UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION





WASHINGTON,
      D.C. 20549





FORM
      10-KSB





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


ACT
      OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 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








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; and·
              other
                  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; or·
                Redesign
                    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; and·
              Government
                    regulation.




The
      complexity of our products could result in unforeseen delays or expense and
      in
      undetected defects, which could adversely affect the market acceptance of new
      products and damage our reputation with prospective customers.




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





11


Governmental
      regulation concerning the technical specifications of semiconductor technologies
      that are deployed in the telephone networks could adversely affect the market
      acceptance of our semiconductors.





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





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





We
      depend on attracting, motivating and retaining key personnel and the failure
      to
      attract, motivate or retain needed personnel could adversely affect our
      business.





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




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; and·
                Announcements
                    by us or our competitors of technological innovations or new
                    products.


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




We
      do not anticipate paying any dividends on our common stock.




We
      have
      not paid any dividends on our common stock since our inception and do not
      anticipate paying any dividends on our common stock in the foreseeable future.
      Instead, we intend to retain any future earnings for use in the operation and
      expansion of our business.




Additional
      burdens imposed upon broker-dealers by the application of the “Penny Stock”
rules to our common stock may limit the market for our common
      stock.




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.





Caution
      Regarding Forward-Looking Statements





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




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





Overview





We
      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.




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;
                            and·
                  a
                            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; and·
                      a
                          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.*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:
                January 29, 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)
            
            January
                29, 2008/s/
                Ray Willenberg,
                Jr.
              Ray
                Willenberg, Jr.
            
            Chairman
                of the Board and Executive Vice President
            
            January
                29, 2008/s/
                Jack
                Peckham
              Jack
                Peckham
            
            Director
            
            January
                29, 2008/s/
                William A.
                Swope
              William
                A. Swope
            
            Director
            
            January
                29, 2008Boon
                Tiong Tan
            
            Director




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).




/s/
      MARCUM & KLIEGMAN LLP








New
      York,
      New York


January
      28, 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.




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        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




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      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


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        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




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        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




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        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


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        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


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        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


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        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


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




F-25


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        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.




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        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.




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        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.




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        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).




F-37