THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS". SEE ALSO OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MAY 31, 2008.

Overview

In June 2005, we entered into a series of agreements with TPL and others to facilitate the pursuit of infringers of our intellectual property. We intend to continue our joint venture with TPL to pursue license agreements with infringers of our technology. We believe that utilizing the option of working through TPL, as compared to creating and using a Company licensing team for those activities, avoids a competitive devaluation of our principal assets and is a prudent way to achieve the desired results as we seek to obtain fair value from users of our intellectual property.

With the proceeds generated by these licensing efforts, we are undertaking to make investments in technologies, and acquisitions of companies operating in the electronics technology market sector by way of i) selective expansion of our IP portfolio, ii) pursuit of strategic minority investments in certain early-stage revenue or technology ventures that represent a technology or capability of interest to us, and iii) full M&A transactions.

Critical Accounting Policies and Estimates

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

1. Revenue Recognition

Historically we recognized revenue from the sale of our microprocessor chips upon shipment to the customer, at which time title transferred and we had no further obligations. We discontinued the sale of our microprocessor chips during the first fiscal quarter of 2009. 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), and the customer is provided with the licensed technology, if applicable. Fees for maintenance or support are recorded on a straight-line basis over the underlying period of performance.

Crossflo sells software and services to end users primarily through relationships with systems integrators and prime contractors. Crossflo recognizes revenue in accordance with Statement of Position No. 97-2, Software Revenue Recognition, and all related amendments and interpretations ("SOP 97-2"). Crossflo's revenue is 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 term of the support period. Revenue for support services is recognized on a straight-line basis over the support period.

When a sale involves multiple elements, Crossflo allocates the entire fee from the arrangement to each respective element based on its Vendor Specific Objective Evidence ("VSOE") of fair value and recognizes revenue when each element's revenue recognition criteria are met. VSOE of fair value for each element is established based on the price charged when the same element is sold separately. Crossflo has not yet demonstrated VSOE for the professional services that are rendered in conjunction with its software license sales. Accordingly, we have combined their presentation on our condensed consolidated statements of operations under the caption "License and service revenue".

The majority of Crossflo's contracts with customers, including systems integrators and prime contractors, are multiple element arrangements which contain professional services that are considered essential to the functionality of the other elements of the arrangement. Crossflo accounts for revenue recognition on these arrangements according to the provisions of AICPA Statement of Position (SOP) 81-1, Accounting for Performance of Construction-Type and Certain Production-Type Contracts. Under SOP 81-1, Crossflo recognizes revenue based on progress towards contract completion measured by actual hours incurred in relation to the estimate of total expected hours. Crossflo measures SOP 81-1 revenues by applying the contract-specific estimated percentage of completion to the total contract amount for software and professional services. Crossflo routinely updates the estimates of future hours for agreements in process and reports any cumulative effects of such adjustments in current operations. Crossflo immediately recognizes any loss expected on these contracts when it is projected that loss is probable.

In certain situations where Crossflo's customer contracts contain acceptance criteria or other conditions that are deemed adverse to the probability for collection, revenues recognized are limited by the amount of cash already collected.

Holocom recognizes revenue upon shipment of its product or upon receipt of its product by the customer when shipped FOB destination and recognizes revenue on its short-term installation contracts as time and materials costs are incurred.

Holocom maintains agreements with stocking distributors. These agreements provide for a limited product warranty for a period of one year from the date of sale to the end user. The warranty does not cover damage to the product after it has been delivered to the distributor. Holocom's stocking distributor agreements also allow limited rights to periodic stock rotation. These rotation rights allow for the exchange of a percentage of distributor inventory for replacement products of the distributor's choosing. At November 30, 2008, Holocom has evaluated the potential for rotated product and has provided for the estimated impact in the accounting records.

2. Assessment of Contingent Liabilities

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

3. Stock Options and Warrants

On June 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment, which establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, primarily focusing on accounting for transactions where an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments, including stock options, based on the grant-date fair value of the award and to recognize it as compensation expense over the period the employee is required to provide service in exchange for the award, usually the vesting period. Stock-based awards to non-employees are accounted for using the fair value method in accordance with SFAS No. 123, Accounting for Stock Based Compensation.

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

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Stock-based compensation expense recognized in our condensed consolidated statement of operations for the six months ended November 30, 2007 included compensation expense for the share-based payment awards granted subsequent to May 31, 2007 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). Stock-based compensation expense recognized in our condensed consolidated statement of operations for the six months ended November 30, 2008 included compensation expense for share-based payment awards granted prior to May 31, 2008 based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R). As stock-based compensation expense recognized in the condensed consolidated statements of operations is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The estimated average forfeiture rate for the six months ended November 30, 2008 and 2007 of approximately 5% was based on historical forfeiture experience and estimated future employee forfeitures. The estimated pricing term of option grants for the six months ended November 30, 2008 and 2007 was five years.

4. Income Taxes

We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. We believe that a substantial majority of the deferred tax assets recorded on our balance sheet will ultimately be recovered. However, should there be a change in our ability to recover the deferred tax assets; the tax provision would increase in the period in which we determined that the recovery was not probable.

Additionally, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109, or FIN 48, on June 1, 2007, the first day of fiscal 2008. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. FIN 48 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 FIN 48 we may only recognize tax positions that meet a "more likely than not" threshold.

5. Investments in Affiliated Companies

We have a 50% interest in PDS. We account for our investment using the equity method of accounting since the investment provides us the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of the investee of between 20% and 50%, although other factors, such as representation on the investee's Board of Directors, are considered in determining whether the equity method of accounting is appropriate. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the consolidated statement of operations in the caption "Equity in earnings of affiliated companies".

We have a 37.4% interest in Talis. We account for our investment using the equity method of accounting pursuant to paragraph 8 of AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures (which has applicability to non-Real Estate accounting matters as well) as our membership share of this limited liability company is more than minor. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize our share of net earnings or losses of the investee and is recognized in the consolidated statement of operations in the caption "Equity in earnings of affiliated companies".

We own 37.1% of the preferred stock of Avot. This investment is accounted for at cost since we do not have the ability to exercise significant influence over the operating and financial policies of Avot.

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

6. Variable Interest Entity

We own 100% of the preferred stock of Holocom. On March 27, 2007 we entered into an 18 month revolving line of credit with Holocom for a maximum amount of $500,000 which matured on September 27, 2008. The line of credit was paid in full on August 31, 2008. During July 2008, Holocom obtained a credit facility from a third party which we guaranteed. The line of credit and the subsequent guaranty by us caused us to have a variable interest in Holocom, a variable interest entity, and we have determined that we are the primary beneficiary as we absorb more than half of the variable interest entity's expected losses. FASB Interpretation 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 ("FIN 46") as modified by FASB in December of 2003 ("FIN 46(R)"), requires us to consolidate Holocom as long as we are deemed to be the primary beneficiary.

We reevaluate our primary beneficiary position at each of our balance sheet dates using the guidance in FIN 46(R). If we are no longer deemed to be the primary beneficiary of the variable interest entity, we will discontinue consolidation.

Results of Operations

Comparison of the Three Months Ended November 30, 2008 and Three Months Ended
November 30, 2007.

Consolidated:

                                                     Three Months Ended
                                          November 30, 2008       November 30, 2007
 Revenues:
 Product sales and other                 $         1,616,908     $           945,830
 License and service revenue                         258,353                       -
 Total revenues                                    1,875,261                 945,830

 Cost of sales:
 Product sales and other                             700,365                 356,338
 License and service revenue                         165,140                       -
 Amortization of purchased intangibles               211,302                       -
 Total cost of sales                               1,076,807                 356,338
 Gross profit                            $           798,454     $           589,492

Segment Results:

                                                                 Three months ended
                                                 November 30, 2008                November 30, 2007

Holocom:                                     Dollars       % of Revenue       Dollars       % of Revenue
 Revenues - Product sales and other        $ 1,610,658             100.0 %   $  933,280             100.0 %
 Cost of sales                                 700,365              43.5 %      356,338              38.2 %
 Gross profit                              $   910,293              56.5 %   $  576,942              61.8 %

Crossflo:
 License and service revenue               $   258,353             100.0 %   $        -                 -
 Cost of sales                                 165,140              63.9 %            -                 -
Amortization of purchased intangibles          211,302                 -              -                 -
 Gross profit                              $  (118,089 )               -     $        -                 -

PTSC:
 Revenues - Product sales and other        $     6,250             100.0 %   $   12,550             100.0 %
 Cost of sales                                       -                 -              -                 -
 Gross profit                              $     6,250             100.0 %   $   12,550             100.0 %

Holocom

During the three months ended November 30, 2008 and 2007, we recorded sales amounting to approximately $1,611,000 and $933,000, respectively, by our consolidated variable interest entity, Holocom, with cost of sales amounting to approximately $700,000 and $356,000, respectively. The increase in sales for Holocom during the three months ended November 30, 2008 as compared to the three months ended November 30, 2007 is primarily due to increased sales to distributors.

Crossflo

We acquired Crossflo on September 1, 2008. Revenue consists of software licenses and related services relating to Crossflo's CDX data agent product. Cost of sales includes the direct time of Crossflo employees on each project as well as outside contractors. Included in cost of sales is approximately $211,300 of amortization expense on purchased intangible assets.

PTSC

During the three months ended November 30, 2008 and 2007, we recognized maintenance fee revenues totaling approximately $6,250 and $6,250 in connection with an agreement with AMD Corporation during the 2005 fiscal year. The agreement called for maintenance fees totaling $100,000 connected with a license agreement for our Ignite technology; the license fee revenue is being recognized as revenue evenly over the four year period of the license.

In addition during the three months ended November 30, 2007, we recorded sales of approximately $6,300 from the sale of microprocessor chips that we no longer market. Inventory associated with the sales of these microprocessor chips is carried at zero value. Our final sales of microprocessor chips occurred during the quarter ended August 31, 2008.

Consolidated

Our revenues increased from approximately $946,000 for the three months ended November 30, 2007 to approximately $1,875,000 for the three months ended November 30, 2008. Our revenue amounts do not include income of approximately $251,000 and $5,486,000, respectively, from our investment in PDS for the three months ended November 30, 2008 and 2007, respectively, and a loss of approximately $141,000 from our investment in Talis for the three months ended November 30, 2008.

Three months ended November 30, 2008 November 30, 2007 Research and development $ 151,874 $ -

Crossflo

We acquired Crossflo on September 1, 2008. Research and development costs
consist of Crossflo's payroll and related expenses for software engineers as
well as outside contractors retained to assist in development of Crossflo's
software product. For the three months ended November 30, 2008, approximately
$378 of non cash compensation was recorded in connection with vesting of
employee stock options in accordance with SFAS 123(R).

Consolidated:

                                                    Three months ended
                                         November 30, 2008       November 30, 2007
  Selling, general and administrative   $         2,175,788     $         1,986,363



Segment Results:
                                                    Three months ended
                                         November 30, 2008       November 30, 2007
  Holocom:
  Selling, general and administrative   $           567,672     $           456,355
  Crossflo:
  Selling, general and administrative   $           636,092     $                 -
  PTSC:
  Selling, general and administrative   $           972,024     $         1,530,008

Holocom

Selling, general and administrative expenses increased from approximately $456,000 for the three months ended November 30, 2007 to approximately $568,000 for the three months ended November 30, 2008. The increase consisted of approximately $91,000 relating to payroll and related expenses for bonuses granted to employees, approximately $12,000 for meals and internal events, approximately $7,400 for royalty payments under the earn out agreement, approximately $5,000 for subcontractors and approximately $3,600 for legal expenses. For the three months ended November 30, 2008, approximately $6,700 of non cash compensation was recorded in connection with vesting of employee stock options in accordance with SFAS 123(R). These increases were offset by a decrease in travel and related expenses of approximately $18,000.

Crossflo

We acquired Crossflo on September 1, 2008. Selling, general and administrative expenses for the three months ended November 30, 2008 consist of approximately $435,000 of payroll and related expenses for the sales and administrative employees, approximately $58,000 of travel and related expenses for the sales employees, approximately $11,000 for sales commissions, approximately $19,000 for sales consultants, and approximately $26,000 for rent expense. For the three months ended November 30, 2008, approximately $15,600 of non cash compensation was recorded in connection with vesting of employee stock options in accordance with SFAS 123(R).

PTSC

Selling, general and administrative expenses decreased from approximately $1,530,000 for the three months ended November 30, 2007 to approximately $972,000 for the three months ended November 30, 2008. The decrease consisted of approximately $752,000 in legal and accounting expense, primarily due to capitalization of legal and accounting fees in connection with the Crossflo acquisition, approximately $45,000 in public and investor relations expenses, and approximately $63,000 in consulting expenses. These decreases were offset by increases in payroll and related expenses of approximately $253,000 related to officer bonuses, and approximately $19,000 in travel and related expenses. For the three months ended November 30, 2008, approximately $142,000 of non cash compensation was recorded in connection with vesting of employee stock options in accordance with SFAS 123(R) as compared to approximately $63,000 for the three months ended November 30, 2007.

Consolidated

Selling, general and administrative expenses increased from approximately
$1,986,000 for the three months ended November 30, 2007 to approximately
$2,176,000 for the three months ended November 30, 2008, primarily due to the
acquisition of Crossflo and Patriot's capitalization of transaction costs in
connection with the acquisition.

                                                  Three months ended
                                      November 30, 2008         November 30, 2007
    Settlement and license expense   $                 -       $           388,660

Patriot recorded settlement and license expenses amounting to approximately $389,000 for the three months ended November 30, 2007 relating to royalties payable resulting from an agreement with Fish (see Note 10 to our condensed consolidated financial statements for more information).

Consolidated:
                                                           Three months ended
                                                      November 30,     November 30,
                                                          2008             2007
    Other income (expense):
   Interest and other income                          $    144,748     $    301,066
   Loss on sale of assets                                   (1,733 )           (924 )
   Interest expense                                        (16,075 )              -
   Equity in earnings of affiliated companies              109,739        5,486,039
          Total other income, net                     $    236,679     $  5,786,181



Segment Results:
                                                           Three months ended
                                                      November 30,     November 30,
                                                          2008             2007
   Holocom:
   Interest and other income                          $      2,587     $      5,507
   Interest expense                                         (2,500 )              -
   Loss on sale of assets                                        -                -
   Total other income, net                            $         87     $      5,507
   Crossflo:
   Interest and other income                          $      3,003     $          -
   Interest expense                                            (17 )              -
   Loss on sale of assets                                   (1,733 )              -
   Total other income, net                            $      1,253     $          -
   PTSC:
   Interest and other income                          $    139,158     $    295,559
   Interest expense                                        (13,558 )              -
   Loss on sale of assets                                        -             (924 )
   Equity in earnings of affiliated companies              109,739        5,486,039
   Total other income, net                            $    235,339     $  5,780,674

Consolidated

Our other income and expenses for the three months ended November 30, 2008 included equity in the earnings of PDS consisting of net income after expenses in the amount of approximately $251,000 and our share of loss in Talis consisting of approximately $141,000 after expenses. For the three months ended November 30, 2007, our other income and expenses included our share of income in PDS of approximately $5,486,000. Our investments in PDS and Talis are accounted for in accordance with the equity method of accounting for investments. Total other income and expense for the three months ended November 30, 2008 amounted to net other income of approximately $237,000 compared with approximately $5,786,000 for the three months ended November 30, 2007. Interest income and other income decreased from approximately $296,000 for the three months ended November 30, 2007 to approximately $139,000 for the three months ended November 30, 2008 due to declines in interest rates for our cash, cash equivalents and short term investment accounts.

During the three months ended November 30, 2008 we recorded a benefit for income . . .