**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 APRIL 30, 2006**





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


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





*COMMISSION
      FILE NUMBER 0-21785*





**RIM
      SEMICONDUCTOR COMPANY**





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








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





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








Check
      whether the issuer (1) has filed all reports required to be filed by Section
      13
      or 15(d) of the Exchange Act during the past 12 months (or for such period
      that
      the registrant was required to file such reports), and (2) has been subject
      to
      such filing requirements for the past 90 days.


Yes x No  ̈





The
      number of shares of the issuer’s Common Stock, par value $.001 per share,
      outstanding as of June 12, 2006, was 323,042,763.





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










**FORM
      10-QSB**





**RIM
      SEMICONDUCTOR COMPANY**





**APRIL
      30, 2006**





**TABLE
      OF CONTENTS**





**PAGE**


PART
                I -FINANCIAL
                INFORMATIONITEM
                1.FINANCIAL
                STATEMENTSCONDENSED
                CONSOLIDATED BALANCE SHEET
                (Unaudited)At
                April 30, 2006
            2CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS
                (Unaudited)For
                the Six and Three Months Ended April 30, 2006 and
                2005
            3CONDENSED
                CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
                (Unaudited)For
                the Six Months Ended April 30,
                2006
            5CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS
                (Unaudited)For
                the Six Months Ended April 30, 2006 and
                2005
            6NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL
                STATEMENTS
            8ITEM
                2.MANAGEMENT’S
                DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
            28ITEM
                3.CONTROLS
                AND PROCEDURES
            36PART
                II - OTHER INFORMATIONITEM
                2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
                PROCEEDS
            38ITEM
                4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            39ITEM
                6.EXHIBITS
            39SIGNATURES
            41




1


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      I.   FINANCIAL STATEMENTS**





**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED BALANCE SHEET**


( Unaudited )





ASSETS





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





LIABILITIES
      AND STOCKHOLDERS’ EQUITY





Current
                Liabilities:Convertible
                notes payable
            
            $
            525,000Convertible
                debentures (net of debt discount of $24,136)
            
            
            100,864Conversion
                  option liability
            
            
            2,588,813Account
                payable and accrued expenses
            
            
            785,473TOTAL
                CURRENT LIABILITIES
            
            
            4,000,150Long-term
                portion of convertible debentures (net of debt discount of
                $4,732,137)
            
            
            1,308,427TOTAL
                LIABILITIES
            
            
            5,308,577Commitments,
                Contingencies and Other MattersStockholders’
                Equity:Preferred
                stock - $0.01 par value; 15,000,000 shares authorized;
              -0-
                shares issued and outstanding
            
            
            —Common
                stock - $0.001 par value; 900,000,000 shares authorized;
              323,542,617
                shares issued and 323,042,763 shares outstanding
            
            
            323,543Treasury
                stock - 499,854 shares at cost
            
            
            (7,498
            )Additional
                paid-in capital
            
            
            75,096,501Unearned
                compensation
            
            
            (1,687,796
            )Accumulated
                deficit
            
            
            (66,930,791
            )TOTAL
                STOCKHOLDERS’ EQUITY
            
            
            6,793,959TOTAL
                LIABILITIES AND STOCKHOLDERS’ EQUITY
            
            $
            12,102,536





See
      notes
      to condensed consolidated financial statements.


2


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF
      OPERATIONS**


(U naudited )





For
                the Six Months Ended
              April
                30,2006
            
            2005REVENUES
            
            $
            58,874
            
            $
            16,198OPERATING
                EXPENSES:Cost
                of sales
            
            
            —
            
            
            11,945Amortization
                of technology license and capitalizedsoftware
                development fee
            
            
            315,232
            
            
            —Research
                and development expenses (includingstock
                based compensation of $26,860 and$0,
                respectively)
            
            
            137,600
            
            
            7,053Selling,
                general and administrative expenses(including
                stock based compensation of $983,710and
                $888,930, respectively)
            
            
            2,356,072
            
            
            1,571,334TOTAL
                OPERATING EXPENSES
            
            
            2,808,904
            
            
            1,590,332OPERATING
                LOSS
            
            
            (2,750,030
            )
            
            (1,574,134
            )OTHER
                (INCOME) EXPENSES:Interest
                expense
            
            
            2,223,816
            
            
            639,646Amortization
                of deferred financing costs
            
            
            568,819
            
            
            53,109Gain
                on forgiveness of principal and intereston
                Zaiq Note
            
            
            (1,169,820
            )
            
            —Gain
                on sale of property and equipment
            
            
            —
            
            
            (20,000
            )Gain
                on exchange of Redeemable Series B PreferredStock
                into common stock
            
            
            —
            
            
            (55,814
            )Loss
                on exchange of notes payable into common stock
            
            
            446,386
            
            
            —Other
            
            
            (3,000
            )
            
            (28,506
            )TOTAL
                OTHER (INCOME) EXPENSES
            
            
            2,066,201
            
            
            588,435NET
                LOSS
            
            $
            (4,816,231
            )
            $
            (2,162,569
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.02
            )
            $
            (0.02
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            267,242,791
            
            
            93,198,867





See
      notes
      to condensed consolidated financial statements.


3


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS**


(Unaudited)





For
                the Three Months Ended
              April
                30,2006
            
            2005REVENUES
            
            $
            18,698
            
            $
            7,397OPERATING
                EXPENSES:Cost
                of sales
            
            
            —
            
            
            5,320Amortization
                of technology license and capitalizedsoftware
                development fee
            
            
            212,536
            
            
            —Research
                and development expenses (includingstock
                based compensation of $5,044 and$0,
                respectively)
            
            
            52,556
            
            
            —Selling,
                general and administrative expenses(including
                stock based compensation of $333,958and
                $609,381, respectively)
            
            
            1,549,001
            
            
            974,388TOTAL
                OPERATING EXPENSES
            
            
            1,814,093
            
            
            979,708OPERATING
                LOSS
            
            
            (1,795,395
            )
            
            (972,311
            )OTHER
                (INCOME) EXPENSES:Interest
                expense
            
            
            978,860
            
            
            360,864Amortization
                of deferred financing costs
            
            
            324,852
            
            
            28,490Gain
                on sale of property and equipment
            
            
            —
            
            
            (20,000
            )Gain
                on exchange of Redeemable Series B PreferredStock
                into common stock
            
            
            —
            
            
            (55,814
            )Loss
                on exchange of notes payable into common stock
            
            
            446,386
            
            
            —Other
            
            
            (3,000
            )
            
            (28,506
            )TOTAL
                OTHER (INCOME) EXPENSES
            
            
            1,747,098
            
            
            285,034NET
                LOSS
            
            $
            (3,542,493
            )
            $
            (1,257,345
            )BASIC
                AND DILUTED NET LOSS PER COMMON SHARE
            
            $
            (0.01
            )
            $
            (0.01
            )WEIGHTED
                AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
            
            
            306,633,326
            
            
            99,061,445





See
      notes
      to condensed consolidated financial statements.


4


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENT OF STOCKHOLDERS’
EQUITY**


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


(Unaudited)





Common
                Stock
            
            Treasury
                Stock
            
            Additional
              Paid-in
              Capital
            
            Unearned
              Compensation
            
            Accumulated
              Deficit
            
            Total
              Stockholders’
              EquityShares
            
            Amount
            
            Shares
            
            AmountBalance
                at October 31, 2005
            
            
            184,901,320
            
            $
            184,902
            
            
            —
            
            
            —
            
            $
            63,679,065
            
            $
            (22,771
            )
            $
            (62,114,560
            )
            $
            1,726,636Repurchase
                of common
              stock
                for cash
            
            
            —
            
            
            —
            
            
            (499,854
            )
            $
            (7,498
            )
            
            —
            
            
            —
            
            
            —
            
            
            (7,498
            )Issuance
                of common stock
              under
                consulting
              agreements
            
            
            11,000,000
            
            
            11,000
            
            
            —
            
            
            —
            
            
            1,859,000
            
            
            (1,870,000
            )
            
            —
            
            
            —Issuance
                of common stock
              for
                conversion of
              convertible
                deben-
              tures
                and accrued
              interest
            
            
            104,170,465
            
            
            104,170
            
            
            —
            
            
            —
            
            
            1,743,155
            
            
            —
            
            
            —
            
            
            1,847,325Issuance
                of common stock
              for
                convertible notes
              payable
                and accrued
              interest
            
            
            35,714
            
            
            36
            
            
            —
            
            
            —
            
            
            14,964
            
            
            —
            
            
            —
            
            
            15,000Issuance
                of common stock
              for
                notes payable
              and
                accrued interest
            
            
            12,064,494
            
            
            12,064
            
            
            —
            
            
            —
            
            
            1,278,837
            
            
            —
            
            
            —
            
            
            1,290,901Issuance
                of common stock
              upon
                exercise of
              warrants
            
            
            11,370,624
            
            
            11,371
            
            
            —
            
            
            —
            
            
            557,160
            
            
            —
            
            
            —
            
            
            568,531Stock
                options issued to
              key
                employees and
              advisory
                board
              member
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            805,595
            
            
            (805,595
            )
            
            —
            
            
            —Warrants
                issued with
              notes
                payable
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            120,000
            
            
            —
            
            
            —
            
            
            120,000Warrants
                issued with
              convertible
                debentures
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            2,485,490
            
            
            —
            
            
            —
            
            
            2,485,490Warrants
                issued to
              placement
                agent
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,792,452
            
            
            —
            
            
            —
            
            
            1,792,452Reclassification
                of
              conversion
                option
              liability
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            760,783
            
            
            —
            
            
            —
            
            
            760,783Amortization
                of unearned
              compensation
                expense
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            1,010,570
            
            
            —
            
            
            1,010,570Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (4,816,231
            )
            
            (4,816,231
            )Balance
                at April 30, 2006
            
            
            323,542,617
            
            $
            323,543
            
            
            (499,854
            )
            $
            (7,498
            )
            $
            75,096,501
            
            $
            (1,687,796
            )
            $
            (66,930,791
            )
            $
            6,793,959





See
      notes
      to condensed consolidated financial statements.


5


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH
      FLOWS**


(Unaudited)




For
                the Six Months Ended
              April
                30,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                Loss
            
            $
            (4,816,231
            )
            $
            (2,162,569
            )Adjustments
                to reconcile net loss to net cash used inoperating
                activities:Consulting
                fees and other compensatory elements ofstock
                issuances
            
            
            1,010,570
            
            
            888,930Loss
                on exchange of notes payable into common stock
            
            
            446,386
            
            
            —Gain
                on forgiveness of principal and interest onZaiq
                Note
            
            
            (1,169,820
            )
            
            —Gain
                on sale of property and equipment
            
            
            —
            
            
            (20,000
            )Gain
                on exchange of Redeemable Series B PreferredStock
                into common stock
            
            
            —
            
            
            (55,814
            )Other
                non-cash income
            
            
            —
            
            
            (33,514
            )Amortization
                of deferred financing costs
            
            
            568,819
            
            
            53,109Amortization
                of film in production costs
            
            
            —
            
            
            11,945Amortization
                of debt discount on notes
            
            
            2,103,107
            
            
            520,169Amortization
                of technology license and capitalizedsoftware
                development fee
            
            
            315,232
            
            
            —Depreciation
            
            
            1,239
            
            
            7,095Change
                in Assets (Increase) Decrease:Other
                current assets
            
            
            (9,841
            )
            
            (898
            )Other
                assets
            
            
            370
            
            
            (2,990
            )Change
                in Liabilities Increase (Decrease):Accounts
                payable and accrued expenses
            
            
            199,687
            
            
            (22,329
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (1,350,482
            )
            
            (816,866
            )CASH
                FLOWS FROM INVESTING ACTIVITIESAcquisition
                of technology license and development fee
            
            
            (200,000
            )
            
            —Acquisition
                of property and equipment
            
            
            (4,499
            )
            
            —NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (204,499
            )
            
            —CASH
                FLOWS FROM FINANCING ACTIVITIESProceeds
                from issuance of common stock
            
            
            —
            
            
            800,100Proceeds
                from exercise of warrants
            
            
            568,531
            
            
            —Purchase
                of treasury stock
            
            
            (7,498
            )
            
            —Proceeds
                from convertible debentures
            
            
            6,000,000
            
            
            —Proceeds
                from notes payable
            
            
            750,000
            
            
            300,000Capitalized
                financing costs
            
            
            (742,450
            )
            
            (33,029
            )Repayments
                of notes payable
            
            
            (944,291
            )
            
            —Repayments
                of convertible notes payable
            
            
            (435,322
            )
            
            (25,625
            )NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            5,188,970
            
            
            1,041,446INCREASE
                IN CASH
            
            
            3,633,989
            
            
            224,580CASH
                - BEGINNING OF PERIOD
            
            
            373,481
            
            
            127,811CASH
                - ENDING OF PERIOD
            
            $
            4,007,470
            
            $
            352,391




See
      notes
      to condensed consolidated financial statements.


6


**RIM
      SEMICONDUCTOR COMPANY AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


(Unaudited)





For
                the Six Months Ended
              April
                30,2006
            
            2005SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
                paid during the period for:Interest
            
            $
            3,158
            
            $
            5,400NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Common
                stock issued for conversion of convertibledebentures,
              convertible
                notes payable, notes payable and accrued interest
            
            $
            3,153,226
            
            $
            630,476Common
                stock issued for consulting services
            
            $
            1,870,000
            
            $
            —Value
                assigned to warrants issued in connectionwith
                notes payable
            
            $
            120,000
            
            $
            —Value
                assigned to warrants issued to holders of2006
                Debentures
            
            $
            2,485,490
            
            $
            —Value
                assigned to warrants issued to placement agents
            
            $
            1,792,452
            
            $
            —Accounts
                payable and accrued expenses satisfied by issuanceof
                common stock
            
            $
            —
            
            $
            71,911Common
                stock issued for accrued liquidated damages
            
            $
            —
            
            $
            96,000Accounts
                payable and accrued expenses converted to note payable
            
            $
            —
            
            $
            55,251Deferred
                compensation converted to convertible note payable(See
                footnote 6(4))
            
            $
            212,450
            
            $
            383,911Reclassification
                of conversion option liability to equity
            
            $
            760,783
            
            $
            —Redeemable
                Series B Preferred Stock exchanged into notes payable
            
            $
            —
            
            $
            2,392,000Redeemable
                Series B Preferred Stock (recorded at $800,000)exchangedinto
                common stock
            
            $
            —
            
            $
            744,186




See
      notes
      to condensed consolidated financial statements.




7


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





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





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with accounting principles generally accepted in the
      United States of America (“US GAAP”). In the opinion of management, the
      accompanying unaudited financial statements contain all adjustments, consisting
      only of those of a normal recurring nature, necessary for a fair presentation
      of
      the Company’s financial position, results of operations and cash flows at the
      dates and for the periods indicated. These financial statements should be read
      in conjunction with the financial statements and notes related thereto included
      in the Annual Report on Form 10-KSB for the fiscal year ended October 31,
      2005.





These
      results for the three months and six months ended April 30, 2006 are not
      necessarily indicative of the results to be expected for the full fiscal year.
      The preparation of the consolidated financial statements in conformity with
      US
      GAAP requires management to make estimates and assumptions that affect the
      reported amounts of assets and liabilities and disclosure of contingent assets
      and liabilities at the date of the financial statements and the reported amounts
      of revenues and expenses during the reporting period. Actual results could
      differ from those estimates.





Rim
      Semiconductor Company was incorporated under the laws of the State of Utah
      on
      December 5, 1985. The Company operates in two business segments, the production
      of motion pictures, films and videos (“Entertainment Segment”) and the
      development of new semiconductor technologies (“Semiconductor Segment”). The
      Company’s Entertainment Segment is dependent on future revenues from the
      Company’s film “Step Into Liquid” (“Film”). The Semiconductor Segment is
      dependent on the Company’s ability to successfully commercialize its developed
      technology, and has generated no revenues to date. The Company’s first chipset
      was first made available to prospective customers for evaluation and testing
      during the three months ended January 31, 2006.





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





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


8


**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. Revenue and cost forecasts are continually reviewed by management
      and revised when warranted by changing conditions. A change to the estimate
      of
      gross revenues for the Film may result in an increase or decrease to the
      percentage of amortization of capitalized film costs relative to a previous
      period.





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





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





**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.




9


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





**Loss
      Per Common Share**





Basic
      loss per common share is computed based on weighted average shares outstanding
      and excludes any potential dilution. Diluted loss per share reflects the
      potential dilution from the exercise or conversion of all dilutive securities
      into common stock based on the average market price of common shares outstanding
      during the period. For the three months and six months ended April 30, 2006
      and
      2005, respectively, no effect has been given to outstanding options, warrants,
      convertible notes payable, or convertible debentures in the diluted computation,
      as their effect would be anti-dilutive.





10


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





**Stock-Based
      Compensation**





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





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





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





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





Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options was $378,802 and $447,839 for the three months and six months ended
      April 30, 2006, respectively. Stock based-compensation expense for share-based
      payment awards granted prior to, but not yet vested as of October 31, 2005
      based
      on the grant date fair value estimated in accordance with the pro-forma
      provisions of SFAS 123 was $0 and $247,057 for the three months and six months
      ended April 30, 2006, respectively. Stock based-compensation expense recognized
      for non-employees under other accounting standards was $292,766 and $315,674
      for
      the three months and six months ended April 30, 2006, respectively.





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




11


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





**Stock-Based
      Compensation (Continued)**





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





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





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





**Impact
      of Recently Issued Accounting Standards**





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





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




12


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





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





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





EITF
      Issue No. 05-4 “The Effect of a Liquidated Damages Clause on a Freestanding
      Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative
      Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
      Stock’” (“EITF No. 05-4”) addresses financial instruments, such as stock
      purchase warrants, which are accounted for under EITF 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. In March 2006 and May 2005, the Company entered into private
      placement agreements for convertible debentures, a registration rights agreement
      and warrants in connection with a private placement (see Note
      7). Based
      on
      the interpretive guidance in EITF Issue No. 05-4, view C, due to certain
      factors, including an uncapped liquidated damages provision in the registration
      rights agreement, the Company determined that the embedded conversion option
      related to these convertible debentures and the registration rights are
      derivative liabilities. Accordingly, the fair value of the embedded conversion
      options was recorded as a liability as of the closing of the sale of these
      convertible debentures. Due to various factors, including substantial
      conversions of these convertible debentures and the registration statement
      becoming effective on August 1, 2005, the value of the registration rights
      was
      deemed to be de minimus.


13


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





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





In
      September 2005, the FASB ratified EITF Issue No. 05-7, “Accounting for
      Modifications to Conversion Options Embedded in Debt Instruments and Related
      Issues” (“EITF No. 05-7”), which addresses whether a modification to a
      conversion option that changes its fair value affects the recognition of
      interest expense for the associated debt instrument after the modification
      and
      whether a borrower should recognize a beneficial conversion feature, not a
      debt
      extinguishment, if a debt modification increases the intrinsic value of the
      debt
      (for example, the modification reduces the conversion price of the debt). EITF
      No. 05-7 is effective for the first interim or annual reporting period beginning
      after December 15, 2005. The Company adopted EITF No. 05-7 as of the beginning
      of the Company’s interim reporting period that began on February 1, 2006. The
      adoption of this pronouncement did not have an impact on 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.’” 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 application 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 $18,698 and $58,874 for the three months and
      six
      months ended April 30, 2006, respectively. The Company recognized revenues
      of
      $7,397 and $16,198 for the three months and six months ended April 30, 2005,
      respectively. There was no amortization expense for the three months and six
      months ended April 30, 2006. The Company had amortization expense of $5,320
      and
      $11,945 for the three months and six months ended April 30, 2005,
      respectively.




14


**NOTE
      4 - DEFERRED FINANCING COSTS**





As
      of
      April 30, 2006, deferred financing costs consisted of costs incurred and
      warrants issued in connection with the sale of $6,000,000 of 2006 Debentures,
      $3,500,000 of 2005 Debentures, $1,350,000 of 7% convertible debentures, and
      promissory notes:





Deferred
                financing costs
            
            $
            3,541,818Less:
                accumulated amortization
            
            
            (1,249,428
            )Deferred
                financing costs, net
            
            $
            2,292,390





Costs
      incurred in connection with debt financings are capitalized as deferred
      financing costs and amortized over the term of the related debt. If any or
      all
      of the related debt is converted or repaid prior to its maturity date, a
      pro-rata share of the related deferred financing costs are written off and
      recorded as amortization expense in the period of the conversion or repayment
      in
      the consolidated statement of operations.





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





**NOTE
      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(5)), 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 and the convertible promissory note discussed in foot
      note
      (4) below. Except for these two notes, the notes are due when the Company
      reaches certain milestones from the distribution of its motion picture. The
      notes may be converted at any time, in whole or in part, into that number of
      fully paid and non-assessable shares of common stock at conversion prices
      ranging from $0.33 to $1.00.


15


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





The
      outstanding convertible notes are summarized below:





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





(1)
            Due
                when receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $375,000. The Company made payments of $25,000
                and
                $50,000 during the three months and six months ended April 30, 2006,
                respectively.(2)
            Due
                when receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $2,250,000. 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)
            Due
                when receipts received by the Company from its Top Secret Productions,
                LLC
                joint venture exceed $750,000.





In
      March
      2005, the Company issued in favor of the Company’s executive vice president, a
      non-interest bearing convertible promissory note in the principal amount of
      $383,911. The convertible promissory note was issued in evidence of the
      Company’s obligation for deferred compensation. In accordance with APB 21,
      imputed interest (at an effective rate of 15%) was calculated to arrive at
      the
      fair value of the convertible promissory note. The difference between the face
      amount and the present value upon issuance of the convertible promissory note
      is
      shown as a discount that is amortized as interest expense over the life of
      the
      convertible promissory note. The Company made payments of $20,833 and $84,125
      during the three months and six months ended April 30, 2006, respectively.
      In
      March 2006, the remaining principal amount of this note and additional deferred
      compensation payable to the note holder of $212,450 were converted into a
      convertible promissory note with an aggregate principal amount of $301,197.
      The
      principal and accrued interest on this note was repaid in April 2006. The
      remaining amortized debt discount on the March 2005 convertible promissory
      note
      of $15,583 was recorded as interest expense during the three months ended April
      30, 2006. For the three months and six months ended April 30, 2006, amortization
      of debt discount on the March 2005 convertible promissory note was $15,583
      and
      $5,292, respectively.





**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.




16


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





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





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 (subject to adjustments for stock
      splits, stock dividends, recapitalizations, mergers, spin-offs, and certain
      other transactions). The warrants are exercisable until the last day of the
      month in which the third anniversary of the effective date of the registration
      statement registering the shares underlying the warrants occurs.





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





The
      2006
      Debentures are convertible into shares of common stock at the holder’s option at
      any time on or after the earlier of (i) the 65th day following issuance or
      (ii)
      the effective date of the registration statement, with the conversion price
      for
      any such conversion equal to the lower of (x) 70% of the volume weighted average
      price (“VWAP”) of the common stock for the 20 days ending on the trading day
      immediately preceding the conversion date or (y) if the Company enters into
      certain financing transactions, the lowest purchase price or conversion price
      applicable to that transaction. The conversion price is subject to
      adjustment.





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





To
      secure
      the Company’s obligations under the 2006 Debentures, the Company has granted a
      security interest in substantially all of its assets, including without
      limitation, its intellectual property, in favor of the Investors. The security
      interest terminates upon the earlier of (i) the date on which less than
      one-fourth of the original principal amount of the 2006 Debentures issued on
      the
      Closing Date are outstanding or (ii) payment or satisfaction of all of the
      Company’s obligations under the Securities Purchase Agreement.





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





In
      connection with the placement of the 2006 Debentures, a placement agent received
      a placement agent fee equal to (i) 10% of the aggregate purchase price (i.e.,
      $600,000), (ii) 10% of the proceeds realized in the future from exercise of
      warrants issued to the Investors, (iii) warrants to purchase an aggregate of
      7,095,556 shares of common stock having an initial exercise price equal to
      $0.1693 per share valued at $888,779, 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. 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
      gross
      proceeds of $6,000,000 are recorded as a liability net of a debt discount of
      $5,056,919 consisting of an allocation of the fair values attributed to the
      Investors’ warrants and to the embedded conversion option in accordance with
      EITF issue No. 00-19 “Accounting for Derivative Financial Instruments Indexed to
      and Potentially Settled in a Company’s Own Stock” and EITF issue No. 05-04, view
      C “The Effect of a Liquidated Damages Clause on a Freestanding Financial
      Instrument.” The
      debt
      discount consisted of a $2,485,490 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 on a pro rata
      basis.






17


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





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





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 option related to the 2006 Debentures and the
      registration rights as derivative liabilities. The Company classified the fair
      value of the Investors’ warrants as equity.





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





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





Outstanding
              Principal
                Amount
            
            Unamortized
              DebtDiscount
            
            Net
                Carrying
              ValueLong-term
                portion
            
            $
                6,000,000
            
            $
                4,704,111
            
            $ 
                1,295,889





**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, with warrants for 11,312,220 shares being exercisable
      through the last day of the month in which the first anniversary of the
      effective date of the Registration Statement occurs (August 31, 2006) at a
      per
      share exercise price of $0.1547 and warrants for 22,624,430 shares being
      exercisable through the last day of the month in which the third anniversary
      of
      the effective date of the Registration Statement occurs (August 31, 2008) at
      a
      per share exercise price of $0.3094.





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
      option in accordance with EITF issue No. 00-19 “Accounting for Derivative
      Financial Instruments Indexed to and Potentially Settled in a Company’s Own
      Stock” and EITF issue No. 05-04, view C “The Effect of a Liquidated Damages
      Clause on a Freestanding Financial Instrument.” 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 determined that the embedded conversion option
      related to the 2005 Debentures and the registration rights are derivative
      liabilities. Accordingly, the fair value of the embedded conversion option
      of
      $1,500,000 was recorded as a liability as of the closing of the sale of the
      2005
      Debentures. Due to various factors, including substantial conversions of the
      2005 Debentures and the registration statement becoming effective on August
      1,
      2005, the value of the registration rights was deemed to be de
      minimus.





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





The
      Company followed the guidelines in EITF issue No. 05-04, view C and classified
      the fair value of the Investor Warrants as equity and separately valued the
      derivative liability related to the registration rights.


18


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





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





No
      gain
      or loss was deemed necessary during the three months and six months ended April
      30, 2006, as the fair value of the derivative liabilities did not fluctuate
      in
      value.





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. This amount was recorded as a
      deferred financing cost and is being charged to interest expense over the term
      of the 2005 Debentures. Warrants to purchase up to 2,262,443 shares are
      exercisable through the last day of the month in which the third anniversary
      of
      the effective date of the Registration Statement occurs (August 31, 2008) at
      a
      per share exercise price of $0.3094. Warrants to purchase up to 2,262,443 shares
      are exercisable through the last day of the month in which the third anniversary
      of the closing occurs (May 31, 2008) at a per share exercise price of $0.1547.
      Warrants to purchase up to 1,131,222 shares are exercisable through the last
      day
      of the month in which the first anniversary of the effective date of the
      Registration Statement occurs (August 31, 2006) at a per share exercise price
      of
      $0.1547. The Compensation Warrants are otherwise exercisable on substantially
      the same terms and conditions as the Investor Warrants.





On
      February 21, 2006, the Company and certain holders of Investor and Compensation
      Warrants entered into an amendment (the “Warrant Amendment”) to the terms of
      their warrants.





Pursuant
      to the Warrant Amendment, the Company and certain holders of the Investor and
      Compensation Warrants agreed to temporarily reduce the exercise price of the
      Investor and Compensation Warrants to $0.05 per share from February 21, 2006
      until March 10, 2006 (the “New Price Exercise Period”). The warrant holders that
      are parties to the Warrant Amendment were permitted, but not required to,
      exercise all or any portion of their Investor and Compensation Warrants at
      a per
      share price of $0.05 at any time during the New Price Exercise Period, but
      could
      not do so by means of a cashless exercise. This reduction in the exercise price
      of the Investor and Compensation Warrants expired on March 10, 2006. During
      the
      New Price Exercise Period, holders of the Investor and Compensation Warrants
      exercised warrants to purchase 11,370,624 shares of common stock at the reduced
      exercise price of $0.05 per share, resulting in gross proceeds to the Company
      of
      $568,531.





Any
      shares of common stock issued with any exercise of an Investor or Compensation
      Warrant to a holder of an Investor or Compensation Warrant who or which executed
      the Warrant Amendment, whether during the New Price Exercise Period (on the
      terms contemplated in the Warrant Amendment) or thereafter (on the original
      terms provided in the Investor and Compensation Warrants) were or will be in
      restricted common stock, but shall have the registration rights provided in
      the
      Warrant Amendment. Except as expressly provided in the Warrant Amendment, the
      terms and conditions of the Investor and Compensation Warrants and any related
      registration rights agreement shall be unchanged and remain in full force and
      effect. In addition, the warrant holders agreed to waive any claims arising
      out
      of or relating to the failure, if any, to have available registered Warrant
      Shares, as defined in the Investor and Compensation Warrants, prior to the
      New
      Required Effective Date (as defined below).





The
      Company agreed to include the shares of common stock issuable upon the exercise
      of each Investor or Compensation Warrant (whether or not pursuant to the terms
      of the Warrant Amendment) in a registration statement to be filed by the Company
      with the Securities and Exchange Commission (the “SEC”) no later than the
      earlier of the date the Company files its next registration statement with
      the
      SEC (other than on Form S-8 or S-4) for the sale of shares by the Company or
      other selling stockholders, or May 1, 2006. The term “New Required
      Effective Date” means the date which is the later of 120 days from the
      expiration of the New Price Exercise Period, or sixty days after the filing
      of
      such registration statement; provided, however, that in no event shall such
      date
      be later than the required effective date contemplated by the terms of any
      new
      transaction consummated by the Company after February
      21, 2006, where
      the shares of common stock issued or issuable to the investors in such
      transaction are included in a registration statement that is required to be
      made
      effective by a stated date. The common stock underlying the Investor and
      Compensation Warrants were included in the registration statement filed on
      April
      24, 2006.


19


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





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





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





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





During
      the three months ended January 31, 2006, $1,310,724 of principal amount of
      2005
      Debentures plus accrued interest of $69,777 were converted into 81,262,199
      shares of common stock. During the three months ended April 30, 2006,
      $464,423 of principal amount of the 2005 Debentures plus accrued interest of
      $2,401 were converted into 22,908,266 shares of common stock.





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





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





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





**7%
      Debentures**





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





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





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





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





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




20


**NOTE
      8 - NOTES PAYABLE**





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





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





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





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





In
      April
      2005, the Company issued a promissory note in connection with the cancellation
      of the Redeemable Series B Preferred Stock which bears interest at the rate
      of
      7% per annum. In December 2005, the Company entered into an agreement to repay
      a
      portion of the outstanding principal and accrued interest on the promissory
      note
      with the remaining principal balance and accrued interest being forgiven. See
      Note 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. In March 2006, 108% of the principal amount
      ($810,000) was repaid and the security interest was released. All unamortized
      debt discount and deferred financing costs were written off during the three
      months ended April 30, 2006 in connection with the repayment of the
      loan.




21


**NOTE
      9 - STOCKHOLDERS’ EQUITY**





**Common
      Stock**





During
      the six months ended April 30, 2006, the Company:





·
            issued
                104,170,465 shares of common stock for conversion of convertible
                debentures with a principal amount of $1,775,947 and accrued interest
                of
                $72,178;





·
            repurchased
                499,854 shares of common stock for $7,498 from
                Zaiq;





·
            issued
                35,714 shares of common stock for conversion of convertible notes
                payable
                with a principal amount of $10,000 and accrued interest of
                $5,000;





·
            issued
                12,064,494 shares of common stock valued at $1,290,901 in exchange
                for the
                return and cancellation of notes payable with a principal amount
                of
                $700,337 and accrued interest of
                $144,178;





·
            issued
                11,370,624 shares of common stock upon exercise of warrants resulting
                in
                gross proceeds of $568,531; and





·
            issued
                11,000,000 shares of restricted common stock to consultants for services
                valued at $1,870,000.





**Stock
      Option Plans**





On
      November 1, 2005, the Company early adopted SFAS 123(R), which requires the
      measurement and recognition of compensation expense for all share-based payment
      awards made to the Company’s employees and directors including employee stock
      options based on estimated fair values.





Upon
      adoption of SFAS 123(R), the Company continued to estimate the value of stock
      options on the date of grant using the Black-Scholes model and the assumptions
      noted in the table below. Prior to the adoption of SFAS 123(R), the value of
      each stock option was also estimated on the date of grant using the
      Black-Scholes model for the purpose of the pro-forma financial information
      in
      accordance with SFAS 123.





The
      Company used its historical stock price volatility in accordance with SFAS
      123(R) and SAB 107. The selection of the historical volatility approach was
      based upon the lack of availability of actively traded options on the Company’s
      stock and the Company’s assessment that historical volatility is representative
      of future stock price trends.





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





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




22


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





**Stock
      Option Plans** **(Continued)**





The
      weighted-average estimated fair value of stock options granted during the six
      months ended April 30, 2006 was $0.03 per share using the Black-Scholes model
      with the following assumptions:





Expected
                volatility
            147%Risk-free
                interest rate
            4.4%Expected
                dividends
            0.0%Expected
                life
            10
                years





A
      summary
      of option activity as of April 30, 2006 and changes during the period then
      ended
      is as follows:





Under
              the
                Plans
            
            Weighted
              Average
              ExercisePrice
            
            Aggregate
              Intrinsic
              Value
            
            Outside
              thePlans
            
            Weighted
              Average
                ExercisePrice
            
            Aggregate
              Intrinsic
              ValueOutstanding
                at October 31, 2005
            
            
            993,750
            
            $
            0.97
            
            
            
            
            
            15,900,000
            
            $
            0.25Options
                granted:Under
                the Plans
            
            
            100,000
            
            
            0.08
            
            
            
            
            
            —
            
            
            —Outside
                the Plans
            
            
            —
            
            
            —
            
            
            
            
            
            26,400,000
            
            $
            0.03Options
                expired/cancelled:Under
                the Plans
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            —Outside
                the Plans
            
            
            —
            
            
            —
            
            
            
            
            
            (14,000,000
            )
            $
            0.17Options
                exercised:Under
                the Plans
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            —Outside
                the Plans
            
            
            —
            
            
            —
            
            
            
            
            
            —
            
            
            —Outstanding
                at April 30, 2006
            
            
            1,093,750
            
            $
            0.89
            
            $
            4,500
            
            
            28,300,000
            
            $
            0.08
            
            $
            2,567,600Exercisable
                at April 30, 2006
            
            
            999,306
            
            $
            0.97
            
            $
            250
            
            
            16,100,000
            
            $
            0.13
            
            $
            1,381,800





The
      weighted-average remaining contractual term of stock options outstanding under
      the plans as of April 30, 2006 was 6.1 years. The weighted-average remaining
      contractual term of stock options outstanding outside the plans as of April
      30,
      2006 was 9.3 years.





The
      weighted-average remaining contractual term of stock options currently
      exercisable under the plans as of April 30, 2006 was 5.7 years. The
      weighted-average remaining contractual term of stock options currently
      exercisable outside the plans as of April 30, 2006 was 9.0 years.





As
      of
      April 30, 2006, total compensation cost related to nonvested stock options
      not
      yet recognized was $ 369,735, which is
      expected to be recognized through February 2009 over a weighted-average period
      of approximately two months.





The
      total
      fair value of options vested during the three months and six months ended April
      30, 2006 was $407,569 and $654,626, respectively.




23


**NOTE
      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
      and
      six months ended April 30, 2006, the Company recognized $0 and $247,057,
      respectively, of stock-based compensation expense related to these vested
      options.





During
      the three months ended January 31, 2006, options to purchase 22,400,000 shares
      of common stock were granted to the Company’s Chief Executive Officer, the
      Executive Vice President, and an advisory board member. These options were
      valued at $591,863 and have a 10 year term, an exercise price of $0.027 per
      share, and vest at various times between February 2006 and July 2006. During
      the
      three months and six months ended April 30, 2006, the Company recognized
      $313,961 and $388,042, respectively, of stock-based compensation expense related
      to these options.





During
      the three months ended April 30, 2006, the following options were
      granted:





(i)
            Options
                to purchase 2,000,000 shares of common stock were granted to directors.
                These options were valued at $84,277 and have a 10-year term, an
                exercise
                price of $0.0319 per share, and vested on May 1, 2006;(ii)
            Options
                to purchase 2,000,000 shares of common stock were granted in connection
                with legal services performed for the Company. These options were
                valued
                at $84,277 and have a 10-year term, an exercise price of $0.0319
                per
                share, and vested on March 1, 2006; and(iii)
            Options
                to purchase 100,000 shares of common stock were granted to an employee.
                These options were valued at $16,887 and have a 10-year term, exercise
                price of $0.08 per share, and vest equally over a three year
                period.





**Options
      Expired, Cancelled and Forfeited**





Options
      to purchase 0 and 14,000,000 shares of common stock were canceled during the
      three months and six months ended April 30, 2006, respectively.





**Warrants
      Granted**





In
      January 2006, the Company granted warrants to purchase 7,500,000 shares of
      its
      common stock at an exercise price of $0.10 per share to a lender in connection
      with a loan agreement (see Note
      8(5)). The fair
      value of the stock warrants estimated on the date of grant using the
      Black-Scholes option pricing model is $0.016 per share or $120,000.





In
      March
      2006, the Company granted warrants to purchase 70,955,548 shares of its common
      stock at an exercise price of $0.15 per share to the Investors in the 2006
      Debentures (see Note 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.


24


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





**Warrants
      Granted (Continued)**





In
      March
      2006, the Company granted additional warrants to purchase 7,095,556 shares
      of
      its common stock at an exercise price of $0.15 per share to the placement agent
      in connection with the 2006 Debentures (see Note 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 $903,673.





**Warrants
      Expired**





Warrants
      to purchase 0 and 200,000 shares of common stock expired during the three months
      and six months ended April 30, 2006, respectively.





**Net
      Loss Per Share**





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





Warrants
                to purchase common stock
            
            
            131,888,7932006
                Debentures and accrued interest (1)
            
            
            69,021,246Options
                to purchase common stock
            
            
            29,393,750Convertible
                notes payable and accrued interest
            
            
            1,757,4147%
                debentures and accrued interest
            
            
            975,2042005
                Debentures and accrued interest (2)
            
            
            500,247Total
                as of April 30, 2006
            
            
            233,536,654





(1)
            Based
                on a twenty day volume weighted average common stock price discounted
                by
                30% at April 30, 2006 of $0.08778.(2)
            Based
                on a five day volume weighted average common stock price discounted
                by 30%
                at April 30, 2006 of $0.09002.





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





**Research
      and Development Agreement**





The
      Company and HelloSoft entered into an amendment, effective as of October 11,
      2004 (the “Amendment”), to their Services Agreement dated as of March 31, 2004
      (the “Original Agreement”) pursuant to which HelloSoft will provide development
      services relating to the Company’s semiconductor technologies. The Original
      Agreement provides that, upon the Company’s request from time to time, HelloSoft
      is to provide services to be specified pursuant to mutually agreed upon terms.
      The Amendment represents the first project that HelloSoft is undertaking
      pursuant to the Original Agreement.





In
      consideration for the services being rendered under the Amendment, the Company
      agreed to pay to HelloSoft $185,000, half of which was paid in the form of
      restricted common stock issued at a discount of 25% to the closing price of
      the
      Company’s Common Stock on the day of the commencement of services. The other
      half will be remitted in cash, periodically, upon completion by HelloSoft and
      acceptance by the Company of specified milestones. HelloSoft has assigned to
      the
      Company the rights to any improvements, developments, discoveries or other
      inventions that may be generated by HelloSoft in its performance of the services
      to be provided under the Amendment.





On
      July
      26, 2005, the Company signed an amendment to the Original Agreement that defines
      and prices the next two phases of the technology development. The Company will
      expend $445,000 on Phase II and $350,000 on Phase III.


25


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





**Research
      and Development Agreement** **(Continued)**





Half
      of
      Phase II, or $222,500, was paid to HelloSoft on July 26, 2005, in the form
      of
      restricted common stock issued at a discount of 25% to the closing price of
      the
      Company’s common stock on that date, and the remaining $222,500 is payable in
      cash upon completion of certain stages of Phase II. The restricted common stock
      issued to HelloSoft was valued at $296,667 and recorded as research and
      development expense. Of the remaining $222,500, $62,500 was accrued as of
      October 31, 2005 and paid during the three months ended January 31, 2006 and
      $100,000 was accrued as of April 30, 2006 and paid in May 2006.





When
      HelloSoft commences Phase III, the Company will issue to them $175,000 worth
      of
      restricted common stock, and the other $175,000 will be paid to them in cash
      when they complete Phase III. Phase III will be deemed complete when HelloSoft
      releases the E30 Rel. 1.5 to the Company. The Company projects that this also
      will occur in the third
      calendar quarter of 2006.





On
      November 3, 2005 and January 24, 2006, the Company and HelloSoft, Inc. entered
      into further amendments to the Original Agreement. Pursuant to the amendments,
      the Company agreed to pay HelloSoft an aggregate of $80,000 in cash, and the
      parties agreed upon certain additions to the development services to be
      performed by HelloSoft pursuant to the Original Agreement, as amended. $60,000
      was paid to HelloSoft during the three months ended January 31, 2006 and $20,000
      was paid to HelloSoft during the three months ended April 30, 2006.





On
      February 6, 2006, the Company entered into a technology license agreement with
      HelloSoft. Under the agreement, the Company has obtained a license to include
      HelloSoft’s integrated VoIP software suite in the Company’s E30 semiconductor.
      In exchange for this license, the Company has agreed to pay HelloSoft a license
      fee and certain royalties based on its sales of products including the licensed
      technology.




**Unresolved
        SEC Comment Letter**
 
 The
        Company filed a registration statement on Form SB-2 on April 24, 2006 and
        received a comment letter on May 22, 2006 from the staff of the Division
        of Corporation
        Finance of the Securities and Exchange Commission. The staff's letter addressed
        a number of issues relating to the registration statement, including several
        issues relating to the Company's audited and unaudited financial statements
        that
        were contained in the registration statement. Among other comments, the staff's
        letter inquired regarding the Company's accounting treatment for warrants
        issued
        in connection with the Company's 2005 debentures and their classification as
        equity
        rather than derivative liabilities in the Company's financial statements
        as of
        and for the fiscal year ended October 31, 2005.
 
 The
        Company sent a letter to the staff on June 5, 2006 and has had two telephone
        conferences with the staff regarding this comment, which remains unresolved
        as
        of the
        date
        of filing of this quarterly report. The Company is continuing to work with
        the
        SEC staff to provide additional information on this issue. If the Company
        is required
        to classify the warrants as derivative liabilities, the Company would restate
        the unaudited financial statements contained in this report on Form 10-QSB,
        as well
        as
        the unaudited financial statements contained in the Company's reports on
        Form
        10-QSB for the periods ended July 31, 2005 and January 31, 2006, and the audited
        financial statements contained in the Company's report on Form 10-KSB for
        the
        fiscal year ended October 31, 2005. The modifications to the Company's financial
        statements would involve only non-cash accounting items, but would materially
        impact the Company's balance sheet and statements of operations, stockholders'
        equity and cash flows for each period presented.





**NOTE
      11** **-** **SEGMENT
      INFORMATION**





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





For
      the Six Months Ended April 30, 2006





Telecommunications
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsNet
                Sales - domestic
            
            $
            —
            
            $
            6,932
            
            $
            —
            
            $
            6,932Net
                Sales - foreign
            
            $
            —
            
            $
            51,942
            
            $
            —
            
            $
            51,942Operating
                income (loss)
            
            $
            (316,471
            )
            $
            53,688
            
            $
            (2,487,247
            )
            $
            (2,750,030
            )Depreciation
                and amortization
            
            $
            316,471
            
            $
            —
            
            $
            —
            
            $
            316,471Total
                Identifiable Assets atApril
                30, 2006
            
            $
            8,041,340
            
            $
            —
            
            $
            4,061,196
            
            $
            12,102,536




26


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





For
      the Six Months Ended April 30, 2005





Telecommunications
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsNet
                Sales - domestic
            
            $
            —
            
            $
            9,898
            
            $
            —
            
            $
            9,898Net
                Sales - foreign
            
            $
            —
            
            $
            6,300
            
            $
            —
            
            $
            6,300Operating
                income (loss)
            
            $
            (1,899
            )
            $
            (7,317
            )
            $
            (1,564,918
            )
            $
            (1,574,134
            )Depreciation
                and amortization
            
            $
            1,899
            
            $
            5,196
            
            $
            —
            
            $
            7,095Total
                Identifiable Assets atApril
                30, 2005
            
            $
            5,935,110
            
            $
            1,009,777
            
            $
            371,967
            
            $
            7,316,854





For
      the Three Months Ended April 30, 2006





Telecommunications
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsNet
                Sales - domestic
            
            $
            —
            
            $
            698
            
            $
            —
            
            $
            698Net
                Sales - foreign
            
            $
            —
            
            $
            18,000
            
            $
            —
            
            $
            18,000Operating
                income (loss)
            
            $
            (213,156
            )
            $
            17,397
            
            $
            (1,599,636
            )
            $
            (1,795,395
            )Depreciation
                and amortization
            
            $
            213,156
            
            $
            —
            
            $
            —
            
            $
            213,156Total
                Identifiable Assets atApril
                30, 2006
            
            $
            8,041,340
            
            $
            —
            
            $
            4,061,196
            
            $
            12,102,536





For
      the Three Months Ended April 30, 2005





Telecommunications
              Business
            
            Entertainment
              Business
            
            Unallocable
            
            TotalsNet
                Sales - domestic
            
            $
            —
            
            $
            7,397
            
            $
            —
            
            $
            7,397Net
                Sales - foreign
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Operating
                income (loss)
            
            $
            (740
            )
            $
            (3,601
            )
            $
            (967,970
            )
            $
            (972,311
            )Depreciation
                and amortization
            
            $
            740
            
            $
            2,187
            
            $
            —
            
            $
            2,927Total
                Identifiable Assets atApril
                30, 2005
            
            $
            5,935,110
            
            $
            1,009,777
            
            $
            371,967
            
            $
            7,316,854


27


**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 that reflect our beliefs and
      assumptions based upon information available to us at the date of this report.
      In some cases, you can identify these statements by words such as “if,” “may,”
“might,” “will, “should,” “expects,” “plans,” “anticipates,” “believes,”
“estimates,” “predicts,” “potential,” “continue,” and other similar terms. These
      forward-looking statements include, among other things, projections of our
      future financial performance and our anticipated growth, descriptions of our
      strategies, our product and market development plans, the trends we anticipate
      in our business and the markets in which we operate, and the competitive nature
      and anticipated growth of those markets.





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





**OVERVIEW**





We
      are
      developing advanced transmission technology products to enable data to be
      transmitted across copper telephone wire at speeds and over distances that
      exceed those offered by leading DSL technology providers. Our first chipset
      in a
      planned family of transport processors, the Embarq(TM) E30 (Release 1.3) digital
      signal processor, was first made available to prospective customers for
      evaluation and testing in the first quarter of fiscal 2006. We are presently
      working on Release 1.4 of the E30 and Release 1.1 of the Embarq(TM) E20 analog
      front end. Our products are designed to substantially increase the capacity
      of existing copper telephone networks, allowing telephone companies, office
      building managers, and enterprise network operators to provide enhanced and
      secure video, data and voice services over the existing copper
      telecommunications infrastructure.





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





Our
      semiconductor business segment is dependent upon our ability to generate future
      revenues and positive cash flow from our advanced transmission technology
      products, such as the E30 and E20. No assurance can be provided that our target
      customers will purchase these products in large volumes, or at all.





In
      April
      2000, our NV Entertainment subsidiary entered into a joint venture production
      agreement to produce a feature length film, “Step into Liquid” (the “Film”). We
      own a 50% interest in the joint venture. The financial condition and results
      of
      operations of the joint venture are consolidated with our financial condition
      and results of operations on the accompanying condensed consolidated financial
      statements. The Film was released to theaters in the United States in 2003
      and
      is currently in foreign and DVD distribution. During the three months and six
      months ended April 30, 2006, we received revenues of $18,698 and $58,874,
      respectively, from the Film. During the three months and six months ended April
      30, 2005, we received revenues of $7,397 and $16,198, respectively. As a result
      of impairment reviews during the years ended October 31, 2005 and 2004, we
      reduced the carrying value of the Film to $0 on our balance sheet. We do not
      intend to make further investment in our entertainment business.




28


**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 Investors’ warrants and
      to the embedded conversion option in accordance with EIFT issue No. 00-19
“Accounting for Derivative Financial Instruments Indexed to and Potentially
      Settled in a Company’s Own Stock” and EITF issue No. 05-04, view C “The Effect
      Of a Liquidated Damages Clause on a Freestanding Financial
      Instrument.”





**Stock-Based
      Compensation**





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





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





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





Stock-based
      compensation expense recognized under SFAS 123(R) related to employee stock
      options was $378,802 and $447,839 for the three months and six months ended
      April 30, 2006, respectively. Stock based-compensation expense for share-based
      payment awards granted prior to, but not yet vested as of October 31, 2005
      based
      on the grant date fair value estimated in accordance with the pro-forma
      provisions of SFAS 123 was $0 and $247,057 for the three months and six months
      ended April 30, 2006, respectively. Stock-based compensation expense recognized
      for non-employees under other accounting standards was $292,766 and $315,674
      for
      the three months and six months ended April 30, 2006, respectively.





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




29


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





**Revenue
      Recognition**





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





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





(i)
            persuasive
                evidence of a sale or licensing arrangement with a customer
                exists;(ii)
            the
                film is complete and, in accordance with the terms of the arrangement,
                has
                been delivered or is available for immediate and unconditional
                delivery;(iii)
            the
                license period of the arrangement has begun and the customer can
                begin its
                exploitation, exhibition or sale;(iv)
            the
                arrangement fee is fixed or determinable; and(v)
            collection
                of the arrangement fee is reasonably
                assured.





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





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





**Film
      in Distribution**





SOP
      00-2
      requires that film costs be capitalized and reported as a separate asset on
      the
      balance sheet. Film costs include all direct negative costs incurred in the
      production of a film, as well as allocations of production overhead and
      capitalized interest. Direct negative costs include cost of scenario, story,
      compensation of cast, directors, producers, writers, extras and staff, cost
      of
      set construction, wardrobe, accessories, sound synchronization, rental of
      facilities on location and post production costs. SOP 00-2 also requires that
      film costs be amortized and participation costs accrued, using the
      individual-film-forecast-computation method, which amortizes or accrues such
      costs in the same ratio that the current period actual revenue (numerator)
      bears
      to the estimated remaining unrecognized ultimate revenue as of the beginning
      of
      the fiscal year (denominator). We make certain estimates and judgments of future
      gross revenue to be received for the Film based on information received by
      its
      distributor, historical results and management’s knowledge of the industry.
      Revenue and cost 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.




30


In
      addition, SOP 00-2 also requires that if an event or change in circumstances
      indicates that an entity should assess whether the fair value of a film is
      less
      than its unamortized film costs, then an entity should determine the fair value
      of the film and write-off to the statement of operations the amount by which
      the
      unamortized film costs exceeds the film’s fair value. As a result of impairment
      reviews during the years ended October 31, 2005 and 2004, we wrote down the
      carrying value attributed to the Film to $0.





**Capitalized
      Software Development Costs**





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





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





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





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





We
      commenced amortization of capitalized software development costs during December
      2005 and have recorded amortization expense of $212,536 and $315,232 during
      the
      three months and six months ended April 30, 2006, respectively.





**Research
      and Development**





Research
      and development expenses relate to the design and development of advanced
      transmission technology products. We outsource to independent third parties
      all
      of our design and development activities. Payments made to independent software
      developers under development agreements are capitalized to software development
      costs once technological feasibility is established or if the development costs
      have an alternative future use. Prior to establishing technological feasibility,
      software development costs are expensed to research and development costs and
      to
      cost of sales subsequent to confirmation of technological feasibility. Internal
      development costs are capitalized to software development costs once
      technological feasibility is established. Technological feasibility is evaluated
      on a product-by-product basis.





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




31


**RESULTS
      OF OPERATIONS**





COMPARISON
      OF THE THREE MONTHS AND SIX MONTHS ENDED APRIL 30, 2006 AND THE THREE MONTHS
      AND
      SIX MONTHS ENDED APRIL 30, 2005





REVENUES .  
      Revenues for the three months and six months ended April 30, 2006 were $18,698
      and $58,874, respectively. Of this amount, $698 and $6,932 was in the form
      of
      guarantee and/or license payments related to the U.S. distribution of the Film
      and $18,000 and $51,942 was related to foreign distribution of the Film during
      the three months ended and six months ended April 30, 2006, respectively.
      Revenues for the three months and six months ended April 30, 2005 were $7,397
      and $16,198, respectively and were from our entertainment business. Revenues
      increased 153% or $11,301 for the three months ended April 30, 2006 and 263%
      or
      $42,676 for the six months ended April 30, 2006 due primarily to an increase
      in
      the number and value of license agreements for distribution of the Film or
      portions of the Film in foreign markets. No revenues were recorded in connection
      with our semiconductor business during the three months and six months ended
      April 30, 2006 and 2005.





OPERATING
      EXPENSES . 
      Operating expenses included cost of sales, amortization of technology license
      and capitalized software development fee, research and development expenses
      in
      connection with the semiconductor business, and selling, general and
      administrative expenses.





Total
      operating expenses increased 85% or $834,385 to $1,814,093 for the three months
      ended April 30, 2006 from $979,708 for the three months ended April 30, 2005.
      The increase in total operating expenses for the three months ended April 30,
      2006 was due primarily to increases in amortization of technology license and
      capitalized software development fee of $212,536, research and development
      expenses of $52,556, and selling, general and administrative expenses of
      $574,613, offset by a decrease in cost of sales of $5,320.  Total
      operating expenses increased 77% or $1,218,572 to $2,808,904 for the six months
      ended April 30, 2006 from $1,590,332 for the six months ended April 30, 2005.
      The increase in total operating expenses for the six months ended April 30,
      2006
      was due primarily to increases in amortization of technology license and
      capitalized software development fee of $315,232, research and development
      expenses of $130,547, and selling, general and administrative expenses of
      $784,738, offset by a decrease in cost of sales of $11,945.





Cost
      of
      sales for the three months and six months ended April 30, 2005 were $5,320
      and
      $11,945, respectively. The cost of sales represents the amortization of film
      cost for the Film. The decrease for the three months and six months ended April
      30, 2006 was a result of the impairment of the Film costs in 2005 which reduced
      the carrying value of the Film costs to $0.





Amortization
      of technology license and capitalized software development fee was $212,536
      and
      $315,232 for the three months and six months ended April 30, 2006 due to the
      commencement of amortization related to the market release of the E30 (Release
      1.3) to prospective customers for evaluation and testing during December 2005.
      No amortization was recorded prior to this period.





Research
      and development expenses increased by $52,556 to for the three months ended
      April 30, 2006 from $0 for the three months ended April 30, 2005. Research
      and
      development expenses increased 1,851% or $130,547 to $137,600 for the six months
      ended April 30, 2006 from $7,053 for the six months ended April 30, 2005. The
      increase is principally the result of additional payments made to HelloSoft,
      Inc. (“HelloSoft”) in accordance with the terms of our services agreement, as
      amended, and the issuance of stock options in connection with research and
      development activities.





Total
      selling, general and administrative expenses increased 59% or $574,613 to
      $1,549,001 for the three months ended April 30, 2006 from $974,388 for the
      three
      months ended April 30, 2005. Total selling, general and administrative expenses
      increased 50% or $784,738 to $2,356,072 for the six months
      ended April 30, 2006 from $1,571,334 for the six months ended April 30, 2005.
      The increases are primarily the result of an increase in salaries and wages
      due
      to an increase in employees, professional fees related to the filing of a
      registration statement in April 2006, and stock-based compensation related
      to
      options and restricted common stock issued to key employees, directors,
      consultants, and service providers.




32


OTHER
      (INCOME) EXPENSES . 
      Other expenses included interest expense, amortization of deferred financing
      costs, and a loss on exchange of notes payable into common stock.





Total
      Other (Income) Expenses increased 513% or $1,462,064 to $1,747,098 for the
      three
      months ended April 30, 2006 from $285,034 for the three months ended April
      30,
      2005. Total Other (Income) Expenses increased 251% or $1,477,768 to $2,066,201
      for the six months ended April 30, 2006 from $588,435 for the six months ended
      April 30, 2005. The increases are primarily for the reasons noted
      below.





Interest
      expense increased 171% or $617,996 to $978,860 for the three months ended April
      30, 2006 from $360,864 for the three months ended April 30, 2005. Interest
      expense increased 248% or $1,584,170 to $2,223,816 for the six months ended
      April 30, 2006 from $639,646 for the three months ended April 30, 2005. The
      increases are primarily due to the value allocated to the warrants and
      conversion option liability 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.





The
      amortization of deferred financing costs increased 1,040% or $296,362 to
      $324,852 for the three months ended April 30, 2006 from $28,490 for the three
      months ended April 30, 2005. The amortization of deferred financing costs
      increased 971% or $515,710 to $568,819 for the six months ended April 30, 2006
      from $53,109 for the six months ended April 30, 2005. The increase is primarily
      a result of the conversions of the 2005 Debentures, repayment of a note payable,
      and the amortization of additional deferred financing costs related to the
      2006
      Debentures. Upon conversion or repayment of debt prior to its maturity date,
      a
      pro-rata share of debt discount and deferred financing costs are written off
      and
      recorded as expense.





Other
      expenses also increased in the three months and six months ended April 30,
      2006
      due to the loss recognized on exchange of notes payable into common stock of
      $446,386.





Other
      income in the six months ended April 30, 2006 consisted primarily of a gain
      on
      forgiveness of principal and interest on a promissory note to Zaiq Technologies,
      Inc. of $1,169,820.





Other
      income in the six months ended April 30, 2005 consisted primarily of a gain
      on
      sale of property and equipment of $20,000, a gain on exchange of Redeemable
      Series B Preferred Stock into common stock of $55,814, and other miscellaneous
      gains of $28,506.





NET
      LOSS .
 
      For the three months ended April 30, 2006 our net loss increased 182% or
      $2,285,148 to $3,542,493 from $1,257,345 as the result of higher interest costs,
      higher amortization of deferred financing costs, higher selling, general, and
      administrative expense, and higher research and development expenses, partially
      offset by an increase in revenues and the gain on the forgiveness of principal
      and interest on the promissory note to Zaiq Technologies, Inc. discussed above.
      For the six months ended April 30, 2006, the net loss increased 123% or
      $2,653,662 to $4,816,231 from $2,162,569 for primarily the same reasons noted
      above.





**LIQUIDITY
      AND CAPITAL RESOURCES**





Cash
      balances totaled $3,406,914 at June 12, 2006 and $4,007,470 as of April 30,
      2006
      compared to $373,481 at October 31, 2005.





Net
      cash
      used in operating activities was $1,350,482 for the six months ended April
      30,
      2006, compared to $816,866 for the six months ended April 30, 2005. The increase
      in cash used in operations was principally the result of the following
      items:





·
            an
                increase in the net loss, which was $4,816,231, compared with $2,162,569
                for the six months ended April 30, 2005; and·
            a
                decrease for the six months ended April 30, 2006 of accounts payable
                and
                accrued liabilities of $199,687, compared to an increaseof
                accounts payable and accrued liabilities for the six months ended
                April
                30, 2005 of $22,329, resulting in a net decrease in cash used of
                $177,358;





impacted
      by the following non-cash items:





·
            increased
                amortization of deferred financing costs, which were $568,819 for
                the six
                months ended April 30, 2006, compared to $53,109 for the six months
                ended
                April 30, 2005, principally due to increased conversions of the May
                2005
                debentures, the repayment of a note payable, and the amortization
                of
                additional deferred financing costs related to the 2006
                Debentures;·
            increased
                amortization of debt discount on notes, which was $2,103,107 for
                the six
                months ended April 30, 2006, compared to $520,169 for the six months
                ended
                April 30, 2005, principally due to increased conversions of the May
                2005
                Debentures, the repayment of a note payable, and the amortization
                of
                additional debt discount related to the 2006
                Debentures;·
            increased
                amortization of technology license and capitalized software development
                fee, which was $315,232 for the six months ended April 30, 2006,
                compared
                to $0 for the six months ended April 30, 2005, due to the commencement
                of
                amortization related to the market release of the E30 (Release 1.3)
                to
                prospective customers for evaluation and testing;·
            gain
                on forgiveness of principal and interest on the promissory note to
                Zaiq
                Technologies, Inc. of $1,169,820 during the six months ended April
                30,
                2006;·
            increased
                stock-based compensation expense, which was $1,010,570 for the six
                months
                ended April 30, 2006 compared to $888,930 for the six months ended
                April
                30, 2005; and·
            loss
                on exchange of notes payable into common stock of $446,386 during
                the six
                months ended April 30, 2006.





Net
      cash
      used by investing activities was $204,499 for the six months ended April 30,
      2006 compared to $0 in the six months ended April 30, 2005. The increase was
      due
      to the acquisition of property and equipment of $4,499 and a technology license
      and development fee of $200,000.





Net
      cash
      provided by financing activities was $5,188,970 for the six months ended April
      30, 2006 compared to $1,041,466 for the six months ended April 30, 2005. Net
      cash provided by financing activities for the six months ended April 30, 2006
      was the result of proceeds from the 2006 Debentures of $6,000,000, proceeds
      from
      the exercise of warrants of $568,531, and proceeds from the issuance of a note
      payable of $750,000, offset by capitalized financing costs of $742,450, and
      total payments of $1,379,613 in connection with the repayment of notes payable
      of $944,291 and convertible notes payable of $435,322. Net cash provided by
      financing activities for the six months ended April 30, 2005 was the result
      of
      proceeds from the issuance of common stock in the amount of $800,100 and
      proceeds from notes payable of $300,000, offset by capitalized financing costs
      of $33,029, and repayments of convertible notes payable of $25,625.





Our
      liquidity improved significantly as a result of a series of transactions
      completed during the six months ended April 30, 2006.





First,
      as
      described in Note
      7
      to the
      accompanying condensed consolidated financial statements, we raised gross
      proceeds of $6.0 million in March 2006 from the private placement to 17
      institutional and individual investors of our 2006 Debentures. We received
      net
      proceeds of approximately $4.5 million from the proceeds of the 2006 Debentures,
      after the payment of offering related fees and expenses and after the repayment
      in full of notes payable, made in December 2005 and January 2006, in the
      aggregate amount of $810,000.




33


Second,
      we received $568,531 from the exercise of warrants to purchase 11,370,624 shares
      of our common stock.





Third,
      we
      reduced our current liabilities by $844,315 by issuing 12,064,494 shares of
      common stock to several holders of notes payable.





These
      transactions increased our working capital by over $5.9 million upon their
      completion during the six months ended April 30, 2006.





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





In
      December 2005 and January 2006, we entered into secured bridge loan agreements
      with a third party pursuant to which we borrowed $750,000. After payment of
      due
      diligence fees and transaction related fees and expenses, we received net
      proceeds of $672,470. An amount equal to 108% of the principal amount of the
      loans was due and payable on the earlier of May 25, 2006 or the date we effect
      a
      financing transaction or series of transactions resulting in gross proceeds
      to
      us of at least $2,000,000. We repaid the loans in their entirety from the
      proceeds of the 2006 Debentures.





In
      May
      2005, we sold $3,500,000 in aggregate principal amount of our 2005 Debentures,
      receiving net proceeds of approximately $3.11 million after the payment of
      offering related costs. As of April 30, 2006, $ 3,459,436
      of principal amount and $108,509 of
      interest of the 2005 Debentures had been converted into 170,376,861
      shares of our
      common stock and there was $ 40,564 of
      principal amount of the 2005 Debentures outstanding. The 2005 Debentures mature
      in May 2008.





In
      December 2003, April 2004 and May 2004, we raised net proceeds of approximately
      $1,024,000 from the private placement to certain private and institutional
      investors of our three year 7% Convertible Debentures. $ 125,000 of
      principal issued in December 2003 was outstanding as of June
      12,
      2006 and
      matures in December 2006.





As
      of
      June 12, 2006 ,
      we had
      cash balances of approximately $3.4 million.
      Although management believes funds on hand will enable us to meet our liquidity
      needs for at least the
      next
      15 months ,
      we will
      need to raise additional funds to fulfill our business plan and to meet our
      future operating requirements, prior to the receipt of revenues from our
      semiconductor business.





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





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




**UNRESOLVED
      SEC COMMENT LETTER**




The
      Company filed a registration statement on Form SB-2 on April 24, 2006 and
      received a comment letter on May 22, 2006 from the staff of the Division of
      Corporation Finance of the Securities and Exchange Commission. The staff’s
      letter addressed a number of issues relating to the registration statement,
      including several issues relating to the Company’s audited and unaudited
      financial statements that were contained in the registration statement. Among
      other comments, the staff’s letter inquired regarding the Company’s accounting
      treatment for warrants issued in connection with the Company’s 2005 debentures
      and their classification as equity rather than derivative liabilities in the
      Company’s financial statements as of and for the fiscal year ended October 31,
      2005.




34




The
      Company sent a letter to the staff on June 5, 2006 and has had two telephone
      conferences with the staff regarding this comment, which remains unresolved
      as
      of the date of filing of this quarterly report. The Company is continuing to
      work with the SEC staff to provide additional information on this issue. If
      the
      Company is required to classify the warrants as derivative liabilities, the
      Company would restate the unaudited financial statements contained in this
      report on Form 10-QSB, as well as the unaudited financial statements contained
      in the Company’s reports on Form 10-QSB for the periods ended July 31, 2005 and
      January 31, 2006, and the audited financial statements contained in the
      Company’s report on Form 10-KSB for the fiscal year ended October 31, 2005. The
      modifications to the Company’s financial statements would involve only non-cash
      accounting items, but would materially impact the Company’s balance sheet and
      statements of operations, stockholders’ equity and cash flows for each period
      presented.




**IMPACT
      OF RECENTLY ISSUED ACCOUNTING STANDARDS**





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





The
      Emerging Issues Task Force (“EITF”) reached a tentative conclusion on EITF Issue
      No. 05-1, “Accounting for the Conversion of an Instrument That Becomes
      Convertible upon the Issuer’s Exercise of a Call Option” that no gain or loss
      should be recognized upon the conversion of an instrument that becomes
      convertible as a result of an issuer’s exercise of a call option pursuant to the
      original terms of the instrument. The application 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 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. In March 2006 and May 2005, we entered into private placement
      agreements for convertible debentures, a registration rights agreement and
      warrants in connection with a private placement. Based on the interpretive
      guidance in EITF Issue No. 05-4, view C, due to certain factors, including
      an
      uncapped liquidated damages provision in the registration rights agreement,
      we
      determined that the embedded conversion option related to these convertible
      debentures and the registration rights are derivative liabilities. Accordingly,
      the fair value of the embedded conversion options was recorded as a liability
      as
      of the closing of the sale of these convertible debentures. Due to various
      factors, including substantial conversions of these convertible debentures
      and
      the registration statement becoming effective on August 1, 2005, the value
      of
      the registration rights was deemed to be de minimus.




35


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 application of this pronouncement for new convertible
      debt instruments with a beneficial conversion feature is not expected to have
      an
      impact on our consolidated financial position, results of operations or cash
      flows.





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








**ITEM
      3.  CONTROLS AND PROCEDURES**





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





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




36


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 six months ended April 30, 2006, there have been no changes in our internal
      controls over financial reporting that have materially affected, or are
      reasonably likely to materially affect, these controls.




37


**PART
      II - OTHER INFORMATION**





**ITEM
      2.  U****nregistered
      Sales of Equity Securities and Use of Proceeds.**





During
      the three months ended April 30, 2006, the Company sold or issued unregistered
      securities as follows:





In
      February 2006, we issued





(i)  options
      to purchase 2,100,000 shares of Common Stock to members of our Board of
      Directors, an advisory member and an employee;





(ii)  12,064,494
      shares of Common Stock in exchange for the cancellation of notes payable by
      the
      Company with a principal amount of $700,337 and interest of $144,178;





(iii)  5,656,108
      shares of Common Stock upon exercise of warrants resulting in gross proceeds
      of
      $282,805; and





(iv)  options
      to purchase 2,000,000 shares of Common Stock to our legal counsel for legal
      services valued at $84,277.





During
      the period between February 21, 2006 and March 10, 2006, we issued 11,370,624
      shares of Common Stock upon exercise of warrants resulting in gross proceeds
      of
      $568,531.





In
                March 2006, we issued





(i)  5,714,516
      shares of Common Stock upon exercise of warrants resulting in gross proceeds
      of
      $285,726;





(ii)  11,000,000
      shares of restricted Common Stock to consultants for services valued at
      $1,870,000; and





(iii)  a
      promissory note in the principal amount of $301,197 to our Executive Vice
      President, which was convertible into shares of our Common Stock and has since
      such date been paid in full and cancelled.





In
      April
      2006, we issued 35,714 shares of Common Stock upon conversion of a convertible
      promissory note and interest valued at $15,000.





All
      of
      the securities issued in the transactions described above were issued without
      registration under the Securities Act in reliance upon the exemptions provided
      in Section 4(2) of the Securities Act or Regulation S under such Securities
      Act.
      Except with respect to securities sold under Regulation S, the recipients of
      securities in each such transaction acquired the securities for investment
      only
      and not with a view to or for sale in connection with any distribution thereof.
      Appropriate legends were affixed to the share certificates issued in all of
      the
      above transactions. Each of the recipients represented that they were
      "accredited investors" within the meaning of Rule 501(a) of Regulation D under
      the Securities Act, or had such knowledge and experience in financial and
      business matters as to be able to evaluate the merits and risks of an investment
      in its common stock. All recipients had adequate access, through their
      relationships with the Company and its officers and directors, to information
      about the Company. None of the transactions described above involved general
      solicitation or advertising.




38


**ITEM
      4.  Submission of Matters to a Vote of Security
      Holders.**





The
      Company submitted the following matters to a vote of its shareholders at its
      annual meeting, which was held on April 18, 2006.





(a)  The
      Company shareholders were asked to vote for the election of Brad Ketch, Ray
      Willenberg, Jr., Jack L. Peckham and Thomas J. Cooper to the Board of Directors
      of the Company, to hold office until the 2007 Annual Meeting of Shareholders.
      The nominees were all elected pursuant to the following votes:





Name
                of Director
            Votes
                For
            Votes
                WithheldBrad
                Ketch
            257,328,351
            3,737,068Ray
                Willenberg, Jr.
            257,955,892
            3,109,527Jack
                L. Peckham
            256,575,209
            4,490,210Thomas
                J. Cooper
            257,200,818
            3,864,601





(b)  The
      Company’s shareholders were asked to ratify Marcum & Kliegman, LLP as
      independent public accountants for the year ending October 31, 2006. The
      shareholders ratified the selection of the independent public accountants with
      258,517,733 votes cast for, 1,888,438 votes cast against and 734,247
      abstentions.





(c)  The
      Company’s shareholders were asked to amend Article IV of the Articles of
      Incorporation to increase the Company’s authorized common stock from 500 million
      shares to 900 million shares. The shareholders approved the amendment to Article
      IV with 95,131,548 votes cast for, 9,720,526 votes cast against, and 585,475
      abstentions.





(d)  The
      Company’s shareholders were asked to amend Section B(2) of Article IV of the
      Articles of Incorporation relating to the Company’s preferred stock. The
      shareholders approved the amendment with 99,060,931 votes cast for, 5,316,324
      votes cast against and 1,033,294 abstentions.





(e)  The
      Company’s shareholders were asked to amend Article IV of the Articles of
      Incorporation to delete paragraph C (regarding the reverse stock split effected
      by the Company in 2000). The shareholders approved the amendment with
      100,880,963 votes cast for, 3,069,673 votes cast against and 1,486,913
      abstentions.





(f)  The
      Company’s shareholders were asked to amend the Articles of Incorporation to
      cancel the designations of the Company’s Series A through G preferred stock. The
      shareholders approved the amendment with 101,143,690 votes cast for, 3,222,643
      votes cast against and 1,071,216 abstentions.





**ITEM
      6.****E****xhibits**





3.1
            Amended
                and Restated Articles of Incorporation (incorporated by reference
                to
                Exhibit 3.1 of the Company’s Registration Statement on Form SB-2 filed
                with the Commission on April 24, 2006).4.1
            Amendment
                to Class 2005-A, -B and -C Common Stock Purchase Warrants dated as
                of
                February 21, 2006 (incorporated by reference to Exhibit 4.1 of the
                Company’s Report on Form 8-K filed with the Commission on March 9,
                2006).4.2
            Form
                of 7% Senior Secured Convertible Debenture (incorporated by reference
                to
                Exhibit 4.1 of the Company’s Report on Form 8-K filed with the Commission
                on March 13, 2006 (the “March 13, 2006 8-K”)).10.1
            License
                Agreement dated as of February 6, 2006 between the Company and HelloSoft,
                Inc. (Confidential treatment has been requested with respect to certain
                portions of this exhibit. Omitted portions have been filed separately
                with
                the Commission)(incorporated by reference to Exhibit 10.10 of the
                Company’s quarterly report on Form 10-QSB for the quarterly period ended
                January 31, 2006 (the “January 2006 10-QSB”)).


39





10.2
            Stock
                Option Agreement dated February 16, 2006 between the Company and
                Davis
                Munck Butrus, P.C. (incorporated by reference to Exhibit 10.11 of
                the
                Company’s January 2006 10-QSB).10.3
            Stock
                Option Agreement dated February 16, 2006 between the Company and
                Jack
                Peckham* (incorporated by reference to Exhibit 10.12 of the Company’s
                January 2006 10-QSB)(1)10.4
            Stock
                Option Agreement dated February 16, 2006 between the Company and
                Thomas
                Cooper (incorporated by reference to Exhibit 10.13 of the Company’s
                January 2006 10-QSB)(1)10.5
            Form
                of Securities Purchase Agreement, dated as of March 6, 2006, between
                the
                Company and the investors named therein (incorporated by reference
                to
                Exhibit 10.1 of the Company's March 13, 2006 8-K)10.6
            Form
                of Warrant issued in connection with the Securities Purchase Agreement
                (incorporated by reference to Exhibit 10.2 of the Company's March
                13, 2006
                8-K)10.7
            Form
                of Security Interest Agreement, dated as of March 6, 2006, among
                the
                Company, the Secured Parties named therein, and Krieger & Prager, LLP,
                as agent for the Secured Parties (incorporated by reference to Exhibit
                10.3 of the Company's March 13, 2006 8-K)10.8
            Form
                of Registration Rights Agreement, dated as of March 6, 2006, between
                the
                Company and the investors named therein (incorporated by reference
                to
                Exhibit 10.4 of the Company's March 13, 2006 8-K)10.9
            Placement
                Agency Agreement, dated as of March 3, 2006, between the Company
                and Pond
                Equities (incorporated by reference to Exhibit 10.5 of the Company's
                March
                13, 2006 8-K)10.10
            Employment
                Agreement between the Company and Ray Willenberg, Jr. dated as of
                March 1,
                2006 (incorporated by reference to Exhibit 10.1 of the Company's
                Report on
                Form 8-K filed with the Commission on March 15, 2006 (the "March
                15, 2006
                8-K")) (1)10.11
            Convertible
                Promissory Note dated March 7, 2006 by the Company in favor of Ray
                Willenberg, Jr. (incorporated by reference to Exhibit 10.2 of the
                Company's March 15, 2006 8-K)10.12
            Consulting
                Agreement between the Company and LF Technology Group, LLC dated
                March 7,
                2006 (incorporated by reference to Exhibit 10.3 of the Company's
                March 15,
                2006 8-K)10.13
            Consulting
                Agreement between the Company and Starburst Innovations, LLC dated
                March
                7, 2006 (incorporated by reference to Exhibit 10.4 of the Company's
                March
                15, 2006 8-K)10.14
            Consulting
                Agreement between the Company and Advisor Associates, Inc. dated
                March 8,
                2006 (incorporated by reference to Exhibit 10.5 of the Company's
                March 15,
                2006 8-K)10.15
            First
                Amendment to Lease between the Company and American Property Management
                Corp. as agent for Weston Investment Co. LLC dated March 8,
                2006.*31.1
            Rule
                13a-14(a)/15d-14(a) Certification*32.1
            Section
                1350 Certification*





___________________________





* 
      Filed herewith.


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


40


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






41