For the quarterly period ended August 31, 2011

11. Subsequent Events

During the period September 1, 2011 through October 7, 2011, we purchased 140,500 shares of our common stock at an aggregate cost of $6,668 pursuant to our stock buyback program.

On October 6, 2011, we settled our dispute with TPL regarding the management of the MMP Portfolio. Pursuant to the terms of the executed settlement agreement, TPL has agreed to have PDS take the following actions: 1) allocate to PTSC $1,100,000 at the rate of five and ten percent of future distributions due to TPL as a member of PDS, 2) TPL has agreed to increased review and procedures by PDS and us on all MMP Portfolio licensing, 3) we have agreed to have PDS pay TPL for certain litigation and reexamination support services at the rate of $172,000 for June 2011, and $86,000 per month thereafter until 60 days after the Markman hearing in the current patent infringement litigation, 4) the parties have agreed to established guidelines and procedures relating to proposed license arrangements to be entered into by TPL involving the MMP Portfolio patents and one or more other patents within TPL’s portfolio that is not an MMP Portfolio patent, and 5) a procedure for allocating revenue between the MMP Portfolio patents and the non-MMP Portfolio patents, if needed.

21

10Q for period ending Nov 30, 2011

Liquidity and Management’s Plans

Cash shortfalls currently experienced by Phoenix Digital Solutions, LLC (“PDS”) and continued negative cash flows incurred by PDSG will have an adverse effect on our liquidity. Accordingly, we have and may continue to examine alternatives that could allow for the partnering or divestiture of PDSG. If successful, these measures may provide for a further reduction in expenses and cash use, or additionally in the event of divestiture, cash proceeds, although given the operational history of PDSG to date there can be no guarantee that a divestiture will result in the realization of material consideration. With respect to PDS, although we presently do not have any contractual commitments to fund any cash requirements (see Note 6), in December 2011 we did contribute $200,000 in additional capital to PDS, in order to fund a portion of a legal retainer discussed below. In addition, we do not have any intention of funding any cash requirements of our 50% partner in PDS, Technology Properties Limited, Inc. (“TPL”).

6

Patriot Scientific Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

Liquidity and Management’s Plans (continued)

Our current liquid cash resources as of November 30, 2011, 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 as the revenues from our PDSG subsidiary are insufficient to cover the costs of their operations and the costs of Patriot Scientific Corporation as a whole. 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 $8,975,788 at November 30, 2011. In December 2011, TPL engaged new 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 that we contributed to PDS referred to above, was used to pay the first installment of such retainer. The remaining balance of the retainer is anticipated to be funded by PDS from licensing revenues. In the event that PDS does not have the funds to pay one or more installments 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

I guess we will know soon enough if the $86,000 per month payment to TPL has stopped and if there have been any additional contributions to PDS towards the retainer mentioned above