UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-KSB/A


(Amendment No.
1)







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


ACT
OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 2007





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, 2007: $14,757




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 25, 2008 was
approximately $12,700,000 (based on the closing sales price of the registrant’s
common stock on that date ($0.027)). 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 25, 2008
was 476,182,134.




Documents Incorporated By
Reference: Portions of the Company’s Definitive Proxy Statement for the
2008 Annual Meeting of Shareholders are incorporated by reference into Part III,
Items 9, 10, 11, 12 and 14.




Transitional
Small Business Disclosure Format: Yes  No x







EXPLANATORY
NOTE
 
 This Annual Report on Form 10-KSB/A
(Amendment No. 1) is being filed by Rim Semiconductor Company ("we," "us" or the
"Company") to amend the Company's Annual Report on Form 10-KSB for the period
ended October 31, 2007 that was initially filed with the Securities and Exchange
Commission (the "SEC") on January 29, 2008 (the "Original Report"). The changes
made to the Original Report are as follows: (1) an updated Report of Independent
Registered Public Accounting Firm is included in the Company's audited
consolidated financial statements (the “Financial Statements”);
(2) addition of “NOTE 18 - ACQUISITION OF BROADBAND DISTANCE SYSTEMS,
INC. - SUBSEQUENT EVENT” included in the Financial Statements; (3) Part II
Item 6 has been amended to add disclosure of the Company's acquisition of
Broadband Distance Systems, Inc.; (4) Part III Item 13 has been amended to
revise the description of Exhibit 10.37; and (5) an updated Consent of Marcum
& Kleigman LLP is filed as Exhibit 23.1 (collectively the "Amended Items").
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as
amended, the Amended Items have been amended and restated in their entirety. In
addition, new certifications from the Company's Chief Executive Officer and
Principal Financial and Accounting Officer, as required by Sections 302 and 906
of the Sarbanes-Oxley Act of 2002, are filed with this Form 10-KSB/A as Exhibits
31.1 and 32.1.










RIM
SEMICONDUCTOR COMPANY


2007
ANNUAL REPORT ON FORM 10-KSB





TABLE
OF CONTENTS





PART
      I
            PAGEITEM
      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
      ISSUERPURCHASES
      OF EQUITY SECURITIES
            15ITEM
      6.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            18ITEM
      7.
            FINANCIAL
      STATEMENTS
            27ITEM
      8.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE
            27ITEM
      8A.
            CONTROLS
      AND PROCEDURES
            27ITEM
      8B.
            OTHER
      INFORMATION
            28PART
      IIIITEM
      9.
            DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE;
      COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
            28ITEM
      10.
            EXECUTIVE
      COMPENSATION
            28ITEM
      11.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS
            28ITEM
      12.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            28ITEM
      13.
            EXHIBITS
            29ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES
            32




i




PART
I





ITEM 1.DESCRIPTION OF
BUSINESS.





Overview





Rim
Semiconductor Company (the “Company,” “we,” “our,” or “us”) develops and markets
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 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 Cu5001
digital signal processor, is commercially available in field programmable gate
array (“FPGA”) form. We are currently developing it in application-specific
standard part (“ASSP”) form. In general, an FPGA platform has a higher per unit
cost than an ASSP does, but a lower overall expense to engineer and validate. We
have entered into memoranda of understanding with five equipment manufacturers
concerning their evaluation and testing of our product.  Five
telephone companies have also agreed to evaluate and test our product for use in
their network.




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.




While our
technology is currently available for evaluation and testing in FPGA form, we do
not believe that we will realize substantial revenues until our chip is
mass-produced in ASSP form. In order to complete development of the ASSP, we
need to raise additional capital. 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. To date, we have not recorded any revenues from the
sale of products based on our technology.





Our
Telecommunications Business





Our
Product Line





We have
developed 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.  Our evaluations, evaluations by an independent third-party
technical services provider, and evaluations by telephone companies indicate
that our product performs better than existing available technologies from other
companies.  We have launched our product line in FPGA
form.  Completing our engineering work and launching it in ASSP form
is subject to raising additional capital.




In June
2007, we filed a patent application on technology we developed that we refer to
as RQAMTM.  RQAMTM can move data faster, across longer distances of
copper wire, and with a much lower bit error rate, than our previous technology
could.  It also outperforms competing technologies like VDSL2 and ADSL2+ by
a wider margin than we had previously benchmarked. In addition to higher
performance, we believe RQAMTM will lower the power consumption, heat
dissipation, complexity and cost of our CupriaTM semiconductor.




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.





1




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 1.4
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.





2


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.
In June 2007, we filed a patent application in the United States on our RQAMTM
technology. Under an agreement with Adaptive Networks, Inc. (“Adaptive”), we
have a license to and/or co-own four issued patents and six pending patent
applications in the United States. As a result of our purchase of the assets of
1021 Technologies, Inc. and 1021 Technologies KK, we own eleven issued patents
and four pending patent applications in the United States. All of these issued
and pending patents pertain 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.





3


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
worldwide DVD distribution. During the years ended October 31, 2007 and 2006, we
recognized film distribution royalties of $14,757 and $61,699, respectively,
from the film. In December 2007, we discontinued the operations of our
entertainment segment and accordingly re-entered the development stage as
defined in Statement of Financial Accounting Standards (“SFAS”) No. 7,
“Accounting and Reporting for Development Stage Companies” (“SFAS No.
7”).





Research
and Development





Together,
our outsourced and employed engineer head count on October 31, 2007 totaled 11
full-time equivalent personnel. From time to time, we outsource some of the
development activities with respect to our products to independent third party
developers. During fiscal years 2007 and 2006, we expended $1,231,065 and
$325,124, respectively, for research and development of our semiconductor
technology.





Manufacturing
and Suppliers





We have 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.  As discussed elsewhere in this Report, our ability
to complete the development of the ASSP version of our product and fabricate the
chip is dependent on our receipt of future financing.




We will
rely on this third party supplier 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.




The
reliance on this supplier 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 finished
goods. 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.





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.





4


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
$14,842,164 and $15,965,621 for the years ended October 31, 2007 and 2006,
respectively. As of October 31, 2007, we had an accumulated deficit of
$90,689,341. 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.





Our
need for additional financing is acute and failure to obtain adequate financing
could lead to the financial failure of our Company in the future.





As of
January 25, 2008, we had cash of approximately $5,100.  We need to
raise additional funds on an immediate basis in order to comply with the terms
of certain outstanding agreements, keep current essential suppliers and vendors,
and to maintain our operations as presently conducted. If we are unable to raise
these funds, we will not be able to maintain operations as presently conducted
and may cease operating as a going concern.





5


At the
present time, 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 have may 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 Debentures issued in March 2006 and December 2007 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, or take advantage of unanticipated acquisition
opportunities.





We have incurred significant net losses
since inception, negative cash flows and liquidity problems. These conditions
raise substantial doubt about our ability to continue as a going
concern. Due to the fact that there is substantial doubt about our ability
to continue as a going concern, our independent registered public accountants
have included a “going concern” paragraph in their audit report on our 2007
financial statements. The financial statements do not include any adjustment
that might result from the outcome of such uncertainty. This uncertainty
may make it more difficult for us to raise additional funds than if such
uncertainty did not exist.





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 not recorded any revenues from the sale of our
semiconductors. No assurance can be provided that we will be successful in
securing any significant revenue generating agreement on terms commercially
acceptable to us or at all.





Our
shareholders may experience significant dilution upon the conversion of our 2007
Debentures, 2006 Debentures and 2005 Debentures because these debentures convert
at a discount to the market price of our common stock at the time of
conversion.





We
currently have approximately $3.53 million of 2007 Convertible Debentures (“2007
Debentures”), approximately $652,000 of 2006 Convertible Debentures (“2006
Debentures”) and approximately $4,300 of 2005 Convertible Debentures (“2005
Debentures” and together with the 2007 Debentures and the 2006 Debentures, the
“Debentures”) outstanding.  The conversion prices of the 2005 and 2006
Debentures equals 70% of the volume weighted average price of our common stock
over five and 20 trading days, respectively, preceding the applicable conversion
date.  The conversion price of the 2007 Debentures is equal to 75% of
the average of the closing bid prices of the common stock for the 10 trading
days preceding the conversion date (which shall in no event exceed $0.05 per
share).





There is
an inverse relationship between our stock price and the number of shares
issuable upon conversion of these Debentures. That is, the higher the market
price of our common stock at the time a Debenture is converted, the fewer shares
we would be required to issue, and the lower the market price of our common
stock at the time a Debenture is converted, the more shares we would be required
to issue.  By way of illustration, if all of the Debentures were to
convert according to their respective terms at a price of $0.05 per share, we
would be obligated to issue approximately 84 million shares of our Common Stock
to the holders of the Debentures.  If all of the Debentures were to
convert at a conversion price of $0.03 per share, we would be required to issue
approximately 140 million shares of our Common Stock.  If all of the
Debentures were to convert at a conversion price of $0.01 per share, we would be
required to issue approximately 419 million shares of our Common
Stock.





6


We
may need to increase the amount of authorized common stock in order to meet our
obligations to the holders of our derivative securities or to conduct future
equity transactions.





We have
900 million shares of common stock currently authorized for issuance, of
which 476,182,134 shares are issued and outstanding. As of January 25,
2008, an additional 344,718,321 shares of common stock were reserved for
issuance upon the exercise of outstanding options and warrants exercisable at
exercise prices ranging from $0.021 to $3.92 per share. The terms of the 2005
and 2006 Debentures provide that the debentures convert into shares of our
common stock at an initial conversion price equal to 70% of the volume-weighted
average price per share of our common stock over a specific period of
time.  The terms of the 2007 Debentures provide that the debentures
convert into shares of our common stock at an initial conversion price equal to
75% of the average of the closing bid prices for our common stock for the 10
trading days preceding the conversion date (not to exceed $0.05 per
share).  If our stock price decreases, the number of shares into which
the debentures will convert will increase and could exceed the number of shares
currently available for issuance by us. As a result, we may need to increase the
number of shares of common stock authorized in order to honor our obligations to
issue shares of common stock to the Debenture holders and other holders of
options, warrants, convertible promissory notes and other derivative securities.
If we did not have sufficient authorized shares reserved to meet our obligations
to the Debenture holders, we would be in default under the terms of the
Debentures and, in the case of the 2007 Debentures, could lose substantially all
of our assets. See “–If we default on the 2007 Debentures we could lose
substantially all of our assets. Furthermore, a lack of authorized shares of
common stock would impair our ability to use our equity securities for raising
capital, acquisitions, compensation and other corporate purposes. In order to
increase our authorized common stock, our shareholders must approve an amendment
to our articles of incorporation. It may take a significant amount of time for
us to obtain approval of our shareholders, and there is no guarantee that we
will be able to obtain such approval.





Future
sales of common stock or other dilutive events may adversely affect prevailing
market prices for our common stock.





As of
January 25, 2008, we had 476,182,134 shares of our common stock outstanding. As
of January 25, 2008, an additional 344,718,321 shares of common stock were
reserved for issuance upon the exercise of outstanding options and warrants
exercisable at exercise prices ranging from $0.021 to $3.92 per share. In
addition, as of January 25, 2008, we had outstanding $3,527,778 principal amount
of convertible debentures we issued in December 2007, $652,000 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
conversion price of the December 2007 debentures is variable, and is based upon
a 25% discount to the average of the closing bid prices for our common stock for
the 10 trading days preceding the conversion date (not to exceed $0.05 per
share).  The conversion price of the March 2006 debentures is
variable, and is based upon a 30% discount to the volume weighted average price
of our common stock for the 20 days preceding the applicable conversion date.
The conversion price of the May 2005 debentures is variable, and is based upon
an initial conversion price equal to 30% of the volume-weighted 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 a
conversion 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.





7


If
we default on the 2007 Debentures, we could lose substantially all of our
assets.


To secure our obligations under the
2007 Debentures, we granted a security interest in substantially all of our
assets, including our intellectual property, in favor of the investors under the
terms and conditions of a Security Agreement dated as of December 5, 2007. The
security interest terminates upon the payment or satisfaction of all of our
obligations under the 2007 Debentures. If we are unable to perform our
obligations under the 2007 Debentures, the investors could seek to foreclose and
obtain possession or force the sale of substantially all of our assets,
including our products under development. If this were to occur, we could not
continue in our current line of business and any investment you may have in the
Company would lose value.





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.





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.





In
December 2007, we discontinued the operations of our entertainment segment and
accordingly re-entered the development stage as defined in SFAS No. 7. 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 (such as TSMC and eSilicon) 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.




8




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




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




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.




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 our products s 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
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.





9


We
may be unable to adequately protect our proprietary rights or may be sued by
third parties for infringement of their proprietary rights.




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:




Cease
      selling, incorporating or using products or services that incorporate the
      challenged intellectual property;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; orRedesign
      those products or services that incorporate such
    technology.
  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.




10




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.




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:




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




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.




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.




12




Our
stock price has been and may continue to 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:




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




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.




13




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
$15,172. 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 $1,150. 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, 2007, the Company did not submit any matters
to a vote of its security holders.




14


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 25, 2008 was $0.027 per
share.





HIGH
            
            LOWNovember
      2006 through October 2007First
      Quarter
            
            $
            0.15
            
            $
            0.08Second
      Quarter
            
            
            0.12
            
            
            0.09Third
      Quarter
            
            
            0.10
            
            
            0.06Fourth
      Quarter
            
            
            0.08
            
            
            0.04November
      2005 through October 2006First
      Quarter
            
            $
            0.27
            
            $
            0.02Second
      Quarter
            
            
            0.27
            
            
            0.03Third
      Quarter
            
            
            0.24
            
            
            0.08Fourth
      Quarter
            
            
            0.24
            
            
            0.08





Shareholders





As of
January 25, 2008, there were 1,081 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, 2007, we issued:





(i)
            9,462,000
      shares of common stock to 10 individuals, one partnership and two trusts,
      for cash totaling $473,100;(ii)
            Warrants
      to purchase 9,462,000 shares of common stock at $0.15 per share, valued at
      $285,627 to 10 individuals, one partnership and two
  trusts;(iii)
            Options
      to purchase 200,000 shares of common stock to one employee at an exercise
      price of $0.055 per share.








15




From
November 1, 2007 to January 25, 2008, subsequent to the fiscal year ended
October 31, 2007, we issued:


(i)
              400,000
      shares of common stock  to one individual for cash totaling
      $20,000;(ii)
              Warrants
      to purchase 400,000 shares of common stock at an exercise price of $0.15
      per share;(iii)
              Notes
      aggregating $3,527,778 to 12 investors, which are convertible into shares
      of our common stock at a conversion price equal to 75% of the average of
      the closing bid price of our common stock for the 10 trading days
      preceding the conversion date (which shall in no event exceed $0.05 per
      share);(iv)
              Warrants
      to purchase an aggregate of 175,839,399 shares of common stock at an
      exercise price of $0.10 per share;(v)
              6,000,000
      shares of common stock to three consultants for services valued at
      $126,000;(vi)
              Options
      to purchase 250,000 shares of common stock to one employee at an exercise
      price of $0.021 per share;(vii)
              1,295,944
      shares of common stock  to five holders of our 2006 Convertible
      Debentures in payment of $23,133 in accrued interest;
  and(viii)
              Options
      to purchase 2,000,000 shares of common stock to one director at an
      exercise price of $0.031 per
share.






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 2003 Consultant Stock Plan (the “Consultant Plan”) and the 2006
Stock Incentive Plan (the “2006 Plan”) (collectively, the “Plans”). Each of the
Plans has been approved by the Company’s shareholders.




The
following table presents information as of October 31, 2007 with respect to
compensation plans under which equity securities were authorized for issuance,
including the 2000 Plan, the 2001 Plan, the Consultant Stock Plan, the 2006 Plan
and agreements granting options or warrants outside of these Plans.





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
              PlansEquity
      compensation plans approved by security holders
            
            
            8,665,985
            
            
            $
            0.15
            
            
            
            32,334,015Equity
      compensation plans not approved by security holders
            
            
            31,250,000
            
            
            $
            0.06
            
            
            
            —Total
            
            
            39,915,985
            
            
            $
            0.08
            
            
            
            32,334,015




16




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, 2007.




As of
October 31, 2007, we had outstanding compensatory options and warrants to
purchase an aggregate of 31,250,000 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.




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.




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 have
vested.




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 have vested. 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 have vested. Of the options granted in connection with legal
services, options to purchase 150,000 shares of common stock were exercised
during fiscal 2006 and options to purchase 600,000 shares of common stock were
exercised during fiscal 2007.




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.




During
the fourth quarter of fiscal 2006, options to purchase 3,500,000 shares of
common stock were granted to the Company’s Senior 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.




Issuer
Purchases of Equity Securities





The
Company did not repurchase any of its equity securities during the three months
ended October 31, 2007.




17


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/A (Amendment No. 1).





Caution
Regarding Forward-Looking Statements





Our
prospects are subject to uncertainties and risks. In this Annual Report on Form
10-KSB/A (Amendment No. 1), 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 have
developed 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, is
commercially available in FPGA form.  We are presently working on 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.




During
fiscal 2006 and 2007, we operated in two business segments.  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 worldwide DVD distribution. During the years ended October 31,
2007 and 2006, we received film distribution royalties of $14,757 and $61,699,
respectively, from the Film.




In
December 2007, we discontinued the operations of our entertainment
segment.  As we have not generated revenues from our semiconductor
segment, we re-entered the development stage as defined in SFAS No.
7.
  On
January 29, 2008 the Company completed its acquisition of all of the issued and
outstanding capital stock of Broadband Distance Systems, Inc. (“BDSI”), a
subsidiary of UTEK Corporation (“UTEK) in exchange for 60,000,000 shares of
unregistered common stock of the Company, which are subject to certain
anti-dilution adjustments.  As a result of the transaction BDSI became
a wholly owned subsidiary of the Company. Upon closing of the acquisition
transaction, the assets of BDSI included $400,000 in cash and a worldwide
exclusive license to patented technology developed by researchers at the
University of Illinois. The patent
relates to an algorithm designedto enhance power allocation in
telecommunications systems that use multicarrier modulation protocol.IPSL, ADSL, VDSL and DSL systems are all examples of multicarrier
modulation protocols. The
algorithm serves to improve the achievable data rate or the signal-to-noise
ratio, reducing errors inthe transmission. Under the Exclusive License Agreement (the “License
Agreement”) relating to such technology, BDSI is obligated to pay theUniversity of Illinois royalties based on achievement of certain sales
levels for products utilizing the technology. Unless earlier terminated by a
party pursuant to the terms of the License Agreement, the license expires upon
the expiration or termination of all of the University of Illinois patent rights
underlying the technology. The License Agreement also permits BDSI to sublicense
the technology and obligates BDSI to make royalty payments to the University of
Illinois based on a percentage of payments received by BDSI from
sublicensees.




18




Asset
Impairment





As of
July 31, 2007, we reassessed the underlying value of our technology due to the
development of a new improvement to our existing data transport technologies,
which was completed in August 2007. This development replaces all of the
original design elements that resulted from our strategic partnership with
Adaptive Networks, Inc. (“Adaptive”) and improves certain design elements
developed with HelloSoft, Inc. (“HelloSoft”).  In June 2007, we filed a
provisional patent application protecting technology that replaces certain
aspects of prior versions of our CupriaTM
semiconductor platform.  Our current technology does not utilize previously
capitalized licenses and software that were incorporated into prior versions of
the CupriaTM
semiconductor platform.  As a result of this new technology, on September
11, 2007, our Board of Directors reviewed the recoverability of our capitalized
technology licenses and software development costs and determined that as of
July 31, 2007 the remaining book value of $4,415,943 was not recoverable based
on estimated future cash flows to be generated from the licenses. This
conclusion was reached in connection with the Board’s review and the Company’s
preparation of its Form 10-QSB for the quarterly period ended July 31,
2007.  In addition, as of October 31, 2007, we reassessed the
underlying value of our remaining purchased technology and capitalized software
development costs and determined that the remaining carrying value of $1,918,886
was not recoverable based on the inability to reasonably estimate future cash
flows to be generated.  Accordingly, we have recognized an aggregate loss
on impairment of $6,334,829 in our consolidated statement of operations for the
year ended October 31, 2007.





Critical Accounting
Policies





The preparation of our consolidated
financial statements in conformity with accounting principles generally accepted
in the United States of America requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. Our estimates are based
on historical experience, other information that is currently available to us
and various other assumptions that we believe to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions and the variances could be material.  Our
critical accounting policies are those that affect our consolidated financial
statements materially and involve difficult, subjective or complex judgments by
management. We have identified the following critical accounting policies that
affect the more significant judgments and estimates used in the preparation of
our consolidated financial statements.





Derivative
Financial Instruments





In
connection with the issuance of certain convertible debentures, 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 is reclassified as of the date of the event that
caused the reclassification.




19




Stock-Based
Compensation





We report
stock based compensation under accounting guidance provided by 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.




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).




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.




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).




Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options granted during the years ended October 31, 2007 and 2006 was $449,436
and $672,194, respectively.  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.




We have
continued to attribute the value of stock-based compensation to expense on the
straight-line single option method.




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.





Revenue
Recognition





Our
policy is to 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.





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.




20




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.




As a result of such reviews, we recognized an aggregate
loss on impairment of $6,334,829 in our consolidated statement of operations for
the year ended October 31, 2007.  See "ASSET IMPAIRMENT"
above.




We
commenced amortization of capitalized software development costs during December
2005 and have recorded amortization expense of $892,046 and $777,026 during the
years ended October 31, 2007 and 2006, respectively.





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.  We have
averaged eleven full-time equivalent employees or contractors engaged in
research and development since that time.  During the years ended
October 31, 2007 and 2006, we expended $1,231,065 and $325,124, 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. We also
jointly developed technology with Adaptive that enhanced the licensed
technology. From April 2002 until August 2007, the licensed technology and
enhancements provided the core technology for our semiconductor products. Our
CupriaTM
semiconductor platform no longer utilizes the technology licensed from Adaptive.
The board of directors believes that the Adaptive licenses and intellectual
property may be used in future products that we are planning.




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.




21




In
February 2006, we obtained a license to include HelloSoft, Inc.’s (“HelloSoft”)
integrated VoIP software suite in the CupriaTM 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 that include the licensed technology.





Results
of Operations





Comparison
Of The Year Ended October 31, 2007 (The “2007 Period”) And The Year Ended
October 31, 2006 (The “2006 Period”)





Revenues. Film
distribution royalties for the 2007 period were $14,757, a decrease of $46,942
from $61,699 for the 2006 Period. For the 2007 period, all Film distribution
royalties were in the form of guarantee and/or license payments relating to the
U.S. distribution of the Film.  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.




This
decrease from the 2006 Period was due to the decrease 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 2007 and 2006 Periods.




Operating Expenses.
Operating expenses primarily include the impairment of technology licenses and
capitalized software development costs, amortization of technology licenses 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 121% to $14,405,569 for the 2007 Period from
$6,530,880 for the 2006 Period, a $7,874,689 increase. This increase in total
operating expenses is due primarily to the impairment of technology licenses and
capitalized software development costs of $6,334,829 during the 2007 Period that
did not occur during the 2006 Period.  In addition, there were
increases in amortization of technology licenses and capitalized software
development fees, research and development expenses, and selling, general and
administrative expenses.




Amortization
of technology licenses and capitalized software development fees was $892,046
for the 2007 Period as compared to $777,026 for the 2006 Period. The increase is
due primarily to the increase in capitalized research and development costs
during the 2007 Period and the purchase of technology from 1021 Technologies,
Inc. and 1021 Technologies KK during the 2006 Period, plus the recognition of an
additional 1.5 months of amortization for the 2007 Period as amortization did
not commence until December 2005.




Research
and development expenses increased by $905,941 or 279% to $1,231,065 for the
2007 Period from $325,124 for the 2006 Period.  In addition to salary
and payroll taxes and benefits associated with additional employees during the
2007 Period, stock based compensation recognized for research and development
for the 2007 Period was $491,434, the majority of which is accounted for by a
share-based payment valued at $395,000 to eSilicon. This initial payment was
required to commence pre-production work for Release 2.0 of the Cupria product
line. For the 2006 Period, stock based compensation recognized for research and
development was only $41,639. The remaining increase for the 2007 Period is
primarily due to increased consulting expenses for research and development
activities.  This is primarily because during the 2006 Period, most of
the technical and engineering work to complete the new Cupria releases was being
performed by Hellosoft, the costs for which were being capitalized to
capitalized software.




Selling,
general and administrative expenses increased by $518,899 or 10% to $5,947,629
for the 2007 Period from $5,428,730 for the 2006 Period.  The increase
in selling, general and administrative expenses was primarily caused by an
increase of $654,933 in stock based compensation from $1,862,547 for the 2006
Period to $2,517,480 for the 2007 Period, offset by a decrease in legal and
accounting fees from the level incurred during the 2006 Period related to the
filing of a registration statement.




22




Other (Income)
Expenses.  Other expenses-net included interest income, interest
expense, a gain/loss on the change in fair value of derivative liabilities,
amortization of deferred financing costs, gain on forgiveness of principal and
interest on a promissory note, and a loss on exchange of notes payable into
common stock.




Total
other expenses decreased 95% or $9,045,088 to $451,352 for the 2007 Period from
total other expenses of $9,496,440 for the 2006 Period. The increases are
primarily for the reasons noted below.




Interest
expense decreased 64% or $6,970,023 to $3,853,079 during the 2007 Period from
$10,823,102 during the 2006 Period.  The decrease in interest expense
is primarily due to higher levels of amortization and write-off of debt discount
due to conversions of 2005 Debentures during the 2006 Period and the fair value
allocated to the warrants in excess of the debt discount of $5,608,156 and
liquidated damages of $212,000 related to the 2006 Debentures during the 2006
Period that did not occur during the 2007 Period, offset by additional
amortization of debt discount related to the April 2007 and July 2007 bridge
loans.




We
recognized a gain of $4,700,098 on the change in fair value of derivative
liabilities for the 2007 Period, an increase of $2,741,191 from $1,958,907 for
the 2006 Period. The gain was due primarily to a decrease in the market price of
our common stock as of October 31, 2007 as compared to October 31, 2006. The
closing market price of our common stock was $0.049 and $0.095 per share as of
October 31, 2007 and 2006, respectively. In general, decreases in the market
price of our common stock as compared to the exercise price of our warrants or
options results in decreases in the fair value of the warrant or option as
estimated using the Black-Scholes model.




The
amortization of deferred financing costs decreased 16% or $258,287 to $1,328,099
for the 2007 Period from $1,586,386 for the 2006 Period. The decrease is
primarily a result of the amortization and conversions of the 2005 Debentures
during the 2006 Period that were significantly higher than during the 2007
Period due to significant conversions that occurred during the 2006
Period.  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 were also higher during the 2006 Period due to the loss recognized on
exchange of notes payable into common stock of $446,386 that didn’t occur during
the 2007 Period.




Other
income during the 2006 Period 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 2006 Period, we recognized other 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.




Net Loss.  For
the 2007 Period our net loss decreased 7% or $1,123,457 to $14,842,164 from
$15,965,621 for the 2006 Period primarily as the result of decreases in interest
expense, the loss on exchange of notes payable into common stock during the 2006
Period that did not occur during the 2007 Period, decreases in amortization of
deferred financing costs and the gain on the change in fair value of the
derivative liabilities, offset by, increases in operating expenses and the gain
on forgiveness of principal and interest on the Zaiq Note.




23




Liquidity
and Capital Resources





Cash and
cash equivalents totaled approximately $5,100 as of January 25,
2008, $35,368 as of October 31, 2007, and $1,090,119 as of October 31,
2006.




Net cash
used in operating activities was $3,412,279 in the 2007 Period, as compared to
$3,447,918 in the 2006 Period. The increase in cash used in operations was
principally the result of the following items:




A
      decrease in the net loss, which was $14,842,164 in the 2007 Period, as
      compared with $15,965,621 in the 2006 Period;
      anda
      net increase for the 2007 Period in other current assets, other assets and
      accounts payable and accrued liabilities of $778,980, as compared to a net
      increase for the 2006 Period in other current assets, other assets and
      accounts payable and accrued liabilities of
      $610,895;
 impacted
by the following non-cash items:




a
      net increase of $1,085,638 in consulting fees and other compensatory
      elements of stock issuances to $3,008,914 for the 2007 Period, as compared
      with $1,923,276 for the 2006
    Period;a
      gain on the change in fair value of derivative liabilities of $4,700,098
      for the 2007 Period, as compared to a gain of $1,958,907 for the 2006
      Period;interest
      expense related to the fair value of Investors’ warrants at issuance in
      excess of debt discount of $5,608,156 for the 2006 Period which did not
      occur during the 2007 Period;a
      loss on impairment of technology licenses and capitalized software
      development costs of $6,334,829 for the 2007 Period which did not occur
      during the 2006 Period;loss
      on exchange of notes payable into common stock of $446,386 for the 2006
      Period which did not occur during the 2007 Period;a
      gain on forgiveness of principal and interest on the promissory note to
      Zaiq Technologies, Inc. of $1,169,820 for the 2006 Period which did not
      occur during the 2007 Period;a
      net decrease of $258,287 in amortization of deferred financing costs to
      $1,328,099 for the 2007 Period, as compared with $1,586,386 for the 2006
      Period;a
      net decrease of $921,060 in amortization of debt discount on notes to
      $3,760,484 for the 2007 Period, as compared with $4,681,544 for the 2006
      Period; anda
      net increase of $115,020 in amortization of technology licenses and
      capitalized software development fees to $892,046 for the 2007 Period, as
      compared with $777,026 for the 2006
Period.
  Net cash
provided by investing activities was $60,428 for the 2007 Period compared to net
cash used in investing activities of $1,800,327 for the 2006 Period. The net
increase for the 2007 Period was due to proceeds from the maturity of short-term
investments, that was originally purchased during the 2006 Period, and from the
sale of certain trademark rights, offset by capitalization of research and
development costs and software development fees, the purchase of equipment and
leasehold improvements related to the build out of our headquarters office
facility, and funds loaned pursuant to a promissory note.  The
2006 Period also included cash out flows for the purchase of technology from
1021 Technologies, Inc. and 1021 Technologies KK that did not occur during the
2007 Period.
  24
  Net cash
provided by financing activities was $2,297,100 in the 2007 Period compared to
$5,964,883 in the 2006 Period. Net cash provided by financing activities in the
2007 Period was the result of proceeds from the issuance of common stock of
$1,060,100 and proceeds from notes payable of $1,700,000, offset by capitalized
financing costs of $139,000 and the repayment of a note payable of
$324,000.
  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.
  Since
inception, we have funded our operations primarily through the issuance of our
common stock and debt securities. As a result of our issuances of debt
securities, we have significant repayment obligations in 2008 and 2009 that will
affect our liquidity position.
  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 October
31, 2007, there was $75,000 of principal amount of the 7% Debentures
outstanding. The 7% Debentures matured in May 2007, however, they have not yet
been repaid.
  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 October 31, 2007, there was $652,000 of principal amount of
the 2006 Debentures outstanding. The 2006 Debentures mature in March
2008.
  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 October 31,
2007, there was $4,280 of principal amount of the 2005 Debentures outstanding.
The 2005 Debentures mature in May 2008.
  In May
2007, we received $400,000 in proceeds from the issuance of a note payable which
originally matured on August 22, 2007. The maturity date on this note payable
was extended to October 31, 2007. We are in discussions with the lender
concerning an additional extension.  At December 18, 2007, the unpaid
balance of the note was $350,000.
  In
December 2007, we sold $3,527,778 in aggregate principal amount of our 10%
Secured Convertible Notes and warrants, receiving net proceeds of approximately
$1.7 million (the “2007 Debentures”), after the payment of offering related fees
and expenses of $345,000 and after the repayment in full of $1,100,000 principal
and accrued interest on bridge loans issued in July 2007.  The 2007
Debentures mature in December 2009.
  As of
January 25, 2008, we had cash on hand of approximately $5,100. We need to raise
additional funds on an immediate basis in order to comply with the terms of
certain outstanding agreements, keep current essential suppliers and vendors,
and maintain our operations as presently conducted. Management’s plans in this
regard are to obtain other debt and equity financing until profitable operation
and positive cash flow are achieved and maintained. We may not be successful in
our efforts to raise additional funds, which may be limited by the terms of our
outstanding debt securities. 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, 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.
  25
  We have
incurred significant net losses since inception, negative cash flows and
liquidity problems.  These conditions raise substantial doubt about
our ability to continue as a going concern. Due to the fact that there is
substantial doubt about our ability to continue as a going concern, our
independent registered public accounting firm’s audit report accompanying our
2007 financial statements includes an explanatory paragraph to the uncertainty
of our ability to continue as a going concern. The financial statements do not
include any adjustment that might result from the outcome of such
uncertainty. This uncertainty may make it more difficult for us to
raise additional capital than if such uncertainty did not
exist.





Impact
of Recently Issued Accounting Standards





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. 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.




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
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value.  The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings.  SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 does not eliminate disclosure requirements included
in other accounting standards, including requirements for disclosures about fair
value measurements included in SFAS 157 and SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments.” SFAS 159 is effective for us as of
the beginning of fiscal year 2009. We have not yet determined the impact SFAS
159 may have on our consolidated financial position, results of operations, or
cash flows.




In
December 2006, the FASB approved FASB Staff Position (FSP) No. EITF
00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”), which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with SFAS No. 5, “Accounting for
Contingencies”. FSP EITF 00-19-2 also requires additional disclosure
regarding the nature of any registration payment arrangements, alternative
settlement methods, the maximum potential amount of consideration and the
current carrying amount of the liability, if any. The guidance in
FSP EITF 00-19-2 amends FASB Statements No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, and No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity”, and FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others”, to include scope exceptions for registration payment
arrangements.  FSP EITF 00-19-2 is effective immediately for
registration payment arrangements and the financial instruments subject to those
arrangements that are entered into or modified subsequent to the issuance date
of this FSP, or for financial statements issued for fiscal years beginning after
December 15, 2006, and interim periods within those fiscal years, for
registration payment arrangements entered into prior to the issuance date of
this FSP. The adoption of this pronouncement did not have a material impact
on our consolidated financial position, results of operations and cash flow,
however, this pronouncement may effect future periods.




26




In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business
Combinations”, and is effective for us for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. SFAS 141(R) requires the
new acquiring entity to recognize all assets acquired and liabilities assumed in
the transactions; establishes an acquisition-date fair value for acquired assets
and liabilities; and fully discloses to investors the financial effect the
acquisition will have.  We are evaluating the impact of this
pronouncement on our consolidated financial position, results of operations and
cash flows.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities
to report minority interests in subsidiaries as equity in the consolidated
financial statements, and requires that transactions between entities and
noncontrolling interests be treated as equity.  SFAS 160 is effective
for us as of the beginning of fiscal 2010.  We are evaluating the
impact of this pronouncement on our consolidated financial position, results of
operations and 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
Chief 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 Chief 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.




Management
is aware that there is a lack of segregation of duties at the Company due to the
small number of employees dealing with general administrative and financial
matters. This constitutes a significant deficiency in the internal controls. In
the past, management had decided that considering the employees involved, the
control procedures in place, and the outsourcing of certain financial functions,
the risks associated with such lack of segregation were low and the potential
benefits of adding additional employees to clearly segregate duties did not
justify the expenses associated with such increases. Management periodically
reevaluates this situation. In light of the Company’s current cash flow
situation, the Company does not intend to increase staffing to mitigate the
current lack of segregation of duties within the general administrative and
financial functions.




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 intentional circumvention of the established process.




27




CHANGES IN INTERNAL CONTROLS OVER
FINANCIAL REPORTING. During the three months ended October 31, 2007, the
Company’s Controller resigned.  The Company has not hired a new
Controller.  The duties formerly performed by the Controller are being
performed by other Company employees and an outside accounting
firm.  Except as described above, 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 three months ended October
31, 2007.





ITEM
8B.OTHER
INFORMATION





None.




PART
III





ITEM 9.DIRECTORS AND EXECUTIVE
OFFICERS,PROMOTERS AND CONTROL PERSONS AND
CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE
ACT





Incorporated
by reference from the discussions under the headings “Item 1, Election of
Directors,” “Executive Officers” and “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement for our 2008 Annual Meeting of
Shareholders to be filed with the SEC within 120 days after the end of the year
ended October 31, 2007 (the “Proxy Statement”).




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 at
www.rimsemi.com. The code of ethics may be found as follows: From our main Web
page, first click on “Investor” at the top of the page. Next, click on
“Governance.”  Finally, click on “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





Incorporated
by reference from the discussions under the headings “Executive Compensation,”
“Employment Agreements with Executive Officers” and “Additional Information
Concerning the Board of Directors” in the Proxy Statement.





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





Incorporated
by reference from the discussion under the headings “Equity Compensation Plan
Information” and “Beneficial Ownership of Certain Shareholders, Directors and
Executive Officers” in the Proxy Statement.





ITEM
12.CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





Incorporated
by reference from the discussion under the heading “Certain Relationships and
Related Transactions” in the Proxy Statement.




28




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
            Form
      of 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).4.3
            Form
      of Common Stock Purchase Warrant issued to certain investors (incorporated
      by reference to Exhibit 4.2 of the June 1, 2005
      8-K).4.4
            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”).4.5
            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).4.6
            Form
      of Secured Convertible Note issued on December 5, 2007 (incorporated by
      reference to Exhibit 4.1 of the Company’s Report on Form 8-K filed with
      the Commission on December 11, 2007 (the “December 11, 2007
      8-K”)).4.7
            Form
      of Class A Common Stock Purchase Warrant, issued as of December 5, 2007
      (incorporated by reference to Exhibit 4.2 of the Company’s December 11,
      2007 8-K).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)10.210.2
            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”)).




29




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).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
            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).10.12
            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).10.13
            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)10.14
            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”)).10.15
            Form
      of Warrant issued in connection with the Bridge Loan Agreement between the
      Company and Double U Master Fund, L.P., dated January 24, 2006
      (incorporated by reference to Exhibit 10.3 of the Company’s
      January 30, 2006 8-K).10.16
            Stock
      Option Agreement dated January 26, 2006 between the Company and Brad
      Ketch. (incorporated by reference to Exhibit 10.33 of the Company’s Annual
      Report on Form 10-KSB for the fiscal year ended October 31, 2006 (the
      “2006 10-KSB”)). (1)10.17
            Stock
      Option Agreement dated January 26, 2006 between the Company and Ray
      Willenberg, Jr. (incorporated by reference to Exhibit 10.34 of the
      Company’s 2006 10-KSB) (1)10.18
            Stock
      Option Agreement dated January 26, 2006 between the Company and
      Walter Chen (incorporated by reference to Exhibit 10.35 of the Company’s
      2006 10-KSB).10.19
            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).




30




10.20
            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).10.21
            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).10.22
            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).10.23
            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).10.24
            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).10.25
            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).10.26
            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).10.27
            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).10.28
            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)10.29
            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)10.30
            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).10.31
            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).10.32
            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).10.33
            Stock
      Option Agreement between the Company and Jack Peckham dated July 6, 2006
      (incorporated by reference to Exhibit 10.51 of Company’s 2006 10-KSB).
      (1)10.34
            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)10.35
            Stock
      Option Agreement between the Company and David Wojcik dated August 31,
      2006 (incorporated by reference to Exhibit 10.53 of the Company’s 2006
      10-KSB). (1)




31




10.36
            2006
      Stock Incentive Plan (incorporated by reference to Exhibit 10.54 of the
      Company’s 2006 10-KSB).10.37
            Office
      Lease, dated September 5, 2006, by and between American Property
      Management Corp. as agent for and on behalf of Western Investment Co., LLC
      and the Company (incorporated by reference to Exhibit 10.37 of the
      Company's Annual Report on Form 10-KSB for the fiscal year ended October
      31, 2007, filed with the Commission on January 29,
  2008).10.38
            Master
      ASIC Services Agreement between the Company and eSilicon Corporation dated
      December 12, 2006 (incorporated by reference to Exhibit 10.55 of the
      Company’s 2006 10-KSB).10.39
            Bridge
      Loan Agreement, dated as of March 27, 2007, between the Company and Double
      U Master Fund, L.P. (incorporated by reference to Exhibit 10.1 of the
      Company’s Report on Form 10-QSB for the period ended April 30, 2007 (the
      “April 2007 10-QSB”)).10.40
            Form
      of Note issued in connection with the March 27, 2007 Bridge Loan Agreement
      (incorporated by reference to Exhibit 10.2 of the Company’s April 2007
      10-QSB).10.41
            Form
      of Warrant issued in connection with the March 27, 2007 Bridge Loan
      Agreement (incorporated by reference to Exhibit 10.3 of the April 2007
      10-QSB).10.42
            Security
      Interest Agreement, dated as of March 26, 2007 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 April 2007 10-QSB).10.43
            Convertible
      Promissory Note, dated as of May 24, 2007 in favor of the Charles R. Cono
      Trust (incorporated by reference to Exhibit 10.5 of the April 2007
      10-QSB).10.44
            Bridge
      Loan Agreement, dated as of July 26, 2007 (incorporated by reference to
      Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the
      Commission on August 1, 2007 (the “August 2007 8-K”)).10.45
            Form
      of Senior Secured Promissory Note (incorporated by reference to Exhibit
      10.2 of the Company’s August 1, 2007 8-K).10.46
            Security
      Interest Agreement dated as of July 26, 2007 by and among the Secured
      Parties (as defined in the Agreement), Rim Semiconductor Company, and
      Krieger & Prager, LLP, as agent for the Secured Parties (incorporated
      by reference to Exhibit 10.3 of the Company’s August 1, 2007
      8-K).10.47
            Subscription
      Agreement dated as of December 5, 2007, by and among the Company and the
      Subscribers defined therein (incorporated by reference to Exhibit 10.1 of
      the Company’s December 11, 2007 8-K).10.48
            Security
      Agreement, dated as of December 5, 2007, by and between the Company, NV
      Entertainment, Inc. and Barbara R. Mittman as collateral agent
      (incorporated by reference to Exhibit 10.2 of the Company’s December 11,
      2007 8-K).10.49
            Funds
      Escrow Agreement, dated as of December 5, 2007, among the Company, the
      Subscribers and Grushko & Mittman, P.C. (incorporated by reference to
      Exhibit 10.3 of the Company’s December 11, 2007 8-K).10.50
            Form
      of Lockup Agreement, dated as of December 5, 2007 (incorporated by
      reference to Exhibit 10.4 of the Company’s December 2007
    8-K).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.





ITEM
14.PRINCIPAL
ACCOUNTANT FEES AND SERVICES





Incorporated
by reference from the discussion under the heading “Independent Auditor Fee
Information” in the Proxy Statement.




32


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
      12, 2008
            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
      PrincipalFinancial
      and Accounting Officer)
            
            February
      12, 2008/s/ Ray Willenberg,
      Jr.
              Ray
      Willenberg, Jr.
            
            Chairman
      of the Board and Executive Vice President
            
            February
      12, 2008Jack
      Peckham
            
            Director/s/ William A.
      Swope
              William
      A. Swope
            
            Director
            
            February
      12, 2008/s/ Boon Tiong
      Tan
              Boon
      Tiong Tan
            
            Director
            
            February
      12, 2008
                (Singapore)




33




INDEX
TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS








Report
      of Independent Registered Public Accounting Firm
            F-2Consolidated
      Balance Sheets At October 31, 2007 and 2006
            F-3Consolidated
      Statements of Operations for the Years Ended October 31, 2007 and
      2006
            F-4Consolidated
      Statements of Stockholders’ (Deficiency) Equity for the Years Ended
      October 31, 2007 and 2006
            F-5
      to F-6Consolidated
      Statements of Cash Flows for the Years Ended October 31, 2007 and
      2006
            F-7
      to F-8Notes
      to the Consolidated Financial Statements
            F-9
      to F-37




F-1




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, 2007 and 2006 and the
related consolidated statements of operations, stockholders’ (deficiency)
equity, and cash flows for the years then ended. 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, 2007 and 2006 and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.




The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern.  As shown in the
consolidated financial statements, the Company incurred losses of $14,842,164
and $15,965,621 during the years ended October 31, 2007 and 2006, respectively,
and has a working capital deficiency of approximately $6,194,000 and
stockholders’ deficiency of approximately $5,859,000 as of October 31,
2007.  These conditions raise substantial doubt about its ability to
continue as a going concern. Management’s plans in regard to these matters are
described in Note 1.  The consolidated financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.  In December 2007, the Company discontinued the
operations of its entertainment segment and accordingly has re-entered the
development stage (see Note 17 and 18).




/s/
MARCUM & KLIEGMAN LLP








New York,
New York


January
28, 2008, except for Note 18 which is as of February 4, 2008




F-2




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES


Consolidated
Balance Sheets





October
      31,2007
            
            
            2006ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            35,368
            
            
            $
            1,090,119Short-term
      investments
            
            
            -
            
            
            
            1,000,000Other
      current assets
            
            
            93,360
            
            
            
            310,266TOTAL CURRENT
    ASSETS
            
            
            128,728
            
            
            
            2,400,385Property
      and equipment - net
            
            
            180,632
            
            
            
            64,546Technology
      licenses and capitalized software development costs - net
            
            
            -
            
            
            
            6,250,496Note
      receivable
            
            
            50,000
            
            
            
            -Deferred
      financing costs - net
            
            
            85,724
            
            
            
            1,274,823Other
      assets
            
            
            18,482
            
            
            
            22,144TOTAL ASSETS
            
            $
            463,566
            
            
            $
            10,012,394LIABILITIES AND
      STOCKHOLDERS’ DEFICIENCYCurrent
      Liabilities:Convertible
      notes payable
            
            $
            478,000
            
            
            $
            478,000Convertible
      debentures (net of debt discount of $117,667 and $1,548,
      respectively)
            
            
            613,613
            
            
            
            73,452Notes
      payable (net of debt discount of $293,333 and $0,
      respectively)
            
            
            1,206,667
            
            
            
            -Derivative
      liabilities – warrants, options and embedded conversion
    option
            
            
            2,289,607
            
            
            
            8,238,583Accounts
      payable and accrued expenses
            
            
            1,734,386
            
            
            
            1,223,210TOTAL CURRENT
      LIABILITIES
            
            
            6,322,273
            
            
            
            10,013,245Long-term
      portion of convertible debentures (net of debt discount of $0 and
      $3,119,369, respectively)
            
            
            -
            
            
            
            1,479,195TOTAL LIABILITIES
            
            
            6,322,273
            
            
            
            11,492,440Commitments,
      Contingencies and Other mattersStockholders’
      Deficiency:Preferred
      stock - $0.01 par value; 15,000,000 shares authorized; -0- shares issued
      and outstanding
            
            
            -
            
            
            
            -Common
      stock - $0.001 par value; Authorized - 900,000,000 shares; Issued -
      468,986,043 and 356,399,782 shares at October 31, 2007 and 2006,
      respectively; Outstanding – 468,486,189 and 355,899,928 shares at October
      31, 2007 and 2006, respectively
            
            
            468,986
            
            
            
            356,400Treasury
      Stock, at cost - 499,854 shares of common stock at October 31, 2007 and
      2006, respectively
            
            
            (7,498
            )
            
            
            (7,498
            )Additional
      paid-in capital
            
            
            85,276,802
            
            
            
            75,215,263Unearned
      compensation
            
            
            (907,656
            )
            
            
            (1,197,034
            )Accumulated
      deficit
            
            
            (90,689,341
            )
            
            
            (75,847,177
            )TOTAL STOCKHOLDERS’
      DEFICIENCY
            
            
            (5,858,707
            )
            
            
            (1,480,046
            )TOTAL LIABILITIES AND
      STOCKHOLDERS’ DEFICIENCY
            
            $
            463,566
            
            
            $
            10,012,394





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




F-3





RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES


Consolidated
Statements of Operations





For
      the Years Ended
              October
      31,2007
            
            
            2006FILM
      DISTRIBUTION ROYALTIES
            
            $
            14,757
            
            
            $
            61,699OPERATING
      EXPENSES:Impairment
      of technology licenses and capitalized software development
      costs
            
            
            6,334,829
            
            
            
            -Amortization
      of technology licenses and capitalized software development
      costs
            
            
            892,046
            
            
            
            777,026Research
      and development expenses (including stock based compensation of $491,434
      and $41,639, respectively)
            
            
            1,231,065
            
            
            
            325,124Selling,
      general and administrative expenses (including stock based compensation of
      $2,517,480 and $1,862,547, respectively)
            
            
            5,947,629
            
            
            
            5,428,730TOTAL
      OPERATING EXPENSES
            
            
            14,405,569
            
            
            
            6,530,880OPERATING
      LOSS
            
            
            (14,390,812
            )
            
            
            (6,469,181
            )OTHER
      EXPENSES (INCOME):Interest
      income
            
            
            (30,854
            )
            
            
            (19,612
            )Interest
      expense
            
            
            3,853,079
            
            
            
            10,823,102Change
      in fair value of derivative liabilities
            
            
            (4,700,098
            )
            
            
            (1,958,907
            )Amortization
      of deferred financing costs
            
            
            1,328,099
            
            
            
            1,586,386Gain
      on forgiveness of principal and interest on Zaiq Note
            
            
            -
            
            
            
            (1,169,820
            )Loss
      on exchange of notes payable into common stock
            
            
            -
            
            
            
            446,386Other
            
            
            1,126
            
            
            
            (211,095
            )TOTAL
      OTHER EXPENSES
            
            
            451,352
            
            
            
            9,496,440NET
      LOSS
            
            $
            (14,842,164
            )
            
            $
            (15,965,621
            )BASIC
      AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.03
            )
            
            $
            (0.05
            )WEIGHTED
      AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            431,248,398
            
            
            
            301,858,638




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




F-4




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES


Consolidated
Statements of Stockholders’ (Deficiency) Equity


For
The Years Ended October 31, 2007 And 2006




Common
      Stock
            
            Treasury
      Stock
            
            Additional
              Paid-in
            
            Unearned
            
            Accumulated
            
            Total
              Stockholders’
              (Deficiency)Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Compensation
            
            Deficit
            
            EquityBalance
      at November 1, 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
            )




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




F-5





RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES


Consolidated
Statements of Stockholders’ (Deficiency) Equity


For
The Years Ended October 31, 2007 And 2006




Common
      Stock
            
            Treasury
      Stock
            
            Additional
              Paid-in
            
            Unearned
            
            Accumulated
            
            Total
              Stockholders’
              (Deficiency)Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Compensation
            
            Deficit
            
            EquityBalance
      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
            )Issuance
      of common stock for cash
            
            
            21,202,000
            
            
            21,202
            
            
            -
            
            
            -
            
            
            1,038,898
            
            
            -
            
            
            -
            
            
            1,060,100Issuance
      of common stock under service and consulting agreements
            
            
            23,284,938
            
            
            23,285
            
            
            -
            
            
            -
            
            
            2,276,339
            
            
            (2,299,624
            )
            
            -
            
            
            -Issuance
      of common stock in connection with notes payable
            
            
            10,000,000
            
            
            10,000
            
            
            -
            
            
            -
            
            
            690,000
            
            
            -
            
            
            -
            
            
            700,000Issuance
      of common stock for conversion of convertible debentures and accrued
      interest
            
            
            57,034,788
            
            
            57,034
            
            
            -
            
            
            -
            
            
            4,044,799
            
            
            -
            
            
            -
            
            
            4,101,833Issuance
      of common stock in satisfaction of liquidated damages
            
            
            464,535
            
            
            465
            
            
            -
            
            
            -
            
            
            68,082
            
            
            -
            
            
            -
            
            
            68,547Issuance
      of common stock upon exercise of stock options for the settlement of
      vendor payables
            
            
            600,000
            
            
            600
            
            
            -
            
            
            -
            
            
            18,540
            
            
            -
            
            
            -
            
            
            19,140Stock
      based compensation expense recognized for the granting and vesting of
      options to employees and advisory board members
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            449,436
            
            
            -
            
            
            -
            
            
            449,436Reclassification
      of derivative liability upon exercise of options
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            71,521
            
            
            -
            
            
            -
            
            
            71,521Reclassification
      of conversion option liability
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,689,551
            
            
            -
            
            
            -
            
            
            1,689,551Amortization
      of unearned compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            2,589,002
            
            
            -
            
            
            2,589,002Reclassification
      of warrants issued in connected with restricted common stock to derivative
      liability
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (285,627
            )
            
            -
            
            
            -
            
            
            (285,627
            )Net
      loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (14,842,164
            )
            
            (14,842,164
            )Balance
      at October 31, 2007
            
            
            468,986,043
            
            $
            468,986
            
            
            (499,854
            )
            $
            (7,498
            )
            $
            85,276,802
            
            $
            (907,656
            )
            $
            (90,689,341
            )
            $
            (5,858,707
            )




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
      31,2007
            
            
            2006Cash
      Flows From Operating ActivitiesNet
      Loss
            
            $
            (14,842,164
            )
            
            $
            (15,965,621
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Consulting
      fees and other compensatory elements of stock issuances
            
            
            3,008,914
            
            
            
            1,923,276Change
      in fair value of derivative liabilities
            
            
            (4,700,098
            )
            
            
            (1,958,907
            )Fair
      value of Investors’ warrants in excess of debt discount
            
            
            -
            
            
            
            5,608,156Loss
      on impairment of technology licenses and capitalized software development
      costs
            
            
            6,334,829
            
            
            
            -Gain
      on forgiveness of principal and interest on Zaiq note
            
            
            -
            
            
            
            (1,169,820
            )Loss
      on exchange of notes payable into common stock
            
            
            -
            
            
            
            446,386Amortization
      of deferred financing costs
            
            
            1,328,099
            
            
            
            1,586,386Amortization
      on debt discount on notes
            
            
            3,760,484
            
            
            
            4,681,544Amortization
      of technology licenses and capitalized software development
      costs
            
            
            892,046
            
            
            
            777,026Depreciation
      and amortization
            
            
            26,017
            
            
            
            5,242Other
      non-cash expense
            
            
            614
            
            
            
            7,519Change
      in assets:Other
      current assets
            
            
            16,906
            
            
            
            (276,234
            )Other
      assets
            
            
            3,662
            
            
            
            (11,920
            )Change
      in liabilities:Accounts
      payable and accrued expenses
            
            
            758,412
            
            
            
            899,049Net
      Cash Used In Operating Activities
            
            
            (3,412,279
            )
            
            
            (3,447,918
            )Cash
      Flows From Investing ActivitiesProceeds
      from sale of trademark rights
            
            
            200,000
            
            
            
            -Note
      receivable
            
            
            (50,000
            )
            
            
            -Proceeds
      from maturity of short-term investments
            
            
            1,000,000
            
            
            
            -Purchase
      of short-term investments
            
            
            -
            
            
            
            (1,000,000
            )Acquisition
      of assets from 1021 Technologies
            
            
            -
            
            
            
            (150,000
            )Acquisition
      and costs of capitalized software and development fees
            
            
            (946,855
            )
            
            
            (590,461
            )Acquisition
      of property and equipment
            
            
            (142,717
            )
            
            
            (59,866
            )Net
      Cash Provided By (Used In) Investing Activities
            
            
            60,428
            
            
            
            (1,800,327
            )Cash
      Flows From Financing ActivitiesProceeds
      from issuance of common stock
            
            
            1,060,100
            
            
            
            -Proceeds
      from exercise of warrants
            
            
            -
            
            
            
            1,391,444Purchase
      of treasury stock
            
            
            -
            
            
            
            (7,498
            )Proceeds
      from convertible debentures
            
            
            -
            
            
            
            6,000,000Proceeds
      from notes payable
            
            
            1,700,000
            
            
            
            750,000Capitalized
      financing costs
            
            
            (139,000
            )
            
            
            (742,450
            )Repayments
      of notes payable
            
            
            (324,000
            )
            
            
            (944,291
            )Repayments
      of convertible notes payable
            
            
            -
            
            
            
            (482,322
            )Net
      Cash Provided By Financing Activities
            
            
            2,297,100
            
            
            
            5,964,883(Decrease)
      Increase In Cash And Cash Equivalents
            
            
            (1,054,751
            )
            
            
            716,638Cash
      And Cash Equivalents - Beginning Of Year
            
            
            1,090,119
            
            
            
            373,481Cash
      And Cash Equivalents - End Of Year
            
            $
            35,368
            
            
            $
            1,090,119




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




F-7




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES


Consolidated
Statements of Cash Flows





For
      the Years Ended
              October
      31,2007
            
            2006Supplemental
      Disclosure Of Cash Flow Information:Cash
      paid during the year for:Interest
            
            $
            77,050
            
            $
            6,650Income
      taxes
            
            $
            -
            
            $
            -Non-Cash
      Investing And Financing Activities:Common
      stock issued for conversion of convertible debentures, convertible note
      payable, notes payable and accrued interest
            
            $
            4,101,833
            
            $
            4,802,066Common
      stock issued upon cashless exercise of warrants
            
            $
            -
            
            $
            184,803Issuance
      of common stock upon exercise of stock options for the settlement of
      vendor payables
            
            $
            19,140
            
            $
            4,784Common
      stock issued for settlement of accrued liquidated damages
            
            $
            68,547
            
            $
            -Value
      recorded as debt discount relating to warrants issued to purchasers of
      convertible debentures
            
            $
            -
            
            $
            3,428,571Value
      assigned to conversion option liability in connection with issuance of
      convertible debentures
            
            $
            -
            
            $
            2,571,429Reclassification
      of conversion option liability to equity
            
            $
            1,689,551
            
            $
            1,378,782Value
      assigned on issuance date to warrants issued to placement
      agent
            
            $
            -
            
            $
            1,792,452Value
      assigned to warrants granted in connection with notes
      payable
            
            $
            226,567
            
            
            120,000Value
      assigned to common stock issued in connection with notes
      payable
            
            $
            700,000
            
            
            -Deferred
      compensation converted to convertible note payable
            
            $
            -
            
            $
            212,450Issuance
      of common stock to purchase assets from 1021 Technologies
            
            $
            -
            
            $
            78,000Reclassification
      of derivative liability upon exercise of options and
    warrants
            
            $
            71,521
            
            $
            2,758,046





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




F-8




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 2000, the Company acquired NV Technology,
Inc. and commenced its technology business. The Company’s technology business
has generated no revenues to date.





During the fiscal years ended October
31, 2007 and 2006, the Company operated in two business segments,the development of new semiconductor
technologies (Semiconductor Segment) and the production of motion pictures,
films and videos (Entertainment Segment). The Semiconductor Segment will have no
operating revenues until successful commercialization of its developed
technology and will continue to incur substantial operating expenses,
capitalized costs and operating losses.





The Company’s Entertainment Segment
is operated through its wholly owned subsidiary, NV Entertainment. In December
2007, the Company discontinued the operations of its Entertainment Segment and
accordingly has re-entered the development stage (see Note
17).





Going Concern
Uncertainty





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





The
carrying amounts of assets and liabilities presented in the financial statements
do not purport to represent realizable or settlement values.  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, 2007 and 2006 the Company
incurred net losses of approximately $14.8 million and $16.0 million,
respectively, and as of October 31, 2007 had a working capital deficiency of
approximately $6.2 million and stockholders’ deficiency of
approximately $5.9 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, 2008. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.





The
Company funded its operations during 2007 and 2006 through sales of its common
stock, proceeds from notes, convertible debentures and the exercise of warrants,
resulting in proceeds to the Company of approximately $2,760,000 and $8,141,000,
respectively.





The
Company's ability to continue to operate as a going concern is dependent on its
ability to generate sufficient cash flows to meet its obligations on a timely
basis, to obtain additional financing and to ultimately attain
profitability.





Management
of the Company is continuing its efforts to secure funds through equity and/or
debt instruments for its operations. The Company will 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 and whether the Company will be able to turn into a profitable
position and generate positive operating cash flow. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty and these adjustments may be material (see Note
17).




F-9




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 at the date of the financial statements and the reported amount of
revenue and expenses during the reporting period. Significant estimates include
impairment analysis for long-lived assets, 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, which matured on January 28, 2007. The
certificates of deposit earned 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, once placed in service, 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.





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.  For Fiscal 2008, the Company will adopt FASB Interpretation No. 48,
“Accounting
for Uncertainty in Income Taxes - An Interpretationof FASB Statement No.
109” (“FIN 48”) (see Note
2).




F-10




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Revenue
Recognition





The
Company’s policy is to recognize 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
Statement of Position 00-2, “Accounting by Producers or Distributors of Films”
(“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 during each of the years ended October 31, 2007 and
2006, respectively, and were recorded as revenue.  This revenue is
reported as Film distribution royalties.





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. In the past, the Company has outsourced its
design and development activities to independent third parties, although it is
not currently doing so. Internal development costs and 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, development costs and payments made are expensed to
research and development costs. 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.




F-11




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





Capitalized Software
Development Costs (Continued)





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
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 (see Note 4).





Derivative Financial
Instruments





In
connection with the issuance of certain convertible debentures, 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 for each reporting period
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 is 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, 2007 and 2006 using the Black-Scholes model and the following range
of assumptions:





2007
            
            
            2006Expected
      dividends
            
            None
            
            
            NoneExpected
      volatility
            
            62.6
      - 120.6%
            
            
            92.9
      – 158.8%Risk-free
      interest rate
            
            3.9
      - 4.5%
            
            
            4.6
      – 5.0%Contractual
      term (years)
            
            4.6
      – 5.0
            
            
            0.9
      - 9.8





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.




F-12


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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.





For the
years ended October 31, 2007 and 2006, 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 the computation of
diluted loss per share was approximately 186,859,254 and 220,194,580, for the
years ended October 31, 2007 and 2006, respectively (see Note 13).





Stock-Based
Compensation





The
Company reports stock based compensation under accounting guidance provided by
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.





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).





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.





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).





Stock-based
compensation expense recognized under SFAS 123(R) related to employee stock
options granted during the years ended October 31, 2007 and 2006 was $449,436
and $672,194, respectively.  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.





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





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.




F-13




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)





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 (see Note 4).





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 for any periods presented.





Impact of Recently Issued
Accounting Standards





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. 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
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
provides companies with an option to report selected financial assets and
liabilities at fair value.  The objective of SFAS 159 is to reduce
both complexity in accounting for financial instruments and the volatility in
earnings caused by measuring related assets and liabilities differently.
Generally accepted accounting principles have required different measurement
attributes for different assets and liabilities that can create artificial
volatility in earnings.  SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 does not eliminate disclosure requirements included
in other accounting standards, including requirements for disclosures about fair
value measurements included in SFAS 157 and SFAS No. 107, “Disclosures
about Fair Value of Financial Instruments.” SFAS 159 is effective for the
Company as of the beginning of fiscal year 2009. The Company has not yet
determined the impact SFAS 159 may have on its consolidated financial position,
results of operations, or cash flows.





In
December 2006, the FASB approved FASB Staff Position (FSP) No. EITF
00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF
00-19-2”), which specifies that the contingent obligation to make future
payments or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included as a provision
of a financial instrument or other agreement, should be separately recognized
and measured in accordance with SFAS No. 5, “Accounting for
Contingencies”. FSP EITF 00-19-2 also requires additional disclosure
regarding the nature of any registration payment arrangements, alternative
settlement methods, the maximum potential amount of consideration and the
current carrying amount of the liability, if any. The guidance in
FSP EITF 00-19-2 amends FASB Statements No. 133, “Accounting for
Derivative Instruments and Hedging Activities”, and No. 150, “Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity”, and FASB Interpretation No. 45, “Guarantor’s Accounting




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 (Continued)





and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others”, to include scope exceptions for registration payment
arrangements.  FSP EITF 00-19-2 is effective immediately for
registration payment arrangements and the financial instruments subject to those
arrangements that are entered into or modified subsequent to the issuance date
of this FSP, or for financial statements issued for fiscal years beginning after
December 15, 2006, and interim periods within those fiscal years, for
registration payment arrangements entered into prior to the issuance date of
this FSP. The adoption of this pronouncement did not have a material impact on
the Company’s consolidated financial position, results of operations and cash
flows, however, this pronouncement may effect future periods.





In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). SFAS 141(R) replaces SFAS No. 141, “Business
Combinations”, and is effective for the Company for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. SFAS 141(R)
requires the new acquiring entity to recognize all assets acquired and
liabilities assumed in the transactions; establishes an acquisition-date fair
value for acquired assets and liabilities; and fully discloses to investors the
financial effect the acquisition will have.  The Company is evaluating
the impact of this pronouncement on the Company’s consolidated financial
position, results of operations and cash flows.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities
to report minority interests in subsidiaries as equity in the consolidated
financial statements, and requires that transactions between entities and
noncontrolling interests be treated as equity.  SFAS 160 is effective
for the Company as of the beginning of fiscal 2010.  The Company is
evaluating the impact of this pronouncement on the Company’s consolidated
financial position, results of operations and cash flows.





NOTE
3 - PROPERTY AND EQUIPMENT





Property
and equipment consists of the following:




At
      October 31,2007
            
            2006Leasehold
      improvements
            
            $
            127,032
            
            $
            44,778Furniture
      and fixtures
            
            
            19,554
            
            
            8,565Office
      equipment
            
            
            65,118
            
            
            17,684211,704
            
            
            71,027Less:
      accumulated depreciation and amortization
            
            
            31,072
            
            
            6,481Total
            
            $
            180,632
            
            $
            64,546





For the
years ended October 31, 2007 and 2006, depreciation and amortization expense was
$26,017 and $5,242, respectively.





NOTE
4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS





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





October
      31,2007
            
            2006Technology
      licenses
            
            $
            -
            
            $
            5,751,000Purchased
      technology
            
            
            -
            
            
            228,000Capitalized
      software development cost
            
            
            -
            
            
            1,048,522-
            
            
            7,027,522Accumulated
      amortization
            
            
            -
            
            
            (777,026
            )Total
            
            $
            -
            
            $
            6,250,496




F-15




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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





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 $892,046 and $777,026 during the years ended October 31,
2007 and 2006, respectively.





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 the Company’s 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 Company has also
jointly developed technology with Adaptive that enhances the licensed
technology. From April 2002 until August 2007, the licensed technology and
enhancements provided the core technology for our semiconductor
products.





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 it under this royalty arrangement.




In
February 2006, the Company obtained a license to include HelloSoft, Inc.’s
(“HelloSoft”) integrated VoIP software suite in the CupriaTM family
of transport processors. In consideration of this license, the Company paid
HelloSoft a license fee and will pay certain royalties based on the sale of the
Company’s products that include the licensed technology.




Purchased Technology and
Capitalized Software Development Costs





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
during the year ended October 31, 2006. During the yearsended October 31,2007 and2006, the Company capitalized
approximately$254,500
and$913,100, respectively,under the HelloSoft service
agreement(see Note 15)and$721,900 and$135,500, respectively,of internally developed software
costs.





Impairment





As of July 31, 2007, the Company
reassessed the underlying value of its technology due to the development of a
new improvement to the Company’s existing data transport technologies. This
development, which was completed in August 2007, replaces all of the original
design elements that resulted from the Company’s strategic partnership with
Adaptive and improves certain design elements developed with
HelloSoft.  In June 2007, the Company filed a provisional patent
application protecting technology that replaces certain aspects of prior
versions of its CupriaTMsemiconductor
platform.  The Company’s current technology does not utilize
previously capitalized licenses and software that were incorporated into prior
versions of the Company’s CupriaTMsemiconductor platform.  As
a result of this new technology, the Company reviewed the recoverability of its
capitalized technology licenses and software development costs and determined
that as of July 31, 2007 the remaining carrying value of $4,415,943 was not
recoverable based on estimated future cash flows to be generated from the
licenses.  Accordingly, the Company has recognized a loss on
impairment of $4,415,943 in the consolidated statement of operations for the
year ended October 31, 2007.





The technology licensed from or
jointly developed with Adaptive may find use in future products but no
estimation of this future value is currently determinable.




F-16


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




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





Impairment
(Continued)





As of October 31, 2007, the Company
reassessed the underlying value of its purchased technology and capitalized
software development costs and determined that the remaining carrying value of
$1,918,886 was not recoverable based on the Company’s inability to reasonably
estimate future cash flows to be generated.  Accordingly, the Company
has recognized a loss on impairment of $1,918,886 in the consolidated statement
of operations for the year ended October 31, 2007.





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, 2007, the Company
has funded a net of $2,335,101 for completion of the film. The film is currently
in worldwide DVD distribution.





The
Company recognized film distribution royalties of $14,757 and $61,699 for the
years ended October 31, 2007 and 2006, respectively. The Company had no
amortization costs for the years ended October 31, 2007 and 2006. In December
2007, the Company discontinued the operations of its entertainment segment and
accordingly has re-entered the development stage (see Note 17).





NOTE
6 – NOTE RECEIVABLE





On March
9, 2007, the Company agreed to loan funds to an independent non-profit
organization.  Between April and July 2007, the Company loaned the
organization $50,000 pursuant to a promissory note.The note earns simple
interest at a rate of 7% per annum. Payment is due to the Company on the earlier
of when the organization has received no less from membership dues or financing
from sources other than the Company than an amount equal to or exceeding the
principal and interest owed; or on March 10, 2010.





NOTE
7 - DEFERRED FINANCING COSTS





As of
October 31, 2007, the deferred financing costs consist of costs incurred in
connection with the issuance of the Company’s outstanding debt:





Deferred
      financing costs
            
            $
            2,258,532Less:
      accumulated amortization
            
            
            (2,172,808
            )Deferred
      financing costs, net
            
            $
            85,724





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
included with amortization expense in the period of the conversion or repayment
in the consolidated statement of operations. For the years ended October 31,
2007 and 2006, amortization of deferred financing costs was $1,328,099 and
$1,586,386, respectively.




F-17




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
8 - 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. During
the year ended October 31, 2005, the Company issued 529,311 additional shares of
common stock in accordance with anti-dilution provisions of the Exchange
Agreement.





On
December 19, 2005, the Company agreed to repurchase from Zaiq for $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 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 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.





NOTE
9 - 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 repay the principal and an additional amount equal to 50% of the principal on
all notes in (1) below.





As of
October 31, 2007, the Company has accrued in the aggregate approximately
$284,000 of interest which is included as part of accounts payable and accrued
expenses. Approximately $237,000 of the accrued interest relates to the
Company’s convertible promissory notes outstanding as of October 31, 2007 and
$47,000 relates to accrued unpaid interest on a previously repaid promissory
note.





As of
October 31, 2006, the Company has accrued in the aggregate approximately
$358,000 of interest which is included as part of accounts payable and accrued
expenses. Approximately $236,000 of the accrued interest relates to the
Company’s convertible promissory notes outstanding as of October 31, 2006 and
$122,000 relates to accrued unpaid interest on a previously repaid promissory
note.





The
outstanding convertible notes are summarized in the table below:





At
      October 31,2007
            
            2006Notes
      payable (nine notes) (1)
            
            $
            468,000
            
            $
            468,000Notes
      payable, 9% interest, related party (2)
            
            
            10,000
            
            
            10,000Total
            
            $
            478,000
            
            $
            478,000





(1)
            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. At the option of the
      holder, 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.(2)
            This
      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.




F-18




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
9 - CONVERTIBLE NOTES PAYABLE (CONTINUED)





For all
the above convertible notes, the fair values of the conversion options as of
October 31, 2007 and 2006 were nominal due to the conversion price being
substantially out-of-the money.





NOTE
10 - 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 $5.31 million from the 2006
Debentures after the payment of offering related fees and expenses of
approximately $690,000. At the same time, from these proceeds, the Company
repaid in full certain 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. During
the three months ended January 31, 2007, condition (i) was met and 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. These liquidated damages
aggregated $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
at the time the liquidated damages became due. During the year ended October 31,
2007, 464,535 shares of common stock valued at $68,547 were issued as payment
for liquidated damages.  Accrued liquidated damages as of October 31,
2007 and 2006 were $143,453 and $212,000, respectively.




F-19




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
10 - 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.





In
accordance with SFAS No. 133 and EITF Issue No. 00-19, due to the possibility
that an indeterminate number of shares could 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 and
the placement agent’s warrants as derivative liabilities. 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 the year ended October
31, 2006.





During
the year ended October 31, 2007, $3,941,000 of principal amount of 2006
Debentures plus accrued interest of $159,512 were converted into 57,016,467
shares of common stock.  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, 2007 and 2006, the conversion option liability of $2,571,429 was
reduced to $279,429 and $1,968,429, respectively, as a result of conversions of
the 2006 Debentures.  $1,689,000 and $603,000 has been recorded as a
reclassification to stockholders’ equity during the years ended October 31, 2007
and 2006, respectively.





A gain on
the change in fair value of these derivative liabilities of $3,234,358 and
$6,087,380 was recognized as part of other income during the years ended October
31, 2007 and 2006, respectively.




Included
in interest expense for the years ended October 31, 2007 and 2006 is $2,999,611
and $2,883,546, respectively, related to the amortization of the debt discount
on these debentures.





The 2006
Debentures are summarized below as of October 31, 2007:





Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
              Discount
            
            Net
              Carrying
              ValueCurrent
            
            $
            652,000
            
            $
            116,843
            
            $
            535,157




F-20




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
10 - 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. 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.  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.





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.




F-21


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
10 - CONVERTIBLE DEBENTURES (CONTINUED)





2005 Debentures
(Continued)





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 the possibility that an
indeterminate number of shares could be issued upon conversion of the 2005
Debentures, the Company separately values and accounts for the embedded
conversion feature related to the 2005 Debentures and the Investor Warrants as
derivative liabilities.





As of
October 31, 2007 and 2006, the conversion option liability of $1,500,000 was
reduced to $1,834 and $2,385, respectively, as a result of conversions of the
2005 Debentures.  $551 and $775,782 has been recorded as a
reclassification to stockholders’ equity during the years ended October 31, 2007
and 2006, respectively.





A gain on
the change in fair value of the derivative liabilities of $681,635 was
recognized during the year ended October 31, 2007 and 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.





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.





During
the year ended October 31, 2007, $1,284 of principal amount of 2005 Debentures
plus accrued interest of $37 were converted into shares 18,321 of common
stock.  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 104,614,279 shares of common stock.





Included
in interest expense for the years ended October 31, 2007 and 2006 is $2,091 and
$1,551,054, respectively, related to the amortization of the debt discount
related to these debentures.





The 2005
Debentures are summarized below as of October 31, 2007:





Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
              Discount
            
            Net
              Carrying
              ValueCurrent
            
            $
            4,280
            
            $
            824
            
            $
            3,456





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.  At the Company’s 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.  Accrued liquidated damages as of October 31, 2007 and 2006
were $37,550.




F-22


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
10 - CONVERTIBLE DEBENTURES (CONTINUED)





7% Debentures
(Continued)





During
the year ended October 31, 2007, no principal or accrued interest was converted
into shares of common stock.  During the year ended October 31, 2006,
$50,000 of principal amount plus accrued interest of $8,974 were converted into
393,158 shares of common stock.





Included
in interest expense for the years ended October 31, 2007 and 2006, is $1,548 and
$46,069, respectively, related to the amortization of the debt discount on these
debentures.





The 7%
Debentures are summarized below as of October 31, 2007:





Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
              Discount
            
            Net
              Carrying
              ValueCurrent
            
            $
            75,000
            
            $
            -
            
            $
            75,000





The
remaining 7% Debentures outstanding at October 31, 2007, originally issued in
May 2004, were due and payable in May 2007. As of October 31, 2007, the 7%
Debentures remain outstanding.





NOTE
11 - NOTES PAYABLE





In July
2007, the Company entered into a bridge loan agreement with two institutional
investors pursuant to which the institutional investors loaned the Company a
total of $1,000,000. Pursuant to the bridge loan agreement, the Company issued
to each institutional investor a secured promissory note in the principal amount
of $550,000, for an aggregate of $1,100,000 (each, a “Note”), representing an
original issue discount of 10%. The difference of $100,000 between the gross
proceeds and amount due at maturity is shown as a debt discount that is
amortized as interest expense over the life of the loan. The Company received
net proceeds of approximately $895,000 after the payment of transaction related
fees and expenses of $105,000. The transaction related fees were recorded as
deferred financing costs. Out of these proceeds the Company repaid the April
2007 loan in the amount of $324,000 (discussed below).





In
connection with the bridge loan agreement, the Company also issued to the
institutional investors an aggregate of 10,000,000 unregistered shares of the
Company’s common stock with a relative fair value at the issuance date of
$700,000. The relative fair value of the unregistered shares of common stock is
shown as a debt discount that is amortized as interest expense over the life of
the loan.  Amortization of debt discount on this bridge loan was
$506,667 for the year ended October 31, 2007.  As of October 31, 2007,
the balance of $1,100,000 has been included in the consolidated balance sheet as
part of notes payable.





All
outstanding principal and interest on the Notes was repaid out of the proceeds
of the 2007 Debentures entered into in December 2007 (see Note 17).





To secure
the Company’s obligations under the bridge loan agreement, the Company granted a
security interest in substantially all of its assets, including without
limitation, its intellectual property, in favor of the institutional investors
under the terms and conditions of a security agreement dated as of the date of
the bridge loan agreement. The security interest terminated upon repayment of
the Notes in December 2007.





In May
2007, the Company entered into a promissory note resulting in gross proceeds of
$400,000. The promissory note was due and payable on August 22, 2007 and bears
interest at the rate of 10% per annum. The
maturity date of this promissory note was extended to October 31, 2007. Because
the promissory note was not repaid by the maturity date, the unpaid portion of
the promissory note is convertible, in whole or
in part, into shares of the Company's common stock at a conversion price of
$0.08 per share. The
Company is in discussions with the lender concerning an additional
extension.  In December 2007, the Company paid $50,000 that was due on the
promissory note.




F-23


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
11 - NOTES PAYABLE (CONTINUED)





In April
2007, the Company entered into a loan agreement with a third party pursuant to
which the Company borrowed $300,000 from the lender. An amount equal to 108% of
the principal amount ($324,000) of the loan was due and payable on the earlier
of July 31, 2007 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 Company received net proceeds of $265,970 at the issue date
following the payment of due diligence fees and transaction related fees and
expenses. Transaction related fees in the amount of $34,000 were recorded as
deferred financing costs. The loan was repaid in full out of the proceeds of the
note payable entered into by the Company in July 2007. The difference of $24,000
between the gross proceeds and amount due at maturity was shown as a debt
discount that was amortized as interest expense over the life of the loan. The
Company issued to the lender warrants to purchase 3,333,333 shares of common
stock at an exercise price of $0.10 per share. The fair value of the warrants of
$226,567 at the issuance date was shown as a debt discount that was amortized as
interest expense over the life of the loan. Amortization of debt discount on
this bridge loan was $250,567 for the year ended October 31, 2007.




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. The Company determined that
the conversion price of $0.07 was determined to be below the market price of the
common stock on the commitment date. Accordingly, under EITF 98-5 “Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios” and EITF 00-27 “Application of Issue No. 98-5 to
Certain Convertible Instruments” the Company recorded an additional charge of
$196,257.
 
 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 an unsecured note payable. The Company
determined that the conversion price of $0.07 was determined to be below the
market price of the common stock on the commitment date. Accordingly, under EITF
98-5 “Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios” and EITF 00-27 “Application of
Issue No. 98-5 to Certain Convertible Instruments” the Company recorded an
additional charge of $250,129.
  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 charged to interest expense in connection
with the repayment of the loan.





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.





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 8).




F-24


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
12 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES





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





2007
            
            2006Accrued
      officers’ compensation, bonuses and payroll
            
            $
            433,032
            
            $
            259,945Professional
      fees
            
            
            419,856
            
            
            147,333Interest
      payable
            
            
            343,514
            
            
            486,141Accrued
      liquidated damages
            
            
            181,003
            
            
            249,550Consulting
      fees
            
            
            102,027
            
            
            9,394Other
            
            
            254,954
            
            
            70,847$
            1,734,386
            
            $
            1,223,210





NOTE
13 - STOCKHOLDERS’ DEFICIENCY





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, 2007, the Company:





issued
      21,202,000 shares of restricted common stock in exchange for cash proceeds
      of $1,060,100;issued
      23,284,938 shares of restricted common stock in exchange for services
      valued at $2,299,624;issued
      10,000,000 shares of restricted common stock valued at $700,000 in
      connection with the issuance of the July 2007 bridge
  loan;issued
      57,034,788 shares of common stock upon conversion of convertible
      debentures with a principal amount of $3,942,284 and accrued interest of
      $159,549;issued
      464,535 shares of restricted common stock to 2006 Debenture holders in
      satisfaction of $68,547 in liquidated damages; andissued
      600,000 shares of common stock upon exercise of stock options in
      satisfaction of accrued expenses of
$19,140.





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 for
      settlement 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.;
      andissued
      13,712,222 shares of restricted common stock to consultants for services
      valued at $2,396,425.




F-25


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
13 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)





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”), 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.





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, 2007, 3,200,000 shares of common stock
and options to purchase 900,000 shares of common stock have been issued under
the Consultant Plan.





In
November 2006, the Board of Directors of the Company approved the 2006 Stock
Incentive Plan (the “2006 Plan”), which provides for the issuance of up to
30,000,000 incentive stock options, non-qualified stock options or stock awards
to officers, employees, directors and consultants of the Company.





The
stockholders of the Company ratified the 2000 Plan in May 2000, the 2001 Plan in
July 2002, and the 2006 Plan and Consultant Plan in May 2007.





The
weighted-average estimated fair value of stock options granted during the years
ended October 31, 2007 and 2006 was $0.09 and $0.05 per share, respectively,
using the Black-Scholes model with the following assumptions:





2007
            
            
            2006Expected
      dividends
            
            
            None
            
            
            NoneExpected
      volatility
            
            
            115%
            
            
            140%Risk-free
      interest rate
            
            
            4.7%
            
            
            4.5%Expected
      life
            
            
            10
      years
            
            
            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.




F-26




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
13 - STOCKHOLDERS’ DEFICIENCY (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, 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
            
            $
            1,766,135Options
      granted:Under
      the Plans
            
            
            5,300,000
            
            $
            0.09
            
            
            
            
            
            -
            
            
            -Outside
      the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Options
      expired/cancelled:Under
      the Plans
            
            
            (527,765
            )
            $
            0.15
            
            
            
            
            
            -
            
            
            -Outside
      the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Options
      exercised:Under
      the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            -
            
            
            -Outside
      the Plans
            
            
            -
            
            
            -
            
            
            
            
            
            (600,000
            )
            $
            0.0319Outstanding
      as of October 31, 2007
            
            
            8,665,985
            
            $
            0.15
            
            $
            -
            
            
            30,950,000
            
            $
            0.06
            
            $
            548,375Exercisable
      as of October 31, 2007
            
            
            3,581,975
            
            $
            0.21
            
            $
            -
            
            
            28,597,227
            
            $
            0.05
            
            $
            548,375





The
intrinsic value of options exercised during the year ended October 31, 2007, was
$54,660. During the year ended October 31, 2007, upon the exercise of options to
purchase 600,000 shares of common stock, the Company reclassified the fair value
of the exercised options of $71,521 from derivative liabilities to stockholders’
equity.





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, 2007 was 8.6 years. The weighted-average remaining
contractual term of stock options outstanding outside the plans as of October
31, 2007 was 8.0 years.




F-27


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
13 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)





Stock Option Plans
(Continued)





The
weighted-average remaining contractual term of stock options currently
exercisable under the plans as of October 31, 2007 was 8.1 years. The
weighted-average remaining contractual term of stock options currently
exercisable outside the plans as of October 31, 2007 was 7.9 years.





As of
October 31, 2007, total compensation cost related to nonvested stock options not
yet recognized was $854,312, which is expected to be recognized through
September 2010 over a weighted-average period of approximately 2.0
years.





The total
fair value of options vested during the years ended October 31, 2007 and 2006
was $447,853 and $1,115,645, respectively.





Options
Granted





During
the three months ended January 31, 2007, the following options were
granted:





(i)
            Options
      to purchase 100,000 shares of common stock were granted to an employee
      under the 2006 Plan. These options were valued at $11,344 and have a
      10-year term, an exercise price of $0.12 per share, and vest over a period
      of approximately three years through January 2010; and(ii)
            Options
      to purchase 4,250,000 shares of common stock were granted to one director
      and three executive employees under the 2006 Plan.  These
      options were valued at $386,427 and have a 10-year term, an exercise price
      of $0.096 per share, and vest over a period of approximately three years
      through November 2009.





During
the three months ended July 31, 2007, the following options were
granted:





(i)
            Options
      to purchase 450,000 shares of common stock were granted to two employees
      under the 2006 Plan. These options were valued at $31,736 and have a
      10-year term, an exercise price of $0.075 per share, and vest over a
      period of approximately three years through July 2010;





(ii)
            Options
      to purchase 100,000 shares of common stock were granted to an employee
      under the 2006 Plan. These options were valued at $9,339 and have a ten
      year term, an exercise price of $0.092 per share, and vest over a period
      of approximately three years through June 2010; and





(iii)
            Options
      to purchase 200,000 shares of common stock were granted to a consultant
      under the Consultant Plan. These options were valued at $18,678 and have a
      ten year term, an exercise price of $0.092 per share, and vest over a
      period of approximately three years through June 2010.





During
the three months ended October 31, 2007, options to purchase 200,000 shares of
common stock were granted to an employee under the 2006 Plan. These options were
valued at $10,302 and have a 10-year term, an exercise price of $0.055 per
share, and vest over a period of approximately three years through
September 2010.





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.




F-28




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
13 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)





Options Granted
(Continued)





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(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
Granted





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 11). 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 10). 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 10). 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 10). 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.





In April
2007, 3,333,333 warrants to purchase common stock were issued in connection with
the April 2007 note payable (see Note 11).  These warrants are
exercisable at a price of $0.05 per share beginning 65 days from the issuance
date (June 6, 2007) and expire April 2, 2012.  The fair value of the
stock warrants estimated on the date of grant using the Black-Scholes model is
$0.068 per share or $226,567.





Between
August and October 2007, the Company granted additional warrants to purchase
9,462,000 shares of its common stock at an exercise price of $0.15 per share to
various investors in connection with the issuance of restricted common
stock.  The fair value of the stock warrants estimated on the dates of
grant using the Black-Scholes model is $0.03 per share or $285,627.




F-29


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
13 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)





Warrants
Expired





Warrants
to purchase 720,000 and 3,587,062 shares of common stock expired during the
years ended October 31, 2007 and 2006, respectively.





Warrants
Exercised





No
warrants were exercised during the year ended October 31,
2007.  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 during the year ended October 31, 2006.





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.





Warrants Outstanding and
Exercisable





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





Number
      of Shares
            
            Weighted
              Average
              Exercise
      Price
            
            ExercisableOutstanding
      at October 31, 2005
            50,812,757
            
            $
            0.26
            
            50,812,757Granted
            92,646,660
            
            $
            0.15Exercised
            (25,334,751)
            
            $
            0.16Expired
            (3,587,062)
            
            $
            0.31Outstanding
      at October 31, 2006
            114,537,604
            
            $
            0.19
            
            114,537,604Granted
            12,795,333
            
            $
            0.12Exercised
            -
            
            
            -Expired
            (720,000)
            
            $
            0.17Outstanding
      at October 31, 2007
            126,612,937
            
            $
            0.18
            
            126,612,937





As of
October 31, 2007, the Company had outstanding and exercisable warrants to
purchase shares of common stock as follows:





Exercise
      Prices
            
            Number
      of Shares
              Outstanding
            
            Weighted
      Average
              Remaining
      Contractual
              Life
      (Years)
            
            Weighted
              Average
              Exercise
      Price$
            0.05
            
            3,333,333
            
            
            4.42
            
            $
            0.05$
            0.12
            
            200,000
            
            
            0.64
            
            $
            0.12$
            0.15
            
            87,846,438
            
            
            2.16
            
            $
            0.15$
            0.1693
            
            7,095,556
            
            
            1.83
            
            $
            0.1693$
            0.25
            
            9,666,665
            
            
            1.26
            
            $
            0.25$
            0.3094
            
            18,470,945
            
            
            0.83
            
            $
            0.3094126,612,937




F-30


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
13 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)





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:




October
      31,2007
              
              
              2006Warrants
      to purchase common stock
              
              
              126,612,937
              
              
              
              114,537,6042006
      Debentures and accrued interest (1)
              
              
              18,296,484
              
              
              
              67,840,468Options
      to purchase common stock
              
              
              39,615,985
              
              
              
              35,443,750Convertible
      notes payable and accrued interest
              
              
              1,447,184
              
              
              
              1,633,1707%
      Debentures and accrued interest
              
              
              639,189
              
              
              
              604,1912005
      Debentures and accrued interest (2)
              
              
              247,475
              
              
              
              135,397Total
              
              
              186,859,254
              
              
              
              220,194,580





(1)
              Based
      on a twenty day volume weighted average common stock price contractually
      discounted by 30% as of October 31, 2007 and 2006 of $0.0365 and
      $0.0693, respectively.


(2)
              Based
      on a five day volume weighted average common stock price contractually
      discounted by 30% as of October 31, 2007 and 2006 of $0.0332 and
      $0.0682, respectively.





Substantial
      issuances after October 31, 2007 through January 25, 2008:Options
      granted to purchase common stock
            
            2,250,000Common
      stock issued to consultants
            
            6,000,000Common
      stock issued in connection with conversion of accrued
    interest
            
            1,295,944Common
      stock issued in exchange for cash proceeds
            
            400,000Warrants
      granted to purchase common stock
            
            176,239,399





F-31




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
14 - INCOME TAXES





As of
October 31, 2007 and 2006, the Company has a deferred tax asset of approximately
$25,415,000 and $20,590,000, 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 in
the valuation allowance of $4,825,000 (2007) and $713,000 (2006). 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, 2007 and 2006 is as
follows:





2007
            
            
            2006Federal
      statutory rate
            
            
            34.0
            %
            
            
            34.0
            %State
      tax benefit, net of federal tax
            
            
            6.6
            %
            
            
            6.6
            %Permanent
      differences
            
            
            (1.2
            )%
            
            
            (26.9
            )%Valuation
      allowance
            
            
            (39.4
            )%
            
            
            (13.7
            )%Effective
      rate
            
            
            0.0
            %
            
            
            0.0
            %





As of
October 31, 2007, the Company had approximately $54,454,000 of net operating
loss carry forwards for income tax purposes, which expire as
follows:




Year
            
            Net
      Operating Loss2011
            
            $
            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
            
            
            3,935,0002027
            
            
            4,551,000$
            54,454,000





NOTE
15 - 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.





As of
October 31, 2007, HelloSoft had completed all committed work under the Original
Agreement and its amendments, and been paid in full. As of October 31, 2007, the
Company had paid an aggregate of approximately $998,000 in cash and has issued
8,047,618 shares of common stock valued at $820,042 to HelloSoft for the
services rendered under the Original Agreement and its amendments. Of this
amount, $62,500 in cash that had been accrued at October 31, 2005 was paid
during the three months ended January 31, 2006 and $225,000 in cash was paid
during the three months ended January 31, 2007. The Company issued another
317,460 shares of unregistered common stock valued at $29,524, on March 23, 2007
to satisfy its final obligation under the contract.




F-32




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
15 - 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.





eSilicon
Agreement


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. The
common stock issued to eSilicon was valued at the market price at the time of
issuance and the $395,000 was recorded as research
and development expense. Additional cash payments will be made by the Company to
eSilicon for other services as such services are performed.




Leases





The
Company has operating leases for its corporate headquarters and administrative
offices that expire at various dates through November 2009 and include annual
escalations in the monthly rental payments.  Rent expense for the
years ended October 31, 2007 and 2006 was $207,445 and $80,558,
respectively.





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:





2008
            
            $
            186,6312009
            
            
            157,5682010
            
            
            11,395Total
            
            $
            355,594





Concentration of Credit
Risk





The
Company maintains cash balances in one financial institution. The balance is
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, 2007, there were no uninsured balances.  The Company
believes it is not exposed to any significant credit risk for cash.




F-33




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
16 - 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, 2007:Net
      Sales – Domestic
            
            $
            -
            
            
            $
            14,757
            
            
            $
            -
            
            
            $
            14,757Net
      Sales – Foreign
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Operating
      (Loss) Income
            
            $
            (14,382,863
            )
            
            $
            (7,949
            )
            
            $
            -
            
            
            $
            (14,390,812
            )Depreciation
      and amortization
            
            $
            918,063
            
            
            $
            -
            
            
            $
            -
            
            
            $
            918,063Total
      Identifiable Assets
            
            $
            409,716
            
            
            $
            60
            
            
            $
            53,790
            
            
            $
            463,566





For
      the Year Ended October 31, 2006:Net
      Sales - Domestic
            
            $
            -
            
            
            $
            9,757
            
            
            $
            -
            
            
            $
            9,757Net
      Sales - Foreign
            
            $
            -
            
            
            $
            51,942
            
            
            $
            -
            
            
            $
            51,942Operating
      Loss
            
            $
            (6,506,583
            )
            
            $
            37,402
            
            
            $
            -
            
            
            $
            (6,469,181
            )Depreciation
      and amortization
            
            $
            782,268
            
            
            $
            -
            
            
            $
            -
            
            
            $
            782,268Total
      Identifiable Assets
            
            $
            7,900,131
            
            
            $
            -
            
            
            $
            2,112,263
            
            
            $
            10,012,394





NOTE
17 - SUBSEQUENT EVENTS





2007
Debentures





On
December 5, 2007, the Company entered into a subscription agreement with certain
institutional and individual investors pursuant to which the Company sold 10%
secured convertible notes (the “2007 Debentures”) and warrants to purchase
shares of the Company’s common stock.  The 2007 Debentures were issued
on December 5, 2007, have a term of two years and are secured by substantially
all of the Company’s assets, including all of the Company’s intellectual
property. The Company has raised gross proceeds of $3,175,000 from the private
placement of secured convertible notes with an aggregate principal amount of
$3,527,778 (which amount reflects an original issue discount of
10%).  In connection with the issuance of the 2007 Debentures, the
Company issued to the investors warrants to purchase an aggregate of 146,532,832
shares of common stock at an initial exercise price of $0.10 per share, valued
at $2,486,388 on the issuance date.





The
Company received net cash proceeds of approximately $2.83 million, after the
payment of offering related fees and expenses of $345,000. Out of these proceeds
the Company repaid in full the $1,100,000 bridge
loans  issued  in July 2007 (see Note 11). Each holder has
the right at any time until his note is fully paid to convert any outstanding
and unpaid principal and accrued interest into shares of common stock at the
conversion price per share equal to 75% of the average of the closing bid prices
of the Company’s common stock for the 10 trading days preceding the conversion
date, however, the conversion price shall not exceed $0.05 per
share.  The conversion price and number and kind of shares or other
securities to be issued upon conversion are subject to adjustment for certain
issuances, transactions or events that would result in “full ratchet” protection
to the holders.




F-34


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
17 - SUBSEQUENT EVENTS (CONTINUED)





2007 Debentures
(Continued)





The
Company evaluates and accounts for conversion options embedded in its
convertible instruments in accordance with SFAS No. 133 and EITF Issue
No. 00-19. SFAS 133 generally provides three criteria that, if met, require
companies to bifurcate conversion options from their host instruments and
account for them as free standing derivative financial instruments in accordance
with EITF Issue No. 00-19. These three criteria include circumstances in which
(a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics
and risks of the host contract, (b) the hybrid instrument that embodies
both the embedded derivative instrument and the host contract is not remeasured
at fair value under otherwise applicable generally accepted accounting
principles with changes in fair value reported in earnings as they occur and
(c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument subject to the
requirements of SFAS 133. SFAS 133 and EITF Issue No. 00-19 also
provide an exception to this rule when the host instrument is deemed to be
conventional (as that term is described in the implementation guidance to
SFAS 133 and further clarified in EITF Issue No. 05-2 “The Meaning of
“Conventional Convertible Debt Instrument” in EITF Issue No.
00-19”).





The
Company determined that the embedded conversion option and the warrants are
derivative liabilities.





The gross
proceeds of $3,175,000 are recorded as a liability net of a debt discount of
$3,175,000 consisting of an allocation of the fair values attributed to the
warrants issued to investors and to the embedded conversion feature in
accordance with EITF Issue No. 00-19.  The debt discount consisted of
a $2,116,667 value related to the warrants issued to investors and a value
attributed to the embedded conversion feature of $1,058,333. The debt discount
was first allocated to the embedded conversion feature based on its fair value.
After reducing the gross proceeds by the value attributed to the embedded
conversion feature, the remaining unallocated debt discount of $2,116,667 was
allocated to the warrants issued to investors. The excess of the fair value of
the warrants issued to investors above the debt discount allocated to these
warrants was $369,721 and was recorded as interest expense.





Interest
payable on the 2007 Debentures accrues at an annual rate of 10% and is payable
December 31, 2007 and quarterly thereafter, and on the maturity date,
accelerated or otherwise, when the principal and remaining accrued but unpaid
interest is due and payable, unless previously converted into common stock. The
Company has the option of prepaying the outstanding principal on the 2007
Debentures, in whole or in part, by paying the holder(s) 130% of the principal
amount to be redeemed, together with accrued but unpaid interest.





The
warrants are immediately exercisable at a per share exercise price of $0.10
(which is subject to adjustment) through the fifth anniversary of the date of
issuance. The warrants include a cashless exercise provision as well as “full
ratchet” antidilution provisions with respect to certain securities
issuances.





In
connection with the sale of the 2007 Debentures, the Company agreed to prepare
and file with the SEC, within 45 days following the closing date, a registration
statement on Form SB-2 for the purpose of registering for resale a number of
shares of common stock equal to 125% of the shares issuable upon conversion of
the 2007 Debentures. Should the Company fail to file such registration statement
within such time, or if the registration statement is not declared effective
within 150 days from the closing date, the Company must pay liquidated damages
equal to 2% of the principal amount of the 2007 Debentures and purchase price of
the related warrants for each 30 day period.  Such liquidated damages
are payable in cash or registered shares of stock valued at 75% of the average
closing bid prices over the preceding 5 day period.





The
Company accounts for the registration rights under FSP EITF 00-19-2, which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
SFAS No. 5, “Accounting for Contingencies”. FSP EITF 00-19-2 also requires
additional disclosure regarding the nature of any registration payment
arrangements, alternative settlement methods, the maximum potential amount of
consideration and the current carrying amount of the liability, if
any.




F-35


RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE
17 - SUBSEQUENT EVENTS (CONTINUED)





2007 Debentures
(Continued)





As of
January 29, 2008 the Company has not filed a registration statement and is not
in compliance with the terms of the registration rights granted to holders of
the 2007 Debentures.  However, t he
Company has obtained waivers from 9 of the 12 holders of the 2007 Debentures
(representing 75.59% of the outstanding 2007 Debenture principal)  waiving
such registration rights.





The
Company paid Blumfield Investments (the “Finder”) a cash finder’s fee equal to
$317,500 (10% of the aggregate purchase price for the 2007 Debentures
issued).  An additional fee equal to 10% of any cash proceeds received
by the Company from exercise of the warrants will be payable to the Finder upon
exercise of the warrants.  The Company also agreed to issue to the
Finder a warrant, in substantially the same form as the warrants issued to the
holders of the 2007 Debentures, pursuant to which the Finder may purchase 10
shares of common stock for each 100 shares issuable upon conversion of the 2007
Debentures and warrants as of the closing date.  As a result, the
Company has issued a warrant to the Finder pursuant to which the Finder may
purchase up to 29,306,567 shares of common stock at an initial exercise price of $0.10 per
share, valued at $497,277 on the issuance date.  The fair value of
these warrants of $497,277 and the offering related fees and expenses of
$345,000 was recorded as a deferred financing cost and is being charged to
interest expense over the term of the 2007 Debentures.





To secure
the Company’s obligations under the 2007 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 payment or satisfaction of all of the Company’s
obligations under the 2007 Debentures.





Equity
Transactions





In
November 2007:





(i)
            400,000
      shares of restricted common stock were issued in exchange for cash
      proceeds of $20,000; and(ii)
            Warrants
      to purchase 400,000 shares of common stock at an exercise price of $0.15
      per share were granted to an investor in connection with the issuance of
      restricted common stock.  The fair value of the stock warrants
      estimated on the date of grant using the Black-Scholes model is $0.025 per
      share or $9,946.





In
December 2007:





(i)
            Options
      to purchase 250,000 shares of common stock were granted to an employee.
      These options were valued at $5,628 and have a ten year term, an exercise
      price of $0.021 per share, and vest over a period of approximately three
      years through December 2010;(ii)
            Warrants
      to purchase 175,839,399 shares of common stock at an exercise price of
      $0.10 per share were granted to investors and the Finder in connection
      with the issuance of the 2007 Debentures.  The fair value of the
      stock warrants estimated on the date of grant using the Black-Scholes
      model is $0.017 per share or $2,983,665; and(iii)
            6,000,000
      shares of restricted common stock valued at $126,000 were issued to three
      consultants.





In
January 2008:





(i)
            1,295,944
      shares of common stock valued at $23,133 were issued to five holders of
      2006 Debentures in payment of accrued interest on the 2006 Debentures;
      and(ii)
            Options
      to purchase 2,000,000 shares of common stock were granted to a
      director.  These options were valued at $57,827 and have a ten
      year term, an exercise price of $0.031 per share, and vest over a period
      of approximately three years through January
  2011.




F-36




RIM
SEMICONDUCTOR COMPANY AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




NOTE
17 - SUBSEQUENT EVENTS (CONTINUED)








Demand
Letter


On
January 14, 2008, the Company received a demand letter on behalf of an employee
of a non-profit corporation.  The employee contends that he was
jointly employed by the non-profit corporation and the Company, and that the
Company is liable to him for unpaid wages of approximately $85,000 and
additional damages.  The Company disputes these claims.  The
Company has a note receivable from the non-profit corporation in the principal
amount of $50,000 (see Note 6).
 NOTE
18 - ACQUISITION OF BROADBAND DISTANCE SYSTEMS, INC. - SUBSEQUENT
EVENT
  On
January 29, 2008 the Company completed its acquisition of all of the issued and
outstanding capital stock of Broadband Distance Systems, Inc. (“BDSI”), a
subsidiary of UTEK Corporation (“UTEK) in exchange for 60,000,000 shares of
unregistered common stock of the Company, which are subject to certain
anti-dilution adjustments.  As a result of the transaction BDSI became
a wholly owned subsidiary of the Company. Upon closing of the acquisition
transaction, the assets of BDSI included $400,000 in cash and a worldwide
exclusive license to patented technology developed by researchers at the
University of Illinois. The patent
relates to an algorithm designedto enhance power allocation in
telecommunications systems that use multicarrier modulation protocol.IPSL, ADSL, VDSL and DSL systems are all examples of multicarrier
modulation protocols. The
algorithm serves to improve the achievable data rate or the signal-to-noise
ratio, reducing errors inthe transmission. Under the Exclusive License Agreement (the “License
Agreement”) relating to such technology, BDSI is obligated to pay theUniversity of Illinois royalties based on achievement of certain sales
levels for products utilizing the technology. Unless earlier terminated by a
party pursuant to the terms of the License Agreement, the license expires upon
the expiration or termination of all of the University of Illinois patent rights
underlying the technology. The License Agreement also permits BDSI to sublicense
the technology and obligates BDSI to make royalty payments to the University of
Illinois based on a percentage of payments received by BDSI from
sublicensees.


F-37