**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**




WASHINGTON,
      D.C. 20549




**FORM
      10-KSB**




**x** **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE**


**ACT
      OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2006**





**OR**





** ̈** **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
      SECURITIES**


**EXCHANGE
      ACT OF 1934 for the transition period from _____ to _____**





*COMMISSION
      FILE NUMBER: 000-21785*





**Rim
      Semiconductor Company**


(Name
      of
      small business issuer in its charter)




UTAH
              (State
                or other jurisdiction of
              incorporation
                or organization)
            95-4545704
              (I.R.S.
                employer
              identification
                no.)





305
                NE 102ND AVENUE, SUITE 105
              PORTLAND,
                OREGON 97220
              (Address
                of principal executive offices,
              including
                zip code)
            (503)
                257-6700
              (Issuer’s
                telephone number,
              including
                area code)





SECURITIES
      REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:


None





SECURITIES
      REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:


Common
      Stock, $.001 Par Value


___________________________________________________________________________





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act.  ̈




Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No  ̈




Check
      if
      there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
      S-B contained in this form, and no disclosure will be contained, to the best
      of
      registrant’s knowledge, in definitive proxy or information statements
      incorporated by reference in Part III of this Form 10-KSB or any amendment
      to
      this Form 10-KSB.  ̈




Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes  ̈ No x




Issuer’s
      revenues for the fiscal year ended October 31, 2006: $61,699




The
      aggregate market value of the registrant’s common stock, $0.001 par value per
      share, held by non-affiliates of the registrant on January 24, 2007 was
      approximately $50,275,000 (based on the closing sales price of the registrant’s
      common stock on that date ($0.12)). Shares of the registrant’s common stock held
      by each officer and director and each person known to the registrant to own
      10%
      or more of the outstanding voting power of the registrant have been excluded
      in
      that such persons may be deemed to be affiliates. This determination of
      affiliate status is not a determination for other purposes.




The
      number of shares of the issuer’s common stock outstanding as of January 24, 2007
      was 424,795,899.




DOCUMENTS
      INCORPORATED BY REFERENCE: None




Transitional
      Small Business Disclosure Format: Yes  ̈ No x











**RIM
      SEMICONDUCTOR COMPANY**


**2006
      ANNUAL REPORT ON FORM 10-KSB**





**TABLE
      OF CONTENTS**





PART
                I
            **PAGE**ITEM
                1.
            DESCRIPTION
                OF BUSINESS
            1ITEM
                2.
            DESCRIPTION
                OF PROPERTY
            14ITEM
                3.
            LEGAL
                PROCEEDINGS
            14ITEM
                4.
            SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY HOLDERS
            14PART
                IIITEM
                5.
            MARKET
                FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
                SMALL BUSINESS ISSUER PURCHASES OF EQUITY
                SECURITIES
            14ITEM
                6.
            MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            17ITEM
                7.
            FINANCIAL
                STATEMENTS
            29ITEM
                8.
            CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                AND FINANCIAL DISCLOSURE
            29ITEM
                8A.
            CONTROLS
                AND PROCEDURES
            29ITEM
                8B.
            OTHER
                INFORMATION
            29PART
                IIIITEM
                9.
            DIRECTORS
                AND EXECUTIVE OFFICERS
            30ITEM
                10.
            EXECUTIVE
                COMPENSATION
            33ITEM
                11.
            SECURITY
                OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                STOCKHOLDER MATTERS
            35ITEM
                12.
            CERTAIN
                RELATIONSHIPS AND RELATED TRANSACTIONS
            36ITEM
                13.
            EXHIBITS
            37ITEM
                14.
            PRINCIPAL
                ACCOUNTANT FEES AND SERVICES
            41





**PART
      I**





**ITEM
      1.**  **DESCRIPTION
      OF BUSINESS.**





**Overview**





Rim
      Semiconductor Company (the “Company,” “we,” “our,” or “us”) is developing
      advanced transmission technology products to enable data to be transmitted
      across copper telephone wire at speeds and over distances that exceed those
      offered by leading DSL technology providers. In September 2005, the Company
      changed its name from New Visual Corporation to Rim Semiconductor Company.
      Our
      common stock trades on the OTC Bulletin Board under the symbol RSMI. Our
      corporate headquarters are located at 305 NE 102nd Avenue, Portland, Oregon
      97220 and our telephone number is (503) 257-6700.





Our
      initial chipset in a planned family of transport processors, the CupriaTM
(formerly known as EmbarqTM )
      Cu5001
      digital signal processor, was first shown to several prospective customers
      during the first fiscal quarter of 2006. In
      the
      third fiscal quarter of 2006, we initiated a technical cooperation program
      with
      Embarq Corporation of Overland Park, Kansas that will evaluate the potential
      application of our integrated circuits in Embarq’s data network. As part of this
      program, we and Embarq are working with suppliers to develop prototype network
      elements like digital subscriber line access multiplexers and consumer modems
      that utilize our chipset. If such prototypes are developed and subsequent lab
      evaluations are deemed successful, Embarq has agreed to conduct a field trial
      of
      our CupriaTM family of semiconductors and to share its observations from the
      trial with its suppliers. As part of our efforts to produce network
      infrastructure equipment utilizing the Cu5001 that we believe will be suitable
      for use in Embarq’s network, we secured a commitment from Extreme Copper, Inc.
      of Newbury Park, California to incorporate the Cu5001 in its next generation
      digital subscriber line access multiplexers (DSLAM) and customer premises
      equipment (CPE).




While
      our
      technology is currently available for evaluation and testing in field
      programmable gate array (“FPGA”) form, we do not believe that we will realize
      substantial revenues until our technologies are mass-produced in
      application-specific standard part (“ASSP”) form. We estimate that it will cost
      approximately $400,000 of additional engineering and fabrication expense in
      order to produce a mass market ASSP version. Subject to raising the needed
      capital, we estimate that we will complete them during the second fiscal quarter
      of 2007. To date, we have not recorded any revenues from the sale of products
      based on our technology and have not secured any purchase orders to sell our
      products.





We
      estimate that we will need an additional $1 million to accelerate our sales,
      marketing, manufacturing and customer service activities. We presently do not
      have the capital resources to undertake any of these steps, although we do
      have
      a commitment from an institutional investor to purchase $6 million of 7% Senior
      Secured Convertible Debentures upon our request at any time after March 1,
      2007.
      The complexity of our technology could result in unforeseen delays or expenses
      in the commercialization process, and there can be no assurance that we will
      be
      able to successfully commercialize our semiconductor technology.





We
      expect
      that system-level products that use our technology will have a significant
      advantage over existing system-level products that use existing broadband
      technologies, such as digital subscriber line (DSL), because such products
      will
      transmit data faster, and over longer distances. We expect products using our
      technology will offer numerous advantages to the network operators that deploy
      them, including the ability to support new services, the ability to offer
      existing and new services to previously unreachable locations in their network,
      reduction in total cost of ownership, security, and
      reliability.





1





**Our
      Telecommunications Business**




***The
      Technology Underlying Our Proposed Solution***




Since
      the
      inception of our technology development effort in 2000, we have endeavored
      to
      define, design and commercialize an entirely new set of technologies and
      protocols for transmitting very high-speed data across telephone wires. This
      set
      of technologies is called Internet protocol subscriber line, or IPSL. IPSL
      1.0
      contains contributions from several sources in addition to our own research
      and
      development efforts. These sources are described below.





In
      April
      2002, we entered into a development and license agreement with Adaptive
      Networks, Inc. (“Adaptive”) to acquire a worldwide, perpetual license to
      Adaptive’s PowerstreamTM technology, intellectual property, and patent portfolio
      for use in products relating all applications in the field of the copper
      telephone wire telecommunications network. Adaptive is engaged in the research,
      development and sales of silicone embedded networking technology of use in
      wiring environments. PowerstreamTM technology refers to technologies that enable
      data transmission across wiring infrastructures inside buildings. Under the
      agreement with Adaptive, we have a license and/or co-own six issued patents
      in
      the United States pertaining to methodologies for modifying data in order to
      transmit it more efficiently on metallic media.





Adaptive
      is entitled to a percentage of any net sales of products sold by us and any
      license revenue we receive from the licensed and co-owned technologies, less
      the
      first five million dollars that would otherwise be payable to them under this
      royalty arrangement.





In
      February 2006, we obtained a license to include HelloSoft Inc.’s integrated
      voice over Internet protocol (VoIP) software suite in the CupriaTM family of
      transport processors. We believe that the inclusion of VoIP features in our
      products will enable customers to eliminate components currently placed on
      their
      modems that are dedicated to VoIP. We expect this reduction in components will
      lower their cost of production by more than 20% and eliminate significant design
      complexity. In exchange for such rights, we have paid to HelloSoft a license
      fee
      and will pay certain royalties based on our sales of products including the
      licensed technology.





In September
      2006, we purchased substantially all of the assets of 1021 Technologies,
      Inc. and 1021 Technologies KK. The assets purchased include the rights
      to nine patents, seven patent applications, a completed VDSL
      semiconductor, VDSL2 software and hardware technology components, and various
      computer equipment and related software. This asset acquisition consisted of
      a
      cash payment of $150,000 plus the issuance of 500,000 shares of restricted
      common stock valued at $78,000, for a total of $228,000, and has been recorded
      as an addition to technology license and capitalized software development
      costs.





***Our
      Product Line***





We
      are
      developing an advanced transmission technology to enable data to be transmitted
      across copper telephone wire at faster speeds and over greater distances than
      is
      presently offered by leading digital subscriber line (DSL) technology providers.
      We believe our technology, using the name CupriaTM ,  offers
      significant improvements over existing broadband technologies by
      utilizing:





·
            quality
                of service approaches that are optimized for high definition
                television;·
            a
                wideband, extremely high-speed transport protocol;·
            on-the-fly
                rapid equalization;·
            a
                low noise floor; and·
            flexible
                upstream/downstream asymmetry.





We
      believe that telephone companies will find that applications such as streaming
      media, VoIP, and peer-to-peer file sharing work better as a result.





2





***Broadband
      Opportunities Over Metallic Media***





We
      believe the value of the existing copper-based telephone network is directly
      related to the amount of data that it can deliver. We also believe there are
      substantial business opportunities for companies that can develop technologies
      that increase the data-bearing capability, or bandwidth of this network,
      enabling telephone network operators to increase their offering of services
      and
      reduce the cost of network upgrades. Worldwide, this network contains over
      1.3
      billion copper lines, and currently delivers to end users most of the world’s
      telephone traffic and much of its broadband access. Virtually every home,
      business and governmental location in the United States, Europe and East Asia
      is
      served with an existing copper wire connection.




The
      existing copper wire connections were not engineered by service providers to
      support high-speed data. Originally buried in the ground or strung on aerial
      cables to only carry voice calls, these wires are ill suited to carrying
      high-speed data. The single most important technical limitation is that the
      amount of data that a given piece of copper wire is capable of bearing reduces
      as a function of its length. Thus, shorter wires can support higher data rates,
      and longer wires must support lower data rates. This lack of suitability has
      been the largest driving force behind the telephone companies’ recent capital
      investments in new fiber optic and wireless “last mile” networks. When either of
      these technologies is introduced into a previously copper-based network, the
      copper wires are either shortened or eliminated entirely. While the introduction
      of our  technologies
      is not likely to completely eliminate the need for fiber optics or for wireless
      deployments, we believe that it could reduce or forestall them. Such reduction
      or delay positively reduces the capital expenditures of the service providers.
      Thus, we believe that the existing worldwide copper wire base offers significant
      advantages over these alternative networks as a medium for providing broadband
      access, and that telephone companies adopting our technologies will enjoy these
      benefits:




*Low
      Cost Deployment.* First,
      these solutions enable the service provider to leverage a huge existing
      infrastructure, avoiding the high costs associated with replacing the local
      loop
      with fiber, laying new cable or upgrading existing cable connections, or
      deploying relatively new wireless or satellite communications technologies.
      Because our technology uses the existing local loop, they can be less expensive
      to deploy than other high-speed data transmission technologies.




*Limited
      Service Degradation and Improved Security Over Alternative
      Technologies.* In
      contrast to cable delivery systems, our technology is a point-to-point
      technology that connects the end user to the service provider’s central office
      or to an intermediate hub over copper wire. Our technology therefore does not
      encounter service degradation as other subscribers are added to the system,
      and
      also allows a higher level of security. Alternative technologies, such as cable,
      are shared systems and may suffer degradation and increased security risk as
      the
      number of end users on the system increases.




*Rapid
      Deployment.* Because
      virtually every home and business in the United States, Europe and
      East Asia have existing copper telephone wire connections, copper
      wire-based broadband solutions can be rapidly deployed to a large number of
      potential end users.





**Competition**




The
      market for high-speed telecommunications products is highly competitive, and
      we
      expect that it will become increasingly competitive in the future. Our
      competitors, including Centillium Communications, Inc., Conexant Systems, Inc.,
      PMC-Sierra, Texas Instruments Incorporated, Ikanos Communications, ST
      Microelectronics N.V., Metalink Ltd., Broadcom Corporation, Infineon
      Technologies A.G. and others, have developed and are currently marketing
      technologies that also address the existing technical impediments of using
      existing copper networks as broadband options or are otherwise substantially
      similar to our products. Our competitors include some of the largest, most
      successful domestic and international telecommunications companies and other
      companies with well-established reputations in the broadband telecommunications
      industry. Our competitors possess substantially greater name recognition,
      financial, sales and marketing, manufacturing, technical, personnel, and other
      resources than we have. These competitors may also have pre-existing
      relationships with our potential customers. These competitors may compete
      effectively with us because in addition to the above-listed factors, they more
      quickly introduce new technologies, more rapidly or effectively address customer
      requirements or devote greater resources to the promotion and sale of their
      products than we do. Further, in the event of a manufacturing capacity shortage,
      these competitors may be able to manufacture products when we are unable to
      do
      so. In all of our target markets, we also may face competition from newly
      established competitors, suppliers of products based on new or emerging
      technologies, and customers who choose to develop wire based solutions that
      are
      functionally similar to our semiconductor technologies.





3





We
      believe we will be able to compete with these companies because our products
      are
      designed to increase the data transfer rates of broadband transmission over
      copper telephone wire at rates not yet achieved by competing wire based
      technologies.





In
      addition to facing competition from providers of DSL-based products, we will
      compete with products using other broadband technologies, such as cable modems,
      wireless, satellite, and fiber optic telecommunications technology. Commercial
      acceptance of any one of these competing solutions could decrease demand for
      our
      products.





We
      also
      face competition from new technologies that are currently under development
      that
      may result in new competitors entering the market with products that may make
      ours obsolete. We cannot predict the competitive impact of these new
      technologies and competitors.





**Proprietary
      Rights**





We
      currently rely on a combination of trade secret, patent, copyright and trademark
      law, as well as non-disclosure agreements and invention-assignment agreements,
      to protect our proprietary information. However, such methods may not afford
      complete protection and there can be no assurance that other competitors will
      not independently develop similar processes, concepts, ideas and documentation.
      Under our agreement with Adaptive, we have a license to and/or co-own six
      issued patents and six pending patent application in the United States. As
      a result of our purchase of the assets of 1021 Technologies, we own nine issued
      patents and seven pending patent applications in the United States. All of
      these
      issued and pending patents pertaining to methodologies for modifying data in
      order to transmit it more efficiently on metallic media. We also rely upon
      trade
      secrets, know-how, continuing technological innovations and licensing
      opportunities to develop our competitive position. Our policy is to protect
      our
      technology by, among other things, filing, or requiring the applicable licensor
      to file, patent applications for technology that we consider important to the
      development of our business. We intend to file additional patent applications,
      when appropriate, relating to our technology, improvements to the technology,
      and to specific products we develop.





Our
      policy is to require our employees, consultants, other advisors, as well as
      software design collaborators, to execute confidentiality agreements upon the
      commencement of employment, consulting or advisory relationships. These
      agreements generally provide that all confidential information developed or
      made
      known to the individual by us during the course of the individual’s relationship
      with us is to be kept confidential and not to be disclosed to third parties
      except in specific circumstances. In the case of employees and consultants,
      the
      agreements provide that inventions conceived by the individual in the course
      of
      their employment or consulting relationship shall be our exclusive property.
      There can be no assurance, however, that these agreements will provide
      meaningful protection or adequate remedies for trade secrets in the event of
      unauthorized use or disclosure of such information.





**Government
      Regulation**





Our
      products are likely to be subject to extensive regulation by each country and
      in
      the United States by federal and state agencies, including the Federal
      Communications Commission (the “FCC”), and various state public utility and
      service commissions. There are some regulations pertaining to the use of the
      available bandwidth spectrum at present that have been interpreted by our target
      customers as discouraging to the technical innovations that we are bringing
      to
      market, though we do not believe this to be the case. Further, regulations
      affecting the availability of broadband access services generally, the terms
      under which telecommunications service providers conduct their business, and
      the
      competitive environment among service providers, for example, could have a
      negative impact on our business.





4





Our
      Joint
      Venture





In
      April
      2000, our NV Entertainment subsidiary entered into a joint venture production
      agreement to produce a feature length film, “Step Into Liquid”. We own a 50%
      interest in the joint venture. The financial condition and results of operations
      of the joint venture are consolidated with our financial condition and results
      of operations on the accompanying consolidated financial statements. The film
      was released to theaters in the United States in 2003 and is currently in
      foreign and DVD distribution. During the years ended October 31, 2006 and 2005,
      we recognized revenues of $61,699 and $39,866, respectively, from the film.
      We
      recorded amortization expense of $0 and $11,945 related to the film for the
      years ended October 31, 2006 and 2005, respectively.





As
      a
      result of impairment reviews during the years ended October 31, 2006 and
      2005, we reduced the carrying value of the film to $0 on our balance
      sheet.





**Research
      and Development**





We
      outsourced all of the development activities with respect to our products to
      independent third party developers until April 2006, when we hired our first
      engineer. During the third and fourth fiscal quarters of 2006, we hired a Vice
      President to oversee the development and marketing of our semiconductors as
      well
      as four other engineering employees to supervise the continued development
      of
      our products. Together, our outsourced and employed engineer head count on
      October 31, 2006 totaled 18 full-time equivalent personnel. During fiscal years
      2006 and 2005, we expended $325,124 and $366,306, respectively, for research
      and
      development of our semiconductor technology.





**Manufacturing
      and Suppliers**





We
      intend
      to contract with third party manufacturers to produce our products and will
      rely
      on third party suppliers to obtain the raw materials essential to our products’
production. Manufacturing of products utilizing our semiconductor technologies
      will be a complex process and we cannot assure you that we will not experience
      production problems or delays. Any interruption in operations could materially
      and adversely affect our business and operating results.





There
      may
      be a limited number of suppliers of some of the components necessary for the
      manufacture of products utilizing our semiconductor technologies. The reliance
      on a limited number of suppliers, particularly if such suppliers are foreign,
      poses several risks, including a potential inability to obtain an adequate
      supply of required components, low manufacturing yields and reduced control
      over
      pricing, quality and timely delivery of components. We cannot assure you that
      we
      will be able to obtain adequate supplies of raw materials. Certain key
      components of our semiconductor technologies may involve long lead times, and
      in
      the event of an unanticipated increase in the demand for our products, we could
      be unable to manufacture certain products in a quantity sufficient to satisfy
      potential demand. If we cannot obtain adequate deliveries of key components,
      we
      may be unable to ship products on a timely basis. Low manufacturing yields
      could
      cause us to incur substantially higher costs of goods sold. Delays in shipment
      could damage our relationships with customers and could harm our business and
      operating results.





On
      December 19, 2006, we announced a strategic partnership with eSilicon
      Corporation of Sunnyvale, California, a leading supplier of custom integrated
      circuits to the telecommunications industry. eSilicon is to manage the physical
      implementation and manufacture of the ASSP version of the Cupria Cu5001 device,
      including test program development, device test, packaging and shipment of
      the
      packaged, test parts. eSilicon’s manufacturing partner, Taiwan Semiconductor
      Manufacturing Company (TSMC), will fabricate the Rim Semi chip. TSMC is the
      world’s largest dedicated semiconductor foundry.





**Our
      Employees**





We
      currently have fourteen full-time employees and one part-time employee. We
      anticipate that we will need to hire additional employees and other personnel.
      We may, from time to time, supplement our regular work force as necessary with
      temporary and contract personnel. None of our employees is represented by a
      labor union.





5





Our
      future performance depends highly upon the continued service of the senior
      members of our management team. We believe that our future success will also
      depend upon our continuing ability to identify, attract, motivate, train and
      retain other highly skilled managerial, technical, sales and marketing
      personnel. Hiring for such personnel is intensely competitive, and there can
      be
      no assurance that we will be able to retain our key employees or attract,
      assimilate or retain the qualified personnel necessary for our business in
      a
      timely manner or at all.





**Available
      Information**





Our
      Internet website is located at http://www.rimsemi.com. This reference to our
      Internet website does not constitute incorporation by reference in this report
      of the information contained on or hyperlinked from our Internet website and
      such information should not be considered part of this report.





We
      are
      required to file annual reports on Form 10-KSB and quarterly reports on Form
      10-QSB with the Securities and Exchange Commission (“SEC”) on a regular basis,
      and are required to disclose certain material events (e.g., changes in corporate
      control; acquisitions or dispositions of a significant amount of assets other
      than in the ordinary course of business and bankruptcy) in a current report
      on
      Form 8-K. The public may read and copy any materials we file with the SEC at
      the
      SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549.
      The public may obtain information on the operation of the Public Reference
      Room
      by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website
      that contains reports, proxy and information statements and other information
      regarding issuers that file electronically with the SEC. The SEC’s Internet
      website is located at http://www.sec.gov.





**RISK
      FACTORS**





We
      are
      subject to various risks that may materially harm our business, financial
      condition and results of operations. You should carefully consider the risks
      and
      uncertainties described below and the other information in this filing before
      deciding to purchase our common stock. If any of these risks or uncertainties
      actually occurs, our business, financial condition or operating results could
      be
      materially harmed. In that case, the trading price of our common stock could
      decline and you could lose all or part of your investment.





WE
      HAVE A
      HISTORY OF LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE FOR THE FORESEEABLE
      FUTURE.





Since
      inception, we have incurred significant net losses. We incurred net losses
      of
      $15,965,621 and $4,690,382 for the years ended October 31, 2006 and 2005,
      respectively. As of October 31, 2006, we had an accumulated deficit of
      $75,847,177. We expect to continue to incur net losses for the foreseeable
      future as we continue to develop and market our products and semiconductor
      technology. We have been funding our operations through the sale of our
      securities and expect to continue doing so for the foreseeable future. Our
      ability to generate and sustain significant additional revenues or achieve
      profitability will depend upon the factors discussed elsewhere in this “Risk
      Factors” section. We cannot assure you that we will achieve or sustain
      profitability or that our operating losses will not increase in the future.
      If
      we do achieve profitability, we cannot be certain that we can sustain or
      increase profitability on a quarterly or annual basis in the future. We expect
      to increase expense levels on research and development, engineering,
      manufacturing, marketing, sales and administration as we continue to market
      our
      products, and to invest in new semiconductor technologies. These expenditures
      will necessarily precede the realization of substantial revenues from the sale
      of our semiconductor products, if any, which may result in future operating
      losses.





6





WE
      MAY
      NEED TO RAISE ADDITIONAL FUNDS IN ORDER TO ACHIEVE OUR BUSINESS
      OBJECTIVES.





As
      of
      January 24, 2007, we had cash and short-term investments of approximately
      $848,000. An institutional investor that has been a prior investor in the
      Company has committed to purchase $6 million of 7% Senior Secured Convertible
      Debentures upon our request at any time after March 1, 2007. As a result,
      management believes funds on hand or committed to us will enable us to meet
      our
      liquidity needs for the next twelve months. Nevertheless, circumstances
      may arise that would require us to raise additional capital in order to meet
      our
      liquidity needs and satisfy our current business plan prior to the receipt
      of
      revenues from our semiconductor business .
      Even
      after we begin to sell our products, we do not yet know what payment terms
      will
      be required by our customers or if our products will be successful. At the
      present time, other than the $6 million commitment referred to above, we have
      no
      commitments for any additional financing, and there can be no assurance that,
      if
      needed, additional capital will be available to us on commercially acceptable
      terms or at all. We may have difficulty obtaining additional funds as and if
      needed, and we may have to accept terms that would adversely affect our
      stockholders. Additional equity financings are likely to be dilutive to holders
      of our common stock and debt financing may involve significant payment
      obligations and covenants that restrict how we operate our
      business.





We
      also
      may be required to seek additional financing in the future to respond to
      increased expenses or shortfalls in anticipated revenues, accelerate product
      development and deployment, respond to competitive pressures, develop new or
      enhanced products, or take advantage of unanticipated acquisition opportunities.
      We cannot be certain we will be able to find such additional financing on
      commercially reasonable terms, or at all. Covenants in our agreements with
      certain holders of our 7% Senior Secured Convertible Debentures issued in March
      2006 may impede our ability to obtain additional financing. If we are unable
      to
      obtain additional financing when needed, we could be required to modify our
      business plan in accordance with the extent of available financing. We also
      may
      not be able to accelerate the development and deployment of our products,
      respond to competitive pressures, develop new or enhanced products or take
      advantage of unanticipated acquisition opportunities.





WE
      HAVE
      NOT SOLD ANY SEMICONDUCTOR PRODUCTS TO DATE AND NO ASSURANCE CAN BE PROVIDED
      THAT WE WILL DO SO.





Although
      we have entered into multi-year Supply Agreements with two prospective
      customers, we have neither received nor accepted any purchase orders for our
      semiconductor products. No assurance can be provided that we will be successful
      in concluding any significant-revenue generating agreement on terms commercially
      acceptable to us or at all.





OUR
      OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICAL NATURE OF THE
      SEMICONDUCTOR INDUSTRY AND ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
      PRICE OF OUR COMMON STOCK.





We
      operate in the semiconductor industry, which is cyclical and subject to rapid
      technological change. The semiconductor industry, from time to time, experiences
      significant downturns characterized by diminished product demand, accelerated
      erosion of prices and excess production capacity. These downturns in the
      semiconductor industry may be severe and prolonged, and could delay or hinder
      the market acceptance of our semiconductor technologies and seriously impact
      our
      revenues and harm our business, financial condition and results of operations.
      This industry also periodically experiences increased demand and production
      capacity constraints, which may affect our ability to ship products utilizing
      the semiconductor technologies in future periods. Accordingly, our quarterly
      results may vary significantly as a result of the general conditions in the
      semiconductor industry, which could cause our stock price to
      decline.





In
      addition, the worldwide telecommunications industry from time to time has
      experienced a significant downturn. In such an event, wireline
      telecommunications carriers may reduce their capital expenditures, cancel or
      delay new service introductions, and reduce their workforces and equipment
      inventories. They may take a cautious approach to acquiring new equipment from
      equipment manufacturers. Together or separately, these actions would have a
      negative impact on our business. A downturn in the worldwide telecommunications
      industry may cause our operating results to fluctuate from year to year, which
      also may tend to increase the volatility of the price of our common stock and
      harm our business.




WE
      HAVE A
      LIMITED OPERATING HISTORY IN THE TELECOMMUNICATIONS INDUSTRY AND, CONSEQUENTLY,
      THERE IS LIMITED HISTORICAL FINANCIAL DATA UPON WHICH AN EVALUATION OF OUR
      BUSINESS PROSPECTS COULD BE MADE.


7





We
      have
      only been engaged in the semiconductor business since February 2000. We have
      not
      begun commercial shipments of our semiconductors, and therefore have not
      generated any revenues from our semiconductor business. As a result, we have
      no
      historical financial data that can be used in evaluating our business prospects
      and in projecting future operating results. For example, we cannot forecast
      operating expenses based on our historical results, and we are instead required
      to forecast expenses based in part on future revenue projections. In addition,
      our ability to accurately forecast our revenue going forward is
      limited.





You
      must
      consider our prospects in light of the risks, expenses and difficulties we
      might
      encounter because we are at an early stage of product introduction in a new
      and
      rapidly evolving market. Many of these risks are described under the
      sub-headings below. We may not successfully address any or all of these risks
      and our business strategy may not be successful.





OUR
      SUCCESS IS CONTINGENT UPON THE INCORPORATION OF OUR PRODUCTS INTO SUCCESSFUL
      PRODUCTS OFFERED BY LEADING EQUIPMENT MANUFACTURERS AND THE NON-INCORPORATION
      OF
      OUR PRODUCTS INTO SUCH EQUIPMENT COULD ADVERSELY AFFECT OUR BUSINESS
      PROSPECTS.





Our
      products will not be sold directly to the end-user of broadband services;
      rather, they will be components of other products. As a result, we must rely
      upon equipment manufacturers to design our products into their equipment. If
      equipment that incorporates our products is not accepted in the marketplace,
      we
      may not achieve adequate sales volume, which would have a negative effect on
      our
      results of operations. Accordingly, we must correctly anticipate the price,
      performance and functionality requirements of these data equipment
      manufacturers. We must also successfully develop products containing our
      semiconductor technology that meet these requirements and make such products
      available on a timely basis and in sufficient quantities. Further, if there
      is
      consolidation in the data equipment manufacturing industry, or if a small number
      of data equipment manufacturers otherwise dominate the market for data
      equipment, then our success will depend upon our ability to establish and
      maintain relationships with these market leaders. If we do not anticipate trends
      in the market for products enabling the digital transmission of data, voice
      and
      video to homes and business enterprises over existing copper wire telephone
      lines and meet the requirements of equipment manufacturers, or if we do not
      successfully establish and maintain relationships with leading data equipment
      manufacturers, then our business, financial condition and results of operations
      will be seriously harmed.





BECAUSE
      WE WILL DEPEND ON THIRD PARTIES TO MANUFACTURE, PACKAGE AND TEST OUR
      SEMICONDUCTORS, WE MAY EXPERIENCE DELAYS IN RECEIVING SEMICONDUCTOR DEVICES.





We
      do not
      own or operate a semiconductor fabrication facility. Rather, semiconductor
      devices that will contain our technology will be manufactured at independent
      foundries. We intend to rely solely on third-party foundries and other
      specialist suppliers for all of our manufacturing, packaging and testing
      requirements. However, these parties may not be obligated to supply products
      to
      us for any specific period, in any specific quantity or at any specific price,
      except as may be provided in a particular forecast or purchase order that has
      been accepted by one of them. As a result, we will not directly control
      semiconductor delivery schedules, which could lead to product shortages, poor
      quality and increases in the costs of our products. Because the semiconductor
      industry is currently experiencing high demand, we may experience delays in
      receiving semiconductor devices from foundries due to foundry scheduling and
      process problems. We cannot be sure that we will be able to obtain
      semiconductors within the time frames and in the volumes required by us. Any
      disruption in the availability of semiconductors or any problems associated
      with
      the delivery, quality or cost of the fabrication packaging and testing of our
      products could significantly hinder our ability to deliver products to our
      customers.





In
      order
      to secure sufficient manufacturing capacity, we may enter into various
      arrangements that could be costly, including:




o
              option
                  payments or other prepayments to a subcontractor;o
              nonrefundable
                  deposits in exchange for capacity commitments;o
              contracts
                  that commit us to purchase specified quantities of products over
                  extended
                  periods;o
              issuance
                  of our equity securities to a subcontractor; ando
              other
                  contractual relationships with
                  subcontractors.


8




We
      may
      not be able to make any such arrangements in a timely fashion or at all, and
      any
      arrangements may be costly, reduce our financial flexibility and not be on
      terms
      favorable to us. Moreover, if we are able to secure facility capacity, we may
      be
      obligated to use all of that capacity or incur penalties. These penalties and
      obligations may be expensive and require significant capital and could harm
      our
      business.





WE
      MAY
      INCUR SUBSTANTIAL EXPENSES DEVELOPING NEW PRODUCTS BEFORE WE EARN ASSOCIATED
      NET
      REVENUES AND MAY NOT ULTIMATELY SELL A LARGE VOLUME OF OUR
      PRODUCTS.





We
      are
      currently working on new products and we anticipate that we will incur
      substantial development expenditures prior to generating associated net revenues
      from a commercially deployable version (if any). We anticipate receiving limited
      orders for our products during the period that potential customers test and
      evaluate them. This test and evaluation period typically lasts from three to
      six
      months or longer, and volume production of an equipment manufacturer’s product
      incorporating our products typically would not begin until this test and
      evaluation period has been completed. As a result, a significant period of
      time
      may lapse between product development and sales efforts and the realization
      of
      revenues from volume ordering by customers of our products. In addition,
      achieving a design win with a customer does not necessarily mean that this
      customer will order our products. A design win is not a binding commitment
      by a
      customer to purchase products. Rather, it is a decision by a customer to use
      our
      products in the design process of that customer’s equipment. A customer can
      choose at any time to discontinue using our products in that customer’s designs
      or product development efforts. Even if our products are chosen to be
      incorporated into a customer’s equipment, we may still not realize significant
      net revenues from that customer if that customer’s products are not commercially
      successful.





WE
      MAY BE
      UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR MAY BE SUED BY THIRD
      PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.





We
      outsource to independent third parties a significant portion of the design,
      development and testing activities relating to our products. Our success depends
      significantly on our ability to obtain and maintain patent, trademark and
      copyright protection for our intellectual property, to preserve our trade
      secrets and to operate without infringing the proprietary rights of third
      parties. If we are not adequately protected, our competitors could use the
      intellectual property that we have developed to enhance their products and
      services, which could harm our business.





We
      rely
      on patent protection, as well as a combination of copyright and trademark laws,
      trade secrets, confidentiality provisions and other contractual provisions,
      to
      protect our proprietary rights, but these legal means afford only limited
      protection. Despite any measures taken to protect our intellectual property,
      unauthorized parties may copy aspects of our semiconductor technology or obtain
      and use information that we regard as proprietary. In addition, the laws of
      some
      foreign countries may not protect our proprietary rights as fully as do the
      laws
      of the United States. If we litigated to enforce our rights, it would be
      expensive, divert management resources and may not be adequate to protect our
      intellectual property rights.





The
      telecommunications industry is characterized by the existence of a large number
      of patents and frequent litigation based on allegations of trade secret,
      copyright or patent infringement. We may inadvertently infringe a patent of
      which we are unaware. In addition, because patent applications can take many
      years to issue, there may be a patent application now pending of which we are
      unaware that will cause us to be infringing when it is issued in the future.
      Although we are not currently involved in any intellectual property litigation,
      we may be a party to litigation in the future to protect our intellectual
      property or as a result of our alleged infringement of another’s intellectual
      property, forcing us to do one or more of the following:




o
              Cease
                  selling, incorporating or using products or services that incorporate
                  the
                  challenged intellectual property;o
              Obtain
                  from the holder of the infringed intellectual property right a
                  license to
                  sell or use the relevant technology, which license may not be available
                  on
                  reasonable terms; oro
              Redesign
                  those products or services that incorporate such
                  technology.


9




A
      successful claim of infringement against us, and our failure to license the
      same
      or similar technology, could adversely affect our business, asset value or
      stock
      value. Infringement claims, with or without merit, would be expensive to
      litigate or settle, and would divert management resources.





OUR
      MARKET IS HIGHLY COMPETITIVE AND OUR PRODUCTS OR TECHNOLOGY MAY NOT BE ABLE
      TO
      COMPETE EFFECTIVELY WITH OTHER PRODUCTS OR TECHNOLOGIES.





The
      market for high-speed telecommunications products is highly competitive, and
      we
      expect that it will become increasingly competitive in the future. Our
      competitors, including Centillium Communications, Inc., Conexant Systems, Inc.,
      PMC-Sierra, Texas Instruments Incorporated, Ikanos Communications, ST
      Microelectronics N.V., Metalink Ltd., Broadcom Corporation, Infineon
      Technologies A.G. and others, have developed and are currently marketing
      technologies that also address the existing technical impediments of using
      existing copper networks as broadband options or are otherwise substantially
      similar to our products. Our competitors include some of the largest, most
      successful domestic and international telecommunications companies and other
      companies with well-established reputations in the broadband telecommunications
      industry. Some of our competitors operate their own fabrication facilities.
      Our
      competitors have longer operating histories and possess substantially greater
      name recognition, financial, sales and marketing, manufacturing, technical,
      personnel, and other resources than we have. As a result, these competitors
      may
      be able to adapt more quickly to new or emerging technologies and changes in
      customer requirements. They may also be able to devote greater resources to
      the
      promotion and sale of their products. These competitors may also have
      pre-existing relationships with our potential customers. Further, in the event
      of a manufacturing capacity shortage, these competitors may be able to
      manufacture products when we are unable to do so. In all of our target markets,
      we also may face competition from newly established competitors, suppliers
      of
      products based on new or emerging technologies, and customers who choose to
      develop wire based solutions that are functionally similar to our products.
      Although we believe we will be able to compete based on the special features
      of
      our products, they will incorporate new concepts and may not be successful
      even
      if they are superior to those of our competitors.





In
      addition to facing competition from the above-mentioned suppliers, our
      semiconductors will compete with products using other broadband access
      technologies, such as cable modems, wireless, satellite and fiber optic
      telecommunications technology. Commercial acceptance of any one of these
      competing solutions, or new technologies, could decrease demand for our proposed
      products. We cannot assure you that we will be able to compete successfully
      or
      that competitive pressures will not materially and adversely affect our
      business, financial condition and results of operations.





WE
      MUST
      KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY AND
      BROADBAND COMMUNICATIONS MARKET IN ORDER TO BE COMPETITIVE.





Our
      success will depend on our ability to anticipate and adapt to changes in
      technology and industry standards. We will also need to develop and introduce
      new and enhanced products to meet our customers’ changing demands. The
      semiconductor industry and broadband communications market are characterized
      by
      rapidly changing technology, evolving industry standards, frequent new product
      introductions and short product life cycles. In addition, this industry and
      market continues to undergo rapid growth and consolidation. A cyclical slowdown
      in the semiconductor industry or other broadband communications markets could
      materially and adversely affect our business, financial condition and results
      of
      operations. Our success will also depend on the ability of our potential
      telecommunications equipment customers to develop new products and enhance
      existing products for the broadband communications markets and to introduce
      and
      promote those products successfully. The broadband communications markets may
      not continue to develop to the extent or in the timeframes that we anticipate.
      If new markets do not develop as we anticipate, or if upon their deployment
      our
      products do not gain widespread acceptance in these markets, our business,
      financial condition and results of operations could be materially and adversely
      affected.





10





BECAUSE
      OUR SUCCESS IS DEPENDENT UPON THE BROAD DEPLOYMENT OF DATA SERVICES BY
      TELECOMMUNICATIONS SERVICE PROVIDERS, WE MAY NOT BE ABLE TO GENERATE SUBSTANTIAL
      REVENUES IF SUCH DEPLOYMENT DOES NOT OCCUR.





Our
      products are designed to be incorporated in equipment that is targeted at
      end-users of data services offered by wire-line telecommunications carriers.
      Consequently, the success of our products depends upon the decision by
      telecommunications service providers to broadly deploy data technologies and
      the
      timing of such deployment. If service providers do not offer data services
      on a
      timely basis, or if there are technical difficulties with the deployment of
      these services, sales of our products would be adversely affected, which would
      have a negative effect on our results of operations. Factors that may impact
      data deployment include:





o
            A
                prolonged approval process, including laboratory tests, technical
                trials,
                marketing trials, initial commercial deployment and full commercial
                deployment;o
            The
                development of a viable business model for data services, including
                the
                capability to market, sell, install and maintain data
                services;o
            Cost
                constraints, such as installation costs and space and power requirements
                at the telecommunications service provider’s central
                office;o
            Evolving
                industry standards; ando
            Government
                regulation.





THE
      COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSE AND
      IN
      UNDETECTED DEFECTS, WHICH COULD ADVERSELY AFFECT THE MARKET ACCEPTANCE OF NEW
      PRODUCTS AND DAMAGE OUR REPUTATION WITH PROSPECTIVE CUSTOMERS.





Highly
      complex products such as the semiconductors that we expect to offer frequently
      contain defects and bugs when they are first introduced or as new versions
      are
      released. If our products contain defects, or have reliability, quality or
      compatibility problems, our reputation may be damaged and customers may be
      reluctant to buy our semiconductors, which could materially and adversely affect
      our ability to retain existing customers or attract new customers. In addition,
      these defects could interrupt or delay sales to our potential customers. In
      order to alleviate these problems, we may have to invest significant capital
      and
      other resources. Although our suppliers and potential customers will test our
      products it is possible that these tests will fail to uncover defects. If any
      of
      these problems are not found until after we have commenced commercial production
      of products, we may be required to incur additional development costs and
      product recall, repair or replacement costs. These problems may also result
      in
      claims against us by our customers or others. In addition, these problems may
      divert our technical and other resources from other development efforts.
      Moreover, we would likely lose, or experience a delay in, market acceptance
      of
      the affected product, and we could lose credibility with our prospective
      customers.





11





GOVERNMENTAL
      REGULATION CONCERNING THE TECHNICAL SPECIFICATIONS OF SEMICONDUCTOR TECHNOLOGIES
      THAT ARE DEPLOYED IN THE TELEPHONE NETWORKS COULD ADVERSELY AFFECT THE MARKET
      ACCEPTANCE OF OUR SEMICONDUCTORS.





The
      jurisdiction of the Federal Communication Commission (“FCC”) extends to the
      entire US communications industry, including potential customers for our
      semiconductors. Future FCC regulations affecting the broadband access industry
      may adversely affect our business. In addition, international regulatory bodies
      such as The American National Standards Institute (ANSI) and The Committee
      T1E1.4 in North America, European Telecommunications Standards Institute (ETSI)
      in Europe and ITU-T and the Institute of Electrical and Electronics Engineers,
      Inc. (IEEE) worldwide are beginning to adopt standards and regulations for
      the
      broadband access industry. These domestic and foreign standards, laws and
      regulations address various aspects of Internet, telephony and broadband use,
      including issues relating to liability for information retrieved from or
      transmitted over the Internet, online context regulation, user privacy,
      taxation, consumer protection, security of data, access by law enforcement,
      tariffs, as well as intellectual property ownership, obscenity and libel.
      Changes in laws, standards and/or regulations, or judgments in favor of
      plaintiffs in lawsuits against service providers, e-commerce and other Internet
      companies, could adversely affect the development of e-commerce and other uses
      of the Internet. This, in turn, could directly or indirectly materially
      adversely impact the broadband telecommunications and data industry in which
      our
      customers operate. To the extent our customers are adversely affected by laws
      or
      regulations regarding their business, products or service offerings, this could
      result in a material and adverse effect on our business, financial condition
      and
      results of operations.





In
      addition, highly complex products such as the semiconductors that we expect
      to
      offer are subject to rules, limitations and requirements as set forth by
      international standards bodies such as ANSI and The Committee T1E1.4 in North
      America, ETSI in Europe and ITU-T and IEEE worldwide, and as adopted by the
      governments of each of the countries that we intend to market in. There are
      some
      FCC regulations in the United States pertaining to the use of the available
      bandwidth spectrum that at present have been interpreted by some of our target
      customers as discouraging to the technical innovations that we are bringing
      to
      market. Further, regulations affecting the availability of broadband access
      services generally, the terms under which telecommunications service providers
      conduct their business, and the competitive environment among service providers,
      for example, could have a negative impact on our business.





WE
      DEPEND
      ON ATTRACTING, MOTIVATING AND RETAINING KEY PERSONNEL AND THE FAILURE TO
      ATTRACT, MOTIVATE OR RETAIN NEEDED PERSONNEL COULD ADVERSELY AFFECT OUR
      BUSINESS.





We
      are
      highly dependent on the principal members of our management and on our
      technology advisors and the technology staff of our development partners. The
      loss of their services might significantly delay or prevent the achievement
      of
      development or strategic objectives. Our success depends on our ability to
      retain certain key employees and our partner relationships, and to attract
      additional qualified employees. Competition for these employees is intense.
      We
      cannot assure you that we will be able to retain existing personnel and partners
      or attract and retain highly qualified employees in the future.





FUTURE
      SALES OF COMMON STOCK OR OTHER DILUTIVE EVENTS MAY ADVERSELY AFFECT PREVAILING
      MARKET PRICES FOR OUR COMMON STOCK.





As
      of
      January 24, 2007, we had 424,795,899 shares of our common stock outstanding.
      As
      of January 24, 2007, an additional 154,031,354 shares of common stock were
      reserved for issuance upon the exercise of outstanding options and warrants
      exercisable at exercise prices ranging from $0.027 to $3.92 per share. In
      addition, as of January 24, 2007, we had outstanding $662,000 principal amount
      of convertible debentures we issued in March 2006, and approximately $4,300
      principal amount of convertible debentures we issued in May 2005, all of which
      are convertible into an undeterminable number of shares of our common stock.
      The
      exercise price of the March 2006 debentures is variable, and is based upon
      a 30%
      discount to the volume weighted average closing price of our common stock for
      the 20 days preceding the applicable conversion date. The exercise price of
      the
      May 2005 debentures is variable, and is based upon an initial conversion price
      equal to 30% of the volume-weighted closing price per share of our common stock
      for the five days preceding the applicable conversion date. We also have
      outstanding $75,000 principal amount of convertible debentures we issued in
      May
      2004. These debentures are convertible into our common stock at an exercise
      price of $0.15 per share. Many of the above options, warrants and convertible
      debentures contain provisions that require the issuance of increased numbers
      of
      shares of common stock upon exercise or conversion in the event of stock splits,
      redemptions, mergers or other transactions.




The
        occurrence of any such event or the exercise or conversion of any of the
        options, warrants or convertible debentures described above would dilute
        the
        interest in the Company represented by each share of common stock and may
        adversely affect the prevailing market price of our common stock. Finally,
        we
        may need to raise additional capital through the sale of shares of common
        stock
        or other securities exercisable for or convertible into common stock. The
        occurrence of any such sale would dilute the interest in the Company represented
        by each share of common stock and may adversely affect the prevailing market
        price of our common stock.
 
 OUR
        BOARD
        OF DIRECTORS’ RIGHT TO AUTHORIZE THE ISSUANCE OF SHARES OF PREFERRED STOCK COULD
        ADVERSELY IMPACT THE RIGHTS OF HOLDERS OF OUR COMMON
        STOCK.


12




Our
      Articles of Incorporation authorize our board of directors to issue up to
      15,000,000 shares of preferred stock in one or more series, and to fix the
      rights, preferences, privileges and restrictions granted to or imposed upon
      any
      such series, without further vote or action by shareholders. The terms of any
      series of preferred stock, which may include priority claims to assets and
      dividends and special voting rights, could adversely affect the rights of the
      holders of our common stock and thereby reduce the value of our common stock.
      The issuance of preferred stock could discourage certain types of transactions
      involving an actual or potential change in control of our company, including
      transactions in which the holders of common stock might otherwise receive a
      premium for their shares over then current prices, otherwise dilute the rights
      of holders of common stock, and may limit the ability of such shareholders
      to
      cause or approve transactions which they may deem to be in their best interests,
      all of which could have a material adverse effect on the market price of our
      common stock.





OUR
      STOCK
      PRICE MAY BE VOLATILE





The
      market price of our common stock will likely fluctuate significantly in response
      to the following factors, some of which are beyond our control:





o
            Variations
                in our quarterly operating results due to a number of factors, including
                but not limited to those identified in this “Risk Factors”
                section;o
            Changes
                in financial estimates of our revenues and operating results by securities
                analysts or investors;o
            Changes
                in market valuations of telecommunications equipment
                companies;o
            Announcements
                by us of commencement to, changes to, or cancellation of significant
                contracts, acquisitions, strategic partnerships, joint ventures or capital
                commitments;o
            Additions
                or departures of key personnel;o
            Future
                sales of our common stock;o
            Stock
                market price and volume fluctuations attributable to inconsistent
                trading
                volume levels of our stock;o
            Commencement
                of or involvement in litigation; ando
            Announcements
                by us or our competitors of technological innovations or new
                products.





In
      addition, the equity markets have experienced volatility that has particularly
      affected the market prices of equity securities issued by high technology
      companies and that often has been unrelated or disproportionate to the operating
      results of those companies. These broad market fluctuations may adversely affect
      the market price of our common stock.




WE
        DO NOT
        ANTICIPATE PAYING ANY DIVIDENDS ON OUR COMMON STOCK.
 
 We
        have
        not paid any dividends on our common stock since our inception and do not
        anticipate paying any dividends on our common stock in the foreseeable future.
        Instead, we intend to retain any future earnings for use in the operation
        and
        expansion of our business.
 
 ADDITIONAL
        BURDENS IMPOSED UPON BROKER-DEALERS BY THE APPLICATION OF THE “PENNY STOCK”
RULES TO OUR COMMON STOCK MAY LIMIT THE MARKET FOR OUR COMMON
        STOCK.


13





The
      SEC
      has adopted regulations concerning low-priced (or “penny”) stocks. The
      regulations generally define “penny stock” to be any equity security that has a
      market price less than $5.00 per share, subject to certain exceptions. If our
      shares continue to be offered at a market price less than $5.00 per share,
      and
      do not qualify for any exemption from the penny stock regulations, our shares
      will continue to be subject to these additional regulations relating to
      low-priced stocks.





The
      penny
      stock regulations require that broker-dealers who recommend penny stocks to
      persons other than institutional accredited investors, make a special
      suitability determination for the purchaser, receive the purchaser’s written
      agreement to the transaction prior to the sale and provide the purchaser with
      risk disclosure documents that identify risks associated with investing in
      penny
      stocks. Furthermore, the broker-dealer must obtain a signed and dated
      acknowledgment from the purchaser demonstrating that the purchaser has actually
      received the required risk disclosure document before effecting a transaction
      in
      penny stock. These requirements have historically resulted in reducing the
      level
      of trading activity in securities that become subject to the penny stock
      rules.





The
      additional burdens imposed upon broker-dealers by these penny stock requirements
      may discourage broker-dealers from effecting transactions in the common stock,
      which could severely limit the market liquidity of our Common Stock and our
      shareholders’ ability to sell our common stock in the secondary
      market.





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**





We
      do not
      own any real property. Our corporate headquarters are located at 305 NE 102nd
      Avenue, Suite 105, Portland, Oregon 97220. The original premises are occupied
      under a three-year lease that commenced on April 1, 2005. In March 2006, we
      expanded our original space to include part of another floor in the same
      facility. In October 2006, we entered into another lease in the same building
      for an additional 6,967 square feet, bringing the total in the Portland location
      to 9,561 square feet. After amending the lease terms in March and leasing the
      additional space in October, the current monthly rental under the leases is
      $14,730. The lease on our corporate headquarters expires in March 2009. We
      also
      lease approximately 200 square feet of space in La Jolla, California that we
      use
      for administrative offices under a lease that expires in February 2008. Our
      monthly rental payment under this lease is $1,100. We believe our properties
      are
      generally in good condition and suitable to carry on our business. We also
      believe that, if required, suitable alternative or additional space will be
      available to us on commercially reasonable terms.





**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





There
      are
      no material pending legal proceedings to which we are a party or to which any
      of
      our properties are subject. There are no material proceedings known to us to
      be
      contemplated by any governmental authority.





**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





During
      the three months ended October 31, 2006, the Company did not submit any matters
      to a vote of its security holders.





**PART
      II**





**ITEM
      5.**  **MARKET
      FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER
      PURCHASES OF EQUITY SECURITIES**





Our
      common stock is currently traded on the Nasdaq Stock Market’s over-the-counter
      bulletin board (the “OTC Bulletin Board”) under the trading symbol
“RSMI.”





The
      following table sets forth the high and low bid prices for our common stock
      on
      the OTC Bulletin Board for the periods indicated. These prices represent
      inter-dealer quotations without retail markup, markdown or commission and may
      not necessarily represent actual transactions. Investors should not rely on
      historical stock price performance as an indication of future price performance.
      The closing price of our common stock on January 24, 2007 was $0.12 per
      share.





14





**HIGH**
            
            **LOW**November
                2005 through October 2006First
                Quarter
            
            $
            .27
            
            $
            .02Second
                Quarter
            
            
            .27
            
            
            .03Third
                Quarter
            
            
            .24
            
            
            .08Fourth
                Quarter
            
            
            .24
            
            
            .08November
                2004 through October 2005First
                Quarter
            
            $
            .19
            
            $
            .10Second
                Quarter
            
            
            .19
            
            
            .14Third
                Quarter
            
            
            .18
            
            
            .05Fourth
                Quarter
            
            
            .07
            
            
            .03





**Shareholders**





As
      of
      January 24, 2007, there were 1,332 holders of record of our common stock. A
      significant number of shares of our common stock are held in either nominee
      name
      or street name brokerage accounts. The actual number of beneficial owners of
      such shares is not included in the foregoing number of holders of
      record.





**Dividends**





We
      have
      not declared or paid any cash dividends on our capital stock and do not
      anticipate paying any cash dividends on our capital stock in the foreseeable
      future. Payment of dividends on the common stock is within the discretion of
      our
      Board of Directors. The Board currently intends to retain future earnings,
      if
      any, to finance our business operations and fund the development and growth
      of
      our business. The declaration of dividends in the future will depend upon our
      earnings, capital requirements, financial condition, and other factors deemed
      relevant by the Board of Directors.





**Recent
      Sales of Unregistered Securities**





During
      the three months ended October 31, 2006, we issued:





(i)
            500,000
                shares of common stock to purchase the assets of 1021 Technologies,
                valued
                at $78,000;(ii)
            1,087,470
                shares of common stock to HelloSoft, valued at $164,208, and recorded
                as
                capitalized software; and(iii)
            5,725,000
                stock options at exercise prices of $0.131 per share with respect
                to
                1,825,000 stock options, $0.158 per share with respect to 3,500,000
                stock
                options, and $0.224 per share with respect to 400,000 stock options,
                to a
                total of six employees of the Company valued at
                $825,429.





From
      November 2006 through January 24, 2007, subsequent to the fiscal year ended
      October 31, 2006, we issued:





(i)
            4,250,000
                stock options at an exercise price of $0.096 per share to one director
                and
                three executive employees valued at $386,427;(ii)
            3,736,991
                shares of common stock to a corporation valued at $395,000 in payment
                of
                non-recurring engineering services;(iii)
            100,000
                stock options at an exercise price of $0.12 per share to one employee
                valued at $11,344;





15





(iv)
            464,535
                shares of common stock to 2006 Debenture holders in satisfaction
                of
                $68,547 in liquidated damages accrued at October 31,
                2006;(v)
            8,000,000
                shares of common stock valued at $1,007,000 to three consultants;
                and(vi)
            300,000
                shares of common stock valued at $9,570 to a law firm upon exercise
                of
                stock options.





These
      securities were issued without registration under the Securities Act in reliance
      upon the exemption provided in Section 4(2) of the Securities Act. Appropriate
      legends were affixed to the share certificates issued in all of the above
      transactions. The Company believes that each of the recipients was an
“accredited investor” within the meaning of Rule 501(a) of Regulation D under
      the Securities Act, or had such knowledge and experience in financial and
      business matters as to be able to evaluate the merits and risks of an investment
      in our common stock. All recipients had adequate access, through their
      relationships with the Company and its officers and directors, to information
      about the Company. None of the transactions described above involved general
      solicitation or advertising.





**Equity
      Compensation Plan Information**





We
      have
      four compensation plans (excluding individual stock option grants outside of
      such plans) under which our equity securities are authorized for issuance to
      employees, directors and consultants in exchange for services - the 2000 Omnibus
      Securities Plan (the “2000 Plan”), the 2001 Stock Incentive Plan (the “2001
      Plan”), the 2006 Stock Incentive Plan (the “2006 Plan”) and the 2003 Consultant
      Stock Plan (the “Consultant Plan”) (collectively, the “Plans”). Our shareholders
      approved the 2000 Plan and 2001 Plan, and the 2006 Plan and the Consultant
      Plan
      have not yet been submitted to the shareholders for approval.





The
      following table presents information as of October 31, 2006 with respect to
      compensation plans under which equity securities were authorized for issuance,
      including the 2000 Plan, the 2001 Plan, the Consultant Stock Plan and agreements
      granting options or warrants outside of these plans. The 2006 Plan was adopted
      after the end of the 2006 fiscal year.





**Number
                of Securities**
              **to
                be Issued Upon**
              **Exercise
                of**
              **Outstanding
                Options,**
              **Warrants
                and Rights**
            
            **Weighted-Average**
              **Exercise
                Price of**
              **Outstanding
                Options, Warrants and Rights**
            
            **Number
                of Securities Remaining Available for Future Issuance Under Equity
                Compensation Plans**Equity
                compensation plansapproved
                by security holders
            
            
            3,193,750
            
            $
            0.23
            
            1,806,250Equity
                compensation plans notapproved
                by security holders
            
            
            32,550,000
            
            $
            0.06
            
            2,100,000Total
            
            
            35,743,750
            
            $
            0.08
            
            3,906,250





***Non-Shareholder
      Approved Plans***





The
      following is a description of options and warrants granted to employees,
      directors, advisory directors, and consultants outside of the Plans that were
      outstanding as of October 31, 2006.




As
      of
      October 31, 2006, we had outstanding compensatory options and warrants to
      purchase an aggregate of 35,743,750 shares of our common stock that were
      granted outside of the Plans. Of this amount, outstanding options to purchase
      100,000 shares of common stock were granted during fiscal 2001 outside of
      the Plans to two advisory directors. These options expire 10 years from their
      grant date and have exercise prices ranging from $1.07 to $2.30. All of these
      options have vested.





16




We
      have
      outstanding options to purchase an aggregate of 500,000 shares of common
      stock that were granted during fiscal 2002 outside of the Plans to a director.
      These options expire ten years from their grant date and have an exercise price
      of $0.39. All of these options have vested.





There
      are
      outstanding warrants to purchase an aggregate of 100,000 shares of common
      stock that were granted during fiscal 2004 to a consultant. These warrants
      have
      a five-year term and an exercise price of $0.15.





We
      have
      outstanding options to purchase 1,000,000 shares of common stock that were
      granted during fiscal 2005 outside of the Plans to a consultant. These options
      expire four years from their grant date and have an exercise price of $0.15.
      All
      of these options have vested.





There
      are
      outstanding warrants to purchase 200,000 shares of common stock that we
      granted during fiscal 2005 to a consultant. These warrants have a term of three
      years and an exercise price of $0.12.





In
      fiscal
      2006, a total of 30,800,000 stock options had been granted outside of
      shareholder-approved plans. During the first quarter of fiscal 2006, options
      to
      purchase 22,400,000 shares of common stock were granted to the Company’s Chief
      Executive Officer, the Executive Vice President, and an advisory board member.
      These options have a 10-year term, an exercise price of $0.027 per share, and
      vested at various times between February 2006 and July 2006.





During
      the second quarter of fiscal 2006, options to purchase 2,000,000 shares of
      common stock were granted to directors outside of the Plans. These options
      have
      a 10-year term, an exercise price of $0.0319 per share, and vested on May 1,
      2006. In addition, options to purchase 2,000,000 shares of common stock were
      granted outside of the Plans in connection with legal services performed for
      the
      Company. These options have a 10-year term, an exercise price of $0.0319 per
      share, and vested on March 1, 2006.





During
      the third quarter of fiscal 2006, options to purchase 200,000 shares of common
      stock were granted to a director outside the Plans. These options have a 10-year
      term, an exercise price of $0.18 per share, and vest over a three year period.
      In addition, options to purchase 500,000 shares of common stock were granted
      to
      a consultant under the Consultant Plan, which has not been approved by the
      shareholders. These options have a 10-year term, an exercise price of $0.18
      per
      share, and vest over a two-year period.





During
      the fourth quarter of fiscal 2006, Options to purchase 200,000 shares of common
      stock were granted to a consultant under the Consultant Plan. These options
      have
      a 10-year term, an exercise price of $0.224 per share, and vest over a
      three-year period. In addition, options to purchase 3,500,000 shares of common
      stock were granted to the Senior Executive Vice President outside of the Plans.
      These options have a 10-year term, an exercise price of $0.158 per share, and
      vest over a three-year period.





The
      Consultant Plan was adopted in January 2003 and authorizes the issuance of
      up to
      6,000,000 non-qualified stock options or stock awards to consultants to the
      Company. Directors, officers and employees are not eligible to participate
      in
      the Consultant Plan. As of October 31, 2006, 3,200,000 shares of common stock
      and options to purchase 700,000 shares of common stock have been issued under
      the Consultant Plan.





The
      2006
      Plan was adopted in November 2006 and authorizes the issuance of up to
      30,000,000 incentive stock options, non-qualified stock options or stock awards
      to directors, officers, employees and certain consultants to the Company. To
      date, we have issued a total of 4,250,000 shares of common stock under the
      2006
      Plan to four directors, officers and employees of the Company. The 2006 Plan
      was
      adopted subsequent to the 2006 fiscal year and as a result, is not included
      in
      the tables above.





***Issuer
      Purchases of Equity Securities***





The
      Company did not repurchase any of its equity securities during the three months
      ended October 31, 2006.





**ITEM
      6.**  **MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**




We
        urge
        you to read the following discussion in conjunction with our consolidated
        financial statements and the notes thereto included elsewhere in this Annual
        Report on Form 10-KSB.


17




**Caution
      Regarding Forward-Looking Statements**





Our
      prospects are subject to uncertainties and risks. In this Annual Report on
      Form
      10-KSB, we make forward-looking statements under the headings “Item 1.
      Description of Business,” “Item 6. Management’s Discussion and Analysis or Plan
      of Operation,” and elsewhere, that also involve substantial uncertainties and
      risks. These forward-looking statements are based upon our current expectations,
      estimates and projections about our business and our industry, and that reflect
      our beliefs and assumptions based upon information available to us at the date
      of this report. In some cases, you can identify these statements by words such
      as “if,” “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,”
“believes,” “estimates,” “predicts,” “potential,” “continue,” and other similar
      terms. These forward-looking statements include, among other things, projections
      of our future financial performance and our anticipated growth, descriptions
      of
      our strategies, our product and market development plans, the trends we
      anticipate in our business and the markets in which we operate, and the
      competitive nature and anticipated growth of those markets.





We
      caution readers that forward-looking statements are predictions based on our
      current expectations about future events. These forward-looking statements
      are
      not guarantees of future performance and are subject to risks, uncertainties
      and
      assumptions that are difficult to predict. Our actual results, performance
      or
      achievements could differ materially from those expressed or implied by the
      forward-looking statements as a result of a number of factors, including but
      not
      limited to the risks and uncertainties discussed under the heading “RISK
      FACTORS” in Item 1 of this Annual Report and in our other filings with the SEC.
      We undertake no obligation to revise or update any forward-looking statement
      for
      any reason.





**Overview**





We
      are
      developing advanced transmission technology products to enable data to be
      transmitted across copper telephone wire at speeds and over distances that
      exceed those offered by leading DSL technology providers. Our first chipset
      in a
      planned family of transport processors, the Cu5001 digital signal processor,
      was
      first made available in FPGA form to prospective customers for evaluation and
      testing in the first fiscal quarter of 2006. We are presently working on Release
      2.0 of the Cu5001, which is also the ASSP version of the semiconductor. We
      market this technology to leading equipment makers in the telecommunications
      industry. Our products are designed to substantially increase the capacity
      of
      existing copper telephone networks, allowing telephone companies, office
      building managers, and enterprise network operators to provide enhanced and
      secure video, data and voice services over the existing copper
      telecommunications infrastructure.





We
      expect
      that system-level products that use our technology will have a significant
      advantage over existing system-level products that use existing broadband
      technologies, such as digital subscriber line (DSL), because such products
      will
      transmit data faster, over longer distances and at a higher quality. We expect
      products using our technology will offer numerous advantages to the network
      operators that deploy them, including the ability to support new services,
      the
      ability to offer existing and new services to previously unreachable locations
      in their network, reduction in total cost of ownership, security and
      reliability.





Our
      semiconductor business segment is dependent upon our ability to generate future
      revenues and positive cash flow from our advanced transmission technology
      products, such as the Cu5001. No assurance can be provided that our target
      customers will purchase these products in large volumes, or at all. See “RISK
      FACTORS.”





In
      April
      2000, our NV Entertainment subsidiary entered into a joint venture production
      agreement to produce a feature length film, “Step into Liquid” (the “Film”). We
      own a 50% interest in the joint venture. The financial condition and results
      of
      operations of the joint venture are consolidated with our financial condition
      and results of operations on the accompanying consolidated financial statements.
      The Film was released to theaters in the United States in 2003 and is currently
      in foreign and DVD distribution. During the years ended October 31, 2006 and
      2005, we received revenues of $61,699 and $39,866, respectively, from the Film.
      In July 2005, we recorded an impairment charge of $1,009,777 and reduced the
      carrying value of the Film to $0 on our balance sheet. We do not intend to
      make
      further investment in our entertainment business.





18





**Derivative
      Financial Instruments**





In
      connection with the issuance of certain convertible debentures (see Note 9),
      the
      terms of the debentures included an embedded conversion feature that provided
      for a conversion of the debentures into shares of our common stock at a rate
      that was determined to be variable. We determined that the conversion feature
      was an embedded derivative instrument and that the conversion option was an
      embedded put option pursuant to Statement of Financial Accounting Standards
      (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging
      Activities,” as amended, and Emerging Issues Task Force (“EITF”) Issue No.
      00-19, “Accounting for Derivative Financial Instruments Indexed To, and
      Potentially Settled In, a Company's Own Stock.”





The
      accounting treatment of derivative financial instruments requires that we record
      the debentures and related warrants at their fair values as of the inception
      date of the convertible debenture agreements and at fair value as of each
      subsequent balance sheet date.  In addition, under the provisions of EITF
      Issue No. 00-19, as a result of entering into the convertible debenture
      agreements, we were required to classify all other non-employee warrants and
      options as derivative liabilities and record them at their fair values at each
      balance sheet date. Any change in fair value was recorded as non-operating,
      non-cash income or expense at each balance sheet date. If the fair value of
      the
      derivatives was higher at the subsequent balance sheet date, we recorded a
      non-operating, non-cash charge.  If the fair value of the derivatives was
      lower at the subsequent balance sheet date, we recorded non-operating, non-cash
      income. We reassess the classification at each balance sheet date. If the
      classification required under EITF Issue No. 00-19 changes as a result of events
      during the period, the contract should be reclassified as of the date of the
      event that caused the reclassification.





**Stock-Based
      Compensation**





On
      November 1, 2005, we adopted Statement of Financial Accounting Standards No.
      123
      (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requires the
      measurement and recognition of compensation expense for all share-based payment
      awards made to employees and directors, including stock options, based on
      estimated fair values. SFAS 123(R) supersedes our previous accounting under
      Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
      Employees” (“APB 25”) for periods beginning on November 1, 2005. In March 2005,
      the Securities and Exchange Commission issued Staff Accounting Bulletin No.
      107
      (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107
      in our adoption of SFAS 123(R).





We
      early
      adopted SFAS 123(R) using the modified prospective transition method, as of
      November 1, 2005, the first day of our fiscal year 2006. Our consolidated
      financial statements as of and for the year ended October 31, 2006 reflect
      the
      impact of SFAS 123(R). In accordance with the modified prospective transition
      method, our consolidated financial statements for prior periods have not been
      restated to reflect, and do not include, the impact of SFAS 123(R).





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in our consolidated statement of
      operations. Prior to the adoption of SFAS 123(R), we accounted for stock-based
      awards to employees and directors using the intrinsic value method in accordance
      with APB 25 as allowed under Statement of Financial Accounting Standards No.
      123, “Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic
      value method, no stock-based compensation expense for employee stock options
      had
      been recognized in our consolidated statement of operations because the exercise
      price of our stock options granted to employees and directors equaled the fair
      market value of the underlying stock at the date of grant.





The
      effect of the adoption of SFAS 123(R) on our fiscal year 2006 results was to
      increase our net loss by $919,251. There was no impact on our basic and diluted
      net loss per common share.





SFAS
      123(R) also requires that the cash retained as a result of the tax deductibility
      of the increase in the value of share-based arrangements be presented as a
      component of cash flows from financing activities in the consolidated statement
      of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
      to be presented as a component of cash flows from operating activities. Due
      to
      our tax net operating loss position, we do not realize cash savings as a result
      of the tax deduction for stock-based compensation. Accordingly, the adoption
      SFAS 123(R) had no effect on our cash flows from operating or financing
      activities for the year ended October 31, 2006.





19





Stock-based
      compensation expense recognized in our consolidated statement of operations
      for
      the year ended October 31, 2006 included compensation expense for share-based
      payment awards granted prior to, but not yet vested as of October 31, 2005
      based
      on the grant date fair value estimated in accordance with the pro-forma
      provisions of SFAS 123 and compensation expense for the share-based payment
      awards granted subsequent to October 31, 2005 based on the grant date fair
      value
      estimated in accordance with the provisions of SFAS 123(R). We have continued
      to
      attribute the value of stock-based compensation to expense on the straight-line
      single option method.





Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options granted during the year ended October 31, 2006 was $672,194. Stock
      based-compensation expense for share-based payment awards granted prior to,
      but
      not yet vested as of October 31, 2005 based on the grant date fair value
      estimated in accordance with the pro-forma provisions of SFAS 123 was $247,057
      for the year ended October 31, 2006. Stock-based compensation expense recognized
      upon issuance of common stock to key employees and directors was $452,500 for
      the year ended October 31, 2005. Stock-based compensation expense recognized
      for
      non-employees under other accounting standards was $984,935 and $976,041 for
      the
      years ended October 31, 2006 and 2005, respectively.





As
      stock-based compensation expense recognized in the consolidated statement of
      operations for the year ended October 31, 2006 is based on awards ultimately
      expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. In our pro-forma information required under SFAS 123(R) for the
      periods prior to fiscal 2006, we accounted for forfeitures as they
      occurred.





**Revenue
      Recognition**





We
      recognize revenue from the sale of our semiconductor products when evidence
      of
      an arrangement exists, the sales price is determinable or fixed, legal title
      and
      risk of loss has passed to the customer, which is generally upon shipment of
      our
      products to our customers, and collection of the resulting receivable is
      probable. To date we have not recognized any revenues related to the sale of
      our
      semiconductor products.





We
      recognize revenue from the distribution of our Film and related products when
      earned and reasonably estimable in accordance with Statement of Position 00-2,
      “Accounting by Producers or Distributors of Films” (“SOP-00-2”). The following
      are the conditions that must be met in order to recognize revenue in accordance
      with SOP-00-2:





(i)
            persuasive
                evidence of a sale or licensing arrangement with a customer
                exists;(ii)
            the
                film is complete and, in accordance with the terms of the arrangement,
                has
                been delivered or is available for immediate and unconditional
                delivery;(iii)
            the
                license period of the arrangement has begun and the customer can
                begin its
                exploitation, exhibition or sale;(iv)
            the
                arrangement fee is fixed or determinable; and(v)
            collection
                of the arrangement fee is reasonably
                assured.





Under
      a
      rights agreement with our distributor for our Film, we share with the
      distributor in the profits of the Film after the distributor recovers its
      marketing, distribution and other predefined costs and fees. The agreement
      provides for the payment of minimum guaranteed license fees, usually payable
      on
      delivery of the completed film, that are subject to further increase based
      on
      the actual distribution results.





In
      accordance with the provisions of SOP-00-2, a film is classified as a library
      title after three years from the film’s initial release. The term library title
      is used solely for the purpose of classification and for identifying previously
      released films in accordance with the provisions of SOP-00-2. Revenue
      recognition for such titles is in accordance with our revenue recognition policy
      for film revenue.





20





**Film
      in Distribution**





SOP-00-2
      requires that film costs be capitalized and reported as a separate asset on
      the
      balance sheet. Film costs include all direct negative costs incurred in the
      production of a film, as well as allocations of production overhead and
      capitalized interest. Direct negative costs include cost of scenario, story,
      compensation of cast, directors, producers, writers, extras and staff, cost
      of
      set construction, wardrobe, accessories, sound synchronization, rental of
      facilities on location and post production costs. SOP-00-2 also requires that
      film costs be amortized and participation costs accrued, using the
      individual-film-forecast-computation method, which amortizes or accrues such
      costs in the same ratio that the current period actual revenue (numerator)
      bears
      to the estimated remaining unrecognized ultimate revenue as of the beginning
      of
      the fiscal year (denominator). We make certain estimates and judgments of its
      future gross revenue to be received for each film based on information received
      by its distributors, historical results and management’s knowledge of the
      industry. Revenue and cost forecasts are continually reviewed by management
      and
      revised when warranted by changing conditions. A change to the estimate of
      gross
      revenues for an individual film may result in an increase or decrease to the
      percentage of amortization of capitalized film costs relative to a previous
      period.





In
      addition, SOP-00-2 also requires that if an event or change in circumstances
      indicates that an entity should assess whether the fair value of a film is
      less
      than its unamortized film costs, then an entity should determine the fair value
      of the film and write-off to the statements of operations the amount by which
      the unamortized film costs exceeds the Film’s fair value.





During
      July 2005, we performed our review and it was determined that the unamortized
      film costs exceeded the Film’s fair value. The conclusion was based upon
      information we received from the film’s distributor relating to lower than
      expected sales. As a result of this review, we wrote-down the remaining carrying
      value attributed to the Film to $0. This resulted in an impairment of
      $1,009,777, which is included in the consolidated statement of operations for
      the year ended October 31, 2005.





**Capitalized
      Software Development Costs**





Capitalization
      of computer software development costs begins upon the establishment of
      technological feasibility. Technological feasibility for our computer software
      is generally based upon achievement of a detail program design free of high-risk
      development issues and the completion of research and development on the product
      hardware in which it is to be used. The establishment of technological
      feasibility and the ongoing assessment of recoverability of capitalized computer
      software development costs require considerable judgment by management with
      respect to certain external factors, including, but not limited to,
      technological feasibility, anticipated future gross revenue, estimated economic
      life and changes in software and hardware technology.




Amortization
      of capitalized computer software development costs commences when the related
      products become available for general release to customers. Amortization is
      provided on a product-by-product basis. The annual amortization is the greater
      of the amount computed using (a) the ratio that current gross revenue for a
      product bears to the total of current and anticipated future gross revenue
      for
      that product, or (b) the straight-line method over the remaining estimated
      economic life of the product. The estimated useful life of our existing product
      is seven years.





We
      periodically perform reviews of the recoverability of our capitalized software
      development costs. At the time a determination is made that capitalized amounts
      are not recoverable based on the estimated cash flows to be generated from
      the
      applicable software, the capitalized costs of each software product is then
      valued at the lower of its remaining unamortized costs or net realizable
      value.





In
      connection with our assessment of our intellectual property, we retained the
      services of an independent valuation firm to value our intangible assets as
      of
      October 31, 2006. As a result of the valuation, no impairment was deemed
      necessary. The valuation does not provide any assurance that the intangible
      assets could be sold for their stated fair value. The valuation provides that
      the market will accept this technology and it assumes that we will be able
      to
      obtain sales or sales contacts related to these intangible assets. Due
      to
      the early stage of the marketability of this technology, there is no assurance
      that we can achieve the assumptions outlined in the valuation. If we determine
      in the future that our capitalized costs are not recoverable, the carrying
      amount of the technology license would be reduced, and such reduction may
      be material.





21




We
      commenced amortization of capitalized software development costs during December
      2005 and have recorded amortization expense of $777,026 during the year ended
      October 31, 2006. We recorded no amortization during the year ended October
      31,
      2005.





**Research
      and Development**





Research
      and development expenses relate to the design and development of advanced
      transmission technology products. Prior to establishing technological
      feasibility, software development costs are expensed to research and development
      costs and to cost of sales subsequent to confirmation of technological
      feasibility. Internal development costs are capitalized to software development
      costs once technological feasibility is established. Technological feasibility
      is evaluated on a product-by-product basis. Research and development expenses
      generally consist of salaries, related expenses for engineering personnel and
      third-party development costs incurred.





We
      outsourced all of the development activities with respect to our products to
      independent third party developers until April 2006, when we hired our first
      engineer. During the fourth fiscal quarter of 2006, we hired a Vice President
      to
      oversee the development and marketing of our semiconductors as well as three
      other engineering employees to supervise the continued development of our
      products. During fiscal years 2006 and 2005, we expended $325,124 and $366,306,
      respectively, for research and development of our semiconductor
      technology.





**Technology
      Licenses**





We
      have
      entered into two technology license agreements that may impact our future
      results of operations. Royalty payments, if any, under each license would be
      reflected in our consolidated statements of operations as a component of cost
      of
      sales.





In
      April
      2002, we entered into a development and license agreement with Adaptive
      Networks, Inc. (“Adaptive”), to acquire a worldwide, perpetual license to
      Adaptive’s technology, intellectual property and patent portfolio. The licensed
      technology provides the core technology for our semiconductor products. We
      have
      also jointly developed technology with Adaptive that enhances the licensed
      technology.





In
      consideration of the development services provided and the licenses granted
      to
      us by Adaptive, we paid Adaptive an aggregate of $5,751,000 between 2002 and
      2004 consisting of cash and our assumption of certain Adaptive liabilities.
      In
      addition to the above payments, Adaptive is entitled to a percentage of any
      net
      sales of products sold by us and any license revenue we receive from the
      licensed and co-owned technologies less the first $5,000,000 that would
      otherwise be payable to them under this royalty arrangement.





In
      February 2006, we obtained a license to include HelloSoft, Inc.’s integrated
      VoIP software suite in the Cupria TM family
      of transport processors. We believe the inclusion of VoIP features in our
      products will eliminate VoIP dedicated components currently needed in modems
      and
      thereby lower their production costs by more than 20%. In consideration of
      this
      license, we have paid HelloSoft a license fee and will pay certain royalties
      based on our sale of products, including the licensed technology.





**Results
      of Operations**





COMPARISON
      OF THE YEAR ENDED OCTOBER 31, 2006 (the “2006 period”) AND THE YEAR ENDED
      OCTOBER 31, 2005 (the “2005 period”)





REVENUES.
      Revenues for the 2006 period were $61,699, an increase of $21,833 over 2005
      revenues of $39,866. For the 2006 period, $9,757 was in the form of guarantee
      and/or license payments relating to the U.S. distribution of the Film and the
      remainder of $51,942 were fees relating to foreign distribution of the
      Film.





22





For
      the
      2005 period, $29,066 was in the form of guarantee and/or license payments
      relating to the U.S. distribution of the Film and the remainder was fees
      relating to foreign distribution of the Film. This increase in the 2006 period
      from the 2005 period was due to an increase in the number and value of license
      agreements for distribution of the Film or portions of the Film in foreign
      markets.





No
      revenues were recorded in connection with our semiconductor business for the
      2006 and 2005 periods.





OPERATING
      EXPENSES. Operating expenses included cost of sales, impairment of film in
      distribution, amortization of technology license and capitalized software
      development fees, research and development expenses in connection with the
      semiconductor business, and selling, general and administrative
      expenses.





Total
      operating expenses increased 50% to $6,530,880 for the 2006 period from
      $4,339,953 for the 2005 period, a $2,190,927 increase. This increase was
      primarily due to the addition of seven ****** new
      employees during the 2006 period, causing salaries and related taxes to increase
      by 49% over 2005. During 2006, we hired a Controller, a Director of Marketing,
      an Executive Vice President in charge of Sales and Business Development, an
      Engineering Vice President, and three engineers. Additionally, the Company
      began
      amortizing the technology license and capitalized software in 2006, resulting
      in
      an expense of $777,026 for 2006, where there was none for 2005. However, in
      2005
      the Company recognized an impairment charge of $1,009,777 when it wrote down
      the
      Film in Distribution to zero. Research and development expenses decreased
      $41,182 to $325,124 for the 2006 period, principally as the result of our
      capitalizing $135,461 of salaries and consulting expenses associated with
      developing the capitalized software for production. Also, in 2006 we capitalized
      payments to HelloSoft, Inc. (“HelloSoft”) totaling $455,000, whereas in 2005, we
      paid $155,000 and recorded it as research and development expense.





There
      were no cost of sales for 2006 and cost of sales for 2005 of $11,945 represents
      the amortization of film cost for the Film.





Amortization
      of technology license and capitalized software development fees was $777,026
      for
      the 2006 period, due to the commencement of amortization related to the market
      release of the Cu5001 digital signal processor to prospective customers for
      evaluation and testing during December 2005. No amortization was recorded prior
      to this period.





Research
      and development expenses decreased by $41,182 to $325,124 or 11% for the 2006
      period from $366,306 for the 2005 period. The decrease is principally the result
      of capitalizing costs associated with multiple releases of and enhancements
      to
      the Cupria product, represented by additional payments made to HelloSoft in
      accordance with the terms of our services agreement, as amended, and the
      issuance of stock options in connection with research and development
      activities. During the year ended October 31, 2005, the projects had not reached
      technological feasibility, and therefore costs incurred were expensed as
      research and development.





Selling,
      general and administrative expenses increased 84% or $2,476,805 to $5,428,730
      primarily as a result of an increase in employees from four to seven. Payroll
      and related expenses increased by 40%, from approximately $685,000 in 2005
      to
      approximately $956,000 in 2006. Also, consultant fees increased by 234% from
      $84,000 in 2005 to $281,000 in 2006. Professional fees also increased by
      $711,626 from $367,247 in 2005 to $1,078,873 in 2006. Stock-based compensation
      expense increased by 65%, from $1,131,874 in 2005 to $1,862,547 for
      2006.





In
      July
      2005, we performed a review to determine if the fair value of the Film was
      less
      than its unamortized film costs. As a result of this review, the Company
      wrote-down the carrying value of the Film to $0, recognizing an impairment
      charge of $1,009,777, which is included in our consolidated statement of
      operations for the year ended October 31, 2005.





OTHER
      (INCOME) EXPENSES.  Other expenses included interest expense, a loss on the
      change in fair value of derivative liabilities, amortization of deferred
      financing costs, and a loss on exchange of notes payable into common
      stock.





23





Total
      other expenses increased 2,333% or $9,106,145 to $9,496,440 for the year ended
      October 31, 2006 from total other expenses of $390,295 for the year ended
      October 31, 2005. The increases are primarily for the reasons noted
      below.





Interest
      expense increased 257% or $7,776,343 to $10,803,490 in 2006 from $3,027,147
      in
      2005. The increases are primarily due to the value allocated to the warrants
      related to the 2006 Debentures, interest on the 2006 Debentures, and the
      amortization and write-off of debt discount due to conversions of the
      convertible debentures and repayment of a note payable.





We
      recognized a gain of $1,958,907 on the change in fair value of derivative
      liabilities for the year ended October 31, 2006, a decrease of $274,097 from
      $2,233,004 for the year ended October 31, 2005. This decrease in the gain from
      the 2005 period to the 2006 period was due primarily to a smaller decrease
      in
      the market price of our common stock during the 2006 period. The closing market
      price of our common stock was $0.095 and $0.027 per share as of October 31,
      2006
      and 2005, respectively. In general, decreases in the market price of our common
      stock as compared to the exercise price of our warrants or options result in
      decreases in the fair value of the warrant or option as estimated using the
      Black-Scholes model.





The
      amortization of deferred financing costs increased 163% or $984,204 to
      $1,586,386 for the year ended October 31, 2006 from $602,182 for the year ended
      October 31, 2005. The increase is primarily a result of the conversions of
      the
      2005 Debentures, repayment of a note payable, and the amortization of additional
      deferred financing costs related to the 2006 Debentures. Upon conversion or
      repayment of debt prior to its maturity date, a pro-rata share of debt discount
      and deferred financing costs are written off and recorded as
      expense.





Other
      expenses also increased in the year ended October 31, 2006 due to the loss
      recognized on exchange of notes payable into common stock of
      $446,386.





Other
      income in the year ended October 31, 2006 consisted primarily of a gain on
      forgiveness of principal and interest on a promissory note (the “Zaiq Note”) to
      Zaiq Technologies, Inc. (“Zaiq”) of $1,169,820. The Zaiq Note was entered into
      in April 2005, had an original principal amount of $2,392,000 and was originally
      due and payable in April 2007. Pursuant to the terms of the note, the principal
      amount of the note decreased by $797,333.33 on each of the nine and 12 month
      anniversaries of the note. In December 2005, when we would not have otherwise
      been required to make a payment under the Zaiq Note, we entered into a letter
      agreement with Zaiq pursuant to which we agreed to repurchase from Zaiq for
      $200,000 the remaining balance of the Zaiq Note and 5,180,474 shares of our
      common stock held of record by Zaiq. We had the right to assign any or all
      of
      our purchase commitment under the letter agreement. We assigned to an
      unaffiliated third party that had been a prior investor in the Company the
      right
      to purchase 4,680,620 of the Zaiq shares. On December 20, 2005, we purchased
      the
      Zaiq Note and 499,854 shares of our common stock held by Zaiq for an aggregate
      purchase price of $129,789. The Zaiq shares we repurchased have been accounted
      for as treasury stock, carried at cost, and reflected as a reduction to
      stockholders’ equity. The remaining principal and accrued interest of $1,292,111
      on the Zaiq Note was canceled resulting in a gain of $1,169,820.





Also,
      during the year ended October 31, 2006, we recognized income of $200,000 from
      the sale to an unrelated third party of our rights to the “Embarq” trademark in
      the United States, Puerto Rico and U.S. possessions and
      territories.





Other
      income in the year ended October 31, 2005 consisted primarily of a gain on
      sale
      of property and equipment of $20,000, a gain on exchange of Redeemable Series
      B
      Preferred Stock into common stock of $55,814, and other miscellaneous gains
      of
      $930,216, arising from the forgiveness of liabilities and the conversion of
      liabilities into notes payable.





NET
      LOSS.
 For the year ended October 31, 2006 our net loss increased 240% or
      $11,275,239 to $15,965,621 from $4,690,382 primarily as the result of higher
      selling, general and administrative costs, interest costs, higher amortization
      of deferred financing costs, and higher amortization of technology license
      and
      capitalized software development fees, partially offset by lower derivative
      gains, lower research and development expense, a gain on the forgiveness of
      the
      Zaiq note, income from the sale of the Embarq trademark, and no loss on the
      write down of the carrying value of the Film in Distribution to $0, which
      occurred during the year ended October 31, 2005.





24





**Liquidity
      and Capital Resources**





Cash
      and
      short-term investments balances totaled approximately $848,000 at January 24,
      2007, $2,090,119 at October 31, 2006, and $373,481 at October 31,
      2005.





Net
      cash
      used in operating activities was $3,447,918 in the 2006 period, compared to
      $2,412,199 in the 2005 period. The increase in cash used in operations was
      principally the result of the following items:





o
            An
                increase in the net loss, which was $15,965,621 in the 2006 period,
                compared with $4,690,382 in the 2005 period;o
            an
                increase in the 2006 period of other current assets and other assets,
                together with an increase in accounts payable and accrued liabilities
                for
                a net of $610,895, compared to an increase in other current assets
                and
                other assets and a decrease of accounts payable and accrued liabilities
                in
                the 2005 period for a net of $252,921, resulting in a net increase
                in cash
                used of $863,816.





impacted
      by the following non-cash items:





o
            interest
                expense related to fair value of Investors’ warrants at issuance in excess
                of debt discount of $5,608,156 for the year ended October 31, 2006,
                compared to $0 for the 2005 period;o
            a
                decrease in the gain on the change in fair value of derivative liabilities
                of $1,958,907 for the year ended October 31, 2006, compared to a
                gain of
                $2,233,004 for the 2005 period;o
            increased
                amortization of deferred financing costs, which were $1,586,386 in
                the
                2006 period, compared to $602,182 for the 2005 period, principally
                due to
                increased conversions of the 2005 Debentures, the repayment of a
                note
                payable, and the amortization of additional deferred financing costs
                related to the 2006 Debentures;o
            increased
                amortization of debt discount on notes, which was $4,681,544 for
                the 2006
                period, compared to $2,692,581 for the 2005 period, principally due
                to
                increased conversions of the 2005 Debentures, the repayment of a
                note
                payable, and the amortization of additional debt discount related
                to the
                2006 Debentures;o
            increased
                amortization of technology license and capitalized software development
                fees, which was $777,026 for the 2006 period, compared to $0 for
                the 2005
                period, due to the commencement of amortization related to the market
                release of the Cu5001 to prospective customers for evaluation and
                testing;o
            gain
                on forgiveness of principal and interest on the promissory note to
                Zaiq
                Technologies, Inc. of $1,169,820 for the 2006 period, compared to
                a gain
                on the forgiveness of liabilities of $896,702 for the 2005
                period;o
            increased
                stock-based compensation expense, which was $1,923,276 for the 2006
                period, compared to $1,428,541 for the 2005 period;o
            loss
                on exchange of notes payable into common stock of $446,386 for the
                2006
                period; ando
            impairment
                of Film in Distribution of $1,009,777 for the 2005 period but not
                in the
                2006 period.




25





Net
      cash
      used in investing activities in the 2006 period was $1,800,327 compared to
      $11,161 in the 2005 period. Net cash used in investing activities for the 2006
      period was the result of the acquisition of technology and software from 1021
      Technologies of $150,000, acquisition of capitalized software and development
      fees of $590,461, the purchase of short-term investments of $1,000,000, and
      acquisition of property and equipment of $59,866. For the 2005 period, cash
      used
      in investing activities was for the acquisition of $11,161 in property and
      equipment.





Net
      cash
      provided by financing activities was $5,964,883 in the 2006 period compared
      to
      $2,669,030 in 2005 period. Net cash provided by financing activities in the
      2006
      period was the result of proceeds from the exercise of warrants totaling
      $1,391,444, proceeds from convertible debentures of $6,000,000, and proceeds
      from notes payable of $750,000, offset by capitalized financing costs of
      $742,450, repayments of notes payable of $944,291, repayments of convertible
      notes payable of $482,322, and the purchase of treasury stock for
      $7,498.





For
      the
      2005 period, net cash provided by financing activities resulted from the
      issuance of common stock for $835,100, proceeds from convertible debentures
      of
      $3,500,000, proceeds from notes payable of $300,000, offset by capitalized
      financing costs of $422,010, repayments of notes payable of $1,010,021, and
      repayments of convertible notes payable of $534,039.





Since
      inception, we have funded our operations primarily through the issuance of
      our
      common stock and debt securities. Our recent financings are discussed
      below.





In
      March
      2006, we sold $6,000,000 in aggregate principal amount of our Senior Secured
      7%
      convertible debentures and warrants, receiving net proceeds of approximately
      $4.5 million after the payment of offering related costs (the “2006
      Debentures”). As of January 24, 2007, approximately $5.6 million of principal
      amount and interest of the 2006 Debentures had been converted into approximately
      73.4 million shares of our common stock and there was $662,000 of principal
      amount of the 2006 Debentures outstanding. The 2006 Debentures mature in March
      2008.





In
      January 2006, we entered into a loan agreement with an institutional investor
      pursuant to which we borrowed $750,000. The outstanding principal and accrued
      interest on this loan was repaid in March 2006 from the proceeds of the 2006
      Debentures.





In
      May
      2005, we sold $3.5 million in aggregate principal amount of our Senior Secured
      7% convertible debentures and warrants (the “2005 Debentures”) in a private
      placement to certain private and institutional investors. As of January 24,
      2007, approximately $3.6 million of principal amount and interest of the 2005
      Debentures had been converted into approximately 170.1 million shares of our
      common stock and there was approximately $4,300 of principal amount of the
      2005
      Debentures outstanding. The 2005 Debentures mature in May 2008.





In
      December 2004, we entered into a loan agreement with an institutional investor
      pursuant to which we borrowed $300,000. The outstanding principal and accrued
      interest on this loan was repaid in May 2005 from the proceeds of the 2005
      Debentures.





In
      September 2004, we entered into a loan agreement with an institutional
      investor/stockholder pursuant to which we borrowed $250,000. The outstanding
      principal and accrued interest on this loan was repaid in May 2005 from the
      proceeds of the 2005 Debentures.





In
      December 2003, April 2004 and May 2004,we sold $1,350,000 in aggregate principal
      amount and received net proceeds of approximately $1,024,000 from the private
      placement to certain private and institutional investors of our three year
      7%
      convertible debentures and warrants (the “7% Debentures”). As of January 24,
      2007, approximately $1.4 million of principal amount and interest of the 7%
      Debentures had been converted into approximately 9.1 million shares of our
      common stock and there was $75,000 of principal amount of the 7% Debentures
      outstanding. The 7% Debentures mature in May 2007.





26





As
      of
      January 24, 2007, we had cash and short-term investments of approximately
      $848,000. An institutional investor that has been a prior investor in the
      Company has committed to purchase $6 million of 7% Senior Secured Convertible
      Debentures upon our request at any time after March 1, 2007. As a result,
      management believes funds on hand or committed to us will enable us to meet
      our
      liquidity needs for the next twelve months. Nevertheless, circumstances
      may arise that would require us to raise additional capital in order to meet
      our
      liquidity needs and satisfy our current business plan prior to the receipt
      of
      revenues from our semiconductor business .





We
      may
      not be successful in our efforts to raise additional funds. Even if we are
      able
      to raise additional funds through the issuance of debt or other means, our
      cash
      needs could be heavier than anticipated in which case we could be forced to
      raise additional capital. Even after we receive orders for our products, we
      do
      not yet know what payment terms will be required by our customers or if our
      products will be successful. At the present time, other than the $6 million
      commitment described above, we have no commitments for any additional financing,
      and there can be no assurance that, if needed, additional capital will be
      available to us on commercially acceptable terms or at all.





Additional
      equity financings are likely to be dilutive to holders of our Common Stock
      and
      debt financing, if available, may involve significant payment obligations and
      covenants that restrict how we operate our business.





**Impact
      of Recently Issued Accounting Standards**





In
      June
      2005, the FASB published Statement of Financial Accounting Standards No. 154,
      “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 establishes
      new standards on accounting for changes in accounting principles. Pursuant
      to
      the new rules, all such changes must be accounted for by retrospective
      application to the financial statements of prior periods unless it is
      impracticable to do so. SFAS 154 completely replaces Accounting Principles
      Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
      pronouncements with respect to accounting for changes in estimates, changes
      in
      the reporting entity, and the correction of errors. The requirements in SFAS
      154
      are effective for accounting changes made in fiscal years beginning after
      December 15, 2005. We will apply these requirements to any accounting changes
      after the implementation date. The adoption of this pronouncement is not
      expected to have an impact on our consolidated financial position, results
      of
      operations, or cash flows.





In
      June
      2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 05-1,
“Accounting for the Conversion of an Instrument That Becomes Convertible upon
      the Issuer’s Exercise of a Call Option” (“EITF No. 05-1”), which indicates that
      no gain or loss should be recognized upon the conversion of an instrument that
      becomes convertible as a result of an issuer’s exercise of a call option
      pursuant to the original terms of the instrument. EITF No. 05-1 is effective
      for
      annual or interim periods beginning after June 28, 2006. The adoption of this
      pronouncement did not have an impact on our consolidated financial position,
      results of operations, or cash flows.




In
      June
      2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of ‘Conventional
      Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock’” (“EITF No. 05-2”), which addresses when a convertible debt instrument
      should be considered “conventional” for the purpose of applying the guidance in
      EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No. 00-19
      for conventional convertible debt instruments and indicated that convertible
      preferred stock having a mandatory redemption date may qualify for the exemption
      provided under EITF No. 00-19 for conventional convertible debt if the
      instrument’s economic characteristics are more similar to debt than equity. EITF
      No. 05-2 is effective for new instruments entered into and instruments modified
      in periods beginning after June 29, 2005. We have applied the requirements
      of
      EITF No. 05-2 since the required implementation date. The adoption of this
      pronouncement did not have an impact on our consolidated financial position,
      results of operations, or cash flows.





27





EITF
      Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
      Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock’” (“EITF No. 05-4”) addresses financial instruments, such as stock
      purchase warrants, which are accounted for under EITF No. 00-19 that may be
      issued at the same time and in contemplation of a registration rights agreement
      that includes a liquidated damages clause. The consensus of EITF No. 05-4 has
      not been finalized. The adoption of this pronouncement is not expected to have
      an impact on our consolidated financial position, results of operations, or
      cash
      flows.





In
      September 2005, the FASB ratified EITF Issue No. 05-7, “Accounting for
      Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues” (“EITF No. 05-7”), which addresses whether a modification to a
      conversion option that changes its fair value affects the recognition of
      interest expense for the associated debt instrument after the modification
      and
      whether a borrower should recognize a beneficial conversion feature, not a
      debt
      extinguishment, if a debt modification increases the intrinsic value of the
      debt
      (for example, the modification reduces the conversion price of the debt). EITF
      No. 05-7 is effective for the first interim or annual reporting period beginning
      after December 15, 2005. We adopted EITF No. 05-7 as of the beginning of our
      interim reporting period that began on February 1, 2006. The adoption of this
      pronouncement did not have an impact on our consolidated financial position,
      results of operations, or cash flows.





In
      September 2005, the FASB ratified EITF Issue No. 05-8, “Income Tax Consequences
      of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF No.
      05-8”), which addresses the treatment of convertible debt issued with a
      beneficial conversion feature as a temporary difference under the guidance
      in
      SFAS 109. In addition, deferred taxes recognized for a temporary difference
      of
      debt with a beneficial conversion feature should be recognized as an adjustment
      of additional paid-in capital. Entities should apply the guidance in EITF No.
      05-8 in the first interim or annual reporting period that begins after December
      15, 2005. Its provisions should be applied retrospectively under the guidance
      in
      SFAS 154 to all convertible debt instruments with a beneficial conversion
      feature accounted for under the guidance in EITF No. 00-27 “Application of EITF
      Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion
      Features or Contingently Adjustable Conversion Ratios.’” We have applied the
      requirements of EITF No. 05-8 to all previously existing convertible debt
      instruments with a beneficial conversion feature and will apply the requirements
      of EITF No. 05-8 for all new convertible debt instruments with a beneficial
      conversion feature. The adoption of this pronouncement for new convertible
      debt
      instruments with a beneficial conversion feature did not have an impact on
      our
      consolidated financial position, results of operations or cash
      flows.





In
      February 2006, the FASB published Statement of Financial Accounting Standards
      No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of
      FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 resolves issues
      addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133
      to Beneficial Interests in Securitized Financial Assets.” The requirements in
      SFAS 155 are effective for all financial instruments acquired or issued after
      the beginning of an entity’s first fiscal year that begins after September 15,
      2006. The adoption of this pronouncement is not expected to have an impact
      on
      our consolidated financial position, results of operations, or cash
      flows.





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting for uncertainty in tax positions. This Interpretation
      requires an entity to recognize the impact of a tax position in its financial
      statements if that position is more likely than not to be sustained on audit
      based on the technical merits of the position. The provisions of FIN 48 are
      effective for us as of the beginning of fiscal 2008, with earlier application
      encouraged. Any cumulative effect of the change in accounting principle will
      be
      recorded as an adjustment to the opening accumulated deficit balance. The
      adoption of this pronouncement is not expected to have an impact on our
      consolidated financial position, results of operations, or cash
      flows.





28





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in accordance with accounting principles generally accepted in the U.S.,
      and expands disclosures about fair value measurements. SFAS 157 is effective
      for
      us as of the beginning of fiscal 2009, with earlier application encouraged.
      Any
      cumulative effect will be recorded as an adjustment to the opening accumulated
      deficit balance, or other appropriate component of equity. The adoption of
      this
      pronouncement is not expected to have an impact on our consolidated financial
      position, results of operations, or cash flows.





In
      September 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”) No. 108,
      Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was
      issued in order to reduce the diversity in practice in how public companies
      quantify misstatements of financial statements, including misstatements that
      were not material to prior years’ financial statements. SAB 108 is effective for
      fiscal year 2007. The adoption of this pronouncement is not expected to have
      an
      impact on our consolidated financial position, results of operations, or cash
      flows.





In
      October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to the
      Application of Grant Date as Defined in FASB Statement No. 123(R)”, which
      provides clarification of the concept of mutual understanding between employer
      and employee with respect to the grant date of a share-based payment award.
      This
      FSP provides that a mutual understanding of the key terms and conditions of
      an
      award shall be presumed to exist on the date the award is approved by management
      if the recipient does not have the ability to negotiate the key terms and
      conditions of the award and those key terms and conditions will be communicated
      to the individual recipient within a relatively short time period after the
      date
      of approval. This guidance was applicable upon the initial adoption of SFAS
      123(R). The adoption of this pronouncement did not have an impact on our
      consolidated financial position, results of operations, or cash
      flows.





**ITEM
      7.**  **FINANCIAL
      STATEMENTS**





The
      information called for by this Item 7 is included following the “Index to
      Financial Statements” contained in this Annual Report on Form
      10-KSB.





**ITEM
      8.**  **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE**





None.





**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**





EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES. The Company, under the supervision and
      with the participation of the Company’s management, including the Company’s
      Chief Executive Officer and Principal Financial Officer, has evaluated the
      effectiveness of the design and operation of the Company’s “disclosure controls
      and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the
      Exchange Act as of this report. The Company’s Chief Executive Officer and
      Principal Financial Officer has concluded based upon his evaluation that the
      Company’s disclosure controls and procedures were effective as of the end of the
      period covered by this report to provide reasonable assurance that material
      information required to be disclosed by the Company in reports that it files
      or
      submits under the Exchange Act is recorded, processed, summarized and reported
      within the time periods specified in SEC rules and forms.





A
      control
      system, no matter how well conceived and operated, can provide only reasonable,
      not absolute, assurance that the objectives of the control system are met.
      Because of the inherent limitations in all control systems, no evaluation of
      controls can provide absolute assurance that all control issues, if any, within
      a company have been detected. Such limitations include the fact that human
      judgment in decision-making can be faulty and that breakdowns in internal
      control can occur because of human failures, such as simple errors or mistakes
      or the intentional circumvention of the established process.




CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There have been no changes in
      our
      internal controls over financial reporting that have materially affected, or
      are
      reasonably likely to affect these controls during the year ended October 31,
      2006.





**ITEM
      8B.**  **OTHER
      INFORMATION**





None





29





**PART
      III**





**ITEM
      9.**  **DIRECTORS
      AND EXECUTIVE OFFICERS**





**Management**





Our
      executive officers and directors and their respective ages and positions are
      as
      follows:





**Name**
            
            **Age**
            
            **Position**Brad
                Ketch
            
            44
            
            President,
                Chief Executive Officer, Secretary, Principal Financial Officer and
                DirectorRay
                Willenberg, Jr.
            
            55
            
            Chairman
                of the Board and Executive Vice PresidentDavid
                Wojcik
            
            40
            
            Senior
                Vice PresidentJack
                L. Peckham
            
            65
            
            Director
                (1)Thomas
                J. Cooper
            
            57
            
            Director
                (2)“David”
                Boon Tiong Tan
            
            50
            
            Director





____________________





(1)
            Audit
                Committee and Compensation Committee Member(2)
            Compensation
                Committee Member





The
      business experience, principal occupations and employment, as well as the
      periods of service, of each of our directors and executive officers during
      at
      least the last five years are set forth below.





*Brad
      Ketch* has
      served the Company in various roles since March 2002. In March 2002, Mr. Ketch
      became a consultant with us on our broadband technology and served in that
      capacity until July 2002, when he became our Chief Marketing Officer. He has
      served as our President and Chief Executive Officer, as well as a director,
      since December 2002. With over 19 years experience creating shareholder value
      through broadband telecommunications products and services, Mr. Ketch, from
      October 2001 to March 2002, served as CEO of Kentrox LLC, a manufacturer and
      marketer of data networking equipment. At Kentrox, Mr. Ketch was responsible
      for
      a company with 260 employees and $90 million in annual revenues. From January
      2001 to October 2001 Mr. Ketch implemented strategic plans for telecom service
      providers and equipment manufacturers through his telecommunications consulting
      company, Brad Ketch & Associates, of which he was founder and President.
      From February 1999 to January 2001 he was Senior Vice President of Sales and
      Marketing for HyperEdge Corporation, a company he co-founded. HyperEdge acquired
      and integrated broadband access equipment manufacturers to further enable
      service providers to deliver broadband access to the “Last Mile.” From August
      1997 through February 1999, Mr. Ketch implemented strategic business and
      technical plans for competitive local exchange carrier network access and
      created products targeted at the incumbent local exchange carrier market as
      a
      consultant to various telecommunications companies as a consultant with Brad
      Ketch & Associates. Prior to August 1997 he served in various capacities at
      Nortel, Advanced Fibre Communications and Cincinnati Bell. Mr. Ketch has a
      Bachelor of Arts degree in Economics from Wheaton College and an MBA from
      Northwestern University.





*Ray
      Willenberg, Jr.* served
      as our President, Chief Executive Officer and Chairman of the Board from April
      1997 to March 2002, and was elected a director in October 1996. Mr. Willenberg
      joined us as Vice President and corporate Secretary in 1996. He currently serves
      as our Executive Vice President and Chairman of the Board of Directors. From
      1972 to 1995, Mr. Willenberg was Chief Executive Officer of Mesa Mortgage
      Company in San Diego, California.





30





*David
      Wojcik* has been
      a member of the Company’s advisory board since March 2005, when he also joined
      the Company as a consultant. In September 2006, Mr. Wojcik joined the Company
      as
      our Vice President Sales and Business Development. He was hired to lead Rim
      Semi’s sales, marketing and business development activities on a global basis.
      With over seventeen years’ experience, including more than ten years in sales
      with telecommunications equipment leader Alcatel, Mr. Wojcik brings strong
      leadership and success in broadband communications equipment sales, business
      development and engineering.





An
      accomplished executive with broad expertise in sophisticated data technology,
      Mr. Wojcik achieved significant success leading large organizations as well
      as
      building and developing startup teams.  His efforts have resulted in the
      implementation of hundreds of millions of dollars in network solutions equipment
      and services during his career.  Mr. Wojcik has held many leadership
      positions including serving as vice president of sales for Alcatel from 2001
      through early 2005, co-founder and executive of Neutral Tandem Inc. in 2000
      until joining Alcatel, and as a member of the research and development staff
      at
      Tellabs.  Most recently, from the second quarter or 2005 until joining us
      in March 2006, he was Area Vice President of Sales at Telmar Network Technology
      (formerly Somera Communications). Mr. Wojcik holds a BS in Electrical
      Engineering from Southern Illinois University.





*Jack
      L. Peckham* is a
      founder and director of Heritage Bank of Commerce in San Jose, California,
      and
      serves on its audit and compensation committees. He is currently the Chairman
      and CEO of Broadband Graphics, a company which owns and licenses intellectual
      property in the areas of video and desktop computing. From 1985 through 1998,
      Mr. Peckham held various positions at ATMEL Corporation (www.atmel.com),
      retiring as its General Manager. He received an MA and a BA in Finance and
      marketing from Burdette College, Boston.





*Thomas
      J. Cooper* has
      served as a member of our Board of Directors since March 2002. From June 1
      to
      December 2, 2002, Mr. Cooper served as our President and Chief Executive
      Officer. Mr. Cooper has been engaged in the development, creation and management
      of global sales and marketing platforms for businesses operating in the areas
      of
      high technology, real estate, office automation, and telecommunications for
      the
      past 30 years. Mr. Cooper is currently the Senior Vice President of Sales and
      Marketing of Artimi, Inc. (www.artimi.com) a fabless semiconductor firm based
      in
      Santa Clara, California serving new markets with Ultra Wideband wireless
      technology and products. From 1994 to 2002, Mr. Cooper served in various
      high-ranking positions at Conexant (formerly Virata), most recently as Senior
      Vice President, Corporate Development (from July 1999 to February 2002), where
      he was responsible for the development and implementation of long range growth
      strategies, including defining global partnership initiatives; identifying
      potential acquisition and joint venture candidates; and directing strategic
      investment of corporate capital into select ventures in which the company
      acquired minority stakes. From 1994 until 1999, Mr. Cooper served as Virata's
      Senior Vice President, Worldwide Sales and Marketing, where he oversaw all
      aspects of the company's product sales and marketing, corporate
      marketing/communications and public relations. Mr. Cooper has a Bachelor of
      Arts
      degree in English Literature from Hamilton College and an MBA from the
      University of Toledo, Ohio.





*”David”
      Boon Tiong Tan* has
      served as a member of the Board of Directors since September 2006. From 1996
      until 2000, Dr. Tan served as the head of the Technology Development Department
      of SingTel, Asia’s leading telecommunications group, where he was responsible
      for the development of the DSL and ATM infrastructure. In 2000, he joined
      Mediacorp Singapore, where he managed its technology fund until 2002. From
      2002
      to 2004, he was an independent technology consultant. Since 2004, Dr. Tan headed
      the NUS Venture Support unit where he is responsible for the funding and
      incubation of over 30 technology start-ups from the National University of
      Singapore (NUS). Dr. Tan holds a Ph.D. from Cambridge University.





***Committees
      of the Board of Directors***





Our
      Board
      of Directors operates with the assistance of the Audit Committee and the
      Compensation Committee. Due to the small size of our Board, we do not presently
      maintain a formal nominating committee. The entire Board participates in the
      process of nominating candidates for the Board of Directors.





The
      function of the Audit Committee is to (i) make recommendations to the full
      Board
      of Directors with respect to appointment of the Company’s independent public
      accountants, and (ii) meet periodically with our independent public accountants
      to review the general scope of audit coverage, including consideration of
      internal accounting controls and financial reporting.





31





The
      Audit
      Committee held four meetings during the fiscal year ended October 31, 2006.
      Jack
      L. Peckham was appointed to the Audit Committee in 2005, and is presently the
      sole member of the committee. The Board of Directors has determined that Mr.
      Peckham is an “Audit Committee Financial Expert” for purposes of the SEC’s
      rules. The Board believes that Mr. Peckham meets the independence criteria
      set
      out in Rule 4200(a)(14) of the Marketplace Rules of the National Association
      of
      Securities Dealers and the rules and other requirements of the SEC.





The
      Compensation Committee sets compensation policy and administers the Company’s
      cash and equity incentive programs for the purpose of attracting and retaining
      skilled executives who will promote the Company’s business goals and build
      shareholder value. The committee is also responsible for reviewing and making
      recommendations to the Board regarding all forms of compensation to be provided
      to the Company’s named executive officers, including stock compensation and
      bonuses. The Compensation Committee met three times during the fiscal year
      ended
      October 31, 2006.





There
      are
      no compensation committee interlocks between the members of our Compensation
      Committee and any other entity. Jack L. Peckham and Thomas J. Cooper are the
      members of the Compensation Committee. Neither of the current members of the
      Compensation Committee is an officer or employee of ours, nor of any of our
      subsidiaries. Mr. Cooper served as our Chief Executive Officer from June to
      December 2002.





***Board
      of Directors; Election of Officers***





All
      directors are elected by a plurality vote at the annual meeting of the
      shareholders, and shall hold office until his successor is duly elected and
      qualified. Any vacancy occurring in the Board of Directors may be filled by
      the
      shareholders, the Board of Directors, or if the Directors remaining in office
      constitute less than a quorum of the Board of Directors, they may fill the
      vacancy by the affirmative vote of a majority of the Directors remaining in
      office. A director elected to fill a vacancy is elected for the unexpired term
      of his predecessor in office. Any directorship filled by reason of an increase
      in the number of directors shall expire at the next shareholders' meeting in
      which directors are elected, unless the vacancy is filled by the shareholders,
      in which case the term shall expire on the later of (i) the next meeting of
      the
      shareholders or (ii) the term designated for the director at the time of
      creation of the position being filled.





Our
      executive officers are elected by our board of directors. Each officer shall
      hold office until the earlier of: his death; resignation or removal from office;
      or the election and qualification of his successor.





***Compensation
      of Directors***





It
      is our
      policy to pay each outside director $2,000 for each meeting of our Board of
      Directors attended and for each committee meeting attended. We also reimburse
      our directors for reasonable expenses incurred in traveling to and from board
      or
      committee meetings.





In
      addition, we have granted stock options to the directors to compensate them
      for
      their services. During the fiscal year ended October 31, 2006, we issued options
      to purchase 1,200,000 and 1,000,000 shares of common stock valued at
      approximately $73,879 and $42,139 to Mr. Peckham and Mr. Cooper, respectively,
      to compensate them for their services as directors. Our directors are eligible
      to receive stock option grants under our 2000 Omnibus Securities Plan, our
      2001
      Stock Incentive Plan and our 2006 Stock Incentive Plan.




**Section
        16(a) Beneficial Ownership Reporting Compliance**
 
 Section
        16(a) of the Securities Exchange Act of 1934, as amended, requires each of
        our
        officers and directors and each person who owns more than 10% of a registered
        class of our equity securities to file with the SEC an initial report of
        ownership and subsequent reports of changes in such ownership. Such persons
        are
        further required by SEC regulation to furnish us with copies of all Section
        16(a) forms (including Forms 3, 4 and 5) that they file. Based solely on
        our
        review of the copies of such forms received by us with respect to fiscal
        year
        2006, or written representations from certain reporting persons, we believe
        all
        of our directors and executive officers met all applicable filing requirements,
        except as described in this paragraph. Brad Ketch and Ray Willenberg, Jr.
        each
        filed a late Form 4, both reporting three transactions during fiscal 2006.
        Jack
        Peckham filed a late Form 4 reporting one transaction. Dave Tan and David
        Wojcik
        each filed a late Form 3 that occurred during fiscal 2006. Dr. Tan’s late Form 3
        did not report any transactions; Mr. Wojcik’s late Form 3 reported three
        transactions. Lastly, the Company’s Controller, Ms. Jan Rautio-Beyer, filed a
        late Form 3 and a late Form 4. Mr. Rautio-Beyer’s Form 3 did not report any
        transactions and her late Form 4 reported one transaction during fiscal
        2006.


32




**Code
      of Ethics**





We
      have
      adopted a code of ethics that applies to our chief executive officer, president,
      chief financial officer, controller and others performing similar executive
      and
      financial functions at the Company. This code of ethics is posted on our Website
      located at www.rimsemi.com. The code of ethics may be found as follows: From
      our
      main Web page, first click on “About Us” at the top of the page and then on
“Investors”. Next, click on “Governance”. Finally, click on “Code of Ethics”. We
      intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding
      an amendment to, or waiver from, a provision of this code of ethics by posting
      such information on our Website, at the address and location specified
      above.





**ITEM
      10.**  **EXECUTIVE
      COMPENSATION**





The
      following table sets forth all compensation for each of the last three fiscal
      years awarded to, or earned by, our Chief Executive Officer and all other
      executive officers serving as such at the end of 2006 whose salary and bonus
      exceeded $100,000.00 for the year ended October 31, 2006, or who, as of October
      31, 2006, was being paid a salary at a rate of at least $100,000.00 per
      year.





**Summary
      Compensation Table**





**Name
                and Principal**
              **Position(s)**
            
            **Year**
            
            **Salary**
            
            **Bonus**
            
            **Other
                Annual**
              **Compensation**
            
            **Securities**
              **Underlying**
              **Options****Brad
                Ketch**
            
            
            2006
            
            $
            250,000
            
            $
            150,000
            
            
            -
            
            
            10,700,000President
                and Chief Executive Officer
            
            
            2005
            
            $
            250,000
            
            $
            70,000
            
            $
            170,000(1
            )
            
            7,000,000(and
                Principal Financial Officer)
            
            
            2004
            
            $
            250,000(2
            )
            
            -
            
            $
            86,667(3
            )
            
            -**Ray
                Willenberg, Jr.**
            
            
            2006
            
            $
            188,000
            
            $
            75,000
            
            
            -
            
            
            10,700,000Chairman
                of the Board, Executive
            
            
            2005
            
            $
            84,896
            
            $
            212,450(4
            )
            $
            170,000(5
            )
            
            7,000,000Vice
                President
            
            
            2004
            
            $
            175,000(6
            )
            $
            152,176
            
            $
            176,667(7
            )
            
            -**David
                Wojcik**
            
            
            2006
            
            $
            149,625(8
            )
            $
            40,000(9
            )
            
            -
            
            
            4,000,000(10
            )Senior
                Vice President
            
            
            2005
            
            
            -
            
            
            -
            
            
            -
            
            
            -2004
            
            
            -
            
            
            -
            
            
            -
            
            
            -


____________________


(1)
            Represents
                the issuance to Mr. Ketch in April 2005 of 1,000,000 shares of common
                stock.(2)
            Includes
                $45,380 paid in 2005(3)
            Represents
                the issuance to Mr. Ketch in December 2003 of 40,000 shares of common
                stock in lieu of $10,000 of deferred payroll, and the issuance to
                Mr.
                Ketch in March 2004 of 333,333 shares of common stock valued at
                $76,333.(4)
            These
                amounts are accrued but unpaid.(5)
            Represents
                the issuance to Mr. Willenberg in April 2005 of 1,000,000 shares
                of common
                stock.(6)
            Includes
                $46,250 paid in 2005.(7)
            Represents
                the issuance to Mr. Willenberg in December 2003 of 400,000 shares
                of
                common stock in lieu of $100,000 of unpaid bonuses, and the issuance
                to
                Mr. Willenberg in March 2004 of 333,333 shares of common stock valued
                at
                $76,667.(8)
            Represents
                $37,500 of Mr. Wojcik’s salary from September 1, 2006 through October 31,
                2006, as well as $112,125 in compensation paid from March 2006 through
                August 2006 when Mr. Wojcik served as a consultant to the
                Company.(9)
            This
                amount was accrued at October 31, 2006 and paid during fiscal year
                2007.(10)
            Includes
                3,500,000 stock options granted to Mr. Wojcik in connection with
                his
                employment agreement in September 2006 and 500,000 stock options
                granted
                to Mr. Wojcik in July 2006 while Mr. Wojcik was a consultant to the
                Company.





33


In
      accordance with the rules of the SEC, other compensation in the form of
      perquisites and other personal benefits has been omitted for the named executive
      officers because the aggregate amount of these perquisites and other personal
      benefits was less than the lesser of $50,000 or 10% of annual salary and bonuses
      for the named executive officers





***Option
      Grants in the Last Fiscal Year***





The
      following table sets forth information concerning individual grants of stock
      options made during the year ended October 31, 2006, to each of the named
      executive officers:





**Name**
            
            **Number
                of**
              **Securities**
              **Underlying**
              **Options****Granted**
            
            **%
                of Total****Options**
              **Granted
                to**
              **Employees**
              **in****Fiscal****Year**
            
            **Exercise
                Price**
            
            **Expiration
                Date**Brad
                Ketch
            
            
            10,700,000
            
            
            38.0
            %
            $
            0.027
            
            
            1/10/2016Ray
                Willenberg, Jr.
            
            
            10,700,000
            
            
            38.0
            %
            $
            0.027
            
            
            1/10/2016David
                Wojcik
            
            
            500,000
            
            
            1.8
            %
            $
            0.18
            
            
            7/6/20163,500,000
            
            
            12.4
            %
            $
            0.158
            
            
            9/1/2016





***Aggregate
      Options Exercised in 2006 and Year-End Option Values***





The
      named
      executive officers did not exercise any stock options during the year ended
      October 31, 2006. The following table sets forth information as of October
      31,
      2006, concerning options held by the named executive officers.




**Shares**
              **Acquired**
              **on****Exercise**
            
            **Value**
              **Realized**
            
            **Number
                of Securities**
              **Underlying
                Unexercised**
              **Options
                at Fiscal Year End**
            
            **Value
                of Unexercised**
              **In-The-Money**
              **Options
                at Fiscal Year End****(#)**
            
            **($)**
            
            **Exercisable**
            
            **Unexercisable**
            
            **Exercisable**
            
            **Unexercisable**Brad
                Ketch
            -
            
            -
            
            10,700,000
            
            -
            
            $727,600
            
            -Ray
                Willenberg, Jr.
            -
            
            -
            
            10,700,000
            
            -
            
            $727,600
            
            -David
                Wojcik
            -
            
            -
            
            500,000
            
            3,500,000
            
            -
            
            -





**Employment
      Agreements with Executive Officers**





*Brad
      Ketch* .
      On
      December 2, 2002, we entered into an employment agreement with Brad Ketch
      pursuant to which Mr. Ketch was retained as our Chief Executive Officer. The
      agreement had a three-year initial term and provided for Mr. Ketch to receive
      an
      initial base salary of $250,000, with an annual bonus to be paid at the
      discretion of the Board of Directors in either cash or stock. In December 2005
      and December 2006, this agreement was automatically renewed for an additional
      one-year term. If Mr. Ketch is terminated without “cause” or leaves Rim
      Semiconductor for “good reason,” each as defined in his agreement, he will
      receive a severance payment equal to two years of his base salary on the date
      of
      termination. If he is terminated without cause or with good reason within one
      year after a “change of control,” as defined in his agreement, he will receive a
      severance payment equal to two years of his base salary and an amount equal
      to
      two times the amount of his last bonus received.





34




*Ray
      Willenberg, Jr* .
      We
      entered into an employment agreement with Mr. Willenberg, dated as of
      March 1, 2006, pursuant to which he continues to serve as our Executive
      Vice President. The agreement terminates on March 3, 2008 and provides for
      Mr. Willenberg to receive a base salary of $250,000 per year, subject to the
      earlier of (i) Mr. Willenberg’s death or Disability (as defined in the
      agreement); (ii) the termination of the agreement by either party without cause
      on written notice; or (iii) termination of the agreement by us for Cause (as
      defined in the agreement).





During
      Mr. Willenberg’s employment, the agreement provides for his nomination to our
      Board of Directors and, if elected, his appointment as chairman. Mr. Willenberg
      would resign from the Board upon the termination of his employment.





Under
      his
      employment agreement, we also granted Mr. Willenberg a right of first refusal
      to
      purchase our equity interest in Top Secret Productions, LLC in the case of
      a
      bona fide third-party offer to purchase that interest or our determination
      to
      offer that interest for sale at a specified price.





*David
      Wojcik* . On
      September 1, 2006, we entered into an employment agreement with David Wojcik
      pursuant to which Mr. Wojcik was retained to serve as our Senior Vice President
      - Sales and Business Development. The employment agreement provides for a base
      annual salary of $225,000. Mr. Wojcik is also eligible to receive quarterly
      bonuses of up to $40,000 per fiscal quarter, as determined by the Company’s
      compensation committee.





Mr.
      Wojcik is employed “at-will” by the Company, and accordingly may be terminated
      with or without reason or notice at any time. If Mr. Wojcik is terminated other
      than with good cause or leaves for good reason (each as defined in the
      Employment Agreement), the Company will pay a severance equal to twelve months
      base salary in effect on the date of Mr. Wojcik’s termination of employment. If
      Mr. Wojcik relocates to the Company’s headquarters in Portland, Oregon, the
      Company will provide him a relocation bonus of $100,000 and reimburse his
      expenses up to $25,000. If Mr. Wojcik does relocate to Portland, Oregon, he
      will
      sign a separate Relocation Agreement which will provide that he will repay
      the
      Company a prorated amount of his reimbursed costs should he leave employment
      with the Company within six months of his relocation .




In
      accordance with his employment agreement, the Company also granted Mr. Wojcik
      an
      option to purchase 3,500,000 shares (the “Option”) of the Company’s common
      stock, at an exercise price of $0.158 per share. The Option vests and becomes
      exercisable in 32 installments. The first two installments shall vest the Option
      with respect to 291,670 shares each on December 1, 2006 and March 1, 2007,
      respectively, and the remainder of the Option shall vest in thirty equal
      installments of 97,222 shares each on the first of each month commencing
      April 1, 2007. Once vested, the Option is exercisable through August 31,
      2016, unless earlier terminated in accordance with the Stock Option
      Agreement.





Prior
      to
      accepting this position, Mr. Wojcik served as a consultant to the Company
      pursuant to a Consulting Agreement dated March 4, 2005. While a consultant,
      Mr.
      Wojcik was granted 37,500 shares of the Company’s common stock and options to
      purchase 500,000 shares of Company common stock at an exercise price of $0.18
      per share.





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**




The
      following table sets forth information as of the close of business on January
      24, 2007, concerning shares of our common stock beneficially owned by (i) each
      director; (ii) each named executive officer; and (iii) by all directors and
      executive officers as a group. We are not aware of any persons beneficially
      owning more than 5% of our common stock.




35
  shares
      of
      common stock outstanding at January 24, 2007.





**Shares
                Beneficially Owned****Person
                or Group**
            
            **Number**
            
            **Percent(1)**Brad
                Ketch
            
            
            12,411,283(2
            )
            
            2.85
            %Ray
                Willenberg, Jr.
            
            
            14,520,743(3
            )
            
            3.33
            %David
                Wojcik
            
            
            1,120,840(4
            )
            
            *
            %Jack
                L. Peckham
            
            
            1,344,432(5
            )
            
            *
            %Thomas
                J. Cooper
            
            
            1,882,258(6
            )
            
            *
            %David
                Tan
            
            
            139,130(7
            )
            
            *
            %All
                executive officers and directors as a group
              (6
                persons)
            
            
            31,418,686
            
            
            6.98
            %


___________________


*Less
      than 1%.





(1)
            Percentage
                of beneficial ownership as to any person as of a particular date
                is
                calculated by dividing the number of shares beneficially owned by
                such
                person by the sum of the number of shares outstanding as of such
                date and
                the number of unissued shares as to which such person has the right
                to
                acquire voting and/or investment power within 60 days.(2)
            Includes
                options to purchase 10,977,950 shares of common stock.(3)
            Includes
                options to purchase 10,839,130 shares of common stock.(4)
            Includes
                options to purchase 1,083,340 shares of common stock.(5)
            Includes
                options to purchase 1,044,432 shares of common stock.(6)
            Includes
                options to purchase 1,500,000 shares of common stock.(7)
            Includes
                options to purchase 139,130 shares of common
                stock.




**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





On
      March 7, 2006, we issued a convertible promissory note in the principal
      amount of $301,196.55 (the “New Note”) to Mr. Willenberg. The New Note
      replaced a promissory note in the principal amount of $383,910.72 dated
      March 25, 2005 (the “Old Note”), between the Company and
      Mr. Willenberg, which had a remaining balance due of $88,746.55. All of the
      amounts represented by the Old Note and the New Note represented amounts owed
      to
      Mr. Willenberg for deferred compensation. The principal amount of the New
      Note, with 8% interest, would have been due on the earlier of March 3, 2008
      or the date on which Mr. Willenberg’s employment was terminated by the
      Company. The Company had the ability, at its option, to prepay the New Note
      without penalty. The New Note was convertible, at the option of
      Mr. Willenberg, into shares of our common stock at a conversion price per
      share equal to the closing price of the common stock on the Over-the-Counter
      Bulletin Board on the date of conversion. The Old Note was
      non-interest-bearing, convertible on the same terms as the New Note, and
      provided for monthly payments equal to at least the monthly base salary paid
      by
      us to our chief executive officer. In April 2006, we paid the New Note in
      full.


36
  **ITEM
        13.**  **EXHIBITS**
 
 3.1
              Restated
                  Articles of Incorporation (incorporated by reference to Exhibit
                  3.1 of the
                  Company’s Registration Statement on Form SB-2 filed with the Commission
                  on
                  April 24, 2006).3.2
              Bylaws,
                  as amended (incorporated by reference to Exhibit 3.1 of the Company’s
                  Report on Form 10-Q for the period ended October 31, 2002, filed with
                  the Commission on January 29, 2002).4.1
              Specimen
                  Stock Certificate (incorporated by reference to Exhibit 4.1 of the
                  Company’s Annual Report on Form 10-KSB for the period ended
                  October 31, 2005, filed with the Commission on January 30, 2006 (the
                  “2005 10-KSB”)).4.2
              Warrant,
                  dated as of October 31, 2003 issued in favor of Melton Management
                  Ltd. (incorporated by reference to Exhibit 4.3 of the Company’s
                  Annual Report on Form 10-K for the period ended October 31, 2003,
                  filed
                  with the Commission on January 29, 2004).4.3
              Form
                  of Three Year Warrant issued to purchasers of the Company’s 7% Convertible
                  Debentures (incorporated by reference to Exhibit 4.5 of the Company’s
                  Registration Statement on Form SB-2 (No. 333-112643) filed with
                  the Commission on February 10, 2004).4.5
              Form
                  of Common Stock Purchase Warrant issued to certain investors (incorporated
                  by reference to Exhibit 4.2 of the June 1, 2005
                  8-K).4.6
              Form
                  of 7% Senior Secured Convertible Debenture, Series 06-01C, of
                  the Company (incorporated by reference to Exhibit 4.1 of the
                  Company’s Report on Form 8-K filed with the Commission on
                  March 13, 2006 (the “March 13, 2006 8-K”).4.7
              Amendment
                  to Class 2005-A, -B, and -C Common Stock Purchase Warrants, dated as
                  of February 21, 2006, among the Company and the Warrant holders that
                  are parties thereto (incorporated by reference to Exhibit 4.1 of the
                  Company’s Report on Form 8-K filed with the Commission on
                  March 9, 2006).10.1
              2000
                  Omnibus Securities Plan (incorporated by reference to Appendix A of
                  the Company’s Definitive Proxy Statement filed with the Commission on
                  May 2, 2000). (1)10.2
              2001
                  Stock Incentive Plan (incorporated by reference to Exhibit 4.1 of the
                  Company’s Registration Statement on Form S-8 (No. 333-68716),
                  filed with the Commission on August 30, 2001). (1)10.3
              Convertible
                  Promissory Note dated October 10, 2001 by the Company in favor of
                  Nellie Streeter Crane, Ltd. (incorporated by reference to
                  Exhibit 10.18 of the Company’s Report on Form 10-K for the
                  fiscal year ended October 31, 2001 (the “2001 10-K”), filed with the
                  Commission on January 29, 2002).10.4
              Stock
                  Option Agreement dated February 26, 2002, between the Company and
                  Thomas J. Cooper (incorporated by reference to Exhibit 10.14 of the
                  Company’s Report on Form 10-Q for the period ended January 31, 2002, filed
                  with the Commission on March 18, 2002).10.5
              Convertible
                  Promissory Note dated May 31, 2002, by the Company in favor of Robert
                  E. Casey, Jr. (incorporated by reference to Exhibit 10.9 of the
                  Company’s Report on Form 10-Q for the period ended July 31, 2002, filed
                  with the Commission on September 16, 2002 (the “July 2002
                  10-Q”)).10.6
              Convertible
                  Promissory Note dated June 12, 2002, by the Company in favor of
                  Bonnie Davis (incorporated by reference to Exhibit 10.10 of the July
                  2002 10-Q).10.7
              Employment
                  Agreement dated December 2, 2002, between the Company and Brad Ketch
                  (incorporated by reference to Exhibit 10.59 of the Company’s Annual
                  Report on Form 10-K for the period ended October 31, 2002, filed with
                  the Commission on January 29, 2003 (the “2002 10-K”)).
                  (1)10.8
              2003
                  Consultant Stock Plan (incorporated by reference to Exhibit 10.4 of
                  the Company’s Report on Form 10-Q for the period ended
                  January 31, 2003, filed with the Commission on March 17,
                  2003).10.9
              Convertible
                  Promissory Note dated February 10, 2003 by the Company in favor of
                  James Warren (incorporated by reference to Exhibit 10.1 of the
                  Company’s Report on Form 10-Q for the period ended April 30, 2003, filed
                  with the Commission on June 16,
                  2003).
  37
 
 10.10
              Convertible
                  Promissory Note dated July 23, 2003 by the Company in favor of
                  Johnnie R. Keith (incorporated by reference to Exhibit 10.5 of the
                  Company’s Report on Form 10-Q for the period ended July 31, 2003, filed
                  with the Commission on September 15, 2003).10.11
              Services
                  Agreement dated as of March 31, 2004 between the Company and
                  HelloSoft, Inc. (incorporated by reference to Exhibit 10.18 of the
                  Company’s 2005 10-KSB).10.12
              First
                  Amendment to the Services Agreement dated as of March 31, 2004
                  between the Company and HelloSoft, Inc. (incorporated by reference
                  to
                  Exhibit 10.20 of the Company’s 2005 10-KSB).10.13
              Amendment
                  1.0 to the Services Agreement dated as of October 11, 2004 between
                  the Company and HelloSoft, Inc. (Confidential treatment has been
                  granted
                  with respect to certain portions of this exhibit. Omitted portions
                  have
                  been filed separately with the Commission) (incorporated by reference
                  to
                  Exhibit 10.21 of the Company’s 2005 10-KSB).10.14
              Amended
                  and Restated Development and License Agreement dated as of
                  November 29, 2004 between Adaptive Networks, Inc. and the Company.
                  (Confidential treatment has been requested with respect to certain
                  portions of this exhibit. Omitted portions have been filed separately
                  with
                  the Commission) (incorporated by reference to Exhibit 10.25 of the
                  Company’s 2005 10-KSB).10.15
              Amended
                  and Restated Right of First Refusal, Credit of Payments and Revenue
                  Sharing Agreement dated as of November 29, 2004, among the Company,
                  Adaptive Networks, Inc. and Certain Shareholders of Adaptive Networks,
                  Inc. (incorporated by reference to Exhibit 10.26 of the Company’s
                  2005 10-KSB).10.16
              Lease
                  Agreement dated as of March 2, 2005 between the Company and American
                  Property Management (incorporated by reference to Exhibit 10.3 of the
                  Company’s Report on Form 10-QSB for the period ended April 30, 2005,
                  filed with the Commission on June 14, 2005 (the “April 2005
                  10-QSB”)).10.17
              Letter
                  Agreement dated March 14, 2005 between Starburst Innovations, LLC and
                  the Company (incorporated by reference to Exhibit 10.30 of the
                  Company’s 2005 10-KSB).10.18
              Employment
                  Agreement between the Company and Ray Willenberg, Jr. dated as of
                  March 23, 2005 (incorporated by reference to Exhibit 10.1 of the
                  Company’s Report on Form 10-QSB for the period ended January 31, 2005,
                  filed with the Commission on March 17, 2005 (the “January 2005 10-QSB”)).
                  (1)10.19
              Convertible
                  Promissory Note dated March 23, 2005, by the Company in favor of Ray
                  Willenberg, Jr. (incorporated by reference to Exhibit 10.32 of
                  the Company’s 2005 10-KSB). (1)10.20
              Exchange
                  Agreement between the Company and Zaiq Technologies, Inc. dated
                  as of
                  April 6, 2005 (incorporated by reference to Exhibit 10.2 of the
                  April 2005 10-QSB).10.21
              Promissory
                  Note dated April 6, 2005, by the Company in favor of Zaiq
                  Technologies, Inc. (incorporated by reference to Exhibit 4.1 of the
                  April 2005 10-QSB).10.22
              Form
                  of Securities Purchase Agreement dated as of May 26, 2005, among the
                  Company and certain investors (incorporated by reference to
                  Exhibit 10.1 of the Company’s Report on Form 8-K filed with the
                  Commission on June 1, 2005 (the “June 2005 8-K”)).10.23
              Form
                  of Registration Rights Agreement dated as of May 26, 2005, among the
                  Company and certain investors (incorporated by reference to
                  Exhibit 10.2 of the June 2005 8-K).10.24
              Security
                  Interest Agreement dated as of May 26, 2005 among the Company,
                  certain specified investors, as secured parties, and Krieger and
                  Prager,
                  as agent for the secured parties (incorporated by reference to
                  Exhibit 10.3 of the June 2005
                  8-K).
  38
 
 10.25
              Consulting
                  Agreement between the Company and Richard Hurn dated July 19, 2005
                  (incorporated by reference to Exhibit 10.38 of the Company’s 2005
                  10-KSB).10.26
              Amendment
                  2.0 to the Services Agreement dated as of July 26, 2005 between the
                  Company and HelloSoft, Inc. (Confidential treatment has been granted
                  with
                  respect to certain portions of this exhibit. Omitted portions have
                  been
                  filed separately with the Commission) (incorporated by reference
                  to
                  Exhibit 10.39 of the Company’s 2005 10-KSB).10.27
              Amendment
                  3.0 to the Services Agreement dated as of November 3, 2005 between
                  the Company and HelloSoft, Inc. (Confidential treatment has been
                  granted
                  with respect to certain portions of this exhibit. Omitted portions
                  have
                  been filed separately with the Commission) (incorporated by reference
                  to
                  Exhibit 10.40 of the Company’s 2005 10-KSB).10.28
              Letter
                  Agreement dated as of December 16, 2005 between the Company and Zaiq
                  Technologies, Inc. (incorporated by reference to Exhibit 10.41 of the
                  Company’s 2005 10-KSB).10.29
              Bridge
                  Loan Agreement between the Company and Double U Master Fund, L.P.
                  dated
                  January 24, 2006 (incorporated by reference to Exhibit 10.1 of
                  the Company’s Report on Form 8-K filed with the Commission on
                  January 30, 2006 (the “January 30, 2006
                  8-K”)).10.30
              Form
                  of Note issued in connection with the Bridge Loan Agreement (incorporated
                  by reference to Exhibit 10.2 of the Company’s January 30, 2006
                  8-K).10.31
              Form
                  of Warrant issued in connection with the Bridge Loan Agreement
                  (incorporated by reference to Exhibit 10.3 of the Company’s
                  January 30, 2006 8-K).10.32
              Security
                  Interest Agreement, dated as of January 24, 2006 among the Company,
                  Double U Master Fund, L.P. (the “Secured Party”) and Krieger &
                  Prager, LLP, as agent for the Secured Party (incorporated by reference
                  to
                  Exhibit 10.4 of the Company’s January 30, 2006
                  8-K).10.33
              Stock
                  Option Agreement dated January 26, 2006 between the Company and Brad
                  Ketch.* (1)10.34
              Stock
                  Option Agreement dated January 26, 2006 between the Company and Ray
                  Willenberg, Jr.* (1)10.35
              Stock
                  Option Agreement dated January 26, 2006 between the Company and
                  Walter Chen.*10.36
              License
                  Agreement dated as of February 6, 2006 between the Company and
                  HelloSoft, Inc. (incorporated by reference to Exhibit 10.10 of the
                  Company’s Quarterly Report on Form 10-QSB for the period ended
                  January 31, 2006, filed with the Commission on April 17, 2006 (the
                  “January 2006 10-QSB”) (Confidential treatment has been granted with
                  respect to certain portions of this exhibit. Omitted portions have
                  been
                  filed separately with the Commission).10.37
              Stock
                  Option Agreement dated February 16, 2006 between the Company and
                  Davis Munck Butrus, P.C. (incorporated by reference to
                  Exhibit 10.11 of the Company’s January 2006
                  10-QSB).10.38
              Stock
                  Option Agreement dated February 16, 2006 between the Company and Jack
                  Peckham (incorporated by reference to Exhibit 10.12 of the Company’s
                  January 2006 10-QSB).10.39
              Stock
                  Option Agreement dated February 16, 2006 between the Company and
                  Thomas Cooper (incorporated by reference to Exhibit 10.13 of the
                  Company’s January 2006 10-QSB).10.40
              Form
                  of Securities Purchase Agreement, dated as of March 6, 2006, between
                  the Company and the investors named therein (incorporated by reference
                  to
                  Exhibit 10.1 of the Company’s March 13, 2006
                  8-K).10.41
              Form
                  of Warrant issued in connection with the Securities Purchase Agreement
                  (incorporated by reference to Exhibit 10.2 of the Company’s
                  March 13, 2006 8-K).
  39
 
 10.42
              Form
                  of Security Interest Agreement, dated as of March 6, 2006, among the
                  Company, the Secured Parties named therein, and Krieger & Prager, LLP,
                  as agent for the Secured Parties (incorporated by reference to
                  Exhibit 10.3 of the Company’s March 13, 2006
                  8-K).10.43
              Form
                  of Registration Rights Agreement, dated as of March 6, 2006, between
                  the Company and the investors named therein (incorporated by reference
                  to
                  Exhibit 10.4 of the Company’s March 13, 2006
                  8-K).10.44
              Placement
                  Agency Agreement, dated as of March 3, 2006, between the Company and
                  Pond Equities (incorporated by reference to Exhibit 10.5 of the
                  Company’s March 13, 2006 8-K).10.45
              Employment
                  Agreement between the Company and Ray Willenberg, Jr. dated as
                  of
                  March 1, 2006 (incorporated by reference to Exhibit 10.1 of the
                  Company’s Report on Form 8-K filed with the Commission on
                  March 15, 2006 (the “March 15, 2006 8-K”).
                  (1)10.46
              Convertible
                  Promissory Note dated March 7, 2006 in favor of Ray Willenberg, Jr.
                  (incorporated by reference to Exhibit 10.2 of the March 15, 2006
                  8-K). (1)10.47
              Consulting
                  Agreement between the Company and LF Technology Group, LLC dated
                  March 7, 2006 (incorporated by reference to Exhibit 10.3 of the
                  Company’s March 15, 2006 8-K).10.48
              Consulting
                  Agreement between the Company and Starburst Innovations, LLC dated
                  March 7, 2006 (incorporated by reference to Exhibit 10.4 of the
                  Company’s March 15, 2006 8-K).10.49
              Consulting
                  Agreement between the Company and Advisor Associates, Inc. dated
                  March 8, 2006 (incorporated by reference to Exhibit 10.5 of the
                  Company’s March 15, 2006 8-K).10.50
              First
                  Amendment to Lease between the Company and American Property Management
                  Corp. as agent for Weston Investment Co. LLC dated March 8, 2006
                  (incorporated by reference to Exhibit 10.15 of the Company’s Report
                  on Form 10-QSB for the period ended April 30, 2006 as filed with
                  the Commission on June 14, 2006).10.51
              Stock
                  Option Agreement between the Company and Jack Peckham dated July
                  6, 2006.*
                  (1)10.52
              Employment
                  Agreement between the Company and David Wojcik dated September
                  1, 2006
                  (incorporated by reference to Exhibit 10.1 of the Company’s Report on Form
                  10-QSB for the period ended July 31, 2006). (1)10.53
              Stock
                  Option Agreement between the Company and David Wojcik dated August
                  31,
                  2006.*(1)10.54
              2006
                  Stock Incentive Plan.*10.55
              Master
                  ASIC Services Agreement between the Company and eSilicon Corporation
                  dated
                  December 12, 2006.*21.1
              Subsidiaries
                  of the Registrant (incorporated by reference to Exhibit 21.1 of the
                  Company’s 2005 10-KSB).23.1
              Consent
                  of Marcum & Kliegman LLP.*31.1
              Rule
                13A - 14(A)
                / 15D - 14 (A) Certification.*32.1
              Section
                1350
                Certification.*
 ____________________





*Filed
                herewith.





(1)
            Signifies
                a management agreement or compensatory plan or
                arrangement.




40





**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





Aggregate
      fees for professional services rendered for the Company by Marcum &
Kliegman, LLP, the Company’s independent accountants, for the fiscal years ended
      October 31, 2006 and 2005 are set forth below.





**Fiscal
                Year Ended October 31, 2006**
            
            **Fiscal
                Year Ended October 31, 2005**Audit
                Fees
            
            $
            385,785
            
            $
            278,199Audit
                Related Fees
            
            $
            0
            
            $
            0Tax
                Fees
            
            $
            10,078
            
            $
            11,510All
                Other Fees
            
            $
            8,270
            
            $
            12,509Total
            
            $
            404,133
            
            $
            302,218





*Audit
      Fees* were for
      professional services rendered for the audits of the consolidated financial
      statements of the Company, quarterly review of the financial statements included
      in Quarterly Reports on Form 10-QSB, consents, and other assistance required
      to
      complete the year-end audit of the consolidated financial statements. *Audit-Related
      Fees* were for
      assurance and related services reasonably related to the performance of the
      audit or review of financial statements and not reported under the caption
      Audit
      Fees. *Tax
      Fees* were for
      professional services related to tax compliance, tax authority audit support
      and
      tax planning. *All
      Other Fees* include
      any other fees charged by the Company’s auditors that are not otherwise
      specified.





The
      Audit
      Committee preapproves all audit and permissible non-audit services to be
      provided by the Company’s independent registered public accountants and the
      estimated fees for these services. None of the services provided by the
      independent registered public accountants that are described above were approved
      by the Audit Committee pursuant to a waiver of the preapproval requirements
      of
      the SEC’s rules and regulations.





41





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.




DATE:
              February 2, 2007
            RIM
              SEMICONDUCTOR
              COMPANYBy:
            /s/
              Brad
              KetchBrad KetchPresident
              and
              Chief Executive Officer
              (Principal
                Executive Officer and Principal Financial and Accounting
                Officer)


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





SIGNATURE
            
            TITLE
            
            DATE/s/
                Brad
                Ketch
              Brad
                Ketch
            
            President,
                Chief Executive Officer and Director (PRINCIPAL EXECUTIVE OFFICER
                and
                PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER)
            
            February
                2, 2007/s/
                Ray Willenberg, Jr.
              Ray
                Willenberg, Jr.
            
            Chairman
                of the Board and Executive Vice President
            
            February
                2, 2007/s/
                Jack
                Peckham
              Jack
                Peckman
            
            Director
            
            February
                2, 2007/s/
                Thomas J. Cooper
              Thomas
                J. Cooper
            
            Director
            
            February
                2, 2007/s/
                Boon Tiong Tan
              Boon
                Tiong Tan
            
            Director
            
            February
                2, 2007




42





**INDEX
      TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS**





Report
                of Independent Registered Public Accounting Firm
            F-1Consolidated
                Balance Sheets At October 31, 2006 and 2005
            F-2Consolidated
                Statements of Operations for the Years Ended October 31, 2006 and
                2005
            F-3Consolidated
                Statements of Stockholders’ (Deficiency) Equity for the Years Ended
                October 31, 2006 and 2005
            F-4
                to F-5Consolidated
                Statements of Cash Flows for the Years Ended October 31, 2006 and
                2005
            F-6
                to F-7Notes
                to the Consolidated Financial Statements
            F-8
                to F-37










REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





Board
      of
      Directors


Rim
      Semiconductor Company





We
      have
      audited the accompanying consolidated balance sheets of Rim Semiconductor
      Company and Subsidiaries (the “Company”) as of October 31, 2006 and 2005 and the
      related consolidated statements of operations, stockholders’ (deficiency)
      equity, and cash flows for the years ended October 31, 2006 and 2005. These
      consolidated financial statements are the responsibility of the Company’s
      management. Our responsibility is to express an opinion on these consolidated
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the
      consolidated financial statements are free of material misstatement. The Company
      is not required to have, nor are we engaged to perform, an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no opinion. An audit includes examining,
      on a
      test basis, evidence supporting the amounts and disclosures in the consolidated
      financial statements, assessing the accounting principles used and significant
      estimates made by management, as well as evaluating the overall consolidated
      financial statement presentation. We believe that our audits provide a
      reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Rim Semiconductor Company
      and Subsidiaries at October 31, 2006 and 2005 and the results of its operations
      and its cash flows for the years ended October 31, 2006 and 2005, in conformity
      with accounting principles generally accepted in the United States of
      America.








/s/
      MARCUM & KLIEGMAN LLP








New
      York,
      New York


February
      1, 2007


F-1





RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES


CONSOLIDATED
      BALANCE SHEETS





October
                31,2006
            
            2005ASSETSCurrent
                Assets:Cash
                and cash equivalents
            
            $
            1,090,119
            
            $
            373,481Short-term
                investments
            
            
            1,000,000
            
            
            -Other
                current assets
            
            
            310,266
            
            
            34,031TOTAL
                CURRENT ASSETS
            
            
            2,400,385
            
            
            407,512Property
                and equipment - net
            
            
            64,546
            
            
            9,922Technology
                  licenses and capitalized softwaredevelopment costs -
                  net
            
            
            6,250,496
            
            
            5,751,000Deferred
                financing costs - net
            
            
            1,274,823
            
            
            326,307Other
                assets
            
            
            22,144
            
            
            10,224TOTAL
                ASSETS
            
            $
            10,012,394
            
            $
            6,504,965LIABILITIES
                AND STOCKHOLDERS’ (DEFICIENCY) EQUITYCurrent
                Liabilities:Convertible
                  notes payable (net of debt discountof $0 and $20,875,
                  respectively)
            
            $
            478,000
            
            $
            736,997Convertible
                  debentures (net of debt discountof $1,548 and $0,
                  respectively)
            
            
            73,452
            
            
            -Notes
                payable
            
            
            -
            
            
            1,834,073Derivative
                liabilities - warrants and options
            
            
            8,238,583
            
            
            864,229Accounts
                payable and accrued expenses
            
            
            1,223,210
            
            
            981,833TOTAL
                CURRENT LIABILITIES
            
            
            10,013,245
            
            
            4,417,132Long-term
                  portion of convertible debentures (net ofdebt discount of
                  $3,119,369 and $1,601,586, respectively)
            
            
            1,479,195
            
            
            339,125Long-term
                portion of notes payable
            
            
            -
            
            
            108,134TOTAL
                LIABILITIES
            
            
            11,492,440
            
            
            4,864,391Commitments,
                Contingencies and Other mattersStockholders’
                (Deficiency) Equity:Preferred
                  stock - $0.01 par value; 15,000,000 sharesauthorized; -0- shares
                  issued and outstanding
            
            
            -
            
            
            -Common
                stock - $0.001 par value; Authorized - 900,000,000and
                500,000,000 shares at October 31, 2006 and 2005,respectively;
                Issued - 356,399,782 and 184,901,320 sharesat
                October 31, 2006 and 2005, respectively; Outstanding -355,899,928
                and 184,901,320 shares at October 31, 2006and
                2005, respectively
            
            
            356,400
            
            
            184,902Treasury
                Stock, at cost - 499,854 and -0- shares of commonstock
                at October 31, 2006 and 2005, respectively
            
            
            (7,498
            )
            
            -Additional
                paid-in capital
            
            
            75,215,263
            
            
            61,359,999Unearned
                compensation
            
            
            (1,197,034
            )
            
            (22,771
            )Accumulated
                deficit
            
            
            (75,847,177
            )
            
            (59,881,556
            )TOTAL
                STOCKHOLDERS’ (DEFICIENCY) EQUITY
            
            
            (1,480,046
            )
            
            1,640,574TOTAL
                LIABILITIES AND STOCKHOLDERS’(DEFICIENCY)
                EQUITY
            
            $
            10,012,394
            
            $
            6,504,965





The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-2





RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF OPERATIONS





For
                the Years Ended October 31,2006
            
            2005REVENUES
            
            $
            61,699
            
            $
            39,866OPERATING
                EXPENSES:Cost
                of Sales
            
            
            -
            
            
            11,945Impairment
                of film in distribution
            
            
            -
            
            
            1,009,777Amortization
                  of technology licenses and capitalizedsoftware development
                  costs
            
            
            777,026
            
            
            -Research
                    and development expenses (includingstock based compensation of
                    $41,639 and $296,667, respectively)
            
            
            325,124
            
            
            366,306Selling,
                    general and administrative expenses(including stock based
                    compensation of $1,862,547 and $1,131,874,
                    respectively)
            
            
            5,428,730
            
            
            2,951,925TOTAL
                OPERATING
                EXPENSES
            
            
            6,530,880
            
            
            4,339,953OPERATING
                LOSS
            
            
            (6,469,181
            )
            
            (4,300,087
            )OTHER
                EXPENSES (INCOME):Interest
                income
            
            
            (19,612
            )
            
            -Interest
                expense
            
            
            10,823,102
            
            
            3,027,147Change
                in fair value of derivative liabilities
            
            
            (1,958,907
            )
            
            (2,233,004
            )Amortization
                of deferred financing costs
            
            
            1,586,386
            
            
            602,182Gain
                on sale of property and equipment
            
            
            -
            
            
            (20,000
            )Gain
                on forgiveness of principal and interest on Zaiq Note
            
            
            (1,169,820
            )
            
            (797,333
            )Gain
                on forgiveness of liabilities
            
            
            -
            
            
            (99,369
            )Loss
                (gain) on extinguishment of debt
            
            
            446,386
            
            
            (55,814
            )Other
            
            
            (211,095
            )
            
            (33,514
            )TOTAL
                OTHER EXPENSES
            
            
            9,496,440
            
            
            390,295NET
                LOSS
            
            $
            (15,965,621
            )
            $
            (4,690,382
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.05
            )
            $
            (0.04
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            301,858,638
            
            $
            114,687,798




The
      accompanying notes are an integral part of these consolidated financial
      statements





F-3





RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ (DEFICIENCY) EQUITY


FOR
      THE
      YEARS ENDED OCTOBER 31, 2006 AND 2005





Common
                Stock
            
            Additional
                Paid-inCapital
            
            UnearnedCompensation
            
            AccumulatedDeficit
            
            Total
                Stockholders’ (Deficiency)
              EquityShares
            
            AmountBalance
                at November 1, 2004
            
            
            84,781,959
            
            $
            84,782
            
            $
            55,031,976
            
            $
            (164,500
            )
            $
            (55,191,174
            )
            $
            (238,916
            )Issuance
                of common stockfor
                cash
            
            
            10,289,026
            
            
            10,289
            
            
            824,811
            
            
            —
            
            
            —
            
            
            835,100Issuance
                of common stockunder
                consulting agreements
            
            
            2,837,500
            
            
            2,838
            
            
            339,162
            
            
            (342,000
            )
            
            —
            
            
            —Issuance
                of common stockfor
                services
            
            
            5,073,015
            
            
            5,073
            
            
            309,594
            
            
            (314,667
            )
            
            —
            
            
            —Issuance
                of common stockto
                key employees and
              directors
            
            
            2,750,000
            
            
            2,750
            
            
            449,750
            
            
            (452,500
            )
            
            —
            
            
            —Issuance
                of common stockfor
                conversion of notes
              payable,
                convertibledebentures,
                and accrued
              interest
            
            
            72,763,232
            
            
            72,763
            
            
            2,636,193
            
            
            —
            
            
            —
            
            
            2,708,956Issuance
                of common stockfor
                liquidated damages
            
            
            803,331
            
            
            804
            
            
            97,646
            
            
            —
            
            
            —
            
            
            98,450Issuance
                of common stockfor
                Below Market
              Issuance
            
            
            529,311
            
            
            529
            
            
            (529
            )
            
            —
            
            
            —
            
            
            —Issuance
                of common stockin
                payment of accounts
              payable
                and accruedexpenses
            
            
            422,783
            
            
            423
            
            
            71,488
            
            
            —
            
            
            —
            
            
            71,911Issuance
                of common stockin
                exchange for
              surrender
                of convertiblepreferred
                stock
            
            
            4,651,163
            
            
            4,651
            
            
            739,535
            
            
            —
            
            
            —
            
            
            744,186Stock
                options issued forprofessional
                services
            
            
            —
            
            
            —
            
            
            165,869
            
            
            (165,869
            )
            
            —
            
            
            —Stock
                offering costs
            
            
            —
            
            
            —
            
            
            (39,105
            )
            
            —
            
            
            —
            
            
            (39,105
            )Reclassification
                of conversionoption
                liability
            
            
            —
            
            
            —
            
            
            721,833
            
            
            —
            
            
            —
            
            
            721,833Warrants
                issued forprofessional
                services
            
            
            —
            
            
            —
            
            
            11,776
            
            
            (11,776
            )
            
            —
            
            
            —Amortization
                of unearnedcompensation
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            1,428,541
            
            
            —
            
            
            1,428,541Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,690,382
            )
            
            (4,690,382
            )Balance
                at October 31, 2005
            
            
            184,901,320
            
            $
            184,902
            
            $
            61,359,999
            
            $
            (22,771
            )
            $
            (59,881,556
            )
            $
            1,640,574





The
      accompanying notes are an integral part of these consolidated financial
      statements





F-4





RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF STOCKHOLDERS’ (DEFICIENCY) EQUITY


FOR
      THE
      YEARS ENDED OCTOBER 31, 2006 AND 2005





Common
                Stock
            
            Treasury
                Stock
            
            Additional
              Paid-in
            
            Unearned
            
            Accumulated
            
            Total
              Stockholders’
                (Deficiency)Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Compensation
            
            Deficit
            
            EquityBalance
                at October 31, 2005
            
            
            184,901,320
            
            $
            184,902
            
            
            -
            
            $
            -
            
            $
            61,359,999
            
            $
            (22,771
            )
            $
            (59,881,556
            )
            $
            1,640,574Repurchase
                of common stock for cash
            
            
            -
            
            
            -
            
            
            (499,854
            )
            
            (7,498
            )
            
            -
            
            
            -
            
            
            -
            
            
            (7,498
            )Issuance
                of common stock under service and consulting agreements
            
            
            13,712,222
            
            
            13,712
            
            
            -
            
            
            -
            
            
            2,382,713
            
            
            (2,396,425
            )
            
            -
            
            
            -Issuance
                of common stock in purchase of assets from 1021
                Technologies
            
            
            500,000
            
            
            500
            
            
            -
            
            
            -
            
            
            77,500
            
            
            -
            
            
            -
            
            
            78,000Issuance
                of common stock for conversion of convertible debentures and accrued
                interest
            
            
            122,075,460
            
            
            122,075
            
            
            -
            
            
            -
            
            
            3,374,090
            
            
            -
            
            
            -
            
            
            3,496,165Issuance
                of common stock for convertible notes payable and accrued
                interest
            
            
            35,714
            
            
            36
            
            
            -
            
            
            -
            
            
            14,964
            
            
            -
            
            
            -
            
            
            15,000Issuance
                of common stock for notes payable and accrued interest
            
            
            12,064,494
            
            
            12,064
            
            
            -
            
            
            -
            
            
            1,278,837
            
            
            -
            
            
            -
            
            
            1,290,901Issuance
                of common stock upon exercise of warrants and options
            
            
            21,915,985
            
            
            21,916
            
            
            -
            
            
            -
            
            
            1,374,312
            
            
            -
            
            
            -
            
            
            1,396,228Issuance
                of common stock upon cashless exercise of warrants
            
            
            1,194,587
            
            
            1,195
            
            
            -
            
            
            -
            
            
            183,608
            
            
            -
            
            
            -
            
            
            184,803Stock
                options granted to key employees and advisory board member
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,032,412
            
            
            -
            
            
            -
            
            
            1,032,412Reclassification
                of derivative liability upon exercise of warrants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,758,046
            
            
            -
            
            
            -
            
            
            2,758,046Reclassification
                of conversion option liability
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,378,782
            
            
            -
            
            
            -
            
            
            1,378,782Amortization
                of unearned compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,222,162
            
            
            -
            
            
            1,222,162Net
                loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (15,965,621
            )
            
            (15,965,621
            )Balance
                at October 31, 2006
            
            
            356,399,782
            
            $
            356,400
            
            
            (499,854
            )
            $
            (7,498
            )
            $
            75,215,263
            
            $
            (1,197,034
            )
            $
            (75,847,177
            )
            $
            (1,480,046
            )











F-5





RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 For
                  the Years Ended October 31,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  Loss
              
              $
              (15,965,621
              )
              $
              (4,690,382
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Consulting
                  fees and other compensatory elements of stock issuances
              
              
              1,923,276
              
              
              1,428,541Change
                  in fair value of derivative liabilities
              
              
              (1,958,907
              )
              
              (2,233,004
              )Fair
                  value of Investors’ warrants in excess of debt discount
              
              
              5,608,156
              
              
              —Impairment
                  of film in distribution
              
              
              —
              
              
              1,009,777Gain
                  on sale of property and equipment
              
              
              —
              
              
              (20,000
              )Gain
                  on exchange of Redeemable Series B Preferred Stock into common
                  stock
              
              
              -
              
              
              (55,814
              )Gain
                  on conversion of accrued expenses into convertible notes
                  payable
              
              
              -
              
              
              (33,514
              )Gain
                  on forgiveness of principal and interest on Zaiq note
              
              
              (1,169,820
              )
              
              (896,702
              )Loss
                  on exchange of notes payable into common stock
              
              
              446,386
              
              
              —Amortization
                  of deferred financing costs
              
              
              1,586,386
              
              
              602,182Amortization
                  of film in production costs
              
              
              —
              
              
              11,945Amortization
                  on debt discount on notes
              
              
              4,681,544
              
              
              2,692,581Amortization
                  of technology licenses and capitalized software development
                  costs
              
              
              777,026
              
              
              —Depreciation
                  and amortization
              
              
              5,242
              
              
              25,112Other
                  non-cash expense (income)
              
              
              7,519
              
              
              —Change
                  in assets:Other
                  current assets
              
              
              (276,234
              )
              
              (26,047
              )Other
                  assets
              
              
              (11,920
              )
              
              (2,790
              )Change
                  in liabilities:Accounts
                  payable and accrued expenses
              
              
              899,049
              
              
              (224,084
              )NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (3,447,918
              )
              
              (2,412,199
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESAcquisition
                  of assets from 1021 Technologies
              
              
              (150,000
              )
              
              —Acquisition
                  and costs of capitalized software and development fees
              
              
              (590,461
              )
              
              —Acquisition
                  of property and equipment
              
              
              (59,866
              )
              
              (11,161
              )Purchase
                  of short-term investments
              
              
              (1,000,000
              )
              
              —NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (1,800,327
              )
              
              (11,161
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from issuance of common stock
              
              
              —
              
              
              835,100Proceeds
                  from exercise of warrants
              
              
              1,391,444
              
              
              —Purchase
                  of treasury stock
              
              
              (7,498
              )
              
              —Proceeds
                  from convertible debentures
              
              
              6,000,000
              
              
              3,500,000Proceeds
                  from notes payable
              
              
              750,000
              
              
              300,000Capitalized
                  financing costs
              
              
              (742,450
              )
              
              (422,010
              )Repayments
                  of notes payable
              
              
              (944,291
              )
              
              (1,010,021
              )Repayments
                  of convertible notes payable
              
              
              (482,322
              )
              
              (534,039
              )NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              5,964,883
              
              
              2,669,030INCREASE
                  IN CASH AND CASH EQUIVALENTS
              
              
              716,638
              
              
              245,670CASH
                  AND CASH EQUIVALENTS - BEGINNING OF YEAR
              
              
              373,481
              
              
              127,811CASH
                  AND CASH EQUIVALENTS - END OF YEAR
              
              $
              1,090,119
              
              $
              373,481





The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-6





RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


For
                  the Years Ended October 31,2006
              
              2005SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid during the year for:Interest
              
              $
              6,650
              
              $
              203,539Income
                  taxes
              
              $
              —
              
              $
              —NON-CASH
                  INVESTING AND FINANCING ACTIVITIES:Common
                  stock issued for conversion of convertible debentures, convertible
                  note
                  payable, notes payable and accrued interest
              
              $
              4,802,066
              
              $
              2,708,956Common
                  stock issued upon cashless exercise of warrants
              
              $
              184,803
              
              $
              —Accounts
                  payable and accrued expenses satisfied by issuance of common
                  stock
              
              $
              4,784
              
              $
              71,911Common
                  stock issued for accrued liquidated damages
              
              $
              —
              
              $
              98,450Accounts
                  payable and accrued expenses converted to notes payable
              
              $
              —
              
              $
              55,251Value
                  recorded as debt discount relating to warrants issued to purchasers
                  of
                  convertible debentures
              
              $
              3,428,571
              
              $
              2,000,000Value
                  assigned to conversion option liability in connection with issuance
                  of
                  convertible debentures
              
              $
              2,571,429
              
              $
              1,500,000Reclassification
                  of conversion option liability to equity
              
              $
              1,378,782
              
              $
              721,833Value
                  assigned on issuance date to warrants issued to placement
                  agent
              
              $
              1,792,452
              
              $
              319,066Redeemable
                  Series B Preferred Stock exchanged into notes payable
              
              $
              —
              
              $
              2,392,000Redeemable
                  Series B Preferred Stock (recorded at $800,000) exchanged into
                  common
                  stock
              
              $
              —
              
              $
              744,186Deferred
                  compensation converted to convertible note payable (see footnote
                  8
                  (4))
              
              $
              212,450
              
              $
              383,911Common
                  stock issued for consulting services (includes $430,875 of capitalized
                  software development fees)
              
              $
              2,396,426
              
              $
              —Issuance
                  of common stock to purchase assets from 1021 Technologies
              
              $
              78,000
              
              $
              —Reclassification
                  of derivative liability to equity upon exercise of
                  warrants
              
              $
              2,758,046
              
              $
              —Stock
                  options granted to key employees and advisory board member
              
              $
              1,032,412
              
              $
              —





The
      accompanying notes are an integral part of these consolidated financial
      statements.





F-7


RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS OPERATIONS**





The
      consolidated financial statements include the accounts of Rim Semiconductor
      Company (formerly New Visual Corporation) (“Rim Semi”) and its wholly-owned
      operating subsidiary, NV Entertainment, Inc. (“NV Entertainment”) (collectively,
      the “Company”). Top Secret Productions, LLC is a 50% owned subsidiary of NV
      Entertainment. All significant intercompany balances and transactions have
      been
      eliminated. The Company consolidates its 50% owned subsidiary Top Secret
      Productions, LLC due to the Company’s control of management and financial
      matters of such entity, including all of the risk of loss.





Rim
      Semiconductor Company was incorporated under the laws of the State of Utah
      on
      December 5, 1985. In November of 1999, the Company began to focus its
      business activities on the development of new semiconductor technologies.
      Pursuant to such plan, in February of 2000, the Company acquired NV Technology,
      Inc. and commenced its technology business. The Company’s technology business
      has generated no revenues to date.





The
      Company operates in two business segments, the production of motion pictures,
      films and videos (Entertainment Segment) and development of new semiconductor
      technologies (Semiconductor Segment). The Company’s Entertainment Segment is
      dependent on future revenues from the Company’s film “Step Into Liquid”
(“Film”). The Semiconductor Segment is dependent on the Company’s ability to
      successfully commercialize its developed technology.





Through
      its subsidiary NV Entertainment the Company has operating revenues for its
      Entertainment Segment, but may continue to report operating losses for this
      segment. The Semiconductor Segment will have no operating revenues until
      successful commercialization of its developed technology, but will continue
      to
      incur substantial operating expenses, capitalized costs and operating
      losses.





**Liquidity
      Discussion**





The
      accompanying consolidated financial statements have been prepared in conformity
      with accounting principles generally accepted in the United States of America,
      which contemplate the realization of assets and the satisfaction of liabilities
      in the normal course of business.





The
      Company has suffered significant recurring operating losses, used substantial
      funds in its operations, and needs to raise additional funds to accomplish
      its
      business plan. For the years ended October 31, 2006 and 2005 the Company
      incurred net losses of approximately $16 million and $4.7 million, respectively,
      and as of October 31, 2006 had a working capital deficiency of approximately
      $7.6 million. In addition, management believes that the Company will continue
      to
      incur net losses and cash flow deficiencies from operating activities through
      at
      least October 31, 2007.





The
      Company funded its operations during 2006 and 2005 through sales of its common
      stock, proceeds from notes, convertible debentures and the exercise of warrants,
      resulting in net proceeds to the Company of approximately $8,141,000 and
      $4,635,000, respectively.





In
      January 2007, an institutional investor that has been a prior investor in the
      Company committed to purchase $6 million of convertible debentures upon the
      Company’s request as discussed in Note 16. Management believes that the net
      proceeds from this financing, together with the approximately $848,000 in cash
      and short-term investments (unaudited) at January 24, 2007, is sufficient to
      fund the planned expenditures for the fiscal year ended October 31,
      2007.





Management
      of the Company is continuing its efforts to secure additional funds through
      equity and/or debt instruments for its operations. After October 31, 2007,
      the
      Company may require additional funds for its operations and to pay down its
      liabilities, as well as finance its expansion plans consistent with its business
      plan. However, there can be no assurance that the Company will be able to secure
      additional funds and that if such funds are available, whether the terms or
      conditions would be acceptable to the Company.





F-8


RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





**Accounting
      Estimates**





The
      preparation of the consolidated financial statements in accordance with
      accounting principles generally accepted in the United States of America
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities, disclosures of contingent assets and
      liabilities in the consolidated financial statements and the accompanying notes.
      Significant estimates include impairment analysis for long-lived assets, the
      individual-film-forecast computation method, income taxes, litigation and
      valuation of derivative instruments. Actual results could differ from those
      estimates.





**Fair
      Value of Financial Instruments**





The
      carrying amounts reported in the consolidated balance sheets for cash and cash
      equivalents, short-term investments, accounts payable, accrued expenses,
      convertible notes payable, convertible debentures and notes payable approximate
      fair value because of their immediate or short-term nature. The fair value
      of
      long-term notes payable and convertible debentures approximates their carrying
      value because the stated rates of the debt either reflect recent market
      conditions or are variable in nature.





**Cash
      and Cash Equivalents**





Cash
      and
      cash equivalents are highly liquid investments with insignificant interest
      rate
      risk and maturities of three months or less at the time of acquisition. They
      include demand deposits and bank time deposits.





**Short-Term
      Investments**





Short-term
      investments at October 31, 2006 consisted of certificates of deposit aggregating
      $1,000,000, acquired June 2, 2006, and which matured on January 28, 2007. The
      certificates of deposit earn interest at 3.54% per annum.





**Property
      and Equipment**





Property
      and equipment procured in the normal course of business are stated at cost.
      Property and equipment purchased in connection with an acquisition is stated
      at
      its estimated fair value. Property and equipment is being depreciated on a
      straight-line method over the estimated useful lives of the assets, which
      generally range from two to seven years. Upon retirement or other disposition
      of
      these assets, the cost and related accumulated depreciation of these assets
      are
      removed from the accounts and the resulting gains or losses are reflected in
      the
      Results of Operations. Leasehold improvements are being amortized over the
      shorter of the useful life or the remainder of the lease term. Maintenance and
      repair expenses are charged to operations as incurred.





**Film
      in Distribution**





Statement
      of Position 00-2, “Accounting by Producers or Distributors of Films”
(“SOP-00-2”) requires that film costs be capitalized and reported as a separate
      asset on the balance sheet. Film costs include all direct negative costs
      incurred in the production of a film, as well as allocations of production
      overhead and capitalized interest. Direct negative costs include cost of
      scenario, story, compensation of cast, directors, producers, writers, extras
      and
      staff, cost of set construction, wardrobe, accessories, sound synchronization,
      rental of facilities on location and post production costs. SOP-00-2 also
      requires that film costs be amortized and participation costs accrued, using
      the
      individual-film-forecast-computation method, which amortizes or accrues such
      costs in the same ratio that the current period actual revenue (numerator)
      bears
      to the estimated remaining unrecognized ultimate revenue as of the beginning
      of
      the fiscal year (denominator). The Company makes certain estimates and judgments
      of its future gross revenue to be received for each film based on information
      received by its distributors, historical results and management’s knowledge of
      the industry. Revenue and cost forecasts are continually reviewed by management
      and revised when warranted by changing conditions. A change to the estimate
      of
      gross revenues for an individual film may result in an increase or decrease
      to
      the percentage of amortization of capitalized film costs relative to a previous
      period.





F-9


RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Film
      in Distribution** **(Continued)**





In
      addition, SOP-00-2 also requires that if an event or change in circumstances
      indicates that an entity should assess whether the fair value of a film is
      less
      than its unamortized film costs, then an entity should determine the fair value
      of the film and write-off to the statements of operations the amount by which
      the unamortized film costs exceeds the Film’s fair value.





During
      July 2005, the Company performed its review, and it was determined that the
      unamortized Film costs exceeded the Film’s fair value. The conclusion was based
      upon information the Company received from the Film’s distributor relating to
      lower than expected sales. As a result of this review, the Company wrote-down
      the remaining carrying value attributed to the Film to $0. This resulted in
      an
      impairment of $1,009,777 which is included in the consolidated statement of
      operations for the year ended October 31, 2005.





**Income
      Taxes**





Income
      taxes are accounted for in accordance with Statement of Financial Accounting
      Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). SFAS
      No. 109 employs an asset and liability method of accounting for income taxes.
      Under the asset and liability method, deferred income taxes are recognized
      for
      tax consequences of temporary differences by applying enacted statutory tax
      rates applicable to future years to the difference between the financial
      statement carrying amounts and the tax bases of existing assets and liabilities.
      Under SFAS No. 109, the effect on deferred income taxes of a change in tax
      rates
      is recognized in operations in the period that includes the enactment
      date.





**Revenue
      Recognition**





The
      Company recognizes revenue from the sale of its semiconductor products when
      evidence of an arrangement exists, the sales price is determinable or fixed,
      legal title and risk of loss has passed to the customer, which is generally
      upon
      shipment of our products to our customers, and collection of the resulting
      receivable is probable. To date the Company has not recognized any revenues
      related to the sale of its semiconductor products.





The
      Company recognizes film revenue from the distribution of its feature film and
      related products when earned and reasonably estimable in accordance with
      SOP-00-2. The following conditions must be met in order to recognize revenue
      in
      accordance with SOP-00-2:





o
            persuasive
                evidence of a sale or licensing arrangement with a customer
                exists;o
            the
                film is complete and, in accordance with the terms of the arrangement,
                has
                been delivered or is available for immediate and unconditional
                delivery;o
            the
                license period of the arrangement has begun and the customer can
                begin its
                exploitation, exhibition or sale;o
            the
                arrangement fee is fixed or determinable; ando
            collection
                of the arrangement fee is reasonably
                assured.





Under
      a
      rights Agreement with Lions Gate Entertainment (“LGE”) the domestic distributor
      for its Film entitled “Step Into Liquid,” the Company shares with LGE in the
      profits of the Film after LGE recovers its marketing, distribution and other
      predefined costs and fees. The agreement provides for the payment of minimum
      guaranteed license fees, usually payable on delivery of the respective completed
      film, that are subject to further increase based on the actual distribution
      results in the respective territory. Minimum guaranteed license fees totaled
      approximately $4,800 and $27,000 during the years ended October 31, 2006 and
      2005, respectively and were recorded as revenue.





F-10


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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Research
      and Development**





Research
      and development costs are charged to expense as incurred. Amounts allocated
      to
      acquired-in-process research and development costs, from business combinations,
      are charged to operations at the consummation of the acquisition.





Research
      and development expenses relate to the design and development of advanced
      transmission technology products. The Company outsources to independent third
      parties all of its design and development activities. Payments made to
      independent software developers under development agreements are capitalized
      to
      software development costs once technological feasibility is established or
      if
      the development costs have an alternative future use. Prior to establishing
      technological feasibility, software development costs are expensed to research
      and development costs and to cost of sales subsequent to confirmation of
      technological feasibility. Internal development costs are capitalized to
      software development costs once technological feasibility is established.
      Technological feasibility is evaluated on a product-by-product
      basis.





Research
      and development expenses generally consist of salaries, related expenses for
      engineering personnel and third-party development costs incurred.





**Capitalized
      Software Development Costs**





Capitalization
      of computer software development costs begins upon the establishment of
      technological feasibility. Technological feasibility for the Company’s computer
      software is generally based upon achievement of a detail program design free
      of
      high-risk development issues and the completion of research and development
      on
      the product hardware in which it is to be used. The establishment of
      technological feasibility and the ongoing assessment of recoverability of
      capitalized computer software development costs require considerable judgment
      by
      management with respect to certain external factors, including, but not limited
      to, technological feasibility, anticipated future gross revenue, estimated
      economic life and changes in software and hardware technology.





Amortization
      of capitalized computer software development costs commences when the related
      products become available for general release to customers. Amortization is
      provided on a product-by-product basis. The annual amortization is the greater
      of the amount computed using (a) the ratio that current gross revenue for a
      product bears to the total of current and anticipated future gross revenue
      for
      that product, or (b) the straight-line method over the remaining estimated
      economic life of the product. The estimated useful life of the Company’s
      existing product is seven years.





The
      Company periodically performs reviews of the recoverability of such capitalized
      software development costs. At the time a determination is made that capitalized
      amounts are not recoverable based on the estimated cash flows to be generated
      from the applicable software, the capitalized cost of each software product
      is
      then valued at the lower of its remaining unamortized costs or net realizable
      value.





**Redeemable
      Series B Preferred Stock**





Redeemable
      Series B Preferred Stock, which includes characteristics of both liabilities
      and
      equity, was classified as a long-term liability in accordance with the
      provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with
      Characteristics of Both Liabilities and Equity.” In April 2005, the Redeemable
      Series B Preferred Stock was cancelled in exchange for the issuance of common
      stock and a promissory note. See Note 7 for further discussion.





F-11


RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Derivative
      Financial Instruments**





In
      connection with the issuance of certain convertible debentures (see Note 9),
      the
      terms of the debentures included an embedded conversion feature which provided
      for a conversion of the debentures into shares of the Company’s common stock at
      a rate which was determined to be variable. The Company determined that the
      conversion feature was an embedded derivative instrument and that the conversion
      option was an embedded put option pursuant to SFAS No. 133, “Accounting for
      Derivative Instruments and Hedging Activities,” as amended, and Emerging Issues
      Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock.”





The
      accounting treatment of derivative financial instruments requires that the
      Company record the conversion option and related warrants at their fair values
      as of the inception date of the convertible debenture agreements and at fair
      value as of each subsequent balance sheet date. In addition, under the
      provisions of EITF Issue No. 00-19, as a result of entering into the convertible
      debenture agreements, the Company was required to classify all other
      non-employee warrants and options as derivative liabilities and record them
      at
      their fair values at each balance sheet date. Any change in fair value was
      recorded as non-operating, non-cash income or expense at each balance sheet
      date. If the fair value of the derivatives was higher at the subsequent balance
      sheet date, the Company recorded a non-operating, non-cash charge. If the fair
      value of the derivatives was lower at the subsequent balance sheet date, the
      Company recorded non-operating, non-cash income. The Company reassesses the
      classification at each balance sheet date. If the classification required under
      EITF Issue No. 00-19 changes as a result of events during the period, the
      contract should be reclassified as of the date of the event that caused the
      reclassification.





The
      fair
      value of derivative financial instruments was estimated during the years ended
      October 31, 2006 and 2005 using the Black-Scholes model and the following range
      of assumptions:





**October
                31, 2006**
            
            **October
                31, 2005**Estimated
                dividends
            
            
            None
            
            
            NoneExpected
                volatility
            
            
            92.9
                - 158.8
            %
            
            82.7
                - 103.9
            %Risk-free
                interest rate
            
            
            4.6
                - 5.0
            %
            
            4.0
                - 4.4
            %Contractual
                term (years)
            
            
            0.9
                - 9.8
            
            
            2.8
                - 3.9





The
      expected volatility is based on a blend of the Company’s industry peer group and
      the Company’s historical volatility. The risk-free interest rate assumption is
      based upon observed interest rates appropriate for the term of the related
      stock
      options and warrants. The dividend yield assumption is based on the Company’s
      history and expectation of dividend payouts. The expected life of stock options
      and warrants represents the Company’s historical experience with regards to the
      exercise behavior of its option and warrant holders and the contractual term
      of
      the options and warrants.





**Loss
      Per Common Share**





Basic
      loss per common share is computed based on weighted average shares outstanding
      and excludes any potential dilution. Diluted loss per share reflects the
      potential dilution from the exercise or conversion of all dilutive securities
      into common stock based on the average market price of common shares outstanding
      during the period.





No
      effect
      has been given to outstanding options, warrants, convertible notes payable,
      or
      convertible debentures in the diluted computation, as their effect would be
      anti-dilutive.





The
      number of potentially dilutive securities excluded from computation of diluted
      loss per share was approximately 220,194,580 and 172,755,614, for the years
      ended October 31, 2006 and 2005, respectively (Note 12).





F-12


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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Stock-Based
      Compensation**





On
      November 1, 2005, the Company adopted SFAS No. 123 (revised 2004), “Share-Based
      Payment” (“SFAS 123(R)”), which requires the measurement and recognition of
      compensation expense for all share-based payment awards made to employees and
      directors, including stock options, based on estimated fair values. SFAS 123(R)
      supersedes the Company’s previous accounting under Accounting Principles Board
      Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) for
      periods beginning on November 1, 2005. In March 2005, the Securities and
      Exchange Commission issued Staff Accounting Bulletin No. 107 (“SAB 107”)
      relating to SFAS 123(R). The Company has applied the provisions of SAB 107
      in
      its adoption of SFAS 123(R).





The
      Company early adopted SFAS 123(R) using the modified prospective transition
      method, as of November 1, 2005, the first day of the Company’s fiscal year 2006.
      The Company’s consolidated financial statements as of and for the year ended
      October 31, 2006 reflect the impact of SFAS 123(R). In accordance with the
      modified prospective transition method, the Company’s consolidated financial
      statements for prior periods have not been restated to reflect, and do not
      include, the impact of SFAS 123(R).





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in the Company’s consolidated
      statement of operations. Prior to the adoption of SFAS 123(R), the Company
      accounted for stock-based awards to employees and directors using the intrinsic
      value method in accordance with APB 25 as allowed under SFAS No. 123,
“Accounting for Stock-Based Compensation” (“SFAS 123”). Under the intrinsic
      value method, no stock-based compensation expense for employee stock options
      had
      been recognized in the Company’s consolidated statement of operations because
      the exercise price of the Company’s stock options granted to employees and
      directors equaled the fair market value of the underlying stock at the date
      of
      grant.





The
      effect of the adoption of SFAS 123(R) on the Company’s fiscal year 2006 results
      was to increase the net loss by $919,251. There was no impact on basic and
      diluted net loss per common share.





SFAS
      123(R) also requires that the cash retained as a result of the tax deductibility
      of the increase in the value of share-based arrangements be presented as a
      component of cash flows from financing activities in the consolidated statement
      of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
      to be presented as a component of cash flows from operating activities. Due
      to
      the Company’s tax net operating loss position, the Company does not realize cash
      savings as a result of the tax deduction for stock-based compensation.
      Accordingly, the adoption SFAS 123(R) had no effect on the Company’s cash flows
      from operating or financing activities for the year ended October 31,
      2006.





Stock-based
      compensation expense recognized in the Company’s consolidated statement of
      operations for the year ended October 31, 2006 included compensation expense
      for
      share-based payment awards granted prior to, but not yet vested as of
      October 31, 2005 based on the grant date fair value estimated in accordance
      with the pro-forma provisions of SFAS 123 and compensation expense for the
      share-based payment awards granted subsequent to October 31, 2005 based on
      the
      grant date fair value estimated in accordance with the provisions of SFAS
      123(R).





The
      Company has continued to attribute the value of stock-based compensation to
      expense on the straight-line single option method.





Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options granted during the year ended October 31, 2006 was $672,194.
      Stock-based-compensation expense for share-based payment awards granted prior
      to, but not yet vested as of October 31, 2005 based on the grant date fair
      value
      estimated in accordance with the provisions of SFAS 123 was $247,057 for the
      year ended October 31, 2006. Stock-based compensation expense recognized upon
      issuance of common stock to key employees and directors was $452,500 for the
      year ended October 31, 2005. Stock-based-compensation expense recognized for
      non-employees under other accounting standards was $984,935 and $976,041 for
      the
      years ended October 31, 2006 and 2005, respectively.





F-13


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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Stock-Based
      Compensation** **(continued)**





As
      stock-based compensation expense recognized in the consolidated statement of
      operations for the year ended October 31, 2006 is based on awards ultimately
      expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)
      requires forfeitures to be estimated at the time of grant and revised, if
      necessary, in subsequent periods if actual forfeitures differ from those
      estimates. In the Company’s pro-forma information required under SFAS 123(R) for
      the periods prior to fiscal 2006, the Company accounted for forfeitures as
      they
      occurred .





Pro-Forma
      Information Under SFAS 123 for Periods Prior to Fiscal 2006





For
                the Year Ended October 31,2005Net
                loss, as reported
            
            $
            (4,690,382
            )Add:
                Stock-based employee compensation expenseincluded
                in reported net loss
            
            
            -Less:
                Total stock-based employee compensation expensedetermined
                under the fair value-based method forall
                awards, net of income tax
            
            
            (1,029,125
            )Net
                loss, pro-forma
            
            $
            (5,719,507
            )Basic
                and Diluted Net Loss per Common Share:As
                reported
            
            $
            (0.04
            )Pro-forma
            
            $
            (0.05
            )





The
      weighted average fair value at date of grant for options granted during 2005
      was
      $0.09 per share.





The
      fair
      value of options at date of grant during the year ended October 31, 2005 was
      estimated using the Black-Scholes model utilizing the following weighted average
      assumptions:





Expected
                volatility
            79%Risk-free
                interest rate
            3.8%Expected
                dividends
            0.0%Expected
                life
            3
                years





**Impairment
      of Long-Lived Assets**





The
      Company evaluates its long-lived assets for financial impairment, and continues
      to evaluate them as events or changes in circumstances indicate that the
      carrying amount of such assets may not be fully recoverable.





The
      Company evaluates the recoverability of long-lived assets by measuring the
      carrying amount of the assets against the estimated undiscounted future cash
      flows associated with them. At the time such evaluations indicate that the
      future undiscounted cash flows of certain long-lived assets are not sufficient
      to recover the carrying value of such assets, the assets are adjusted to their
      fair values.





**Reclassifications**





Certain
      prior year amounts have been reclassified to conform to the current year
      presentation. The reclassification did not have any effect on reported net
      (losses) income for any periods presented.





F-14


RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Impact
      of Recently Issued Accounting Standards**





In
      June
      2005, the Financial Accounting Standards Board (“FASB”) published SFAS No. 154,
“Accounting Changes and Error Corrections - a Replacement of APB Opinion No.
      20
      and FASB No. 3” (“SFAS 154”). SFAS 154 establishes new standards on accounting
      for changes in accounting principles. Pursuant to the new rules, all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS 154
      completely replaces Accounting Principles Bulletin No. 20 and SFAS 3, though
      it
      carries forward the guidance in those pronouncements with respect to accounting
      for changes in estimates, changes in the reporting entity, and the correction
      of
      errors. The requirements in SFAS 154 are effective for accounting changes made
      in fiscal years beginning after December 15, 2005. The Company will apply these
      requirements to any accounting changes after the implementation date. The
      adoption of this pronouncement is not expected to have an impact on the
      Company’s consolidated financial position, results of operations, or cash
      flows.





In
      June
      2006, the FASB ratified EITF Issue No. 05-1, “Accounting for the Conversion of
      an Instrument That Becomes Convertible upon the Issuer’s Exercise of a Call
      Option” (“EITF No. 05-1”), which indicates that no gain or loss should be
      recognized upon the conversion of an instrument that becomes convertible as
      a
      result of an issuer’s exercise of a call option pursuant to the original terms
      of the instrument. EITF No. 05-1 became effective for annual or interim periods
      beginning after June 28, 2006. The adoption of this pronouncement did not have
      an impact on the Company’s consolidated financial position, results of
      operations, or cash flows.





In
      June
      2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of ‘Conventional
      Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock’” (“EITF No. 05-2”), which addresses when a convertible debt instrument
      should be considered “conventional” for the purpose of applying the guidance in
      EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No. 00-19
      for conventional convertible debt instruments and indicated that convertible
      preferred stock having a mandatory redemption date may qualify for the exemption
      provided under EITF No. 00-19 for conventional convertible debt if the
      instrument’s economic characteristics are more similar to debt than
      equity.





EITF
      No.
      05-2 became effective for new instruments entered into and instruments modified
      in periods beginning after June 29, 2005. The Company has applied the
      requirements of EITF No. 05-2 since the required implementation date. The
      adoption of this pronouncement did not have an impact on the Company’s
      consolidated financial position, results of operations, or cash
      flows.





In
      September 2005, the FASB ratified EITF Issue No. 05-7, “Accounting for
      Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues” (“EITF No. 05-7”), which addresses whether a modification to a
      conversion option that changes its fair value affects the recognition of
      interest expense for the associated debt instrument after the modification
      and
      whether a borrower should recognize a beneficial conversion feature, not a
      debt
      extinguishment, if a debt modification increases the intrinsic value of the
      debt
      (for example, the modification reduces the conversion price of the debt). EITF
      No. 05-7 became effective for the first interim or annual reporting period
      beginning after December 15, 2005. The Company adopted EITF No. 05-7 as of
      the
      beginning of the Company’s interim reporting period that began on February 1,
      2006. The adoption of this pronouncement did not have an impact on the Company’s
      consolidated financial position, results of operations, or cash
      flows.





In
      September 2005, the FASB ratified EITF Issue No. 05-8, “Income Tax Consequences
      of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF No.
      05-8”), which addresses the treatment of convertible debt issued with a
      beneficial conversion feature as a temporary difference under the guidance
      in
      SFAS 109. In addition, deferred taxes recognized for a temporary difference
      of
      debt with a beneficial conversion feature should be recognized as an adjustment
      of additional paid-in capital. Entities should apply the guidance in EITF No.
      05-8 in the first interim or annual reporting period that begins after December
      15, 2005. Its provisions should be applied retrospectively under the guidance
      in
      SFAS 154 to all convertible debt instruments with a beneficial conversion
      feature accounted for under the guidance in EITF No. 00-27 “Application of EITF
      Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion
      Features or Contingently Adjustable Conversion Ratios.’” The Company has applied
      the requirements of EITF No. 05-8 to all previously existing convertible debt
      instruments with a beneficial conversion feature and will apply the requirements
      of EITF No. 05-8 for all new convertible debt





F-15


RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Impact
      of Recently Issued Accounting Standards** **(Continued)**





instruments
      with a beneficial conversion feature. The adoption of this pronouncement for
      new
      convertible debt instruments with a beneficial conversion feature did not have
      an impact on the Company’s consolidated financial position, results of
      operations or cash flows.





In
      February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140” (“SFAS
      155”). SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No.
      D1, “Application of Statement 133 to Beneficial Interests in Securitized
      Financial Assets.” The requirements in SFAS 155 are effective for all financial
      instruments acquired or issued after the beginning of an entity’s first fiscal
      year that begins after September 15, 2006. The adoption of this pronouncement
      is
      not expected to have an impact on the Company’s consolidated financial position,
      results of operations, or cash flows.





In
      June
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which
      clarifies the accounting for uncertainty in tax positions. This Interpretation
      requires an entity to recognize the impact of a tax position in its financial
      statements if that position is more likely than not to be sustained on audit
      based on the technical merits of the position. The provisions of FIN 48 are
      effective for the Company as of the beginning of fiscal 2008, with earlier
      application encouraged. Any cumulative effect of the change in accounting
      principle will be recorded as an adjustment to the opening accumulated deficit
      balance. The adoption of this pronouncement is not expected to have an impact
      on
      the Company’s consolidated financial position, results of operations, or cash
      flows.





In
      September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
      157”). SFAS 157 defines fair value, establishes a framework for measuring fair
      value in accordance with accounting principles generally accepted in the U.S.,
      and expands disclosures about fair value measurements. SFAS 157 is effective
      for
      the Company as of the beginning of fiscal 2009, with earlier application
      encouraged. Any cumulative effect will be recorded as an adjustment to the
      opening accumulated deficit balance, or other appropriate component of equity.
      The adoption of this pronouncement is not expected to have an impact on the
      Company’s consolidated financial position, results of operations, or cash
      flows.





In
      September 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”) No. 108,
      Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was
      issued in order to reduce the diversity in practice in how public companies
      quantify misstatements of financial statements, including misstatements that
      were not material to prior years’ financial statements. SAB 108 is effective for
      fiscal year 2007. The adoption of this pronouncement is not expected to have
      an
      impact on the Company’s consolidated financial position, results of operations,
      or cash flows .





In
      October 2005, the FASB issued FSP FAS 123(R)-2, “Practical Accommodation to the
      Application of Grant Date as Defined in FASB Statement No. 123(R)”, which
      provides clarification of the concept of mutual understanding between employer
      and employee with respect to the grant date of a share-based payment award.
      This
      FSP provides that a mutual understanding of the key terms and conditions of
      an
      award shall be presumed to exist on the date the award is approved by management
      if the recipient does not have the ability to negotiate the key terms and
      conditions of the award and those key terms and conditions will be communicated
      to the individual recipient within a relatively short time period after the
      date
      of approval. This guidance was applicable upon the initial adoption of SFAS
      123(R). The adoption of this pronouncement did not have an impact on the
      Company's consolidated financial position, results of operations, or cash
      flows.





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**NOTE
      3 - PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following:





At
                October 31,2006
            
            2005Leasehold
                improvements
            
            $
            44,778
            
            $
            -Furniture
                and fixtures
            
            
            8,565
            
            
            6,525Office
                equipment
            
            
            17,684
            
            
            4,63671,027
            
            
            11,161Less:
                accumulated depreciation and amortization
            
            
            6,481
            
            
            1,239Total
            
            $
            64,546
            
            $
            9,922





For
      the
      years ended October 31, 2006 and 2005, depreciation and amortization expense
      was
      $5,242 and $25,112, respectively.





**NOTE
      4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS**





Technology
      licenses and capitalized software development costs consist of the
      following:





October
                31,2006
            
            2005Balance
                at beginning of year
            
            $
            5,751,000
            
            $
            5,751,000Purchased
                technology
            
            
            228,000
            
            
            -Capitalized
                software development cost
            
            
            1,048,522
            
            
            -7,027,522
            
            
            5,751,000Accumulated
                amortization
            
            
            (777,026
            )
            
            -Total
            
            $
            6,250,496
            
            $
            5,751,000





In
      September 2006, the Company purchased substantially all of the assets of 1021
      Technologies, Inc. and 1021 Technologies KK. The assets purchased include the
      rights to nine patents, seven patent applications, a completed VDSL
      semiconductor, VDSL2 software and hardware technology components, and various
      computer equipment and related software. This asset acquisition consisted of
      a
      cash payment of $150,000 plus the issuance of 500,000 shares of restricted
      common stock valued at $78,000, for a total of $228,000, and has been recorded
      as an addition to technology license and capitalized software development
      costs.





As
      of
      October 31, 2006, the weighted average useful life of the Company’s capitalized
      software was approximately 6.5 years. The Company commenced amortization of
      technology licenses and capitalized software development costs during December
      2005 when the Company made available to the market the Cupria Cu5001
      semiconductor and recorded amortization expense of $777,026 and $0 during the
      years ended October 31, 2006 and 2005, respectively. The following table shows
      the estimated amortization expense for those assets for each of the five
      succeeding fiscal years.





For
                the year ending October 31,
            
            Estimated
                Amortization Expense2007
            
            $
            1,063,8922008
            
            
            1,063,8922009
            
            
            1,063,8922010
            
            
            1,063,8922011
            
            
            1,063,892Total
            
            $
            5,319,460




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**NOTE
      4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
      (CONTINUED)**





No
      assurance can be given that products the Company releases based upon the
      licensed technology and capitalized software costs will receive market
      acceptance. If the Company determines in the future that the capitalized costs
      are not recoverable, the carrying amount of the technology license would be
      reduced, and such reduction could be material.





**Technology
      Licenses**





The
      Company has entered into two technology license agreements. Royalty payments,
      as
      a percentage of sales after obtaining certain revenue levels, if any, under
      each
      license would be reflected in our consolidated statements of operations as
      a
      component of cost of sales.





In
      April
      2002, the Company entered into a development and license agreement with Adaptive
      Networks, Inc. (“Adaptive”), to acquire a worldwide, perpetual license to
      Adaptive’s technology, intellectual property and patent portfolio. The licensed
      technology provides the core technology for our semiconductor products. The
      Company has also jointly developed technology with Adaptive that enhances the
      licensed technology.





In
      consideration of the development services provided and the licenses granted
      to
      the Company by Adaptive, the Company paid Adaptive an aggregate of $5,751,000
      between 2002 and 2004 consisting of cash and the assumption of certain Adaptive
      liabilities. In addition to the above payments, Adaptive is entitled to a
      percentage of any net sales of products sold by the Company and any license
      revenue received from the licensed and co-owned technologies less the first
      $5,000,000 that would otherwise be payable to them under this royalty
      arrangement.





In
      February 2006, the Company obtained a license to include HelloSoft, Inc.’s
      integrated VoIP software suite in the CupriaTM (formerly known as EmbarqTM) family
      of semiconductors (Note 14).





**NOTE
      5 - FILM IN DISTRIBUTION**





In
      April
      2000, the Company entered into a joint venture production agreement to produce
      a
      feature length film (“Step Into Liquid”) for theatrical distribution. The
      Company agreed to provide 100% of the funding for the production in the amount
      of up to $2,250,000 and, in exchange, received a 50% share in all net profits
      from worldwide distribution and merchandising, after receiving funds equal
      to
      its initial investment of up to $2,250,000. As of October 31, 2006 the Company
      has funded a net of $2,335,101 for completion of the film. The film is currently
      in foreign and DVD distribution.





Based
      upon information received from the Company’s film distributor in January 2005,
      the Company recorded an impairment charge of $977,799 during the year ended
      October 31, 2004 which reduced the carrying value of its Film in distribution
      to
      $1,021,722. The impairment charge was due to higher than expected distribution
      costs and lower than expected average retail selling price for the DVD. In
      addition, based upon information received from the Company’s Film distributor in
      July 2005, which indicated that sales were lower than expected, the Company
      recorded an impairment charge of $1,009,777 during the year ended October 31,
      2005 which reduced the carrying value of its Film in distribution to
      $0.





The
      Company recognized revenues of $61,699 and $39,866 for the years ended October
      31, 2006 and 2005, respectively. The Company had no amortization costs for
      the
      year ended October 31, 2006, and $11,945 for the year ended October 31,
      2005.





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**NOTE
      6 - DEFERRED FINANCING COSTS**





As
      of
      October 31, 2006, deferred financing costs consists of costs incurred and
      warrants issued in connection with the sale of $6,000,000 of 2006 Debentures,
      $3,500,000 of 2005 Debentures, $1,350,000 of 7% convertible debentures, and
      promissory notes:





Deferred
                financing costs
            
            $
            3,541,818Less:
                accumulated amortization
            
            
            (2,266,995
            )Deferred
                financing costs, net
            
            $
            1,274,823





Costs
      incurred in connection with debt financings are capitalized as deferred
      financing costs and amortized over the term of the related debt. If any or
      all
      of the related debt is converted or repaid prior to its maturity date, a
      pro-rata share of the related deferred financing costs are written off and
      recorded as amortization expense in the period of the conversion or repayment
      in
      the consolidated statement of operations. For the years ended October 31, 2006
      and 2005, amortization of deferred financing costs was $1,586,386 and $602,182,
      respectively.





**NOTE
      7 - EXCHANGE AGREEMENT**





In
      April
      2005, the Company entered into an Exchange Agreement (the “Exchange Agreement”)
      with Zaiq Technologies, Inc. (“Zaiq”), pursuant to which the Company issued
      4,651,163 shares of common stock with a value of $744,186 and a promissory
      note
      in the principal amount of $2,392,000 (the “Zaiq Note”) in exchange for the
      surrender by Zaiq of 3,192 shares of Redeemable Series B Preferred Stock. The
      fair value of the common stock and promissory note on the closing date was
      determined to be less than the aggregate liquidation preference of the
      Redeemable Series B Preferred Stock and accordingly, a gain of $55,814 was
      recognized during the year ended October 31, 2005.





The
      Exchange Agreement provides that, subject to certain exceptions, if the Company,
      at any time prior to the payment in full of the amount due under the promissory
      note, issues common stock or securities convertible into or exercisable for
      shares of common stock at a price below the fair market value of the common
      stock or such securities (a “Below Market Issuance”), then the Company will
      issue to Zaiq additional shares of common stock in an amount that is determined
      in accordance with a formula that takes into consideration both the number
      of
      shares of common stock or other securities issued and the total consideration
      received by the Company in the Below Market Issuance. During the year ended
      October 31, 2005, the Company issued 529,311 additional shares of common stock
      with an aggregate par value of $529 and a fair value of $18,504 to Zaiq as
      a
      result of Below Market Issuances.





On
      December 19, 2005, the Company entered into a letter agreement with Zaiq,
      pursuant to which the Company agreed to repurchase from Zaiq for total
      consideration of $200,000 the following Zaiq assets: (i) 5,180,474 shares (the
      “Zaiq Shares”) of the Company’s common stock held of record by Zaiq, and (ii)
      the remaining principal balance of the Zaiq Note.





The
      Company had the right under the letter agreement to assign any or all of its
      purchase commitment, and assigned its right to purchase 4,680,620 of the Zaiq
      Shares to an unaffiliated third party that previously invested in the
      Company.





On
      December 20, 2005, the Company paid Zaiq an aggregate of $129,789, out of an
      advance on the note payable that was subsequently signed in January 2006 (see
      Note 10), to purchase the Zaiq Note and 499,854 Zaiq Shares. The Zaiq Shares
      repurchased by the Company have been accounted for as treasury stock, carried
      at
      cost, and reflected as a reduction to stockholders’ equity. The remaining
      principal and accrued interest of $1,292,111 on the Zaiq Note has been canceled
      resulting in a gain of $1,169,820.





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**NOTE
      8 - CONVERTIBLE NOTES PAYABLE**





The
      Company entered into several convertible promissory note agreements with various
      trusts and individuals to fund the operations of the Company. The Company agreed
      to pay the principal and an additional amount equal to 50% of the principal
      on
      all notes below, except for the two related party notes payable discussed below.
      Interest of approximately $358,000 has been accrued and is recorded in accounts
      payable and accrued expenses as of October 31, 2006.





The
      outstanding convertible notes are summarized in the table below:





At
                October 31,2006
            
            2005Note
                payable (1)
            
            $
            -
            
            $
            97,000Notes
                payable (nine notes) (2)
            
            
            468,000
            
            
            478,000Notes
                payable, 9% interest, related party (3)
            
            
            10,000
            
            
            10,000Note
                payable, related party (4)
            
            
            -
            
            
            172,872TOTAL
            
            
            478,000
            
            
            757,872Less:
                unamortized debt discount
            
            
            -
            
            
            (20,875
            )$
            478,000
            
            $
            736,997


____________________


(1)
            The
                note was issued in October 2001 in the amount of $250,000, and due
                only
                when receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $375,000. The Company made payments of $97,000
                and
                $43,000 during the years ended October 31, 2006 and 2005,
                respectively. As of October 31, 2006 the note had been paid in
                full.(2)
            The
                notes were issued during the period from March 2002 through July
                2003, and
                due only when receipts received by the Company from its Top Secret
                Productions, LLC joint venture exceed $2,250,000. The notes and any
                accrued and unpaid interest may be converted at any time, in whole
                or in
                part, into shares of common stock at conversion prices per share
                ranging
                from $0.33 to $1.00. Principal of $10,000 and accrued interest of
                $5,000
                was converted into 35,714 shares of common stock during the year
                ended
                October 31, 2006. Principal of $5,000 and accrued interest of $2,500
                was
                converted into 17,857 shares of common stock during the year ended
                October 31, 2005.(3)
            The
                note was issued in July 2003, in the amount of $10,000, and due only
                when
                receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $750,000. The note and any accrued and unpaid
                interest may be converted at any time, in whole or in part, into
                shares of
                common stock at a conversion price per share of $0.60.(4)
            In
                March 2005, the Company issued in favor of the Company’s executive vice
                president, a non-interest bearing convertible promissory note in
                the
                principal amount of $383,911. The convertible promissory note was
                issued
                in evidence of the Company’s obligation for deferred compensation. In
                accordance with APB 21, imputed interest (at an effective rate of
                15%) was
                calculated to arrive at the fair value of the convertible promissory
                note.
                The difference between the face amount and the present value upon
                issuance
                of the convertible promissory note was shown as a discount that was
                amortized as interest expense over the life of the convertible promissory
                note. Amortization of debt discount on this note was $20,875 and
                $12,639
                for the years ended October 31, 2006 and 2005, respectively. The
                Company
                made payments of $84,125 and $211,039 during the years ended October
                31,
                2006 and 2005, respectively. In March 2006, the remaining principal
                amount
                of this note and additional deferred compensation payable to the
                note
                holder of $212,450 were converted into a convertible promissory note
                with
                an aggregate principal amount of $301,197. The aggregate principal
                and
                accrued interest of $385,322 on this note was repaid in April 2006.
                The
                remaining unamortized debt discount on the March 2005 convertible
                promissory note of $15,583 was recorded as interest expense during
                the
                year ended October 31, 2006. The note had been paid in full as of
                October
                31, 2006.




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        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      8 - CONVERTIBLE NOTES PAYABLE (CONTINUED)**





For
      all
      the above convertible notes, the fair values of the conversion options as of
      October 31, 2006 and 2005 were nominal due to the conversion price being
      substantially out-of-the money.





**NOTE
      9 - CONVERTIBLE DEBENTURES**





**2006
      Debentures**





On
      March
      10, 2006, the Company raised gross proceeds of $6.0 million from a private
      placement to 17 institutional and individual investors (the “Investors”) of its
      two-year 7% Senior Secured Convertible Debentures (the “2006
      Debentures”).





In
      connection with the issuance of the 2006 Debentures, the Company issued to
      the
      Investors warrants to purchase 70,955,548 shares of the Company’s common stock
      at an exercise price of $0.15 per share valued at $9,036,727 on the issuance
      date (subject to adjustments for stock splits, stock dividends,
      recapitalizations, mergers, spin-offs, and certain other transactions). The
      warrants are exercisable until the last day of the month in which the third
      anniversary of the effective date of the registration statement registering
      the
      shares underlying the warrants occurs (August 31, 2009).





The
      Company received net proceeds of approximately $4.5 million from the 2006
      Debentures, after the payment of offering related fees and expenses and after
      the repayment in full of bridge loans made in December 2005 and January 2006,
      in
      the aggregate amount of $810,000.





The
      2006
      Debentures are convertible into shares of common stock at a conversion price
      for
      any such conversion equal to the lower of (x) 70% of the volume weighted average
      price (“VWAP”) of the common stock for the 20 days ending on the trading day
      immediately preceding the conversion date or (y) if the Company enters into
      certain financing transactions, the lowest purchase price or conversion price
      applicable to that transaction. The conversion price is subject to
      adjustment.





Interest
      on the 2006 Debentures accrues at the rate of 7% per annum, payable upon
      conversion, or semi-annually (June 30 and December 31 of each year) or upon
      maturity, whichever occurs first, and will continue to accrue until the 2006
      Debentures are fully converted and/or paid in full. Interest is payable, at
      the
      option of the Company, either (i) in cash, or (ii) in shares of common stock
      at
      the then applicable conversion price.





To
      secure
      the Company’s obligations under the 2006 Debentures, the Company has granted a
      security interest in substantially all of its assets, including without
      limitation, its intellectual property, in favor of the Investors. The security
      interest terminates upon the earlier of (i) the date on which less than
      one-fourth of the original principal amount of the 2006 Debentures issued on
      the
      Closing Date are outstanding or (ii) payment or satisfaction of all of the
      Company’s obligations under the related securities purchase agreement.
      Subsequent to October 31, 2006, condition (i) was met and therefore the security
      interest terminated.





The
      Company agreed to include the shares of common stock issuable upon conversion
      of
      the 2006 Debentures and exercise of the related warrants issued to investors
      and
      the placement agent in a registration statement filed by the Company with the
      Securities and Exchange Commission (the “SEC”). Since the registration statement
      was not declared effective by the SEC by June 23, 2006, the Company is obligated
      to pay liquidated damages to the holders of the 2006 Debentures. A registration
      statement covering the common stock issuable upon conversion of the 2006
      Debentures and the related warrants issued to investors and the placement agent
      was declared effective by the SEC on August 16, 2006. As of October 31, 2006,
      accrued liquidated damages totaled $212,000. At their option, the holders of
      the
      2006 Debentures are entitled to be paid such amount in cash or shares of
      restricted common stock at a per share rate equal to the effective conversion
      price of the 2006 Debentures.





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**NOTE
      9 - CONVERTIBLE DEBENTURES (CONTINUED)**





**2006
      Debentures** **(Continued)**





In
      connection with the placement of the 2006 Debentures, a placement agent received
      a placement agent fee equal to (i) 10% of the aggregate purchase price (i.e.,
      $600,000), (ii) 10% of the proceeds realized in the future from exercise of
      warrants issued to the Investors, (iii) warrants to purchase an aggregate of
      7,095,556 shares of common stock having an initial exercise price equal to
      $0.1693 per share valued at $888,779 on the issuance date, and (iv) warrants
      to
      purchase an aggregate of 7,095,556 shares of common stock having an initial
      exercise price equal to $0.15 per share valued at $903,673 on the issuance
      date.
      The exercise price of the placement agent warrants is subject to adjustments
      for
      stock splits, stock dividends, recapitalizations, mergers, spin-offs, and
      certain other transactions.





The
      aggregate fair value of the placement agent’s warrants of $1,792,452 on the
      issuance date was recorded as a deferred financing cost and is being charged
      to
      interest expense over the term of the 2006 Debentures.





The
      gross
      proceeds of $6,000,000 are recorded as a liability net of a debt discount of
      $6,000,000 consisting of an allocation of the fair values attributed to the
      Investors’ warrants and to the embedded conversion feature in accordance with
      EITF Issue No. 00-19. The debt discount consisted of a $3,428,571 value
      related to the Investors’ warrants and a value attributed to the embedded
      conversion feature of $2,571,429. The debt discount was first allocated to
      the
      embedded conversion feature based on its fair value. After reducing the gross
      proceeds by the value allocated to the embedded conversion feature, the
      remaining unallocated debt discount of $3,428,571 was allocated to the
      Investors’ warrants. The excess of the fair value of the Investors’ warrants
      above the debt discount allocated to the Investors’ warrants was $5,608,156 and
      was recorded as interest expense.





In
      accordance with SFAS No. 133 and EITF Issue No. 00-19, due to certain factors,
      including an uncapped liquidated damages provision in the registration rights
      agreement and an indeterminate amount of shares to be issued upon conversion
      of
      the 2006 Debentures, the Company separately values and accounts for the embedded
      conversion feature related to the 2006 Debentures, the Investors’ warrants, the
      placement agent’s warrants, and the registration rights as derivative
      liabilities.





During
      the year ended October 31, 2006, $1,407,000 of principal amount of 2006
      Debentures plus accrued interest of $146,779 were converted into 17,068,023
      shares of common stock.





As
      of
      October 31, 2006, the conversion option liability of $2,571,429 had been reduced
      to $1,968,429 as a result of conversions of the 2006 Debentures. Since the
      issuance of the 2006 Debentures, an aggregate of $603,000 has been recorded
      as a
      reclassification to stockholders’ equity.





A
      gain on
      the change in fair value of these derivative liabilities of $6,087,380 was
      recognized during the year ended October 31, 2006.





Included
      in interest expense for the year ended October 31, 2006 is $2,883,546 related
      to
      the amortization of the debt discount on these debentures.





The
      2006
      Debentures are summarized below as of October 31, 2006:





Outstanding
              Principal
                Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueLong-term
                portion
            
            $
            4,593,000
            
            $
            3,116,454
            
            $
            1,476,546




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**NOTE
      9 - CONVERTIBLE DEBENTURES (CONTINUED)**





**2005
      Debentures**





On
      May
      26, 2005, the Company completed a private placement to certain individual and
      institutional investors of $3,500,000 in principal amount of its three-year
      7%
      Senior Secured Convertible Debentures (the “2005 Debentures”). All principal is
      due and payable on May 26, 2008. The 2005 Debentures are convertible into shares
      of common stock at a conversion price equal to the lower of (x) 70% of the
      5 day
      volume weighted average price of the Company’s common stock immediately prior to
      conversion or (y) if the Company entered into certain financing transactions
      subsequent to the closing date, the lowest purchase price or conversion price
      applicable to that transaction.





Interest
      on the 2005 Debentures accrues at the rate of 7% per annum and is payable on
      a
      bi-annual basis, commencing December 31, 2005, or on conversion and may be
      paid,
      at the option of the Company, either in cash or in shares of common stock.
      The
      Company may prepay the amounts outstanding on the 2005 Debentures by giving
      advance notice and paying an amount equal to 120% of the sum of (x) the
      principal being prepaid plus (y) the accrued interest thereon.





In
      connection with the issuance of the 2005 Debentures, the Company issued to
      the
      purchasers thereof warrants (the “Investor Warrants”) to purchase 33,936,650
      shares of common stock valued at $2,000,000 on the issuance date, with warrants
      for 11,312,220 shares being exercisable through the last day of the month in
      which the first anniversary of the effective date of the Registration Statement
      occurs (August 31, 2006) at a per share exercise price of $0.1547 and warrants
      for 22,624,430 shares being exercisable through the last day of the month in
      which the third anniversary of the effective date of the Registration Statement
      occurs (August 31, 2008) at a per share exercise price of $0.3094.





In
      connection with the issuance of the 2005 Debentures, the Company also issued
      to
      a placement agent warrants to purchase up to 5,656,108 shares of Common Stock
      (the “Compensation Warrants”) valued at $319,066 on the issuance date. This
      amount was recorded as a deferred financing cost and is being charged to
      interest expense over the term of the 2005 Debentures. Warrants to purchase
      up
      to 2,262,443 shares were exercisable through August 31, 2008, at a per share
      exercise price of $0.3094. Warrants to purchase up to 2,262,443 shares were
      exercisable through May 31, 2008, at a per share exercise price of $0.1547.
      Warrants to purchase up to 1,131,222 shares were exercisable through August
      31,
      2006, at a per share exercise price of $0.1547. All of the Compensation Warrants
      were exercised in February 2006 in connection with the Warrant Amendment
      discussed below.





On
      February 21, 2006, the Company and certain holders of Investor and Compensation
      Warrants entered into an amendment (the “Warrant Amendment”) to the terms of
      their warrants. Pursuant to the Warrant Amendment, the Company and certain
      holders of the Investor and Compensation Warrants agreed to temporarily reduce
      the exercise price of the Investor and Compensation Warrants to $0.05 per share
      from February 21, 2006 until March 10, 2006 (the “New Price Exercise Period”).
      The warrant holders that are parties to the Warrant Amendment were permitted,
      but not required to, exercise all or any portion of their Investor and
      Compensation Warrants at a per share price of $0.05 at any time during the
      New
      Price Exercise Period, but could not do so by means of a cashless exercise.
      This
      reduction in the exercise price of the Investor and Compensation Warrants
      expired on March 10, 2006. During the New Price Exercise Period, holders of
      the
      Investor and Compensation Warrants exercised warrants to purchase 11,370,624
      shares of common stock at the reduced exercise price of $0.05 per share,
      resulting in gross proceeds to the Company of $568,531. The Company recorded
      a
      charge of $622,305 during the year ended October 31, 2006. Except as expressly
      provided in the Warrant Amendment, the terms and conditions of the Investor
      and
      Compensation Warrants and any related registration rights agreement shall be
      unchanged and remain in full force and effect. In addition, the warrant holders
      agreed to waive any claims arising out of or relating to the failure, if any,
      to
      have available registered Warrant Shares, as defined in the Investor and
      Compensation Warrants, prior to June 23, 2006.





The
      Company agreed to include the shares of common stock issuable upon the exercise
      of each Investor or Compensation Warrant (whether or not pursuant to the terms
      of the Warrant Amendment) in a registration statement to be filed by the Company
      with the SEC. The common stock underlying the Investor and Compensation Warrants
      were included in the registration statement declared effective by the SEC on
      August 16, 2006.





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 NOTES
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**NOTE
      9 - CONVERTIBLE DEBENTURES (CONTINUED)**





**2005
      Debentures** **(continued)**





Holders
      of the Investor Warrants are entitled to exercise those warrants on a cashless
      basis following the first anniversary of issuance if the Registration Statement
      is not in effect at the time of exercise.





The
      gross
      proceeds of $3,500,000 were recorded net of a debt discount of $3,500,000.
      The
      debt discount consisted of a $2,000,000 value related to the Investor Warrants
      and a $1,500,000 value related to the embedded conversion feature in accordance
      with SFAS No. 133 and EITF Issue No. 00-19. Due to certain factors, including
      an
      uncapped liquidated damages provision in the registration rights agreement
      and
      an indeterminate amount of shares to be issued upon conversion of the
      debentures, the Company separately values and accounts for the embedded
      conversion feature related to the 2005 Debentures, the Investor Warrants, the
      Compensation Warrants, and the registration rights as derivative liabilities.
      Accordingly, these derivative liabilities are measured at fair value with
      changes in fair value reported in earnings as long as they remain classified
      as
      liabilities. Due to various factors, including substantial conversions of the
      2005 Debentures and the registration statement becoming effective on August
      1,
      2005, the value of the registration rights was deemed to be de
      minimus.





As
      of
      October 31, 2006, the conversion option liability of $1,500,000 was reduced
      to
      $2,385 as a result of conversions of the 2005 Debentures. $775,782 and $721,833
      has been recorded as a reclassification to stockholders’ equity during the years
      ended October 31, 2006 and 2005, respectively. A loss on the change in fair
      value of the derivative liabilities of $1,980,345 was recognized during the
      year
      ended October 31, 2006. A gain on the change in fair value of the derivative
      liabilities of $2,233,004 was recognized during the year ended October 31,
      2005.





To
      secure
      the Company’s obligations under the 2005 Debentures, the Company granted a
      security interest in substantially all of its assets, including without
      limitation, its intellectual property, in favor of the investors under the
      terms
      and conditions of a Security Interest Agreement dated as of the date of the
      2005
      Debentures. The security interest terminates upon the earlier of (i) the date
      on
      which less than one-third of the original principal amount of the 2005
      Debentures issued on the closing date are outstanding or (ii) payment or
      satisfaction of all of the Company’s obligations under the loan agreement. In
      January 2006, condition (i) was met and therefore the security interest
      terminated.





As
      a
      result of obtaining the 2005 Debentures, 1,000,000 stock options granted to
      each
      of the Company’s chief executive officer and executive vice president in April
      2005 became fully vested and non-forfeitable, as discussed in Note
      12.





During
      the year ended October 31, 2006, $1,810,147 of principal amount of 2005
      Debentures plus accrued interest of $73,265 were converted into shares of common
      stock.





During
      the year ended October 31, 2005, $1,684,289 of principal amount of 2005
      Debentures plus accrued interest of $36,331 were converted into shares of common
      stock.





Included
      in interest expense for the years ended October 31, 2006 and 2005 is $1,551,054
      and $1,946,031, respectively, related to the amortization of the debt discount
      related to these debentures.





The
      2005
      Debentures are summarized below as of October 31, 2006:





Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
              Discount
            
            Net
              Carrying
              ValueLong-term
                portion
            
            $
            5,564
            
            $
            2,915
            
            $
            2,649




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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
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        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      9 - CONVERTIBLE DEBENTURES (CONTINUED)**





**7%
      Debentures**





In
      December 2003, April 2004 and May 2004, the Company completed a private
      placement to certain private and institutional investors of $1,350,000 in
      principal amount of its three-year 7% Convertible Debentures (the “7%
      Debentures”).





Under
      the
      agreements with the purchasers of the 7% Debentures issued in December 2003,
      the
      Company is obligated to pay to the Debenture holders liquidated damages
      associated with the late filing of the Registration Statement and the missed
      Registration Statement required effective date of March 30, 2004. Liquidated
      damages are equal to (x) 2% of the principal amount of all the Debentures during
      the first 30-day period following late filing or effectiveness and (y) 3% of
      the
      principal amount of all Debentures for each subsequent 30-day period (or part
      thereof). These liquidated damages aggregated to $160,000. Accrued liquidated
      damages as of October 31, 2006 and 2005 was $37,550. At their option, the
      Debenture holders are entitled to be paid such amount in cash or shares of
      Common Stock at a per share rate equal to the effective conversion price of
      the
      Debentures, which is currently $0.15. 803,331 shares of common stock valued
      at
      $98,450 were issued during the year ended October 31, 2005 as payment for
      liquidated damages.





During
      the year ended October 31, 2006, $50,000 of principal amount plus accrued
      interest of $8,974 were converted into shares of common stock.





During
      the year ended October 31, 2005, $907,500 of principal amount plus accrued
      interest of $73,336 were converted into shares of common stock.





Included
      in interest expense for the years ended October 31, 2006 and 2005, is $46,069
      and $736,750, respectively, related to the amortization of the debt discount
      on
      these debentures.





The
      7%
      Debentures are summarized below as of October 31, 2006:





Outstanding
              Principal
              Amount
            
            Uamortized
              Debt
              Discount
            
            Net
              Carrying
              ValueCurrent
            
            $
            75,000
            
            $
            1,548
            
            $
            73,452





The
      remaining 7% Debentures outstanding at October 31, 2006 were originally issued
      in May 2004 and are due and payable in May 2007.





**NOTE
      10 - NOTES PAYABLE**





The
      Company has the following notes payable outstanding at October 31:





2006
            
            2005Note
                payable (1)
            
            $
            -
            
            $
            256,886Note
                payable, 10% interest, unsecured, due on demand withthree
                days notice (2)
            
            
            -
            
            
            443,451Note
                payable (3)
            
            
            -
            
            
            12,000Note
                payable (4)
            
            
            -
            
            
            1,229,870TOTAL
            
            $
            -
            
            $
            1,942,207Less:
                current portion of notes payable
            
            
            -
            
            
            (1,834,073
            )Long-term
                portion of notes payable
            
            $
            -
            
            $
            108,134


____________________





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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
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        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      10 - NOTES PAYABLE (CONTINUED)**




(1)
            In
                February 2006, the Company issued 5,304,253 shares of restricted
                common
                stock in exchange for the return and cancellation of the outstanding
                principal of $256,886 and interest of $114,412 on five, unsecured
                individual notes payable, each with identical terms and bearing 6%
                interest.  As the conversion rate of $0.07 was below the closing
                price of the common stock on the conversion date, a loss of $196,257
                was
                recognized during the year ended October 31, 2006.(2)
            In
                June 2005, principal amount of $39,973 and interest of $110,027 was
                paid
                on an unsecured note payable bearing 10% interest from the proceeds
                of the private placement of the 2005 Debentures. In February 2006,
                the
                Company issued 6,760,241 shares of restricted common stock in exchange
                for
                the return and cancellation of the outstanding principal of $443,451
                and
                interest of $29,766 on this note. As the conversion rate of $0.07
                was
                below the closing price of the common stock on the conversion date,
                a loss
                of $250,129 was recognized during the year ended October 31,
                2006.(3)
            On
                March 26, 2004, the Company entered into a loan agreement, pursuant
                to
                which the Company borrowed $12,000 from the lender. In April 2006,
                the
                outstanding principal of $12,000 and interest of $1,217 were
                repaid.(4)
            In
                April 2005, the Company issued a promissory note, in connection with
                the
                cancellation of the Redeemable Series B Preferred Stock, which bears
                interest at the rate of 7% per annum. In December 2005, the Company
                entered into an agreement to repay a portion of the outstanding principal
                and accrued interest on the promissory note with the remaining principal
                balance and accrued interest being forgiven. See Note 7 for further
                details.





In
      December 2005 and January 2006, the Company entered into loan agreements with
      a
      third party pursuant to which the Company borrowed $750,000 from the lender.
      An
      amount equal to 108% of the principal amount ($810,000) of the loans was due
      and
      payable on the earlier of May 25, 2006 or the date the Company effects a
      financing transaction or series of transactions resulting in gross proceeds
      to
      the Company of at least $2,000,000. The difference between the gross proceeds
      and amount due at maturity is shown as a discount was amortized as interest
      expense over the life of the loans. The Company issued to the lender warrants
      to
      purchase 7,500,000 shares of its Common Stock at an exercise price of $0.10
      per
      share. The fair value of the warrants was $120,000 and was shown as a debt
      discount and amortized as interest expense over the life of the loans. In
      connection with the loans, the Company granted a security interest in all of
      its
      assets. The Company received net proceeds of $672,470 following the payment
      of
      due diligence fees and transaction fees and transaction related fees and
      expenses. These transaction related fees were recorded as deferred financing
      costs.





In
      March
      2006, 108% of the principal amount ($810,000) was repaid and the security
      interest was released. All unamortized debt discount and deferred financing
      costs were written off in connection with the repayment of the
      loan.





**NOTE
      11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES**





Accounts
      payable and accrued expenses consist of the following as of October
      31:





2006
            
            2005Accrued
                officers compensation, bonuses and payroll
            
            $
            259,945
            
            $
            215,450Professional
                fees
            
            
            147,333
            
            
            5,718Interest
                payable
            
            
            486,141
            
            
            611,863Accrued
                liquidated damages
            
            
            249,550
            
            
            37,550Consulting
                fees
            
            
            9,394
            
            
            63,414Miscellaneous
            
            
            70,847
            
            
            47,838$
            1,223,210
            
            $
            981,833




F-26


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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
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        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY**





**Common
      Stock**





In
      April
      2006, the Company amended its articles of incorporation and increased the
      authorized number of shares of common stock from 500,000,000 to 900,000,000
      shares.





During
      the year ended October 31, 2006, the Company:





·
            issued
                122,075,460 shares of common stock for conversion of convertible
                debentures with a principal amount of $3,267,147 and accrued interest
                of
                $229,018;·
            repurchased
                499,854 shares of common stock for $7,498 from Zaiq;·
            issued
                35,714 shares of common stock for conversion of convertible notes
                payable
                with a principal amount of $10,000 and accrued interest of
                $5,000;·
            issued
                12,064,494 shares of common stock valued at $1,290,901 in exchange
                for the
                return and cancellation of notes payable with a principal amount
                of
                $700,337 and accrued interest of $144,178;·
            issued
                21,765,985 shares of common stock upon exercise of warrants resulting
                in
                gross proceeds of $1,391,444;·
            issued
                1,194,587 shares of common stock upon cashless exercise of warrants
                valued
                at $184,803;·
            issued
                150,000 shares of common stock upon exercise of stock options in
                satisfaction of accrued expenses of $4,784;·
            issued
                500,000 shares of common stock valued at $78,000 in connection with
                the
                purchase of substantially all of the assets of 1021 Technologies,
                Inc.;
                and·
            issued
                13,712,222 shares of restricted common stock to consultants for services
                valued at $2,396,425.





During
      the year ended October 31, 2005, the Company:





·
            issued
                10,289,026 shares of common stock to various investors for cash
                proceeds of $835,100;·
            issued
                2,837,500 shares of common stock for consulting services valued at
                $342,000;·
            issued
                5,073,015 shares of common stock for various services valued at
                $314,667;·
            issued
                2,750,000 shares of common stock to key employees and directors
                valued at $452,500;·
            issued
                72,763,232 shares of common stock for converted promissory notes,
                debentures and accrued interest valued at $2,708,956;·
            issued
                803,331 shares of common stock as penalty for delayed
                filing/effectiveness of a registration statement valued at $98,450;·
            issued
                529,311 shares of common stock in connection with a Below Market
                Issuance (See Note 7);·
            issued
                422,783 shares of common stock in payment of accounts payable and
                accrued expenses in the amount of $71,911; and





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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
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        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)**





**Common
      Stock** **(continued)**





·
            issued
                4,651,163 shares of common stock with a fair value of $744,186 in
                exchange for the surrender of Redeemable Series B Preferred Stock
                valued at $800,000. The Company recognized a gain of $55,814 on the
                transaction (See Note 7).





**Stock
      Option Plans**





During
      2000, the Board of Directors and the stockholders of the Company approved the
      2000 Omnibus Securities Plan (the “2000 Plan”), which provides for the granting
      of incentive and non-statutory options and restricted stock for up to 2,500,000
      shares of common stock to officers, employees, directors and consultants of
      the
      Company.





During
      August 2001, the Board of Directors of the Company approved the 2001 Stock
      Incentive Plan (the “2001 Plan” and together with the 2000 Plan, the “Plans”),
      which provides for the granting of incentive and non-statutory options,
      restricted stock, dividend equivalent rights and stock appreciation rights
      for
      up to 2,500,000 shares of common stock to officers, employees, directors and
      consultants of the Company. The stockholders of the Company ratified the 2000
      Plan in May 2000, and the 2001 Plan in July 2002.





In
      January 2003, the Board of Directors of the Company approved the 2003 Consultant
      Stock Plan (“Consultant Plan”), which provides for the issuance of up to
      6,000,000 non-qualified stock options or stock awards to consultants to the
      Company. Directors, officers and employees are not eligible to participate
      in
      the Consultant Plan. As of October 31, 2006, 3,200,000 shares of common stock
      and options to purchase 700,000 shares of common stock have been issued under
      the Consultant Plan .





The
      weighted-average estimated fair value of stock options granted during the year
      ended October 31, 2006 was $0.05 per share using the Black-Scholes model with
      the following assumptions:





Expected
                volatility
            140%Risk-free
                interest rate
            4.5%Expected
                dividends
            0.0%Expected
                life
            10
                years





The
      expected volatility is based on a blend of the Company’s industry peer group and
      the Company’s historical volatility. The risk-free interest rate assumption is
      based upon observed interest rates appropriate for the term of the related
      stock
      options and warrants. The dividend yield assumption is based on the Company’s
      history and expectation of dividend payouts. The expected life of stock options
      and warrants represents the Company’s historical experience with regards to the
      exercise behavior of its option and warrant holders and the contractual term
      of
      the options and warrants.




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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
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        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)**





**Stock
      Option Plans** **(Continued)**





A
      summary
      of the Company’s stock option activity and related information is as
      follows:





Under
              the
                Plans
            
            Weighted
              Average
              Exercise
                Price
            
            Aggregate
              Intrinsic
              Value
            
            Outside
              the
                Plans
            
            Weighted
              Average
                Exercise Price
            
            Aggregate
              Intrinsic
              ValueOutstanding
                as of November 1, 2004
            
            
            2,178,750
            
            $
            1.25
            
            
            
            
            
            3,991,250
            
            $
            2.11Options
                granted:Under
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Outside
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            15,000,000
            
            $
            0.17Options
                expired/cancelled:Under
                the Plans
            
            
            (1,185,000
            )
            $
            1.48
            
            
            
            
            
            -
            
            
            -Outside
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            (3,091,250
            )
            $
            1.92Options
                exercised:Under
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Outside
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Outstanding
                as of October 31, 2005
            
            
            993,750
            
            $
            0.97
            
            
            
            
            
            15,900,000
            
            $
            0.25Options
                granted:Under
                the Plans
            
            
            3,225,000
            
            $
            0.15
            
            
            
            
            
            -
            
            
            -Outside
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            30,100,000
            
            $
            0.04Options
                expired/cancelled:Under
                the Plans
            
            
            (325,000
            )
            $
            1.86
            
            
            
            
            
            -
            
            
            -Outside
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            (14,300,000
            )
            $
            0.24Options
                exercised:Under
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Outside
                the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            (150,000
            )
            $
            0.03Outstanding
                as of October 31, 2006
            
            
            3,893,750
            
            $
            0.22
            
            $
            1,500
            
            
            31,550,000
            
            $
            0.06
            
            $
            1,766,135Exercisable
                as of October 31, 2006
            
            
            1,325,091
            
            $
            0.36
            
            $
            333
            
            
            27,866,667
            
            $
            0.04
            
            $
            1,766,135





The
      intrinsic value of options exercised during the year ended October 31, 2006,
      was
      $10,365. During the year ended October 31, 2006, upon the exercise of options
      to
      purchase 150,000 shares of common stock, the Company reclassified the fair
      value
      of the exercised options of $14,670 from derivative liabilities to stockholders’
equity.





The
      weighted-average remaining contractual term of stock options outstanding under
      the plans as of October 31, 2006 was 9 years. The weighted-average remaining
      contractual term of stock options outstanding outside the plans as of October
      31, 2006 was 9 years.





The
      weighted-average remaining contractual term of stock options currently
      exercisable under the plans as of October 31, 2006 was 7.5 years. The
      weighted-average remaining contractual term of stock options currently
      exercisable outside the plans as of October 31, 2006 was 8.9 years.





As
      of
      October 31, 2006, total compensation cost related to nonvested stock options
      not
      yet recognized was $908,677, which is expected to be recognized through October
      2009 over a weighted-average period of approximately 2.8 years.





F-29


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 NOTES
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        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)**





**Stock
      Option Plans** **(continued)**





The
      total
      fair value of options vested during the years ended October 31, 2006 and 2005
      was $1,115,645 and $241,018, respectively.





**Options
      Granted**





In
      April
      2005, the Company issued to each of its Chief Executive Officer and Executive
      Vice President, 1,000,000 shares of common stock, and performance-based options
      to purchase 7,000,000 shares of restricted common stock at an exercise price
      of
      $0.17, which was equal to the closing price of the common stock on the
      Over-the-Counter Bulletin Board on the date of grant. Options to purchase
      2,000,000 shares of restricted common stock vested upon the Company’s
      consummation of the sale of the 2005 Debentures in May 2005 and options to
      purchase 12,000,000 shares of restricted common stock vested in December 2005
      upon the Company’s release of a version of its semiconductor technologies. In
      January 2006, all of these options were canceled.





During
      the three months ended January 31, 2006, options to purchase 22,400,000 shares
      of common stock were granted to the Company’s Chief Executive Officer, the
      Executive Vice President, and an advisory board member. These options were
      valued at $591,863 and have a 10 year term, an exercise price of $0.027 per
      share, and vested at various times between February 2006 and July
      2006.





During
      the three months ended April 30, 2006, the following options were
      granted:





(i)
            Options
                to purchase 2,000,000 shares of common stock were granted to directors.
                These options were valued at $84,277 and have a 10-year term, an
                exercise
                price of $0.0319 per share, and vested on May 1, 2006;(ii)
            Options
                to purchase 2,000,000 shares of common stock were granted in connection
                with legal services performed for the Company. These options were
                valued
                at $84,277 and have a 10-year term, an exercise price of $0.0319
                per
                share, and vested on March 1, 2006; and(iii)
            Options
                to purchase 100,000 shares of common stock under the Plans were granted
                to
                an employee. These options were valued at $16,887 and have a 10-year
                term,
                exercise price of $0.08 per share, and vest over a three year
                period.





During
      the three months ended July 31, 2006, the following options were
      granted:





(i)
            Options
                to purchase 600,000 shares of common stock, 400,000 of which were
                under
                the Plans, were granted to employees and a director. These options
                were
                valued at $95,200 and have a 10-year term, an exercise price of $0.18
                per
                share, and vest over a three year period; and(ii)
            Options
                to purchase 500,000 shares of common stock under the Consultant Plan
                were
                granted to a consultant. These options were valued at $79,333 and
                have a
                10-year term, an exercise price of $0.18 per share, and vest over
                a two
                year period.





During
      the three months ended October 31, 2006, the following options were
      granted:





(i)
            Options
                to purchase 400,000 shares of common stock, 200,000 of which were
                under
                the Plans and 200,000 of which were under the Consultant Plan, were
                granted to employees. These options were valued at $88,600 and have
                a
                10-year term, an exercise price of $0.224 per share, and vest over
                a three
                year period;(ii)
            Options
                to purchase 3,500,000 shares of common stock were granted to the
                Senior
                Executive Vice President. These options were valued at $518,772 and
                have a
                10-year term, an exercise price of $0.158 per share, and vest over
                a three
                year period; and





F-30


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        SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS


**NOTE
      12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)**





**Options
      Granted** **(continued)**





(iii)  Options
      to purchase 1,825,000 shares of common stock under the Plans were granted to
      employees. These options were valued at $218,057 and have a 10-year term, an
      exercise price of $0.131 per share, and vest over a three year
      period.





**Warrants**





As
      of
      October 31, 2006, the Company had outstanding warrants to purchase shares of
      common stock as follows:





GRANT
                DATE
            
            NUMBER
                OF SHARES
            
            EXERCISE
                PRICE ($)
            
            EXPIRATION
                DATEOctober
                31, 2003
            
            
            600,000
            
            
            0.15
            
            
            September
                30, 2007(1
            )December
                31, 2003
            
            
            7,333,333
            
            
            0.25
            
            
            December
                31, 2008January
                11, 2004
            
            
            100,000
            
            
            0.15
            
            
            January
                11, 2009April
                20, 2004
            
            
            666,666
            
            
            0.25
            
            
            April
                30, 2009(2
            )April
                20, 2004
            
            
            66,667
            
            
            0.15
            
            
            April
                30, 2009(2
            )May
                7, 2004
            
            
            1,666,666
            
            
            0.25
            
            
            May
                31, 2009(2
            )May
                7, 2004
            
            
            166,667
            
            
            0.15
            
            
            May
                31, 2009(2
            )October
                1, 2004
            
            
            120,000
            
            
            0.25
            
            
            October
                1, 2007May
                26, 2005
            
            
            18,470,945
            
            
            0.3094
            
            
            August
                31, 2008June
                23, 2005
            
            
            200,000
            
            
            0.12
            
            
            June
                23, 2008March
                10, 2006
            
            
            78,051,104
            
            
            0.15
            
            
            August
                31, 2009March
                10, 2006
            
            
            7,095,556
            
            
            0.1693
            
            
            August
                31, 2009Exercisable
                as of October 31, 2006
            
            
            114,537,604
            
            $
            0.12
                to $0.3094
            
            
            September
                30, 2007 to
              August
                31, 2009





(1)  In
      September 2006, the expiration date was extended until September 30, 2007,
      which
      resulted in an additional expense of $19,090 that was charged to operating
      expenses.


(2)  Under
      certain conditions the Company may accelerate the expiration date.





**Warrants
      Granted**





On
      May
      26, 2005, the Company issued warrants to purchase 22,624,430 shares of its
      common stock at an exercise price of $0.3094 in connection with the placement
      of
      the 2005 Debentures. The fair value of the stock warrants estimated on the
      date
      of grant using the Black-Scholes model is approximately $0.06 per share or
      $1,362,324.





On
      May
      26, 2005, the Company issued warrants to purchase 11,312,220 shares of its
      common stock at an exercise price of $0.1547 in connection with the placement
      of
      the 2005 Debentures. The fair value of the stock warrants estimated on the
      date
      of grant using the Black-Scholes model is approximately $0.06 per share or
      $637,676.





On
      May
      26, 2005, the Company granted warrants to purchase 2,262,443 shares of its
      common stock at an exercise price of $0.3094 to the placement agent in
      connection with the placement of the 2005 Debentures. The fair value of the
      stock warrants estimated on the date of grant using the Black-Scholes model
      is
      $0.06 per share or $130,710. All of these warrants were exercised in February
      2006.





On
      May
      26, 2005, the Company granted warrants to purchase 2,262,443 shares of its
      common stock at an exercise price of $0.1547 to the placement agent in
      connection with the placement of the 2005 Debentures. The fair value of the
      stock warrants estimated on the date of grant using the Black-Scholes model
      is
      $0.06 per share or $130,710. All of these warrants were exercised in February
      2006.





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**NOTE
      12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)**





**Warrants
      Granted** **(Continued)**





On
      May
      26, 2005, the Company granted warrants to purchase 1,131,222 shares of its
      common stock at an exercise price of $0.1547 to the placement agent in
      connection with the placement of the 2005 Debentures. The fair value of the
      stock warrants estimated on the date of grant using the Black-Scholes model
      is
      $0.05 per share or $57,646. All of these warrants were exercised in February
      2006.





On
      June
      23, 2005, the Company granted warrants to purchase 200,000 shares of its common
      stock at an exercise price of $0.12 in connection with consulting services
      performed for the Company. The fair value of the stock warrants estimated on
      the
      date of grant using the Black-Scholes model is $0.06 per share or
      $11,776.





In
      January 2006, the Company granted warrants to purchase 7,500,000 shares of
      its
      common stock at an exercise price of $0.10 per share to a lender in connection
      with a loan agreement (see Note 10). The fair value of the stock warrants
      estimated on the date of grant using the Black-Scholes model is $0.016 per
      share
      or $120,000. All of these warrants were exercised in August 2006.





In
      March
      2006, the Company granted warrants to purchase 70,955,548 shares of its common
      stock at an exercise price of $0.15 per share to the Investors in the 2006
      Debentures (see Note 9). The fair value of the stock warrants estimated on
      the
      date of grant using the Black-Scholes model is $0.127 per share or
      $9,036,727.





In
      March
      2006, the Company also granted warrants to purchase 7,095,556 shares of its
      common stock at an exercise price of $0.1693 per share to the placement agent
      in
      connection with the 2006 Debentures (see Note 9). The fair value of the stock
      warrants estimated on the date of grant using the Black-Scholes model is $0.125
      per share or $888,779.





In
      March
      2006, the Company granted additional warrants to purchase 7,095,556 shares
      of
      its common stock at an exercise price of $0.15 per share to the placement agent
      in connection with the 2006 Debentures (see Note 9 ).
      The
      fair value of the stock warrants estimated on the date of grant using the
      Black-Scholes model is $0.127 per share or $903,673.





**Warrants
      Expired**





Warrants
      to purchase 3,587,062 and 800,000 shares of common stock expired during the
      years ended October 31, 2006 and 2005, respectively.





**Warrants
      Exercised**





Warrants
      to purchase 25,334,751 shares of common stock were exercised during the year
      ended October 31, 2006. 3,568,766 of these exercises were on a cashless basis.
      No warrants were exercised during the year ended October 31, 2005.





During
      the year ended October 31, 2006, upon the exercise of warrants to purchase
      an
      aggregate of 25,334,751 shares of common stock, the Company reclassified the
      fair value of the exercised warrants of $2,758,046 from derivative liabilities
      to stockholders’ equity.





**Net
      Loss Per Share**





Securities
      that could potentially dilute basic earnings per share (EPS), in the future,
      that were not included in the computation of diluted EPS because to do so would
      have been anti-dilutive for the periods presented, consist of the
      following:





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**NOTE
      12 - STOCKHOLDERS’ (DEFICIENCY) EQUITY (CONTINUED)**





**Net
      Loss Per Share** **(Continued)**





Warrants
                to purchase common stock
            
            
            114,537,6042006
                Debentures and accrued interest (1)
            
            
            67,840,468Options
                to purchase common stock
            
            
            35,443,750Convertible
                notes payable and accrued interest
            
            
            1,633,1707%
                Debentures and accrued interest
            
            
            604,1912005
                Debentures and accrued interest (2)
            
            
            135,397Total
                as of October 31, 2006
            
            
            220,194,580





____________________


(1)  Based
      on
      a twenty day volume weighted average common stock price discounted by 30% at
      October 31, 2006 of $0.0693.


(2)  Based
      on
      a five day volume weighted average common stock price discounted by 30% at
      October 31, 2006 of $0.0682.





Substantial
                issuances after October 31, 2006 through January 24, 2007:Options
                granted to purchase common stock
            
            
            4,350,000Common
                stock issued in connection with services agreement
            
            
            3,736,991Common
                stock issued in connection with conversion of debentures
            
            
            56,394,444Common
                stock issued in payment of liquidated damages
            
            
            464,535Common
                stock issued in connection with exercise of stock options
            
            
            300,000Common
                stock issued to consultants
            
            
            8,000,000





**NOTE
      13 - INCOME TAXES**





As
      of
      October 31, 2006, the Company had approximately $50,014,000 of net operating
      loss carry forwards for income tax purposes, which expire as
      follows:




Year
            Net
                OperatingLoss2011
            
            $
            1,583,0002012
            
            
            4,714,0002018
            
            
            4,472,0002019
            
            
            1,698,0002020
            
            
            4,759,0002021
            
            
            9,503,0002022
            
            
            10,230,0002023
            
            
            4,143,0002024
            
            
            2,245,0002025
            
            
            2,621,0002026
            
            
            4,046,000$
            50,014,000








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**NOTE
      13 - INCOME TAXES (CONTINUED)**





At
      October 31, 2006 and 2005, the Company has a deferred tax asset of approximately
      $20,590,000 and $19,877,000, respectively, representing the benefits of its
      net
      operating loss and certain expenses not currently deductible for tax purposes,
      principally related to the granting of stock options and warrants and the
      difference in tax basis of certain intangible assets. The Company’s deferred tax
      asset has been fully reserved by a valuation allowance since realization of
      its
      benefit is uncertain. The difference between the Federal statutory tax rate
      of
      34% and the Company’s effective Federal tax rate of 0% is due to the increase
      (decrease) in the valuation allowance of $713,000 (2006) and $(2,227,000)
      (2005). The Company’s ability to utilize its carry forwards may be subject to
      any annual limitation in future periods, pursuant to Section 382 of the Internal
      Revenue Code of 1986, as amended.





A
      reconciliation between the statutory federal income tax rate (34%) and the
      Company’s effective rate for the years ended October 31, 2006 and 2005 is as
      follows:





2006
            
            2005Federal
                statutory rate
            
            
            34.0
            %
            
            34.0
            %State
                income tax rate, net of federal benefit
            
            
            6.6
            %
            
            6.6
            %Permanent
                differences
            
            
            (29.3
            )%
            
            -Valuation
                allowance
            
            
            (11.3
            )%
            
            (40.6
            )%Effective
                rate
            
            
            0.0
            %
            
            0.0
            %





**NOTE
      14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS**





**Research
      and Development Agreement**





The
      Company and HelloSoft, Inc. (“HelloSoft”) entered into a Services Agreement
      dated as of March 31, 2004 (the “Original Agreement”) pursuant to which
      HelloSoft provides development services relating to the Company’s semiconductor
      technologies. The Original Agreement provides that, upon the Company’s request
      from time to time, HelloSoft is to provide services to be specified pursuant
      to
      mutually agreed upon terms. HelloSoft has assigned to the Company the rights
      to
      any improvements, developments, discoveries or other inventions that may be
      generated by HelloSoft in its performance of the services to be provided under
      the Original Agreement and its amendments.





On
      July
      26, 2005, the Company signed an Amendment that defined and priced Phases II
      and
      III of the technology development program at $445,000 on Phase II and $350,000
      on Phase III. Half of Phase II, or $222,500, was paid to HelloSoft on July
      26,
      2005, in the form of restricted common stock issued at a discount of 25% to
      the
      closing price of the Company’s common stock on that date, and the remaining
      $222,500 is payable in cash upon completion of certain stages of Phase II.
      The
      restricted common stock issued to HelloSoft was valued at $296,667 and recorded
      as research and development expense. Of the remaining $222,500, $62,500 was
      accrued as of October 31, 2005 and paid during the three months ended January
      31, 2006 and a further $100,000 was paid in May 2006.





HelloSoft
      commenced the Phase III development stage during the Company’s second fiscal
      quarter 2006. On July 31, 2006, the Company paid HelloSoft $75,000 in cash
      and
      issued $175,000 of restricted common stock at a discount of 25% to the closing
      price of the Company’s common stock on that date. The restricted common stock
      issued to HelloSoft was valued at $233,333. The Company paid the remaining
      $100,000 cash payable in relation to Phase III in January 2007.





In
      July
      2006 and August 2006, the Company and HelloSoft, entered into further amendments
      to the Original Agreement. Pursuant to these amendments, on July 31, 2006,
      the
      Company issued $25,000 of restricted common stock at a discount of 25% to the
      closing price of the Company’s common stock on that date. The restricted common
      stock issued to HelloSoft was valued at $33,334, and capitalized. In addition,
      the Company issued to HelloSoft 1,087,470 shares of common stock valued at
      $164,208 as compensation for past development services. HelloSoft has completed
      all committed work under the Original Agreement and all subsequent amendments
      and has been fully paid.





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**NOTE
      14 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
      (CONTINUED)**





**Research
      and Development Agreement** **(Continued)**





On
      February 6, 2006, the Company entered into a technology license agreement with
      HelloSoft. Under the agreement, the Company has obtained a license to include
      HelloSoft’s integrated VoIP software suite in the Company’s CupriaTM family of
      semiconductors. In exchange for this license, the Company paid HelloSoft a
      license fee and has agreed to pay certain royalties based on its sales of
      products including the licensed technology.





**Leases**





The
      Company’s future minimum lease payments required under operating leases with a
      term greater than one year are as follows:





Years
      ending October 31:





2007
            
            $
            182,8442008
            
            
            188,9272009
            
            
            143,5752010
            
            
            -2011
            
            
            -Total
            
            $
            515,346





Rent
      expense for the years ended October 31, 2006 and 2005 was $80,588 and $39,747,
      respectively.





**Concentration
      of Credit Risk**





The
      Company maintains cash balances in two financial institutions. The balances
      are
      insured by the Federal Deposit Insurance Corporation up to $100,000 per
      institution. From time to time, the Company’s balances may exceed these limits.
      As of October 31, 2006 and 2005, uninsured cash balances were approximately
      $1,988,947 and $303,682, respectively. The Company believes it is not exposed
      to
      any significant credit risk for cash.





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**NOTE
      15 - SEGMENT INFORMATION**





Summarized
      financial information concerning the Company’s reportable segments is shown in
      the following table:





Semiconductor
                Business
            
            Entertainment
                Business
            
            Unallocable
            
            TotalsFor
                the Year Ended October 31, 2006:Net
                Sales - Domestic
            
            $
            -
            
            $
            9,757
            
            $
            -
            
            $
            9,757Net
                Sales - Foreign
            
            $
            -
            
            $
            51,942
            
            $
            -
            
            $
            51,942Operating
                (Loss) Income
            
            $
            (6,506,583
            )
            $
            37,402
            
            $
            -
            
            $
            (6,469,181
            )Depreciation
                and amortization
            
            $
            782,268
            
            $
            -
            
            $
            -
            
            $
            782,268Total
                Identifiable Assets
            
            $
            7,900,131
            
            $
            -
            
            $
            2,112,263
            
            $
            10,012,394For
                the Year Ended October 31, 2005:Net
                Sales - Domestic
            
            $
            -
            
            $
            29,066
            
            $
            -
            
            $
            29,066Net
                Sales - Foreign
            
            $
            -
            
            $
            10,800
            
            $
            -
            
            $
            10,800Operating
                Loss
            
            $
            (7,032
            )
            $
            (1,014,451
            )
            $
            (3,278,604
            )
            $
            (4,300,087
            )Depreciation
                and amortization
            
            $
            7,032
            
            $
            18,080
            
            $
            -
            
            $
            25,112Total
                Identifiable Assets
            
            $
            6,087,229
            
            $
            -
            
            $
            417,736
            
            $
            6,504,965





**NOTE
      16 - SUBSEQUENT EVENTS**





**eSilicon
      Transaction**





On
      December 12, 2006, the Company entered into a three-year Master ASIC Services
      Agreement with eSilicon Corporation (“eSilicon”) (the “MSA”), pursuant to which
      eSilicon agreed to provide physical design and manufacturing services to the
      Company in exchange for cash and unregistered shares of the Company’s common
      stock. In connection with the MSA and related orders by the Company and pursuant
      to a Stock Purchase Agreement between the Company and eSilicon, the Company
      issued to eSilicon 3,736,991 shares of restricted common stock for $395,000
      of
      non-recurring engineering services to be provided by eSilicon related to the
      application-specific standard part (“ASSP”) version of the CupriaTM Cu5001.
      Additional cash payments will be made by the Company to eSilicon for other
      services as such services are performed.





**Equity
      Transactions**





In
      November 2006:





(i)
            13,936,199
                shares of common stock were issued upon conversion of 2006 Debentures
                with
                a principal amount of $932,750 and interest of $25,485;
                and(ii)
            Options
                to purchase 4,250,000 shares of common stock were granted to one
                director
                and three executive employees under the 2006 Stock Incentive Plan
                discussed below. These options were valued at $386,427 and have a
                ten year
                term, an exercise price of $0.096 per share, and vest over a period
                of
                approximately three years through October
                2009.




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**NOTE
      16 - SUBSEQUENT EVENTS (CONTINUED)**





**Equity
      Transactions** **(Continued)**





In
      December 2006:





(i)
            42,212,058
                shares of common stock were issued upon conversion of 2005 and 2006
                Debentures with a principal amount of $2,999,534 and interest of
                $90,266;(ii)
            3,736,991
                shares of restricted common stock were issued for $395,000 of
                non-recurring engineering services (as described above);
                and(iii)
            300,000
                shares of common stock were issued upon exercise of stock options
                resulting in gross proceeds of
                $9,570.





In
      January 2007:





(i)
            Options
                to purchase 100,000 shares of common stock were granted to an employee.
                These options were valued at $11,344 and have a ten year term, an
                exercise
                price of $0.12 per share, and vest over a period of approximately
                three
                years through January 2010;(ii)
            464,535
                shares of restricted common stock were issued to 2006 Debenture holders
                in
                satisfaction of $68,547 in liquidated damages accrued at October
                31,
                2006;(iii)
            8,000,000
                shares of restricted common stock valued at $1,007,000 were issued
                to
                three consultants; and(iv)
            246,187
                shares of common stock valued at $21,197 were issued to four holders
                of
                2006 Debentures in payment of interest on the 2006
                Debentures.





**2006
      Stock Incentive Plan**





In
      November 2006, the Company’s Board of Directors approved the Company’s 2006
      Stock Incentive Plan, which authorizes the issuance of up to 30,000,000
      incentive stock options, non-qualified stock options or stock awards to
      directors, officers, employees and certain consultants to the
      Company.





**Financing
      Commitment**





In
      January 2007, an institutional investor that has been a prior investor in the
      Company committed to purchase $6 million of 7% Senior Secured Convertible
      Debentures from the Company upon request at any time after March 1, 2007. As
      of
      the date of this report, the Company has not made such a request.




F-37