**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**




WASHINGTON,
      D.C. 20549




**FORM
      10-QSB**




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


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




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


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




*COMMISSION
      FILE NUMBER 000-21785*




**RIM
      SEMICONDUCTOR COMPANY**




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




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




305
                NE 102ND AVENUE, SUITE 350
              PORTLAND,
                OREGON 97220
            
            (503)
                257-6700(Address
                of principal executive offices)
            
            (Issuer’s
                telephone number,
              including
                area code)




Check
                whether the issuer (1) has filed all reports required to be filed
                by
                Section 13 or 15(d) of the Exchange Act during the past 12 months
                (or for
                such period that the registrant was required to file such reports),
                and
                (2) has been subject to such filing requirements for the past 90
                days.
            YesxNo ̈Indicate
                by check mark whether the registrant is a shell company (as defined
                by
                Rule 12b-2 of the Exchange Act)
            Yes ̈NoxThe
                number of shares of the issuer’s Common Stock, par value $.001 per share,
                outstanding as of September 12, 2007, was 463,234,190.Transitional
                Small Business Disclosure Format (Check one)
            Yes ̈Nox










**FORM
      10-QSB**




**RIM
      SEMICONDUCTOR COMPANY**




**JULY
      31, 2007**




**TABLE
      OF CONTENTS**







**PAGE**PART
                I - FINANCIAL INFORMATIONITEM
                1.  FINANCIAL STATEMENTSCONDENSED
                CONSOLIDATED BALANCE SHEET (Unaudited) At July 31,
                2007
            1CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) For the Nine and
                Three
                Months Ended July 31, 2007 and 2006
            2CONDENSED
                CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY (Unaudited) For
                the Nine Months Ended July 31, 2007
            4CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the Nine Months
                Ended July 31, 2007 and 2006
            5NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
            7ITEM
                2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                OPERATION
            26ITEM
                3.  CONTROLS AND PROCEDURES
            35PART
                II - OTHER INFORMATION
            35ITEM
                2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            35ITEM
                5.  OTHER INFORMATION
            36ITEM
                6.  EXHIBITS
            37SIGNATURES
            38










**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1.  FINANCIAL STATEMENTS**




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


**(Unaudited)**




July
                31,
              2007ASSETSCurrent
                Assets:Cash
                and cash equivalents
            
            $
            241,930Other
                current assets
            
            
            152,877TOTAL
                CURRENT ASSETS
            
            
            394,807Property
                and equipment - net
            
            
            187,413Technology
                licenses and capitalized software development costs - net
            
            
            1,764,435Deferred
                financing costs - net
            
            
            183,736Other
                assets
            
            
            22,144TOTAL
                ASSETS
            
            $
            2,552,535LIABILITIES
                AND STOCKHOLDERS’ DEFICIENCYCurrent
                Liabilities:Convertible
                notes payable
            
            $
            478,000Notes
                payable (net of debt discount of $784,000)
            
            
            716,000Convertible
                debentures (net of debt discount of $200,080)
            
            
            531,200Derivative
                liabilities - warrants, options and embedded conversion
                option
            
            
            3,688,060Accounts
                payable and accrued expenses
            
            
            1,205,433TOTAL
                CURRENT LIABILITIES
            
            
            6,618,693TOTAL
                LIABILITIES
            
            
            6,618,693Commitments,
                Contingencies and Other MattersStockholders’
                Deficiency:Preferred
                stock - $0.01 par value; Authorized - 15,000,000 shares; Issued -
                0
                shares; Outstanding - 0 shares
            
            
            --Common
                stock - $0.001 par value; Authorized - 900,000,000 shares; Issued
                -
                459,524,043 shares; Outstanding - 459,024,189 shares
            
            
            459,524Treasury
                stock, at cost - 499,854 shares
            
            
            (7,498
            )Additional
                paid-in capital
            
            
            84,990,747Unearned
                compensation
            
            
            (1,578,025
            )Accumulated
                deficit
            
            
            (87,930,906
            )TOTAL
                STOCKHOLDERS’ DEFICIENCY
            
            
            (4,066,158
            )TOTAL
                LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
            
            $
            2,552,535





See
      notes
      to condensed consolidated financial statements.


1


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**




For
                the Nine Months Ended
              July
                31,2007
            
            2006REVENUES
            
            $
            14,757
            
            $
            59,899OPERATING
                EXPENSES:Impairment
                of technology licenses and capitalized software development
                costs
            
            
            4,415,943
            
            
            --Amortization
                of technology licenses and capitalized software development
                costs
            
            
            809,821
            
            
            531,692Research
                and development expenses (including stock based compensation of $466,170
                and $26,860, respectively)
            
            
            1,041,884
            
            
            255,821Selling,
                general and administrative expenses (including stock based compensation
                of
                $1,764,331 and $1,501,569, respectively)
            
            
            4,390,257
            
            
            3,700,983TOTAL
                OPERATING EXPENSES
            
            
            10,657,905
            
            
            4,488,496OPERATING
                LOSS
            
            
            (10,643,148
            )
            
            (4,428,597
            )OTHER
                EXPENSES (INCOME):Interest
                expense
            
            
            3,255,762
            
            
            9,275,907Change
                in fair value of derivative liabilities
            
            
            (3,016,018
            )
            
            12,128,413Amortization
                of deferred financing costs
            
            
            1,230,087
            
            
            1,017,659Gain
                on forgiveness of principal and interest on Zaiq Note
            
            
            --
            
            
            (1,169,820
            )Loss
                on exchange of notes payable into common stock
            
            
            --
            
            
            446,386Other
            
            
            (29,250
            )
            
            (3,000
            )TOTAL
                OTHER EXPENSES
            
            
            1,440,581
            
            
            21,695,545NET
                LOSS
            
            $
            (12,083,729
            )
            $
            (26,124,142
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.03
            )
            $
            (0.09
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            420,534,014
            
            
            286,694,814







See
      notes
      to condensed consolidated financial statements.


2





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


**(Unaudited)**




For
                the Three Months Ended
              July
                31,2007
            
            2006REVENUES
            
            $
            14,757
            
            $
            1,025OPERATING
                EXPENSES:Impairment
                of technology licenses and capitalized software development
                costs
            
            
            4,415,943
            
            
            --Amortization
                of technology licenses and capitalized software development
                costs
            
            
            279,155
            
            
            216,460Research
                and development expenses (including stock based compensation of $22,738
                and $0, respectively)
            
            
            232,264
            
            
            119,888Selling,
                general and administrative expenses (including stock based compensation
                of
                $705,540 and $517,859, respectively)
            
            
            1,534,962
            
            
            1,343,244TOTAL
                OPERATING EXPENSES
            
            
            6,462,324
            
            
            1,679,592OPERATING
                LOSS
            
            
            (6,447,567
            )
            
            (1,678,567
            )OTHER
                EXPENSES (INCOME):Interest
                expense
            
            
            315,245
            
            
            1,378,138Change
                in fair value of derivative liabilities
            
            
            (2,654,271
            )
            
            11,643,875Amortization
                of deferred financing costs
            
            
            64,240
            
            
            448,840Other
            
            
            (1,355
            )
            
            --TOTAL
                OTHER EXPENSES (INCOME)
            
            
            (2,276,141
            )
            
            13,470,853NET
                LOSS
            
            $
            (4,171,426
            )
            $
            (15,149,420
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.01
            )
            $
            (0.05
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            440,632,466
            
            
            324,964,555





See
      notes
      to condensed consolidated financial statements.


3


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY**


**For
      The Nine Months Ended July 31, 2007**


**(Unaudited)**





Common
                Stock
            
            Treasury
                StockShares
            
            Amount
            
            Shares
            
            Amount
            
            Additional
                Paid-in
              Capital
            
            Unearned
                Compensation
            
            Accumulated
                Deficit
            
            Total
                Stockholders’
              DeficiencyBalance
                at November 1, 2006
            
            
            356,399,782
            
            $
            356,400
            
            
            (499,854
            )
            $
            (7,498
            )
            $
            75,215,263
            
            $
            (1,197,034
            )
            $
            (75,847,177
            )
            $
            (1,480,046
            )Issuance
                of common stock for cash
            
            
            11,740,000
            
            
            11,740
            
            
            --
            
            
            --
            
            
            575,260
            
            
            --
            
            
            --
            
            
            587,000Issuance
                of common stock under service and consulting agreements
            
            
            23,284,938
            
            
            23,285
            
            
            --
            
            
            --
            
            
            2,276,339
            
            
            (2,299,624
            )
            
            --
            
            
            --Issuance
                of common stock in connection with notes payable
            
            
            10,000,000
            
            
            10,000
            
            
            --
            
            
            --
            
            
            690,000
            
            
            --
            
            
            --
            
            
            700,000Issuance
                of common stock for conversion of convertible debentures and accrued
                interest
            
            
            57,034,788
            
            
            57,034
            
            
            --
            
            
            --
            
            
            4,044,799
            
            
            --
            
            
            --
            
            
            4,101,833Issuance
                of common stock in satisfaction of liquidated damages
            
            
            464,535
            
            
            465
            
            
            --
            
            
            --
            
            
            68,082
            
            
            --
            
            
            --
            
            
            68,547Issuance
                of common stock upon exercise of stock options for the settlement
                of
                vendor payables
            
            
            600,000
            
            
            600
            
            
            --
            
            
            --
            
            
            18,540
            
            
            --
            
            
            --
            
            
            19,140Stock
                based compensation expense recognized for the granting and vesting
                of
                options to employees and advisory board members
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            341,392
            
            
            --
            
            
            --
            
            
            341,392Reclassification
                of derivative liability upon exercise of options
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            71,521
            
            
            --
            
            
            --
            
            
            71,521Reclassification
                of conversion option liability
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,689,551
            
            
            --
            
            
            --
            
            
            1,689,551Amortization
                of unearned compensation expense
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            1,918,633
            
            
            --
            
            
            1,918,633Net
                loss
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            (12,083,729
            )
            
            (12,083,729
            )Balance
                at July 31, 2007
            
            
            459,524,043
            
            $
            459,524
            
            
            (499,854
            )
            $
            (7,498
            )
            $
            84,990,747
            
            $
            (1,578,025
            )
            $
            (87,930,906
            )
            $
            (4,066,158
            )







See
      notes
      to condensed consolidated financial statements.


4


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**




For
                the Nine Months Ended
              July
                31,2007
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                loss
            
            $
            (12,083,729
            )
            $
            (26,124,142
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Consulting
                fees and other compensatory elements of stock issuances
            
            
            2,230,501
            
            
            1,528,429Change
                in fair value of derivative liabilities
            
            
            (3,016,018
            )
            
            12,128,413(Gain)/Loss
                on disposal of property and equipment
            
            
            614
            
            
            --Loss
                on impairment of technology licenses and capitalized
              software
                development costs
            
            
            4,415,943
            
            
            --Fair
                value of Investors’ warrants in excess of debt discount
            
            
            --
            
            
            5,608,156Loss
                on exchange of notes payable into common stock
            
            
            --
            
            
            446,386Gain
                on forgiveness of principal and interest on Zaiq Note
            
            
            --
            
            
            (1,169,820
            )Amortization
                of deferred financing costs
            
            
            1,230,087
            
            
            1,017,659Amortization
                of debt discount on notes
            
            
            3,187,404
            
            
            3,290,683Amortization
                of technology licenses and capitalized software development
                fees
            
            
            809,821
            
            
            531,692Depreciation
            
            
            17,281
            
            
            2,306Change
                in assetsOther
                current assets
            
            
            (42,611
            )
            
            (96,615
            )Other
                assets
            
            
            --
            
            
            2,486Change
                in liabilitiesAccounts
                payable and accrued expenses
            
            
            229,459
            
            
            519,473NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (3,021,248
            )
            
            (2,314,894
            )CASH
                FLOWS FROM INVESTING ACTIVITIESProceeds
                from sale of trademark rights
            
            
            200,000
            
            
            --Proceeds
                from maturity of short-term investments
            
            
            1,000,000
            
            
            --Acquisition
                and costs of capitalized software and development fees
            
            
            (710,179
            )
            
            (375,000
            )Acquisition
                of property and equipment
            
            
            (140,762
            )
            
            (6,539
            )NET
                CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
            
            
            349,059
            
            
            (381,539
            )CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from issuance of common stock
            
            
            587,000
            
            
            --Proceeds
                from exercise of warrants
            
            
            --
            
            
            697,407Purchase
                of treasury stock
            
            
            --
            
            
            (7,498
            )Proceeds
                from notes payable
            
            
            1,700,000
            
            
            750,000Proceeds
                from convertible debentures
            
            
            --
            
            
            6,000,000Capitalized
                financing costs
            
            
            (139,000
            )
            
            (742,450
            )Repayments
                of notes payable
            
            
            (324,000
            )
            
            (944,291
            )Repayments
                of convertible notes payable
            
            
            --
            
            
            (460,322
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            1,824,000
            
            
            5,292,846(DECREASE)
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            (848,189
            )
            
            2,596,413CASH
                AND CASH EQUIVALENTS - BEGINNING OF PERIOD
            
            
            1,090,119
            
            
            373,481CASH
                AND CASH EQUIVALENTS - END OF PERIOD
            
            $
            241,930
            
            $
            2,969,894





See
      notes
      to condensed consolidated financial statements.


5





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**




For
                the Nine Months Ended
              July
                31,2007
            
            2006**Supplemental
                Disclosure of Cash Flow Information:**Cash
                paid during the period for:Interest
            
            $
            76,025
            
            $
            3,350**Supplemental
                Disclosures of**
              **Non-Cash
                Investing and Financing Activities:**Common
                stock issued for conversion of convertible debentures, notes payable
                and
                accrued interest
            
            $
            4,101,833
            
            $
            3,777,854Issuance
                of common stock upon exercise of stock options for the settlement
                of
                vendor payables
            
            $
            19,140
            
            $
            --Value
                assigned to warrants granted in connection with notes
                payable
            
            $
            226,567
            
            $
            120,000Value
                assigned to common stock issued in connection with notes
                payable
            
            $
            700,000
            
            $
            --Value
                recorded as debt discount relating to warrants issued to purchasers
                of
                convertible debentures
            
            $
            --
            
            $
            3,428,571Value
                assigned on issuance date to warrants issued to placement
                agent
            
            $
            --
            
            $
            1,792,452Value
                assigned to conversion option liability in connection with issuance
                of
                convertible debentures
            
            $
            --
            
            $
            2,571,429Common
                stock issued for the settlement of accrued liquidated
                damages
            
            $
            68,547
            
            $
            --Deferred
                compensation converted to convertible note payable
            
            $
            --
            
            $
            212,450Reclassification
                of conversion option liability to equity
            
            $
            1,689,551
            
            $
            947,211Reclassification
                of derivative liability upon exercise of options and
                warrants
            
            $
            71,521
            
            $
            1,141,769





See
      notes
      to condensed consolidated financial statements.


6





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





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




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




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




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




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




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




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




**Liquidity
      Discussion**




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




The
      Company has significant recurring operating losses, used substantial funds
      in
      its operations, and needs to raise additional funds to accomplish its business
      plan. For the three months ended July 31, 2007 and 2006, the Company incurred
      net losses of approximately $4.2 million and $15.1 million, respectively, and
      approximately $12.1 million and $26.1 million for the nine months ended July
      31,
      2007 and 2006, respectively. As of July 31, 2007, the Company has a working
      capital deficiency of approximately $6.2 million. In addition, management
      believes that the Company will continue to incur net losses and cash flow
      deficiencies from operating activities through at least July 31,
      2008.




In
      September 2007, an institutional investor that had previously invested in the
      Company committed to purchase $6 million of convertible debentures upon the
      Company’s request at any time through January 1, 2008. Management believes that
      the net proceeds from this financing, together with $241,930 in cash as of
      July
      31, 2007, is sufficient to fund the planned expenditures through at least July
      31, 2008.




7





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**NOTE
      1 - PRINCIPLES OF CONSOLIDATION AND BUSINESS OPERATIONS
      (CONTINUED)**




**Liquidity
      Discussion** **(Continued)**




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




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




**Accounting
      Estimates**




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




**Revenue
      Recognition**




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




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




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


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


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


o
            the
                arrangement fee is fixed or determinable;
                and


o
            collection
                of the arrangement fee is reasonably
                assured.




Under
      a
      rights Agreement with Lions Gate Entertainment (“LGE”) the domestic distributor
      for its Film entitled “Step Into Liquid,” the Company shares with LGE in the
      profits of the Film after LGE recovers its marketing, distribution and other
      predefined costs and fees. The agreement provides for the payment of minimum
      guaranteed license fees, usually payable on delivery of the respective completed
      film, that are subject to further increase based on the actual distribution
      results in the respective territory.




8





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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




**Research
      and Development**




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




Research
      and development expenses relate to the design and development of advanced
      transmission technology products. In the past, the Company has outsourced its
      design and development activities to independent third parties, although it
      is
      not currently doing so. Internal development costs and payments made to
      independent software developers under development agreements are capitalized
      to
      software development costs once technological feasibility is established or
      if
      the development costs have an alternative future use. Prior to establishing
      technological feasibility, development costs and payments made are expensed to
      research and development costs. Technological feasibility is evaluated on a
      product-by-product basis.




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




**Capitalized
      Software Development Costs**




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




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




The
      Company periodically performs reviews of the recoverability of such capitalized
      software development costs. At the time a determination is made that capitalized
      amounts are not recoverable based on the estimated cash flows to be generated
      from the applicable software, the capitalized cost of each software product
      is
      then valued at the lower of its remaining unamortized costs or net realizable
      value (See Note 4).




**Derivative
      Financial Instruments**




In
      connection with the issuance of certain convertible debentures (see Note 8),
      the
      terms of the debentures included an embedded conversion feature which provided
      for a conversion of the debentures into shares of the Company’s common stock at
      a rate which was determined to be variable. The Company determined that the
      conversion feature was an embedded derivative instrument and that the conversion
      option was an embedded put option pursuant to SFAS No. 133, “Accounting for
      Derivative Instruments and Hedging Activities,” as amended, and Emerging Issues
      Task Force (“EITF”) Issue No. 00-19, “Accounting for Derivative Financial
      Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock.”




9





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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




**Derivative
      Financial Instruments** **(Continued)**




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




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




Three
                Months Ended July 31,
            
            Nine
                Months Ended July 31,2007
            
            2006
            
            2007
            
            2006Expected
                dividends
            
            None
            
            None
            
            None
            
            NoneExpected
                volatility
            
            
            57.9
                - 125.9%
            
            
            90.0
                - 123.5%
            
            
            47.9
                - 136.9%
            
            
            95.3
                - 308.8%Risk-free
                interest rate
            
            
            4.6
                - 5.0%
            
            
            4.9%
            
            
            4.5
                - 5.2%
            
            
            4.3
                - 4.9%Contractual
                term (years)
            
            
            0.2
                - 9.0
            
            
            0.1
                - 9.9
            
            
            0.2
                - 9.5
            
            
            0.1
                - 9.9




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




**Loss
      Per Common Share**




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




For
      the
      three months and nine months ended July 31, 2007 and 2006, no effect has been
      given to outstanding options, warrants, convertible notes payable, or
      convertible debentures in the diluted computation, as their effect would be
      anti-dilutive.




**Stock-Based
      Compensation**




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




10





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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




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




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




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




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




Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options was $113,444 and $341,392 for the three months and nine months ended
      July 31, 2007, respectively, and $205,240 and $653,079 for the three months
      and
      nine months ended July 31, 2006, respectively. Stock-based-compensation expense
      for share-based payment awards granted prior to, but not yet vested as of
      October 31, 2005 based on the grant date fair value estimated in accordance
      with
      the provisions of SFAS 123 was $0 and $247,057 for the three months and nine
      months ended July 31, 2006, respectively.




Stock-based
      compensation expense recognized for non-employees under other accounting
      standards was $614,834 and $1,889,109 for the three months and nine months
      ended
      July 31, 2007, respectively, and $312,619 and $628,293 for the three months
      and
      nine months ended July 31, 2006, respectively.




As
      stock-based compensation expense recognized in the consolidated statement of
      operations for the three months and nine months ended July 31, 2007 is based
      on
      awards ultimately expected to vest, it has been reduced for estimated
      forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates.




**Impairment
      of Long-Lived Assets**




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




The
      Company evaluates the recoverability of long-lived assets by measuring the
      carrying amount of the assets against the estimated undiscounted future cash
      flows associated with them. At the time such evaluations indicate that the
      future undiscounted cash flows of certain long-lived assets are not sufficient
      to recover the carrying value of such assets, the assets are adjusted to their
      fair values (See Note 4).




**Reclassifications**




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




11





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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




**Impact
      of Recently Issued Accounting Standards**




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




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




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
      provides companies with an option to report selected financial assets and
      liabilities at fair value.  The objective of SFAS 159 is to reduce
      both complexity in accounting for financial instruments and the volatility
      in
      earnings caused by measuring related assets and liabilities differently.
      Generally accepted accounting principles have required different measurement
      attributes for different assets and liabilities that can create artificial
      volatility in earnings.  The FASB has indicated it believes that
      SFAS 159 helps to mitigate this type of accounting-induced volatility by
      enabling companies to report related assets and liabilities at fair value,
      which
      would likely reduce the need for companies to comply with detailed rules for
      hedge accounting. SFAS 159 also establishes presentation and disclosure
      requirements designed to facilitate comparisons between companies that choose
      different measurement attributes for similar types of assets and
      liabilities.




SFAS 159
      does not eliminate disclosure requirements included in other accounting
      standards, including requirements for disclosures about fair value measurements
      included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of
      Financial Instruments.” SFAS 159 is effective for the Company as of the
      beginning of fiscal year 2009. The Company has not yet determined the impact
      SFAS 159 may have on its consolidated financial position, results of operations,
      or cash flows.




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




FSP EITF 00-19-2
      is effective immediately for registration payment arrangements and the financial
      instruments subject to those arrangements that are entered into or modified
      subsequent to the issuance date of this FSP, or for financial statements issued
      for fiscal years beginning after December 15, 2006, and interim periods within
      those fiscal years, for registration payment arrangements entered into prior
      to
      the issuance date of this FSP. The Company is evaluating the impact of this
      pronouncement on the Company’s consolidated financial position, results of
      operations and cash flows.




12





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**NOTE
      3 - PROPERTY AND EQUIPMENT**




Property
      and equipment consists of the following:




At
                July 31,
              2007Leasehold
                improvements
            
            $
            127,032Furniture
                and fixtures
            
            
            19,554Office
                equipment
            
            
            63,163209,749Accumulated
                depreciation and amortization
            
            
            (22,336
            )Total
            
            $
            187,413




For
      the
      three months and nine months ended July 31, 2007, depreciation and amortization
      expense was $7,843 and $17,281, respectively. For the three months and nine
      months ended July 31, 2006, depreciation and amortization expense was $1,067
      and
      $2,306, respectively.




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




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




At
                July 31,
              2007Technology
                licenses
            
            $
            5,751,000Purchased
                technology
            
            
            228,000Capitalized
                software development cost
            
            
            1,788,2257,767,225Loss
                on impairment
            
            
            (4,415,943
            )(1,586,847
            )Total
            
            $
            1,764,435





The
      weighted average useful life of the Company’s capitalized
      software was approximately 6 years as of July 31, 2007. The Company commenced
      amortization of technology licenses and capitalized software development costs
      during December 2005 when the Company made available to the market the Cupria
      Cu5001 semiconductor and has recorded amortization expense of $279,155 and
      $809,821 during the three months and nine months ended July 31, 2007,
      respectively, and $216,460 and $531,692 during the three months and nine months
      ended July 31, 2006, respectively.





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




As
      of
      July 31, 2007, the Company reassessed the underlying value of its technology
      due
      to the development of a new improvement to the Company’s existing data transport
      technologies. This development, which was completed in August 2007, replaces
      all
      of the original design elements that resulted from the Company’s strategic
      partnership with Adaptive Networks, Inc. (“Adaptive”) and improves certain
      design elements developed with Hellosoft.  In June 2007, the Company filed
      a provisional patent application protecting technology that replaces certain
      aspects of prior versions of its Cupria TM semiconductor platform.  The Company’s current technology does not utilize
      previously capitalized licenses and software that were incorporated into prior
      versions of the Company’s Cupria TM semiconductor platform.  As a result of this new technology , the Company
      reviewed the recoverability of its capitalized technology licenses and software
      development costs and determined that as of July 31, 2007 the remaining book
      value of approximately $4.4 million was not recoverable based on estimated
      future cash flows to be generated from the licenses.  Accordingly, the
      Company has recognized a loss on impairment of approximately $4.4 million in
      the
      condensed consolidated statements of operations for the three months and nine
      months ended July 31, 2007.




13





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





**NOTE
      4 - TECHNOLOGY LICENSES AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
      (CONT’D)**





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





**NOTE
      5 - FILM IN DISTRIBUTION**




The
      Company recognized of revenues $14,757 for each of the three months and nine
      months ended July 31, 2007. The Company recognized revenues of $1,025 and
      $59,899 for the three months and nine months ended July 31, 2006, respectively.





**NOTE
      6 - DEFERRED FINANCING COSTS**




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




Deferred
                financing costs
            
            $
            3,680,818Less:
                accumulated amortization
            
            
            (3,497,082
            )Deferred
                financing costs, net
            
            $
            183,736




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 nine months
      ended July 31, 2007, amortization of deferred financing costs was $64,240 and
      $1,230,087, respectively. For the three months and nine months ended July 31,
      2006, amortization of deferred financing costs was $448,840 and $1,017,659,
      respectively.




**NOTE
      7 - CONVERTIBLE NOTES PAYABLE**




The
      Company entered into several convertible promissory note agreements with various
      trusts and individuals to fund the operations of the Company. The Company agreed
      to repay the principal and an additional amount equal to 50% of the principal
      on
      all notes in (1) below.





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




The
      outstanding convertible notes are summarized in the table below:




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




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





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




14





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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




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




**NOTE
      8 - CONVERTIBLE DEBENTURES**




**2006
      Debentures**




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




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




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




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




To
      secure
      the Company’s obligations under the 2006 Debentures, the Company granted a
      security interest in substantially all of its assets, including without
      limitation, its intellectual property, in favor of the Investors. The security
      interest terminated upon the earlier of (i) the date on which less than
      one-fourth of the original principal amount of the 2006 Debentures issued on
      the
      Closing Date are outstanding or (ii) payment or satisfaction of all of the
      Company’s obligations under the related securities purchase agreement. During
      the three months ended January 31, 2007, condition (i) was met and the security
      interest terminated.




The
      Company agreed to include the shares of common stock issuable upon conversion
      of
      the 2006 Debentures and exercise of the related warrants issued to investors
      and
      the placement agent in a registration statement filed by the Company with the
      Securities and Exchange Commission (the “SEC”). Since the registration statement
      was not declared effective by the SEC by June 23, 2006, the Company was
      obligated to pay liquidated damages to the holders of the 2006 Debentures.
      A
      registration statement covering the common stock issuable upon conversion of
      the
      2006 Debentures and the related warrants issued to investors and the placement
      agent was declared effective by the SEC on August 16, 2006. These liquidated
      damages aggregated $212,000. At their option, the holders of the 2006 Debentures
      were entitled to be paid such amount in cash or shares of restricted common
      stock at a per share rate equal to the effective conversion price of the 2006
      Debentures at the time the liquidated damages became due. During the three
      months ended January 31, 2007, 464,535 shares of common stock valued at $68,547
      were issued as payment for liquidated damages. There were no such payments
      made
      during the three months ended April 30, 2007 or the three months ended July
      31,
      2007. Accrued liquidated damages as of July 31, 2007 was $143,453.




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.




15


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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





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




In
      accordance with SFAS No. 133 and EITF Issue No. 00-19, due to the possibility
      that an indeterminate number of shares could be issued upon conversion of the
      2006 Debentures, the Company separately values and accounts for the embedded
      conversion feature related to the 2006 Debentures, the Investors’ warrants and
      the placement agent’s warrants.




As
      of
      July 31, 2007, the conversion option liability of $2,571,429 had been reduced
      to
      $279,429 as a result of conversions of the 2006 Debentures. During the nine
      months ended July 31, 2007, $1,689,000 was recorded as a reclassification to
      stockholders’ equity. Since the issuance of the 2006 Debentures, an aggregate of
      $2,292,000 has been recorded as a reclassification to stockholders’ equity.




A
      gain on
      the change in fair value of the derivative liabilities of $1,697,490 and
      $1,834,393 was recognized as part of other income during the three months and
      nine months ended July 31, 2007, respectively. A loss on the change in fair
      value of the derivative liabilities of $9,315,408 and $6,666,740 was recognized
      as part of other expense during the three months and nine months ended July
      31,
      2006, respectively.




During
      the three months ended January 31, 2007, $3,931,000 of principal amount of
      2006
      Debentures plus accrued interest of $136,911 were converted into 56,376,123
      shares of common stock. During the three months ended April 30, 2007, no
      principal or accrued interest was converted into shares of common stock. During
      the three months ended July 31, 2007, $10,000 of principal amount of 2006
      Debentures plus accrued interest of $22,601 were converted into 640,344 shares
      of common stock.





During
      the three months ended April 30, 2006, no principal or accrued interest was
      converted into shares of common stock. During the three months ended July 31,
      2006, $400,000 of principal amount of 2006 Debentures plus accrued interest
      of
      $129,567 were converted into 5,647,147 shares of common stock.




Included
      in interest expense for the three months and nine months ended July 31, 2007
      is
      $86,367 and $2,917,554, respectively, related to the amortization of the debt
      discount on these debentures. Included in interest expense for the three months
      and nine months ended July 31, 2006 is $1,076,881 and $1,495,486, respectively,
      related to the amortization of the debt discount on these
      debentures.




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




Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueCurrent
            
            $
            652,000
            
            $
            198,900
            
            $
            453,100




16





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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





**2005
      Debentures**




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




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





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




In
      connection with the issuance of the 2005 Debentures, the Company also issued
      to
      a placement agent warrants to purchase up to 5,656,108 shares of Common Stock
      (the “Compensation Warrants”) valued at $319,066 on the issuance date. This
      amount was recorded as a deferred financing cost and is being charged to
      interest expense over the term of the 2005 Debentures. All of the Compensation
      Warrants were exercised in February 2006 in connection with the Warrant
      Amendment discussed below.




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




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




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




17





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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




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





The
      gross
      proceeds of $3,500,000 are recorded net of a debt discount of $3,500,000. The
      debt discount consisted of a $2,000,000 value related to the Investor Warrants
      and a $1,500,000 value related to the embedded conversion feature in accordance
      with SFAS No. 133 and EITF Issue No. 00-19. Due to the possibility that an
      indeterminate number of shares could be issued upon conversion of the 2005
      Debentures, the Company separately values and accounts for the embedded
      conversion feature related to the 2005 Debentures and the Investor Warrants
      as
      derivative liabilities. Accordingly, these derivative liabilities are measured
      at fair value with changes in fair value reported in earnings as long as they
      remain classified as liabilities.




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





A
      gain on
      the change in fair value of the derivative liabilities of $565,459 and $671,878
      was recognized as part of other income during the three months and nine months
      ended July 31, 2007, respectively. A loss on the change in fair value of the
      derivative liabilities of $1,058,056 and $4,191,262 was recognized during the
      three months and nine months ended July 31, 2006, respectively.





During
      the three months ended January 31, 2007, $1,284 of principal amount of 2005
      Debentures plus accrued interest of $37 were converted into 18,321 shares of
      common stock. During the three months ended April 30, 2007, no principal or
      accrued interest was converted into shares of common stock. During the three
      months ended July 31, 2007, no principal or accrued interest was converted
      into
      shares of common stock.




During
      the three months ended January 31, 2006, $1,310,724 of principal amount of
      2005
      Debentures plus accrued interest of $69,777 were converted into 81,262,199
      shares of common stock. 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. During the three months ended
      July 31, 2006, $35,000 of principal amount of the 2005 Debentures plus accrued
      interest of $1,087 were converted into 443,814 shares of common stock.




Included
      in interest expense for the three months and nine months ended July 31, 2007
      is
      $360 and $1,735, respectively, related to the amortization of the debt discount
      related to these debentures. Included in interest expense for the three months
      and nine months ended July 31, 2006 is $24,643 and $1,550,586, respectively,
      related to the amortization of the debt discount related to these
      debentures.




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




Outstanding
              Principal
              Amount
            
            Unamortized
              Debt
                Discount
            
            Net
                Carrying
              ValueCurrent
            
            $
            4,280
            
            $
            1,180
            
            $
            3,100




18





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




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





**7%
      Debentures**




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




Under
      the
      agreements with the purchasers of the 7% Debentures issued in December 2003,
      the
      Company is obligated to pay to the Debenture holders liquidated damages
      associated with the late filing of the Registration Statement and the missed
      Registration Statement required effective date of March 30, 2004. Liquidated
      damages are equal to (x) 2% of the principal amount of all the Debentures during
      the first 30-day period following late filing or effectiveness and (y) 3% of
      the
      principal amount of all Debentures for each subsequent 30-day period (or part
      thereof). These liquidated damages aggregated to $160,000. At their option,
      the
      Debenture holders are entitled to be paid such amount in cash or shares of
      Common Stock at a per share rate equal to the effective conversion price of
      the
      Debentures, which is currently $0.15. Accrued liquidated damages as of July
      31,
      2007 was $37,550.





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





Included
      in interest expense for the three months and nine months ended July 31, 2007
      is
      $57 and $1,548, respectively, related to the amortization of the debt discount
      related to these debentures. Included in interest expense for the three months
      and nine months ended July 31, 2006 is $20,255 and $43,736, respectively,
      related to the amortization of the debt discount related to these
      debentures.




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




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




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




**NOTE
      9 - NOTES PAYABLE**




In
      July
      2007, the Company entered into a bridge loan agreement with two institutional
      investors pursuant to which the institutional investors loaned the Company
      a
      total of $1,000,000. After
      the
      payment of transaction related fees and expenses of $105,000, and repayment
      of
      the April 2007 loan (discussed below), the Company received net proceeds of
      $571,000. The
      transaction related fees were recorded as deferred financing costs.





Pursuant
      to the bridge loan agreement, the Company issued to each institutional investor
      a secured promissory note in the principal amount of $550,000, for an aggregate
      of $1,100,000 (each, a “Note”), representing an original issue discount of 10%.
      The difference of $100,000 between the gross proceeds and amount due at maturity
      is shown as a debt discount that is amortized as interest expense over the
      life
      of the loan. In connection with the bridge loan agreement, the Company also
      issued to the institutional investors an aggregate of 10,000,000 unregistered
      shares of the Company’s common stock with a fair value at the issuance date of
      $700,000. The fair value of the unregistered shares of common stock is shown
      as
      a debt discount that is amortized as interest expense over the life of the loan.
      For both the three months and nine months ended July 31, 2007, amortization
      of
      debt discount on the Notes was $16,000.





Each
      Note
      will mature on the date which is the earlier of (i) December 24, 2007, or (ii)
      the date the Company effects a subsequent financing that, individually or when
      combined with other financings completed by the Company after July 26, 2007,
      results in gross proceeds to the Company of at least $3 million.




19





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





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





In
      the
      event the Notes, or other amounts due under the Notes, is not repaid by the
      maturity date, or is otherwise in default, the Notes become convertible into
      shares of the Company’s common stock, subject to certain conditions provided in
      the loan agreement, at a conversion price equal to the greater of: (i) 75%
      of
      the average closing price of the common stock for the five trading days
      preceding the applicable conversion date, or (ii) $0.01 (subject to adjustment
      as provided in the Notes), and the Company incurs the share registration
      obligations set forth in the Notes.





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





In
      May
      2007, the Company entered into a promissory note resulting in gross proceeds
      of
      $400,000. The promissory note was due and payable on August 22, 2007 and bears
      interest at the rate of 10% per annum. In the event the promissory note is
      not
      repaid by the maturity date, or is otherwise in default, the unpaid portion
      of
      the promissory note will become convertible, in whole or in part, into shares
      of
      the Company's common stock at a conversion price of $0.08 per share. In August,
      2007, the maturity date of this promissory note was extended to October 1,
      2007.





In
      April
      2007, the Company entered into a loan agreement with a third party pursuant
      to
      which the Company borrowed $300,000 from the lender. An amount equal to 108%
      of
      the principal amount ($324,000) of the loan was due and payable on the earlier
      of July 31, 2007 or the date the Company effects a financing transaction or
      series of transactions resulting in gross proceeds to the Company of at least
      $2,000,000. The Company received net proceeds of $265,970 at the issue date
      following the payment of due diligence fees and transaction related fees and
      expenses. Transaction related fees in the amount of $34,000 were recorded as
      deferred financing costs. The loan was repaid out of the proceeds of the note
      payable entered into by the Company in July 2007. The
      difference of $24,000 between the gross proceeds and amount due at maturity
      was
      shown as a debt discount that was amortized as interest expense over the life
      of
      the loan. The
      Company issued to the lender warrants to purchase 3,333,333 shares of common
      stock at an exercise price of $0.10 per share. The fair value of the warrants
      of
      $226,567 at the issuance date was shown as a debt discount that was amortized
      as
      interest expense over the life of the loan. For the three months and nine months
      ended July 31, 2007, amortization of debt discount on this loan was $191,110
      and
      $250,567, respectively.




A
      provision in the agreement required repricing of the warrants to the same price
      as any subsequent stock sales. This event occurred on April 30, 2007 and the
      exercise price was lowered to $0.05 per share. The reduction of the warrant
      exercise price resulted in revaluing the warrants to $143,311. To secure the
      Company’s obligations under the loan agreement, the Company granted a security
      interest in substantially all of its assets, including without limitation,
      its
      intellectual property. The security interest terminated upon payment or
      satisfaction of all of the Company’s obligations under the loan agreement.





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.





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.





20





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**


**NOTE
      10 - STOCKHOLDERS’ DEFICIENCY**




**Common
      Stock**




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




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


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


·
            issued
                464,535 shares of restricted common stock to 2006 Debenture holders
                in
                satisfaction of $68,547 in liquidated damages;
                and


·
            issued
                600,000 shares of common stock upon exercise of stock options in
                satisfaction of accrued expenses of
                $19,140.





During
      the three months ended April 30, 2007, the Company:





·
            issued
                6,000,000 shares of restricted common stock in exchange for cash
                proceeds
                of $300,000; and


·
            issued
                317,460 shares of restricted common stock in exchange for services
                valued
                at $29,524.





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





·
            issued
                640,344 shares of common stock upon conversion of convertible debentures
                with a principal amount of $10,000 and accrued interest of $22,601;·
            issued
                5,740,000 shares of restricted common stock in exchange for cash
                proceeds
                of $287,000;


·
            issued
                10,000,000 shares of restricted common stock valued at $700,000 in
                connection with the issuance of the July 2007 bridge loan;
                and


·
            issued
                11,230,487 shares of restricted common stock in exchange for services
                valued at $868,100.





**Stock
      Option Plans**




In
      November 2006, the Company’s board of directors adopted the 2006 Stock Incentive
      Plan (the “2006 Plan”). The 2006 Plan authorizes the issuance of up to
      30,000,000 incentive stock options, non-qualified stock options or stock awards
      to directors, officers, employees and certain consultants to the Company. The
      2006 Plan was approved by the Company’s shareholders in May 2007 at the
      Company’s 2007 Annual Meeting of Shareholders. The Company’s 2003 Consultant
      Stock Plan (the “2003 Plan”) was also adopted by the shareholders at the 2007
      Annual Meeting. During the nine months ended July 31, 2007, there were no
      issuances made under the 2003 Plan.




**Options
      Granted**




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




·
            Options
                to purchase 100,000 shares of common stock were granted to an employee
                under the 2006 Plan. These options were valued at $11,344 and have
                a ten
                year term, an exercise price of $0.12 per share, and vest over a
                period of
                approximately three years through January 2010;
                and





·
            Options
                to purchase 4,250,000 shares of common stock were granted to one
                director
                and three executive employees under the 2006 Plan. These options
                were
                valued at $386,427 and have a ten year term, an exercise price of
                $0.096
                per share, and vest over a period of approximately three years through
                November 2009.




21





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





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





**Options
      Granted (Continued)**





During
      the three months ended April 30, 2007, no options were granted.




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




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





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




Three
                Months Ended July 31,
            
            Nine
                Months Ended July 31,2007
            
            2006
            
            2007
            
            2006Expected
                dividends
            
            
            None
            
            
            None
            
            
            None
            
            
            NoneExpected
                volatility
            
            
            112%
            
            
            90%
            
            
            112
                - 116%
            
            
            90
                - 158%Risk-free
                interest rate
            
            
            5.16%
            
            
            5.19%
            
            
            4.63
                - 5.16%
            
            
            4.34
                - 5.19%Expected
                life
            
            
            10
                years
            
            
            10
                years
            
            
            10
                years
            
            
            10
                years




**Options
      Exercised**




During
      the three months ended January 31, 2007, options to purchase 600,000 shares
      of
      common stock were exercised. Upon the exercise of these options, the Company
      reclassified the fair value of $71,521 from derivative liabilities to
      stockholders’ equity. During the three months ended January 31, 2007, the
      Company recognized a loss of $16,441 resulting from the change in fair value
      of
      these options. During both the three months ended April 30, 2007 and the three
      months ended July 31, 2007, no options were exercised.




**Options
      Cancelled**




During
      the three months ended January 31, 2007, no options were cancelled. During
      the
      three months ended April 30, 2007, 300,000 options granted to an employee were
      cancelled under the terms of the plan. During the three months ended July 31,
      2007, 100,000 options granted to an employee were cancelled under the terms
      of
      the plan.




**Warrants**




During
      the three months ended April 30, 2007, 3,333,333 warrants to purchase common
      stock were issued in connection with the April 2007 note payable (see Note
      9).
      These warrants are exercisable at a price of $0.05 per share beginning 65 days
      from the issuance date (June 6, 2007) and expire April 2, 2012.





During
      the three months ended July 31, 2007, no warrants to purchase common stock
      were
      issued or exercised.




22





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





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





**Net
      Loss Per Share**




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




July
                31,2007
            
            2006Warrants
                to purchase common stock
            
            
            117,870,937
            
            
            130,955,7242006
                Debentures and accrued interest (1)
            
            
            12,868,296
            
            
            43,760,531Options
                to purchase common stock
            
            
            39,243,750
            
            
            29,868,750Convertible
                notes payable and accrued interest
            
            
            1,446,805
            
            
            1,695,2927%
                Debentures and accrued interest
            
            
            630,369
            
            
            595,3692005
                Debentures and accrued interest (2)
            
            
            168,919
            
            
            64,558Total
            
            
            172,229,076
            
            
            206,940,224





(1) Based
      on
      a twenty day volume weighted average common stock price discounted by 30% as
      of
      July 31, 2007 and 2006 of $0.0728 and $0.1287, respectively.


(2) Based
      on
      a five day volume weighted average common stock price discounted by 30% as
      of
      July 31, 2007 and 2006 of $0.0688 and $0.1415, respectively.





Substantial
                issuances after July 31, 2007 through September 12, 2007:Common
                stock issued for cash
            
            
            4,210,000Options
                and warrants granted to purchase common stock
            
            
            3,050,000





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




**HelloSoft
      Agreements**




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




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




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




23




**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**





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





**eSilicon
      Agreement**




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




**Concentration
      of Credit Risk**




The
      Company maintains cash balances in one financial institution. The balance is
      insured by the Federal Deposit Insurance Corporation up to $100,000 per
      institution. From time to time, the Company’s balances may exceed these limits.
      As of July 31, 2007, uninsured balances were approximately $142,000. The Company
      believes it is not exposed to any significant credit risk for cash.




**NOTE
      12 - SEGMENT INFORMATION**




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




Semiconductor
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsFor
                the Three Months Ended July 31, 2007:Net
                Sales - Domestic
            
            $
            --
            
            $
            14,757
            
            $
            --
            
            $
            14,757Net
                Sales - Foreign
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --Operating
                Loss
            
            $
            (6,445,352
            )
            $
            (2,215
            )
            $
            --
            
            $
            (6,447,567
            )Depreciation
                and amortization
            
            $
            286,998
            
            $
            --
            
            $
            --
            
            $
            286,998







Semiconductor
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsFor
                the Three Months Ended July 31, 2006:Net
                Sales - Domestic
            
            $
            --
            
            $
            1,025
            
            $
            --
            
            $
            1,025Net
                Sales - Foreign
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --Operating
                Loss
            
            $
            (217,527
            )
            $
            (3,154
            )
            $
            (1,457,886
            )
            $
            (1,678,567
            )Depreciation
                and amortization
            
            $
            217,527
            
            $
            --
            
            $
            --
            
            $
            217,527







Semiconductor
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsFor
                the Nine Months Ended July 31, 2007:Net
                Sales - Domestic
            
            $
            --
            
            $
            14,757
            
            $
            --
            
            $
            14,757Net
                Sales - Foreign
            
            $
            --
            
            $
            --
            
            $
            --
            
            $
            --Operating
                Loss
            
            $
            (10,626,499
            )
            $
            (16,649
            )
            $
            --
            
            $
            (10,643,148
            )Depreciation
                and amortization
            
            $
            827,102
            
            $
            --
            
            $
            --
            
            $
            827,102Total
                Identifiable Assets at July 31, 2007
            
            $
            2,288,461
            
            $
            255
            
            $
            263,819
            
            $
            2,552,535




24


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**NOTE
      12 - SEGMENT INFORMATION (CONTINUED)**





Semiconductor
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsFor
                the Nine Months Ended July 31, 2006:Net
                Sales - Domestic
            
            $
            --
            
            $
            7,957
            
            $
            --
            
            $
            7,957Net
                Sales - Foreign
            
            $
            --
            
            $
            51,942
            
            $
            --
            
            $
            51,942Operating
                (Loss) Income
            
            $
            (533,998
            )
            $
            50,533
            
            $
            (3,945,132
            )
            $
            (4,428,597
            )Depreciation
                and amortization
            
            $
            533,998
            
            $
            --
            
            $
            --
            
            $
            533,988Total
                Identifiable Assets at July 31, 2006
            
            $
            7,910,074
            
            $
            --
            
            $
            3,108,278
            
            $
            11,018,352





**NOTE
      13 - SUBSEQUENT EVENTS**




**Equity
      Transactions**





In
      August
      2007:





The
      Company issued  860,000 unregistered shares of common stock in exchange for
      cash proceeds of $43,000.





In
      September 2007:





The
      Company granted options to purchase 200,000 shares of common stock to an
      employee under the Company’s 2006 Plan. These options were valued at $10,302 and
      have a ten year term, an exercise price of $0.055, and vest over a period of
      approximately three years through September 2010; and





The
      Company issued 3,350,000 unregistered shares of common stock in exchange for
      cash proceeds of $167,500. In connection with the issuances of common stock
      the
      Company also issued warrants to purchase 2,850,000 shares of common stock at
      an
      exercise price of $0.15 per share. The warrants have a five year term and are
      immediately exercisable.




25





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




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




**CAUTION
      REGARDING FORWARD-LOOKING STATEMENTS**




Our
      prospects are subject to uncertainties and risks. In this Quarterly Report
      on
      Form 10-QSB, we make forward-looking statements in this Item 2 and elsewhere
      that also involve substantial uncertainties and risks. These forward-looking
      statements are based upon our current expectations, estimates and projections
      about our business and our industry, and reflect our beliefs and assumptions
      based upon information available to us at the date of this report. In some
      cases, you can identify these statements by words such as “if,” “may,” “might,”
“will, “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “potential,” “continue,” and other similar terms. These
      forward-looking statements include, among other things, projections of our
      future financial performance and our anticipated growth, descriptions of our
      strategies, our product and market development plans, the trends we anticipate
      in our business and the markets in which we operate, and the competitive nature
      and anticipated growth of those markets.




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




**OVERVIEW**




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




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




While
      our
      technology is currently available for evaluation and testing in field
      programmable gate array (“FPGA”) form, we do not believe that we will realize
      substantial revenues until our technologies are mass-produced in
      application-specific standard part (“ASSP”) form. We estimate that it will cost
      approximately $500,000 of additional engineering and fabrication expense in
      order to produce a mass market ASSP version. Subject to raising the needed
      capital, we estimate that we will complete them during the first half of fiscal
      2008. To date, we have not recorded any revenues from the sale of products
      based
      on our technology. During the three months ended April 30, 2007, we received
      our
      first purchase order for CupriaTM products. This order, for $114,000 is expected
      to be fulfilled during our fourth fiscal quarter. However, because it is subject
      to cancellation by the purchaser without penalty, there can be no assurance
      that
      this order will result in a completed sale.





We
      will
      need to raise approximately $1.5 million to repay short-term loans that will
      become due and payable in September and December 2007. We presently do not
      have
      the capital resources to repay these debts, although we do have a commitment
      from an institutional investor to purchase $6 million of 7% Senior Secured
      Convertible Debentures upon our request. The complexity of our technology could
      result in unforeseen delays or expenses in the commercialization process, and
      there can be no assurance that we will be able to successfully commercialize
      our
      semiconductor technology.




26


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




**Research
      and Development**




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




We
      outsourced all of the development activities with respect to our products to
      independent third party developers until April 2006, when we hired our first
      engineer. During the fourth fiscal quarter of 2006, we hired a Vice President
      to
      oversee the development of our semiconductors. At July 31, 2007 we employed
      nine
      full-time employees and two full-time equivalent consultants to pursue the
      continued development of our products. During the three months ended July 31,
      2007 and 2006, we expended $232,264 and $119,888, respectively, for research
      and
      development of our semiconductor technology. During the nine months ended July
      31, 2007 and 2006, we expended $1,041,884 and $255,821, respectively, for
      research and development of our semiconductor technology.




**Technology
      Licenses**




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




In
      April
      2002, we entered into a development and license agreement with Adaptive
      Networks, Inc. (“Adaptive”), to acquire a worldwide, perpetual license to
      Adaptive’s technology, intellectual property and patent portfolio. We also
      jointly developed technology with Adaptive that enhanced the licensed
      technology. From April 2002 until August 2007, the licensed technology and
      enhancements provided the core technology for our semiconductor products. Our
      Cupria TM semiconductor platform no longer utilizes the technology licensed from Adaptive.
      The board of directors believes that the Adaptive licenses and intellectual
      property may be used in future products that we are planning.




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




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





As
      of
      July 31, 2007, we reassessed the underlying value of our technology due to
      the
      development of a new improvement to our existing data transport technologies,
      which was completed in August 2007. This development replaces all of the
      original design elements that resulted from our strategic partnership with
      Adaptive and improves certain design elements developed with Hellosoft.  In
      June 2007, we filed a provisional patent application protecting technology
      that
      replaces certain aspects of prior versions of our Cupria TM semiconductor platform.  Our current technology does not utilize previously
      capitalized licenses and software that were incorporated into prior versions
      of
      the Cupria TM semiconductor platform.  As a result of this new technology, on September
      11, 2007, our Board of Directors reviewed the recoverability of our capitalized
      technology licenses and software development costs and determined that as of
      July 31, 2007 the remaining book value of approximately $4.4 million was not
      recoverable based on estimated future cash flows to be generated from the
      licenses. This conclusion was reached in connection with the Board’s review
      and the Company’s preparation of this Report on Form 10-QSB. As a result, we
      recognized a loss on impairment of approximately $4.4 million in our condensed
      consolidated statements of operations for the three months and nine months
      ended
      July 31, 2007.




27


**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.




**Derivative
      Financial Instruments**




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




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




**Stock-Based
      Compensation**




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




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




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




28


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 $113,444 and $341,392 for the three months and nine months ended
      July 31, 2007, respectively, and $205,240 and $653,079 for the three months
      and
      nine months ended July 31, 2006, respectively. Stock-based-compensation expense
      for share-based payment awards granted prior to, but not yet vested as of
      October 31, 2005 based on the grant date fair value estimated in accordance
      with
      the provisions of SFAS 123 was $0 and $247,057 for the three months and nine
      months ended July 31, 2006, respectively.




Stock-based
      compensation expense recognized for non-employees under other accounting
      standards was $614,834 and $1,889,109 for the three months and nine months
      ended
      July 31, 2007, respectively, and $312,619 and $628,293 for the three months
      and
      nine months ended July 31, 2006, respectively.




As
      stock-based compensation expense recognized in the consolidated statement of
      operations for the three months and nine months ended July 31, 2007 and 2006
      is
      based on awards ultimately expected to vest, it has been reduced for estimated
      forfeitures. SFAS 123(R) requires forfeitures to be estimated at the time of
      grant and revised, if necessary, in subsequent periods if actual forfeitures
      differ from those estimates.




**Revenue
      Recognition**




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




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




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


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


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


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


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




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




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




**Capitalized
      Software Development Costs**




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




29


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




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




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




We
      commenced amortization of capitalized software development costs during December
      2005 and recorded amortization expense of $279,155 and $809,821 during the
      three
      months and nine months ended July 31, 2007, respectively, and $216,460 and
      $531,692 during the three months and nine months ended July 31, 2006,
      respectively.




**RESULTS
      OF OPERATIONS**




COMPARISON
      OF THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2007 AND THE THREE MONTHS
      AND
      NINE MONTHS ENDED JULY 31, 2006




REVENUES .  
      Revenues for the three months and nine months ended July 31, 2007 were $14,757
      and $14,757, respectively, and were entirely from our entertainment business.
      The revenues were in the form of guarantee and/or license payments related
      to
      the U.S. distribution of the Film. Revenues for the three months and nine months
      ended July 31, 2006 were $1,025 and $59,899, respectively, and were entirely
      from our entertainment business. Of this amount, $1,025 and $7,957 were in
      the
      form of guarantee and/or license payments related to the U.S. distribution
      of
      the Film and $0 and $51,942 were related to foreign distribution of the Film
      during the three months ended and nine months ended July 31, 2006, respectively.
      No revenues were recorded in connection with our semiconductor business during
      the three months or the nine months ended July 31, 2007 and 2006.





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




Total
      operating expenses increased 285% or $4,782,732 to $6,462,324 for the three
      months ended July 31, 2007 from $1,679,592 for the three months ended July
      31,
      2006. Total operating expenses increased 137% or $6,169,409 to $10,657,905
      for
      the nine months ended July 31, 2007 from $4,488,496 for the nine months ended
      July 31, 2006. This increase in total operating expenses is due primarily to
      the
      impairment of technology licenses and capitalized software development costs
      of
      $4,415,943 for the three months and nine months ended July 31, 2007. In
      addition, there were increases in amortization of technology licenses and
      capitalized software development fees, research and development expenses, and
      selling, general and administrative expenses during the three months and nine
      months ended July 31, 2007 as compared to the three months and nine months
      ended
      July 31, 2006.




Amortization
      of technology licenses and capitalized software development fees was $279,155
      for the three months ended July 31, 2007 as compared to $216,460 for the three
      months ended July 31, 2006. This is due to the increase in capitalized research
      and development costs during
      the nine months ended July 31, 2007 and the
      purchase of technology from 1021 Technologies, Inc. and 1021 Technologies KK
      during the year ended October 31, 2006. Amortization of technology licenses
      and
      capitalized software development fees was $809,821 for the nine months ended
      July 31, 2007 as compared to $531,692 for the nine months ended July 31, 2006.
      This is also due to the increase in capitalized research and development costs
      during the nine months ended July 31, 2007 and the purchase of technology from
      1021 Technologies, Inc. and 1021 Technologies KK during the year ended October
      31, 2006, plus the recognition of an additional 1.5 months of amortization
      for
      the nine months ended July 31, 2007 than for the nine months ended July 31,
      2006
      as amortization did not commence until December 2005.




30


Research
      and development expenses increased by 94% or $112,376 to $232,264 for the three
      months ended July 31, 2007 from $119,888 for the three months ended July 31,
      2006. This increase is primarily attributable to the increase in consulting
      related expenses and employees and related salaries, payroll taxes and benefits
      for the three months ended July 31, 2007 as compared to the three months ended
      July 31, 2006.





For
      the
      nine months ended July 31, 2007, the increase in research and development
      expenses was 307% or $786,063 from $255,821 for the nine months ended July
      31,
      2006 to $1,041,884 for the nine months ended July 31, 2007. In addition to
      salaries, payroll taxes and benefits associated with additional employees,
      stock
      based compensation recognized for research and development for the nine months
      ended July 31, 2007 was $466,170, the majority of which is accounted for by
      a
      share-based payment valued at $395,000 to eSilicon. This initial payment was
      required to commence pre-production work for Release 2.0 of the Cupria product
      line. For the nine months ended July 31, 2006, stock based compensation
      recognized for research and development was only $26,860. The remaining increase
      is primarily due to consulting expenses for research and development activities
      of $264,194 for the nine months ended July 31, 2007 as compared to $41,657
      for
      the nine months ended July 31, 2006. This is primarily because during the nine
      months ended July 31, 2006, most of the technical and engineering work to
      complete the new Cupria releases was being performed by Hellosoft, the costs
      for
      which were being capitalized to capitalized software.





Total
      selling, general and administrative expenses increased 14% or $191,718 to
      $1,534,962 for the three months ended July 31, 2007 from $1,343,244 for the
      three months ended July 31, 2006. The increase is primarily related to
      additional stock based compensation of $187,681 related to common stock issued
      to consultants and options granted to employees and an increase in salaries
      and
      wages due to an increase in the number of employees during the three months
      ended July 31, 2007 as compared to the three months ended July 31, 2006. This
      increase was offset by a decrease in legal and accounting fees from the level
      incurred during the three months ended July 31, 2006 related to the filing
      of a
      registration statement. The increase in selling, general and administrative
      expenses of 19% or $689,274 to $4,390,257 for the nine months ended July 31,
      2007 from $3,700,983 for the nine months ended July 31, 2006, was primarily
      caused by the increase in headcount referred to above, including an increase
      of
      $262,762 in stock based compensation from $1,501,569 for the nine months ended
      July 31, 2006 to $1,764,331 for the nine months ended July 31, 2007, offset
      by a
      decrease in legal and accounting fees from the level incurred during the nine
      months ended July 31, 2006 related to the filing of a registration
      statement.





OTHER
      (INCOME) EXPENSES . 
      Other expenses-net included interest income, interest expense, a gain/loss
      on
      the change in fair value of derivative liabilities, amortization of deferred
      financing costs, gain on forgiveness of principal and interest on a promissory
      note, and a loss on exchange of notes payable into common stock. In total,
      there
      was income of $2,276,141 for the three months ended July 31, 2007 as compared
      with a loss of $13,470,853 for the three months ended July 31, 2006. For the
      nine months ended July 31, 2007, there was a loss of $1,440,581, a decrease
      of
      93% from the loss of $21,695,545 for the nine months ended July 31, 2006.
      Explanations for the changes in individual line items are described further
      below.




Interest
      expense decreased 77% or $1,062,893 to $315,245 for the three months ended
      July
      31, 2007 from $1,378,138 for the three months ended July 31, 2006. The decrease
      in interest expense for the three months ended July 31, 2007 as compared to
      the
      three months ended July 31, 2006 is primarily due to amortization and write-off
      of debt discount due to conversions of 2006 Debentures during the three months
      ended July 31, 2006. Interest expense decreased 65% or $6,020,145 to $3,255,762
      for the nine months ended July 31, 2007 from $9,275,907 for the nine months
      ended July 31, 2006. The decrease in interest expense is primarily due to the
      value allocated to the warrants of $5,608,156 and liquidated damages of $152,000
      related to the 2006 Debentures during the nine months ended July 31, 2006 that
      did not occur during the nine months ended July 31, 2007.




We
      recognized a gain of $2,654,271 on the change in fair value of derivative
      liabilities for the three months ended July 31, 2007, a change of $14,298,146
      or
      123% from a loss of $11,643,875 for the three months ended July 31, 2006. The
      gain was due primarily to a decrease in the market price of our common stock
      during the three months ended July 31, 2007 as compared to three months ended
      July 31, 2006. The closing market price of our common stock was $0.07 and $0.235
      per share as of July 31, 2007 and 2006, respectively. In general, decreases
      in
      the market price of our common stock as compared to the exercise price of our
      warrants or options results in decreases in the fair value of the warrant or
      option as estimated using the Black-Scholes model. For the nine months ended
      July 31, 2007, we recognized a gain of $3,016,018 as compared with a loss of
      $12,128,413 for the nine months ended July 31, 2006, a difference of $15,144,431
      or 125%. The gain was due primarily to a decrease in the market price of the
      stock as compared with the exercise price of the derivatives, as described
      above.




The
      amortization of deferred financing costs decreased 86% or $384,600 to $64,240
      for the three months ended July 31, 2007 from $448,840 for the three months
      ended July 31, 2006 due primarily to conversions of the 2006 Debentures during
      the three months ended July 31, 2006 that did not occur during the three months
      ended July 31, 2007. The amortization of deferred financing costs increased
      21%
      or $212,428 to $1,230,087 for the nine months ended July 31 2007 from $1,017,659
      for the nine months ended July 31, 2006 due primarily to the significant number
      of conversions of the 2006 Debentures during the three months ended January
      31,
      2007. In addition, the 2006 Debentures and related deferred financing costs
      were
      only outstanding for a portion of the nine months ended July 31, 2006. 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.




31


Other
      expenses were also higher during the nine months ended July 31, 2006 due to
      the
      loss recognized on exchange of notes payable into common stock of
      $446,386.




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




The
      remaining items in other income primarily represent interest earned on
      short-term investments and favorable cash management positions for the three
      months and nine months ended July 31, 2007.




NET
      LOSS .
       For the three months ended July 31, 2007, our net loss decreased 72% or
      $10,977,994 to $4,171,426 from $15,149,420 for the three months ended July
      31,
      2006, primarily as the result of decreases in interest expense and amortization
      of deferred financing costs and the gain on the change in fair value of the
      derivative liabilities, offset by increases in operating expenses.





For
      the
      nine months ended July 31, 2007, our net loss decreased 54% or $14,040,413
      to
      $12,083,729 from $26,124,142 for the nine months ended July 31, 2006, primarily
      as the result of decreases in interest expense, the loss on exchange of notes
      payable into common stock, and the gain on the change in fair value of the
      derivative liabilities, offset by increases in amortization of deferred
      financing costs, increases in operating expenses, and the gain on forgiveness
      of
      principal and interest on the Zaiq Note.




**LIQUIDITY
      AND CAPITAL RESOURCES**




Cash
      and
      short-term investments was $119,405 as of September 12, 2007, $241,930 as of
      July 31, 2007, and $2,090,119 as of October 31, 2006.




Net
      cash
      used in operating activities was $3,021,248 for the nine months ended July
      31,
      2007, compared to $2,314,894 for the nine months ended July 31, 2006. The
      increase in cash used in operations was principally the result of the following
      items:




·
            a
                decrease in the net loss, which was $12,083,729 for the nine months
                ended
                July 31, 2007, compared to $26,124,142 for the nine months ended
                July 31,
                2006; and





·
            a
                net increase for the nine months ended July 31, 2007 in other current
                assets, other assets, and accounts payable and accrued liabilities
                of
                $186,848, compared to a net increase of $425,344 for the nine months
                ended
                July 31, 2006;





impacted
      primarily by the following non-cash items:





·
            a
                net increase of $702,072 in consulting fees and other compensatory
                elements of stock issuances to $2,230,501 for the nine months ended
                July
                31, 2007, as compared with $1,528,429 for the nine months ended July
                31,
                2006;





·
            a
                gain on the change in fair value of derivative liabilities of $3,016,018
                for the nine months ended July 31, 2007, as compared to a loss of
                $12,128,413 for the nine months ended July 31,
                2006;





·
            a
                loss on impairment of technology licenses and capitalized software
                development costs of $4,415,943 for the nine months ended July 31,
                2007
                which did not occur during the nine months ended July 31,
                2006;




32




·
            interest
                expense related to the fair value of Investors’ warrants at issuance in
                excess of debt discount of $5,608,156 for the nine months ended July
                31,
                2006 which did not occur during the nine months ended July 31,
                2007;





·
            loss
                on exchange of notes payable into common stock of $446,386 for the
                nine
                months ended July 31, 2006 which did not occur during the nine months
                ended July 31, 2007;





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





·
            a
                net increase of $212,428 in amortization of deferred financing costs
                to
                $1,230,087 for the nine months ended July 31, 2007, as compared with
                $1,017,659 for the nine months ended July 31,
                2006;





·
            a
                net decrease of $103,279 in amortization of debt discount on notes
                to
                $3,187,404 for the nine months ended July 31, 2007, as compared with
                $3,290,683 for the nine months ended July 31, 2006;
                and





·
            a
                net increase of $278,129 in amortization of technology licenses and
                capitalized software development fees to $809,821 for the nine months
                ended July 31, 2007, as compared with $531,692 for the nine months
                ended
                July 31, 2006.




Net
      cash
      provided by investing activities was $349,059 for the nine months ended July
      31,
      2007 compared to net cash used in investing activities of $381,539 for the
      nine
      months ended July 31, 2006. The net increase was due to proceeds from the
      maturity of short-term investments and from the sale of certain trademark
      rights, offset by capitalization of research and development costs and software
      development fees, as well as the purchase of equipment and leasehold
      improvements related to the buildout of our headquarters office
      facility.




Net
      cash
      provided by financing activities for the nine months ended July 31, 2007 was
      $1,824,000, the result of proceeds from the issuance of notes payable of
      $1,700,000 and from the issuance of common stock of $587,000; offset by the
      repayment of a note payable of $324,000 and capitalized financing costs of
      $139,000. This was a decrease of $3,468,846 from the nine months ended July
      31,
      2006 when there was the issuance of convertible debentures of $6,000,000,
      proceeds from the exercise of warrants of $697,407, and $750,000 in proceeds
      from a note payable, offset by repayments of notes payable and convertible
      notes
      payable, as well as the capitalization of financing costs associated with the
      convertible debentures and the notes payable.




Since
      inception, we have funded our operations primarily through the issuance of
      our
      common stock and debt securities. A description of recent financing transactions
      and our repayment obligations with respect to our outstanding debt securities
      is
      discussed below.




In
      July
      2007, we received $1,000,000 in gross proceeds from the issuance of a note
      payable, together with the issuance of 10,000,000 unregistered shares of common
      stock. The note matures on the earlier of (i) December 24, 2007, or (ii) the
      date we effect a subsequent financing that, individually or when combined with
      other financings completed by us after July 26, 2007, results in gross proceeds
      of at least $3 million. After the payment of transaction related fees and
      expenses of $105,000, and repayment of the April 2007 note payable, we received
      net proceeds of approximately $571,000.





In
      May
      2007, we received $400,000 in proceeds from the issuance of a note payable
      which
      originally matured on August 22, 2007. The maturity date on this note payable
      has been extended to October 1, 2007.





In
      April
      2007, May 2007 and July 2007, we received an aggregate of $587,000 in proceeds
      from the sale of unregistered securities.




In
      April
      2007, we received $300,000 in proceeds from the issuance of a note payable,
      together with the issuance of 3,333,333 in warrants convertible into
      unregistered shares of common stock. The outstanding principal and accrued
      interest of $324,000 on this note was repaid in July 2007 from the proceeds
      of
      the July 2007 note payable.




In
      March
      2006, we sold $6,000,000 in aggregate principal amount of our Senior Secured
      7%
      convertible debentures and warrants, receiving net proceeds of approximately
      $4.5 million after the payment of offering related costs (the “2006
      Debentures”). As of July 31, 2007, approximately $5.6 million of principal
      amount and interest of the 2006 Debentures had been converted into approximately
      74 million shares of our common stock and there was $652,000 of principal amount
      of the 2006 Debentures outstanding. The 2006 Debentures mature in March
      2008.




33


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




In
      December 2003, April 2004 and May 2004, we sold $1,350,000 in aggregate
      principal amount and received net proceeds of approximately $1,024,000 from
      the
      private placement to certain private and institutional investors of our three
      year 7% convertible debentures and warrants (the “7% Debentures”). As of July
      31, 2007, approximately $1.4 million of principal amount and interest of the
      7%
      Debentures had been converted into approximately 9.1 million shares of our
      common stock and there was $75,000 of principal amount of the 7% Debentures
      outstanding. The 7% Debentures matured in May 2007, however, they have not
      yet
      been repaid.




As
      of
      September 12, 2007, we had $119,405 in cash. An institutional investor that
      has
      been a prior investor in the Company has committed to purchase $6 million of
      7%
      Senior Secured Convertible Debentures upon our request at any time through
      January 1, 2008. As a result, management believes funds on hand or committed
      to
      us will enable us to meet our liquidity needs for the next twelve months.
      Nevertheless, circumstances may arise that would require us to raise additional
      capital in order to meet our liquidity needs and satisfy our current business
      plan prior to the receipt of revenues from our semiconductor business.




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




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




**Impact
      of Recently Issued Accounting Standards**





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




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




In
      February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
      Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159
      provides companies with an option to report selected financial assets and
      liabilities at fair value.  The objective of SFAS 159 is to reduce
      both complexity in accounting for financial instruments and the volatility
      in
      earnings caused by measuring related assets and liabilities differently.
      Generally accepted accounting principles have required different measurement
      attributes for different assets and liabilities that can create artificial
      volatility in earnings.  The FASB has indicated it believes that
      SFAS 159 helps to mitigate this type of accounting-induced volatility by
      enabling companies to report related assets and liabilities at fair value,
      which
      would likely reduce the need for companies to comply with detailed rules for
      hedge accounting. SFAS 159 also establishes presentation and disclosure
      requirements designed to facilitate comparisons between companies that choose
      different measurement attributes for similar types of assets and
      liabilities.




SFAS 159
      does not eliminate disclosure requirements included in other accounting
      standards, including requirements for disclosures about fair value measurements
      included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of
      Financial Instruments.” SFAS 159 is effective for us as of the beginning of
      fiscal year 2009. We have not yet determined the impact SFAS 159 may have on
      our
      consolidated financial position, results of operations, or cash
      flows.




34


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




FSP EITF 00-19-2
      is effective immediately for registration payment arrangements and the financial
      instruments subject to those arrangements that are entered into or modified
      subsequent to the issuance date of this FSP, or for financial statements issued
      for fiscal years beginning after December 15, 2006, and interim periods within
      those fiscal years, for registration payment arrangements entered into prior
      to
      the issuance date of this FSP. The Company is evaluating the impact of this
      pronouncement on the Company’s consolidated financial position, results of
      operations and 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 Principal
      Financial Officer, has evaluated the effectiveness of the design and operation
      of the Company’s “disclosure controls and procedures,” as such term is defined
      in Rule 13a-15(e) promulgated under the Exchange Act as of this report. The
      Company’s Chief Executive Officer and Principal Financial Officer has concluded
      based upon his evaluation that the Company’s disclosure controls and procedures
      were effective as of the end of the period covered by this report to provide
      reasonable assurance that material information required to be disclosed by
      the
      Company in reports that it files or submits under the Exchange Act is recorded,
      processed, summarized and reported within the time periods specified in SEC
      rules and forms.




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




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





**PART
      II - OTHER INFORMATION**





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





During
      the three months ended July 31, 2007, the Company sold or issued unregistered
      securities as follows:





In
      May
      2007, we issued:


·
            an
                aggregate 2,500,000 shares of common stock to three investors for
                total
                cash proceeds of $125,000; and


·
            30,487
                shares of common stock to one individual in exchange for services
                valued
                at approximately $2,500.





In
      June
      2007, we issued:


·
            1,200,000
                shares of common stock to one individual in exchange for services
                valued
                at $75,600; and


·
            10,000,000
                shares of common stock to a partnership valued at $790,000, in
                consideration of consulting services rendered in connection with
                a bridge
                loan.





In
      July
      2007, we issued:


·
            3,240,000
                shares of common stock to three investors for cash proceeds of
                $162,000;




35




·
            203,232
                shares of common stock to six investors upon conversion of debentures
                totaling approximately $10,357;


·
            437,112
                shares of common stock to five investors valued at $22,244 in payment
                of
                interest due on outstanding debentures;
                and


·
            10,000,000
                shares of common stock to two investors valued at $700,000 in connection
                with a bridge loan financing.





In
      August
      2007, subsequent to the three months ended July 31, 2007, we issued 860,000
      shares of common stock to three investors for total cash proceeds of $43,000.





In
      September 2007, subsequent to the three months ended July 31, 2007, we
      issued:





·
            options
                to purchase 200,000 shares of common stock under the Company’s 2006 Stock
                Plan to an employee of the Company. The options have an exercise
                price of
                $0.055 per share, vest over a three year period, and expire in September
                2017; and


·
            3,350,000
                shares of common stock and warrants to purchase 2,850,000 shares
                of common
                stock to four investors for total cash proceeds of $167,500. The
                warrants,
                which are exercisable upon issuance, expire in September
                2012,





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.





**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 May 2, 2007.





(a) The
      Company shareholders were asked to vote for the election of Brad Ketch, Ray
      Willenberg, Jr., Jack L. Peckham, Thomas J. Cooper and “David” Boon Tiong Tan to
      the Board of Directors of the Company, to hold office until the 2008 Annual
      Meeting of Shareholders. The nominees were all elected pursuant to the following
      votes:





Name
                of Director
            
            Votes
                For
            
            Votes
                WithheldBrad
                Ketch
            
            
            347,940,060
            
            
            2,411,344Ray
                Willenberg, Jr.
            
            
            347,872,135
            
            
            2,479,269Jack
                L. Peckham
            
            
            348,117,278
            
            
            2,234,126Thomas
                J. Cooper
            
            
            348,757,040
            
            
            1,594,364“David”
                Boon Tiong Tan
            
            
            348,117,416
            
            
            2,233,988





(b) The
      Company’s shareholders were asked to ratify Marcum & Kliegman, LLP as
      independent public accountants for the year ending October 31, 2007. The
      shareholders ratified the selection of the independent public accountants with
      348,653,885 votes cast for, 844,734 votes cast against and 852,784
      abstentions.





(c) The
      Company’s shareholders were asked to approve the Company’s 2003 Consultant Stock
      Plan. The shareholders approved the 2003 Consultant Stock Plan with 93,337,671
      votes cast for, 13,237,767 votes cast against, and 1,347,633
      abstentions.





(d) The
      Company’s shareholders were asked to approve the Company’s 2006 Stock Incentive
      Plan. The shareholders approved the 2006 Stock Incentive Plan with 93,212,626
      votes cast for, 13,473,852 votes cast against and 1,236,593
      abstentions.





36





**ITEM
      6.** **Exhibits**





ExhibitNumber
            Description10.1
            Convertible
                Promissory Note dated May 24, 2007 by Rim Semiconductor in favor
                of The
                Charles R. Cono Trust (incorporated by reference to Exhibit 10.5
                of the
                Company’s Report on Form 10-QSB for the period ended April 30,
                2007).10.2
            Bridge
                Loan Agreement dated as of July 26, 2007 by and between Rim Semiconductor
                Company and the Lenders parties thereto (incorporated by reference
                to
                Exhibit 10.1 of the Company’s Report on Form 8-K dated August 1, 2007 (the
                “August 1st 8-K”))10.3
            Form
                of Senior Secured Promissory Note (incorporated by reference to Exhibit
                10.2 of the August 1st 8-K)10.4
            Security
                Interest Agreement dated as of July 26, 2007 by and among the Secured
                Parties (as defined in the Agreement), Rim Semiconductor Company,
                and
                Krieger & Prager, LLP, as agent for the Secured Parties (incorporated
                by reference to Exhibit 10.3 of the August 1st 8-K).31.1
            Rule
                13a-14/15d-14(a) Certification*31.2
            Section
                1350 Certification**
            Filed
                herewith




37


**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: 
                September 13, 2007
            By:
            /s/ BradKetchBrad
                KetchPresident
                and Chief Executive Officer
              (Principal
                Executive Officer, Financial and
              Accounting
                Officer and Authorized Signatory)




38