Loss Per Share

Basic net loss per share for continuing and discontinued operations includes no dilution and is computed by dividing ~~net~~ loss available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share for continuing and discontinued operations reflect the potential dilution of securities that could share in the earnings of an entity.

~~For the three~~

At August 31, 2012 and ~~nine months ended February 29, 2012~~2011 potential common shares of ~~2,450,000~~1,575,000 and 3,010,000, respectively, related to our outstanding options were not included in the calculation of diluted ~~income~~loss per share for continuing and discontinued operations as we ~~had no income. For~~recorded a loss. Had we reported net income for the three ~~and nine~~ months ended ~~February 28,~~August 31, 2012 and 2011, ~~potential common~~an additional 650,000 and 0, respectively, shares of ~~5,274,502 related to our outstanding warrants and options were not~~common stock would have been included in the calculation of diluted income per share ~~as we had no income. Had we reported net income~~ for ~~the three~~continuing and ~~nine months ended February 29, 2012 no shares of~~ ~~common stock would have been included in the number of shares used to calculate diluted earnings per share.~~

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Net Loss Per Share (continued)~~

Had we reported net income for the three and nine months ended February 28, 2011, an additional 0 and 755,000 shares of common stock, respectively, would have been included in the number of shares used to calculate diluted earnings per share.

discontinued operations.

In connection with our acquisition of Crossflo, which is now a part of PDSG, we issued escrow shares that are contingent upon certain representations and warranties made by Crossflo at the time of the merger agreement (see Note 6). We exclude these escrow shares from the basic loss per share calculations and include the escrowed shares in the diluted ~~earnings~~loss per share calculations.

~~Share-Based Compensation~~

Share-based compensation expense recognized during the three and nine months ended February 29, 2012 and February 28, 2011 is based on the grant date fair value of the portion of share-based payment awards ultimately expected to vest during the year. As share-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. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeiture rates are based on historical forfeiture experience and estimated future employee forfeitures.

Income Taxes

We follow authoritative guidance in accounting for uncertainties in income taxes. This authoritative guidance prescribes a recognition threshold and measurement requirement for the financial statement recognition of a tax position that has been taken or is expected to be taken on a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Under this guidance we may only recognize tax positions that meet a “more likely than not” threshold.

We follow authoritative guidance to evaluate whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. In making such judgments, significant weight is given to evidence that can be objectively verified. We are assessing our deferred tax assets under more likely than not scenarios in which they may be realized through future income.

~~During fiscal 2011, we~~

We have determined that isit was not more likely than not that all of our deferred tax assets will be realized in the future due to our continuing pre-tax and taxable losses. As a result of this determination we have placed a full valuation allowance against our deferred tax assets.

We follow authoritative guidance to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, jurisdictions with a projected loss for the year or a year-to-date loss where no tax benefit can be recognized are excluded from the estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings or losses versus annual projections.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

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 any 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.

2. Cash, Cash Equivalents, Restricted Cash and Marketable Securities

We consider all highly liquid investments with original maturities of three months or less to be cash equivalents.

Restricted cash and cash equivalents at ~~February 29,~~August 31, 2012 and May 31, ~~2011~~2012 consist of deposits in a savings account required to be held as collateral for our corporate credit card.

At ~~February 29,~~August 31, 2012 and May 31, ~~2011,~~2012, our current portion of marketable securities in the amount of ~~$2,061,481~~$2,111,070 and ~~$2,207,009,~~$2,907,106, respectively, consists of the par value plus accrued interest of our time deposits. At ~~February 29,~~August 31, 2012 and May 31, 2012, our non-current portion of marketable securities in the amount of ~~$245,733~~$194,155 and $229,045, respectively, consists of the par value plus accrued interest of time deposits. These marketable securities are classified as available for sale and are reported at fair market value.

We follow authoritative ~~guidance to~~guidanceto account for our marketable securities as available for sale. Under this authoritative guidance we are required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. We determine fair value based on quoted prices when available or through the use of alternative approaches, such as discounting the expected cash flows using market interest rates commensurate with the credit quality and duration of the investment or valuations by third party professionals. The three levels of inputs that we may use to measure fair value are:

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e. supported by little or no market activity).

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Cash, Cash Equivalents, Restricted Cash and Marketable Securities (continued)

The following tables detail the fair value measurements within the fair value hierarchy of our cash, cash equivalents and investments in marketable securities:

Fair Value Measurements at February 29, 2012 Using

Fair Value at
February 29,
2012

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Cash and cash equivalents:
Cash $ 294,940 $ 294,940 $ - $ -
Money market funds 4,942,598 4,942,598 - -
Certificates of deposit 1,228,169 1,228,169
Restricted cash 20,887 20,887
Marketable securities:
Short-term:
Certificates of deposit 2,061,481 2,061,481 - -
Long-term:
Certificates of deposit 245,733 245,733
Total $ 8,793,808 $ 8,793,808 $ - $ -

Fair Value Measurements at May 31, 2011 Using

Fair Value at
May 31,
2011

Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)

Cash and cash equivalents:
Cash $ 128,655 $ 128,655 $ - $ -
Money market funds 8,080,005 8,080,005 - -
Certificates of deposit 245,005 245,005 - -
Restricted cash 20,809 20,809 - -
Marketable securities:
Certificates of deposit 2,207,009 2,207,009 - -
Total $ 10,681,483 $ 10,681,483 $ - $ -

~~The following table summarizes the activity for the period by investment type for the nine months ended February 28, 2011:~~

Fair Value Measurements Using Significant
Unobservable Inputs
(Level 3)

Description

Auction Rate
Securities

Beginning balance, June 1, 2010 $ 5,133,835
Total realized/unrealized recovery (losses):
Included in earnings (648,740 )
Included in comprehensive income (loss) 416,165
Settlements (350,000 )
Settlements (4,551,260 )
Ending balance, February 28, 2011 $ -

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Cash, Cash Equivalents, Restricted Cash and Marketable Securities (continued)~~

All realized gains or losses related to financial instruments whose fair value is determined based on Level 3 inputs are included in other income. All unrealized gains or losses related to financial instruments whose fair value is determined based on Level 3 inputs are included in other comprehensive income (loss).

During September 2010, we reached a confidential settlement agreement with Deutsche Bank. Under terms of the agreement, we transferred approximately $5.2 million in illiquid auction rate securities instruments to Deutsche Bank for a substantial portion of the face value of the securities, and if the instruments are redeemed by a certain date then we will receive the full face amount of the instruments. On October 4, 2010, we received settlement proceeds from Deutsche Bank of $4,551,260 plus $6,330 of interest income.

			Fair Value Measurements at August 31, 2012 Using
	Fair Value at August 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents:
Cash	$	301,059	$	301,059	$	–	$	–
Money market funds		1,916,102		1,916,102		–		–
Certificates of deposit		2,207,773		2,207,773		–		–
Restricted cash		20,940		20,940		–		–
Marketable securities:
Short-term:
Certificates of deposit		2,111,070		2,111,070		–		–
Long-term:
Certificates of deposit		194,155		194,155		–		–
Total	$	6,751,099	$	6,751,099	$	–	$	–

Fair Value Measurements at May 31, 2012 Using

Quoted Prices

Significant

in Active

Other

Significant

Fair Value at

Markets for

Observable

Unobservable

May 31,

Identical Assets

Inputs

2012

(Level 1)

(Level 2)

(Level 3)

Cash and cash equivalents:

Cash

77,745

–

Money market funds

2,559,456

–

Certificates of deposit

2,061,973

–

Restricted cash

20,913

–

Marketable securities:

Short-term:

Certificates of deposit

2,907,106

–

Long-term:

Certificates of deposit

229,045

–

Total

7,856,238

–

Beginning in fiscal 2011, we purchased certificates of deposit with varying maturity dates greater than three months. The following table summarizes the maturities, gross unrealized gains or losses and fair value of the certificates of deposit as of ~~February 29,~~August 31, 2012:

	August 31, 2012
	Cost		Gross Unrealized Gains/(Losses)		Fair Value
Maturity
Due in three months or less	$	2,207,773	$	–	$	2,207,773
Due in one year or less	$	2,111,070	$	–	$	2,111,070
Due in one year or more	$	194,155	$	–	$	194,155

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

February 29, 2012
Cost Gross Unrealized Gains/(Losses)
Fair
Value

Maturity
Due in three months or less $ 1,228,169 $ - $ 1,228,169
Due in one year or less $ 2,061,481 $ - $ 2,061,481
Due in one year or more $ 245,733 $ - $ 245,733

Cash, Cash Equivalents, Restricted Cash and Marketable Securities (continued)

The following table summarizes the maturities, gross unrealized gains or losses and fair value of the certificates of deposit as of May 31, ~~2011:~~

May 31, 2011
Cost Gross Unrealized Gains/(Losses)
Fair
Value

Maturity
Due in three months or less $ 245,005 $ - $ 245,005
Due in one year or less $ 2,207,009 $ - $ 2,207,009

2012:

	May 31, 2012
	Cost		Gross Unrealized Gains/(Losses)		Fair Value
Maturity
Due in three months or less	$	2,061,973	$	–	$	2,061,973
Due in one year or less	$	2,907,106	$	–	$	2,907,106
Due in one year or more	$	229,045	$	–	$	229,045

3. Investment in Affiliated Company

On June 7, 2005, we entered into a Master Agreement (the “Master Agreement”) with TPL, and Charles H. Moore (“Moore”), the co-inventor of the technology which is the subject of the MMP Portfolio of microprocessor patents, pursuant to which the parties resolved all legal disputes between them. Pursuant to the Master Agreement, we and TPL entered into the Limited Liability Company Operating Agreement of PDS (the “LLC Agreement”) into which we and Moore contributed our rights to certain of our technologies.

We and TPL each own 50% of the membership interests of PDS, 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. There has not been a third management committee member since May 2010, nor are there any current attempts to seek a replacement member. Pursuant to the

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Investment in Affiliated Company (continued)~~

LLC Agreement, we and TPL agreed to establish a working capital fund for PDS 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 PDS in order to maintain working capital of not more than $8,000,000. If the management committee determines that additional capital is required, neither we nor TPL are required to contribute more than $2,000,000 in any fiscal year. Since there is currently not a third member of the management committee, working capital contributions made to PDS require the approval of both management committee members. ~~On December 14, 2011 we contributed $200,000 and TPL forfeited rights to $200,000 of special litigation support payments due it pursuant to~~During the October 6, 2011 settlement agreement for an in-kind capital contribution of $200,000 in order to fund a portion of a retainer due to newly engaged counsel (see Note 1, Liquidity and Management’s Plans). On March 23, 2012 and April 13,three months ended August 31, 2012 we and TPL each contributed ~~$150,000 and $150,000 to PDS~~$586,750 to fund ~~a portion~~the remaining portions of athe legal retainer ~~due to such counsel.~~and the operations of PDS. Distributable cash and allocation of profits and losses will be allocated to the members in the priority defined in the LLC Agreement.

Pursuant to our June 7, 2005 agreement with PDS ~~has~~and TPL to license the MMP Portfolio (“Commercialization Agreement”), PDS had 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 PDS) for supporting efforts to secure licensing agreements by TPL on behalf of PDS. During the ~~nine~~three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011, PDS expensed ~~$1,500,000~~$185,000 and ~~$2,000,000,~~$500,000, respectively, pursuant to this commitment. ~~This expense is~~These expenses are recorded in the accompanying PDS statements of operations presented below.

PDS reimburses TPL for payment of all legal and third-party expert fees and other related third-party costs and other ~~expenses.~~expenses, although the majority of third-party costs are paid directly by PDS. During the ~~nine~~three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011, PDS expensed ~~$5,412,451~~$117,877 and ~~$4,780,936,~~$1,635,516, respectively, pursuant to the agreement. As a result of the fee arrangement with current litigation counsel we expect the legal costs of

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Investment in Affiliated Company(continued)

PDS to decrease substantially from fiscal year end 2012 levels. These expenses are recorded in the accompanying PDS statements of operations presented below.

On ~~April 12, 2010,~~July 11, 2012, we ~~filed~~entered into a Licensing Program Services Agreement (the “Program Agreement”) with PDS, TPL, and Alliacense Limited, LLC (“Alliacense”, an ~~action~~affiliate of TPL), and an Agreement (the “TPL Agreement”) with TPL. Pursuant to the Program Agreement, PDS engaged Alliacense to negotiate MMP portfolio licenses and to pursue claims against violators of the MMP portfolio on behalf of PDS, TPL, and the Company. The Program Agreement continues through the useful life of the MMP portfolio patents. Pursuant to the TPL Agreement, we and TPL agreed to certain allocations of obligations in connection with the engagement of Alliacense.

On July 17, 2012, we entered into an Agreement with PDS and TPL whereby we agreed to certain additional allocations of obligations relating to the Program Agreement.

Pursuant to the Program Agreement, PDS has committed to advance Alliacense a quarterly amount of $500,000 for supporting efforts to secure licensing agreements on behalf of PDS. These advances replace the quarterly amounts previously paid to TPL pursuant to the Commercialization Agreement. During the three months ended August 31, 2012 PDS expensed $315,000 pursuant to this commitment. This expense is recorded in the ~~San Diego Superior Court. On January 19, 2011, pursuant~~accompanying PDS statement of operations for the three months ended August 31, 2012 presented below. Certain terms of the Program Agreement and the TPL Agreement if enacted could provide for some reductions and/or limitations to ~~our settlement agreement with TPL,~~the amount of the quarterly advances provided to Alliacense.

Pursuant to the Program Agreement PDS ~~agreed~~has committed to pay ~~TPL $67,000 per month from September 1, 2010 to April 30, 2011~~Alliacense fees relating to ~~TPL’s~~Alliacense’s special work and effort regarding internal costs related to MMP maintenance and litigation support including support for the complaints filed on behalf of TPL, PDS and ~~patent re-examinations.~~

~~On April 22, 2010, we filed an action against TPL in~~us with the ~~Superior Court of Santa Clara County. We and TPL had been in negotiations to restructure our relationship. On October 6, 2011, we announced that we had settled this action. Pursuant~~U.S. International Trade Commission (“ITC”) on July 24, 2012. During the three months ended August 31, 2012 PDS expensed $943,103 pursuant to this ~~executed settlement agreement with TPL, PDS agreed to pay TPL~~ ~~$172,000 for June 2011, and $86,000 per month thereafter until 60 days after the Markman hearing~~ relating to TPL’s special work and effort regarding internal costs related to litigation support. Accordingly, PDS has recognized $860,000 through February 29, 2012 pursuant to the executed settlement agreement and this expense iscommitment. These expenses are recorded in the accompanying PDS ~~statements~~statement of operations for the three months ended August 31, 2012 presented below.

~~We are~~

Based on our analysis of current authoritative accounting guidance with respect to our investment in PDS, we continue to account for our investment in PDS under the equity method of accounting, and accordingly have recorded our ~~reportable~~ share of PDS’ net loss during the ~~nine~~three months ended ~~February 29,~~August 31, 2012 and 2011 of ~~$632,551~~$557,068 and $300,283, respectively, as a decrease ~~in our investment. We have recorded our share of PDS’ net income during the nine months ended February 28, 2011 of $825,074 as an increase~~ in our investment. We received no cash distributions from PDS during the ~~nine months ended February 29, 2012. Cash distributions received from PDS during the nine months ended February 28, 2011 of $807,806 were recorded as a reduction in our investment. During the~~ three months ended ~~November 30, 2011~~August 31, 2012 and 2011. During the fiscal year ended May 31, 2012 we accounted for an advance of $227,268 ~~previously advanced by us~~ for legal services, which are reimbursable by PDS as equity in loss of PDS, under the equity method of accounting given that this amount ~~remains~~remained unreimbursed at ~~November 30, 2011.~~May 31, 2012. During the ~~three months~~fiscal year ended ~~February 29,~~May 31, 2012 we advanced PDS ~~$5,000~~$10,000 for legal services and received $100,000 in payment on previous advances.

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Investment in Affiliated Company (continued)~~

~~Accordingly, our investment in,~~

At August 31, 2012 and ~~advances to PDS, are $0 and $132,268, respectively. During the nine months ended February 29,~~May 31, 2012, our ~~entire~~ share of ~~PDS’ net~~ loss ~~is $2,175,788 and at May 31, 2011~~in PDS exceeds our investment in PDS ~~was $300,283. For~~by $711,142 and $740,824, respectively. Such amounts have been recorded as “Cumulative losses in excess of investment in affiliated company” on our condensed consolidated balance sheets at August 31, 2012 and May 31, 2012, due to our and TPL’s intent to fund the ~~nine months ended February 29, 2012 we~~working capital of PDS.

We have recorded our share of PDS’ net loss to the extent of our basis in the investment. The remaining loss will be carried forward until such time as it can be recovered. We will not record our excess loss in PDS unless we guarantee the obligations of PDS or are otherwise committed to provide further financial support for PDS. Accordingly, our investment in PDS is $0 on our February 29, 2012 balance sheet. We have recorded our share of PDS’ net income for the ~~nine~~three months ended ~~February 28,~~August 31, 2012 and 2011 as “Equity in ~~earnings~~loss of affiliated company” in the accompanying condensed consolidated statements of operations.

During the three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011, TPL entered into licensing agreements with third parties, pursuant to which PDS received aggregate proceeds of ~~$2,452,000~~$450,000 and ~~$7,441,000,~~$512,300, respectively.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

During the nine months ended February 29, 2012 and February 28, 2011, TPL entered into licensing agreements with third parties, pursuant to which PDS received aggregate proceeds of $3,009,300 and $8,850,000, respectively.

Investment in Affiliated Company(continued)

At ~~February 29,~~August 31, 2012, PDS had accounts payable balances of approximately ~~$1,902,000~~$1,588,000 and ~~$132,000~~$137,000 to TPL and PTSC, respectively. At May 31, ~~2011,~~2012, PDS had accounts payable and accrued expense balances of approximately ~~$1,754,000~~$1,948,000 and ~~$129,000~~$137,000 to TPL and PTSC, respectively.

Variable Interest Entity Disclosures

~~On April 9,~~

At October 10, 2012, PDS’ cash and cash equivalents balance was $45,904. Management has concluded that our equity investment at risk in PDS is insufficient to finance its activities as the volume of license revenue has not supported litigation costs independent of additional working capital funding.

~~We have not provided material financial support to PDS other than required capital contributions, the $200,000 contribution~~$40,723.

In July and August 2012, we ~~agreed to make in December 2011~~ and ~~the March 2012~~TPL each contributed $50,000 and April 2012 contributions of $150,000 and $150,000 as described above, and we are not contractually obligated to provide financial support to PDS other than to fund the working capital account at the discretion of PDS’ management committee.$536,750, respectively. In the event we, and not TPL, provide working capital funding to PDS we would consolidate PDS’ financial statements with our own as our ownership in PDS would be greater than 50%.

Our variable interest in PDS consists of 50% of PDS’ Members ~~Equity (Deficit) in addition to~~Deficit of ($848,410) as well as the accounts payable balance due us of $137,268 for a total of ~~$(1,807,773)~~$(985,678) at ~~February 29,~~August 31, 2012. ~~We are unable to quantify our maximum exposure to loss associated with this VIE. We do not have any contractual commitments and do not presently~~At August 31, 2012, we intend to continue to fund ~~any cash requirements of~~ PDS ~~however we may determine that it is in the best interests of the MMP licensing program that we provide~~consistent with our 50% ~~share of capital to provide for legal retainer payments in the event license revenues received by PDS are insufficient to meet these needs.~~

joint venture ownership percentage.

PDS’ balance sheets at ~~February 29,~~August 31, 2012 and May 31, ~~2011~~2012 and statements of operations for the three ~~and nine~~ months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011 are as follows:

Balance Sheets

ASSETS:

	August 31, 2012		May 31, 2012
	(Unaudited)		(Audited)
Cash and cash equivalents	$	40,912	$	1,003,489
Prepaid expenses		31,736		–
Total assets	$	72,648	$	1,003,489

LIABILITIES AND MEMBERS’ DEFICIT:

	August 31, 2012			May 31, 2012
	(Unaudited)			(Audited)
Related party payables and accrued expenses	$	1,769,468		$	2,747,883
LLC tax payable		–			11,790
Members’ deficit		(1,696,820	)		(1,756,184	)
Total liabilities and members’ deficit	$	72,648		$	1,003,489

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

Investment in Affiliated Company(continued)

~~Balance Sheets~~

~~ASSETS:~~

February 29, 2012
(Unaudited)
May 31, 2011
(Audited)

Cash and cash equivalents $ 96,590 $ 1,895,653
Prepaid expenses - 600,000
Total assets $ 96,590 $ 2,495,653

~~LIABILITIES AND MEMBERS’ EQUITY (DEFICIT):~~

February 29, 2012
(Unaudited)

May 31, 2011
(Audited)

Related party payables and accrued expenses $ 3,447,600 $ 1,883,296
LLC tax payable - 11,790
Members’ equity (deficit) (3,351,010 ) 600,567
Total liabilities and members’ equity $ 96,590 $ 2,495,653

Statements of Operations

Three Months Ended Nine Months Ended
February 29, 2012 February 28, 2011 February 29, 2012 February 28, 2011
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenues $ 2,452,000 $ 7,441,000 $ 3,009,300 $ 8,850,000
Operating expenses 2,621,953 4,298,078 7,360,877 7,245,943
Operating loss (169,953 ) 3,142,922 (4,351,577 ) 1,604,057
Reserve for loan loss and uncollectable receivable - 1,413,095 - -
Interest income - 45,808 - 46,090
Net loss $ (169,953 ) $ 4,601,825 $ (4,351,577 ) $ 1,650,147

	Three Months Ended August 31,
	2012			2011
	(Unaudited)			(Unaudited)
Revenues	$	450,000		$	512,300
Operating expenses		1,564,136			2,577,439
Operating loss		(1,114,136	)		(2,065,139	)
Net loss	$	(1,114,136	)	$	(2,065,139	)

4. Income Taxes

~~During the third quarter of fiscal 2011, we~~

We have determined that it was not more likely than not that all of our deferred tax assets will be realized in the future due to our continuing pre-tax and taxable losses. As a result of this determination we have placed a full valuation allowance against our deferred tax assets. There have been no changes to our determination during the current fiscal year.

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

5. Stockholders’ Equity

Share Repurchases

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 ~~1,578,616~~160,709 and ~~1,028,289~~631,639 shares of our common stock at an aggregate cost of ~~$101,777~~$14,256 and ~~$113,401~~$47,556 during the ~~nine~~three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011, respectively.

Equity Transactions

The following table summarizes equity transactions during the ~~nine~~three months ended ~~February 29,~~August 31, 2012:

Common Stock
Shares Amounts Additional Paid-in Capital Accumulated Deficit Treasury Stock

Balance June 1, 2011 407,526,799 $ 4,381 $ 77,314,301 $ (51,077,059 ) $ (14,223,037 )
Share-based compensation - - 14,968 - -
Repurchase of common stock for treasury (1,578,616 ) - - - (101,777 )
Net loss - - - (3,314,575 ) -
Balance February 29, 2012 405,948,183 $ 4,381 $ 77,329,269 $ (54,391,634 ) $ (14,324,814 )

	Common Stock
	Shares			Amounts		Additional Paid-in Capital		Accumulated Deficit			Treasury Stock

Balance June 1, 2012		405,735,958		$	4,381	$	77,330,935	$	(55,897,464	)	$	(14,347,254	)
Repurchase of common stock for treasury		(160,709	)		–		–		–			(14,256	)
Net loss		–			–		–		(892,412	)		–
Balance August 31, 2012		405,575,249		$	4,381	$	77,330,935	$	(56,789,876	)	$	(14,361,510	)

Stock ~~Options~~ ~~and Warrant~~Option Activity

As of ~~February 29,~~August 31, 2012, we had ~~125,000 options outstanding pursuant to our 2001 Stock Option Plan exercisable at $0.47 per share expiring in 2012; and 2,325,000~~1,575,000 fully vested options outstanding pursuant to our 2006 Stock Option Plan exercisable at a range of ~~$0.09~~$0.10 to $0.45 per share expiring through 2015. ~~Some of the options outstanding under the 2006 Stock Option Plan are on a vesting schedule and are not presently exercisable.~~

During the ~~nine~~three months ended ~~February 29, 2012,~~August 31, 2011, we recorded ~~$14,968~~$5,009 of share-based compensation expense related to vesting of stock options granted to PDSG employees. ~~During the nine months ended February 28, 2011, we recorded $71,862 of share-based compensation expense related to vesting of stock options, including $15,483 related to PDSG.~~

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Stockholders’ Equity (continued)

Share-based Compensation

Summary of Assumptions and Activity

The fair value of share-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 ~~nine~~three months ended ~~February 28, 2011~~August 31, 2012 is based on the historical volatilities of our common stock. These factors could change in the future, affecting the determination of share-based compensation expense in future periods.

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Stockholders’ Equity (continued)~~

	Three Months Ended ~~February 29,~~ August 31, 2012 (Unaudited)		~~Nine Months~~ ~~Ended~~ ~~February 29, 2012 (Unaudited)~~			Three Months Ended ~~February 28,~~ August 31, 2011 (Unaudited)		~~Nine Months~~ ~~Ended~~ ~~February 28, 2011~~ ~~(Unaudited)~~

Expected term	*	*years		*		5years	~~years~~
Expected volatility	*	*%		*	%	~~106~~	%
Risk-free interest rate	*	*%		*	%	~~2.17~~	%

* No stock options were granted during these periods.

A summary of option activity as of ~~February 29,~~August 31, 2012 and changes during the ~~nine~~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, 2012		2,360,838		$	0.26
Options granted		–		$	–
Options exercised		–		$	–
Options forfeited		(785,838	)	$	0.24
Options outstanding at August 31, 2012		1,575,000		$	0.27		1.32	$	37,750
Options vested and expected to vest at August 31, 2012		1,575,000		$	0.27		1.32	$	37,750
Options exercisable at August 31, 2012		1,575,000		$	0.27		1.32	$	37,750

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Shares
Weighted Average
Exercise Price
Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value
Options outstanding at June 1, 2011 3,010,000 $ 0.33
Options granted - $ -
Options exercised - $ -
Options forfeited (560,000 ) $ 0.64
Options outstanding at February 29, 2012 2,450,000 $ 0.26 1.77 $ 53,500
Options vested and expected to vest at February 29, 2012 2,399,118 $ 0.26 1.77 $ 53,500
Options exercisable at February 29, 2012 2,348,235 $ 0.26 1.77 $ 46,800

~~The weighted average grant date fair value of options granted during the nine months ended February 28, 2011 was $0.08.~~

Stockholders’ Equity (continued)

There were no options granted or exercised during the ~~nine~~three months ended ~~February 29,~~August 31, 2012 or ~~February 28,~~ 2011.

The aggregate intrinsic value represents the differences in market price at the close of the quarter ($~~0.16~~0.15 per share on ~~February 29,~~August 31, 2012) and the exercise price of outstanding, in-the-money options (those options with exercise prices below ~~$0.16)~~$0.15) on ~~February 29,~~August 31, 2012.

As of February 29, 2012, there was $8,555 of total unrecognized compensation cost, net of forfeitures, related to employee stock option compensation arrangements. That cost is expected to be recognized on a straight-line basis over the next 13 months.

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Stockholders’ Equity (continued)~~

The following table summarizes ~~employee and director share-based compensation expense for Patriot and~~ employee share-based compensation for PDSG for the three ~~and nine~~ months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011, which was recorded in loss from discontinued operations, net as follows:

Three Months
Ended
February 29, 2012

Nine Months
Ended
February29, 2012

Three Months
Ended
February28, 2011

Nine Months
Ended
February 28, 2011

Research and development - PDSG $ 483 $ 1,450 $ 483 $ 1,552
Selling, general and administrative expense - PDSG 4,472 13,518 4,521 13,931
Selling, general and administrative expense - Patriot - - 872 56,379
Total $ 4,955 $ 14,968 $ 5,876 $ 71,862

	Three Months Ended		Three Months Ended
	August 31, 2012		August 31, 2011
Research and development – PDSG	$	–	$	484
Selling, general and administrative expense - PDSG		–		4,525
Total	$	–	$	5,009

6. Commitments and Contingencies

Litigation

Patent Litigation

On February 8, 2008, we, TPL and Alliacense Ltd. were named as defendants in separate lawsuits filed in the United States District Court for the Northern District of California by HTC Corporation, and Acer, Inc., and affiliated entities of each of them.

TheAcercase seeks declaratory relief that its products do not infringe enforceable claims of the '336, ‘749, '148, ~~patents~~ and ~~US 5,530,890 (the “890 patent”).~~'890 patents. TheHTCcase similarly seeks declaratory relief that its products do not infringe enforceable claims of those patents. We allege counterclaims for patent infringement of the '336, '749, '148 and '890 patents against Acer and HTC.

A claims construction hearing was conducted on January 27, 2012. The issues are under submission and we do not know when the Court will issue its ruling. Acer has asked the Court to consider a Motion for Summary Judgments, but a briefing schedule likely will not be established until after the Markman ruling.

On December 1, 2008, we, TPL and Alliacense, Ltd. were named as defendants in a lawsuit filed in the United States District Court for the Northern District of California by Barco, N.V. TheBarco case seeks declaratory relief that its products do not infringe enforceable claims of the '749, '890 and ~~'890~~'336 patents. We allege counterclaims for patent infringement of ~~our~~the '749, '890 and '336 patents.

A ~~claims~~claim construction hearing ~~in this matter~~ was conducted on January 27, 2012 in all three matters. The Court issued a partial ruling on June 12, 2012, upholding our construction of most claims terms at issue. The ruling requested further briefing from the parties on several terms. Supplemental claims construction briefing and discovery is underway. A claims construction hearing on the remaining terms in issue is set for November 30, 2012. Trial is set for June 24, 2013.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Commitments and Contingencies (continued)

On July 24, 2012 complaints were filed on behalf of us, TPL, and PDS with the ITC alleging infringement of the ‘336 patent, and in U.S. District Court for the Northern District of California alleging infringement of the ‘749, ‘890 and ‘336 patents. The ITC complaint names Acer Inc., Amazon.com Inc., Barnes & Noble Inc., Garmin Ltd., HTC Corporation, Huawei Technologies Co. Ltd., Kyocera Corporation, LG Electronics, Nintendo Co. Ltd., Novatel Wireless Inc., Samsung Electronics Co. Ltd., Sierra Wireless Inc., and ZTE Corporation. The new district court complaints name all of those parties except Acer and HTC, which are already in litigation with us and TPL regarding infringement of the '749, '890 and '336 patents in the Northern District of California. The new actions seek: (1) an ITC Exclusion Order prohibiting the importation of unlicensed products; (2) damages for past infringement; and, (3) the pursuit of injunctions in both the U.S. District Court and the ITC barring the sale of infringing products in the United States in the future. Respondents in the ITC action have indicated they intend to move for a stay of the investigation pending resolution of patent ownership and standing issues that are ~~under submission and we~~the subject a of pending lawsuit against TPL. Our counsel is working diligently to oppose this motion. We do not know when or how that Motion may be addressed by the ITC. Assuming the ITC proceedings are not stayed, the District Court ~~will issue its ruling. Barco has asked~~Actions against these new parties are likely to be stayed while the ~~Court to consider a Summary Judgment Motion, but a briefing schedule likely will not be established until after the Markman ruling.~~

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Commitments and Contingencies (continued)~~

ITC actions proceed.

Crossflo ~~Systems, Inc.~~ Litigation

Under the terms of our Agreement and Plan of Merger (the "Merger Agreement") with Crossflo, and certain of its principal officers, an escrow account was established to hold back approximately 10% of the merger consideration payable to the shareholders of Crossflo (the "Escrow Merger Consideration"). See Escrow Shares below. We contend that certain representations and warranties made by Crossflo and certain of its principal officers in the Merger Agreement were false when made, and were false as of the closing of the merger. We submitted a demand to the escrow agent on August 31, 2009 not to release the Escrow Merger Consideration to the Crossflo shareholders and to instead return it to us. A sufficient number of Crossflo shareholders have opposed our demand that the escrow consideration has not been released to either side.

On August 31, 2009, we initiated an arbitration proceeding before the American Arbitration Association against the three Crossflo principal officers who were signatories to the Merger Agreement alleging they provided false representations and warranties in the Merger Agreement and alleging nondisclosure of information about Crossflo during the due diligence process leading up to the merger. Those three principal officers deny our claims and filed counterclaims for monetary damages alleging libel associated with the making of our demands on escrow and related disclosures in our periodic filings, and misrepresentation associated with our purported intent to fund the operations of Crossflo post acquisition.

officers. During March 2012, we reached a confidential settlement with the ~~three principal~~Crossflo officers ~~of Crossflo~~ which is subject to certain conditions. ~~If the conditions are not met, the arbitration will be rescheduled in fall 2012.~~ If the settlement conditions are met, the settlement consideration will have neither a positive nor negative material impact on us.

401(k) Plan

Patriot ~~and PDSG have~~has a retirement ~~plans~~plan that ~~comply~~complies with Section 401(k) of the Internal Revenue Code. All employees are eligible to participate in the ~~plans.~~plan. Patriot matches 100% of elective deferrals subject to a maximum of 4% of the participant’s eligible earnings. Patriot’s participants vest 33% per year over a three year period in their matching contributions. Patriot’s matching contributions during the ~~nine~~three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011 were ~~$13,357~~$3,753 and ~~$7,761,~~$5,257, respectively. ~~PDSG does not match participant voluntary contributions.~~

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 PDSG. In connection with our facility ~~leases,~~lease, we have indemnified our ~~lessors~~lessor for certain claims arising from the use of the ~~facilities.~~facility. 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 condensed consolidated balance sheets.

~~Patriot Scientific Corporation~~

~~Notes to Unaudited Condensed Consolidated Financial Statements~~

~~Commitments and Contingencies (continued)~~

~~Bonuses~~

During fiscal 2011, a retention bonus program was implemented to be paid to individuals who remain with PDSG until February 29, 2012. The projected liability for such bonuses was $90,000. This liability was being accrued ratably over the retention period. In November 2011, the retention bonus program was rescinded and replaced with an incentive bonus program for PDSG employees. Under the terms of the new bonus program the employees are eligible for a bonus if PDSG is acquired and the employees are retained by an acquirer or severance payments in the event PDSG employees are not retained by an acquirer. At February 29, 2012 we have accrued for approximately $68,000 in severance payments and approximately $73,000 in incentive bonus payments due to PDSG employees under the November 2011 plan.

Escrow Shares

On August 31, 2009 we gave notice to the former shareholders of Crossflo and Union Bank of California (the “Escrow Agent”) under Section 2.5 of the Agreement and Plan of Merger between us and Crossflo (the “Agreement”), outlining damages incurred by us in conjunction with the acquisition of Crossflo, and seeking the return of 2,844,630 shares of our common stock held by the Escrow Agent. Subsequently, former shareholders of Crossflo representing a majority of the escrowed shares responded in protest to our claim, delaying the release of the escrowed shares until a formal resolution is reached. In the event we fail to prevail in our claim against the escrowed shares, we may be obligated to deposit into escrow approximately $256,000 of cash consideration due to the decline in our average stock price over the one year escrow period, calculated in accordance with the Section 2.5 of the Agreement. We have evaluated the potential for loss regarding our claim and believe that it is probable that the resolution of this issue will not result in a material obligation to the Company, although there is no assurance of this. Accordingly, we have not recorded a liability for this matter.

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

7. Segment Information

Prior to the quarter ended February 29, 2012, we operated in two segments. PDSG was reflected as a separate reporting unit. ~~With our board~~On April 30, 2012 we sold substantially all of ~~directors authorization to sell~~ the assets of PDSG and we have classified PDSG as discontinued operations (see Note 1). As a result, we now operate in one segment.

8. Subsequent Events

~~On March 23,~~

During the period September 1, 2012 through October 10, 2012, we ~~and TPL each contributed $150,000~~purchased 274,406 shares of our common stock at an aggregate cost of $28,780 pursuant to ~~PDS following a determination by PDS’ management committee that additional funds were required so that PDS could fund an installment of a legal retainer payable to newly engaged IP counsel.~~our stock buyback program.

During March 2012, we reached a confidential settlement with the three principal officers of Crossflo which is subject to certain conditions. If the conditions are not met, the arbitration will be rescheduled in fall 2012. If the settlement conditions are met, the settlement consideration will have neither a positive nor negative material impact on us.

~~During April 2012, we renewed the PDSG facility lease of Suite 100 on a month to month basis at $11,028 per month.~~

On April 13, 2012, we and TPL each contributed $150,000 to PDS following a determination by PDS’ management committee that additional funds were required so that PDS could fund an installment of a legal retainer payable to newly engaged IP counsel.

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

THE FOLLOWING DISCUSSION AND THE REST OF THIS QUARTERLY REPORT ON FORM 10-Q 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, ~~2011.~~

2012.

Overview

In June 2005, we entered into a series of agreements with TPL and others to facilitate the pursuit of unlicensed users of our intellectual property. In October 2011 we settled litigation with TPL that was initiated by us over matters related to the management of the MMP Portfolio. In July 2012 we entered into additional agreements with TPL, PDS and the TPL affiliate Alliacense in furtherance of the management and commercialization of the MMP Portfolio. The July 2012 Agreements (“July 2012 Agreements”) paved the way for an aggressive litigation strategy subsequently initiated on July 24, 2012 whereby Alliacense filed parallel actions with the ITC and in the U.S. District Court against multiple companies alleged to be infringers of the MMP portfolio. We believe that the significant investment in legal effort and costs incurred to date at PDS, in addition to this expanded litigation strategy, is necessary for the protection of our interests in the MMP portfolio and its future success. We intend to continue our joint venture with TPL to pursue license agreements with unlicensed users of our technology. We believe that continuing to work through TPL and its affiliate Alliacense, as compared to pursuing other alternatives, including creating and using our own 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.

~~On October 5, 2009,~~

During fiscal 2011 and through the date of this filing we ~~announced a reorganization of PDSG~~ and our management. On January 25, 2010, we sold the Iameter assets and during August 2010, we sold the Vigilys business line. As a result of our reorganization and PDSG’s continued inability to meet its business plan, we have incurred impairment charges for our intangibles and goodwill in the PDSG segment of our business. On July 28, 2011, PDSG announced new business initiatives including Software as a Service offerings aimed at providing alternative methods to generate new revenues. We continuedTPL each contributed $1,236,750 to fund the ~~day~~working capital of PDS. We expect the contributions to ~~day operating costs~~continue in the future due to the working capital demands of PDSG through March 2012. On March 27, 2012 we entered into an interim agreement with the potential purchaser of PDSG to fund the operations of PDSG until a sale is finalized. Our merger and acquisition activities have ceased since our October 2009 reorganization.

PDS. Cash shortfalls currently experienced by PDS will have an adverse effect on our liquidity. ~~Although~~To date we ~~presently do not~~ have any contractual commitments to fund any cash requirements, in December 2011, March 2012 and April 2012 we contributed $200,000, $150,000 and $150,000, respectively, in additional capital to PDS, in order to fund a portion of a legal retainer. We may determinedetermined that it is in the best interests of the MMP licensing program that we provide our 50% share of capital to provide for ~~legal retainer~~PDS litigation support payments to Alliacense, in the event license revenues received by PDS are insufficient to meet these needs.

On ~~April 9,~~October 10, 2012 PDS’ cash balance was ~~$45,904.~~$40,723. Management’s plans for the continued operation of PDS rely on the ability of ~~TPL~~Alliacense to obtain license agreements to cover the operational costs of PDS. PDS has experienced a decline in licensing revenues and has experienced an increase in legal costs due to the patent litigation actions currently in ~~progress.~~progress although; as a result of the fee arrangement with current litigation counsel we expect the legal costs of PDS to decrease substantially from fiscal year end 2012 levels. In the event that ~~TPL~~Alliacense cannot obtain license agreements to cover the operational costs of PDS, we and TPL must decide whether to fund PDS’ legal costs on a go forward basis.

In the event that we provide funding to PDS that is not reciprocated by TPL, which could result in our having a larger ownership percentage in PDS, we may determine that we have controlling financial interest in PDS, in which case, we would be required to consolidate PDS in our condensed consolidated financial statements. If we determine that it is appropriate to consolidate PDS, we would measure the assets, liabilities and noncontrolling interests of PDS at their fair values at the date that we have the controlling financial interest.

The results of PDSG, which was previously reported as a separate business segment, is being presented as discontinued operations in the condensed consolidated ~~statement~~statements of operations for all periods presented.

Discontinued Operations and Assets Held for Sale

On February 17, 2012, our board of directors authorized management to sell the assets of PDSG due to the inability of PDSG to meet its business plan and continuing projected negative cash flows. In accordance with authoritative guidance we have classified the assets, liabilities, operations and cash flows of PDSG as discontinued operations for all periods presented. ~~We are in~~During March 2012, we entered into an interim agreement with the ~~process~~purchaser of ~~negotiating~~the assets of PDSG which required the purchaser to pay PDSG $93,450 to subsidize the April 2012 expenses of PDSG during the sale transaction negotiations. On April 30, 2012, we negotiated a sale transaction ~~pursuant to~~in which we ~~would sell~~sold substantially all of the assets of PDSG in exchange for a royalty on PDSG revenues for a period of three years. InAt August 31, 2012, the ~~event that we are unable to consummate~~loss on the asset sale transaction by May 11, 2012, it is anticipated that we will cease PDSG operations as of such date with closure costs consisting primarily of payroll related expenses estimated at approximately $350,000. Based on preliminary estimates of the sales proceeds, we have reduced the carrying value of the net assets of PDSG is approximately $10,500.

Summarized operating results of discontinued operations for the three months ended August 31, 2012 and 2011 are as follows:

	August 31, 2012			August 31, 2011
Revenues	$	–		$	134,563
Gross profit	$	–		$	101,479
Operating loss from discontinued operations	$	(1,387	)	$	(333,136	)
Other income from discontinued operations	$	–		$	509
Gain on sale of discontinued operations	$	532		$	–
Loss before income taxes	$	(855	)	$	(332,627	)
Loss from discontinued operations	$	(855	)	$	(332,627	)

PDSG activity for the three months ended August 31, 2012 consists of operating expenses for: insurance, taxes and bank fees offset by ~~approximately $14,600 at February 29, 2012.~~

PDSG royalty revenues.

	August 31, 2012		May 31, 2012
Current assets:
Other current assets	$	2,017	$	7,273
	$	2,017	$	7,273

Long-lived assets:
Other	$	42,000	$	42,000
	$	42,000	$	42,000

Critical Accounting Policies and Estimates

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

1. Investments in Marketable Securities

2. Investment in Affiliated Company

We have a 50% interest in ~~Phoenix Digital Solutions, LLC (“PDS”).~~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 ~~condensed~~ consolidated statements of operations in the caption “Equity in loss of affiliated ~~company.”~~company” and also is adjusted by contributions to and distributions from PDS.

~~During~~

PDS recognizes revenue from technology license agreements at the ~~nine months ended February 29,~~time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), obligations under the license agreement are satisfied, and the realization of revenue is assured which is generally upon the receipt of the license proceeds. PDS may at times enter into license agreements whereby contingent revenues are recognized as one or more contractual milestones are met.

At August 31, 2012, our share of loss in PDS exceeds our investment in PDS by ~~$1,543,237. We presently do not have a contractual obligation~~$711,142. Such amount has been recorded as “Cumulative losses in excess of investment in affiliated company” on our condensed consolidated balance sheet at August 31, 2012, due to our and TPL’s intent to fund ~~any cash requirements~~the working capital of PDS ~~(see Note 3) and accordingly we have not recorded~~based on the ~~excess loss on~~July 2012 licensing contract with Alliacense.

At August 31, 2012, our ~~consolidated financial statements, which is a change in our policy of accounting for PDS. We will not record our excess loss~~investment in PDS ~~unless~~is presented as a liability pursuant to generally accepted accounting principles in the United States of America. In the event our investment in PDS was to reflect an asset balance, we guarantee the obligations of PDS or are otherwise committed to provide further financial support for PDS. Under the equity method of accounting, we only recognize losses from PDS up to our carrying amount of the investment and advances. Once the investment balance is reduced to $0, we discontinue recognizing losses until such time that our share of future net income reported by PDS equals our share of net losses not recognized during the period the equity method was suspended.

Wewould review our investment in an affiliated company to determine whether events or changes in circumstances indicate that ~~the~~an asset carrying amount may not be recoverable. The primary factors we would 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.

3. Revenue Recognition

~~Revenue~~

PDS recognizes revenue from technology license agreements ~~is recognized~~ at the time a contract is entered into, the license method is determined (paid-in-advance or on-going royalty), obligations under the license agreement are satisfied, and the ~~customer~~realization of revenue is ~~provided with~~assured which is generally upon the ~~licensed technology, if applicable.~~

PDSG’s contracts with customers, including systems integrators and prime contractors, were multiple element arrangements which contained professional services that were considered essential to the functionality of the other elements of the arrangement. PDSG accounted for revenue on these arrangements according to authoritative guidance for contract accounting. Under this guidance, PDSGlicense proceeds. PDS may at times enter into license agreements whereby contingent revenues are recognized revenue based on progress towards contract completion measured by actual hours incurred in relation to the estimate of total expected hours. PDSG measured these revenues by applying the contract-specific estimated percentage of completion to the total contract amount for software and professional services. PDSG routinely updated the estimates of future hours for agreements in process and reported any cumulative effects of such adjustments in current operations. PDSG immediately recognized any loss expected on these contracts when it is projected that loss was probable.

4. ~~Research and Development~~

~~Research and development costs were expensed as incurred and primarily included payroll and related benefit costs and contractor fees.~~

5. Share-Based Compensation

Share-based compensation expense recognized during the period is based on the grant date fair value of the portion of share-based payment awards ultimately expected to vest during the period.As share-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeiture rates are based on historical forfeiture experience and estimated future employee forfeitures.

5. Income Taxes

~~During fiscal 2011, we~~

6. Assessment of Contingent Liabilities

Results of Operations

Comparison of the Three Months Ended ~~February 29,~~August 31, 2012 and Three Months Ended ~~February 28,~~August 31, 2011.

Three months ended
February 29, 2012 February 28, 2011
Selling, general and administrative $ 623,375 $ 538,906

	Three months ended
	August 31, 2012		August 31, 2011
Selling, general and administrative	$	392,062	$	472,085

Selling, general and administrative expenses ~~increased~~decreased from approximately ~~$539,000~~$472,000 for the three months ended ~~February 28,~~August 31, 2011 to approximately ~~$623,000~~$392,000 for the three months ended ~~February 29,~~August 31, 2012. The ~~increase~~decrease consisted primarily of approximately ~~$81,000 in payroll and related costs, approximately $44,000~~$68,000 in legal ~~fees due to the arbitration with the Crossflo officers,~~ and approximately $36,000 in consulting fees due to the broker fees for the sale of PDSG. These increases were offset by decreases of approximately $30,000 in board of directors fees due to less directors serving on the board, approximately $14,000 in accounting ~~fees and approximately $13,000 in rent expense.~~

Three months ended
February 29, 2012 February 28, 2011
Other income (expense):
Interest and other income $ 44,668 $ 86,017
Recovery of loan loss - 1,013,151
Realized gain on sale of marketable securities - 47,860
Equity in earnings (loss) of affiliated company (105,000 ) 2,300,912
Total other income (expense), net $ (60,332 ) $ 3,447,940

fees.

	Three months ended
	August 31, 2012			August 31, 2011
Other income (expense):
Interest and other income	$	4,265		$	3,621
Realized gain on sale of marketable securities		55,873			39,005
Equity in loss of affiliated company		(557,068	)		(300,283	)
Total other expense, net	$	(496,930	)	$	(257,657	)

Our other income and ~~expenses~~(expenses) for the three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011 included equity in the loss of PDS of approximately ~~$105,000 for the three months ended February 29, 2012~~$557,000 and ~~equity in the earnings of PDS of approximately $2,301,000 for the three months ended February 28, 2011.~~$300,000, respectively. Our investment in PDS is accounted for in accordance with the equity method of accounting for investments, accordingly we will only record income to the extent PDS eliminates accumulated losses and after basis in our investment is zero we will only record losses to the extent that we advance or contribute funds to PDS.investments. The change in the earnings of PDS is due to the decline in licensing revenue and the continuing legal costs incurred by PDS in connection with the patent litigation.

Three months ended
February 29, 2012 February 28, 2011
Income (loss) from continuing operations before income taxes $ (683,707 ) $ 2,909,034

~~For~~ Included in interest and other income for the three months ended ~~February 28,~~August 31, 2012 and 2011 is approximately $56,000 and $39,000, respectively, of recovery on the $600,879 realized loss on sale of marketable securities relating to our auction rate securities recognized during the fiscal year ended May 31, 2011. Through August 2012 we ~~recorded income from continuing operations~~have received proceeds totaling $403,325 relating to the recovery of our fiscal 2011 realized loss.

	Three months ended
	August 31, 2012			August 31, 2011
Loss from continuing operations before income taxes	$	(888,992	)	$	(729,742	)

Loss before income taxes increased from approximately $730,000 for the three months ended August 31, 2011 to approximately $889,000 for the three months ended August 31, 2012 primarily due to the ~~recovery of loan~~equity loss ~~of approximately $1,013,000 and our equity~~ in the earnings of PDS of approximately $2,301,000. For the three months ended February 29, 2012 we are unable to recognize our losses from PDS as our losses have exceeded the cost basis of our investment.

PDS.

Provision ~~(benefit)~~ for income taxes

During the three months ended ~~February 29,~~August 31, 2012 and 2011, we recorded a ~~benefit~~provision for income taxes related to federal and California taxes of approximately ~~$4,300.~~

~~During the three months ended February 28, 2011, we recorded a provision for income taxes of approximately $3,484,000 related to federal~~$2,600 and ~~California taxes.~~

$1,600, respectively.

Net loss

We recorded a net loss for the three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011 of ~~$1,246,125~~$892,412 and ~~$5,649,009,~~$1,063,969, respectively.

~~Comparison of the Nine Months Ended February 29, 2012 and Nine Months Ended February 28, 2011.~~

Nine months ended
February 29, 2012 February 28, 2011
Selling, general and administrative $ 1,546,836 $ 2,197,953

Selling, general and administrative expenses decreased from approximately $2,198,000 for the nine months ended February 28, 2011 to approximately $1,547,000 for the nine months ended February 29, 2012. The decrease consisted primarily of approximately $266,000 in legal fees due to the settlement of the Deutsche Bank matter and the settlement of one of the TPL actions, approximately $140,000 in consulting fees due to the termination of the services of Attain, approximately $118,000 in board of directors’ fees due to fewer directors serving on our board during the current year period and approximately $36,000 in rent expense. For the nine months ended February 28, 2011, approximately $56,000 of share-based compensation was recorded in connection with vesting of employee stock options.

Nine months ended
February 29, 2012 February 28, 2011
Other income (expense):
Interest and other income $ 92,976 $ 104,597
Interest expense - (20,810 )
Recovery of loan loss - 1,013,151
Realized loss on sale of marketable securities - (600,879 )
Equity in earnings (loss) of affiliated company (632,551 ) 825,074
Total other expense, net $ (539,575 ) $ 1,321,133

Our other income and expenses for the nine months ended February 29, 2012 and February 28, 2011 included equity in the loss of PDS of approximately $633,000 and equity in the earnings of PDS of approximately $825,000, respectively. Since the quarter ended August 31, 2011 we have not been able to fully recognize our losses in PDS as the losses have exceeded our cost basis in the investment. Our investment in PDS is accounted for in accordance with the equity method of accounting for investments. During the nine months ended February 28, 2011, we realized a loss on our ARS of approximately $601,000 according to terms of our confidential settlement agreement with Deutsche Bank and we recovered our loan from TPL which had been previously fully reserved.

Nine months ended
February 29, 2012 February 28, 2011
Loss from continuing operations before income taxes $ (2,086,411 ) $ (876,820 )

Loss from continuing operations before income taxes increased from approximately $877,000 for the nine months ended February 28, 2011 to approximately $2,086,000 for the nine months ended February 29, 2012 primarily due to the recovery of loan loss and income from PDS in the prior period.

~~Provision (benefit) for income taxes~~

~~During the nine months ended February 29, 2012, we recorded a benefit for income taxes related to federal and California taxes of $1,100.~~

~~During the nine months ended February 28, 2011, we recorded a provision for income taxes of approximately $1,971,000 related to federal and California taxes.~~

~~Net loss~~

~~We recorded a net loss for the nine months ended February 29, 2012 and February 28, 2011 of $3,314,575 and $9,148,938, respectively.~~

Results of Discontinued Operations

Comparison of the Three Months Ended ~~February 29,~~August 31, 2012 and Three Months Ended ~~February 28,~~August 31, 2011.

Three months ended
February 29, 2012 February 28, 2011
Dollars % of Revenue Dollars % of Revenue
Revenue:
License and service revenue $ (2,279 ) 100.0% $ 109,857 100.0%
Cost of sales:
License and service revenue 2,058 - 17,376 15.8%
Amortization of purchased intangibles - - 68,889 62.7%
Total cost of sales 2,058 - 86,265 78.5%
Gross (loss) profit $ (4,337 ) - $ 23,592 21.5%

Three months ended

August 31, 2012

August 31, 2011

Dollars

% of Revenue

Dollars

% of Revenue

Revenue:

License and service revenue

–

134,563

100.0%

Cost of sales:

License and service revenue

–

33,084

24.6%

Gross profit

–

101,479

75.4%

Revenue ~~consisting~~consisted of software licenses and associated services relating to PDSG’s CDX product decreased from approximately $110,000 for the three months ended February 28, 2011 to approximately $(2,000) for the three months ended February 29, 2012. The decrease was primarily due to the fact that revenue agreements are one time contracts that vary in size and scope depending upon the requirements of the customer. The current quarter includes an adjustment to a contract for services that were not performed.product. Cost of sales ~~includes~~included the direct time of PDSG employees on each project. ~~Included in cost of sales is approximately $68,900 of amortization expense on purchased intangible assets for the three month period ended February 28, 2011.~~

Three months ended
February 29, 2012 February 28, 2011
Research and development $ 279,514 $ 183,065

	Three months ended
	August 31, 2012		August 31, 2011
Research and development	$	–	$	170,195

Research and development costs ~~consist~~consisted of PDSG’s payroll and related expenses for software engineers as well as outside contractors retained to assist in the development of PDSG’s software product. The primary increases in research and development costs for the three months ended February 29, 2012 as compared to February 28, 2011 were approximately $68,000 in severance costs and approximately $26,000 in salaries and related costs. For the three months ended ~~February 29, 2012 and February 28,~~August 31, 2011, approximately ~~$483 and $483, respectively,~~$500 of share-based compensation was recorded in connection with vesting of employee stock options.

Three months ended
February 29, 2012 February 28, 2011
Selling, general and administrative $ 268,313 $ 267,087

	Three months ended
	August 31, 2012		August 31, 2011
Selling, general and administrative	$	1,387	$	264,420

Selling, general and administrative expenses ~~increased~~decreased from approximately ~~$267,000~~$264,000 for the three months ended ~~February 28,~~August 31, 2011 to approximately ~~$268,000~~$1,000 for the three months ended ~~February 29,~~August 31, 2012 due to the sale of substantially all of the assets of PDSG in April 2012. For the three months ended ~~February 29, 2012 and February 28,~~August 31, 2011 approximately $4,500 ~~and $4,500, respectively,~~ of share-based compensation was recorded in connection with vesting of employee stock options.

	Three months ended
	August 31, 2012			August 31, 2011
Operating loss	$	(1,387	)	$	(333,136	)

Three months ended
February 29, 2012 February 28, 2011
Operating loss $ (552,164 ) $ (426,560 )

Operating loss ~~increased~~decreased from approximately ~~$427,000~~$333,000 for the three months ended ~~February 28,~~August 31, 2011 to approximately ~~$552,000~~$1,000 for the three months ended ~~February 29, 2012 primarily due to salaries and related costs.~~

~~Comparison of the Nine Months Ended February 29, 2012 and Nine Months Ended February 28, 2011.~~

Nine months ended
February 29, 2012 February 28, 2011
Dollars % of Revenue Dollars % of Revenue
Revenue:
License and service revenue $ 179,871 100.0% $ 276,687 100.0%
Cost of sales:
License and service revenue 47,455 26.4% 45,791 16.5%
Amortization of purchased intangibles - - 206,667 74.7%
Total cost of sales 47,455 26.4% 252,458 91.2%
Gross profit $ 132,416 73.6% $ 24,229 8.8%

Revenue consisting of software licenses and associated services relating to PDSG’s CDX product decreased from approximately $277,000 for the nine months ended February 28, 2011 to approximately $180,000 for the nine months ended February 29, 2012. Cost of sales includes the direct time of PDSG employees on each project. Included in cost of sales is approximately $207,000 of amortization expense on purchased intangible assets for the nine months ended February 28, 2011.

Nine months ended
February 29, 2012 February 28, 2011
Research and development $ 600,466 $ 571,094

Research and development costs consist of PDSG’s payroll and related expenses for software engineers as well as outside contractors retained to assist in the development of PDSG’s software product. The primary increase in research and development costs for the nine months ended February 29, 2012 as compared to February 28, 2011 was approximately $46,000 in salaries and related costs. For the nine months ended February 29, 2012 and February 28, 2011, approximately $1,500 and $1,600, respectively, of share-based compensation was recorded in connection with vesting of employee stock options.

Nine months ended
February 29, 2012 February 28, 2011
Selling, general and administrative $ 747,169 $ 904,209

~~Selling, general and administrative expenses decreased from approximately $904,000 for the nine months ended February 28, 2011 to approximately $747,000 for the nine months ended February 29,~~August 31, 2012 due to ~~management’s restructuring plan to reduce expenses. Decreases consisted primarily~~the sale of ~~approximately $64,000~~substantially all of the assets of PDSG in ~~salaries and related expenses, approximately $38,000 in legal and accounting expenses and approximately $21,000 in rent expenses. For~~April 2012.

Loss from Discontinued Operations, Net

We recorded a net loss from discontinued operations for the ~~nine~~three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~ 2011 ~~approximately $13,500~~of $855 and ~~$13,900, respectively, of share-based compensation was recorded in connection with vesting of employee stock options.~~

Nine months ended
February 29, 2012 February 28, 2011
Impairment of goodwill $ - $ 642,981

Management’s plan of restructuring on October 5, 2009 and the continuing inability of PDSG to meet its business plan were indicators of potential impairment on our goodwill. Accordingly, at February 28, 2011 management determined that goodwill was impaired by approximately $643,000.

Nine months ended
February 29, 2012 February 28, 2011
Operating loss $ (1,215,219 ) $ (2,094,055 )

Operating loss decreased from approximately $2,094,000 for the nine months ended February 28, 2011 to approximately $1,215,000 for the nine months ended February 29, 2012 primarily due to the impairment of goodwill recognized during the nine months ended February 28, 2011 and management’s plan of restructuring implemented in October 2009 which reduced salaries and related expenses.

$332,627, respectively.

Liquidity and Capital Resources

Liquidity

Our cash and short-term investment balances decreased from approximately ~~$10,661,000~~$7,606,000 as of May 31, ~~2011~~2012 to approximately ~~$8,527,000~~$6,536,000 as of ~~February 29,~~August 31, 2012. We also have restricted cash balances amounting to approximately $21,000 as of May 31, ~~2011~~2012 and ~~February 29,~~August 31, 2012. Total current assets decreased from approximately ~~$12,196,000~~$7,860,000 as of May 31, ~~2011~~2012 to approximately ~~$8,642,000~~$6,735,000 as of ~~February 29,~~August 31, 2012. Total current liabilities amounted to approximately ~~$576,000~~$307,000 and approximately ~~$327,000~~$83,000 as of May 31, ~~2011~~2012 and ~~February 29,~~August 31, 2012, respectively.

The change in our working capital position as of August 31, 2012 as compared with May 31, 2012 results primarily from our capital contributions to PDS.

The cost of accessing the credit markets ~~has increased~~could be challenging as many lenders and institutional investors have ~~increased interest rates,~~ enacted tighter lending standards and reduced or ceased to provide funding to borrowers. Credit sources if identified, could come at significant cost. Adverse changes in the economy could limit our ability to obtain financing from debt or equity sources or could adversely affect the terms on which we may be able to obtain any such financing.

Cash shortfalls currently experienced by PDS will have an adverse effect on our liquidity. ~~Although we presently do not have any contractual commitments to fund any cash requirements, in December 2011, March 2012 and April~~During fiscal 2012 we contributed ~~$200,000, $150,000 and $150,000, respectively,~~$650,000 in additional capital to PDS, in order to fund a portion of a legal retainer. During the three months ended August 31, 2012, we and TPL ~~satisfied its December 2011 capital contribution via an in-kind contribution by forfeiting amounts otherwise due it from PDS,~~each contributed $586,750 to fund the remaining portions of the legal retainer and ~~contributed cash to satisfy~~ the ~~March 2012 and April 2012 capital funding.~~operations of PDS. We ~~may determine~~have determined that it is in the best interests of the MMP licensing program that we provide our 50% share of capital ~~to provide~~ for ~~legal retainer payments in~~ the ~~event~~operating expenses of PDS as license revenues received by PDS are insufficient to meet these needs.

~~While we do not have any contractual commitments and do not presently intend~~

We expect to fund any cash requirements of TPL and/or PDS other than certain litigation related legal retainer payments, given PDS’s current financial condition and/or the need to ensure TPL’s (and Alliacense’s) on-going efforts on behalf of PDS, we may determine, based on multiple factors including recommendations from patent litigation counsel, that providing additional funding to either PDS and/or TPL is in our ~~and our stockholders’ best interests in order to support the continued licensing~~share of the ~~MMP Portfolio. Any additional funding provided~~PDS capital shortfalls in the event PDS does not generate enough licensing revenue to ~~TPL by PDS would be in exchange for additional services and/or concessions~~cover all of its expenses, including fees and costs owed to ~~existing contracts.~~Alliacense pursuant to the July 2012 Program Agreement. In the event that we provide funding to PDS that is not reciprocated by TPL, which could result in our having a larger ownership percentage in PDS, we may determine that we have controlling financial interest in PDS, in which case, we would be required to consolidate PDS in our consolidated financial statements. If we determine that it is appropriate to consolidate PDS, we would measure the assets, liabilities and noncontrolling interests of PDS at their fair values at the date that we have the controlling financial interest.

Our current liquid cash resources as of February 29, 2012, are expected to provide the funds necessary to support our operations through at least the next twelve months assuming we do not continue to fund the obligations of PDS. The cash flows from our interest in PDS represent our primary significant source of cash generation. In the event of a continued decrease or interruption in MMP Portfolio licensing we will incur a significant reduction to our cash position. It is highly unlikely that we would be able to obtain any additional sources of financing to supplement our cash and short-term investment position of $8,527,188 at February 29, 2012.

~~Cash Flows From Operating Activities~~

Cash used in operating activities of continuing operations was approximately $1,707,000 and $3,539,000 for the nine months ended February 29, 2012 and February 28, 2011, respectively. The principal components of the current period amount were: loss in earnings of affiliated company of approximately $633,000, and receivable from affiliated company of approximately $1,135,000. These increases were offset by: net loss from continuing operations of approximately $2,085,000, and changes in income taxes payable and accounts payable and accrued expenses of approximately $1,282,000 and $267,000, respectively. The principal components of the prior period are the prior period net loss from continuing operations, the recovery of loan loss, the equity in earnings of affiliated company, and the change in receivable from affiliated company offset by the: realized loss on sale of marketable securities, the equity in loss of affiliated company and the change in deferred taxes due to our valuation allowance on our deferred tax assets in the current period.

~~Cash provided by operating activities of discontinued operations was approximately $19,000 and $18,000 for the nine months ended February 29, 2012 and February 28, 2011, respectively.~~

~~Cash Flows From Investing Activities~~

Cash used in investing activities of continuing operations was approximately $198,000 for the nine months ended February 29, 2012 as compared to cash provided by investing activities of continuing operations of approximately $6,556,000 for the nine months ended February 28, 2011. Cash activities for the current period were primarily attributable to purchases and sales of marketable securities. Cash activities for the prior period were primarily attributable to purchases and sales of marketable securities and cash received for repayment of a note receivable. We also received distributions from PDS for the nine months ended February 28, 2011 of approximately $808,000.

Cash provided by investing activities of discontinued operations was approximately $125,000 for the nine months ended February 28, 2011 and related to repayment of a note receivable resulting from the sale of the assets of Verras Medical.

~~Cash Flows From Financing Activities~~

Cash used in financing activities for the nine months ended February 29, 2012 and February 28, 2011 was approximately $102,000 and $3,238,000, respectively. For the nine months ended February 29, 2012 and February 28, 2011, cash of approximately $102,000 and $113,000 was used to purchase common stock for treasury. For the nine months ended February 28, 2011 cash of approximately $3,122,000 was used to repay our note with Wedbush.

~~Capital Resources~~

~~Our current liquid cash resources as of February 29,~~August 31, 2012, are expected to provide the funds necessary to support our operations through at least the next twelve months. The cash flows from our interest in PDS represent our primary significant source of cash generation. In the event of a continued decrease or interruption in MMP Portfolio licensing we will incur a significant reduction to our cash position. It is highly unlikely that we would be able to obtain any additional sources of financing to supplement our cash and short-term investment position of ~~$8,527,188~~$6,536,004 at ~~February 29,~~August 31, 2012.

~~In December 2011, TPL engaged new litigation counsel on behalf~~

Cash Flows From Operating Activities

Cash used in operating activities of ~~PDS,~~continuing operations was approximately $566,000 and ~~committed PDS to paying an initial retainer payable in monthly installments. The $200,000 that we contributed to PDS in December 2011 and~~$336,000 for the ~~$150,000 and $150,000 that we and TPL each contributed in March~~three months ended August 31, 2012 and ~~April 2012 was used to pay the first, fourth and fifth installments~~2011, respectively. The principal component of the ~~retainer.~~current period amount was the loss in earnings of affiliated company of approximately $557,000. This increase was offset by the net loss from continuing operations of approximately $892,000, and changes in accounts payable and accrued expenses of approximately $226,000. The ~~remaining balance~~principal components of the ~~retainer~~prior period are the prior period net loss from continuing operations and changes in accounts payable and accrued expenses, offset by the loss in earnings of affiliated company and change in income taxes payable.

Cash provided by operating activities of discontinued operations was approximately $4,000 for the three months ended August 31, 2012. Cash used in operating activities of discontinued operations was approximately $259,000 for the three months ended August 31, 2011. The change is ~~anticipated~~attributed to ~~be funded~~the sale of the PDSG assets in April of 2012.

Cash Flows From Investing Activities

Cash provided by investing activities of continuing operations was approximately $302,000 for the three months ended August 31, 2012 as compared to cash used in investing activities of continuing operations of approximately $2,475,000 for the three months ended August 31, 2011. Cash activities for the current period were primarily attributable to purchases and sales of marketable securities and capital contributions to PDS. Cash activities for the prior period were primarily attributable to purchases and sales of marketable securities.

Cash Flows From Financing Activities

Cash used in financing activities for the three months ended August 31, 2012 and 2011 was approximately $14,000 and $48,000, respectively. Cash activities for the current and prior periods were attributable to purchases of common stock for treasury.

Capital Resources

Our current liquid cash resources as of August 31, 2012, are expected to provide the funds necessary to support our operations through at least the next twelve months. The cash flows from our interest in PDS ~~from licensing revenues.~~represent our primary significant source of cash generation. In the event ~~that PDS does not have the funds~~of a continued decrease or interruption in MMP Portfolio licensing we will incur a significant reduction to ~~pay one or more installments of the retainer, we expect~~our cash position. It is highly unlikely that we would be able to obtain any additional sources of financing to supplement our cash and ~~TPL will contribute additional capital to PDS to fund such installments. The newly retained counsel will continue the Northern California cases to trial after the claims construction hearing.~~

short-term investment position of $6,536,004 at August 31, 2012.

Recent Accounting Pronouncements

During the ~~nine~~three months ended ~~February 29,~~August 31, 2012, there were no recent issuances of accounting pronouncements as compared to those described in our Annual Report on Form 10-K for the fiscal year ended May 31, ~~2011,~~2012, that are of significance, or have potential material significance to us.

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. Please refer to our risk factors contained in our Form 10-K for the year ended May 31, ~~2011~~2012 for additional risk factors.

We Have Reported Licensing Income In Prior Fiscal Years Which May Not Be Indicative Of Our Future Income.

We have entered into license agreements through our joint venture with TPL and have reported ~~licensing~~ income ~~as a result of this activity~~from the joint venture for the fiscal years 2006 to 2011. 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, potential adverse outcomes associated with the U. S. Patent and Trademark Office (“USPTO”) re-examinations, the litigation initiated by an inventor of the microprocessor portfolio with TPL, and the possible effect of new judicial interpretations of patent laws, we may not receive revenues from such agreements in the future consistent with amounts received in the past, and we may not receive future revenues from license agreements at all.

We Are Dependent Upon A Joint Venture In Which Our Role Is Of A Passive Nature For Substantially All Of Our Income.

In June 2005, we entered into a joint venture with TPL, ~~pursuant to~~ which as a result of agreements entered into in June 2005 and July 2012, TPL isand its affiliate Alliacense are responsible for the licensing and enforcement of our microprocessor patent portfolio. This joint venture has been the source of substantially all of our income since June 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 TPL and Alliacense on behalf of the joint venture, and the ability of TPL and Alliacense to obtain capital when necessary to fund ~~its~~their operations.

Our Joint Venture Is At Risk For Going Concern And An Inability To Meet Certain Obligations.

PDS, our joint venture with TPL, which received a going concern opinion in ~~our~~its May 31, 2012 and 2011 financial statements, has experienced significant declines in revenues while at the same time incurring significant legal costs associated with pending litigation with companies which we allege have infringed on our patent portfolio. ~~Currently, there are no commitments by~~Terms of the July 2012 licensing agreement with Alliacense will require TPL and us ~~or TPL~~ to ~~provide additional working capital to PDS. We expect PDS will~~ fund ~~its operations through licensing revenue.~~

~~In December 2011, TPL engaged new counsel on behalf of PDS, and committed PDS to paying an initial retainer payable in monthly installments. The $200,000 that we contributed to~~ PDS in December 2011 and the $150,000 and $150,000 that we and TPL each contributed in March 2012 and April 2012 was used to pay the first, fourth and fifth installments of the retainer. The remaining balance of the retainer is anticipated to be funded by PDS from licensing revenues, which have declined over recent years to a point where PDS’ ability to make the foregoing retainer payments is in substantial doubt unless licensing revenues substantially increases in the near term.

In the event ~~that~~ PDS does not ~~have~~generate enough licensing revenue to cover the ~~funds to pay one or more installments~~licensing and litigation support fees of the retainer, we and TPL must decide whether to contribute additional capital to PDS to fund such installments. The newly retained counsel will continue the Northern California cases to trial after the claims construction hearing.

Alliacense.

Adverse Changes In The Financial Condition Of Our Joint Venture Partner, TPL, Could Have A Significant And Adverse Effect On Us.

While we are not privy to the financial condition of our joint venture partner, TPL or its affiliate, Alliacense, several factors could have a negative effect on TPL’s or Alliacense’s financial condition, such as the continued decline in MMP Portfolio license revenue and increased MMP Portfolio related litigation costs. Additionally, the adverse outcome of known current contract litigation against TPL and other factors to which we are not privy while not impacting us directly, may impact us indirectly to the extent the licensing program is negatively affected. In the event that one or more of the foregoing adversely affects TPL’s or Alliacense’s financial condition, ~~TPL’s~~TPL and or Alliacense’s ability to continue to aggressively pursue the licensing of the MMP Portfolio on behalf of PDS could be severely impacted which would in turn adversely affect our revenue and cash flow.

A Successful Challenge To Our Intellectual Property Rights Could 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 could 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. With respect to our core technologies, we currently have seven U.S. patents five of which are unexpired, 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 likely to vigorously defend their actions and assert that our patents are invalid. Problems with patents or other rights could result in significant costs, limit future license revenue, and impair or hinder our acquisition strategy. 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. From time to time parties have petitioned the USPTO to re-examine certain of our patents. An adverse decision in litigation or in the re-examination process could have a very significant and adverse effect on our business.

We have been named as co-defendants in multiple lawsuits regarding the MMP Portfolio. See footnote 6 to our condensed consolidated financial statements and Part II, Item 1. “Legal Proceedings” in this quarterly report on Form 10-Q for more information.

In the event that one or more of these lawsuits regarding the MMP Portfolio are not resolved in our favor, such outcome (or lack of an outcome) could weaken the MMP Portfolio which would have a negative affect on PDS's ability to procure future license revenues and, therefore, adversely affect PDS's and our cash flows.

Disruptions In The Debt And Equity Markets Will Have An Adverse Affect On Our ~~Wholly-Owned Subsidiary Cannot Operate Without Our Continued Support.~~

~~Since~~Ability To Obtain Funding.

The debt and equity markets have been experiencing volatility and disruption for several years. These issues, along with significant write-offs in the ~~acquisition~~financial services sector, the re-pricing of credit risk, and the current weak economic conditions have made, and will likely continue to make, it difficult to obtain funding. The cost of accessing the credit markets has increased as many lenders and institutional investors have enacted tighter lending standards and reduced or ceased to provide funding to borrowers. Adverse changes in the economy could limit our ~~wholly-owned subsidiary PDSG in September 2008,~~ability to obtain financing from debt or equity sources or could adversely affect the terms on which we have provided 100% of PDSG’s operational funding amounting to approximately $9,150,000 through February 29, 2012. After restructuring measures initiated in October 2009 and continued through February 29, 2012, PDSG continues to remain unable to generate sufficient revenues to support its operations and remains entirely dependent on our funding. During October 2011, PTSC retained the services of an investment banker to seek a buyer for PDSG. Should a sale of PDSG occur, it may be able to obtain any such financing for our operating activities See Part I – Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources-Liquidity.” in this report on ~~distressed terms with only minimal consideration realized. We are in the process of negotiating a sale transaction pursuant to which we would sell substantially all of the assets of PDSG in exchange~~Form 10-Q for a royalty on PDSG revenues for a period of three years. In the event that we are unable to consummate the sale transaction by May 11, 2012, it is anticipated that we will cease PDSG operations as of such date.

On March 27, 2012, we executed an interim agreement with the potential purchaser of the assets of PDSG. The interim agreement requires the purchaser to fund the operations of PDSG including the lease renewal beginning with the month of April and continuing until the transaction is closed or until three full days after advising us that the transaction will not go forward in order to hold open the proposed sale transaction while the terms of the purchase agreement are being finalized. We expect the sale transaction to close on or around April 30, 2012 and no later than May 11, 2012.

more information.

Unstable Market And Economic Conditions May Have Serious Adverse Consequences On Our Business.

Our general business strategy may be adversely affected by the ~~recent~~ economic downturn and volatile business environment and continued unpredictable and unstable market conditions. A prolonged or profound economic downturn may result in adverse changes to our sales and pricing, which would harm our operating results. Failure to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our ~~growth~~ strategy, financial performance and stock price and could require us to delay or abandon ~~development~~ plans. There is also a possibility that our stock price may decline further, due in part to the volatility of the stock market and the general economic downturn.

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.

For our investment accounted for under the equity method (PDS), we record as part of other income or expense our share of the increase or decrease in the equity of this company in which we have invested. It is possible that, in the future, our relationships and/or our interests in or with this equity method investee could change. Such potential future changes could result in consolidation of such entity which could result in changes in our reported results.

If A Large Number Of Our Shares Are Sold All At Once Or In Blocks, The Market Price Of Our Shares Would ~~MostLikely~~MostLikely Decline.

Most of our shareholders are not restricted in the price at which they can sell their shares. Shares sold at a price below the current market price at which our Common Stock is trading may cause the market price of our Common Stock to decline.

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 OTCQB operated by OTC Markets, Inc. 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~~

policies.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

As required by Rule 13a-15(b) under the Exchange Act, as of ~~February 29,~~August 31, 2012, 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 Interim 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 reports 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 Interim Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of ~~February 29,~~August 31, 2012, our management, with the participation of our Interim 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 significant 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.

PART ~~II –~~II- OTHER INFORMATION

Item 1. Legal Proceedings

Patent Litigation

Our patent litigation with TPL and Alliacense Ltd. in the United States District Court for the Northern District of California against Acer, Inc., HTC Corporation and affiliated entities, as described in Item 3 – “Legal Proceedings” in our Annual Report on Form 10-K for the year ended May 31, ~~2011~~2012 ("Annual Report"), is still ongoing, but there have been no material developments in such litigation since our Annual Report.

Our patent litigation with TPL and Alliacense Ltd. in the United States District Court for the Northern District of California against Barco, N.V., as described in Item 3 – “Legal Proceedings” in our Annual Report, is still ongoing, but there have been no material developments in such litigation since our Annual Report.

~~Crossflo Systems,~~

Our patent litigation with TPL and PDS in the ITC against Acer Inc. ~~Litigation~~

~~During March 2012, we reached~~, Amazon.com Inc., Barnes & Noble Inc., Garmin Ltd., HTC Corporation, Huawei Technologies Co. Ltd., Kyocera Corporation, LG Electronics, Nintendo Co. Ltd., Novatel Wireless Inc., Samsung Electronics Co. Ltd., Sierra Wireless Inc., and ZTE Corporation, as described in Item 3 – “Legal Proceedings” in our Annual Report, is still ongoing. Respondents in the ITC action have indicated they intend to move for a ~~confidential settlement with~~stay of the ~~three principal officers~~investigation pending resolution of ~~Crossflo which~~patent ownership and standing issues that are the subject of a pending lawsuit against TPL. Our ITC counsel is ~~subject~~working diligently to ~~certain conditions see Note 6~~oppose this motion. We do not know when or how that Motion may be addressed by the ITC. Assuming the ITC proceedings are not stayed, the District Court Actions against these new parties are likely to ~~our condensed consolidated financial statements.~~

be stayed while the ITC actions proceed.

Item 1A. Risk Factors

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, our 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 ~~604,066~~160,709 shares of our common stock at an aggregate cost of ~~$35,389~~$14,256 during the three months ended ~~February 29,~~August 31, 2012.

Following is a summary of all repurchases by us of our common stock during the three month period ended ~~February 29,~~August 31, 2012:

Period Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

December 1 – 31, 2011 552,016 $ 0.05 552,016
January 1 – 31, 2012 12,050 $ 0.08 12,050
February 1 – 29, 2012 40,000 $ 0.13 40,000
Total 604,066 $ 0.06 604,066

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, 2012		30,769	$	0.10		30,769
July 1 – 31, 2012		129,940	$	0.09		129,940
August 1 – 31, 2012		–	$	–		–
Total		160,709	$	0.09		160,709

The repurchase plan has no maximum number of shares or dollar amount and is solely at the discretion of the Board of Directors. The repurchase plan has no set expiration date.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None.

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.

Those exhibits marked with a cross (†) refer to contracts with respect to which we have requested confidential treatment pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. The confidential portions of such exhibits have been omitted and are marked accordingly and the confidential portions have been filed separately with the Securities and Exchange Commission.

Exhibit No.	Document

2.1	Agreement and Plan of Merger dated August 4, 2008, among Patriot Scientific Corporation, PTSC Acquisition 1 Corp, Crossflo Systems, Inc. and the Crossflo principal officers, incorporated by reference to Exhibit 99.1 to our Current Report on Form 8-K filed August 11, 2008 (Commission file No. 000-22182)
3.1
~~3.1~~	Original Articles of incorporation of Patriot Scientific Corporation’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
~~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
~~3.3~~	Certificate of Incorporation of Patriot Scientific Corporation, as filed with the Delaware Secretary of State on March 24, 1992, incorporated by reference to Exhibit 3.3 to our Current Report on 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 Patriot Scientific Corporation, as filed with the Delaware Secretary of State on April 18, 1995, incorporated by reference to Exhibit 3.3.1 to our Annual Report on Form 10-KSB for the fiscal year ended May 31, 1995 (Commission file No. 000-22182)

3.3.2

~~3.3.2~~

Certificate of Amendment to the Certificate of Incorporation of Patriot Scientific Corporation, as filed with the Delaware Secretary of State on June 24, 1997, incorporated by reference to Exhibit 3.3.2 to our Annual Report on Form 10-KSB for the fiscal year ended May 31, 1997, filed July 18, 1997 (Commission file No. 000-22182)

3.3.3

~~3.3.3~~

Certificate of Amendment to the Certificate of Incorporation of Patriot Scientific Corporation, 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 Patriot Scientific Corporation, as filed with the Delaware Secretary of State on May 6, 2002, incorporated by reference to Exhibit 3.3.4 to our Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2009, filed April 9, 2009 (Commission file No. 000-22182)
3.3.5
~~3.3.5~~	Certificate of Amendment to the Certificate of Incorporation of Patriot Scientific Corporation, 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)
3.3.6
~~3.3.6~~	Certificate of Amendment to the Certificate of Incorporation of Patriot Scientific Corporation, as filed with the Delaware Secretary of State on April 29, 2005, incorporated by reference to Exhibit 3.3.6 to our Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2009, filed April 9, 2009 (Commission file No. 000-22182)
3.3.7
~~3.3.7~~	Certificate of Amendment to the Certificate of Incorporation of Patriot Scientific Corporation, as filed with the Delaware Secretary of State on November 14, 2005, incorporated by reference to Exhibit 3.3.7 to our Quarterly Report on Form 10-Q for the quarterly period ended February 28, 2009, filed April 9, 2009 (Commission file No. 000-22182)

3.3.8	Certificate of Amendment to the Certificate of Incorporation of Patriot Scientific Corporation, as filed with the Delaware Secretary of State on March 18, 2009, incorporated by reference to Exhibit 3.3.8 to our Annual Report on Form 10-K for the year ended May 31, 2009, filed August 14, 2009 (Commission file No. 000-22182)

3.4	Articles and Certificate of Merger of Patriot Financial Corporation into Patriot Scientific Corporation dated May 1, 1992, with Agreement and Plan of Merger attached thereto as Exhibit A, incorporated by reference to Exhibit 3.4 to our Current Report on 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 our Current Report on 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 our Current Report on 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 our Current Report on Form 8-K dated May 12, 1992 (Commission file No. 33-23143-FW)

3.7.1	Amendment to bylaws of the Company, incorporated by reference to Exhibit 3.7.1 to our Current Report on Form 8-K dated November 4, 2010 (Commission file No. 000-22182)
10.7	Licensing Program Services Agreement effective July 11, 2012 among Phoenix Digital Solutions, LLC, Alliacense Limited, LLC, Technology Properties Limited, LLC, and the Company, incorporated by reference to Exhibit 10.7 to our Current Report on Form 8-K dated July 11, 2012 (Commission file No. 000-22182).^†
10.8	Agreement effective July 11, 2012 between Technology Properties Limited, LLC and the Company, incorporated by reference to Exhibit 10.8 to our Current Report on Form 8-K dated July 11, 2012 (Commission file No. 000-22182).^†
10.9	Agreement effective July 17, 2012 among Phoenix Digital Solutions, LLC, Alliacense Limited, LLC, Technology Properties Limited, LLC, and the Company, incorporated by reference to Exhibit 10.9 to our Current Report on Form 8-K dated July 11, 2012 (Commission file No. 000-22182).^†
31.1*	Certification of Clifford L. Flowers, Interim CEO, pursuant to Rule 13a-14(a)/15d-14(a)

31.2*	Certification of Clifford L. Flowers, CFO, pursuant Rule 13a-14(a)/15d-14(a)
32.1*
32.1*	Certification of Clifford L. Flowers, CFO and Interim CEO, pursuant to Section 1350 of Chapter 63 Title 18 of the United States Code

101.INS	XBRL Instance Document

~~101.INS~~	~~XBRL Instance Document~~
101.SCH	XBRL Schema Document

101.CAL	XBRL Calculation Linkbase Document

101.DEF	XBRL Definition Linkbase Document

101.LAB	XBRL Label Linkbase Document

101.PRE	XBRL Presentation Linkbase Document

SIGNATURES

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

DATED: ~~April 16,~~October 15, 2012

PATRIOT SCIENTIFIC CORPORATION

/S/ CLIFFORD L. FLOWERS

/s/ Clifford L. Flowers

Clifford L. Flowers

Interim Chief Executive Officer and Chief Financial Officer

(Duly Authorized and Principal Financial Officer)

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed consolidated Balance Sheets as of ~~February 29,~~August 31, 2012 (unaudited) and May 31, ~~2011~~2012	3
Condensed consolidated Statements of Operations for the three ~~and nine~~ months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~August 31, 2011 (unaudited)	4
Condensed consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~February 29,~~August 31, 2012 and ~~February 28,~~August 31, 2011 (unaudited)	5
Notes to condensed consolidated Financial Statements (unaudited)	~~6-22~~6-19
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~23-36~~20-29
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk	3629
ITEM 4. Controls and Procedures	3629

PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings	3730
ITEM 1A. Risk Factors	3730
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds	3730
ITEM 3. Defaults Upon Senior Securities	3831
ITEM 4. Mine Safety Disclosures	3831
ITEM 5. Other Information	3831
ITEM 6. Exhibits	~~38-39~~31-33

SIGNATURES	40

	February 29, 2012			May 31, 2011
ASSETS	(Unaudited)
Current assets:
Cash and cash equivalents	$	6,465,707		$	8,453,665
Restricted cash and cash equivalents		20,887			20,809
Current portion of marketable securities		2,061,481			2,207,009
Accounts receivable - affiliated company		-			129,345
Prepaid income taxes		-			904,200
Prepaid expenses and other current assets		66,146			222,654
Current assets of discontinued operations		27,955			258,021
Total current assets		8,642,176			12,195,703

Marketable securities, net of current portion		245,733			-
Property and equipment, net		8,333			9,467
Other assets		-			3,036
Investment in affiliated company		-			300,283
Non-current assets of discontinued operations		47,623			88,914
Total assets	$	8,943,865		$	12,597,403

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	42,210		$	305,846
Accrued expenses and other		50,790			53,907
Income taxes payable		2,284			-
Current liabilities of discontinued operations		231,379			215,824
Total current liabilities		326,663			575,577

Non-current liabilities of discontinued operations		-			3,240
Total liabilities		326,663			578,817

Commitments and contingencies

Stockholders’ equity:
Preferred stock, $0.00001 par value; 5,000,000 shares authorized: none outstanding		-			-
Common stock, $0.00001 par value: 600,000,000 shares authorized: 438,167,618 shares issued and 405,948,183 shares outstanding at February 29, 2012 and 438,167,618 shares issued and 407,526,799 shares outstanding at May 31, 2011		4,381			4,381
Additional paid-in capital		77,329,269			77,314,301
Accumulated deficit		(54,391,634	)		(51,077,059	)
Common stock held in treasury, at cost – 32,219,435 shares and 30,640,819 shares at February 29, 2012 and May 31, 2011, respectively		(14,324,814	)		(14,223,037	)
Total stockholders’ equity		8,617,202			12,018,586
Total liabilities and stockholders’ equity	$	8,943,865		$	12,597,403

	Three Months Ended						Nine Months Ended
	February 29, 2012			February 28, 2011			February 29, 2012			February 28, 2011
Operating expenses:
Selling, general and administrative	$	623,375		$	538,906		$	1,546,836		$	2,197,953
Total operating expenses		623,375			538,906			1,546,836			2,197,953

Other income (expense):
Interest and other income		44,668			86,017			92,976			104,597
Interest expense		-			-			-			(20,810	)
Recovery of loan loss		-			1,013,151			-			1,013,151
Realized gain (loss) on sale of marketable securities		-			47,860			-			(600,879	)
Equity in earnings (loss) of affiliated company		(105,000	)		2,300,912			(632,551	)		825,074
Total other income (expense), net		(60,332	)		3,447,940			(539,575	)		1,321,133

Income (loss) from continuing operations before income taxes		(683,707	)		2,909,034			(2,086,411	)		(876,820	)

Provision (benefit) for income taxes		(4,304	)		3,483,746			(1,104	)		1,971,457

Loss from continuing operations		(679,403	)		(574,712	)		(2,085,307	)		(2,848,277	)

Loss from discontinued operations, net		(566,722	)		(5,074,297	)		(1,229,268	)		(6,300,661	)

Net loss	$	(1,246,125	)	$	(5,649,009	)	$	(3,314,575	)	$	(9,148,938	)

Basic loss per common share:
Loss from continuing operations	$	-		$	-		$	(0.01	)	$	(0.01	)
Loss from discontinued operations	$	-		$	(0.01	)	$	-		$	(0.01	)
Net loss	$	-		$	(0.01	)	$	(0.01	)	$	(0.02	)

Diluted loss per common share:
Loss from continuing operations	$	-		$	-		$	(0.01	)	$	(0.01	)
Loss from discontinued operations	$	-		$	(0.01	)	$	-		$	(0.01	)
Net loss	$	-		$	(0.01	)	$	(0.01	)	$	(0.02	)

Weighted average number of common shares outstanding-basic		403,247,828			405,013,021			403,826,335			405,355,673

Weighted average number of common shares outstanding-diluted		403,247,828			405,013,021			403,826,335			405,355,673

			Fair Value Measurements at February 29, 2012 Using
	Fair Value at February 29, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents:
Cash	$	294,940	$	294,940	$	-	$	-
Money market funds		4,942,598		4,942,598		-		-
Certificates of deposit		1,228,169		1,228,169
Restricted cash		20,887		20,887
Marketable securities:
Short-term:
Certificates of deposit		2,061,481		2,061,481		-		-
Long-term:
Certificates of deposit		245,733		245,733
Total	$	8,793,808	$	8,793,808	$	-	$	-

			Fair Value Measurements at May 31, 2011 Using
	Fair Value at May 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash and cash equivalents:
Cash	$	128,655	$	128,655	$	-	$	-
Money market funds		8,080,005		8,080,005		-		-
Certificates of deposit		245,005		245,005		-		-
Restricted cash		20,809		20,809		-		-
Marketable securities:
Certificates of deposit		2,207,009		2,207,009		-		-
Total	$	10,681,483	$	10,681,483	$	-	$	-

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Description	Auction Rate Securities
Beginning balance, June 1, 2010	$	5,133,835
Total realized/unrealized recovery (losses):
Included in earnings		(648,740	)
Included in comprehensive income (loss)		416,165
Settlements		(350,000	)
Settlements		(4,551,260	)
Ending balance, February 28, 2011	$	-

	February 29, 2012 (Unaudited)		May 31, 2011 (Audited)
Cash and cash equivalents	$	96,590	$	1,895,653
Prepaid expenses		-		600,000
Total assets	$	96,590	$	2,495,653

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
Options outstanding at June 1, 2011		3,010,000		$	0.33
Options granted		-		$	-
Options exercised		-		$	-
Options forfeited		(560,000	)	$	0.64
Options outstanding at February 29, 2012		2,450,000		$	0.26		1.77	$	53,500
Options vested and expected to vest at February 29, 2012		2,399,118		$	0.26		1.77	$	53,500
Options exercisable at February 29, 2012		2,348,235		$	0.26		1.77	$	46,800

	Three Months Ended February 29, 2012		Nine Months Ended February29, 2012		Three Months Ended February28, 2011		Nine Months Ended February 28, 2011
Research and development - PDSG	$	483	$	1,450	$	483	$	1,552
Selling, general and administrative expense - PDSG		4,472		13,518		4,521		13,931
Selling, general and administrative expense - Patriot		-		-		872		56,379
Total	$	4,955	$	14,968	$	5,876	$	71,862

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

December 1 – 31, 2011		552,016	$	0.05		552,016
January 1 – 31, 2012		12,050	$	0.08		12,050
February 1 – 29, 2012		40,000	$	0.13		40,000
Total		604,066	$	0.06		604,066