**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, 2006**
  ** ̈** **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE**
 **ACT
        OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO
        __________**
  *COMMISSION
        FILE NUMBER 0-21785*
  **RIM
        SEMICONDUCTOR COMPANY**
  (Exact
        name of small business issuer as specified in its charter)
  UTAH
              
              95-4545704(State
                  or other jurisdiction of
                incorporation
                  or organization)
              
              (I.R.S.
                  Employer
                identification
                  no.)
 
  305
                  NE 102ND AVENUE, SUITE 105
                PORTLAND,
                  OREGON 97220
              
              (503)
                  257-6700(Address
                  of principal executive offices)
              
              (Issuer’s
                  telephone number,
                including
                  area code)
   Check
                    whether the issuer (1) has filed all reports required to be filed
                    by
                    Section 13 or 15(d) of the Exchange Act during the past 12 months
                    (or for
                    such period that the registrant was required to file such reports),
                    and
                    (2) has been subject to such filing requirements for the past
                    90
                    days.
                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 11, 2006, was 346,396,890.Transitional
                    Small Business Disclosure Format (Check one)
                Yes ̈Nox
   
  **FORM
        10-QSB**
  **RIM
        SEMICONDUCTOR COMPANY**
  **JULY
        31, 2006**
  **TABLE
        OF CONTENTS**
   **PAGE**PART
                  I - FINANCIAL INFORMATION
              3ITEM
                  1.  FINANCIAL STATEMENTS
              3CONDENSED
                  CONSOLIDATED BALANCE SHEET (Unaudited)At
                  July 31, 2006
              3CONDENSED
                  CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)For
                  the Nine and Three Months Ended July 31, 2006 and 2005
              4CONDENSED
                  CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
                  (Unaudited)For
                  the Nine Months ended July 31, 2006
              6CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)For
                  the Nine Months ended July 31, 2006 and 2005
              7NOTES
                  TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              9ITEM
                  2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
                  OPERATION
              30ITEM
                  3.  CONTROLS AND PROCEDURES
              40PART
                  II - OTHER INFORMATION
              41ITEM
                  2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                  PROCEEDS
              41ITEM
                  6.  EXHIBITS
              41SIGNATURES
              42
  
  **PART
        I - FINANCIAL INFORMATION**
  **ITEM
        I.   FINANCIAL STATEMENTS**
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEET**
 (Unaudited)
  ASSETS
  **July
                  31, 2006**Current
                  Assets:Cash
                  and cash equivalents
              
              $
              2,969,894Other
                  current assets
              
              
              130,646TOTAL
                  CURRENT ASSETS
              
              
              3,100,540Property
                  and equipment (net of accumulated depreciation of $3,545)
              
              
              14,155Technology
                  license and capitalized software development fees (net of accumulatedamortization
                  of $531,692)
              
              
              6,052,369Deferred
                  financing costs (net of accumulated amortization of
                  $1,698,268)
              
              
              1,843,550Other
                  assets
              
              
              7,738TOTAL
                  ASSETS
              
              $
              11,018,352LIABILITIES
                  AND STOCKHOLDERS’ DEFICIENCYCurrent
                  Liabilities:Convertible
                  notes payable
              
              $
              500,000Convertible
                  debentures (net of debt discount of $3,881)
              
              
              71,119Derivative
                  liabilities - warrants and options
              
              
              24,450,714Account
                  payable and accrued expenses
              
              
              1,057,025TOTAL
                  CURRENT LIABILITIES
              
              
              26,078,858Long-term
                  portion of convertible debentures (net of debt discount of
                  $4,507,897)
              
              
              1,097,667TOTAL
                  LIABILITIES
              
              
              27,176,525Commitments,
                  Contingencies and Other MattersStockholders’
                  Deficiency:Preferred
                  stock - $0.01 par value; 15,000,000 shares authorized; -0- shares
                  issued
                  and outstanding
              
              
              —Common
                  stock - $0.001 par value; 900,000,000 shares authorized;332,484,557
                  shares issued and 331,984,703 outstanding
              
              
              332,485Treasury
                  stock - 499,854 shares at cost
              
              
              (7,498
              )Additional
                  paid-in capital
              
              
              71,019,709Unearned
                  compensation
              
              
              (1,497,171
              )Accumulated
                  deficit
              
              
              (86,005,698
              )TOTAL
                  STOCKHOLDERS’ DEFICIENCY
              
              
              (16,158,173
              )TOTAL
                  LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
              
              $
              11,018,352
  See
        notes
        to condensed consolidated financial statements.
  3
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS
        OF
        OPERATIONS**
 (Unaudited)
 For
                    the Nine Months Ended
                  July
                    31,2006
                
                2005REVENUES
                
                $
                59,899
                
                $
                26,558OPERATING
                    EXPENSES:Cost
                    of sales
                
                
                —
                
                
                11,945Impairment
                    of film in distribution
                
                
                —
                
                
                1,009,777Amortization
                    of technology license and capitalized software development
                    fees
                
                
                531,692
                
                
                —Research
                    and development expenses (including stock based compensation
                    of $26,860
                    and $296,667, respectively)
                
                
                255,821
                
                
                303,720Selling,
                    general and administrative expenses(including stock based compensation
                    of
                    $1,501,569 and $998,963, respectively)
                
                
                3,700,983
                
                
                2,460,145TOTAL
                    OPERATING EXPENSES
                
                
                4,488,496
                
                
                3,785,587OPERATING
                    LOSS
                
                
                (4,428,597
                )
                
                (3,759,029
                )OTHER
                    EXPENSES (INCOME):Interest
                    expense - net
                
                
                9,275,907
                
                
                1,183,318Derivative
                    loss (gain)
                
                
                12,128,413
                
                
                (1,799,103
                )Amortization
                    of deferred financing costs
                
                
                1,017,659
                
                
                120,934Gain
                    on forgiveness of liabilities
                
                
                —
                
                
                (99,369
                )Gain
                    on forgiveness of principal and interest on Zaiq Note
                
                
                (1,169,820
                )
                
                —Gain
                    on conversion of accrued expenses into convertible notes
                    payable
                
                
                —
                
                
                (33,514
                )Loss
                    on exchange of notes payable into common stock
                
                
                446,386
                
                
                —Gain
                    on sale of property and equipment
                
                
                —
                
                
                (20,000
                )Gain
                    on exchange of Redeemable Series B PreferredStock
                    into common stock
                
                
                —
                
                
                (55,814
                )Other
                
                
                (3,000
                )
                
                5,008TOTAL
                    OTHER EXPENSES (INCOME)
                
                
                21,695,545
                
                
                (698,540
                )NET
                    LOSS
                
                $
                (26,124,142
                )
                $
                (3,060,489
                )BASIC
                    AND DILUTED NET LOSS PER COMMON SHARE
                
                $
                (0.09
                )
                $
                (0.03
                )WEIGHTED
                    AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
                
                
                286,694,814
                
                
                99,459,187
  See
        notes
        to condensed consolidated financial statements.
  4
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF OPERATIONS**
 (Unaudited)
  For
                  the Three Months Ended
                July
                  31,2006
              
              2005REVENUES
              
              $
              1,025
              
              $
              10,360OPERATING
                  EXPENSES:Impairment
                  of film in distribution
              
              
              —
              
              
              1,009,777Amortization
                    of technology license and capitalizedsoftware development
                    fees
              
              
              216,460
              
              
              —Research
                      and development expenses (including stock based compensation
                      of $0 and
                      $296,667, respectively)
              
              
              119,888
              
              
              296,667Selling,
                      general and administrative expenses (including stock based
                      compensation of
                      $517,859 and $110,033, respectively)
              
              
              1,343,244
              
              
              888,811TOTAL
                  OPERATING EXPENSES
              
              
              1,679,592
              
              
              2,195,255OPERATING
                  LOSS
              
              
              (1,678,567
              )
              
              (2,184,895
              )OTHER
                  EXPENSES (INCOME):Interest
                  expense - net
              
              
              1,378,138
              
              
              543,672Derivative
                  loss (gain)
              
              
              11,643,875
              
              
              (1,799,103
              )Amortization
                  of deferred financing costs
              
              
              448,840
              
              
              67,825Gain
                  on forgiveness of liabilities
              
              
              —
              
              
              (99,369
              )TOTAL
                  OTHER EXPENSES (INCOME)
              
              
              13,470,853
              
              
              (1,286,975
              )NET
                  LOSS
              
              $
              (15,149,420
              )
              $
              (897,920
              )BASIC
                  AND DILUTED NET LOSS PER COMMON SHARE
              
              $
              (0.05
              )
              $
              (0.01
              )WEIGHTED
                  AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
              
              
              324,964,555
              
              
              111,616,151
  See
        notes
        to condensed consolidated financial statements.
  5
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY**
 **For
        The Nine Months Ended July 31, 2006**
 (Unaudited)
  Common
                  Stock
              
              Treasury
                  Stock
              
              Additional
                Paid-in
              
              Unearned
              
              Accumulated
              
              Total
                Stockholders'Shares
              
              Amount
              
              Shares
              
              Amount
              
              Capital
              
              Compensation
              
              Deficit
              
              DeficiencyBalance
                  at October 31, 2005
              
              
              184,901,320
              
              $
              184,902
              
              
              —
              
              
              —
              
              $
              61,359,999
              
              $
              (22,771
              )
              $
              (59,881,556
              )
              $
              1,640,574Repurchase
                  of common stock for cash
              
              
              —
              
              
              —
              
              
              (499,854
              )
              $
              (7,498
              )
              
              —
              
              
              —
              
              
              —
              
              
              (7,498
              )Issuance
                  of common stock under service and consulting agreements
              
              
              12,624,752
              
              
              12,625
              
              
              —
              
              
              —
              
              
              2,219,592
              
              
              (2,232,217
              )
              
              —
              
              
              —Issuance
                  of common stock for conversion of convertible debentures and accrued
                  interest
              
              
              110,654,584
              
              
              110,654
              
              
              —
              
              
              —
              
              
              2,361,299
              
              
              —
              
              
              —
              
              
              2,471,953Issuance
                  of common stock for convertible notes payable and accrued
                  interest
              
              
              35,714
              
              
              36
              
              
              —
              
              
              —
              
              
              14,964
              
              
              —
              
              
              —
              
              
              15,000Issuance
                  of common stock for notes payable and accrued interest
              
              
              12,064,494
              
              
              12,064
              
              
              —
              
              
              —
              
              
              1,278,837
              
              
              —
              
              
              —
              
              
              1,290,901Issuance
                  of common stock upon exercise of warrants
              
              
              12,203,693
              
              
              12,204
              
              
              —
              
              
              —
              
              
              685,203
              
              
              —
              
              
              —
              
              
              697,407Stock
                  options granted to key employees and advisory board member
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,010,835
              
              
              (1,010,835
              )
              
              —
              
              
              —Reclassification
                  of derivative liability upon exercise of warrants
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,141,769
              
              
              —
              
              
              —
              
              
              1,141,769Reclassification
                  of conversion option liability
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              947,211
              
              
              —
              
              
              —
              
              
              947,211Amortization
                  of unearned compensation expense
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              1,768,652
              
              
              —
              
              
              1,768,652Net
                  loss
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (26,124,142
              )
              
              (26,124,142
              )Balance
                  at July 31, 2006
              
              
              332,484,557
              
              $
              332,485
              
              
              (499,854
              )
              $
              (7,498
              )
              $
              71,019,709
              
              $
              (1,497,171
              )
              $
              (86,005,698
              )
              $
              (16,158,173
              )
  See
        notes
        to condensed consolidated financial statements.
  6
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
 For
                  the Nine Months Ended
                July
                  31,2006
              
              2005CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  loss
              
              $
              (26,124,142
              )
              $
              (3,060,489
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities:Consulting
                  fees and other compensatory elements of stock issuances
              
              
              1,528,429
              
              
              1,295,630Derivative
                  loss (gain)
              
              
              12,128,413
              
              
              (1,799,103
              )Issuance
                  of common stock for below market issuance
              
              
              —
              
              
              5,008Fair
                  value of Investors’ warrants in excess of debt discount
              
              
              5,608,156
              
              
              —Loss
                  on exchange of notes payable into common stock
              
              
              446,386
              
              
              —Gain
                  on forgiveness of liabilities
              
              
              —
              
              
              (99,369
              )Gain
                  on forgiveness of principal and interest on Zaiq Note
              
              
              (1,169,820
              )
              
              —Gain
                  on sale of property and equipment
              
              
              —
              
              
              (20,000
              )Gain
                  on exchange of Redeemable Series B Preferred Stock into common
                  stock
              
              
              —
              
              
              (55,814
              )Gain
                  on conversion of accrued expenses into convertiblenotes
                  payable
              
              
              —
              
              
              (33,514
              )Amortization
                  of deferred financing costs
              
              
              1,017,659
              
              
              120,934Amortization
                  of film in production costs
              
              
              —
              
              
              11,945Amortization
                  of debt discount on notes
              
              
              3,290,683
              
              
              941,531Amortization
                  of technology license and capitalized software development
                  fees
              
              
              531,692
              
              
              —Impairment
                  of film in distribution
              
              
              —
              
              
              1,009,777Depreciation
              
              
              2,306
              
              
              24,492Change
                  in Assets (Increase) Decrease:Other
                  current assets
              
              
              (96,615
              )
              
              (24,035
              )Other
                  assets
              
              
              2,486
              
              
              (2,790
              )Change
                  in Liabilities Increase (Decrease):Accounts
                  payable and accrued expenses
              
              
              519,473
              
              
              (66,248
              )NET
                  CASH USED IN OPERATING ACTIVITIES
              
              
              (2,314,894
              )
              
              (1,752,045
              )CASH
                  FLOWS FROM INVESTING ACTIVITIESAcquisition
                  of capitalized software and development fees
              
              
              (375,000
              )
              
              —Acquisition
                  of property and equipment
              
              
              (6,539
              )
              
              (11,161
              )NET
                  CASH USED IN INVESTING ACTIVITIES
              
              
              (381,539
              )
              
              (11,161
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from issuance of common stock
              
              
              —
              
              
              835,100Proceeds
                  from exercise of warrants
              
              
              697,407
              
              
              —Purchase
                  of treasury stock
              
              
              (7,498
              )
              
              —Proceeds
                  from convertible debentures
              
              
              6,000,000
              
              
              3,500,000Proceeds
                  from notes payable
              
              
              750,000
              
              
              300,000Capitalized
                  financing costs
              
              
              (742,450
              )
              
              (422,010
              )Repayments
                  of notes payable
              
              
              (944,291
              )
              
              (1,120,048
              )Repayments
                  of convertible notes payable
              
              
              (460,322
              )
              
              (401,540
              )NET
                  CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              5,292,846
              
              
              2,691,502INCREASE
                  IN CASH AND CASH EQUIVALENTS
              
              
              2,596,413
              
              
              928,296CASH
                  AND CASH EQUIVALENTS - BEGINNING OF PERIOD
              
              
              373,481
              
              
              127,811CASH
                  AND CASH EQUIVALENTS - ENDING OF PERIOD
              
              $
              2,969,894
              
              $
              1,056,107
  See
        notes
        to condensed consolidated financial statements.
  7
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 (Unaudited)
  For
                  the Nine Months Ended
                July
                  31,2006
              
              2005SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid during the period for:Interest
              
              $
              3,350
              
              $
              203,539NON-CASH
                  INVESTING AND FINANCING ACTIVITIES:Common
                  stock issued and for conversion of convertible debentures, convertible
                  notes payable, notes payable and accrued interest
              
              $
              3,777,854
              
              $
              988,347Common
                  stock issued and issuable for consulting services (includes $458,061
                  of
                  capitalized software development fees)
              
              $
              2,423,611
              
              $
              —Value
                  assigned to warrants issued to holders of convertible debentures
                  on the
                  issuance date
              
              $
              9,036,727
              
              $
              2,000,000Value
                  assigned to warrants issued to placement agents on the issuance
                  date
              
              $
              1,792,452
              
              $
              319,066Value
                  assigned to conversion option liability in connection with issuance
                  of
                  convertible debentures
              
              $
              2,571,429
              
              $
              1,500,000Accounts
                  payable and accrued expenses satisfied by issuance of common
                  stock
              
              $
              —
              
              $
              71,911Common
                  stock issued for accrued liquidated damages
              
              $
              —
              
              $
              96,000Accounts
                  payable and accrued expenses converted to note payable
              
              $
              —
              
              $
              55,251Deferred
                  compensation converted to convertible note payable
              
              $
              212,450
              
              $
              383,911Reclassification
                  of conversion option liability to equity
              
              $
              947,211
              
              $
              —Redeemable
                  Series B Preferred Stock exchanged into notes payable
              
              $
              —
              
              $
              2,392,000Redeemable
                  Series B Preferred Stock (recorded at $800,000) exchanged into common
                  stock
              
              $
              —
              
              $
              744,186Stock
                  options granted to key employees and advisory board member
              
              $
              1,010,835
              
              $
              —Reclassification
                  of derivative liability upon exercise of
                  warrants
              
              $
              1,141,769
              
              $
              —
  See
        notes
        to condensed consolidated financial statements.
  8
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL
        STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        1 - PRINCIPLES OF CONSOLIDATION, BUSINESS AND CONTINUED
        OPERATIONS**
  The
        condensed consolidated financial statements include the accounts of Rim
        Semiconductor Company (formerly New Visual Corporation) and its wholly owned
        operating subsidiary, NV Entertainment, Inc. (“NV Entertainment” and
        collectively, the “Company”). Top Secret Productions, LLC is a 50% - owned
        subsidiary of NV Entertainment. All significant intercompany balances and
        transactions have been eliminated. The Company consolidates its 50% - owned
        subsidiary Top Secret Productions, LLC due to the Company’s control of
        management and financial matters of such entity.
  The
        accompanying unaudited condensed consolidated financial statements have been
        prepared in accordance with accounting principles generally accepted in the
        United States of America (“US GAAP”). In the opinion of management, the
        accompanying unaudited financial statements contain all adjustments, consisting
        only of those of a normal recurring nature, necessary for a fair presentation
        of
        the Company’s financial position, results of operations and cash flows at the
        dates and for the periods indicated. These financial statements should be
        read
        in conjunction with the financial statements and notes related thereto included
        in the Annual Report on Form 10-KSB (Amendment No. 2) for the fiscal year
        ended
        October 31, 2005.
  These
        results for the three months and nine months ended July 31, 2006 are not
        necessarily indicative of the results to be expected for the full fiscal
        year.
        The preparation of the consolidated financial statements in conformity with
        US
        GAAP requires management to make estimates and assumptions that affect the
        reported amounts of assets and liabilities and disclosure of contingent assets
        and liabilities at the date of the financial statements and the reported
        amounts
        of revenues and expenses during the reporting period. Actual results could
        differ from those estimates.
  Rim
        Semiconductor Company was incorporated under the laws of the State of Utah
        on
        December 5, 1985. The Company operates in two business segments, the production
        of motion pictures, films and videos (“Entertainment Segment”) and the
        development of new semiconductor technologies (“Semiconductor Segment”). The
        Company’s Entertainment Segment is dependent on future revenues from the
        Company’s film “Step Into Liquid” (“Film”). The Semiconductor Segment is
        dependent on the Company’s ability to successfully commercialize its developed
        technology, and has generated no revenues to date. The Company’s first chipset
        was first made available to prospective customers for evaluation and testing
        during the three months ended January 31, 2006.
  Through
        its subsidiary NV Entertainment, the Company has operating revenues for its
        Entertainment Segment, but may continue to report operating losses for this
        segment. The Semiconductor Segment will have no operating revenues until
        successful commercialization of its developed technology, but will continue
        to
        incur substantial operating expenses, capitalized costs and operating
        losses.
  Historically,
        the Company has experienced significant recurring net operating losses as
        well
        as negative cash flows from operations. The Company’s main source of liquidity
        has been equity and debt financing, which was used to fund historical losses
        from operating activities. Based on the Company’s current cash position, the
        Company believes it has sufficient cash to meet its funding needs through
        at
        least August 2007. The Company plans to increase its expenses above the
        current level in order to realize its business plans.
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**
  **Film
        In Distribution**
  Statement
        of Position 00-2, Accounting by Producers or Distributors of Films (“SOP 00-2”)
        requires that film costs be capitalized and reported as a separate asset
        on the
        balance sheet. Film costs include all direct negative costs incurred in the
        production of a film, as well as allocations of production overhead and
        capitalized interest. Direct negative costs include cost of scenario, story,
        compensation of cast, directors, producers, writers, extras and staff, cost
        of
        set construction, wardrobe, accessories, sound synchronization, rental of
        facilities on location and post production costs. SOP 00-2 also requires
        that
        film costs be amortized and participation costs accrued, using the
        individual-film-forecast-computation method, which amortizes or accrues such
        costs in the same ratio that the current period actual revenue (numerator)
        bears to the estimated remaining unrecognized ultimate revenue as of the
        beginning of the fiscal year (denominator). The Company makes certain estimates
        and judgments of its future gross revenue to be received for the Film based
        on
        information received by its distributor, historical results and management’s
        knowledge of the industry.
 9
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)**
  **Film
        In Distribution** **(Continued)**
  Revenue
        and cost forecasts are continually reviewed by management and revised when
        warranted by changing conditions. A change to the estimate of gross revenues
        for
        the Film may result in an increase or decrease to the percentage of amortization
        of capitalized film costs relative to a previous period.
  In
        addition, SOP 00-2 requires that if an event or change in circumstances
        indicates that an entity should assess whether the fair value of a film is
        less
        than its unamortized film costs, then an entity should determine the fair
        value
        of the film and write-off to the statement of operations the amount by which
        the
        unamortized film costs exceeds the film’s fair value.
  As
        a
        result of impairment reviews during the years ended October 31, 2005 and
        2004,
        the Company wrote down the carrying value attributed to the Film to $0. This
        resulted in an impairment of $1,009,777 being recognized during the three
        months
        and nine months ended July 31, 2005.
  **Revenue
        Recognition**
  The
        Company recognizes revenue from the sale of its semiconductor products when
        evidence of an arrangement exists, the sales price is determinable or fixed,
        legal title and risk of loss has passed to the customer, which is generally
        upon
        shipment of our products to our customers, and collection of the resulting
        receivable is probable. To date the Company has not recognized any revenues
        related to the sale of its semiconductor products.
  The
        Company recognizes film revenue from the distribution of its feature film
        and
        related products when earned and reasonably estimable in accordance with
        SOP
        00-2. The following conditions must be met in order to recognize revenue
        in
        accordance with SOP 00-2:
  ·
              persuasive
                  evidence of a sale or licensing arrangement with a customer exists;
 
 ·
              the
                  film is complete and, in accordance with the terms of the arrangement,
                  has
                  been delivered or is available for immediate and unconditional
                  delivery;
 
 ·
              the
                  license period of the arrangement has begun and the customer can
                  begin its
                  exploitation, exhibition or sale;
 
 ·
              the
                  arrangement fee is fixed or determinable; and
 
 ·
              collection
                  of the arrangement fee is reasonably assured.
  Under
        a
        rights agreement with Lions Gate Entertainment (“LGE”), the domestic distributor
        for its Film entitled “Step Into Liquid,” the Company shares with LGE in the
        profits of the Film after LGE recovers its marketing, distribution and other
        predefined costs and fees. The agreement provides for the payment of minimum
        guaranteed license fees, usually payable on delivery of the respective completed
        film, that are subject to further increase based on the actual distribution
        results in the respective territory.
  10
  **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 earnings at the consummation of the acquisition.
 
 **Capitalized
        Software Development Costs**
  Capitalization
        of computer software development costs begins upon the establishment of
        technological feasibility. Technological feasibility for the Company’s computer
        software is generally based upon achievement of a detail program design free
        of
        high-risk development issues and the completion of research and development
        on
        the product hardware in which it is to be used. The establishment of
        technological feasibility and the ongoing assessment of recoverability of
        capitalized computer software development costs require considerable judgment
        by
        management with respect to certain external factors, including, but not limited
        to, technological feasibility, anticipated future gross revenue, estimated
        economic life and changes in software and hardware technology.
  Amortization
        of capitalized computer software development costs commences when the related
        products become available for general release to customers. Amortization
        is
        provided on a product-by-product basis. The annual amortization is the greater
        of the amount computed using (a) the ratio that current gross revenue for
        a
        product bears to the total of current and anticipated future gross revenue
        for
        that product, or (b) the straight-line method over the remaining estimated
        economic life of the product. The estimated useful life of the Company’s
        existing product is seven years.
  The
        Company periodically performs reviews of the recoverability of such capitalized
        software development costs. At the time a determination is made that capitalized
        amounts are not recoverable based on the estimated cash flows to be generated
        from the applicable software, the capitalized cost of each software product
        is
        then valued at the lower of its remaining unamortized costs or net realizable
        value.
  No
        assurance can be given that such technology will receive market acceptance.
        Accordingly, it is possible that the carrying amount of the technology license
        may be reduced materially in the near future.
  The
        Company had amortization expense of $216,460 and $531,692 for the three months
        and nine months ended July 31, 2006, respectively, related to its capitalized
        software development costs. There was no amortization expense for the three
        months and nine months ended July 31, 2005.
  **Loss
        Per Common Share**
  Basic
        loss per common share is computed based on weighted average shares outstanding
        and excludes any potential dilution. Diluted loss per share reflects the
        potential dilution from the exercise or conversion of all dilutive securities
        into common stock based on the average market price of common shares outstanding
        during the period. For the three months and nine months ended July 31, 2006
        and
        2005, no effect has been given to outstanding options, warrants, convertible
        notes payable, or convertible debentures in the diluted computation, as their
        effect would be anti-dilutive.
  **Stock-Based
        Compensation**
  On
        November 1, 2005, the Company adopted Statement of Financial Accounting
        Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which
        requires the measurement and recognition of compensation expense for all
        share-based payment awards made to employees and directors, including stock
        options, based on estimated fair values. SFAS 123(R) supersedes the Company’s
        previous accounting under Accounting Principles Board Opinion No. 25,
“Accounting for Stock Issued to Employees” (“APB 25”) for periods beginning on
        November 1, 2005. In March 2005, the Securities and Exchange Commission issued
        Staff Accounting Bulletin No. 107 (“SAB 107”) relating to SFAS 123(R). The
        Company has applied the provisions of SAB 107 in its adoption of SFAS
        123(R).
 11
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)**
  **Stock-Based
        Compensation** **(Continued)**
  The
        Company early adopted SFAS 123(R) using the modified prospective transition
        method, as of November 1, 2005, the first day of the Company’s fiscal year 2006.
        The Company’s condensed consolidated financial statements as of and for the nine
        months ended July 31, 2006 reflect the impact of SFAS 123(R). In accordance
        with
        the modified prospective transition method, the Company’s condensed consolidated
        financial statements for prior periods have not been restated to reflect,
        and do
        not include, the impact of SFAS 123(R).
  SFAS
        123(R) requires companies to estimate the fair value of share-based payment
        awards on the date of grant using an option-pricing model. The value of the
        portion of the award that is ultimately expected to vest is recognized as
        expense over the requisite service periods in the Company’s condensed
        consolidated statement of operations. Prior to the adoption of SFAS 123(R),
        the
        Company accounted for stock-based awards to employees and directors using
        the
        intrinsic value method in accordance with APB 25 as allowed under Statement
        of
        Financial Accounting Standards No. 123, “Accounting for Stock-Based
        Compensation” (“SFAS 123”). Under the intrinsic value method, no stock-based
        compensation expense for employee stock options had been recognized in the
        Company’s condensed consolidated statement of operations because the exercise
        price of the Company’s stock options granted to employees and directors equaled
        the fair market value of the underlying stock at the date of
        grant.
  Stock-based
        compensation expense recognized in the Company’s condensed consolidated
        statement of operations for the nine months ended July 31, 2006 included
        compensation expense for share-based payment awards granted prior to, but
        not yet vested as of October 31, 2005 based on the grant date fair
        value estimated in accordance with the pro-forma provisions of SFAS 123
        and compensation expense for the share-based payment awards granted
        subsequent to October 31, 2005 based on the grant date fair value estimated
        in
        accordance with the provisions of SFAS 123(R). 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 $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 pro-forma
        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 $312,619 and $628,293
        for
        the three months and nine months ended July 31, 2006,
        respectively.
  As
        the
        closing price of common stock at July 31, 2005 was below the exercise price
        for
        certain options, previously recorded expense of $20,915 was reversed during
        the
        three months ended July 31, 2005. Accordingly, stock-based compensation expense
        related to employee stock options under other accounting standards for the
        three
        months and nine months ended July 31, 2005 was $(20,915) and $0, respectively.
        Stock based-compensation expense recognized for non-employees under other
        accounting standards was $130,948 and $546,463 for the three months and nine
        months ended July 31, 2005, respectively.
  As
        stock-based compensation expense recognized in the condensed consolidated
        statement of operations for the three months and nine months ended July 31,
        2006
        is based on awards ultimately expected to vest, it has been reduced for
        estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
        the
        time of grant and revised, if necessary, in subsequent periods if actual
        forfeitures differ from those estimates. In the Company’s pro-forma information
        required under SFAS 123(R) for the periods prior to fiscal 2006, the Company
        accounted for forfeitures as they occurred.
  12
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)**
  **Stock-Based
        Compensation** **(Continued)**
  Pro-Forma
        Information Under SFAS 123 for Periods Prior to Fiscal 2006
  For
                  the Nine
                Months
                  Ended
                July
                  31, 2005
              
              For
                  the Three
                Months
                  Ended
                July
                  31, 2005Net
                  loss, as reported
              
              $
              (3,060,489
              )
              $
              (897,920
              )Add:
                  Stock-based employee compensation expenseincluded
                  in reported net loss
              
              
              —
              
              
              (20,915
              )Less:
                  Total stock-based employee compensation expensedetermined
                  under the fair value-based method of all awards
              
              
              (794,819
              )
              
              (604,031
              )Net
                  loss, pro-forma
              
              $
              (3,855,308
              )
              $
              (1,522,866
              )Basic
                  and Diluted Net Loss per Common Share:As
                  reported
              
              $
              (0.03
              )
              $
              (0.01
              )Pro-forma
              
              $
              (0.04
              )
              $
              (0.01
              )
  **Impact
        of Recently Issued Accounting Standards**
  In
        June
        2005, the FASB published Statement of Financial Accounting Standards No.
        154,
“Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 establishes
        new standards on accounting for changes in accounting principles. Pursuant
        to
        the new rules, all such changes must be accounted for by retrospective
        application to the financial statements of prior periods unless it is
        impracticable to do so. SFAS 154 completely replaces Accounting Principles
        Bulletin No. 20 and SFAS 3, though it carries forward the guidance in those
        pronouncements with respect to accounting for changes in estimates, changes
        in
        the reporting entity, and the correction of errors. The requirements in SFAS
        154
        are effective for accounting changes made in fiscal years beginning after
        December 15, 2005. The Company will apply these requirements to any accounting
        changes after the implementation date.
  In
        June
        2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 05-1,
“Accounting for the Conversion of an Instrument That Becomes Convertible upon
        the Issuer’s Exercise of a Call Option” (“EITF No. 05-1”), which indicates that
        no gain or loss should be recognized upon the conversion of an instrument
        that
        becomes convertible as a result of an issuer’s exercise of a call option
        pursuant to the original terms of the instrument. EITF No. 05-1 is effective
        for
        annual or interim periods beginning after June 28, 2006. The adoption of
        this
        pronouncement is not expected to have an impact on the Company’s consolidated
        financial position, results of operations, or cash flows.
  In
        June
        2005, the FASB ratified EITF Issue No. 05-2, “The Meaning of ‘Conventional
        Convertible Debt Instrument’ in EITF Issue No. 00-19, ‘Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
        Stock’” (“EITF No. 05-2”), which addresses when a convertible debt instrument
        should be considered “conventional” for the purpose of applying the guidance in
        EITF No. 00-19. EITF No. 05-2 also retained the exemption under EITF No.
        00-19
        for conventional convertible debt instruments and indicated that convertible
        preferred stock having a mandatory redemption date may qualify for the exemption
        provided under EITF No. 00-19 for conventional convertible debt if the
        instrument’s economic characteristics are more similar to debt than equity. EITF
        No. 05-2 is effective for new instruments entered into and instruments modified
        in periods beginning after June 29, 2005. The Company has applied the
        requirements of EITF No. 05-2 since the required implementation date. The
        adoption of this pronouncement did not have an impact on the Company’s
        consolidated financial position, results of operations, or cash
        flows.
 13
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
        (CONTINUED)**
  **Impact
        of Recently Issued Accounting Standards** **(Continued)**
  EITF
        Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
        Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative
        Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
        Stock’” (“EITF No. 05-4”) addresses financial instruments, such as stock
        purchase warrants, which are accounted for under EITF No. 00-19 that may
        be
        issued at the same time and in contemplation of a registration rights agreement
        that includes a liquidated damages clause. The consensus of EITF No. 05-4
        has
        not been finalized. The adoption of this pronouncement is not expected to
        have
        an impact on the Company’s consolidated financial position, results of
        operations, or cash flows.
  In
        September 2005, the FASB ratified EITF Issue No. 05-7, “Accounting for
        Modifications to Conversion Options Embedded in Debt Instruments and Related
        Issues” (“EITF No. 05-7”), which addresses whether a modification to a
        conversion option that changes its fair value affects the recognition of
        interest expense for the associated debt instrument after the modification
        and
        whether a borrower should recognize a beneficial conversion feature, not
        a debt
        extinguishment, if a debt modification increases the intrinsic value of the
        debt
        (for example, the modification reduces the conversion price of the debt).
        EITF
        No. 05-7 is effective for the first interim or annual reporting period beginning
        after December 15, 2005. The Company adopted EITF No. 05-7 as of the beginning
        of the Company’s interim reporting period that began on February 1, 2006. The
        adoption of this pronouncement did not have an impact on the Company’s
        consolidated financial position, results of operations, or cash
        flows.
  In
        September 2005, the FASB ratified EITF Issue No. 05-8, “Income Tax Consequences
        of Issuing Convertible Debt with a Beneficial Conversion Feature” (“EITF No.
        05-8”), which addresses the treatment of convertible debt issued with a
        beneficial conversion feature as a temporary difference under the guidance
        in
        SFAS 109. In addition, deferred taxes recognized for a temporary difference
        of
        debt with a beneficial conversion feature should be recognized as an adjustment
        of additional paid-in capital. Entities should apply the guidance in EITF
        No.
        05-8 in the first interim or annual reporting period that begins after December
        15, 2005. Its provisions should be applied retrospectively under the guidance
        in
        SFAS 154 to all convertible debt instruments with a beneficial conversion
        feature accounted for under the guidance in EITF No. 00-27 “Application of EITF
        Issue No. 98-5 ‘Accounting for Convertible Securities with Beneficial Conversion
        Features or Contingently Adjustable Conversion Ratios.’” The Company has applied
        the requirements of EITF No. 05-8 to all previously existing convertible
        debt
        instruments with a beneficial conversion feature and will apply the requirements
        of EITF No. 05-8 for all new convertible debt instruments with a beneficial
        conversion feature. The adoption of this pronouncement for new convertible
        debt
        instruments with a beneficial conversion feature is not expected to have
        an
        impact on the Company’s consolidated financial position, results of operations
        or cash flows.
  In
        February 2006, the FASB published Statement of Financial Accounting Standards
        No. 155, “Accounting for Certain Hybrid Financial Instruments - an amendment of
        FASB Statements No. 133 and 140” (“SFAS 155”). SFAS 155 resolves issues
        addressed in SFAS 133 Implementation Issue No. D1, “Application of Statement 133
        to Beneficial Interests in Securitized Financial Assets.” The requirements in
        SFAS 155 are effective for all financial instruments acquired or issued after
        the beginning of an entity’s first fiscal year that begins after September 15,
        2006. The adoption of this pronouncement is not expected to have an impact
        on
        the Company’s consolidated financial position, results of operations, or cash
        flows.
  **NOTE
        3 - FILM IN DISTRIBUTION**
  The
        Company recognized revenues of $1,025 and $59,899 for the three months and
        nine
        months ended July 31, 2006, respectively. The Company recognized revenues
        of
        $10,360 and $26,558 for the three months and nine months ended July 31, 2005,
        respectively. There was no amortization expense for the three months and
        nine
        months ended July 31, 2006. The Company had amortization expense of $0 and
        $11,945 for the three months and nine months ended July 31, 2005,
        respectively.
 14
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        4 - DEFERRED FINANCING COSTS**
  As
        of
        July 31, 2006, deferred financing costs consisted of costs incurred and warrants
        issued in connection with the sale of $6,000,000 of 2006 Debentures, $3,500,000
        of 2005 Debentures, $1,350,000 of 7% convertible debentures, and promissory
        notes:
  Deferred
                  financing costs
              
              $
              3,541,818Less:
                  accumulated amortization
              
              
              (1,698,268
              )Deferred
                  financing costs, net
              
              $
              1,843,550
 
  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, 2006, amortization of deferred
        financing costs was $448,840 and $1,017,659, respectively. For the three
        months
        and nine months ended July 31, 2005, amortization of deferred financing costs
        was $67,825 and $120,934, respectively.
  **NOTE
        5 - EXCHANGE AGREEMENT**
  In
        April
        2005, the Company entered into an Exchange Agreement (the “Exchange Agreement”)
        with Zaiq Technologies, Inc. (“Zaiq”), pursuant to which the Company issued
        4,651,163 shares of common stock with a value of $744,186 and a promissory
        note
        in the principal amount of $2,392,000 (the “Zaiq Note”) in exchange for the
        surrender by Zaiq of 3,192 shares of Redeemable Series B Preferred Stock.
        The
        fair value of the common stock and promissory note on the closing date was
        determined to be less than the aggregate liquidation preference of the
        Redeemable Series B Preferred Stock and accordingly, a gain of $55,814 was
        recognized during the year ended October 31, 2005.
  On
        December 19, 2005, the Company entered into a letter agreement with Zaiq,
        pursuant to which the Company agreed to repurchase from Zaiq for total
        consideration of $200,000 the following Zaiq assets: (i) 5,180,474 shares
        (the
“Zaiq Shares”) of the Company’s common stock held of record by Zaiq, and (ii)
        the remaining principal balance of the Zaiq Note.
  The
        Company had the right under the letter agreement to assign any or all of
        its
        purchase commitment, and assigned its right to purchase 4,680,620 of the
        Zaiq
        Shares to an unaffiliated third party that previously invested in the
        Company.
  On
        December 20, 2005, the Company paid Zaiq an aggregate of $129,789, out of
        an
        advance on the note payable that was subsequently signed in January 2006
        (see
        Note 8), to purchase the Zaiq Note and 499,854 Zaiq Shares. The Zaiq Shares
        repurchased by the Company have been accounted for as treasury stock, carried
        at
        cost, and reflected as a reduction to stockholders’ equity. The remaining
        principal and accrued interest of $1,292,111 on the Zaiq Note has been canceled
        resulting in a gain of $1,169,820.
  **NOTE
        6 - CONVERTIBLE NOTES PAYABLE**
  The
        Company entered into several convertible promissory note agreements with
        various
        trusts and individuals to fund the operations of the Company. The Company
        agreed
        to pay the principal and an additional amount equal to 50% of the principal
        on
        all notes below except for one note for $10,000, which accrues interest at
        the
        rate of 9% per annum.
  15
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        6 - CONVERTIBLE NOTES PAYABLE (CONTINUED)**
  The
        outstanding convertible notes are summarized below:
  **At
                  July 31,****2006**Note
                  payable (1)
              
              $
              22,000Notes
                  payable (nine notes) (2)
              
              
              468,000Notes
                  payable, 9% interest (3)
              
              
              10,000TOTAL
              
              $
              500,000
 
  (1)
              The
                  note was issued in October 2001 in the amount of $250,000, and
                  due only
                  when receipts received by the Company from its Top Secret Productions,
                  LLC
                  joint venture exceed $375,000. The note and any accrued and unpaid
                  interest may be converted at any time, in whole or in part, into
                  shares of
                  common stock at a conversion price per share of $0.40. The Company
                  made
                  payments of $25,000 and $75,000 during the three months and nine
                  months
                  ended July 31, 2006, respectively.(2)
              The
                  notes were issued during the period from March 2002 through July
                  2003 in
                  the aggregate amount of $478,000 and due only when receipts received
                  by
                  the Company from its Top Secret Productions, LLC joint venture
                  exceed
                  $2,250,000. The notes and any accrued and unpaid interest may be
                  converted
                  at any time, in whole or in part, into shares of common stock at
                  conversion prices per share ranging from $0.33 to $1.00. Principal
                  of
                  $10,000 and accrued interest of $5,000 was converted into 35,714
                  shares of
                  common stock during the three months ended April 30, 2006.(3)
              The
                  note was issued in July 2003 in the amount of $10,000, and due
                  only when
                  receipts received by the Company from its Top Secret Productions,
                  LLC
                  joint venture exceed $750,000. The note and any accrued and unpaid
                  interest may be converted at any time, in whole or in part, into
                  shares of
                  common stock at a conversion price per share of
                  $0.60.
  **NOTE
        7 - 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”). Of
        this amount, $3.0 million was delivered by the Company to a security agent,
        acting on behalf of the Investors (the “Security Deposit”), to secure certain
        obligations of the Company to the Investors if the Company failed to file
        an
        amendment, with the approval of the Company’s shareholders, to its charter
        documents to reflect the increase in the Company’s authorized common stock from
        500 million to 900 million shares (the “Authorized Share Increase”). The
        Company’s shareholders approved the Authorized Share Increase on April 18, 2006
        and the $3.0 million Security Deposit was released to the
        Company.
  In
        connection with the issuance of the 2006 Debentures, the Company issued to
        the
        Investors warrants to purchase 70,955,548 shares of the Company’s common stock
        at an exercise price of $0.15 per share valued at $9,036,727 on the issuance
        date (subject to adjustments for stock splits, stock dividends,
        recapitalizations, mergers, spin-offs, and certain other transactions). The
        warrants are exercisable until the last day of the month in which the third
        anniversary of the effective date of the registration statement registering
        the
        shares underlying the warrants occurs (August 31, 2009).
  The
        Company received net proceeds of approximately $4.5 million from the proceeds
        of
        the 2006 Debentures, after the payment of offering related fees and expenses
        and
        after the repayment in full of bridge loans made in December 2005 and January
        2006, in the aggregate amount of $810,000.
  16
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
   **NOTE
        7 - CONVERTIBLE DEBENTURES (CONTINUED)**
  **2006
        Debentures** **(Continued)**
  The
        2006
        Debentures are convertible into shares of common stock at a conversion price
        for
        any such conversion equal to the lower of (x) 70% of the volume weighted
        average
        price (“VWAP”) of the common stock for the 20 days ending on the trading day
        immediately preceding the conversion date or (y) if the Company enters into
        certain financing transactions, the lowest purchase price or conversion price
        applicable to that transaction. The conversion price is subject to
        adjustment.
  Interest
        on the 2006 Debentures accrues at the rate of 7% per annum, payable upon
        conversion, or semi-annually (June 30 and December 31 of each year) or upon
        maturity, whichever occurs first, and will continue to accrue until the 2006
        Debentures are fully converted and/or paid in full. Interest is payable,
        at the
        option of the Company, either (i) in cash, or (ii) in shares of common stock
        at
        the then applicable conversion price.
  To
        secure
        the Company’s obligations under the 2006 Debentures, the Company has granted a
        security interest in substantially all of its assets, including without
        limitation, its intellectual property, in favor of the Investors. The security
        interest terminates upon the earlier of (i) the date on which less than
        one-fourth of the original principal amount of the 2006 Debentures issued
        on the
        Closing Date are outstanding or (ii) payment or satisfaction of all of the
        Company’s obligations under the related securities purchase
        agreement.
  The
        Company agreed to include the shares of common stock issuable upon conversion
        of
        the 2006 Debentures and exercise of the related warrants issued to investors
        and
        the placement agent in a registration statement filed by the Company with
        the
        Securities and Exchange Commission (the “SEC”). Since the registration statement
        was not declared effective by the SEC by June 23, 2006, the Company is obligated
        to pay liquidated damages to the holders of the 2006 Debentures. As of July
        31,
        2006, accrued liquidated damages totaled $152,000. 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. As of August 16, 2006, accrued
        liquidated damages totaled $212,000. At their option, the holders of the
        2006
        Debentures 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.
  In
        connection with the placement of the 2006 Debentures, a placement agent received
        a placement agent fee equal to (i) 10% of the aggregate purchase price (i.e.,
        $600,000), (ii) 10% of the proceeds realized in the future from exercise
        of
        warrants issued to the Investors, (iii) warrants to purchase an aggregate
        of
        7,095,556 shares of common stock having an initial exercise price equal to
        $0.1693 per share valued at $888,779 on the issuance date, and (iv) warrants
        to
        purchase an aggregate of 7,095,556 shares of common stock having an initial
        exercise price equal to $0.15 per share valued at $903,673 on the issuance
        date.
        The exercise price of the placement agent warrants is subject to adjustments
        for
        stock splits, stock dividends, recapitalizations, mergers, spin-offs, and
        certain other transactions.
  The
        aggregate fair value of the placement agent’s warrants of $1,792,452 on the
        issuance date was recorded as a deferred financing cost and is being charged
        to
        interest expense over the term of the 2006 Debentures.
  The
        gross
        proceeds of $6,000,000 are recorded as a liability net of a debt discount
        of
        $6,000,000 consisting of an allocation of the fair values attributed to the
        Investors’ warrants and to the embedded conversion feature in accordance with
        EITF issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to
        and Potentially Settled in a Company’s Own Stock.” The debt discount consisted
        of a $3,428,571 value related to the Investors' warrants and a value
        attributed to the embedded conversion feature of $2,571,429.  The debt
        discount was first allocated to the embedded conversion feature based on
        its
        fair value. After reducing the gross proceeds by the value allocated to the
        embedded conversion feature, the remaining unallocated debt discount of
        $3,428,571 was allocated to the Investors' warrants. The excess of the fair
        value of the Investors’ warrants above the debt discount allocated to the
        Investors’ warrants was $5,608,156 and was recorded as interest
        expense.
 17
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
        7 - CONVERTIBLE DEBENTURES (CONTINUED)**
  **2006
        Debentures** **(Continued)**
  In
        accordance with EITF No. 00-19, due to certain factors, including an uncapped
        liquidated damages provision in the registration rights agreement and an
        indeterminate amount of shares to be issued upon conversion of the debentures,
        the Company separately values and accounts for the embedded conversion feature
        related to the 2006 Debentures, the Investors’ warrants, the placement agent’s
        warrants, and the registration rights as derivative liabilities. Accordingly,
        these derivative liabilities are measured at fair value with changes in fair
        value reported in earnings as long as they remain classified as liabilities.
        The
        Company reassesses the classification at each balance sheet date. If the
        classification required under EITF No. 00-19 changes as a result of events
        during the period, the contract is reclassified as of the date of the event
        that
        caused the reclassification.
  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.
  As
        of
        July 31, 2006, the conversion option liability of $2,571,429 had been reduced
        to
        $2,400,000 as a result of conversions of the 2006 Debentures. Since the issuance
        of the 2006 Debentures, an aggregate of $171,429 has been reflected as a
        reclassification to stockholders’ equity.
  A
        loss on
        the change in fair value of these derivative liabilities of $9,315,408 and
        $6,666,740 was recognized during the three months and nine months ended July
        31,
        2006, respectively.
  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, 2006:
  Outstanding
                Principal
                  Amount
              
              
              Unamortized
                Debt
                  Discount
              
              
              Net
                  Carrying
                ValueLong-term
                  portion
              
              $
              5,600,000
              
              $
              4,504,514
              
              $
              1,095,486
  **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.
  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 August 31, 2006 at a per
        share
        exercise price of $0.1547 and warrants for 22,624,430 shares being exercisable
        through August 31, 2008 at a per share exercise price of $0.3094.
  In
        connection with the issuance of the 2005 Debentures, the Company also issued
        to
        a placement agent warrants to purchase up to 5,656,108 shares of Common Stock
        (the “Compensation Warrants”) valued at $319,066 on the issuance date. This
        amount was recorded as a deferred financing cost and is being charged to
        interest expense over the term of the 2005 Debentures. Warrants to purchase
        up
        to 2,262,443 shares were exercisable through August 31, 2008 at a per share
        exercise price of $0.3094. Warrants to purchase up to 2,262,443 shares were
        exercisable through May 31, 2008 at a per share exercise price of $0.1547.
        Warrants to purchase up to 1,131,222 shares were exercisable through August
        31,
        2006 at a per share exercise price of $0.1547. All of the Compensation Warrants
        were exercised during the nine months ended July 31, 2006.
  18
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  **NOTE
        7 - CONVERTIBLE DEBENTURES (CONTINUED)**
  **2005
        Debentures** **(Continued)**
  The
        gross
        proceeds of $3,500,000 are recorded as a liability net of a debt discount
        of
        $3,500,000. The debt discount consisted of a $2,000,000 value related to
        the
        Investor Warrants and a $1,500,000 value related to the embedded conversion
        feature in accordance with EITF issue No. 00-19 “Accounting for Derivative
        Financial Instruments Indexed to and Potentially Settled in a Company’s Own
        Stock.” Due to certain factors, including an uncapped liquidated damages
        provision in the registration rights agreement and an indeterminate amount
        of
        shares to be issued upon conversion of the debentures, the Company separately
        values and accounts for the embedded conversion feature related to the 2005
        Debentures, the Investors’ Warrants, the Compensation Warrants, and the
        registration rights as derivative liabilities. Accordingly, these derivative
        liabilities are measured at fair value with changes in fair value reported
        in
        earnings as long as they remain classified as liabilities. The Company
        reassesses the classification at each balance sheet date. If the classification
        required under EITF No. 00-19 changes as a result of events during the period,
        the contract is reclassified as of the date of the event that caused the
        reclassification. Due to various factors, including substantial conversions
        of
        the 2005 Debentures and the registration statement registering the 2005
        Debentures becoming effective on August 1, 2005, the value of the registration
        rights was deemed to be de minimus.
  As
        of
        July 31, 2006, the conversion option liability of $1,500,000 had been reduced
        to
        $2,385 as a result of conversions of the 2005 Debentures. Since the issuance
        of
        the 2005 Debentures, an aggregate of $1,497,615 has been reclassified from
        conversion option liability to stockholders’ equity.
  During
        the nine months ended July 31, 2006, upon the exercise by holders of the
        Investor and Compensation Warrants, of warrants to purchase an aggregate
        of
        12,203,693 shares, the Company reassessed the classification of the exercised
        warrants and reclassified the fair value of the exercised warrants of $1,141,769
        from current liabilities to stockholders’ equity.
  A
        loss on
        the change in fair value of these derivative liabilities of $1,058,056 and
        $4,191,262 was recognized during the three months and nine months ended July
        31,
        2006, respectively.
  On
        February 21, 2006, the Company and certain holders of Investor and Compensation
        Warrants entered into an amendment (the “Warrant Amendment”) to the terms of
        their warrants. Pursuant to the Warrant Amendment, the Company and certain
        holders of the Investor and Compensation Warrants agreed to temporarily reduce
        the exercise price of the Investor and Compensation Warrants to $0.05 per
        share
        from February 21, 2006 until March 10, 2006 (the “New Price Exercise Period”).
        The warrant holders that are parties to the Warrant Amendment were permitted,
        but not required to, exercise all or any portion of their Investor and
        Compensation Warrants at a per share price of $0.05 at any time during the
        New
        Price Exercise Period, but could not do so by means of a cashless exercise.
        This
        reduction in the exercise price of the Investor and Compensation Warrants
        expired on March 10, 2006. During the New Price Exercise Period, holders
        of the
        Investor and Compensation Warrants exercised warrants to purchase 11,370,624
        shares of common stock at the reduced exercise price of $0.05 per share,
        resulting in gross proceeds to the Company of $568,531. Except
        as
        expressly provided in the Warrant Amendment, the terms and conditions of
        the
        Investor and Compensation Warrants and any related registration rights agreement
        shall be unchanged and remain in full force and effect. In addition, the
        warrant
        holders agreed to waive any claims arising out of or relating to the failure,
        if
        any, to have available registered Warrant Shares, as defined in the Investor
        and
        Compensation Warrants, prior to June 23, 2006.
  19
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        7 - CONVERTIBLE DEBENTURES (CONTINUED)**
  **2005
        Debentures** **(Continued)**
  The
        Company agreed to include the shares of common stock issuable upon the exercise
        of each Investor or Compensation Warrant (whether or not pursuant to the
        terms
        of the Warrant Amendment) in a registration statement to be filed by the
        Company
        with the 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.
  To
        secure
        the Company’s obligations under the 2005 Debentures, the Company granted a
        security interest in substantially all of its assets, including without
        limitation, its intellectual property, in favor of the investors under the
        terms
        and conditions of a Security Interest Agreement dated as of the date of the
        2005
        Debentures. The security interest terminates upon the earlier of (i) the
        date on
        which less than one-third of the original principal amount of the 2005
        Debentures issued on the closing date are outstanding or (ii) payment or
        satisfaction of all of the Company’s obligations under the loan agreement.
        In January 2006, condition (i) was met and the security interest
        terminated.
  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 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 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, 2006
        is
        $24,643 and $1,550,586, respectively, related to the amortization of the
        debt
        discount on these debentures.
  The
        2005
        Debentures are summarized below as of July 31, 2006:
  Outstanding
                Principal
                  Amount
              
              Unamortized
                Debt
                  Discount
              
              Net
                  Carrying
                ValueLong-term
                  portion
              
              $
              5,564
              
              $
              3,383
              
              $
              2,181
  **7%
        Debentures**
  In
        December 2003, April 2004 and May 2004, the Company completed a private
        placement to certain private and institutional investors of $1,350,000 in
        principal amount of its three-year 7% Convertible Debentures (the “7%
        Debentures”).
  During
        the three 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 at
        a
        conversion price of $0.15.
  During
        the three months ended January 31, 2005, $199,450 of principal amount plus
        accrued interest of $12,264 were converted into 1,411,428 shares of common
        stock
        at a conversion price of $0.15. During the three months ended April 30, 2005,
        $383,050 of principal plus accrued interest of $28,212 were converted into
        2,741,747 shares of common stock at a conversion price of $0.15. During the
        three months ended July 31, 2005, $325,000 of principal amount plus accrued
        interest of $32,860 were converted into 2,385,804 shares of common stock
        at a
        conversion price of $0.15.
  20
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
   **NOTE
        7 - CONVERTIBLE DEBENTURES (CONTINUED)**
  **7%
        Debentures** **(continued)**
  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 on these debentures.
  The
        7%
        Debentures are summarized below as of July 31, 2006:
  Outstanding
                Principal
                  Amount
              
              Unamortized
                Debt
                  Discount
              
              Net
                  Carrying
                ValueCurrent
                  portion
              
              $
              75,000
              
              $
              3,881
              
              $
              71,119
  The
        remaining 7% Debentures outstanding at July 31, 2006 were originally issued
        in
        December 2003 and are due and payable in December 2006.
  **NOTE
        8 - NOTES PAYABLE**
  The
        Company does not currently have any outstanding notes payable. During
        the nine months ended July 31, 2006, the Company recognized
        losses as a result of the conversion of several notes payable into common
        stock
        and also repaid several notes payable, as further described
        below.
  In
        February 2006, the Company issued 5,304,253 shares of restricted common stock
        in
        exchange for the return and cancellation of the outstanding principal of
        $256,886 and interest of $114,412 on five, unsecured individual notes
        payable, each with identical terms and bearing 6% interest.  As the
        conversion rate of $0.07 was below the closing price of the common stock
        on the
        conversion date, a loss of $196,257 was recognized during the three months
        ended
        April 30, 2006.
  Outstanding
        principal of $39,973 and interest of $110,027 was paid in June 2005 on an
        unsecured note payable bearing 10% interest from the proceeds of the
        private placement of the 2005 Debentures. In February 2006, the Company issued
        6,760,241 shares of restricted common stock in exchange for the return and
        cancellation of the outstanding principal of $443,251 and interest of $29,766
        on
        this note. As the conversion rate of $0.07 was below the closing price of
        the
        common stock on the conversion date, a loss of $250,129 was recognized during
        the three months ended April 30, 2006.
  On
        March
        26, 2004, the Company entered into a loan agreement, pursuant to which the
        Company borrowed $12,000 from the lender. In April 2006, the outstanding
        principal of $12,000 and interest of $1,217 were repaid.
  In
        April
        2005, the Company issued a promissory note in connection with the cancellation
        of the Redeemable Series B Preferred Stock which bears interest at the rate
        of
        7% per annum. In December 2005, the Company entered into an agreement to
        repay a
        portion of the outstanding principal and accrued interest on the promissory
        note
        with the remaining principal balance and accrued interest being forgiven.
        See
        Note 5 for further details.
  In
        December 2005 and January 2006, the Company entered into loan agreements
        with a
        third party pursuant to which the Company borrowed $750,000 from the lender.
        An
        amount equal to 108% of the principal amount ($810,000) of the loans is due
        and
        payable on the earlier of May 25, 2006 or the date the Company effects a
        financing transaction or series of transactions resulting in gross proceeds
        to
        the Company of at least $2,000,000. The difference between the gross proceeds
        and amount due at maturity is shown as a discount that is amortized as interest
        expense over the life of the loans. The Company issued to the lender warrants
        to
        purchase 7,500,000 shares of its Common Stock at an exercise price of $0.10
        per
        share. The fair value of the warrants was $120,000 and was shown as a debt
        discount and amortized as interest expense over the life of the loans. In
        connection with the loans, the Company granted a security interest in all
        of its
        assets. The Company received net proceeds of $672,470 following the payment
        of
        due diligence fees and transaction fees and transaction related fees and
        expenses. These transaction related fees were recorded as deferred financing
        costs. For the three months ended January 31, 2006, amortization of debt
        discount on this loan was $10,413.
  21
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        8 - NOTES PAYABLE (CONTINUED)**
  In
        March
        2006, 108% of the principal amount ($810,000) was repaid and the security
        interest was released. All unamortized debt discount and deferred financing
        costs were written off during the three months ended April 30, 2006 in
        connection with the repayment of the loan.
  **NOTE
        9 - STOCKHOLDERS’ EQUITY**
  **Common
        Stock**
  During
        the nine months ended July 31, 2006, the Company:
  ·
              issued
                  110,654,584 shares of common stock for conversion of convertible
                  debentures with a principal amount of $2,260,147 and accrued interest
                  of
                  $211,806;
  ·
              repurchased
                  499,854 shares of common stock for $7,498 from
                  Zaiq;
  ·
              issued
                  35,714 shares of common stock for conversion of convertible notes
                  payable
                  with a principal amount of $10,000 and accrued interest of
                  $5,000;
  ·
              issued
                  12,064,494 shares of common stock valued at $1,290,901 in exchange
                  for the
                  return and cancellation of notes payable with a principal amount
                  of
                  $700,337 and accrued interest of
                  $144,178;
  ·
              issued
                  12,203,693 shares of common stock upon exercise of warrants resulting
                  in
                  gross proceeds of $697,407; and
  ·
              issued
                  12,624,752 shares of restricted common stock to consultants for
                  services
                  valued at $2,232,217.
  **Stock
        Option Plans**
  On
        November 1, 2005, the Company early adopted SFAS 123(R), which requires the
        measurement and recognition of compensation expense for all share-based payment
        awards made to the Company’s employees and directors including employee stock
        options based on estimated fair values.
  Upon
        adoption of SFAS 123(R), the Company continued to estimate the value of stock
        options on the date of grant using the Black-Scholes model and the assumptions
        noted in the table below. Prior to the adoption of SFAS 123(R), the value
        of
        each stock option was also estimated on the date of grant using the
        Black-Scholes model for the purpose of the pro-forma financial information
        in
        accordance with SFAS 123.
  The
        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 Company’s
        stock options. The dividend yield assumption is based on the Company’s history
        and expectation of dividend payouts. The expected life of stock options
        represents the Company’s historical experience with regards to the exercise
        behavior of its option holders and the contractual term of the
        options.
  As
        stock-based compensation expense recognized in the condensed consolidated
        statement of operations for the three months and nine months ended July 31,
        2006
        is based on awards ultimately expected to vest, it has been reduced for
        estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
        the
        time of grant and revised, if necessary, in subsequent periods if actual
        forfeitures differ from those estimates. In the Company’s pro-forma information
        required under SFAS 123 for the periods prior to fiscal 2006, the Company
        accounted for forfeitures as they occurred.
  22
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        9 - STOCKHOLDERS’ EQUITY (CONTINUED)**
  **Stock
        Option Plans (Continued)**
  The
        weighted-average estimated fair value of stock options granted during the
        nine
        months ended July 31, 2006 was $0.03 per share using the Black-Scholes model
        with the following assumptions:
  Expected
                  volatility
              145%Risk-free
                  interest rate
              4.4%Expected
                  dividends
              0.0%Expected
                  life
              10
                  years
 
  A
        summary
        of option activity as of July 31, 2006 and changes during the period then
        ended
        is as follows:
  Under
                the
                  Plans
              
              Weighted
                Average
                Exercise
                  Price
              
              Aggregate
                Intrinsic
                Value
              
              Outside
                the
                  Plans
              
              Weighted
                Average
                  Exercise Price
              
              Aggregate
                Intrinsic
                ValueOutstanding
                  at October 31, 2005
              
              
              993,750
              
              $
              0.97
              
              
              
              
              
              15,900,000
              
              $
              0.25Options
                  granted:Under
                  the Plans
              
              
              1,000,000
              
              $
              0.17
              
              
              
              
              
              —
              
              
              —Outside
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              26,600,000
              
              $
              0.03Options
                  expired/cancelled:Under
                  the Plans
              
              
              (325,000
              )
              $
              1.86
              
              
              
              
              
              —
              
              
              —Outside
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              (14,300,000
              )
              $
              0.24Options
                  exercised:Under
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              —Outside
                  the Plans
              
              
              —
              
              
              —
              
              
              
              
              
              —
              
              
              —Outstanding
                  at July 31, 2006
              
              
              1,668,750
              
              $
              0.32
              
              $
              65,000
              
              
              28,200,000
              
              $
              0.05
              
              $
              5,567,600Exercisable
                  at July 31, 2006
              
              
              849,303
              
              $
              0.47
              
              $
              11,319
              
              
              28,166,664
              
              $
              0.04
              
              $
              5,556,600
  The
        weighted-average remaining contractual term of stock options outstanding
        under
        the plans as of July 31, 2006 was 8.1 years. The weighted-average remaining
        contractual term of stock options outstanding outside the plans as of July
        31,
        2006 was 9.1 years.
  The
        weighted-average remaining contractual term of stock options currently
        exercisable under the plans as of July 31, 2006 was 6.5 years. The
        weighted-average remaining contractual term of stock options currently
        exercisable outside the plans as of July 31, 2006 was 9.1
        years.
  As
        of
        July 31, 2006, total compensation cost related to nonvested stock options
        not
        yet recognized was $162,630, which is expected to be recognized through July
        2009 over a weighted-average period of approximately 2.6 years.
  The
        total
        fair value of options vested during the three months and nine months ended
        July
        31, 2006 was $381,638 and $1,036,264, respectively. The weighted-average
        estimated fair value of options vested during the three months and nine months
        ended July 31, 2006 was $0.03 and $0.03 per share,
        respectively.
  23
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        9 - STOCKHOLDERS’ EQUITY (CONTINUED)**
  **Options Granted**
  In
        April
        2005, the Company issued to each of its Chief Executive Officer and Executive
        Vice President, 1,000,000 shares of common stock, and performance-based options
        to purchase 7,000,000 shares of restricted common stock at an exercise price
        of
        $0.17, which was equal to the closing price of the common stock on the
        Over-the-Counter Bulletin Board
        on
        the date of grant. Options to purchase 2,000,000 shares of restricted common
        stock vested upon the Company’s consummation of the sale of the 2005 Debentures
        in May 2005 and options to purchase 12,000,000 shares of restricted common
        stock
        vested in December 2005 upon the Company’s release of a beta version of its
        semiconductor technologies. In January 2006, all of these options were canceled.
  During
        the three months ended January 31, 2006, options to purchase 22,400,000 shares
        of common stock were granted to the Company’s Chief Executive Officer, the
        Executive Vice President, and an advisory board member. These options were
        valued at $591,863 and have a 10 year term, an exercise price of $0.027 per
        share, and vested at various times between February 2006 and July 2006.
  During
        the three months ended April 30, 2006, the following options were
        granted:
  (i)
              Options
                  to purchase 2,000,000 shares of common stock were granted to directors.
                  These options were valued at $84,277 and have a 10-year term, an
                  exercise
                  price of $0.0319 per share, and vested on May 1, 2006;(ii)
              Options
                  to purchase 2,000,000 shares of common stock were granted in connection
                  with legal services performed for the Company. These options were
                  valued
                  at $84,277 and have a 10-year term, an exercise price of $0.0319
                  per
                  share, and vested on March 1, 2006; and(iii)
              Options
                  to purchase 100,000 shares of common stock were granted to an employee.
                  These options were valued at $16,887 and have a 10-year term, exercise
                  price of $0.08 per share, and vest over a three year
                  period.
  During
        the three months ended July 31, 2006, the following options were
        granted:
  (i)
              Options
                  to purchase 600,000 shares of common stock were granted to employees
                  and a
                  director. These options were valued at $95,200 and have a 10-year
                  term, an
                  exercise price of $0.18 per share, and vest over a three year period;
                  and(ii)
              Options
                  to purchase 500,000 shares of common stock were granted to a consultant.
                  These options were valued at $79,333 and have a 10-year term, an
                  exercise
                  price of $0.18 per share, and vest over a two year period.
  **Options
        Expired, Cancelled and Forfeited**
  Options
        to purchase 625,000 and 14,625,000 shares of common stock were canceled during
        the three months and nine months ended July 31, 2006,
        respectively.
  24
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        9 - STOCKHOLDERS’ EQUITY (CONTINUED)**
  **Warrants
        Granted**
  In
        January 2006, the Company granted warrants to purchase 7,500,000 shares of
        its
        common stock at an exercise price of $0.10 per share to a lender in connection
        with a loan agreement (see Note 8). The fair value of the stock warrants
        estimated on the date of grant using the Black-Scholes option pricing model
        is
        $0.016 per share or $120,000. All of these warrants were exercised in August
        2006.
  In
        March
        2006, the Company granted warrants to purchase 70,955,548 shares of its common
        stock at an exercise price of $0.15 per share to the Investors in the 2006
        Debentures (see Note 7). The fair value of the stock warrants estimated on
        the
        date of grant using the Black-Scholes option pricing model is $0.127 per
        share
        or $9,036,727.
  In
        March
        2006, the Company also granted warrants to purchase 7,095,556 shares of its
        common stock at an exercise price of $0.1693 per share to the placement agent
        in
        connection with the 2006 Debentures (see Note 7). The fair value of the stock
        warrants estimated on the date of grant using the Black-Scholes option pricing
        model is $0.125 per share or $888,779.
  **Warrants
        Expired**
  Warrants
        to purchase 100,000 and 300,000 shares of common stock expired during the
        three
        months and nine months ended July 31, 2006, respectively.
  **Net
        Loss Per Share**
  Securities
        that could potentially dilute basic earnings per share (EPS), in the future,
        that were not included in the computation of diluted EPS because to do so
        would
        have been anti-dilutive for the periods presented, consist of the
        following:
  Warrants
                  to purchase common stock
              
              
              130,955,7242006
                  Debentures and accrued interest (1)
              
              
              43,760,531Options
                  to purchase common stock
              
              
              29,868,750Convertible
                  notes payable and accrued interest
              
              
              1,695,2927%
                  debentures and accrued interest
              
              
              595,3692005
                  Debentures and accrued interest (2)
              
              
              64,558Total
                  as of July 31, 2006
              
              
              206,940,224
  (1)
              Based
                  on a twenty day volume weighted average common stock price discounted
                  by
                  30% at July 31, 2006 of $0.1287.(2)
              Based
                  on a five day volume weighted average common stock price discounted
                  by 30%
                  at July 31, 2006 of $0.1415.
 
 Substantial
        issuances after July 31, 2006 through September 11, 2006
 
 Options
                  granted to purchase shares of common stock
              
              
              3,900,000Common
                  stock issued to consultants
              
              
              1,087,470Common
                  stock issued in connection with the purchase of assets
              
              
              500,000
  25
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
   **NOTE
        10 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS**
  **Research
        and Development Agreement**
  The
        Company and HelloSoft, Inc. (“HelloSoft”) entered into a Services Agreement
        dated as of March 31, 2004 (the “Original Agreement”) pursuant to which
        HelloSoft provides development services relating to the Company’s semiconductor
        technologies. The Original Agreement provides that, upon the Company’s request
        from time to time, HelloSoft is to provide services to be specified pursuant
        to
        mutually agreed upon terms. HelloSoft has assigned to the Company the rights
        to
        any improvements, developments, discoveries or other inventions that may
        be
        generated by HelloSoft in its performance of the services to be provided
        under
        the Original Agreement and its Amendments.
  On
        July
        26, 2005, the Company signed an Amendment that defines and prices Phases
        II and
        III of the technology development program. The Company will expend $445,000
        on
        Phase II and $350,000 on Phase III. Half of Phase II, or $222,500, was paid
        to
        HelloSoft on July 26, 2005, in the form of restricted common stock issued
        at a
        discount of 25% to the closing price of the Company’s common stock on that date,
        and the remaining $222,500 is payable in cash upon completion of certain
        stages
        of Phase II. The restricted common stock issued to HelloSoft was valued at
        $296,667 and recorded as research and development expense. Of the remaining
        $222,500, $62,500 was accrued as of October 31, 2005 and paid during the
        three
        months ended January 31, 2006 and a further $100,000 was paid in May
        2006.
  HelloSoft
        commenced the Phase III development stage during the Company’s second fiscal
        quarter 2006. On July 31, 2006, the Company paid HelloSoft $75,000 in cash
        and
        issued $175,000 of restricted common stock at a discount of 25% to the closing
        price of the Company’s common stock on that date. The restricted common stock
        issued to HelloSoft was valued at $233,333 and capitalized. The Company projects
        that it will pay the remaining $100,000 cash payable in relation to Phase
        III in
        the fourth fiscal quarter 2006.
  In
        July
        2006 and August 2006, the Company and HelloSoft, entered into further amendments
        to the Original Agreement. Pursuant to these amendments, on July 31, 2006,
        the
        Company issued $25,000 of restricted common stock at a discount of 25% to
        the
        closing price of the Company’s common stock on that date. The restricted common
        stock issued to HelloSoft was valued at $33,334, and capitalized. In addition,
        the Company agreed to issue to HelloSoft additional shares of common stock
        valued at $191,394 as of July 31, 2006 as compensation for past
        development services. The value of these shares has been accrued as a liability
        and capitalized as of July 31, 2006.
  On
        February 6, 2006, the Company entered into a technology license agreement
        with
        HelloSoft. Under the agreement, the Company has obtained a license to include
        HelloSoft’s integrated VoIP software suite in the Company’s E30 semiconductor.
        In exchange for this license, the Company has agreed to pay HelloSoft a license
        fee and certain royalties based on its sales of products including the licensed
        technology
  **Concentration
        of Credit Risk**
  The
        Company maintains cash balances in two financial institutions. The balances
        are
        insured by the Federal Deposit Insurance Corporation up to $100,000 per
        institution. At times throughout the year, the Company’s balances may exceed the
        insured limits. At July 31, 2006, the uninsured cash balance was approximately
        $2,877,000. The Company believes it is not exposed to any significant credit
        risk for cash.
  26
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        11 - SEGMENT INFORMATION**
  Summarized
        financial information concerning the Company’s reportable segments is shown in
        the following table:
  For
        the nine months ended July 31, 2006
  Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              7,957
              
              $
              —
              
              $
              7,957Net
                  Sales - foreign
              
              $
              —
              
              $
              51,942
              
              $
              —
              
              $
              51,942Operating
                  income (loss)
              
              $
              (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
  For
        the nine months ended July 31, 2005
  Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              20,258
              
              $
              —
              
              $
              20,258Net
                  Sales - foreign
              
              $
              —
              
              $
              6,300
              
              $
              —
              
              $
              6,300Operating
                  income (loss)
              
              $
              (5,999
              )
              $
              (1,026,843
              )
              $
              (2,726,187
              )
              $
              (3,759,029
              )Depreciation
                  and amortization
              
              $
              5,999
              
              $
              18,493
              
              $
              —
              
              $
              24,492Total
                  Identifiable Assets at July 31, 2005
              
              $
              6,569,097
              
              $
              —
              
              $
              1,098,350
              
              $
              7,667,447
  For
        the Three Months Ended July 31, 2006
  Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              1,025
              
              $
              —
              
              $
              1,025Net
                  Sales - foreign
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Operating
                  income (loss)
              
              $
              (217,527
              )
              $
              (3,154
              )
              $
              (1,457,886
              )
              $
              (1,678,567
              )Depreciation
                  and amortization
              
              $
              217,527
              
              $
              —
              
              $
              —
              
              $
              217,527Total
                  Identifiable Assets at July 31, 2006
              
              $
              7,910,074
              
              $
              —
              
              $
              3,108,278
              
              $
              11,018,352
  27
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 
  **NOTE
        11 - SEGMENT INFORMATION (CONTINUED)**
  For
        the Three Months Ended July 31, 2005
  Telecommunications
                Business
              
              Entertainment
                Business
              
              Unallocable
              
              TotalsNet
                  Sales - domestic
              
              $
              —
              
              $
              10,360
              
              $
              —
              
              $
              10,360Net
                  Sales - foreign
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              —Operating
                  income (loss)
              
              $
              (4,100
              )
              $
              (1,014,300
              )
              $
              (1,166,495
              )
              $
              (2,184,895
              )Depreciation
                  and amortization
              
              $
              4,100
              
              $
              13,297
              
              $
              —
              
              $
              17,397Total
                  Identifiable Assets at July 31, 2005
              
              $
              6,569,097
              
              $
              —
              
              $
              1,098,350
              
              $
              7,667,447
  **NOTE
        12 - RELATED PARTY TRANSACTIONS**
  During
        the three months ended July 31, 2006, the Company deposited $2,500,000 with
        a
        financial institution. One of the Company’s Directors is also a Director of that
        same financial institution.
  **NOTE
        13 - SUBSEQUENT EVENTS**
  **Asset
        Acquisition**
 
 On
        September 1, 2006, the Company purchased substantially all of the assets of
        1021 Technologies, Inc. and 1021 Technologies KK, in exchange for the payment
        of
        $150,000 in cash and 500,000 shares of common stock valued at $78,000. The
        assets purchased include the rights to eight patents, eight patent applications,
        a completed VDSL semiconductor technology, VDSL2 software and hardware
        technology components, and various computer equipment and related
        software.
 
 **Equity
        Transactions**
 
 In
        August
        2006:
 
 (i)
              1,660,559
                  shares of common stock were issued upon conversion of 2006 Debentures
                  with
                  a principal amount of $237,000 and interest of $2,225;(ii)
              10,756,879
                  shares of common stock were issued upon exercise of warrants resulting
                  in
                  gross proceeds of $694,037;(iii)
              1,087,470
                  shares of common stock were issued to consultants for services
                  valued at
                  $164,208;(iv)
              Options
                  to purchase 400,000 shares of common stock were granted. These
                  options
                  were valued at approximately $89,600 and have a ten year term,
                  an exercise
                  price of $0.224 per share, and vest over a period of approximately
                  three
                  years; and(v)
              Investor
                  Warrants to purchase 3,287,062 shares of common stock expired on
                  August
                  31, 2006.
  28
  **RIM
        SEMICONDUCTOR COMPANY AND SUBSIDIARIES**
 **NOTES
        TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  
 **NOTE
        13 - SUBSEQUENT EVENTS (CONTINUED)**
 
 **Equity
        Transactions (continued)**
 
 In
        September 2006:
 
 (i)
              407,279
                  shares of common stock were issued upon conversion of 2006 Debentures
                  with
                  a principal amount of $50,000 and interest of $633;(ii)
              500,000
                  shares of common stock valued at $78,000 were issued in connection
                  with
                  the purchase of substantially all of the assets of 1021 Technologies,
                  Inc.
                  and 1021 Technologies KK (as discussed above); and(iii)
              Options
                  to purchase 3,500,000 shares of common stock were granted. These
                  options
                  were valued at approximately $520,000 and have a ten year term,
                  an
                  exercise price of $0.158 per share, and vest through December
                  2009.
  29
  **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**
  We
        are
        developing advanced transmission technology products to enable data to be
        transmitted across copper telephone wire at speeds and over distances that
        exceed those offered by leading DSL technology providers. Our first chipset
        in a
        planned family of transport processors, the Embarq(TM) E30 digital signal
        processor, was first made available as Release 1.3 to prospective customers
        for
        evaluation and testing in the first quarter of fiscal 2006. We are presently
        working on Release 1.5 of the E30. Our products are designed to
        substantially increase the capacity of existing copper telephone networks,
        allowing telephone companies, office building managers, and enterprise network
        operators to provide enhanced and secure video, data and voice services over
        the
        existing copper telecommunications infrastructure.
  We
        expect
        that system-level products that use our technology will have a significant
        advantage over existing system-level products that use existing broadband
        technologies, such as digital subscriber line (DSL), because such products
        will
        transmit data faster, and over longer distances. We expect products using
        our
        technology will offer numerous advantages to the network operators that deploy
        them, including the ability to support new services, the ability to offer
        existing and new services to previously unreachable locations in their network,
        reduction in total cost of ownership, security and reliability.
  Our
        semiconductor business segment is dependent upon our ability to generate
        future
        revenues and positive cash flow from our advanced transmission technology
        products, such as the E30. No assurance can be provided that our target
        customers will purchase these products in large volumes, or at
        all.
  In
        April
        2000, our NV Entertainment subsidiary entered into a joint venture production
        agreement to produce a feature length film, “Step into Liquid” (the “Film”). We
        own a 50% interest in the joint venture. The financial condition and results
        of
        operations of the joint venture are consolidated with our financial condition
        and results of operations on the accompanying condensed consolidated financial
        statements. The Film was released to theaters in the United States in 2003
        and
        is currently in foreign and DVD distribution. During the three months and
        nine
        months ended July 31, 2006, we received revenues of $1,025 and $59,899,
        respectively, from the Film. During the three months and nine months ended
        July
        31, 2005, we received revenues of $10,360 and $26,558, respectively. As a
        result
        of impairment reviews during the years ended October 31, 2005 and 2004, we
        reduced the carrying value of the Film to $0 on our balance sheet. We do
        not
        intend to make further investment in our entertainment
        business.
  30
  **CRITICAL
        ACCOUNTING POLICIES**
  The
        preparation of our condensed consolidated financial statements in conformity
        with accounting principles generally accepted in the United States of America
        requires us to make estimates and judgments that affect the reported amounts
        of
        assets, liabilities, revenues and expenses, and related disclosure of contingent
        assets and liabilities. Our estimates are based on historical experience,
        other
        information that is currently available to us and various other assumptions
        that
        we believe to be reasonable under the circumstances. Actual results may differ
        from these estimates under different assumptions or conditions and the variances
        could be material.
  Our
        critical accounting policies are those that affect our condensed consolidated
        financial statements materially and involve difficult, subjective or complex
        judgments by management. We have identified the following critical accounting
        policies that affect the more significant judgments and estimates used in
        the
        preparation of our condensed consolidated financial statements.
  **Convertible
        Debentures**
  Proceeds
        of the 2006 and 2005 Debentures are recorded as a liability net of a debt
        discount consisting of the fair values attributed to the related warrants
        and to
        the embedded conversion features. In accordance with EITF issue No. 00-19
        “Accounting for Derivative Financial Instruments Indexed to and Potentially
        Settled in a Company’s Own Stock,” due to certain factors, including an uncapped
        liquidated damages provision in the registration rights agreement and an
        indeterminate amount of shares to be issued upon conversion of the debentures,
        we separately value and account for the embedded conversion features, related
        warrants, and registration rights as derivative liabilities. Accordingly,
        these
        derivative liabilities are measured at fair value with changes in fair value
        reported in earnings as long as they remain classified as liabilities. We
        reassess the classification at each balance sheet date. If the classification
        required under EITF No. 00-19 changes as a result of events during the period,
        the contract is reclassified as of the date of the event that caused the
        reclassification.
  **Stock-Based
        Compensation**
  On
        November 1, 2005, we adopted Statement of Financial Accounting Standards
        No. 123
        (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), which requires the
        measurement and recognition of compensation expense for all share-based payment
        awards made to employees and directors including stock options based on
        estimated fair values. SFAS 123(R) supersedes our previous accounting under
        Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to
        Employees” (“APB 25”) for periods beginning on November 1, 2005. In March 2005,
        the Securities and Exchange Commission issued Staff Accounting Bulletin No.
        107
        (“SAB 107”) relating to SFAS 123(R). We have applied the provisions of SAB 107
        in our adoption of SFAS 123(R).
  We
        early
        adopted SFAS 123(R) using the modified prospective transition method, as
        of
        November 1, 2005, the first day of our fiscal year 2006. Our condensed
        consolidated financial statements as of and for the nine months ended July
        31,
        2006 reflect the impact of SFAS 123(R). In accordance with the modified
        prospective transition method, our condensed consolidated financial statements
        for prior periods have not been restated to reflect, and do not include,
        the
        impact of SFAS 123(R).
  Stock-based
        compensation expense recognized in our condensed consolidated statement of
        operations for the nine months ended July 31, 2006 included compensation
        expense
        for share-based payment awards granted prior to, but not yet vested as of
        October 31, 2005 based on the grant date fair value estimated in accordance
        with
        the pro-forma provisions of SFAS 123 and compensation expense for the
        share-based payment awards granted subsequent to October 31, 2005 based on
        the grant date fair value estimated in accordance with the provisions of
        SFAS
        123(R). 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 $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 pro-forma
        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 $312,619 and $628,293
        for
        the three months and nine months ended July 31, 2006,
        respectively.
  31
  As
        the
        closing price of common stock at July 31, 2005 was below the exercise price
        for
        certain options, previously recorded expense of $20,915 was reversed during
        the
        three months ended July 31, 2005. Accordingly, stock-based compensation expense
        related to employee stock options under other accounting standards for the
        three
        months and nine months ended July 31, 2005 was $(20,915) and $0, respectively.
        Stock-based compensation expense recognized for non-employees under other
        accounting standards was $130,948 and $546,463 for the three months and nine
        months ended July 31, 2005, respectively.
  As
        stock-based compensation expense recognized in the condensed consolidated
        statement of operations for the three months and nine months ended July 31,
        2006
        is based on awards ultimately expected to vest, it has been reduced for
        estimated forfeitures. SFAS 123(R) requires forfeitures to be estimated at
        the
        time of grant and revised, if necessary, in subsequent periods if actual
        forfeitures differ from those estimates. In the Company’s pro-forma information
        required under SFAS 123(R) for the periods prior to fiscal 2006, the Company
        accounted for forfeitures as they occurred.
  **Revenue
        Recognition**
  We
        will
        recognize revenue from the sale of our semiconductor products when evidence
        of
        an arrangement exists, the sales price is determinable or fixed, legal title
        and
        risk of loss has passed to the customer, which is generally upon shipment
        of our
        products to our customers, and collection of the resulting receivable is
        probable. To date we have not recognized any revenues related to the sale
        of our
        semiconductor products.
  We
        recognize revenue from the distribution of our Film and related products
        when
        earned and reasonably estimable in accordance with Statement of Position
        00-2 --
“Accounting by Producers or Distributors of Films” (SOP 00-2). The following are
        the conditions that must be met in order to recognize revenue in accordance
        with
        SOP 00-2:
  (i)
              persuasive
                  evidence of a sale or licensing arrangement with a customer
                  exists;(ii)
              the
                  film is complete and, in accordance with the terms of the arrangement,
                  has
                  been delivered or is available for immediate and unconditional
                  delivery;(iii)
              the
                  license period of the arrangement has begun and the customer can
                  begin its
                  exploitation, exhibition or sale;(iv)
              the
                  arrangement fee is fixed or determinable; and(v)
              collection
                  of the arrangement fee is reasonably
                  assured.
  Under
        a
        rights agreement with our distributor for our Film, we share with the
        distributor in the profits of the Film after the distributor recovers its
        marketing, distribution and other predefined costs and fees. The agreement
        provides for the payment of minimum guaranteed license fees, usually payable
        on
        delivery of the completed film, that are subject to further increase based
        on
        the actual distribution results.
  In
        accordance with the provisions of SOP 00-2, a film is classified as a library
        title after three years from the film’s initial release. The term library title
        is used solely for the purpose of classification and for identifying previously
        released films in accordance with the provisions of SOP 00-2. Revenue
        recognition for such titles is in accordance with our revenue recognition
        policy
        for film revenue.
  **Film
        in Distribution**
  SOP
        00-2
        requires that film costs be capitalized and reported as a separate asset
        on the
        balance sheet. Film costs include all direct negative costs incurred in the
        production of a film, as well as allocations of production overhead and
        capitalized interest. Direct negative costs include cost of scenario, story,
        compensation of cast, directors, producers, writers, extras and staff, cost
        of
        set construction, wardrobe, accessories, sound synchronization, rental of
        facilities on location and post production costs. SOP 00-2 also requires
        that
        film costs be amortized and participation costs accrued, using the
        individual-film-forecast-computation method, which amortizes or accrues such
        costs in the same ratio that the current period actual revenue (numerator)
        bears
        to the estimated remaining unrecognized ultimate revenue as of the beginning
        of
        the fiscal year (denominator). We make certain estimates and judgments of
        future
        gross revenue to be received for the Film based on information received by
        its
        distributor, historical results and management’s knowledge of the industry.
        Revenue and cost forecasts are continually reviewed by management and revised
        when warranted by changing conditions. A change to the estimate of gross
        revenues for the Film may result in an increase or decrease to the percentage
        of
        amortization of capitalized film costs relative to a previous
        period.
  32
  In
        addition, SOP 00-2 also requires that if an event or change in circumstances
        indicates that an entity should assess whether the fair value of a film is
        less
        than its unamortized film costs, then an entity should determine the fair
        value
        of the film and write-off to the statement of operations the amount by which
        the
        unamortized film costs exceeds the film’s fair value. As a result of impairment
        reviews during the years ended October 31, 2005 and 2004, we wrote down the
        carrying value attributed to the Film to $0. This resulted in an impairment
        of
        $1,009,777 being recognized during the three months and nine months ended
        July
        31, 2005.
  **Capitalized
        Software Development Costs**
  Capitalization
        of computer software development costs begins upon the establishment of
        technological feasibility. Technological feasibility for our computer software
        is generally based upon achievement of a detail program design free of high-risk
        development issues and the completion of research and development on the
        product
        hardware in which it is to be used. The establishment of technological
        feasibility and the ongoing assessment of recoverability of capitalized computer
        software development costs require considerable judgment by management with
        respect to certain external factors, including, but not limited to,
        technological feasibility, anticipated future gross revenue, estimated economic
        life and changes in software and hardware technology.
  Amortization
        of capitalized computer software development costs commences when the related
        products become available for general release to customers. Amortization
        is
        provided on a product-by-product basis. The annual amortization is the greater
        of the amount computed using (a) the ratio that current gross revenue for
        a
        product bears to the total of current and anticipated future gross revenue
        for
        that product, or (b) the straight-line method over the remaining estimated
        economic life of the product. The estimated useful life of our existing product
        is seven years.
  We
        periodically perform reviews of the recoverability of our capitalized software
        development costs. At the time a determination is made that capitalized amounts
        are not recoverable based on the estimated cash flows to be generated from
        the
        applicable software, the capitalized costs of each software product is then
        valued at the lower of its remaining unamortized costs or net realizable
        value.
  No
        assurance can be given that products we release based upon the licensed
        technology will receive market acceptance. If we determine in the future
        that
        our capitalized costs are not recoverable, the carrying amount of the technology
        license would be reduced, and such reduction could be material.
  We
        commenced amortization of capitalized software development costs during December
        2005 and have recorded amortization expense of $216,460 and $531,692 during
        the
        three months and nine months ended July 31, 2006, respectively.
  **Research
        and Development**
  Research
        and development expenses relate to the design and development of advanced
        transmission technology products. We outsource to independent third parties
        all
        of our design and development activities. Payments made to independent software
        developers under development agreements are capitalized to software development
        costs once technological feasibility is established or if the development
        costs
        have an alternative future use. Prior to establishing technological feasibility,
        software development costs are expensed to research and development costs
        and to
        cost of sales subsequent to confirmation of technological feasibility. Internal
        development costs are capitalized to software development costs once
        technological feasibility is established. Technological feasibility is evaluated
        on a product-by-product basis.
  Research
        and development expenses generally consist of salaries, related expenses
        for
        engineering personnel and third-party development costs incurred.
  **Technology
        Licenses**
  We
        have
        entered into two technology license agreements that may impact our future
        results of operations. Royalty payments, if any, under each license would
        be
        reflected in our consolidated statements of operations as a component of
        cost of
        sales.
  In
        April
        2002, we entered into a development and license agreement with Adaptive
        Networks, Inc. (“Adaptive”), to acquire a worldwide, perpetual license to
        Adaptive’s technology, intellectual property and patent portfolio. The licensed
        technology provides the core technology for our semiconductor products. We
        have
        also jointly developed technology with Adaptive that enhances the licensed
        technology.
  33
  In
        consideration of the development services provided and the licenses granted
        to
        us by Adaptive, we paid Adaptive an aggregate of $5,571,000 between 2002
        and
        2004 consisting of cash and our assumption of certain Adaptive liabilities.
        In
        addition to the above payments, Adaptive is entitled to a percentage of any
        net
        sales of products sold by us and any license revenue we receive from the
        licensed and co-owned technologies less the first $5,000,000 that would
        otherwise be payable to them under this royalty arrangement.
  In
        February 2006, we obtained a license to include HelloSoft, Inc.’s integrated
        VoIP software suite in the Embarq TM E30
        semiconductor. We believe the inclusion of VoIP features in our products
        will
        eliminate VoIP dedicated components currently needed in modems and thereby
        lower
        their production costs by more than 20%. In consideration of this license,
        we
        have paid HelloSoft a license fee and will pay certain royalties based on
        our
        sale of products, including the licensed technology.
  **RESULTS
        OF OPERATIONS**
  COMPARISON
        OF THE THREE MONTHS AND NINE MONTHS ENDED JULY 31, 2006 AND THE THREE MONTHS
        AND
        NINE MONTHS ENDED JULY 31, 2005
  REVENUES .  
        Revenues for the three months and nine months ended July 31, 2006 were $1,025
        and $59,899, respectively. Of this amount, $1,025 and $7,957 was in the form
        of
        guarantee and/or license payments related to the U.S. distribution of the
        Film
        and $0 and $51,942 was related to foreign distribution of the Film during
        the
        three months ended and nine months ended July 31, 2006, respectively. Revenues
        for the three months and nine months ended July 31, 2005 were $10,360 and
        $26,558, respectively and were from our entertainment business. Revenues
        decreased 90% or $9,355 for the three months ended July 31, 2006 due to a
        decrease in the value of license payments and increased 126% or $33,341 for
        the
        nine months ended July 31, 2006 due primarily to an increase in the number
        and
        value of license agreements for distribution of the Film or portions of the
        Film
        in foreign markets. No revenues were recorded in connection with our
        semiconductor business during the three months and nine months ended July
        31,
        2006 and 2005.
  OPERATING
        EXPENSES . 
        Operating expenses included cost of sales, impairment of film in distribution,
        amortization of technology license and capitalized software development fees,
        research and development expenses in connection with the semiconductor business,
        and selling, general and administrative expenses.
  Total
        operating expenses decreased 23% or $515,663 to $1,679,592 for the three
        months
        ended July 31, 2006 from $2,195,255 for the three months ended July 31, 2005.
        The decrease in total operating expenses for the three months ended July
        31,
        2006 was due primarily to the Company’s decision, during the three months ended
        July 31, 2005, to write down the carrying value of the Film in Distribution
        to
        $0, and recognizing a resultant loss of $1,009,777.  During the three
        months ended July 31, 2006, there were also the following changes: amortization
        of technology license and capitalized software development fees increased
        from
        $0 to $216,460, research and development expenses decreased by 60% or $176,779
        to $119,888, and sales, general and administrative expenses increased by
        51% or
        $454,433 to $1,343,244. Total operating expenses increased 19% or $4,488,496
        for
        the nine months ended July 31, 2006 from $3,785,587 for the nine months ended
        July 31, 2005. The increase in total operating expenses for the nine months
        ended July 31, 2006 was due primarily to increases in amortization of technology
        license and capitalized software development fees of $531,692, and selling,
        general and administrative expenses of $1,240,838, offset by a decrease in
        cost
        of sales of $11,945, the Company’s decision, during the three months ended July
        31, 2005, to write down the carrying value of the Film in Distribution to
        $0,
        and recognizing a resultant loss of $1,009,777, and a decrease of $47,899
        in
        research and development expenses.
  Cost
        of
        sales for the three months and nine months ended July 31, 2005 were $0 and
        $11,945, respectively. The cost of sales represents the amortization of film
        cost for the Film. The decrease for the three months and nine months ended
        July
        31, 2006 was a result of the impairment of the Film costs in 2005, which
        reduced
        the carrying value of the Film costs to $0.
  Amortization
        of technology license and capitalized software development fees was $216,460
        and
        $531,692 for the three months and nine months ended July 31, 2006 due to
        the
        commencement of amortization related to the market release of the E30 (Release
        1.3), to prospective customers for evaluation and testing during December
        2005.
        No amortization was recorded prior to this period.
  34
  Research
        and development expenses decreased by $176,779 to $119,888 or 60% for the
        three
        months ended July 31, 2006 from $296,667 for the three months ended July
        31,
        2005. Research and development expenses decreased 16% or $47,899, from $303,720
        to $255,821 for the nine months ended July 31, 2006. The decrease is principally
        the result of capitalizing costs associated with releases 1.4, 1.4.1 and
        1.4.2
        of the E30, all which reached technological feasibility during the three
        months
        ended July 31, 2006, represented by additional payments made to HelloSoft,
        Inc.
        (“HelloSoft”) in accordance with the terms of our services agreement, as
        amended, and the issuance of stock options in connection with research and
        development activities. During the three months and nine months ended July
        31,
        2005, the projects had not reached technological feasibility, and therefore
        were
        expensed as research and development.
  Total
        selling, general and administrative expenses increased 51% or $454,433 to
        $1,343,244 for the three months ended July 31, 2006 from $888,811 for the
        three
        months ended July 31, 2005. Total selling, general and administrative expenses
        increased 50% or $1,240,838 to $3,700,983 for the nine months ended July
        31,
        2006 from $2,460,145 for the nine months ended July 31, 2005. The increases
        are
        primarily the result of an increase in salaries and wages due to an increase
        in
        employees, professional fees related to the filing of a registration statement
        and amended Form 10-QSBs and a Form 10-KSB, and stock-based compensation
        related
        to options and restricted common stock issued to key employees, directors,
        consultants, and service providers.
  OTHER
        (INCOME) EXPENSES . 
        Other expenses included interest expense, a loss on the change in fair value
        of
        derivative liabilities, amortization of deferred financing costs, and a loss
        on
        exchange of notes payable into common stock.
  Total
        other expenses increased 1,147% or $14,757,828 to $13,470,853 for the three
        months ended July 31, 2006 from total other income - net of $1,286,975 for
        the
        three months ended July 31, 2005. Total other expenses increased 3,206% or
        $22,394,085 to $21,695,545 for the nine months ended July 31, 2006 from total
        other income - net of $698,540 for the nine months ended July 31, 2005. The
        increases are primarily for the reasons noted below.
  Interest
        expense increased 153% or $834,466 to $1,378,138 for the three months ended
        July
        31, 2006 from $543,672 for the three months ended July 31, 2005. Interest
        expense increased 684% or $8,092,589 to $9,275,907 for the nine months ended
        July 31, 2006 from $1,183,318 for the nine months ended July 31, 2005. The
        increases are primarily due to the value allocated to the warrants related
        to
        the 2006 Debentures, interest on the 2006 Debentures, and the amortization
        and
        write-off of debt discount due to conversions of the convertible debentures
        and
        repayment of a note payable.
  We
        recognized a loss on the change in fair value of derivative liabilities of
        $11,643,875 and $12,128,413 for the three months and nine months ended July
        31,
        2006, respectively. This represented an increase of $13,442,978 and $13,927,516
        for the three months and nine months ended July 31, 2006, respectively, from
        the
        gain on the change in fair value of derivative liabilities of $1,799,103
        recognized for both the three months and nine months ended July 31, 2005,
        respectively. This increase was due primarily to an increase in our closing
        stock price as of July 31, 2006 as compared to July 31, 2005.
  The
        amortization of deferred financing costs increased 562% or $381,015 to $448,840
        for the three months ended July 31, 2006 from $67,825 for the three months
        ended
        July 31, 2005. The amortization of deferred financing costs increased 741%
        or
        $896,725 to $1,017,659 for the nine months ended July 31, 2006 from $120,934
        for
        the nine months ended July 31, 2005. The increase is primarily a result of
        the
        conversions of the 2005 Debentures, repayment of a note payable, and the
        amortization of additional deferred financing costs related to the 2006
        Debentures. Upon conversion or repayment of debt prior to its maturity date,
        a
        pro-rata share of debt discount and deferred financing costs are written
        off and
        recorded as expense.
  Other
        expenses also increased in the nine months ended July 31, 2006 due to the
        loss recognized on exchange of notes payable into common stock of
        $446,386.
  Other
        income in 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.
  35
  Other
        income in the nine months ended July 31, 2005 consisted primarily of a gain
        on
        sale of property and equipment of $20,000, a gain on exchange of Redeemable
        Series B Preferred Stock into common stock of $55,814, and other miscellaneous
        gains of $132,883, arising from the forgiveness of liabilities and the
        conversion of liabilities into notes payable.
  NET
        LOSS .
 
        For the three months ended July 31, 2006 our net loss increased 1,587% or
        $14,251,500 to $15,149,420 from $897,920 primarily as the result of higher
        interest costs, a loss on the change in fair value of derivative liabilities,
        higher amortization of deferred financing costs, higher selling, general,
        and
        administrative expense, and higher amortization of technology license and
        capitalized software development fees, partially offset by lower research
        and
        development expenses and no loss on the write down of the carrying value
        of the
        Film in Distribution to $0, which occurred during the three months ended
        July
        31, 2005.
  For
        the
        nine months ended July 31, 2006, the net loss increased 754% or $23,063,653
        to
        $26,124,142 from $3,060,489 primarily as the result of higher interest costs,
        a
        loss on the change in fair value of derivative liabilities, higher amortization
        of deferred financing costs, higher selling, general, and administrative
        expense, higher amortization of technology license and capitalized software
        development fees, and miscellaneous gains which occurred during the nine
        months
        ended July 31, 2005, which did not reoccur during the nine months ended July
        31,
        2006; partially offset by lower research and development expenses, the gain
        on
        the forgiveness of principal and interest on the promissory note to Zaiq
        Technologies, Inc., and no loss on the write down of the carrying value of
        the
        Film in Distribution to $0, which occurred during the three months ended
        July
        31, 2005.
  **LIQUIDITY
        AND CAPITAL RESOURCES**
  Cash
        balances totaled $2,864,405 at September 11, 2006 and $2,969,894 at July
        31,
        2006 compared to $373,481 at October 31, 2005.
  Net
        cash
        used in operating activities was $2,314,894 for the nine months ended July
        31,
        2006, compared to $1,752,045 for the nine months ended July 31, 2005. The
        increase in cash used in operations was principally the result of the following
        items:
  ·
              an
                  increase in the net loss, which was $26,124,142, compared to $3,060,489
                  for the nine months ended July 31, 2005; and·
              an
                  increase for the nine months ended July 31, 2006 of accounts payable
                  and
                  accrued liabilities of $519,473, compared to a decrease of accounts
                  payable and accrued liabilities for the nine months ended July
                  31, 2005 of
                  $66,248, resulting in a net decrease in cash used of
                  $585,721;
  36
 impacted
        primarily by the following non-cash items:
  ·
              interest
                  expense related to fair value of Investors’ warrants at issuance in excess
                  of debt discount of $5,608,156 for the nine months ended July 31,
                  2006;·
              loss
                  on the change in fair value of derivative liabilities of $12,128,413
                  for
                  the nine months ended July 31, 2006, compared to a gain of $1,799,103
                  for
                  the nine months ended July 31, 2005;·
              increased
                  amortization of deferred financing costs, which were $1,017,659
                  for the
                  nine months ended July 31, 2006, compared to $120,934 for the nine
                  months
                  ended July 31, 2005, principally due to increased conversions of
                  the 2005
                  Debentures, the repayment of a note payable, and the amortization
                  of
                  additional deferred financing costs related to the 2006
                  Debentures;·
              increased
                  amortization of debt discount on notes, which was $3,290,683 for
                  the nine
                  months ended July 31, 2006, compared to $941,531 for the nine months
                  ended
                  July 31, 2005, principally due to increased conversions of the
                  2005
                  Debentures, the repayment of a note payable, and the amortization
                  of
                  additional debt discount related to the 2006
                  Debentures;·
              increased
                  amortization of technology license and capitalized software development
                  fees, which was $531,692 for the nine months ended July 31, 2006,
                  compared
                  to $0 for the nine months ended July 31, 2005, due to the commencement
                  of
                  amortization related to the market release of the E30 (Release
                  1.3) to
                  prospective customers for evaluation and testing;·
              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,
                  compared to a gain on the forgiveness of liabilities of $99,369
                  for the
                  nine months ended July 31, 2005;·
              increased
                  stock-based compensation expense, which was $1,528,429 for the
                  nine months
                  ended July 31, 2006 compared to $1,295,630 for the nine months
                  ended July
                  31, 2005;·
              loss
                  on exchange of notes payable into common stock of $446,386 for
                  the nine
                  months ended July 31, 2006; and·
              impairment
                  of Film in Distribution of $1,009,777 for the nine months ended
                  July 31,
                  2005.
  Net
        cash
        used by investing activities was $381,539 for the nine months ended July
        31,
        2006 compared to $11,161 for the nine months ended July 31, 2005. The increase
        was due to the acquisition of property and equipment of $6,539 and technology
        license and software development fees of $375,000.
  Net
        cash
        provided by financing activities was $5,292,846 for the nine months ended
        July
        31, 2006 compared to $2,691,502 for the nine months ended July 31, 2005.
        Net
        cash provided by financing activities for the nine months ended July 31,
        2006
        was the result of proceeds from the 2006 Debentures of $6,000,000, proceeds
        from
        the exercise of warrants of $697,407, and proceeds from the issuance of a
        note
        payable of $750,000, offset by capitalized financing costs of $742,450, and
        total payments of $1,404,613 in connection with the repayment of notes payable
        of $944,291 and convertible notes payable of $460,322. Net cash provided
        by
        financing activities for the nine months ended July 31, 2005 was the result
        of
        proceeds from the issuance of common stock in the amount of $800,100, proceeds
        from the 2005 Debentures of $3,500,000 and proceeds from notes payable of
        $300,000, offset by capitalized financing costs of $422,010, and total payments
        of $1,521,588 in connection with the repayment of notes payable of $1,120,048
        and convertible notes payable of $401,540.
  37
 Since
          inception, we have funded our operations primarily through the issuance
          of our
          common stock and debt securities. Our recent financings are discussed
          below.
 In
          March
          2006, we raised gross proceeds of $6.0 million from the private placement
          to 17
          institutional and individual investors of our 2006 Debentures. We received
          net
          proceeds of approximately $4.5 million from the proceeds of the 2006 Debentures,
          after the payment of offering related fees and expenses and after the repayment
          in full of notes payable, made in December 2005 and January 2006, in the
          aggregate amount of $810,000. $5,600,000 of principal amount was outstanding
          as
          of July 31, 2006 and matures in March 2008.
  In
        December 2005 and January 2006, we entered into secured bridge loan agreements
        with a third party pursuant to which we borrowed $750,000. After payment
        of due
        diligence fees and transaction related fees and expenses, we received net
        proceeds of $672,470. An amount equal to 108% of the principal amount of
        the
        loans was due and payable on the earlier of May 25, 2006 or the date we effect
        a
        financing transaction or series of transactions resulting in gross proceeds
        to
        us of at least $2,000,000. We repaid the loans in their entirety from the
        proceeds of the 2006 Debentures.




In
      May
      2005, we sold $3,500,000 in aggregate principal amount of our 2005 Debentures,
      receiving net proceeds of approximately $3.11 million after the payment of
      offering related costs. As of July 31, 2006, $3,494,436 of principal amount
      and
      $109,596 of interest of the 2005 Debentures had been converted into 170,820,675
      shares of our common stock and there was $5,564 of principal amount of the
      2005
      Debentures outstanding. The 2005 Debentures mature in May 2008.




In
      December 2003, April 2004 and May 2004, we raised net proceeds of approximately
      $1,024,000 from the private placement to certain private and institutional
      investors of our three year 7% Convertible Debentures. $75,000 of principal
      issued in December 2003 was outstanding as of July 31, 2006 and matures in
      December 2006.




As
      of
      September 11, 2006, we had cash balances of $2,864,405. As of the date of this
      Report, our expenses total approximately $240,000 per month. Although management
      believes funds on hand will enable us to meet our liquidity needs for at least
      the next 12 months, we will need to raise additional funds to fulfill our
      business plan and to meet our future operating requirements, prior to the
      receipt of revenues from our semiconductor business.




We
      may
      not be successful in our efforts to raise additional funds. Our cash needs
      could
      be heavier than anticipated in which case we could be forced to raise additional
      capital. Even after we begin to sell our products, we do not yet know what
      payment terms will be required by our customers or if our products will be
      successful. At the present time, we have no commitments for any additional
      financing, and there can be no assurance that, if needed, additional capital
      will be available to us on commercially acceptable terms or at
      all.




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




**Going
      Concern Consideration**




We
      have
      continued losses in each of our years of operation and negative cash flow,
      and
      have had liquidity problems. Our independent registered public accounting firm’s
      report accompanying our audited consolidated financial statements for the years
      ended October 31, 2005 and 2004 includes an explanatory paragraph relating
      to
      the uncertainty about our ability to continue as a going concern. This
      qualification may make it more difficult for us to raise additional capital
      when
      needed. The accompanying consolidated financial statements do not include any
      adjustments relating to the recoverability of reported assets or liabilities
      should we be unable to continue as a going concern.




We
      have
      been able to continue based upon our receipt of funds from the issuance of
      equity securities and borrowings, and by acquiring assets or paying expenses
      by
      issuing stock. Although our liquidity improved significantly as a result of
      a
      series of transactions completed during the nine months ended July 31, 2006
      and
      Management believes funds on hand will enable us to meet our liquidity needs
      through at least August 2007, our continued existence beyond that date may
      be
      dependent upon our continued ability to raise funds through the issuance of
      securities or borrowings, and our ability to acquire assets or satisfy
      liabilities by the issuance of stock. Management’s plans in this regard are to
      obtain other debt and equity financing until profitable operation and positive
      cash flow are achieved and maintained.




**IMPACT
      OF RECENTLY ISSUED ACCOUNTING STANDARDS**




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




38





SFAS
      154
      are effective for accounting changes made in fiscal years beginning after
      December 15, 2005. We will apply these requirements to any accounting changes
      after the implementation date.




In
      June
      2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 05-1,
“Accounting for the Conversion of an Instrument That Becomes Convertible upon
      the Issuer’s Exercise of a Call Option” (“EITF No. 05-1”) which indicates that
      no gain or loss should be recognized upon the conversion of an instrument that
      becomes convertible as a result of an issuer’s exercise of a call option
      pursuant to the original terms of the instrument. EITF No. 05-1 is effective
      for
      annual or interim periods beginning after June 28, 2006. The adoption of this
      pronouncement is not expected to have an impact on our consolidated financial
      position, results of operations, or cash flows




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




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




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




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




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





39





**ITEM
      3.  CONTROLS AND PROCEDURES**




**EVALUATION
      OF DISCLOSURE CONTROLS AND PROCEDURES.** The
      Company, under the supervision and with the participation of the Company’s
      management, including the Company’s Chief Executive Officer and Chief Financial
      Officer, has evaluated the effectiveness of the design and operation of the
      Company’s “disclosure controls and procedures,” as such term is defined in Rule
      13a-15(e) promulgated under the Exchange Act as of this report. The Company’s
      Chief Executive Officer and Chief Financial Officer has concluded based upon
      his
      evaluation that the Company’s disclosure controls and procedures were effective
      as of the end of the period covered by this report to provide reasonable
      assurance that material information required to be disclosed by the Company
      in
      reports that it files or submits under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in SEC rules and
      forms.





Management
      is aware that there is a lack of segregation of duties at the Company due to
      the
      small number of employees dealing with general administrative and financial
      matters. This constitutes a significant deficiency in the internal controls.
      In
      the past, management had decided that considering the employees involved, the
      control procedures in place, and the outsourcing of certain financial functions,
      the risks associated with such lack of segregation were low and the potential
      benefits of adding additional employees to clearly segregate duties did not
      justify the expenses associated with such increases. Management periodically
      reevaluates this situation. In light of the Company’s receipt of additional
      financing in March 2006, over the past several months the Company has and
      intends to continue to increase staffing to mitigate the current lack of
      segregation of duties within the general administrative and financial
      functions.





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





**CHANGES
      IN INTERNAL CONTROLS OVER FINANCIAL REPORTING** .
      During
      the three months ended July 31, 2006, the Company consulted with its counsel,
      outside auditors and other accounting professionals, and improved its disclosure
      controls and procedures in the area of financial reporting of complex equity
      transactions. In addition, the Company hired a Controller during the period.
      Except as described above, there have been no changes in our internal controls
      over financial reporting that have materially affected, or are reasonably likely
      to affect these controls during the three months ended July 31,
      2006.





40





**PART
      II - OTHER INFORMATION**







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




During
      the three months ended July 31, 2006, the Company sold or issued unregistered
      securities as follows:




In
      June
      2006, we issued 443,814 shares of common stock upon conversion of convertible
      debentures with a principal amount of $35,000 and interest of
      $1,087.





In
      July
      2006, we issued:


(i)
      4,453,150 shares of common stock upon conversion of convertible debentures
      with
      a principal amount


of
      $450,000 and interest of $9,664;





(ii)
      1,487,155 shares of common stock to 17 individual and institutional investors
      in
      payment of


accrued
      interest on our convertible debentures;





(iii)
      1,624,752 shares of common stock to five consultants in consideration for
      consulting services


valued
      at
      $362,217;





(iv)
      1,100,000 stock options at an exercise price of $0.18 to three employees, one
      director and one


consultant;
      and





(v)
      833,069 shares of common stock to five investors upon exercise of warrants
      resulting in gross


proceeds
      of $128,876.





In
      August
      2006, subsequent to the three months ended July 31, 2006, we
      issued:


(i)
      10,756,879 shares of common stock to thirteen investors upon exercise of
      warrants resulting in gross proceeds of $694,037;





(ii)
      400,000 stock options at an exercise price of $0.22 per share to one employee
      and one consultant; and





(iii)
      1,087,470 shares of unregistered common stock to one consultant in consideration
      for consulting services


valued
      at
      $164,208.





In
      September 2006, subsequent to the three months ended July 31, 2006, we
      issued:


(i)
      3,500,000 stock options at an exercise price of $0.158 per share to one
      employee; and





(ii)
      500,000 shares of common stock valued at $78,000 to a company as partial payment
      for assets acquired by the Company.





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
      6.  Exhibits**




10.1
            Employment
                Agreement dated September 1, 2006 by and between David Wojcik and
                the
                Company(1)*31.1
            Rule
                13a-14/15d-14(a) Certification*31.2
            Section
                1350 Certification*


___________________________




*
      Filed
      herewith.


(1) 
      Signifies a management agreement or compensatory plan or
      arrangement.





41




**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 14, 2006
            BY:
            /s/ Brad
                KetchBrad
                KetchPresident
                and Chief Executive Officer(Principal
                Executive Officer, Financial andAccounting
                Officer and Authorized Signatory)




42