**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**





WASHINGTON,
      D.C. 20549





**FORM
      10-QSB**





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


**ACT
      OF 1934 FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2007**





** ̈** **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**





(Exact
      name of small business issuer as specified in its charter)





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








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








Check
                whether the issuer (1) has 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 period that the registrant was required to file such reports),
                and
                (2) has been subject to such filing requirements for the past 90
                days.
            YesxNo ̈Indicate
                by check mark whether the registrant is a shell company (as defined
                by
                Rule 12b-2 of the Exchange Act)
            Yes ̈NoxThe
                number of shares of the issuer’s Common Stock, par value $.001 per share,
                outstanding as of March 14, 2007, was 425,095,898.Transitional
                Small Business Disclosure Format (Check one)
            Yes ̈Nox








**FORM
      10-QSB**





**RIM
      SEMICONDUCTOR COMPANY**




**JANUARY
      31, 2007**





**TABLE
      OF CONTENTS**








**PAGE**PART
                I - FINANCIAL INFORMATION
            1ITEM
                1.  FINANCIAL STATEMENTS
            1CONDENSED
                CONSOLIDATED BALANCE SHEET (Unaudited)At
                January 31, 2007
            1CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)For the Three Months Ended January 31, 2007 and 2006
            2CONDENSED
                CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (Unaudited)For
                the Three Months Ended January 31, 2007
            3CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)For
                the Three Months Ended January 31, 2007 and 2006
            4NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            6ITEM
                2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            21ITEM
                3.  CONTROLS AND PROCEDURES
            29PART
                II - OTHER INFORMATION
            30ITEM
                2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            30ITEM
                6.  EXHIBITS
            30SIGNATURES
            31








**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1.  FINANCIAL STATEMENTS**





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**(Unaudited)**





January
                31,
              2007ASSETSCurrent
                Assets:Cash
                and cash equivalents
            $
            186,805Short-term
                investments
            
            500,000Other
                current assets
            
            75,113TOTAL
                CURRENT ASSETS
            
            761,918Property
                and equipment - net
            
            129,787Technology
                licenses and capitalized software development costs - net
            
            6,368,162Deferred
                financing costs - net
            
            150,137Other
                assets
            
            19,644TOTAL
                ASSETS
            $
            7,429,648LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                Liabilities:Convertible
                notes payable
            $
            478,000Convertible
                debentures (net of debt discount of $790)
            
            74,210Derivative
                liabilities - warrants and options
            
            8,020,443Accounts
                payable and accrued expenses
            
            1,025,474TOTAL
                CURRENT LIABILITIES
            
            9,598,127Long-term
                portion of convertible debentures (net of debt discount of
                $367,754)
            
            298,526TOTAL
                LIABILITIES
            
            9,896,653Commitments,
                Contingencies and Other mattersStockholders’
                Deficiency:Preferred
                stock - $0.01 par value; Authorized - 15,000,000 shares; Issued -
                0
                shares; Outstanding - 0 shares
            
            -Common
                stock - $0.001 par value; Authorized - 900,000,000 shares; Issued
                -
                425,595,752 shares; Outstanding - 425,095,898 shares
            
            425,596Treasury
                Stock, at cost - 499,854 shares
            
            (7,498
            )Additional
                paid-in capital
            
            82,572,538Unearned
                compensation
            
            (1,819,980
            )Accumulated
                deficit
            
            (83,637,661
            )TOTAL
                STOCKHOLDERS’ DEFICIENCY
            
            (2,467,005
            )TOTAL
                LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
            $
            7,429,648





See
      notes
      to condensed consolidated financial statements.




1




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**




For
                the Three Months Ended
              January
                31,2007
            
            2006REVENUES
            
            $
            -
            
            $
            40,176OPERATING
                EXPENSES:Amortization
                of technology licenses and capitalized software development
                costs
            
            
            260,303
            
            
            102,696Research
                and development expenses (including stock based compensation of $420,410
                and $5,044 respectively)
            
            
            647,674
            
            
            85,044Selling,
                general and administrative expenses (including stock based compensation
                of
                $469,409 and $333,958, respectively)
            
            
            1,447,216
            
            
            807,071TOTAL
                OPERATING EXPENSES
            
            
            2,355,193
            
            
            994,811OPERATING
                LOSS
            
            
            (2,355,193
            )
            
            (954,635
            )OTHER
                EXPENSES (INCOME):Interest
                income
            
            
            (14,543
            )
            
            -Interest
                expense
            
            
            2,786,501
            
            
            1,244,956Change
                in fair value of derivative liabilities
            
            
            1,538,647
            
            
            24,138Amortization
                of deferred financing costs
            
            
            1,124,686
            
            
            243,967Gain
                on forgiveness of principal and interest on Zaiq Note
            
            
            -
            
            
            (1,169,820
            )TOTAL
                OTHER EXPENSES
            
            
            5,435,291
            
            
            343,241NET
                LOSS
            
            $
            (7,790,484
            )
            $
            (1,297,876
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.02
            )
            $
            (0.01
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            395,822,642
            
            
            229,136,730





See
      notes
      to condensed consolidated financial statements.





2


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY**


**For
      The Three Months Ended January 31, 2007**


**(Unaudited)**




Common
                Stock
            
            Treasury
                StockShares
            
            Amount
            
            Shares
            
            Amount
            
            Additional
                Paid-in Capital
            
            Unearned
                Compensation
            
            Accumulated
                Deficit
            
            Total
                Stockholders’
              DeficiencyBalance
                at November 1, 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 under service and consulting agreements
            
            
            11,736,991
            
            
            11,737
            
            
            -
            
            
            -
            
            
            1,390,263
            
            
            (1,402,000
            )
            
            -
            
            
            -Issuance
                of common stock for conversion of convertible debentures and accrued
                interest
            
            
            56,394,444
            
            
            56,394
            
            
            -
            
            
            -
            
            
            4,012,838
            
            
            -
            
            
            -
            
            
            4,069,232Issuance
                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
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            110,765
            
            
            -
            
            
            -
            
            
            110,765Reclassification
                of derivative liability upon exercise of options
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            71,521
            
            
            -
            
            
            -
            
            
            71,521Reclassification
                of conversion option liability
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,685,266
            
            
            -
            
            
            -
            
            
            1,685,266Amortization
                of unearned compensation expense
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            779,054
            
            
            -
            
            
            779,054Net
                Loss
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (7,790,484
            )
            
            (7,790,484
            )Balance
                at January 31, 2007
            
            
            425,595,752
            
            $
            425,596
            
            
            (499,854
            )
            $
            (7,498
            )
            $
            82,572,538
            
            $
            (1,819,980
            )
            $
            (83,637,661
            )
            $
            (2,467,005
            )





See
      notes
      to condensed consolidated financial statements.




3


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**




For
                the Three Months Ended
              January
                31,2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (7,790,484
            )
            $
            (1,297,876
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Consulting
                fees and other compensatory elements of stock issuances
            
            
            889,819
            
            
            339,002Derivative
                loss
            
            
            1,538,647
            
            
            24,138Loss
                on disposal of property and equipment
            
            
            614
            
            
            -Gain
                on forgiveness of principal and interest on Zaiq Note
            
            
            -
            
            
            (1,169,820
            )Amortization
                of deferred financing costs
            
            
            1,124,686
            
            
            243,967Amortization
                of debt discount on notes
            
            
            2,752,373
            
            
            1,193,195Amortization
                of technology license and capitalized software development
                fees
            
            
            260,303
            
            
            102,696Depreciation
            
            
            3,802
            
            
            619Change
                in assetsOther
                current assets
            
            
            35,153
            
            
            1,573Other
                assets
            
            
            2,500
            
            
            2,582Change
                in liabilitiesAccounts
                payable and accrued expenses
            
            
            26,899
            
            
            92,877NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (1,155,688
            )
            
            (467,047
            )CASH
                FLOWS FROM INVESTING ACTIVITIESProceeds
                from sale of trademark rights
            
            
            200,000
            
            
            -Proceeds
                from maturity of short-term investments
            
            
            500,000
            
            
            -Acquisition
                and costs of capitalized software and development fees
            
            
            (377,969
            )
            
            -Acquisition
                of property and equipment
            
            
            (69,657
            )
            
            -NET
                CASH PROVIDED BY INVESTING ACTIVITIES
            
            
            252,374
            
            
            -CASH
                FLOWS FROM FINANCING ACTIVITIESPurchase
                of treasury stock
            
            
            -
            
            
            (7,498
            )Proceeds
                from notes payable
            
            
            -
            
            
            750,000Capitalized
                financing costs
            
            
            -
            
            
            (82,500
            )Repayments
                of notes payable
            
            
            -
            
            
            (122,291
            )Repayments
                of convertible notes payable
            
            
            -
            
            
            (88,292
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            -
            
            
            449,419DECREASE
                IN CASH AND CASH EQUIVALENTS
            
            
            (903,314
            )
            
            (17,628
            )CASH
                AND CASH EQUIVALENTS - BEGINNING OF PERIOD
            
            
            1,090,119
            
            
            373,481CASH
                AND CASH EQUIVALENTS - END OF PERIOD
            
            $
            186,805
            
            $
            355,853





See
      notes
      to condensed consolidated financial statements.




4




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**




For
                the Three Months Ended
              January
                31,2007
            
            2006**Supplemental
                Disclosure of Cash Flow Information:**Cash
                paid during the period for:Interest
            
            $
            25,000
            
            $
            -**Non-Cash
                Investing and Financing Activities:**Common
                stock issued for conversion of convertible debentures, notes payableand
                accrued interest
            
            $
            4,069,232
            
            $
            1,380,501Issuance
                of common stock upon exercise of stock options for the settlement
                ofvendor
                payables
            
            $
            19,140
            
            $
            -Common
                stock issued for accrued liquidated damages
            
            $
            68,547
            
            $
            -Reclassification
                of derivative liability to equity upon exercise of options
            
            $
            71,521
            
            $
            -Reclassification
                of conversion option liability to equity
            
            $
            1,685,266
            
            $
            681,733Value
                assigned to warrants issued in connection with notes
                payable
            
            $
            -
            
            $
            120,000Common
                stock issued for consulting services
            
            $
            1,402,000
            
            $
            -





See
      notes
      to condensed consolidated financial statements.





5




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


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





The
      condensed consolidated financial statements include the accounts of Rim
      Semiconductor Company (“Rim Semi”) and its wholly-owned operating subsidiary, NV
      Entertainment, Inc. (“NV Entertainment”) (collectively, the “Company”). 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. Top Secret Productions, LLC is a 50% owned
      subsidiary of NV Entertainment.





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America (“US GAAP”). In the opinion of management, the
      accompanying unaudited financial statements contain all adjustments, consisting
      only of those of a normal recurring nature, necessary for a fair presentation
      of
      the Company’s financial position, results of operations and cash flows at the
      dates and for the periods indicated. These financial statements should be read
      in conjunction with the financial statements and notes related thereto included
      in the Annual Report on Form 10-KSB for the fiscal year ended October 31,
      2006.





These
      results for the three months ended January 31, 2007 are not necessarily
      indicative of the results to be expected for the full fiscal year. The
      preparation of the consolidated financial statements in conformity with US
      GAAP
      requires management to make estimates and assumptions that affect the reported
      amounts of assets and liabilities and disclosure of contingent assets and
      liabilities at the date of the financial statements and the reported amounts
      of
      revenues and expenses during the reporting period. Actual results could differ
      from those estimates.





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





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





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





**Liquidity
      Discussion**





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





The
      Company has significant recurring operating losses, used substantial funds
      in
      its operations, and needs to raise additional funds to accomplish its business
      plan. For the three months ended January 31, 2007 and 2006, the Company incurred
      net losses of approximately $7.8 million and $1.3 million, respectively, and
      as
      of January 31, 2007 has a working capital deficiency of approximately $8.8
      million. In addition, management believes that the Company will continue to
      incur net losses and cash flow deficiencies from operating activities through
      at
      least January 31, 2008.





In
      January 2007, an institutional investor that had previously invested in the
      Company committed to purchase $6 million of convertible debentures upon the
      Company’s request. Management believes that the net proceeds from this
      financing, together with the approximately $687,000 in cash and short-term
      investments as of January 31, 2007, is sufficient to fund the planned
      expenditures through at least January 31, 2008.





6


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS OPERATIONS
      (CONTINUED)**





**Liquidity
      Discussion (Continued)**





Management
      of the Company is continuing its efforts to secure additional funds through
      equity and/or debt instruments to fund ongoing operations. After January 31,
      2008, the Company may require additional funds for its operations and to pay
      down its liabilities, as well as finance its expansion plans consistent with
      its
      business plan. However, there can be no assurance that the Company will be
      able
      to secure additional funds and that if such funds are available, whether the
      terms or conditions would be acceptable to the Company.





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





**Accounting
      Estimates**





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





**Short-Term
      Investments**





Short-term
      investments as of January 31, 2007 consisted of a certificate of deposit in
      the
      amount of $500,000, acquired June 2, 2006, and which matured on February
      28, 2007. The certificate of deposit earned interest at the rate of 3.54% per
      annum.





**Revenue
      Recognition**





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





The
      Company recognizes film revenue from the distribution of its feature film and
      related products when earned and reasonably estimable in accordance with
      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;
                and


o
            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.




7


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Research
      and Development**





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





Research
      and development expenses relate to the design and development of advanced
      transmission technology products. 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.





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





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





**Derivative
      Financial Instruments**





In
      connection with the issuance of certain convertible debentures (see Note 8),
      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.”





8


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Derivative
      Financial Instruments (Continued)**





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





The
      fair
      value of derivative financial instruments was estimated during the three months
      ended January 31, 2007 and 2006 using the Black-Scholes model and the following
      range of assumptions:





**January
                31,**
              **2007**
            
            **January
                31,**
              **2006**Expected
                dividends
            None
            
            
            NoneExpected
                volatility
            79.7
                - 136.9
            %
            
            95.3
                - 135.1
            %Risk-free
                interest rate
            4.8
                - 5.2
            %
            
            4.3
                - 4.6
            %Contractual
                term (years)
            0.7
                - 9.5
            
            
            0.6
                - 2.6





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





**Loss
      Per Common Share**





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





For
      the
      three months ended January 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.





**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.





9


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Stock-Based
      Compensation** **(Continued)**





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





SFAS
      123(R) also requires that the cash retained as a result of the tax deductibility
      of the increase in the value of share-based arrangements be presented as a
      component of cash flows from financing activities in the consolidated statement
      of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
      to be presented as a component of cash flows from operating activities. Due
      to
      the Company’s tax net operating loss position, the Company does not realize cash
      savings as a result of the tax deduction for stock-based compensation.
      Accordingly, the adoption SFAS 123(R) had no effect on the Company’s cash flows
      from operating or financing activities for the three months ended January 31,
      2007.





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





Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options was $110,765 and $69,037 for the three months ended January 31, 2007
      and
      2006, 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 three months ended January 31, 2006.





Stock-based
      compensation expense recognized for non-employees under other accounting
      standards was $384,054 and $22,908 for the three months ended January 31, 2007
      and 2006, respectively.





As
      stock-based compensation expense recognized in the consolidated statement of
      operations for the three months ended January 31, 2007 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.





**Impairment
      of Long-Lived Assets**





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





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





**Reclassifications**





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





10


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





**Impact
      of Recently Issued Accounting Standards**





In
      June
      2005, the Financial Accounting Standards Board (“FASB”) published SFAS No. 154,
“Accounting Changes and Error Corrections - a Replacement of APB Opinion No.
      20
      and FASB No. 3” (“SFAS 154”). SFAS 154 establishes new standards on accounting
      for changes in accounting principles. Pursuant to the new rules, all such
      changes must be accounted for by retrospective application to the financial
      statements of prior periods unless it is impracticable to do so. SFAS 154
      completely replaces Accounting Principles Bulletin No. 20 and SFAS 3, though
      it
      carries forward the guidance in those pronouncements with respect to accounting
      for changes in estimates, changes in the reporting entity, and the correction
      of
      errors. The requirements in SFAS 154 are effective for accounting changes made
      in fiscal years beginning after December 15, 2005. The Company adopted SFAS
      154
      as of November 1, 2006. The adoption of this pronouncement did not have an
      impact on the Company’s consolidated financial position, results of operations,
      or cash flows.





In
      February 2006, the FASB issued SFAS 155, “Accounting for Certain Hybrid
      Financial Instruments - an amendment of FASB Statements No. 133 and 140” (“SFAS
      155”). SFAS 155 resolves issues addressed in SFAS 133 Implementation Issue No.
      D1, “Application of Statement 133 to Beneficial Interests in Securitized
      Financial Assets.” The requirements in SFAS 155 are effective for all financial
      instruments acquired or issued after the beginning of an entity’s first fiscal
      year that begins after September 15, 2006. The Company adopted SFAS 155 as
      of
      November 1, 2006. The adoption of this pronouncement did not have an impact
      on
      the Company’s consolidated financial position, results of operations, or cash
      flows.





In
      July
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109” (the
“Interpretation”). The Interpretation establishes for all entities a minimum
      threshold for financial statement recognition of the benefit of tax positions,
      and requires certain expanded disclosures. The Interpretation is effective
      for
      fiscal years beginning after December 31, 2006, and is to be applied to all
      open
      tax years as of the date of effectiveness. The Company is in the process of
      evaluating the impact of the application of the Interpretation to its financial
      statements.





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 year 2009, with earlier application
      encouraged. Any cumulative effect will be recorded as an adjustment to the
      opening accumulated deficit balance, or other appropriate component of equity.
      The adoption of this pronouncement is not expected to have an impact on the
      Company’s consolidated financial position, results of operations, or cash
      flows.





In
      September 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”) No. 108,
      Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was
      issued in order to reduce the diversity in practice in how public companies
      quantify misstatements of financial statements, including misstatements that
      were not material to prior years’ financial statements. SAB 108 is effective for
      fiscal year 2007. The Company adopted SAB 108 as of November 1, 2006. The
      adoption of this pronouncement did not have an impact on the Company’s
      consolidated financial position, results of operations, or cash
      flows.





In
      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.  The FASB has indicated it believes that
      SFAS 159 helps to mitigate this type of accounting-induced volatility by
      enabling companies to report related assets and liabilities at fair value,
      which
      would likely reduce the need for companies to comply with detailed rules for
      hedge accounting. 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.





11


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)**





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





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 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 is not
      expected to have an impact on the Company’s consolidated financial position,
      results of operations or cash flows.





**NOTE
      3 - PROPERTY AND EQUIPMENT**





Property
      and equipment consists of the following:





At
                January 31,
              2007Leasehold
                improvements
            
            $
            95,721Furniture
                and fixtures
            
            
            13,388Office
                equipment
            
            
            29,535138,644Accumulated
                depreciation and amortization
            
            
            (8,857
            )Total
            
            $
            129,787





For
      the
      three months ended January 31, 2007 and 2006, depreciation and amortization
      expense was $3,802 and $619, respectively.





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





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





January
                31,
              2007Technology
                licenses
            
            $
            5,751,000Purchased
                technology
            
            
            228,000Capitalized
                software development cost
            
            
            1,426,4917,405,491Accumulated
                amortization
            
            
            (1,037,329
            )Total
            
            $
            6,368,162





12




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


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





As
      of
      January 31, 2007, the weighted average useful life of the Company’s capitalized
      software was approximately 6.5 years. The Company commenced amortization of
      technology licenses and capitalized software development costs during December
      2005 when the Company made available to the market the Cupria Cu5001
      semiconductor and recorded amortization expense of $260,303 and $102,696 during
      the three months ended January 31, 2007 and 2006, respectively.





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





**NOTE
      5 - FILM IN DISTRIBUTION**





The
      Company recognized revenues of $0 and $40,176 for the three months ended January
      31, 2007 and 2006, respectively.





**NOTE
      6 - DEFERRED FINANCING COSTS**





As
      of
      January 31, 2007, deferred financing costs consists of costs incurred and
      warrants issued in connection with the sale of $6,000,000 of 2006 Debentures,
      $3,500,000 of 2005 Debentures, $1,350,000 of 7% convertible debentures, and
      promissory notes:





Deferred
                financing costs
            
            $
            3,541,818Less:
                accumulated amortization
            
            
            (3,391,681
            )Deferred
                financing costs, net
            
            $
            150,137





Costs
      incurred in connection with debt financings are capitalized as deferred
      financing costs and amortized over the term of the related debt. If any or
      all
      of the related debt is converted or repaid prior to its maturity date, a
      pro-rata share of the related deferred financing costs are written off and
      recorded as amortization expense in the period of the conversion or repayment
      in
      the consolidated statement of operations. For the three months ended January
      31,
      2007 and 2006, amortization of deferred financing costs was $1,124,686 and
      $243,967, respectively.





**NOTE
      7 - CONVERTIBLE NOTES PAYABLE**





The
      Company entered into several convertible promissory note agreements with various
      trusts and individuals to fund the operations of the Company. The Company agreed
      to pay the principal and an additional amount equal to 50% of the principal
      on
      all notes in (1) below. Interest of $236,740 related to these convertible
      promissory notes and $97,000 related to a convertible promissory note that
      was
      previously repaid, for an aggregate of $333,740, has been accrued and is
      recorded in accounts payable and accrued expenses as of January 31,
      2007.





The
      outstanding convertible notes are summarized in the table below:





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





13




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


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





(1)
            The
                notes were issued during the period from March 2002 through July
                2003, and
                are due only when receipts received by the Company from its Top Secret
                Productions, LLC joint venture exceed $2,250,000. The notes and any
                accrued and unpaid interest may be converted at any time, in whole
                or in
                part, into shares of common stock at conversion prices per share
                ranging
                from $0.33 to $1.00.





(2)
            The
                note was issued in July 2003, in the amount of $10,000, and due only
                when
                receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $750,000. The note and any accrued and unpaid
                interest may be converted at any time, in whole or in part, into
                shares of
                common stock at a conversion price per share of
                $0.60.





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





**NOTE
      8 - 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
      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 therefore
      the
      security interest terminated.





The
      Company agreed to include the shares of common stock issuable upon conversion
      of
      the 2006 Debentures and exercise of the related warrants issued to investors
      and
      the placement agent in a registration statement filed by the Company with the
      Securities and Exchange Commission (the “SEC”). Since the registration statement
      was not declared effective by the SEC by June 23, 2006, the Company is obligated
      to pay liquidated damages to the holders of the 2006 Debentures. A registration
      statement covering the common stock issuable upon conversion of the 2006
      Debentures and the related warrants issued to investors and the placement agent
      was declared effective by the SEC on August 16, 2006. 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 three months ended
      January 31, 2007, 464,535 shares of common stock valued at $68,547 were issued
      as payment for liquidated damages. Accrued liquidated damages as of January
      31,
      2007 was $143,453.





14


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      8 - 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 was recorded as a liability net of a debt discount of
      $6,000,000 consisting of an allocation of the fair values attributed to the
      Investors’ warrants and to the embedded conversion feature in accordance with
      EITF Issue No. 00-19. The debt discount consisted of a $3,428,571 value
      related to the Investors’ warrants and a value attributed to the embedded
      conversion feature of $2,571,429. The debt discount was first allocated to
      the
      embedded conversion feature based on its fair value. After reducing the gross
      proceeds by the value allocated to the embedded conversion feature, the
      remaining unallocated debt discount of $3,428,571 was allocated to the
      Investors’ warrants. The excess of the fair value of the Investors’ warrants
      above the debt discount allocated to the Investors’ warrants was $5,608,156 and
      was charged to interest expense during the three months ended April 30,
      2006.





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
      of
      January 31, 2007, the conversion option liability of $2,571,429 had been reduced
      to $283,714 as a result of conversions of the 2006 Debentures. During the three
      months ended January 31, 2007, $1,684,715 was recorded as a reclassification
      to
      stockholders’ equity. Since the issuance of the 2006 Debentures, an aggregate of
      $2,287,715 has been recorded as a reclassification to stockholders’ equity.





A
      loss on
      the change in fair value of the derivative liabilities of $1,141,503 was
      recognized during the three months ended January 31, 2007.





During
      the three months ended January 31, 2007, $3,931,000 of principal amount of
      2006
      Debentures plus accrued interest of $136,911 were converted into 56,376,123
      shares of common stock.





Included
      in interest expense for the three months ended January 31, 2007 is $2,750,588
      related to the amortization of the debt discount on these
      debentures.





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




Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueLong-term
                portion
            
            $
            662,000
            
            $
            365,866
            
            $
            296,134





**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.




15




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


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





**2005
      Debentures** **(Continued)**





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.





The
      gross
      proceeds of $3,500,000 was 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. Accordingly, these derivative liabilities are measured
      at fair value with changes in fair value reported in earnings as long as they
      remain classified as liabilities.





16


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      8 - CONVERTIBLE DEBENTURES (CONTINUED)**





**2005
      Debentures** **(Continued)**





As
      of
      January 31, 2007, the conversion option liability of $1,500,000 had been reduced
      to $1,834 as a result of conversions of the 2005 Debentures. During the three
      months ended January 31, 2007 and 2006, $551 and $0, respectively, was recorded
      as a reclassification to stockholders’ equity. Since the issuance of the 2005
      Debentures, an aggregate of $1,498,166 has been recorded as a reclassification
      to stockholders’ equity.





A
      loss on
      the change in fair value of the derivative liabilities of $212,488 and $24,138
      was recognized during the three months ended January 31, 2007 and 2006,
      respectively.





During
      the three months ended January 31, 2007, $1,284 of principal amount of 2005
      Debentures plus accrued interest of $37 were converted into 18,321 shares of
      common stock.





During
      the three months ended January 31, 2006, $1,310,724 of principal amount of
      2005
      Debentures plus accrued interest of $69,777 were converted into 81,262,199
      shares of common stock.





Included
      in interest expense for the three months ended January 31, 2007 and 2006 is
      $1,027 and $1,164,160, respectively, related to the amortization of the debt
      discount related to these debentures.





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




Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueLong-term
                portion
            
            $
            4,280
            
            $
            1,888
            
            $
            2,392





**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 their option,
      the
      Debenture holders are entitled to be paid such amount in cash or shares of
      Common Stock at a per share rate equal to the effective conversion price of
      the
      Debentures, which is currently $0.15. Accrued liquidated damages as of January
      31, 2007 and 2006 was $37,550.





During
      the three months ended January 31, 2007 and 2006, no principal or accrued
      interest was converted into shares of common stock.





Included
      in interest expense for the three months ended January 31, 2007 and 2006 is
      $758
      and $13,330, respectively, related to the amortization of the debt discount
      on
      these debentures.





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




Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueCurrent
            
            $
            75,000
            
            $
            790
            
            $
            74,210




17


**RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
      8 - CONVERTIBLE DEBENTURES (CONTINUED)**





**7%
      Debentures** **(Continued)**





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





**NOTE
      9 - STOCKHOLDERS’ DEFICIENCY**





**Common
      Stock**





During
      the three months ended January 31, 2007, the Company:





·
            issued
                56,394,444 shares of common stock upon conversion of convertible
                debentures with a principal amount of $3,932,284 and accrued interest
                of
                $136,948;


·
            issued
                11,736,991 shares of restricted common stock in exchange for services
                valued at $1,402,000;


·
            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.





**Stock
      Option Plans**





In
      November 2006, the 2006 Stock Incentive Plan (the “2006 Plan”) was adopted. The
      2006 Plan authorizes the issuance of up to 30,000,000 incentive stock options,
      non-qualified stock options or stock awards to directors, officers, employees
      and certain consultants to the Company. During the three months ended January
      31, 2007, the Company granted a total of 4,350,000 options under the 2006 Plan
      to a total of five directors, officers and employees of the Company.





**Options
      Granted**





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





·
            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 ten
                year term, an exercise price of $0.12 per share, and vest over a
                period of
                approximately three years through January 2010;
                and


·
            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 ten year term, an exercise price of
                $0.096
                per share, and vest over a period of approximately three years through
                November 2009.





The
      weighted-average estimated fair value of stock options granted during the three
      months ended January 31, 2007 and 2006 was $0.09 and $0.03 per share,
      respectively, using the Black-Scholes model with the following
      assumptions:





**January
                31,**
              **2007**
            
            **January
                31,**
              **2006**Expected
                dividends
            None
            
            
            NoneExpected
                volatility
            116
            %
            
            145
            %Risk-free
                interest rate
            4.65
            %
            
            4.30
            %Expected
                life
            10
                years
            
            
            10
                years





18




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


**NOTE
      9 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)**





**Options
      Exercised**





During
      the three months ended January 31, 2007, options to purchase 600,000 shares
      of
      common stock were exercised. Upon the exercise of these options, the Company
      reclassified the fair value of $71,521 from derivative liabilities to
      stockholders’ equity.





**Warrants**





During
      the three months ended January 31, 2007, no warrants were granted, exercised,
      or
      cancelled.





**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:





January
                31,
              2007
            
            January
                31,
              2006Warrants
                to purchase common stock
            
            
            114,537,604
            
            
            58,112,7572006
                Debentures and accrued interest (1)
            
            
            8,272,493
            
            
            -Options
                to purchase common stock
            
            
            39,193,750
            
            
            25,293,750Convertible
                notes payable and accrued interest
            
            
            1,571,049
            
            
            5,768,8377%
                Debentures and accrued interest
            
            
            613,013
            
            
            960,9802005
                Debentures and accrued interest (2)
            
            
            99,989
            
            
            26,585,798Total
            
            
            164,287,898
            
            
            116,722,122





(1)
            Based
                on a twenty day volume weighted average common stock price discounted
                by
                30% as of January 31, 2007 of
                $0.0805.


(2)
            Based
                on a five day volume weighted average common stock price discounted
                by 30%
                as of January 31, 2007 and 2006 of $0.0799 and $0.01918,
                respectively.





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





**HelloSoft
      Agreements**





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
      January 31, 2007, HelloSoft had completed all committed work under the Original
      Agreement and its amendments, and been paid in full. As of January 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.





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.





19




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


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





**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.





**Concentration
      of Credit Risk**





The
      Company maintains cash balances in two financial institutions. The balances
      are
      insured by the Federal Deposit Insurance Corporation up to $100,000 per
      institution. From time to time, the Company’s balances may exceed these limits.
      As of January 31, 2007, uninsured balances were $662,304. The Company believes
      it is not exposed to any significant credit risk for cash.





**NOTE
      11 - SEGMENT INFORMATION**





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




Semiconductor
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsFor
                the Three Months Ended January 31, 2007:Net
                Sales - Domestic
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Net
                Sales - Foreign
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            -Operating
                Loss
            
            $
            (2,343,199
            )
            $
            (11,994
            )
            $
            -
            
            $
            (2,355,193
            )Depreciation
                and amortization
            
            $
            264,105
            
            $
            -
            
            $
            -
            
            $
            264,105Total
                Identifiable Assets
            
            $
            6,723,199
            
            $
            -
            
            $
            706,449
            
            $
            7,429,648




Semiconductor
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsFor
                the Three Months Ended January 31, 2006:Net
                Sales - Domestic
            
            $
            -
            
            $
            6,234
            
            $
            -
            
            $
            6,234Net
                Sales - Foreign
            
            $
            -
            
            $
            33,942
            
            $
            -
            
            $
            33,942Operating
                (Loss) Income
            
            $
            (103,315
            )
            $
            36,291
            
            $
            (887,611
            )
            $
            (954,635
            )Depreciation
                and amortization
            
            $
            103,315
            
            $
            -
            
            $
            -
            
            $
            103,315Total
                Identifiable Assets
            
            $
            5,822,447
            
            $
            -
            
            $
            395,953
            
            $
            6,218,400





20




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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





We
      urge
      you to read the following discussion in conjunction with our condensed
      consolidated financial statements and the notes thereto included elsewhere
      herein.





**CAUTION
      REGARDING FORWARD-LOOKING STATEMENTS**





Our
      prospects are subject to uncertainties and risks. In this Quarterly Report
      on
      Form 10-QSB, we make forward-looking statements in this Item 2 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 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 in our other filings with
      the
      SEC. We undertake no obligation to revise or update any forward-looking
      statement for any reason.





**OVERVIEW**





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





Our
      initial chipset in a planned family of transport processors, the CupriaTM Cu5001
      (formerly known as EmbarqTM E30) digital signal processor, was first shown to
      several prospective customers during the first fiscal quarter of 2006. In the
      third fiscal quarter of 2006, we initiated a technical cooperation program
      with
      Embarq Corporation of Overland Park, Kansas that will evaluate the potential
      application of our integrated circuits in Embarq’s data network. As part of this
      program, we and Embarq are working with suppliers to develop prototype network
      elements like digital subscriber line access multiplexers and consumer modems
      that utilize our chipset. If such prototypes are developed and subsequent lab
      evaluations are deemed successful, Embarq has agreed to conduct a field trial
      of
      our CupriaTM family of semiconductors and to share its observations from the
      trial with its suppliers. As part of our efforts to produce network
      infrastructure equipment utilizing the Cu5001 that we believe will be suitable
      for use in Embarq’s network, we secured commitments from Extreme Copper, Inc. of
      Newbury Park, California and Logic Research of Fukuoka, Japan to incorporate
      the
      Cu5001 in its next generation digital subscriber line access multiplexers
      (DSLAM) and customer premises equipment (CPE).





While
      our
      technology is currently available for evaluation and testing in field
      programmable gate array (“FPGA”) form, we do not believe that we will realize
      substantial revenues until our technologies are mass-produced in
      application-specific standard part (“ASSP”) form. We estimate that it will cost
      approximately $500,000 of additional engineering and fabrication expense in
      order to produce a mass market ASSP version. Subject to raising the needed
      capital, we estimate that we will complete them during the third fiscal quarter
      of 2007. To date, we have not recorded any revenues from the sale of products
      based on our technology and have not secured any purchase orders to sell our
      products.





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




21


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.





**Research
      and Development**





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





We
      outsourced all of the development activities with respect to our products to
      independent third party developers until April 2006, when we hired our first
      engineer. During the fourth fiscal quarter of 2006, we hired a Vice President
      to
      oversee the development and marketing of our semiconductors as well as three
      other engineering employees to supervise the continued development of our
      products. During the three months ended January 31, 2007 and 2006, we expended
      $647,674 and $85,044, respectively, for research and development of our
      semiconductor technology.





**Technology
      Licenses**





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





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





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





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





**CRITICAL
      ACCOUNTING POLICIES**





The
      preparation of our condensed 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 condensed 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 condensed consolidated financial statements.





22




**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 should be reclassified as of the date of the
      event that caused the reclassification.





**Stock-Based
      Compensation**





We
      report
      stock based compensation under accounting guidance provided by Statement of
      Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS 123(R)”), which requires the measurement and recognition of compensation
      expense for all share-based payment awards made to employees and directors,
      including stock options, based on estimated fair values.





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





SFAS
      123(R) also requires that the cash retained as a result of the tax deductibility
      of the increase in the value of share-based arrangements be presented as a
      component of cash flows from financing activities in the consolidated statement
      of cash flows. Prior to the adoption of SFAS 123(R), such amounts were required
      to be presented as a component of cash flows from operating activities. Due
      to
      our tax net operating loss position, we do not realize cash savings as a result
      of the tax deduction for stock-based compensation. Accordingly, the adoption
      SFAS 123(R) had no effect on our cash flows from operating or financing
      activities for the three months ended January 31, 2007.





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





Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options was $110,765 and $69,037 for the three months ended January 31, 2007
      and
      2006, 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 three months ended January 31, 2006.





Stock-based
      compensation expense recognized for non-employees under other accounting
      standards was $384,054 and $22,908 for the three months ended January 31, 2007
      and 2006, respectively.





As
      stock-based compensation expense recognized in the consolidated statement of
      operations for the three months ended January 31, 2007 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.





23




**Revenue
      Recognition**





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





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





(i)
            persuasive
                evidence of a sale or licensing arrangement with a customer
                exists;


(ii)
            the
                film is complete and, in accordance with the terms of the arrangement,
                has
                been delivered or is available for immediate and unconditional
                delivery;


(iii)
            the
                license period of the arrangement has begun and the customer can
                begin its
                exploitation, exhibition or sale;


(iv)
            the
                arrangement fee is fixed or determinable;
                and


(v)
            collection
                of the arrangement fee is reasonably
                assured.





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





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





**Capitalized
      Software Development Costs**





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




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





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





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





We
      commenced amortization of capitalized software development costs during December
      2005 and have recorded amortization expense of $260,303 and $102,696 during
      the
      three months ended January 31, 2007 and 2006, respectively.




24


**RESULTS
      OF OPERATIONS**





COMPARISON
      OF THE THREE MONTHS ENDED JANUARY 31, 2007 AND THE THREE MONTHS ENDED JANUARY
      31, 2006





REVENUES .  
      We had no revenues for the three months ended January 31, 2007. Revenues for
      the
      three months ended January 31, 2006 were $40,176 and were entirely from our
      entertainment business. Revenues decreased 100% for the three months ended
      January 31, 2007 as we received no guarantee or license payments related to
      the
      distribution of our Film during the period. No revenues were recorded in
      connection with our semiconductor business during the three months ended January
      31, 2007 and 2006.





OPERATING
      EXPENSES . 
      Operating expenses primarily include the amortization of technology license
      and
      capitalized software development fees, research and development expenses in
      connection with the semiconductor business, and selling, general and
      administrative expenses.





Total
      operating expenses increased 137% or $1,360,382 to $2,355,193 for the three
      months ended January 31, 2007 from $994,811 for the three months ended January
      31, 2006. The increase in total operating expenses for the three months ended
      January 31, 2007 was due primarily to the continued development of the Cupria
      product line, which was accomplished by adding a Vice President of Engineering
      and three engineers plus one support staff, an Executive Vice President in
      charge of Sales and Marketing, a marketing manager, and a Financial Controller
      during Fiscal 2006, raising our headcount to 10 full-time employees and one
      part-time employee for the three months ended January 31, 2007 from 3 full-time
      employees and one part-time employee for the three months ended January 31,
      2006. Salaries, related taxes and benefits increased by 452% or $425,710 for
      the
      three months ended January 31, 2007 from $94,244 for the three months ended
      January 31, 2006.





During
      the three months ended January 31, 2007, there were also the following changes:
      amortization of technology licenses and capitalized software development fees
      increased 154% from $102,696 for the three months ended January 31, 2006 to
      $260,303 for the three months ended January 31, 2007, research and development
      expenses increased 662% from $85,044 for the three months ended January 31,
      2006
      to $647,674 for the three months ended January 31, 2007, and sales, general
      and
      administrative expenses increased 79% from $807,071 for the three months ended
      January 31, 2006 to $1,447,216 for the three months ended January 31,
      2007.





In
      addition to the headcount increases referred to above, consulting expenses
      increased 210% or $142,072 for the three months ended January 31, 2007 from
      $45,941 for the three months ended January 31, 2006 and compensatory elements
      of
      stock option grants to employees and stock issuances to consultants increased
      by
      162% or $550,817 to $889,819 for the three months ended January 31, 2007 from
      $339,002 for the three months ended January 31, 2006.





Amortization
      of technology licenses and capitalized software development fees was $260,303
      for the three months ended January 31, 2007 as compared to $102,696 for the
      three months ended January 31, 2006. This is due to the increase in capitalized
      research and development costs and the purchase of technology from 1021
      Technologies, Inc. and 1021 Technologies KK during the year ended October 31,
      2006, plus recognizing a full three months of amortization on the technology
      licenses during the three months ended January 31, 2007, as compared to 1.5
      months for the three months ended January 31, 2006, as amortization didn’t
      commence until December 2005.





Research
      and development expenses increased by 662% or $562,630 to $647,674 for the
      three
      months ended January 31, 2007 from $85,044 for the three months ended January
      31, 2006. This increase is principally attributable to the increase in
      employees, having added a Vice President of Engineering and four engineers,
      plus
      a technical staff member during the year ended October 31, 2006 and increasing
      salaries, payroll taxes and benefits for the three months ended January 31,
      2007, as compared to using outsourced consultants during the three months ended
      January 31, 2006. In addition to salaries, wages and benefits of $56,151
      associated with these employees, the compensatory element of stock option
      issuances recognized for the three months ended January 31, 2007 was $420,410,
      the majority of which is accounted for by a share-based payment valued at
      $395,000 to eSilicon, the initial payment required to commence pre-production
      work for Release 2.0 of the Cupria product line. For the three months ended
      January 31, 2006, there were no salaries, wages and benefits, and compensatory
      element of stock option issuances recognized for research and development was
      only $5,044.





Total
      selling, general and administrative expenses increased 79% or $640,145 to
      $1,447,216 for the three months ended January 31, 2007 from $807,071 for the
      three months ended January 31, 2006. The increase is primarily the result of
      an
      increase in salaries and wages due to an increase in employees, having added
      three full-time employees during the year ended October 31, 2006. We had three
      full-time employees and one part-time employee for the three months ended
      January 31, 2006. This resulted in a 344% increase in salaries, wages and
      benefits of $304,497 for the three months ended January 31, 2007 from $88,296
      for the three months ended January 31, 2006.




25


OTHER
      (INCOME) EXPENSES . 
      Other expenses-net included interest income, interest expense, a loss on the
      change in fair value of derivative liabilities, amortization of deferred
      financing costs and a gain on forgiveness of principal and interest on a
      promissory note. In total, other expenses - net increased by 1,484% or
      $5,092,050 to $5,435,291 for the three months ended January 31, 2007 from
      $343,241 for the three months ended January 31, 2006. Changes in individual
      line
      items changed for the reasons below.





Interest
      expense increased 124% or $1,541,545 to $2,786,501 for the three months ended
      January 31, 2007 from $1,244,956 from for the three months ended January 31,
      2006. The increase is primarily due to the amortization and write-off of debt
      discount due to increased conversions of our convertible debentures during
      the
      three months ended January 31, 2007 as compared to the three months ended
      January 31, 2006.





We
      recognized a loss of $1,538,647 on the change in fair value of derivative
      liabilities for the three months ended January 31, 2007, an increase of
      $1,514,509 from $24,138 for the three months ended January 31, 2006. The
      increase in the loss was due primarily to a larger increase in the market price
      of our common stock during the three months ended January 31, 2007 as compared
      to three months ended January 31, 2006 and the warrants issued in connection
      with the 2006 Debentures that were not in existence during the three months
      ended January 31, 2006. The closing market price of our common stock was $0.114
      and $0.028 per share as of January 31, 2007 and 2006, respectively. In general,
      increases in the market price of our common stock as compared to the exercise
      price of our warrants or options results in increases in the fair value of
      the
      warrant or option as estimated using the Black-Scholes model.





The
      amortization of deferred financing costs increased 361% or $880,719 to
      $1,124,686 for the three months ended January 31, 2007 from $243,967 for the
      three months ended January 31, 2006. The increase is primarily a result of
      the
      conversions of the 2006 Debentures. Upon conversion or repayment of debt prior
      to its maturity date, a pro-rata share of debt discount and deferred financing
      costs are written off and recorded as expense.





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





Interest
      income represents interest earned on short-term investments and favorable cash
      management positions for the three months ended January 31, 2007.





NET
      LOSS .
 
      For the three months ended January 31, 2007 our net loss increased 501% or
      $6,492,608 to $7,790,484 for the three months ended January 31, 2007 from
      $1,297,876 for the three months ended January 31, 2006, primarily as the result
      of increases in salaries and related taxes and fringe benefits, consulting
      costs, interest expense, loss on the change in fair value of derivative
      liabilities, amortization of deferred financing costs, and amortization of
      technology licenses and capitalized software development fees.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      and
      short-term investments balances totaled approximately $287,000 at March 14,
      2007, $686,805 as of January 31, 2007, and $2,090,119 as of October 31, 2006.




26




Net
      cash
      used in operating activities was $1,155,688 for the three months ended January
      31, 2007, compared to $467,047 for the three months ended January 31, 2006.
      The
      increase in cash used in operations was principally the result of the following
      items:





·
            an
                increase in the net loss, which was $7,790,484 for the three months
                ended
                January 31, 2007, compared to $1,297,876 for the three months ended
                January 31, 2006; offset by


·
            a
                net increase for the three months ended January 31, 2007 in other
                current
                assets, other assets, and accounts payable and accrued liabilities
                of
                $64,552, compared to a net increase of $97,032 for the three months
                ended January 31, 2006;





impacted
      primarily by the following non-cash items:





·
            increased
                consulting fees and other compensatory elements of stock issuances,
                which
                were $889,819 for the three months ended January 31, 2007, compared
                to
                $339,002 for the three months ended January 31, 2006, principally
                due to
                the issuance of common stock with a value of $395,000 in exchange
                for
                services;


·
            an
                increase in the loss on the change in fair value of derivative liabilities
                of $1,538,647 for the three months ended January 31, 2007, compared
                to a
                loss of $24,138 for the three months ended January 31, 2006, due
                to the
                reasons noted above;


·
            increased
                amortization of deferred financing costs, which were $1,124,686 for
                the
                three months ended January 31, 2007, compared to $243,967 for the
                three
                months ended January 31, 2006, principally due to increased conversions
                of
                the 2006 Debentures and the amortization of the related deferred
                financing
                costs;


·
            increased
                amortization of debt discount on notes, which was $2,752,373 for
                the three
                months ended January 31, 2007, compared to $1,193,195 for the three
                months
                ended January 31, 2006, principally due to increased conversions
                of the
                2006 Debentures and the amortization of the related debt
                discount;


·
            increased
                amortization of technology licenses and capitalized software development
                fees, which was $260,303 for the three months ended January 31, 2007,
                compared to $102,696 for the three months ended January 31, 2006,
                principally due to recognizing a full three months of amortization
                for the
                three months ended January 31, 2007, as compared to 1.5 months for
                the
                three months ended January 31, 2006 as amortization didn’t commence until
                December 2005; and


·
            a
                gain on forgiveness of principal and interest on the promissory note
                to
                Zaiq Technologies, Inc. of $1,169,820 for the three months ended
                January
                31, 2006 which did not occur during the three months ended January
                31,
                2007.





Net
      cash
      provided by investing activities was $252,374 for the three months ended January
      31, 2007 compared to $0 for the three months ended January 31, 2006. The net
      increase was due to proceeds from the maturity of short-term investments and
      from the sale of certain trademark rights, offset by capitalization of research
      and development costs and software development fees, as well as the purchase
      of
      equipment and leasehold improvements related to the buildout of our headquarters
      office facility.





There
      was
      no cash provided by financing activities for the three months ended January
      31,
      2007, compared to $449,419 for the three months ended January 31, 2006, where
      we
      received the proceeds from a note payable, offset by repayments of convertible
      notes payable, notes payable, capitalized financing costs and the repurchase
      of
      common stock.





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





In
      March
      2006, we sold $6,000,000 in aggregate principal amount of our Senior Secured
      7%
      convertible debentures and warrants, receiving net proceeds of approximately
      $4.5 million after the payment of offering related costs (the “2006
      Debentures”). As of January 31, 2007, approximately $5.6 million of principal
      amount and interest of the 2006 Debentures had been converted into approximately
      73.4 million shares of our common stock and there was $662,000 of principal
      amount of the 2006 Debentures outstanding. The 2006 Debentures mature in March
      2008.





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





In
      May
      2005, we sold $3.5 million in aggregate principal amount of our Senior Secured
      7% convertible debentures and warrants (the “2005 Debentures”) in a private
      placement to certain private and institutional investors. As of January 31,
      2007, approximately $3.6 million of principal amount and interest of the 2005
      Debentures had been converted into approximately 170.1 million shares of our
      common stock and there was $4,280 of principal amount of the 2005 Debentures
      outstanding. The 2005 Debentures mature in May 2008.





27




In
      December 2003, April 2004 and May 2004,we sold $1,350,000 in aggregate principal
      amount and received net proceeds of approximately $1,024,000 from the private
      placement to certain private and institutional investors of our three year
      7%
      convertible debentures and warrants (the “7% Debentures”). As of January 31,
      2007, approximately $1.4 million of principal amount and interest of the 7%
      Debentures had been converted into approximately 9.1 million shares of our
      common stock and there was $75,000 of principal amount of the 7% Debentures
      outstanding. The 7% Debentures mature in May 2007.





As
      of
      March 14, 2007, we had cash and short-term investments of approximately
      $287,000. An institutional investor that has been a prior investor in the
      Company has committed to purchase $6 million of 7% Senior Secured Convertible
      Debentures upon our request at any time after March 1, 2007. As a result,
      management believes funds on hand or committed to us will enable us to meet
      our
      liquidity needs for the next twelve months. Nevertheless, circumstances may
      arise that would require us to raise additional capital in order to meet our
      liquidity needs and satisfy our current business plan prior to the receipt
      of
      revenues from our semiconductor business.





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





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





**Impact
      of Recently Issued Accounting Standards**





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





In
      February 2006, the FASB published Statement of Financial Accounting Standards
      No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of
      FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 resolves issues
      addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133
      to Beneficial Interests in Securitized Financial Assets.” The requirements in
      SFAS 155 are effective for all financial instruments acquired or issued after
      the beginning of an entity’s first fiscal year that begins after September 15,
      2006. We adopted SFAS 155 as of November 1, 2006. The adoption of this
      pronouncement did not have an impact on our consolidated financial position,
      results of operations, or cash flows.





In
      July
      2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
      Income Taxes - an Interpretation of FASB Statement No. 109” (the
“Interpretation”). The Interpretation establishes for all entities a minimum
      threshold for financial statement recognition of the benefit of tax positions,
      and requires certain expanded disclosures. The Interpretation is effective
      for
      fiscal years beginning after December 31, 2006, and is to be applied to all
      open
      tax years as of the date of effectiveness. We are in the process of evaluating
      the impact of the application of the Interpretation to our financial
      statements.





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 year 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.




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In
      September 2006, the SEC staff issued Staff Accounting Bulleting (“SAB”) No. 108,
      Considering the Effects of Prior Year Misstatements when Quantifying
      Misstatements in Current Year Financial Statements (“SAB 108”). SAB 108 was
      issued in order to reduce the diversity in practice in how public companies
      quantify misstatements of financial statements, including misstatements that
      were not material to prior years’ financial statements. SAB 108 is effective for
      fiscal year 2007. We adopted SAB 108 as of November 1, 2006. The adoption of
      this pronouncement did not 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.  The FASB has indicated it believes that
      SFAS 159 helps to mitigate this type of accounting-induced volatility by
      enabling companies to report related assets and liabilities at fair value,
      which
      would likely reduce the need for companies to comply with detailed rules for
      hedge accounting. 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 is not
      expected to have an impact on our consolidated financial position, results
      of
      operations or cash flows.





**ITEM
      3.  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.





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.




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**CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING** .
      There
      have been no changes in our internal controls over financial reporting that
      have
      materially affected, or are reasonably likely to affect these controls during
      the three months ended January 31, 2007.





**PART
      II - OTHER INFORMATION**





**ITEM
      2.  Unregistered Sales of Equity Securities and Use of
      Proceeds.**





In
      November 2006, we issued options to purchase 4,250,000 shares of common stock
      at
      an exercise price of $0.096 per share to one director and three executive
      employees valued at $386,427.





In
      December 2006, we issued:





(i)
            3,736,991
                shares of common stock to a corporation valued at $395,000 in payment
                of
                non-recurring engineering services;
                and





(ii)
            300,000 shares of common stock upon exercise of
              stock
              options in satisfaction of accrued expenses of
              $9,570.




In
      January 2007, we issued:





(i)
            an
                option to purchase 100,000 shares of common stock at an exercise
                price of
                $0.12 per share to one employee valued at
                $11,344;


(ii)
            464,535
                shares of common stock to 2006 Debenture holders in satisfaction
                of
                $68,547 in liquidated damages;


(iii)
            8,000,000
                shares of common stock valued at $1,007,000 to three consultants;
                and


(iv)
            300,000
                shares of common stock upon exercise of stock options in satisfaction
                of
                accrued expenses of $9,570.





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.





**ITEM
      6.  Exhibits**





31.1Rule
                13a-14/15d-14(a) Certification*32.1Section
                1350 Certification*


____________________





*
      Filed
      herewith.




30


**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.





**RIM
                SEMICONDUCTOR COMPANY**DATE: 
                March 14, 2007
            BY:
            /s/ Brad
                KetchBrad
                KetchPresident
                and Chief Executive Officer (Principal Executive Officer, Financial
                and Accounting Officer and Authorized
                Signatory)






31