**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C. 20549





**FORM
      10-QSB/A**





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


**ACT
      OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2006**





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


**ACT
      OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
      __________**





*COMMISSION
      FILE NUMBER 0-21785*





**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.


Yes x No  ̈





The
      number of shares of the issuer’s Common Stock, par value $.001 per share,
      outstanding as of July 5, 2006, was 324,973,732.





Transitional
      Small Business Disclosure Format (Check one) Yes  ̈ No x
















**EXPLANATORY
      NOTE**





This
      Quarterly Report on Form 10-QSB/A (the “Report”) is being filed by Rim
      Semiconductor Company (the “Company”) to amend the Company's Quarterly Report on
      Form 10-QSB for the period ended April 30, 2006 that was initially filed with
      the Securities and Exchange Commission (the “SEC”) on June 14, 2006. The Company
      is also filing amendments to its Annual Report on Form 10-KSB for the fiscal
      year ended October 31, 2005 and its Quarterly Reports on Form 10-QSB for the
      periods ended July 31, 2005 and January 31, 2006.





This
      Report reflects the restatement of the Company's previously issued condensed
      consolidated financial statements at and for the period ended April 30, 2006,
      and the notes related thereto, as discussed in Note 2 to the condensed
      consolidated financial statements included herein.
















**FORM
      10-QSB/A**





**RIM
      SEMICONDUCTOR COMPANY**





**APRIL
      30, 2006**





**TABLE
      OF CONTENTS**





**PAGE**


PART
                I - FINANCIAL INFORMATIONITEM
                1.  FINANCIAL STATEMENTSCONDENSED
                CONSOLIDATED BALANCE SHEET (Unaudited)At
                April 30, 2006(Restated)
            2CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)For
                the Six and Three Months Ended April 30, 2006 (Restated) and
                2005
            3CONDENSED
                CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
                (Unaudited)For
                the Six Months Ended April 30, 2006(Restated)
            5CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)For
                the Six Months Ended April 30, 2006 (Restated) and
                2005
            6NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            8ITEM
                2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            29ITEM
                3.  CONTROLS AND PROCEDURES
            39PART
                II - OTHER INFORMATIONITEM
                2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            41ITEM
                4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
                HOLDERS
            42ITEM
                6.  EXHIBITS
            42SIGNATURES
            44






1





**PART
      I - FINANCIAL INFORMATION**





**ITEM
      I.   FINANCIAL STATEMENTS**





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


(Unaudited)


(Restated)





ASSETS




**April
                30,**
              **2006**Current
                Assets:Cash
            
            $
            4,007,470Other
                current assets
            
            
            43,872TOTAL
                CURRENT ASSETS
            
            
            4,051,342Property
                and equipment (net of accumulated depreciation of $2,477)
            
            
            13,182Technology
                license and capitalized software development fee
              (net
                of accumulated amortization of $315,232)
            
            
            5,735,768Deferred
                financing costs (net of accumulated amortization of
                $1,249,428)
            
            
            2,292,390Other
                assets
            
            
            9,854TOTAL
                ASSETS
            
            $
            12,102,536





LIABILITIES
      AND STOCKHOLDERS’ DEFICIENCY





Current
                Liabilities:Convertible
                notes payable
            
            $
            525,000Convertible
                debentures (net of debt discount of $24,136)
            
            
            100,864Conversion
                option liabilities
            
            
            2,588,813Derivative
                liabilities - warrants
            
            
            10,419,140Account
                payable and accrued expenses
            
            
            785,473TOTAL
                CURRENT LIABILITIES
            
            
            14,419,290Long-term
                portion of convertible debentures (net of debt discount of
                $5,609,421)
            
            
            431,143TOTAL
                LIABILITIES
            
            
            14,850,433Commitments,
                Contingencies and Other MattersStockholders’
                Deficiency:Preferred
                stock - $0.01 par value; 15,000,000 shares authorized;
              -0-
                shares issued and outstanding
            
            
            —Common
                stock - $0.001 par value; 900,000,000 shares authorized;
              323,542,617
                shares issued and 323,042,763 shares outstanding
            
            
            323,543Treasury
                stock - 499,854 shares at cost
            
            
            (7,498
            )Additional
                paid-in capital
            
            
            69,480,132Unearned
                compensation
            
            
            (1,687,796
            )Accumulated
                deficit
            
            
            (70,856,278
            )TOTAL
                STOCKHOLDERS’ DEFICIENCY
            
            
            (2,747,897)TOTAL
                LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
            
            $
            12,102,536





See
      notes
      to condensed consolidated financial statements.




2







**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(Unaudited)





For
                the Six Months Ended
              April
                30,2006
              (Restated)
            
            2005REVENUES
            
            $
            58,874
            
            $
            16,198OPERATING
                EXPENSES:Cost
                of sales
            
            
            —
            
            
            11,945Amortization
                of technology license and capitalizedsoftware
                development fee
            
            
            315,232
            
            
            —Research
                and development expenses (includingstock
                based compensation of $26,860 and$0,
                respectively)
            
            
            137,600
            
            
            7,053Selling,
                general and administrative expenses(including
                stock based compensation of $983,710and
                $888,930, respectively)
            
            
            2,356,072
            
            
            1,571,334TOTAL
                OPERATING EXPENSES
            
            
            2,808,904
            
            
            1,590,332OPERATING
                LOSS
            
            
            (2,750,030
            )
            
            (1,574,134
            )OTHER
                (INCOME) EXPENSES:Interest
                expense
            
            
            7,897,769
            
            
            639,646Derivative
                loss
            
            
            484,538
            
            
            —Amortization
                of deferred financing costs
            
            
            568,819
            
            
            53,109Gain
                on forgiveness of principal and intereston
                Zaiq Note
            
            
            (1,169,820
            )
            
            —Gain
                on sale of property and equipment
            
            
            —
            
            
            (20,000
            )Gain
                on exchange of Redeemable Series B PreferredStock
                into common stock
            
            
            —
            
            
            (55,814
            )Loss
                on exchange of notes payable into common stock
            
            
            446,386
            
            
            —Other
            
            
            (3,000
            )
            
            (28,506
            )TOTAL
                OTHER (INCOME) EXPENSES
            
            
            8,224,692
            
            
            588,435NET
                LOSS
            
            $
            (10,974,722
            )
            $
            (2,162,569
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.04
            )
            $
            (0.02
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            267,242,791
            
            
            93,198,867





See
      notes
      to condensed consolidated financial statements.






3







**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(Unaudited)





For
                the Three Months Ended
              April
                30,2006
              (Restated)
            
            2005REVENUES
            
            $
            18,698
            
            $
            7,397OPERATING
                EXPENSES:Cost
                of sales
            
            
            —
            
            
            5,320Amortization
                of technology license and capitalizedsoftware
                development fee
            
            
            212,536
            
            
            —Research
                and development expenses (includingstock
                based compensation of $5,044 and$0,
                respectively)
            
            
            52,556
            
            
            —Selling,
                general and administrative expenses(including
                stock based compensation of $333,958and
                $609,381, respectively)
            
            
            1,549,001
            
            
            974,388TOTAL
                OPERATING EXPENSES
            
            
            1,814,093
            
            
            979,708OPERATING
                LOSS
            
            
            (1,795,395
            )
            
            (972,311
            )OTHER
                (INCOME) EXPENSES:Interest
                expense
            
            
            6,652,813
            
            
            360,864Derivative
                loss (gain)
            
            
            460,400
            
            
            —Amortization
                of deferred financing costs
            
            
            324,852
            
            
            28,490Gain
                on sale of property and equipment
            
            
            —
            
            
            (20,000
            )Gain
                on exchange of Redeemable Series B PreferredStock
                into common stock
            
            
            —
            
            
            (55,814
            )Loss
                on exchange of notes payable into common stock
            
            
            446,386
            
            
            —Other
            
            
            (3,000
            )
            
            (28,506
            )TOTAL
                OTHER (INCOME) EXPENSES
            
            
            7,881,451
            
            
            285,034NET
                LOSS
            
            $
            (9,676,846
            )
            $
            (1,257,345
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.03
            )
            $
            (0.01
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            306,633,326
            
            
            99,061,445





See
      notes
      to condensed consolidated financial statements.





4




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’****DEFICIENCY**


**FOR
      THE SIX MONTHS ENDED APRIL 30, 2006**


(Unaudited)


(Restated)





Common
                Stock
            
            Treasury
                StockShares
            
            Amount
            
            Shares
            
            Amount
            
            Additional
              Paid-in
              Capital
            
            Unearned
              Compensation
            
            Accumulated
              Deficit
            
            Total
              Stockholders’
              DeficiencyBalance
                at October 31, 2005
            
            
            184,901,320
            
            $
            184,902
            
            
            —
            
            
            —
            
            $
            61,359,999
            
            $
            (22,771
            )
            $
            (59,881,556
            )
            $
            1,640,574Repurchase
                of common
              stock
                for cash
            
            
            —
            
            
            —
            
            
            (499,854
            )
            $
            (7,498
            )
            
            —
            
            
            —
            
            
            —
            
            
            (7,498
            )Issuance
                of common stock
              under
                consulting
              agreements
            
            
            11,000,000
            
            
            11,000
            
            
            —
            
            
            —
            
            
            1,859,000
            
            
            (1,870,000
            )
            
            —
            
            
            —Issuance
                of common stock
              for
                conversion of
              convertible
                deben-
              tures
                and accrued
              interest
            
            
            104,170,465
            
            
            104,170
            
            
            —
            
            
            —
            
            
            1,743,155
            
            
            —
            
            
            —
            
            
            1,847,325Issuance
                of common stock
              for
                convertible notes
              payable
                and accrued
              interest
            
            
            35,714
            
            
            36
            
            
            —
            
            
            —
            
            
            14,964
            
            
            —
            
            
            —
            
            
            15,000Issuance
                of common stock
              for
                notes payable
              and
                accrued interest
            
            
            12,064,494
            
            
            12,064
            
            
            —
            
            
            —
            
            
            1,278,837
            
            
            —
            
            
            —
            
            
            1,290,901Issuance
                of common stock
              upon
                exercise of
              warrants
            
            
            11,370,624
            
            
            11,371
            
            
            —
            
            
            —
            
            
            557,160
            
            
            —
            
            
            —
            
            
            568,531Stock
                options issued to
              key
                employees and
              advisory
                board
              member
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            805,595
            
            
            (805,595
            )
            
            —
            
            
            —Reclassification
                of derivative
              liability
                upon exercise of warrants
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,100,639
            
            
            —
            
            
            —
            
            
            1,100,639Reclassification
                of
              conversion
                option
              liability
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            760,783
            
            
            —
            
            
            —
            
            
            760,783Amortization
                of unearned
              compensation
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,010,570
            
            
            —
            
            
            1,010,570Net
              loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (10,974,722
            )
            
            (10,974,722
            )Balance
                at April 30, 2006
            
            
            323,542,617
            
            $
            323,543
            
            
            (499,854
            )
            $
            (7,498
            )
            $
            69,480,132
            
            $
            (1,687,796
            )
            $
            (70,856,278
            )
            $
            (2,747,897
            )




See
      notes
      to condensed consolidated financial statements.






5





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(Unaudited)






For
                the Six Months Ended
              April
                30,2006
              (Restated)
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                Loss
            
            $
            (10,974,722
            )
            $
            (2,162,569
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Consulting
                fees and other compensatory elements of stock issuances
            
            
            1,010,570
            
            
            888,930Derivative
                loss
            
            
            484,538
            
            
            —Fair
                value of Investors’ warrants in excess of debt discount
            
            
            5,608,156
            
            
            —Loss
                on exchange of notes payable into common stock
            
            
            446,386
            
            
            —Gain
                on forgiveness of principal and interest on Zaiq Note
            
            
            (1,169,820
            )
            
            —Gain
                on sale of property and equipment
            
            
            —
            
            
            (20,000
            )Gain
                on exchange of Redeemable Series B Preferred Stock into common
                stock
            
            
            —
            
            
            (55,814
            )Other
                non-cash income
            
            
            —
            
            
            (33,514
            )Amortization
                of deferred financing costs
            
            
            568,819
            
            
            53,109Amortization
                of film in production costs
            
            
            —
            
            
            11,945Amortization
                of debt discount on notes
            
            
            2,168,904
            
            
            520,169Amortization
                of technology license and capitalized software development
                fee
            
            
            315,232
            
            
            —Depreciation
            
            
            1,239
            
            
            7,095Change
                in Assets (Increase) Decrease:Other
                current assets
            
            
            (9,841
            )
            
            (898
            )Other
                assets
            
            
            370
            
            
            (2,990
            )Change
                in Liabilities Increase (Decrease):Accounts
                payable and accrued expenses
            
            
            199,687
            
            
            (22,329
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (1,350,482
            )
            
            (816,866
            )CASH
                FLOWS FROM INVESTING ACTIVITIESAcquisition
                of technology license and development fee
            
            
            (200,000
            )
            
            —Acquisition
                of property and equipment
            
            
            (4,499
            )
            
            —NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (204,499
            )
            
            —CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from issuance of common stock
            
            
            —
            
            
            800,100Proceeds
                from exercise of warrants
            
            
            568,531
            
            
            —Purchase
                of treasury stock
            
            
            (7,498
            )
            
            —Proceeds
                from convertible debentures
            
            
            6,000,000
            
            
            —Proceeds
                from notes payable
            
            
            750,000
            
            
            300,000Capitalized
                financing costs
            
            
            (742,450
            )
            
            (33,029
            )Repayments
                of notes payable
            
            
            (944,291
            )
            
            —Repayments
                of convertible notes payable
            
            
            (435,322
            )
            
            (25,625
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            5,188,970
            
            
            1,041,446INCREASE
                IN CASH
            
            
            3,633,989
            
            
            224,580CASH
                - BEGINNING OF PERIOD
            
            
            373,481
            
            
            127,811CASH
                - ENDING OF PERIOD
            
            $
            4,007,470
            
            $
            352,391




See
      notes
      to condensed consolidated financial statements.





6






**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(Unaudited)





For
                the Six Months Ended
              April
                30,2006
              (Restated)
            
            2005SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
                paid during the period for:Interest
            
            $
            3,158
            
            $
            5,400NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Common
                stock issued for conversion of convertible debentures,
              convertible
                notes payable, notes payable and accrued interest
            
            $
            3,153,226
            
            $
            630,476Common
                stock issued for consulting services
            
            $
            1,870,000
            
            $
            —Value
                assigned to warrants issued in connection with notes
                payable
            
            $
            120,000
            
            $
            —Value
                assigned to warrants issued to holders of 2006 Debentures on the
                issuance
                date
            
            $
            9,036,727
            
            $
            —Value
                assigned to warrants issued to placement agents on the issuance
                date
            
            $
            1,792,452
            
            $
            —Value
                assigned to conversion option liability in connection with issuance
                of2006
                Debentures
            
            $
            2,571,429
            
            $
            —Accounts
                payable and accrued expenses satisfied by issuance of common
                stock
            
            $
            —
            
            $
            71,911Common
                stock issued for accrued liquidated damages
            
            $
            —
            
            $
            96,000Accounts
                payable and accrued expenses converted to note payable
            
            $
            —
            
            $
            55,251Deferred
                compensation converted to convertible note payable (See Note
                7)
            
            $
            212,450
            
            $
            383,911Reclassification
                of conversion option liability to equity
            
            $
            760,783
            
            $
            —Redeemable
                Series B Preferred Stock exchanged into notes payable
            
            $
            —
            
            $
            2,392,000Redeemable
                Series B Preferred Stock (recorded at $800,000) exchanged into common
                stock
            
            $
            —
            
            $
            744,186




See
      notes
      to condensed consolidated financial statements.





7







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





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





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 (Amendment No. 2) for the fiscal year ended
      October 31, 2005.





These
      results for the three months and six months ended April 30, 2006 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. The Company operates in two business segments, the production
      of motion pictures, films and videos (“Entertainment Segment”) and the
      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, and has generated no revenues to date. The Company’s first chipset
      was first made available to prospective customers for evaluation and testing
      during the three months ended January 31, 2006.





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





Historically,
      the Company has experienced significant recurring net operating losses as well
      as negative cash flows from operations. The Company’s main source of liquidity
      has been equity and debt financing, which was used to fund historical losses
      from operating activities. Based on the Company’s current cash position, the
      Company believes it has sufficient cash to meet its funding needs through at
      least September 2007. The Company plans to increase its expenses above the
      current level in order to realize its business plans.





**NOTE
      2 - RESTATEMENT**





On
      July
      6, 2006, the Company’s Board of Directors, after consultations by management and
      the Audit Committee with the Company’s independent registered public accounting
      firm, concluded that the classification of warrants issued in connection with
      the 2005 and 2006 convertible debentures was not in accordance with
      interpretations of 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.”  Accordingly, the condensed
      consolidated financial statements included in the Company’s Quarterly Report on
      Form 10-QSB for the period ended April 30, 2006, as filed on June 14, 2006
      (the
“April 2006 10-QSB”) have been restated to correct the accounting for the
      warrants as derivative liabilities.  The previously issued condensed
      consolidated financial statements included in the April 2006 10-QSB should
      not
      be relied upon.  As a result of this restatement, $10,419,140 included in
      stockholders' equity at April 30, 2006 should have been recorded as a derivative
      liability and the Company should have recorded additional interest expense
      of
      $5,673,953 for the three months and six months ended April 30, 2006. This
      expense was principally related to the amount ($5,608,156) by which the fair
      value on April 30, 2006 of warrants issued to purchasers of debentures sold
      by
      the Company in March 2006 exceeded the debt discount allocated to such warrants.
      See Note 8. In






8







**NOTE
      2 - RESTATEMENT (CONTINUED)**





addition,
      the Company should have recorded losses of $460,400 and $484,538, respectively,
      for the three and six months ended April 30, 2006, on the change in fair value
      of derivative liabilities. The treatment of this non-cash accounting item
      results in an increase in the Company’s net loss for the three months and six
      months ended April 30, 2006 as follows:





For
                the
              Three
                Months
              Ended
                April 30, 2006
            
            For
                the
              Six
                Months
              Ended
                April 30, 2006(As
                Reported)
            
            (As
                Restated)
            
            (As
                Reported)
            
            (As
                Restated)Net
                Loss
            
            $
            (3,542,493
            )
            $
            (9,676,846
            )
            $
            (4,816,231
            )
            $
            (10,974,722
            )Basic
                and diluted net loss
              per
                share of common stock
            
            $
            (0.01
            )
            $
            (0.03
            )
            $
            (0.02
            )
            $
            (0.04
            )





The
      correction of the above also results in the following changes to the
      Company's stockholders' equity (deficiency) and liabilities at April 30,
      2006:





(As
                Reported)
            
            (As
                Restated)Total
                liabilities
            
            $
            5,308,577
            
            $
            14,850,433Stockholders’
                equity (deficiency)
            
            $
            6,793,959
            
            $
            (2,747,897
            )





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





**Film
      In Distribution**





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





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





As
      a
      result of impairment reviews during the years ended October 31, 2005 and 2004,
      the Company wrote down the carrying value attributed to the Film to
      $0.





9








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





**Revenue
      Recognition**





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





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





·
            persuasive
                evidence of a sale or licensing arrangement with a customer exists;


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


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


·
            the
                arrangement fee is fixed or determinable; and


·
            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.





**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 earnings at the consummation of the acquisition.





**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.






10







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





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.





No
      assurance can be given that such technology will receive market acceptance.
      Accordingly, it is possible that the carrying amount of the technology license
      may be reduced materially in the near future.





The
      Company had amortization expense of $212,536 and $315,232 for the three months
      and six months ended April 30, 2006, respectively, related to its
      capitalized software development costs. There was no amortization expense for
      the three months and six months ended April 30, 2005.





**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 and six months ended April 30, 2006
      and
      2005, respectively, 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**





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





The
      Company early adopted SFAS 123(R) using the modified prospective transition
      method, as of November 1, 2005, the first day of the Company’s fiscal year 2006.
      The Company’s condensed consolidated financial statements as of and for the six
      months ended April 30, 2006 reflect the impact of SFAS 123(R). In accordance
      with the modified prospective transition method, the Company’s condensed
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the impact of SFAS 123(R).





SFAS
      123(R) requires companies to estimate the fair value of share-based payment
      awards on the date of grant using an option-pricing model. The value of the
      portion of the award that is ultimately expected to vest is recognized as
      expense over the requisite service periods in the Company’s condensed
      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 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 the
      Company’s condensed 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.





Stock-based
      compensation expense recognized in the Company’s condensed consolidated
      statement of operations for the six months ended April 30, 2006 included
      compensation expense for share-based payment awards granted prior to, but
      not yet vested as of October 31, 2005 based on the grant date fair
      value estimated in accordance with the pro-forma provisions of SFAS 123
      and compensation expense for the share-based payment awards granted
      subsequent to October 31, 2005 based on the grant date fair value estimated
      in
      accordance with the provisions of SFAS 123(R). The Company has continued to
      attribute the value of stock-based compensation to expense on the straight-line
      single option method.





11







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





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





Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options was $378,802 and $447,839 for the three months and six months ended
      April 30, 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 pro-forma
      provisions of SFAS 123 was $0 and $247,057 for the three months and six months
      ended April 30, 2006, respectively. Stock based-compensation expense recognized
      for non-employees under other accounting standards was $292,766 and $315,674
      for
      the three months and six months ended April 30, 2006, respectively.





Stock-based
      compensation expense related to employee stock options under other accounting
      standards for the three months and six months ended April 30, 2005 was $20,915
      and $20,915, respectively. Stock based-compensation expense recognized for
      non-employees under other accounting standards was $135,967 and $415,515 for
      the
      three months and six months ended April 30, 2005, respectively.




As
      stock-based compensation expense recognized in the condensed consolidated
      statement of operations for the three months and six months ended April 30,
      2006
      is based on awards ultimately expected to vest, it has been reduced for
      estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
      the
      time of grant and revised, if necessary, in subsequent periods if actual
      forfeitures differ from those estimates. In the Company’s pro-forma information
      required under SFAS 123(R) for the periods prior to fiscal 2006, the Company
      accounted for forfeitures as they occurred.





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





For
                the Six
              Months
                Ended
              April
                30, 2005
            
            For
                the Three
              Months
                Ended
              April
                30, 2005Net
                loss, as reported
            
            $
            (2,162,569
            )
            $
            (1,257,345
            )Add:
                Stock-based employee compensation expense
              included
                in reported net loss
            
            
            20,915
            
            
            20,915Less:
                Total stock-based employee compensation expense
              determined
                under the fair value-based method of all awards
            
            
            (190,788
            )
            
            (190,788
            )Net
                loss, pro-forma
            
            $
            (2,332,442
            )
            $
            (1,427,218
            )Basic
                and Diluted Net Loss per Common Share:As
                reported
            
            $
            (0.02
            )
            $
            (0.01
            )Pro-forma
            
            $
            (0.03
            )
            $
            (0.01
            )






12








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





**Impact
      of Recently Issued Accounting Standards**





In
      June
      2005, the FASB published Statement of Financial Accounting Standards No. 154,
      “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 establishes
      new standards on accounting for changes in accounting principles. Pursuant
      to
      the new rules, all such changes must be accounted for by retrospective
      application to the financial statements of prior periods unless it is
      impracticable to do so. SFAS 154 completely replaces Accounting Principles
      Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
      pronouncements with respect to accounting for changes in estimates, changes
      in
      the reporting entity, and the correction of errors. The requirements in SFAS
      154
      are effective for accounting changes made in fiscal years beginning after
      December 15, 2005. The Company will apply these requirements to any accounting
      changes after the implementation date.





The
      Emerging Issues Task Force (“EITF”) reached a tentative conclusion on EITF Issue
      No. 05-1, “Accounting for the Conversion of an Instrument That Becomes
      Convertible upon the Issuer’s Exercise of a Call Option” that no gain or loss
      should be recognized upon the conversion of an instrument that becomes
      convertible as a result of an issuer’s exercise of a call option pursuant to the
      original terms of the instrument. The adoption of this pronouncement is not
      expected to have an impact on the Company’s consolidated financial position,
      results of operations, or cash flows.





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





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





13








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





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





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





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





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





**NOTE
      4 - FILM IN DISTRIBUTION**





The
      Company recognized revenues of $18,698 and $58,874 for the three months and
      six
      months ended April 30, 2006, respectively. The Company recognized revenues
      of
      $7,397 and $16,198 for the three months and six months ended April 30, 2005,
      respectively. There was no amortization expense for the three months and six
      months ended April 30, 2006. The Company had amortization expense of $5,320
      and
      $11,945 for the three months and six months ended April 30, 2005,
      respectively.






14







**NOTE
      5 - DEFERRED FINANCING COSTS**





As
      of
      April 30, 2006, deferred financing costs consisted 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
            
            
            (1,249,428
            )Deferred
                financing costs, net
            
            $
            2,292,390





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 and six months ended April 30, 2006, amortization of deferred
      financing costs was $324,852 and $568,819, respectively. For the three months
      and six months ended April 30, 2005, amortization of deferred financing costs
      was $28,490 and $53,109, respectively.





**NOTE
      6 - EXCHANGE AGREEMENT**





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





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





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





On
      December 20, 2005, the Company paid Zaiq an aggregate of $129,789, out of an
      advance on the note payable that was subsequently signed in January 2006 (see
      Note 9), to purchase the Zaiq Note and 499,854 Zaiq Shares. The Zaiq Shares
      repurchased by the Company have been accounted for as treasury stock, carried
      at
      cost, and reflected as a reduction to stockholders’ equity. The remaining
      principal and accrued interest of $1,292,111 on the Zaiq Note has been canceled
      resulting in a gain of $1,169,820.





**NOTE
      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 below except for one note for $10,000, which accrues interest at
      the
      rate of 9% per annum and the convertible promissory note with the Company’s
      executive vice president discussed below.





15








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





The
      outstanding convertible notes are summarized below:




**At
                April 30,****2006**Note
                payable (1)
            
            $
            47,000Notes
                payable (nine notes) (2)
            
            
            468,000Notes
                payable, 9% interest (3)
            
            
            10,000TOTAL
            
            $
            525,000





(1)
            The
                note was issued in October 2001 in the amount of $250,000, and due
                only
                when receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $375,000. The 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 $0.40. The Company
                made
                payments of $25,000 and $50,000 during the three months and six months
                ended April 30, 2006, respectively.(2)
            The
                notes were issued during the period from March 2002 through July
                2003 in
                the aggregate amount of $478,000 and due only when receipts received
                by
                the Company from its Top Secret Productions, LLC joint venture exceed
                $2,250,000. The notes and any accrued and unpaid interest may be
                converted
                at any time, in whole or in part, into shares of common stock at
                conversion prices per share ranging from $0.33 to $1.00. Principal
                of
                $10,000 and accrued interest of $5,000 was converted into 35,714
                shares of
                common stock during the three months ended April 30, 2006.(3)
            The
                note was issued in July 2003 in the amount of $10,000, and due only
                when
                receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $750,000. The note and any accrued and unpaid
                interest may be converted at any time, in whole or in part, into
                shares of
                common stock at a conversion price per share of
                $0.60.




In
      March
      2005, the Company issued in favor of the Company’s executive vice president, a
      non-interest bearing convertible promissory note in the principal amount of
      $383,911. The convertible promissory note was issued in evidence of the
      Company’s obligation for deferred compensation. In accordance with APB 21,
      imputed interest (at an effective rate of 15%) was calculated to arrive at
      the
      fair value of the convertible promissory note. The difference between the face
      amount and the present value upon issuance of the convertible promissory note
      is
      shown as a discount that is amortized as interest expense over the life of
      the
      convertible promissory note. Amortization of debt discount on this note was
      $15,583 and $20,875 for the three months and six months ended April 30, 2006,
      respectively. The Company made payments of $20,833 and $84,125 during the three
      months and six months ended April 30, 2006, respectively. In March 2006, the
      remaining principal amount of this note and additional deferred compensation
      payable to the note holder of $212,450 were converted into a convertible
      promissory note with an aggregate principal amount of $301,197. The principal
      and accrued interest on this note was repaid in April 2006. The remaining
      unamortized debt discount on the March 2005 convertible promissory note of
      $15,583 was recorded as interest expense during the three months ended April
      30,
      2006.






16




**NOTE
      8 - CONVERTIBLE DEBENTURES**





**2006
      Debentures** **(Restated)**





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”). Of
      this amount, $3.0 million was delivered by the Company to a security agent,
      acting on behalf of the Investors (the “Security Deposit”), to secure certain
      obligations of the Company to the Investors if the Company failed to file an
      amendment, with the approval of the Company’s shareholders, to its charter
      documents to reflect the increase in the Company’s authorized common stock from
      500 million to 900 million shares (the “Authorized Share Increase”). The
      Company’s shareholders approved the Authorized Share Increase on April 18, 2006
      and the $3.0 million Security Deposit was released to the Company.





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.





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





The
      2006
      Debentures are convertible into shares of common stock at the holder’s option at
      any time on or after the earlier of (i) the 65th day following issuance or
      (ii)
      the effective date of the registration statement, with the 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 Securities Purchase Agreement.





On
      April
      24, 2006, the Company filed a registration statement covering the common stock
      underlying the 2006 Debentures and the warrants. This registration statement
      has
      not yet been declared effective by the Securities and Exchange
      Commission.





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.






17






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





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





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





The
      gross
      proceeds of $6,000,000 are recorded as a liability net of a debt discount of
      $6,000,000 consisting of an allocation of the fair values attributed to the
      Investors’ warrants and to the embedded conversion feature in accordance with
      EITF issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to
      and Potentially Settled in a Company’s Own Stock.” The debt discount consisted
      of a $3,428,571 value related to the Investors' warrants and a value
      attributed to the embedded conversion feature of $2,571,429.  The debt
      discount was first allocated to the embedded conversion feature based on its
      fair value. After reducing the gross proceeds by the value allocated to the
      embedded conversion feature, the remaining unallocated debt discount of
      $3,428,571 was allocated to the Investors' warrants. The excess of the fair
      value of the Investors’ warrants above the debt discount allocated to the
      Investors’ warrants was $5,608,156 and was recorded as interest
      expense.





In
      accordance with EITF No. 00-19, due to certain factors, including an uncapped
      liquidated damages provision in the registration rights agreement and an
      indeterminate amount of shares to be issued upon conversion of the debentures,
      the Company separately values and accounts for the embedded conversion feature
      related to the 2006 Debentures, the Investors’ warrants, the placement agent’s
      warrants, and the registration rights as derivative liabilities. Accordingly,
      these derivative liabilities are measured at fair value with changes in fair
      value reported in earnings as long as they remain classified as liabilities.
      The
      Company reassesses t he
      classification at each balance sheet date. If the classification required under
      EITF 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.





A
      gain on
      the change in fair value of these derivative liabilities of $2,648,668 was
      recognized during the three and six months ended April 30, 2006.





The
      2006
      Debentures are summarized below as of April 30, 2006:





Outstanding
              Principal
                Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueLong-term
                portion
            
            $
                6,000,000
            
            $
                5,581,395
            
            $ 
                418,605





**2005
      Debentures** **(Restated)**





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.





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




In
      connection with the issuance of the 2005 Debentures, the Company also issued
      to
      a placement agent warrants to purchase up to 5,656,108 shares of Common Stock
      (the “Compensation Warrants”) valued at $319,066 on the issuance date. This
      amount was recorded as a deferred financing cost and is being charged to
      interest expense over the term of the 2005 Debentures. Warrants to purchase
      up
      to 2,262,443 shares are 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. Warrants to purchase
      up to 2,262,443 shares are exercisable through the last day of the month in
      which the third anniversary of the closing occurs (May 31, 2008) at a per share
      exercise price of $0.1547. Warrants to purchase up to 1,131,222 shares are
      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. The Compensation Warrants are otherwise
      exercisable on substantially the same terms and conditions as the Investor
      Warrants.







18






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





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




The
      gross
      proceeds of $3,500,000 are recorded as a liability 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 EITF issue No. 00-19 “Accounting for Derivative
      Financial Instruments Indexed to and Potentially Settled in a Company’s Own
      Stock.” Due to certain factors, including an uncapped liquidated damages
      provision in the registration rights agreement and an indeterminate amount
      of
      shares to be issued upon conversion of the debentures, the Company separately
      values and accounts for the embedded conversion feature related to the 2005
      Debentures, the Investors’ Warrants, the Compensation Warrants, and the
      registration rights as derivative liabilities. Accordingly, these derivative
      liabilities are measured at fair value with changes in fair value reported
      in
      earnings as long as they remain classified as liabilities. The Company
      reassesses t he
      classification at each balance sheet date. If the classification required under
      EITF 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. Due
      to
      various factors, including substantial conversions of the 2005 Debentures and
      the registration statement becoming effective on August 1, 2005, the value
      of
      the registration rights was deemed to be de minimus.





As
      of
      April 30, 2006, the conversion option liability of $1,500,000 had been reduced
      to $17,384 as a result of conversions of the 2005 Debentures. An aggregate
      of
      $1,482,616 has been reflected as a reclassification to stockholders’ equity
      since the issuance of the 2005 Debentures.





During
      the three months ended April 30, 2006, upon the exercise, by holders of the
      Investor and Compensation Warrants, of warrants to purchase an aggregate of
      11,370,624 shares, the Company reassessed the classification of the exercised
      warrants and reclassified the fair value of the exercised warrants of $1,100,639
      from current liabilities to stockholders’ equity.





A
      loss on
      the change in fair value of derivative liabilities of $3,109,068 and $3,133,206
      was recognized during the three months and six months ended April 30, 2006,
      respectively.





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.





Any
      shares of common stock issued with any exercise of an Investor or Compensation
      Warrant to a holder of an Investor or Compensation Warrant who or which executed
      the Warrant Amendment, whether during the New Price Exercise Period (on the
      terms contemplated in the Warrant Amendment) or thereafter (on the original
      terms provided in the Investor and Compensation Warrants) were or will be in
      restricted common stock, but shall have the registration rights provided in
      the
      Warrant Amendment. 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 the
      New
      Required Effective Date (as defined below).





19





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





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


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 Securities and Exchange Commission (the “SEC”) no later than the
      earlier of the date the Company files its next registration statement with
      the
      SEC (other than on Form S-8 or S-4) for the sale of shares by the Company or
      other selling stockholders, or May 1, 2006. The term “New Required
      Effective Date” means the date which is the later of 120 days from the
      expiration of the New Price Exercise Period, or sixty days after the filing
      of
      such registration statement; provided, however, that in no event shall such
      date
      be later than the required effective date contemplated by the terms of any
      new
      transaction consummated by the Company after February 21, 2006, where the shares
      of common stock issued or issuable to the investors in such transaction are
      included in a registration statement that is required to be made effective
      by a
      stated date. The common stock underlying the Investor and Compensation Warrants
      were included in the registration statement filed on April 24,
      2006.





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





A
      registration statement covering the common stock issuable upon conversion of
      the
      2005 Debentures, the Investor Warrants and the Compensation Warrants referred
      to
      above was declared effective by the SEC on August 1, 2005.





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. During the three months ended April 30, 2006,
      $464,423 of principal amount of the 2005 Debentures plus accrued interest of
      $2,401 were converted into 22,908,266 shares of common stock.





Included
      in interest expense for the three months and six months ended April 30, 2006
      is
      $361,783 and $1,525,943, respectively, related to the amortization of the debt
      discount on these debentures.





The
      2005
      Debentures are summarized below as of April 30, 2006:





Outstanding
              Principal
                Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueLong-term
                portion
            
            $ 
                40,564
            
            $ 
                28,026
            
            $ 
                12,538





**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”).





During
      the six months ended April 30, 2006, no principal or accrued interest was
      converted into shares of common stock. During the three months ended January
      31,
      2005, $199,450 of principal amount plus accrued interest of $12,264 were
      converted into 1,411,428 shares of common stock at a conversion price of $0.15.
      During the three months ended April 30, 2005, $383,050 of principal amount
      plus
      accrued interest of $28,212 were converted into 2,741,747 shares of common
      stock
      at a conversion price of $0.15.





20







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





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





The
      7%
      Debentures are summarized below as of April 30, 2006:





Outstanding
              Principal
                Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueCurrent
                portion
            
            $ 
                125,000
            
            $ 
                24,136
            
            $ 
                100,864





The
      remaining 7% Debentures outstanding at April 30, 2006 were originally issued
      in
      December 2003 and are due and payable in December 2006.





**NOTE
      9 - NOTES PAYABLE**





The
      Company does not currently have any outstanding notes payable. During
      the six months ended April 30, 2006, the Company recognized
      losses as a result of the conversion of several notes payable into common stock
      and also repaid several notes payable, as further described below.





In
      February 2006, the Company issued 5,304,253 shares of restricted common stock
      in
      exchange for the return and cancellation of the outstanding principal of
      $256,886 and interest of $114,412 on five, unsecured individual notes
      payable, each with identical terms and bearing 6% interest.  As the
      conversion rate of $0.07 was below the closing price of the common stock on
      the
      conversion date, a loss of $196,257 was recognized during the three months
      ended
      April 30, 2006.





Outstanding
      principal of $39,973 and interest of $110,027 was paid in June 2005 on an
      unsecured note payable bearing 10% interest from the proceeds of the
      private placement of the 2005 Debentures. In February 2006, the Company issued
      6,760,241 shares of restricted common stock in exchange for the return and
      cancellation of the outstanding principal of $443,251 and interest of $29,766
      on
      this note. As the conversion rate of $0.07 was below the closing price of the
      common stock on the conversion date, a loss of $250,129 was recognized during
      the three months ended April 30, 2006.





On
      March
      26, 2004, the Company entered into a loan agreement, pursuant to which the
      Company borrowed $12,000 from the lender. In April 2006, the outstanding
      principal of $12,000 and interest of $1,217 were repaid.





In
      April
      2005, the Company issued a promissory note in connection with the cancellation
      of the Redeemable Series B Preferred Stock which bears interest at the rate
      of
      7% per annum. In December 2005, the Company entered into an agreement to repay
      a
      portion of the outstanding principal and accrued interest on the promissory
      note
      with the remaining principal balance and accrued interest being forgiven. See
      Note 6 for further details.





In
      December 2005 and January 2006, the Company entered into loan agreements with
      a
      third party pursuant to which the Company borrowed $750,000 from the lender.
      An
      amount equal to 108% of the principal amount ($810,000) of the loans is due
      and
      payable on the earlier of May 25, 2006 or the date the Company effects a
      financing transaction or series of transactions resulting in gross proceeds
      to
      the Company of at least $2,000,000. The difference between the gross proceeds
      and amount due at maturity is shown as a discount that is amortized as interest
      expense over the life of the loans. The Company issued to the lender warrants
      to
      purchase 7,500,000 shares of its Common Stock at an exercise price of $0.10
      per
      share. The fair value of the warrants was $120,000 and was shown as a debt
      discount and amortized as interest expense over the life of the loans. In
      connection with the loans, the Company granted a security interest in all of
      its
      assets. The Company received net proceeds of $672,470 following the payment
      of
      due diligence fees and transaction fees and transaction related fees and
      expenses. These transaction related fees were recorded as deferred financing
      costs. For the three months ended January 31, 2006, amortization of debt
      discount on this loan was $10,413. In March 2006, 108% of the principal amount
      ($810,000) was repaid and the security interest was released. All unamortized
      debt discount and deferred financing costs were written off during the three
      months ended April 30, 2006 in connection with the repayment of the
      loan.






21






**NOTE
        10 - STOCKHOLDERS’ EQUITY**
 
 **Common
        Stock**
 
 During
        the six months ended April 30, 2006, the Company:
 
 ·
              issued
                  104,170,465 shares of common stock for conversion of convertible
                  debentures with a principal amount of $1,775,947 and accrued interest
                  of
                  $72,178;
 
 ·
              repurchased
                  499,854 shares of common stock for $7,498 from
                  Zaiq;
 
 ·
              issued
                  35,714 shares of common stock for conversion of convertible notes
                  payable
                  with a principal amount of $10,000 and accrued interest of
                  $5,000;
 
 ·
              issued
                  12,064,494 shares of common stock valued at $1,290,901 in exchange
                  for the
                  return and cancellation of notes payable with a principal amount
                  of
                  $700,337 and accrued interest of
                  $144,178;
 
 ·
              issued
                  11,370,624 shares of common stock upon exercise of warrants resulting
                  in
                  gross proceeds of $568,531; and
 
 ·
              issued
                  11,000,000 shares of restricted common stock to consultants for
                  services
                  valued at $1,870,000.
 
 **Stock
        Option Plans**
 
 On
        November 1, 2005, the Company early adopted SFAS 123(R), which requires the
        measurement and recognition of compensation expense for all share-based payment
        awards made to the Company’s employees and directors including employee stock
        options based on estimated fair values.
 
 Upon
        adoption of SFAS 123(R), the Company continued to estimate the value of stock
        options on the date of grant using the Black-Scholes model and the assumptions
        noted in the table below. Prior to the adoption of SFAS 123(R), the value
        of
        each stock option was also estimated on the date of grant using the
        Black-Scholes model for the purpose of the pro-forma financial information
        in
        accordance with SFAS 123.
 
 The
        Company used its historical stock price volatility in accordance with SFAS
        123(R) and SAB 107. The selection of the historical volatility approach was
        based upon the lack of availability of actively traded options on the Company’s
        stock and the Company’s assessment that historical volatility is representative
        of future stock price trends.
 
 The
        risk-free interest rate assumption is based upon observed interest rates
        appropriate for the term of the Company’s stock options. The dividend yield
        assumption is based on the Company’s history and expectation of dividend
        payouts. The expected life of stock options represents the Company’s historical
        experience with regards to the exercise behavior of its option holders and
        the
        contractual term of the options.
 
 As
        stock-based compensation expense recognized in the condensed consolidated
        statement of operations for the three months and six months ended April 30,
        2006
        is based on awards ultimately expected to vest, it has been reduced for
        estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
        the
        time of grant and revised, if necessary, in subsequent periods if actual
        forfeitures differ from those estimates. In the Company’s pro-forma information
        required under SFAS 123 for the periods prior to fiscal 2006, the Company
        accounted for forfeitures as they occurred.
   22
   **NOTE
        10 - STOCKHOLDERS’ EQUITY (CONTINUED)**
 
 **Stock
        Option Plans** **(Continued)**
 
 The
        weighted-average estimated fair value of stock options granted during the
        six
        months ended April 30, 2006 was $0.03 per share using the Black-Scholes model
        with the following assumptions:
 
 Expected
                  volatility
              147%Risk-free
                  interest rate
              4.4%Expected
                  dividends
              0.0%Expected
                  life
              10
                  years
 
 A
        summary
        of option activity as of April 30, 2006 and changes during the period then
        ended
        is as follows:
 
 Under
                the
                  Plans
              
              Weighted
                Average
                Exercise
                  Price
              
              Aggregate
                Intrinsic
                Value
              
              Outside
                the
                  Plans
              
              Weighted
                Average
                  Exercise Price
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at October 31, 2005
              
              
              993,750
              
              $
              0.97
              
              
              
              
              
              15,900,000
              
              $
              0.25Options
                  granted:Under
                  the Plans
              
              
              100,000
              
              
              0.08
              
              
              
              
              
              —
              
              
              —Outside
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              26,400,000
              
              $
              0.03Options
                  expired/cancelled:Under
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              —Outside
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              (14,000,000
              )
              $
              0.17Options
                  exercised:Under
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              —Outside
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              —Outstanding
                  at April 30, 2006
              
              
              1,093,750
              
              $
              0.89
              
              $
              4,500
              
              
              28,300,000
              
              $
              0.08
              
              $
              2,567,600Exercisable
                  at April 30, 2006
              
              
              999,306
              
              $
              0.97
              
              $
              250
              
              
              16,100,000
              
              $
              0.13
              
              $
              1,381,800
 
 The
        weighted-average remaining contractual term of stock options outstanding
        under
        the plans as of April 30, 2006 was 6.1 years. The weighted-average remaining
        contractual term of stock options outstanding outside the plans as of April
        30,
        2006 was 9.3 years.
 
 The
        weighted-average remaining contractual term of stock options currently
        exercisable under the plans as of April 30, 2006 was 5.7 years. The
        weighted-average remaining contractual term of stock options currently
        exercisable outside the plans as of April 30, 2006 was 9.0 years.
 
 As
        of
        April 30, 2006, total compensation cost related to nonvested stock options
        not
        yet recognized was $369,735, which is expected to be recognized through February
        2009 over a weighted-average period of approximately two months.
 
 The
        total
        fair value of options vested during the three months and six months ended
        April
        30, 2006 was $407,569 and $654,626, respectively.
  23
   **NOTE
        10 - STOCKHOLDERS’ EQUITY (CONTINUED)**
 
 **Options
        Granted**
 
 In
        April
        2005, the Company issued to each of its Chief Executive Officer and Executive
        Vice President, 1,000,000 shares of common stock, and performance based options
        to purchase 7,000,000 shares of restricted common stock at an exercise price
        of
        $0.17, which was equal to the closing price of the common stock on the
        Over-the-Counter Bulletin Board on the date of grant. Options to purchase
        2,000,000 shares of restricted common stock vested upon the Company’s
        consummation of the sale of the 2005 Debentures in May 2005 and options to
        purchase 12,000,000 shares of restricted common stock vested in December
        2005
        upon the Company’s release of a beta version of its semiconductor technologies.
        In January 2006, all of these options were canceled. During the three months
        and
        six months ended April 30, 2006, the Company recognized $0 and $247,057,
        respectively, of stock-based compensation expense related to these vested
        options.
 
 During
        the three months ended January 31, 2006, options to purchase 22,400,000 shares
        of common stock were granted to the Company’s Chief Executive Officer, the
        Executive Vice President, and an advisory board member. These options were
        valued at $591,863 and have a 10 year term, an exercise price of $0.027 per
        share, and vest at various times between February 2006 and July 2006. During
        the
        three months and six months ended April 30, 2006, the Company recognized
        $313,961 and $388,042, respectively, of stock-based compensation expense
        related
        to these options.
 
 During
        the three months ended April 30, 2006, the following options were
        granted:
 
 (i)
              Options
                  to purchase 2,000,000 shares of common stock were granted to directors.
                  These options were valued at $84,277 and have a 10-year term, an
                  exercise
                  price of $0.0319 per share, and vested on May 1, 2006;(ii)
              Options
                  to purchase 2,000,000 shares of common stock were granted in connection
                  with legal services performed for the Company. These options were
                  valued
                  at $84,277 and have a 10-year term, an exercise price of $0.0319
                  per
                  share, and vested on March 1, 2006; and(iii)
              Options
                  to purchase 100,000 shares of common stock were granted to an employee.
                  These options were valued at $16,887 and have a 10-year term, exercise
                  price of $0.08 per share, and vest equally over a three year
                  period.
 
 **Options
        Expired, Cancelled and Forfeited**
 
 Options
        to purchase 0 and 14,000,000 shares of common stock were canceled during
        the
        three months and six months ended April 30, 2006, respectively.
 
 **Warrants
        Granted**
 
 In
        January 2006, the Company granted warrants to purchase 7,500,000 shares of
        its
        common stock at an exercise price of $0.10 per share to a lender in connection
        with a loan agreement (see Note 9). The fair value of the stock warrants
        estimated on the date of grant using the Black-Scholes option pricing model
        is
        $0.016 per share or $120,000.
 
 In
        March
        2006, the Company granted warrants to purchase 70,955,548 shares of its common
        stock at an exercise price of $0.15 per share to the Investors in the 2006
        Debentures (see Note 8). The fair value of the stock warrants estimated on
        the
        date of grant using the Black-Scholes option pricing model is $0.127 per
        share
        or $9,036,727.
 
 In
        March
        2006, the Company also granted warrants to purchase 7,095,556 shares of its
        common stock at an exercise price of $0.1693 per share to the placement agent
        in
        connection with the 2006 Debentures (see Note 8). The fair value of the stock
        warrants estimated on the date of grant using the Black-Scholes option pricing
        model is $0.125 per share or $888,779.
   24
 
 **NOTE
        10 - STOCKHOLDERS’ EQUITY (CONTINUED)**
 
 **Warrants
        Granted** **(Continued)**
 
 In
        March
        2006, the Company granted additional warrants to purchase 7,095,556 shares
        of
        its common stock at an exercise price of $0.15 per share to the placement
        agent
        in connection with the 2006 Debentures (see Note 8). The fair value of the
        stock
        warrants estimated on the date of grant using the Black-Scholes option pricing
        model is $0.127 per share or $903,673.
 
 **Warrants
        Expired**
 
 Warrants
        to purchase 0 and 200,000 shares of common stock expired during the three
        months
        and six months ended April 30, 2006, respectively.
 
 **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:
 
 Warrants
                  to purchase common stock
              
              
              131,888,7932006
                  Debentures and accrued interest (1)
              
              
              69,021,246Options
                  to purchase common stock
              
              
              29,393,750Convertible
                  notes payable and accrued interest
              
              
              1,757,4147%
                  debentures and accrued interest
              
              
              975,2042005
                  Debentures and accrued interest (2)
              
              
              500,247Total
                  as of April 30, 2006
              
              
              233,536,654
 
 (1)
              Based
                  on a twenty day volume weighted average common stock price discounted
                  by
                  30% at April 30, 2006 of $0.08778.(2)
              Based
                  on a five day volume weighted average common stock price discounted
                  by 30%
                  at April 30, 2006 of $0.09002.
 
 **NOTE
        11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS**
 
 **Research
        and Development Agreement**
 
 The
        Company and HelloSoft entered into an amendment, effective as of October
        11,
        2004 (the “Amendment”), to their Services Agreement dated as of March 31, 2004
        (the “Original Agreement”) pursuant to which HelloSoft will provide 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.
        The Amendment represents the first project that HelloSoft is undertaking
        pursuant to the Original Agreement.
 
 In
        consideration for the services being rendered under the Amendment, the Company
        agreed to pay to HelloSoft $185,000, half of which was paid in the form of
        restricted common stock issued at a discount of 25% to the closing price
        of the
        Company’s Common Stock on the day of the commencement of services. The other
        half will be remitted in cash, periodically, upon completion by HelloSoft
        and
        acceptance by the Company of specified milestones. 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 Amendment.
 
 On
        July
        26, 2005, the Company signed an amendment to the Original Agreement that
        defines
        and prices the next two phases of the technology development. The Company
        will
        expend $445,000 on Phase II and $350,000 on Phase III.
 
 25
   **NOTE
        11 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS
        (CONTINUED)**
 
 **Research
        and Development Agreement** **(Continued)**
 
 Half
        of
        Phase II, or $222,500, was paid to HelloSoft on July 26, 2005, in the form
        of
        restricted common stock issued at a discount of 25% to the closing price
        of the
        Company’s common stock on that date, and the remaining $222,500 is payable in
        cash upon completion of certain stages of Phase II. The restricted common
        stock
        issued to HelloSoft was valued at $296,667 and recorded as research and
        development expense. Of the remaining $222,500, $62,500 was accrued as of
        October 31, 2005 and paid during the three months ended January 31, 2006
        and
        $100,000 was accrued as of April 30, 2006 and paid in May 2006.
 
 When
        HelloSoft commences Phase III, the Company will issue to them $175,000 worth
        of
        restricted common stock, and the other $175,000 will be paid to them in cash
        when they complete Phase III. The Company projects that Phase III will be
        deemed
        complete in the third calendar quarter of 2006.
 
 On
        November 3, 2005 and January 24, 2006, the Company and HelloSoft, Inc. entered
        into further amendments to the Original Agreement. Pursuant to the amendments,
        the Company agreed to pay HelloSoft an aggregate of $80,000 in cash, and
        the
        parties agreed upon certain additions to the development services to be
        performed by HelloSoft pursuant to the Original Agreement, as amended. $60,000
        was paid to HelloSoft during the three months ended January 31, 2006 and
        $20,000
        was paid to HelloSoft during the three months ended April 30, 2006.
 
 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 E30 semiconductor.
        In exchange for this license, the Company has agreed to pay HelloSoft a license
        fee and certain royalties based on its sales of products including the licensed
        technology.
  **NOTE
        12 - SEGMENT INFORMATION**
 
 Summarized
        financial information concerning the Company’s reportable segments is shown in
        the following table:
 
 For
        the Six Months Ended April 30, 2006
 
 Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              6,932
              
              $
              —
              
              $
              6,932Net
                  Sales - foreign
              
              $
              —
              
              $
              51,942
              
              $
              —
              
              $
              51,942Operating
                  income (loss)
              
              $
              (316,471
              )
              $
              53,688
              
              $
              (2,487,247
              )
              $
              (2,750,030
              )Depreciation
                  and amortization
              
              $
              316,471
              
              $
              —
              
              $
              —
              
              $
              316,471Total
                  Identifiable Assets at April 30, 2006
              
              $
              8,041,340
              
              $
              —
              
              $
              4,061,196
              
              $
              12,102,536
   26
   **NOTE
        12 - SEGMENT INFORMATION (CONTINUED)**
 
 For
        the Six Months Ended April 30, 2005
 
 Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              9,898
              
              $
              —
              
              $
              9,898Net
                  Sales - foreign
              
              $
              —
              
              $
              6,300
              
              $
              —
              
              $
              6,300Operating
                  income (loss)
              
              $
              (1,899
              )
              $
              (7,317
              )
              $
              (1,564,918
              )
              $
              (1,574,134
              )Depreciation
                  and amortization
              
              $
              1,899
              
              $
              5,196
              
              $
              —
              
              $
              7,095Total
                  Identifiable Assets at April 30, 2005
              
              $
              5,935,110
              
              $
              1,009,777
              
              $
              371,967
              
              $
              7,316,854
 
 For
        the Three Months Ended April 30, 2006
 
 Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              698
              
              $
              —
              
              $
              698Net
                  Sales - foreign
              
              $
              —
              
              $
              18,000
              
              $
              —
              
              $
              18,000Operating
                  income (loss)
              
              $
              (213,156
              )
              $
              17,397
              
              $
              (1,599,636
              )
              $
              (1,795,395
              )Depreciation
                  and amortization
              
              $
              213,156
              
              $
              —
              
              $
              —
              
              $
              213,156Total
                  Identifiable Assets at April 30, 2006
              
              $
              8,041,340
              
              $
              —
              
              $
              4,061,196
              
              $
              12,102,536
 
 For
        the Three Months Ended April 30, 2005
 
 Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              7,397
              
              $
              —
              
              $
              7,397Net
                  Sales - foreign
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Operating
                  income (loss)
              
              $
              (740
              )
              $
              (3,601
              )
              $
              (967,970
              )
              $
              (972,311
              )Depreciation
                  and amortization
              
              $
              740
              
              $
              2,187
              
              $
              —
              
              $
              2,927Total
                  Identifiable Assets at April 30, 2005
              
              $
              5,935,110
              
              $
              1,009,777
              
              $
              371,967
              
              $
              7,316,854
   27
   **NOTE
        13 - SUBSEQUENT EVENTS**
 
 **Equity
        Transactions**
 
 In
        June
        2006, 443,814 shares of common stock were issued upon conversion of 2005
        Debentures with a principal amount of $35,000 and interest of
        $1,087.
 
 In
        July
        2006, 1,487,155 shares of common stock were issued upon conversion of interest
        payable on the 2006 Debentures of $128,877.
   28
   **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.
 
 This
        Quarterly Report on Form 10-QSB/A reflects a restatement of the Company's
        previously issued condensed consolidated financial statements included in
        our
        Quarterly Report on Form 10-QSB for the period ended April 30, 2006, as
        discussed below and in Note 2 to the condensed consolidated financial statements
        included 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 that reflect our beliefs and
        assumptions based upon information available to us at the date of this report.
        In some cases, you can identify these statements by words such as “if,” “may,”
“might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “continue,” and other similar terms. These
        forward-looking statements include, among other things, projections of our
        future financial performance and our anticipated growth, descriptions of
        our
        strategies, our product and market development plans, the trends we anticipate
        in our business and the markets in which we operate, and the competitive
        nature
        and anticipated growth of those markets.
 
 We
        caution readers that forward-looking statements are predictions based on
        our
        current expectations about future events. These forward-looking statements
        are
        not guarantees of future performance and are subject to risks, uncertainties
        and
        assumptions that are difficult to predict. Our actual results, performance
        or
        achievements could differ materially from those expressed or implied by the
        forward-looking statements as a result of a number of factors, including
        but not
        limited to the risks and uncertainties discussed in our other filings with
        the
        SEC. We undertake no obligation to revise or update any forward-looking
        statement for any reason.
 
 **RESTATEMENT**
 
 On
        July
        6, 2006, the Company’s Board of Directors, after consultations by management and
        the Audit Committee with the Company’s independent registered public accounting
        firm, concluded that the classification of warrants issued in connection
        with
        the 2005 and 2006 convertible debentures was not in accordance with
        interpretations of 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.”  Accordingly, the condensed
        consolidated financial statements included in the Company’s Quarterly Report on
        Form 10-QSB for the period ended April 30, 2006, as filed on June 14, 2006
        (the
“April 2006 10-QSB”) have been restated to correct the accounting for the
        warrants as derivative liabilities.  The previously issued condensed
        consolidated financial statements included in the April 2006 10-QSB should
        not
        be relied upon.  As a result of this restatement, $10,419,140 included in
        stockholders' equity at April 30, 2006 should have been recorded as a derivative
        liability and the Company should have recorded additional interest expense
        of
        $5,673,953 for the three months and six months ended April 30, 2006.  This
        expense was principally related to the amount ($5,608,156) by which the fair
        value on April 30, 2006 of warrants issued to purchasers of debentures sold
        by
        the Company in March 2006 exceeded the debt discount allocated to such warrants.
        See Note 8 to the accompanying condensed consolidated financial statements.
        In
        addition, the Company should have recorded losses of $460,400 and $484,538,
        respectively, for the three and six months ended April 30, 2006, on the change
        in fair value of derivative liabilities. The treatment of this non-cash
        accounting item results in an increase in the Company’s net loss for the three
        months and six months ended April 30, 2006 as follows:
   29
  For
                    the
                  Three
                    Months
                  Ended
                    April 30, 2006
                
                For
                    the
                  Six
                    Months
                  Ended
                    April 30, 2006(As
                    Reported)
                
                (As
                    Restated)
                
                (As
                    Reported)
                
                (As
                    Restated)Net
                    Loss
                
                $
                (3,542,493
                )
                $
                (9,676,846
                )
                $
                (4,816,231
                )
                $
                (10,974,722
                )Basic
                    and diluted net loss
                  per
                    share of common stock
                
                $
                (0.01
                )
                $
                (0.03
                )
                $
                (0.02
                )
                $
                (0.04
                )
 The
          correction of the above also results in the following changes to the Company's
          stockholders' equity (deficiency) and liabilities at April 30,
          2006:
 (As
                    Reported)
                
                (As
                    Restated)Total
                    liabilities
                
                $
                5,308,577
                
                $
                14,850,433Stockholders’
                    equity (deficiency)
                
                $
                6,793,959
                
                $
                (2,747,897
                )
 **OVERVIEW**
  We
        are
        developing advanced transmission technology products to enable data to be
        transmitted across copper telephone wire at speeds and over distances that
        exceed those offered by leading DSL technology providers. Our first chipset
        in a
        planned family of transport processors, the Embarq(TM) E30 (Release 1.3)
        digital
        signal processor, was first made available to prospective customers for
        evaluation and testing in the first quarter of fiscal 2006. We are presently
        working on Release 1.4 of the E30 and Release 1.1 of the Embarq(TM) E20 analog
        front end. Our products are designed to substantially increase the capacity
        of existing copper telephone networks, allowing telephone companies, office
        building managers, and enterprise network operators to provide enhanced and
        secure video, data and voice services over the existing copper
        telecommunications infrastructure.
 
 We
        expect
        that system-level products that use our technology will have a significant
        advantage over existing system-level products that use existing broadband
        technologies, such as digital subscriber line (DSL), because such products
        will
        transmit data faster, 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.
 
 Our
        semiconductor business segment is dependent upon our ability to generate
        future
        revenues and positive cash flow from our advanced transmission technology
        products, such as the E30 and E20. No assurance can be provided that our
        target
        customers will purchase these products in large volumes, or at all.
 
 In
        April
        2000, our NV Entertainment subsidiary entered into a joint venture production
        agreement to produce a feature length film, “Step into Liquid” (the “Film”). We
        own a 50% interest in the joint venture. The financial condition and results
        of
        operations of the joint venture are consolidated with our financial condition
        and results of operations on the accompanying condensed consolidated financial
        statements. The Film was released to theaters in the United States in 2003
        and
        is currently in foreign and DVD distribution. During the three months and
        six
        months ended April 30, 2006, we received revenues of $18,698 and $58,874,
        respectively, from the Film. During the three months and six months ended
        April
        30, 2005, we received revenues of $7,397 and $16,198, respectively. As a
        result
        of impairment reviews during the years ended October 31, 2005 and 2004, we
        reduced the carrying value of the Film to $0 on our balance sheet. We do
        not
        intend to make further investment in our entertainment business.
   30
   **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.
 
 **Convertible
        Debentures**
 
 Proceeds
        of the 2006 and 2005 Debentures are recorded as a liability net of a debt
        discount consisting of the fair values attributed to the related warrants
        and to
        the embedded conversion features. In accordance with EITF issue No. 00-19
        “Accounting for Derivative Financial Instruments Indexed to and Potentially
        Settled in a Company’s Own Stock,” due to certain factors, including an uncapped
        liquidated damages provision in the registration rights agreement and an
        indeterminate amount of shares to be issued upon conversion of the debentures,
        the Company separately values and accounts for the embedded conversion features,
        related warrants, and registration rights as derivative liabilities.
        Accordingly, these derivative liabilities are measured at fair value with
        changes in fair value reported in earnings as long as they remain classified
        as
        liabilities. The Company reassesses t he
        classification at each balance sheet date. If the classification required
        under
        EITF No. 00-19 changes as a result of events during the period, the contract
        should be reclassified as of the date of the event that caused the
        reclassification.
 
 **Stock-Based
        Compensation**
 
 On
        November 1, 2005, we adopted Statement of Financial Accounting Standards
        No. 123
        (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requires the
        measurement and recognition of compensation expense for all share-based payment
        awards made to employees and directors including stock options based on
        estimated fair values. SFAS 123(R) supersedes our previous accounting under
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees” (“APB 25”) for periods beginning on November 1, 2005. In March 2005,
        the Securities and Exchange Commission issued Staff Accounting Bulletin No.
        107
        (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107
        in our adoption of SFAS 123(R).
 
 We
        early
        adopted SFAS 123(R) using the modified prospective transition method, as
        of
        November 1, 2005, the first day of our fiscal year 2006. Our condensed
        consolidated financial statements as of and for the six months ended April
        30,
        2006 reflect the impact of SFAS 123(R). In accordance with the modified
        prospective transition method, our condensed consolidated financial statements
        for prior periods have not been restated to reflect, and do not include,
        the
        impact of SFAS 123(R).
 
 Stock-based
        compensation expense recognized in our condensed consolidated statement of
        operations for the six months ended April 30, 2006 included compensation
        expense
        for share-based payment awards granted prior to, but not yet vested as of
        October 31, 2005 based on the grant date fair value estimated in accordance
        with
        the pro-forma provisions of SFAS 123 and compensation expense for the
        share-based payment awards granted subsequent to October 31, 2005 based on
        the
        grant date fair value estimated in accordance with the provisions of SFAS
        123(R). We have continued to attribute the value of stock-based compensation
        to
        expense on the straight-line single option method.
 
 Stock-based
        compensation expense recognized under SFAS 123(R) related to employee stock
        options was $378,802 and $447,839 for the three months and six months ended
        April 30, 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 pro-forma
        provisions of SFAS 123 was $0 and $247,057 for the three months and six months
        ended April 30, 2006, respectively. Stock-based compensation expense recognized
        for non-employees under other accounting standards was $292,766 and $315,674
        for
        the three months and six months ended April 30, 2006, respectively.
   31
 
  Stock-based
        compensation expense related to employee stock options under other accounting
        standards was $20,915 and $20,915 for the three months and six months ended
        April 30, 2005, respectively. Stock based-compensation expense recognized
        for
        non-employees under other accounting standards was $135,967 and $415,515
        for the
        three months and six months ended April 30, 2005, respectively.
 
 As
        stock-based compensation expense recognized in the condensed consolidated
        statement of operations for the six months ended April 30, 2006 is based
        on
        awards ultimately expected to vest, it has been reduced for estimated
        forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time
        of
        grant and revised, if necessary, in subsequent periods if actual forfeitures
        differ from those estimates. In our pro-forma information required under
        SFAS
        123 for the periods prior to fiscal 2006, we accounted for forfeitures as
        they
        occurred.
 
 **Revenue
        Recognition**
 
 We
        will
        recognize revenue from the sale of our semiconductor products when evidence
        of
        an arrangement exists, the sales price is determinable or fixed, legal title
        and
        risk of loss has passed to the customer, which is generally upon shipment
        of our
        products to our customers, and collection of the resulting receivable is
        probable. To date we have not recognized any revenues related to the sale
        of our
        semiconductor products.
 
 We
        recognize revenue from the distribution of our Film and related products
        when
        earned and reasonably estimable in accordance with Statement of Position
        00-2 --
“Accounting by Producers or Distributors of Films” (SOP 00-2). The following are
        the conditions that must be met in order to recognize revenue in accordance
        with
        SOP 00-2:
 
 (i)
              persuasive
                  evidence of a sale or licensing arrangement with a customer
                  exists;(ii)
              the
                  film is complete and, in accordance with the terms of the arrangement,
                  has
                  been delivered or is available for immediate and unconditional
                  delivery;(iii)
              the
                  license period of the arrangement has begun and the customer can
                  begin its
                  exploitation, exhibition or sale;(iv)
              the
                  arrangement fee is fixed or determinable; and(v)
              collection
                  of the arrangement fee is reasonably
                  assured.
 
 Under
        a
        rights agreement with our distributor for our Film, we share with the
        distributor in the profits of the Film after the distributor recovers its
        marketing, distribution and other predefined costs and fees. The agreement
        provides for the payment of minimum guaranteed license fees, usually payable
        on
        delivery of the completed film, that are subject to further increase based
        on
        the actual distribution results.
 
 In
        accordance with the provisions of SOP 00-2, a film is classified as a library
        title after three years from the film’s initial release. The term library title
        is used solely for the purpose of classification and for identifying previously
        released films in accordance with the provisions of SOP 00-2. Revenue
        recognition for such titles is in accordance with our revenue recognition
        policy
        for film revenue.
 
 **Film
        in Distribution**
 
 SOP
        00-2
        requires that film costs be capitalized and reported as a separate asset
        on the
        balance sheet. Film costs include all direct negative costs incurred in the
        production of a film, as well as allocations of production overhead and
        capitalized interest. Direct negative costs include cost of scenario, story,
        compensation of cast, directors, producers, writers, extras and staff, cost
        of
        set construction, wardrobe, accessories, sound synchronization, rental of
        facilities on location and post production costs. SOP 00-2 also requires
        that
        film costs be amortized and participation costs accrued, using the
        individual-film-forecast-computation method, which amortizes or accrues such
        costs in the same ratio that the current period actual revenue (numerator)
        bears
        to the estimated remaining unrecognized ultimate revenue as of the beginning
        of
        the fiscal year (denominator). We make certain estimates and judgments of
        future
        gross revenue to be received for the Film based on information received by
        its
        distributor, historical results and management’s knowledge of the industry.
        Revenue and cost
   32
 
  forecasts
        are continually reviewed by management and revised when warranted by changing
        conditions. A change to the estimate of gross revenues for the Film may result
        in an increase or decrease to the percentage of amortization of capitalized
        film
        costs relative to a previous period.
 
 In
        addition, SOP 00-2 also requires that if an event or change in circumstances
        indicates that an entity should assess whether the fair value of a film is
        less
        than its unamortized film costs, then an entity should determine the fair
        value
        of the film and write-off to the statement of operations the amount by which
        the
        unamortized film costs exceeds the film’s fair value. As a result of impairment
        reviews during the years ended October 31, 2005 and 2004, we wrote down the
        carrying value attributed to the Film to $0.
 
 **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.
 
 No
        assurance can be given that products we release based upon the licensed
        technology will receive market acceptance. 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 could be material.
 
 We
        commenced amortization of capitalized software development costs during December
        2005 and have recorded amortization expense of $212,536 and $315,232 during
        the
        three months and six months ended April 30, 2006, respectively.
 
 **Research
        and Development**
 
 Research
        and development expenses relate to the design and development of advanced
        transmission technology products. We outsource to independent third parties
        all
        of our design and development activities. Payments made to independent software
        developers under development agreements are capitalized to software development
        costs once technological feasibility is established or if the development
        costs
        have an alternative future use. Prior to establishing technological feasibility,
        software development costs are expensed to research and development costs
        and to
        cost of sales subsequent to confirmation of technological feasibility. Internal
        development costs are capitalized to software development costs once
        technological feasibility is established. Technological feasibility is evaluated
        on a product-by-product basis.
 
 Research
        and development expenses generally consist of salaries, related expenses
        for
        engineering personnel and third-party development costs incurred.
 
 33
 
  **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 Powerstream TM technology, intellectual property and patent portfolio. The licensed
        Powerstream TM 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 $5,571,000 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 Embarq TM E30
        semiconductor. We believe the inclusion of VoIP features in our products
        will
        eliminate VoIP dedicated components currently needed in modems and thereby
        lower
        their production costs by more than 20%. In consideration of this license,
        we
        have paid HelloSoft a license fee and will pay certain royalties based on
        our
        sale of products, including the licensed technology.
 
 **RESULTS
        OF OPERATIONS**
 
 COMPARISON
        OF THE THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 2006 AND THE THREE MONTHS
        AND
        SIX MONTHS ENDED APRIL 30, 2005
 
 REVENUES .  
        Revenues for the three months and six months ended April 30, 2006 were $18,698
        and $58,874, respectively. Of this amount, $698 and $6,932 was in the form
        of
        guarantee and/or license payments related to the U.S. distribution of the
        Film
        and $18,000 and $51,942 was related to foreign distribution of the Film during
        the three months ended and six months ended April 30, 2006, respectively.
        Revenues for the three months and six months ended April 30, 2005 were $7,397
        and $16,198, respectively and were from our entertainment business. Revenues
        increased 153% or $11,301 for the three months ended April 30, 2006 and 263%
        or
        $42,676 for the six months ended April 30, 2006 due primarily to an increase
        in
        the number and value of license agreements for distribution of the Film or
        portions of the Film in foreign markets. No revenues were recorded in connection
        with our semiconductor business during the three months and six months ended
        April 30, 2006 and 2005.
 
 OPERATING
        EXPENSES . 
        Operating expenses included cost of sales, amortization of technology license
        and capitalized software development fee, research and development expenses
        in
        connection with the semiconductor business, and selling, general and
        administrative expenses.
 
 Total
        operating expenses increased 85% or $834,385 to $1,814,093 for the three
        months
        ended April 30, 2006 from $979,708 for the three months ended April 30, 2005.
        The increase in total operating expenses for the three months ended April
        30,
        2006 was due primarily to increases in amortization of technology license
        and
        capitalized software development fee of $212,536, research and development
        expenses of $52,556, and selling, general and administrative expenses of
        $574,613, offset by a decrease in cost of sales of $5,320.  Total operating
        expenses increased 77% or $1,218,572 to $2,808,904 for the six months ended
        April 30, 2006 from $1,590,332 for the six months ended April 30, 2005. The
        increase in total operating expenses for the six months ended April 30, 2006
        was
        due primarily to increases in amortization of technology license and capitalized
        software development fee of $315,232, research and development expenses of
        $130,547, and selling, general and administrative expenses of $784,738, offset
        by a decrease in cost of sales of $11,945.
 
 Cost
        of
        sales for the three months and six months ended April 30, 2005 were $5,320
        and
        $11,945, respectively. The cost of sales represents the amortization of film
        cost for the Film. The decrease for the three months and six months ended
        April
        30, 2006 was a result of the impairment of the Film costs in 2005 which reduced
        the carrying value of the Film costs to $0.
   34
   Amortization
        of technology license and capitalized software development fee was $212,536
        and
        $315,232 for the three months and six months ended April 30, 2006 due to
        the
        commencement of amortization related to the market release of the E30 (Release
        1.3) to prospective customers for evaluation and testing during December
        2005.
        No amortization was recorded prior to this period.
 
 Research
        and development expenses increased by $52,556 to for the three months ended
        April 30, 2006 from $0 for the three months ended April 30, 2005. Research
        and
        development expenses increased 1,851% or $130,547 to $137,600 for the six
        months
        ended April 30, 2006 from $7,053 for the six months ended April 30, 2005.
        The
        increase is principally the result of additional payments made to HelloSoft,
        Inc. (“HelloSoft”) in accordance with the terms of our services agreement, as
        amended, and the issuance of stock options in connection with research and
        development activities.
 
 Total
        selling, general and administrative expenses increased 59% or $574,613 to
        $1,549,001 for the three months ended April 30, 2006 from $974,388 for the
        three
        months ended April 30, 2005. Total selling, general and administrative expenses
        increased 50% or $784,738 to $2,356,072 for the six months ended April 30,
        2006
        from $1,571,334 for the six months ended April 30, 2005. The increases are
        primarily the result of an increase in salaries and wages due to an increase
        in
        employees, professional fees related to the filing of a registration statement
        in April 2006, and stock-based compensation related to options and restricted
        common stock issued to key employees, directors, consultants, and service
        providers.
 
 OTHER
        (INCOME) EXPENSES . 
        Other expenses included interest expense, a loss on the change in fair value
        of
        derivative liabilities, amortization of deferred financing costs, and a loss
        on
        exchange of notes payable into common stock.
 
 Total
        Other (Income) Expenses increased 2,665% or $7,596,417 to $7,881,451 for
        the
        three months ended April 30, 2006 from $285,034 for the three months ended
        April
        30, 2005. Total Other (Income) Expenses increased 1,298% or $7,636,257 to
        $8,224,692 for the six months ended April 30, 2006 from $588,435 for the
        six
        months ended April 30, 2005. The increases are primarily for the reasons
        noted
        below.
 
 Interest
        expense increased 1,744% or $6,291,949 to $6,652,813 for the three months
        ended
        April 30, 2006 from $360,864 for the three months ended April 30, 2005. Interest
        expense increased 1,135% or $7,258,123 to $7,897,769 for the six months ended
        April 30, 2006 from $639,646 for the three months ended April 30, 2005. The
        increases are primarily due to the value allocated to the warrants related
        to
        the 2006 Debentures, interest on the 2006 Debentures, and the amortization
        and
        write-off of debt discount due to conversions of the convertible debentures
        and
        repayment of a note payable.
 
 We
        recorded a loss on the change in fair value of derivative liabilities of
        $460,400 and $484,538 for the three months and six months ended April 30,
        2006.
        There were no derivative liabilities outstanding during the three months
        and six
        months ended April 30, 2005.
 
 The
        amortization of deferred financing costs increased 1,040% or $296,362 to
        $324,852 for the three months ended April 30, 2006 from $28,490 for the three
        months ended April 30, 2005. The amortization of deferred financing costs
        increased 971% or $515,710 to $568,819 for the six months ended April 30,
        2006
        from $53,109 for the six months ended April 30, 2005. The increase is primarily
        a result of the conversions of the 2005 Debentures, repayment of a note payable,
        and the amortization of additional deferred financing costs related to the
        2006
        Debentures. Upon conversion or repayment of debt prior to its maturity date,
        a
        pro-rata share of debt discount and deferred financing costs are written
        off and
        recorded as expense.
 
 Other
        expenses also increased in the three months and six months ended April 30,
        2006
        due to the loss recognized on exchange of notes payable into common stock
        of
        $446,386.
 
 Other
        income in the six months ended April 30, 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 six 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
   35
   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.
 
 Other
        income in the six months ended April 30, 2005 consisted primarily of a gain
        on
        sale of property and equipment of $20,000, a gain on exchange of Redeemable
        Series B Preferred Stock into common stock of $55,814, and other miscellaneous
        gains of $28,506.
 
 NET
        LOSS .
 
        For the three months ended April 30, 2006 our net loss increased 670% or
        $8,419,501 to $9,676,846 from $1,257,345 as the result of higher interest
        costs,
        a loss on the change in fair value of derivative liabilities, higher
        amortization of deferred financing costs, higher selling, general, and
        administrative expense, and higher research and development expenses, partially
        offset by an increase in revenues and the gain on the forgiveness of principal
        and interest on the promissory note to Zaiq Technologies, Inc. discussed
        above.
        For the six months ended April 30, 2006, the net loss increased 407% or
        $8,812,153 to $10,974,722 from $2,162,569 for primarily the same reasons
        noted
        above.
 
 **LIQUIDITY
        AND CAPITAL RESOURCES**
 
 Cash
        balances totaled $3,406,914 at June 12, 2006 and $4,007,470 as of April 30,
        2006
        compared to $373,481 at October 31, 2005.
 
 Net
        cash
        used in operating activities was $1,350,482 for the six months ended April
        30,
        2006, compared to $816,866 for the six months ended April 30, 2005. The increase
        in cash used in operations was principally the result of the following
        items:
 
 ·
              an
                  increase in the net loss, which was $10,974,722, compared with
                  $2,162,569
                  for the six months ended April 30, 2005; and·
              an
                  increase for the six months ended April 30, 2006 of accounts payable
                  and
                  accrued liabilities of $199,687, compared to a decrease of accounts
                  payable and accrued liabilities for the six months ended April
                  30, 2005 of
                  $22,329, resulting in a net decrease in cash used of
                  $177,358;
  impacted
        by the following non-cash items:
 
 ·
              interest
                  expense related to fair value of Investors’ warrants at issuance in excess
                  of debt discount of $5,608,156 during the six months ended April
                  30,
                  2006;·
              loss
                  on the change in fair value of derivative liabilities of $484,538
                  during
                  the six months ended April 30, 2006 relating to warrants issued in
                  connection with the 2005 and 2006 debentures;·
              increased
                  amortization of deferred financing costs, which were $568,819 for
                  the six
                  months ended April 30, 2006, compared to $53,109 for the six months
                  ended
                  April 30, 2005, principally due to increased conversions of the
                  May 2005
                  debentures, the repayment of a note payable, and the amortization
                  of
                  additional deferred financing costs related to the 2006
                  Debentures;·
              increased
                  amortization of debt discount on notes, which was $2,168,904 for
                  the six
                  months ended April 30, 2006, compared to $520,169 for the six months
                  ended
                  April 30, 2005, principally due to increased conversions of the
                  May 2005
                  Debentures, the repayment of a note payable, and the amortization
                  of
                  additional debt discount related to the 2006
                  Debentures;·
              increased
                  amortization of technology license and capitalized software development
                  fee, which was $315,232 for the six months ended April 30, 2006,
                  compared
                  to $0 for the six months ended April 30, 2005, due to the commencement
                  of
                  amortization related to the market release of the E30 (Release
                  1.3) to
                  prospective customers for evaluation and
                  testing;
   36
 ·
              gain
                  on forgiveness of principal and interest on the promissory note
                  to Zaiq
                  Technologies, Inc. of $1,169,820 during the six months ended April
                  30,
                  2006;·
              increased
                  stock-based compensation expense, which was $1,010,570 for the
                  six months
                  ended April 30, 2006 compared to $888,930 for the six months ended
                  April
                  30, 2005; and·
              loss
                  on exchange of notes payable into common stock of $446,386 during
                  the six
                  months ended April 30, 2006.
 
 Net
        cash
        used by investing activities was $204,499 for the six months ended April
        30,
        2006 compared to $0 in the six months ended April 30, 2005. The increase
        was due
        to the acquisition of property and equipment of $4,499 and a technology license
        and development fee of $200,000.
 
 Net
        cash
        provided by financing activities was $5,188,970 for the six months ended
        April
        30, 2006 compared to $1,041,466 for the six months ended April 30, 2005.
        Net
        cash provided by financing activities for the six months ended April 30,
        2006
        was the result of proceeds from the 2006 Debentures of $6,000,000, proceeds
        from
        the exercise of warrants of $568,531, and proceeds from the issuance of a
        note
        payable of $750,000, offset by capitalized financing costs of $742,450, and
        total payments of $1,379,613 in connection with the repayment of notes payable
        of $944,291 and convertible notes payable of $435,322. Net cash provided
        by
        financing activities for the six months ended April 30, 2005 was the result
        of
        proceeds from the issuance of common stock in the amount of $800,100 and
        proceeds from notes payable of $300,000, offset by capitalized financing
        costs
        of $33,029, and repayments of convertible notes payable of $25,625.
 
 Our
        liquidity improved significantly as a result of a series of transactions
        completed during the six months ended April 30, 2006.
 
 First,
        as
        described in Note 8 to the accompanying condensed consolidated financial
        statements, we raised gross proceeds of $6.0 million in March 2006 from the
        private placement to 17 institutional and individual investors of our 2006
        Debentures. We received net proceeds of approximately $4.5 million from the
        proceeds of the 2006 Debentures, after the payment of offering related fees
        and
        expenses and after the repayment in full of notes payable, made in December
        2005
        and January 2006, in the aggregate amount of $810,000.
 
 Second,
        we received $568,531 from the exercise of warrants to purchase 11,370,624
        shares
        of our common stock.
 
 Third,
        we
        reduced our current liabilities by $844,315 by issuing 12,064,494 shares
        of
        common stock to several holders of notes payable.
 
 These
        transactions increased our working capital by over $5.9 million upon their
        completion during the six months ended April 30, 2006.
 
 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
        December 2005 and January 2006, we entered into secured bridge loan agreements
        with a third party pursuant to which we borrowed $750,000. After payment
        of due
        diligence fees and transaction related fees and expenses, we received net
        proceeds of $672,470. An amount equal to 108% of the principal amount of
        the
        loans was due and payable on the earlier of May 25, 2006 or the date we effect
        a
        financing transaction or series of transactions resulting in gross proceeds
        to
        us of at least $2,000,000. We repaid the loans in their entirety from the
        proceeds of the 2006 Debentures.
 
 In
        May
        2005, we sold $3,500,000 in aggregate principal amount of our 2005 Debentures,
        receiving net proceeds of approximately $3.11 million after the payment of
        offering related costs. As of April 30, 2006, $3,459,436 of principal amount
        and
        $108,509 of interest of the 2005 Debentures had been converted into 170,376,861
        shares of our common stock and there was $40,564 of principal amount of the
        2005
        Debentures outstanding. The 2005 Debentures mature in May 2008.
   37
 
  In
        December 2003, April 2004 and May 2004, we raised net proceeds of approximately
        $1,024,000 from the private placement to certain private and institutional
        investors of our three year 7% Convertible Debentures. $125,000 of principal
        issued in December 2003 was outstanding as of June 12, 2006 and matures in
        December 2006.
 
 As
        of
        July 5, 2006, we had cash balances of $3,133,214. As of the date of this
        Report,
        our expenses total approximately $210,000 per month. Although management
        believes funds on hand will enable us to meet our liquidity needs for at
        least
        the next 15 months, we will need to raise additional funds to fulfill our
        business plan and to meet our future operating requirements, prior to the
        receipt of revenues from our semiconductor business.
 
 We
        may
        not be successful in our efforts to raise additional funds. Our cash needs
        could
        be heavier than anticipated in which case we could be forced to raise additional
        capital. Even after we begin to sell our products, we do not yet know what
        payment terms will be required by our customers or if our products will be
        successful. At the present time, 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 existing holders of our Common
        Stock and debt financing, if available, may involve significant payment
        obligations and covenants that restrict how we operate our
        business.
 
 **Going
        Concern Consideration**
 
 We
        have
        continued losses in each of our years of operation and negative cash flow,
        and
        have had liquidity problems. Our independent registered public accounting
        firm’s
        report accompanying our audited consolidated financial statements for the
        years
        ended October 31, 2005 and 2004 includes an explanatory paragraph relating
        to
        the uncertainty about our ability to continue as a going concern. This
        qualification may make it more difficult for us to raise additional capital
        when
        needed. The accompanying consolidated financial statements do not include
        any
        adjustments relating to the recoverability of reported assets or liabilities
        should we be unable to continue as a going concern.
 
 We
        have
        been able to continue based upon our receipt of funds from the issuance of
        equity securities and borrowings, and by acquiring assets or paying expenses
        by
        issuing stock. Although our liquidity improved significantly as a result
        of a
        series of transactions completed during the six months ended April 30, 2006
        and
        Management believes funds on hand will enable us to meet our liquidity needs
        through at least September 30, 2007, our continued existence beyond that
        date
        may be dependent upon our continued ability to raise funds through the issuance
        of securities or borrowings, and our ability to acquire assets or satisfy
        liabilities by the issuance of stock. Management’s plans in this regard are to
        obtain other debt and equity financing until profitable operation and positive
        cash flow are achieved and maintained.
  **IMPACT
        OF RECENTLY ISSUED ACCOUNTING STANDARDS**
 
 In
        June
        2005, the FASB published Statement of Financial Accounting Standards No.
        154,
“Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 establishes
        new standards on accounting for changes in accounting principles. Pursuant
        to
        the new rules, all such changes must be accounted for by retrospective
        application to the financial statements of prior periods unless it is
        impracticable to do so. SFAS 154 completely replaces Accounting Principles
        Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
        pronouncements with respect to accounting for changes in estimates, changes
        in
        the reporting entity, and the correction of errors. The requirements in SFAS
        154
        are effective for accounting changes made in fiscal years beginning after
        December 15, 2005. We will apply these requirements to any accounting changes
        after the implementation date.
 
 The
        Emerging Issues Task Force (“EITF”) reached a tentative conclusion on EITF Issue
        No. 05-1, “Accounting for the Conversion of an Instrument That Becomes
        Convertible upon the Issuer’s Exercise of a Call Option” that no gain or loss
        should be recognized upon the conversion of an instrument that becomes
        convertible as a result of an issuer’s exercise of a call option pursuant to the
        original terms of the instrument. The adoption of this pronouncement is not
        expected to have an impact on our consolidated financial position, results
        of
        operations, or cash flows.
 
 In
        June
        2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of ‘Conventional
        Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
        Stock’” (“EITF No. 05-2”), which addresses when a convertible debt instrument
        should be considered “conventional” for the purpose of applying the guidance in
        EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No.
        00-19
        for
   38
 
  conventional
        convertible debt instruments and indicated that convertible preferred stock
        having a mandatory redemption date may qualify for the exemption provided
        under
        EITF No. 00-19 for conventional convertible debt if the instrument’s economic
        characteristics are more similar to debt than equity. EITF No. 05-2 is effective
        for new instruments entered into and instruments modified in periods beginning
        after June 29, 2005. We have applied the requirements of EITF No. 05-2 since
        the
        required implementation date. The adoption of this pronouncement did not
        have an
        impact on our consolidated financial position, results of operations, or
        cash
        flows.
 
 EITF
        Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
        Financial Instrument Subject to EITF Issue No. 00-19, “Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
        Stock” (“EITF No. 05-4”) addresses financial instruments, such as stock purchase
        warrants, which are accounted for under EITF No. 00-19 that may be issued
        at the
        same time and in contemplation of a registration rights agreement that includes
        a liquidated damages clause. The consensus of EITF No. 05-4 has not been
        finalized. The adoption of this pronouncement is not expected to have an
        impact
        on our consolidated financial position, results of operations, or cash
        flows.
 
 In
        September 2005, the FASB ratified EITF Issue No. 05-7, “Accounting for
        Modifications to Conversion Options Embedded in Debt Instruments and Related
        Issues” (“EITF No. 05-7”), which addresses whether a modification to a
        conversion option that changes its fair value affects the recognition of
        interest expense for the associated debt instrument after the modification
        and
        whether a borrower should recognize a beneficial conversion feature, not
        a debt
        extinguishment, if a debt modification increases the intrinsic value of the
        debt
        (for example, the modification reduces the conversion price of the debt).
        EITF
        No. 05-7 is effective for the first interim or annual reporting period beginning
        after December 15, 2005. We adopted EITF No. 05-7 as of the beginning of
        our
        interim reporting period that began on February 1, 2006. The adoption of
        this
        pronouncement did not have an impact on our consolidated financial position,
        results of operations, or cash flows. In
        September 2005, the FASB ratified EITF Issue No. 05-8, “Income Tax Consequences
        of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF No.
        05-8”), which addresses the treatment of convertible debt issued with a
        beneficial conversion feature as a temporary difference under the guidance in
        SFAS 109. In addition, deferred taxes recognized for a temporary difference
        of
        debt with a beneficial conversion feature should be recognized as an adjustment
        of additional paid-in capital. Entities should apply the guidance in EITF
        No.
        05-8 in the first interim or annual reporting period that begins after December
        15, 2005. Its provisions should be applied retrospectively under the guidance
        in
        SFAS 154 to all convertible debt instruments with a beneficial conversion
        feature accounted for under the guidance in EITF No. 00-27 “Application of EITF
        Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion
        Features or Contingently Adjustable Conversion Ratios.’” We have applied the
        requirements of EITF No. 05-8 to all previously existing convertible debt
        instruments with a beneficial conversion feature and will apply the requirements
        of EITF No. 05-8 for all new convertible debt instruments with a beneficial
        conversion feature. The adoption of this pronouncement for new convertible
        debt
        instruments with a beneficial conversion feature 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. 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. As described
        in
        Part I, Item 2 above under the heading, "RESTATEMENT," the
        Company's
   39
   Board concluded
        that the classification of warrants issued by the Company in connection
        with the 2005 and 2006 convertible debentures was not in accordance with
        the
        interpretations of 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." Accordingly, the Board has authorized
        the
        restatement of the Company’s consolidated financial statements at and for the
        fiscal year ended October 31, 2005 and at and for the periods ended July
        31,
        2005, January 31, 2006 and April 30, 2006. Because the above was not prevented
        by the Company's then-existing disclosure controls and procedures, the Chief
        Executive Officer and Chief Financial Officer has concluded based upon his
        evaluation that the Company's disclosure controls and procedures were not
        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. The Company believes that, as a result of its consultations
        with counsel, the Company's outside auditors, and other accounting
        professionals, it has improved its disclosure controls and procedures in
        the
        area of financial reporting of complex equity transactions such as the
        convertible debentures and accompanying warrants.
 
 Management
        is aware that there is a lack of segregation of duties at the Company due
        to the
        small number of employees dealing with general administrative and financial
        matters. This constitutes a significant deficiency in the internal controls.
        In
        the past, management had decided that considering the employees involved,
        the
        control procedures in place, and the outsourcing of certain financial functions,
        the risks associated with such lack of segregation were low and the potential
        benefits of adding additional employees to clearly segregate duties did not
        justify the expenses associated with such increases. Management periodically
        reevaluates this situation. In light of the Company’s receipt of additional
        financing in March 2006, it is the Company’s intention over the next six months
        to increase staffing to mitigate the current lack of segregation of duties
        within the general administrative and financial functions.
 
 A
        control
        system, no matter how well conceived and operated, can provide only reasonable,
        not absolute, assurance that the objectives of the control system are met.
        Because of the inherent limitations in all control systems no evaluation
        of
        controls can provide absolute assurance that all control issues, if any,
        within
        a company have been detected. Such limitations include the fact that human
        judgment in decision-making can be faulty and that breakdowns in internal
        control can occur because of human failures, such as simple errors or mistakes
        or intentional circumvention of the established process.
 
 **CHANGES
        IN INTERNAL CONTROLS OVER FINANCIAL REPORTING** .
        Except
        as described above, during the three months ended April 30, 2006, there have
        been no changes in our internal controls over financial reporting that have
        materially affected, or are reasonably likely to materially affect, these
        controls.
   40
   **PART
        II - OTHER INFORMATION**
 
 **ITEM
        2.  Unregistered Sales of Equity Securities and Use of
        Proceeds.**
 
 During
        the three months ended April 30, 2006, the Company sold or issued unregistered
        securities as follows:
 
 In
        February 2006, we issued
 
 (i) o ptions
        to
        purchase 2,100,000 shares of Common Stock to members of our Board of Directors,
        an advisory member and an employee;
 
 (ii) 12,064,494
        shares of Common Stock in exchange for the cancellation of notes payable
        by the
        Company with a principal amount of $700,337 and interest of $144,178;
 
 (iii) 5,656,108
        shares of Common Stock upon exercise of warrants resulting in gross proceeds
        of
        $282,805; and
 
 (iv) options
        to purchase 2,000,000 shares of Common Stock to our legal counsel for legal
        services valued at $84,277.
 
 During
        the period between February 21, 2006 and March 10, 2006, we issued 11,370,624
        shares of Common Stock upon exercise of warrants resulting in gross proceeds
        of
        $568,531.
  March 2006, we issued
 
 (i) 5,714,516
        shares of Common Stock upon exercise of warrants resulting in gross proceeds
        of
        $285,726;
 
 (ii) 11,000,000
        shares of restricted Common Stock to consultants for services valued at
        $1,870,000; and
 
 (iii) a
        promissory note in the principal amount of $301,197 to our Executive Vice
        President, which was convertible into shares of our Common Stock and has
        since
        such date been paid in full and cancelled.
 
 In
        April
        2006, we issued 35,714 shares of Common Stock upon conversion of a convertible
        promissory note and interest valued at $15,000.
 
 All
        of
        the securities issued in the transactions described above were issued without
        registration under the Securities Act in reliance upon the exemptions provided
        in Section 4(2) of the Securities Act or Regulation S under such Securities
        Act.
        Except with respect to securities sold under Regulation S, the recipients
        of
        securities in each such transaction acquired the securities for investment
        only
        and not with a view to or for sale in connection with any distribution thereof.
        Appropriate legends were affixed to the share certificates issued in all
        of the
        above transactions. Each of the recipients represented that they were
“accredited investors” 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 its 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.
   41
   **ITEM
        4.  Submission of Matters to a Vote of Security
        Holders.**
 
 The
        Company submitted the following matters to a vote of its shareholders at
        its
        annual meeting, which was held on April 18, 2006.
 
 (a) The
        Company shareholders were asked to vote for the election of Brad Ketch, Ray
        Willenberg, Jr., Jack L. Peckham and Thomas J. Cooper to the Board of Directors
        of the Company, to hold office until the 2007 Annual Meeting of Shareholders.
        The nominees were all elected pursuant to the following votes:
 
 Name
                  of Director
              Votes
                  For
              Votes
                  WithheldBrad
                  Ketch
              257,328,351
              3,737,068Ray
                  Willenberg, Jr.
              257,955,892
              3,109,527Jack
                  L. Peckham
              256,575,209
              4,490,210Thomas
                  J. Cooper
              257,200,818
              3,864,601
 
 (b) The
        Company’s shareholders were asked to ratify Marcum & Kliegman, LLP as
        independent public accountants for the year ending October 31, 2006. The
        shareholders ratified the selection of the independent public accountants
        with
        258,517,733 votes cast for, 1,888,438 votes cast against and 734,247
        abstentions.
 
 (c) The
        Company’s shareholders were asked to amend Article IV of the Articles of
        Incorporation to increase the Company’s authorized common stock from 500 million
        shares to 900 million shares. The shareholders approved the amendment to
        Article
        IV with 95,131,548 votes cast for, 9,720,526 votes cast against, and 585,475
        abstentions.
 
 (d) The
        Company’s shareholders were asked to amend Section B(2) of Article IV of the
        Articles of Incorporation relating to the Company’s preferred stock. The
        shareholders approved the amendment with 99,060,931 votes cast for, 5,316,324
        votes cast against and 1,033,294 abstentions.
 
 (e) The
        Company’s shareholders were asked to amend Article IV of the Articles of
        Incorporation to delete paragraph C (regarding the reverse stock split effected
        by the Company in 2000). The shareholders approved the amendment with
        100,880,963 votes cast for, 3,069,673 votes cast against and 1,486,913
        abstentions.
 
 (f) The
        Company’s shareholders were asked to amend the Articles of Incorporation to
        cancel the designations of the Company’s Series A through G preferred stock. The
        shareholders approved the amendment with 101,143,690 votes cast for, 3,222,643
        votes cast against and 1,071,216 abstentions.
 
 **ITEM
        6.  Exhibits**
 
 3.1
              Amended
                  and Restated Articles of Incorporation (incorporated by reference
                  to
                  Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 filed
                  with the Commission on April 24, 2006).4.1
              Amendment
                  to Class 2005-A, -B and -C Common Stock Purchase Warrants dated
                  as of
                  February 21, 2006 (incorporated by reference to Exhibit 4.1 of
                  the
                  Company’s Report on Form 8-K filed with the Commission on March 9,
                  2006).4.2
              Form
                  of 7% Senior Secured Convertible Debenture (incorporated by reference
                  to
                  Exhibit 4.1 of the Company’s Report on Form 8-K filed with the Commission
                  on March 13, 2006 (the “March 13, 2006 8-K”)).10.1
              License
                  Agreement dated as of February 6, 2006 between the Company and
                  HelloSoft,
                  Inc. (Confidential treatment has been requested with respect to
                  certain
                  portions of this exhibit. Omitted portions have been filed separately
                  with
                  the Commission)(incorporated by reference to Exhibit 10.10 of the
                  Company’s quarterly report on Form 10-QSB for the quarterly period ended
                  January 31, 2006 (the “January 2006 10-QSB”)).
 
 42
   10.2
              Stock
                  Option Agreement dated February 16, 2006 between the Company and
                  Davis
                  Munck Butrus, P.C. (incorporated by reference to Exhibit 10.11
                  of the
                  Company’s January 2006 10-QSB).10.3
              Stock
                  Option Agreement dated February 16, 2006 between the Company and
                  Jack
                  Peckham* (incorporated by reference to Exhibit 10.12 of the Company’s
                  January 2006 10-QSB)(1)10.4
              Stock
                  Option Agreement dated February 16, 2006 between the Company and
                  Thomas
                  Cooper (incorporated by reference to Exhibit 10.13 of the Company’s
                  January 2006 10-QSB)(1)10.5
              Form
                  of Securities Purchase Agreement, dated as of March 6, 2006, between
                  the
                  Company and the investors named therein (incorporated by reference
                  to
                  Exhibit 10.1 of the Company's March 13, 2006 8-K)10.6
              Form
                  of Warrant issued in connection with the Securities Purchase Agreement
                  (incorporated by reference to Exhibit 10.2 of the Company's March
                  13, 2006
                  8-K)10.7
              Form
                  of Security Interest Agreement, dated as of March 6, 2006, among
                  the
                  Company, the Secured Parties named therein, and Krieger & Prager, LLP,
                  as agent for the Secured Parties (incorporated by reference to
                  Exhibit
                  10.3 of the Company's March 13, 2006 8-K)10.8
              Form
                  of Registration Rights Agreement, dated as of March 6, 2006, between
                  the
                  Company and the investors named therein (incorporated by reference
                  to
                  Exhibit 10.4 of the Company's March 13, 2006 8-K)10.9
              Placement
                  Agency Agreement, dated as of March 3, 2006, between the Company
                  and Pond
                  Equities (incorporated by reference to Exhibit 10.5 of the Company's
                  March
                  13, 2006 8-K)10.10
              Employment
                  Agreement between the Company and Ray Willenberg, Jr. dated as
                  of March 1,
                  2006 (incorporated by reference to Exhibit 10.1 of the Company's
                  Report on
                  Form 8-K filed with the Commission on March 15, 2006 (the “March 15, 2006
                  8-K”)) (1)10.11
              Convertible
                  Promissory Note dated March 7, 2006 by the Company in favor of
                  Ray
                  Willenberg, Jr. (incorporated by reference to Exhibit 10.2 of the
                  Company's March 15, 2006 8-K)10.12
              Consulting
                  Agreement between the Company and LF Technology Group, LLC dated
                  March 7,
                  2006 (incorporated by reference to Exhibit 10.3 of the Company's
                  March 15,
                  2006 8-K)10.13
              Consulting
                  Agreement between the Company and Starburst Innovations, LLC dated
                  March
                  7, 2006 (incorporated by reference to Exhibit 10.4 of the Company's
                  March
                  15, 2006 8-K)10.14
              Consulting
                  Agreement between the Company and Advisor Associates, Inc. dated
                  March 8,
                  2006 (incorporated by reference to Exhibit 10.5 of the Company's
                  March 15,
                  2006 8-K)10.15
              First
                  Amendment to Lease between the Company and American Property Management
                  Corp. as agent for Weston Investment Co. LLC dated March 8,
                  2006.*31.1
              Rule
                  13a-14(a)/15d-14(a) Certification**32.1
              Section
                  1350 Certification**
  ___________________________
  * 
        Incorporated by reference to Exhibit 10.15 of the Company’s Quarterly Report on
        Form 10-QSB for the period ended April
        30,
        2006, as filed with the Commission on June 14, 2006.
 **
        Filed
        herewith.
 (1) 
        Signifies a management agreement or compensatory plan or
        arrangement.
   43
 
  **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: 
                  July 10, 2006
              BY:
              /s/ Brad
                  KetchBrad
                  KetchPresident
                  and Chief Executive Officer
                (Principal
                  Executive Officer, Financial and
                Accounting
                  Officer and Authorized Signatory)
   44