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

On January 29, 2008, we completed the acquisition of all of the issued and outstanding capital stock of BDSI, a subsidiary of UTEK Corporation (“UTEK”) in exchange for 60,000,000 shares of unregistered common stock of the Company, valued at $1,740,000, which are subject to certain anti-dilution adjustments.  As a result of the transaction, BDSI became a wholly-owned subsidiary of the Company.  Upon closing of the acquisition transaction, BDSI had $400,000 of cash and a worldwide exclusive license to patented technology developed by researchers at the University of Illinois.  The remaining purchase price of $1,340,000 was allocated to the license.  As we recorded an impairment of our existing technology licenses and capitalized software development costs during the year ended October 31, 2007 and are currently in the development stage, management determined it was unable to currently demonstrate alternative future uses for the license and support the carrying amount of the license based upon estimated future cash flows.  Accordingly, the $1,340,000 was charged to operations, under the caption “Acquired in-process research and development” during the three months ended January 31, 2008.

The patent relates to an algorithm designed to enhance power allocation in telecommunications systems that use multicarrier modulation protocol. IPSL, ADSL, VDSL and DSL systems are all examples of multicarrier modulation protocols. The algorithm serves to improve the achievable data rate or the signal-to-noise ratio, reducing errors in the transmission. Under the exclusive license agreement relating to such technology, BDSI is obligated to pay the University of Illinois royalties based on achievement of certain sales levels for products utilizing the technology. Unless earlier terminated by a party pursuant to the terms of the license agreement, the license expires upon the expiration or termination of all of the University of Illinois patent rights underlying the technology. The license agreement also permits BDSI to sublicense the technology and obligates BDSI to make royalty payments to the University of Illinois based on a percentage of payments received by BDSI from sublicensees.

On March 24, 2008, we completed the acquisition of all of the issued and outstanding capital stock of Multi-Carrier Communications, Inc., (“MCCI”), a subsidiary of UTEK Corporation (“UTEK”) in exchange for 150,000,000 shares of unregistered common stock of the Company, which are subject to certain anti-dilution adjustments.  As a result of the transaction, MCCI became a wholly-owned subsidiary of the Company. MCCI was incorporated on March 12, 2008 and its historical operations prior to acquisition were not significant.  We have accounted for this acquisition under the purchase method of accounting.  Upon closing of the acquisition transaction, the assets of MCCI included $300,000 in cash and a worldwide exclusive license to certain technology owned by The University of Queensland & The University of Sydney and UNIQUEST Pty Limited (“Uniquest”). The remaining purchase price of $1,675,000 was allocated to the license.  As we recorded an impairment of our existing technology licenses and capitalized software development costs during the year ended October 31, 2007 and are currently in the development stage, management determined it was unable to currently demonstrate alternative future uses for the license and support the carrying amount of the license based upon estimated future cash flows.  Accordingly, the $1,675,000 was charged to operations, under the caption “Acquired in-process research and development” during the three and six months ended April 30, 2008.

The technology relates to multiple advanced algorithms for the transmission of digital data across metallic media, such as copper wires. Under the License Agreement (the “Uniquest License Agreement”) relating to such technology, MCCI is obligated to pay Uniquest an up-front fee and a patent reimbursement fee to cover patents costs relating to the technology. MCCI made those payments to Uniquest before we acquired MCCI. The Uniquest License Agreement also provides that MCCI shall pay royalties based on achievement of certain sales levels for products utilizing the technology. Royalty obligations of MCCI are subject to certain minimum amounts. Unless earlier terminated by a party pursuant to the terms of the Uniquest License Agreement, the license expires upon the day before the date of expiration of all of the patent rights underlying the technology or 20 years from the date of the Uniquest License Agreement for unpatented technology. The Uniquest License Agreement also permits MCCI to sublicense the technology with the consent of Uniquest and obligates MCCI to make royalty payments to Uniquest based on a percentage of payments received by MCCI from sublicensees. MCCI and Uniquest have also entered into a Research Agreement pursuant to which MCCI shall fund and obtain certain rights relating to the licensed technology developed through a research program to be implemented by Uniquest. MCCI funded this research before we acquired MCCI.

In May 2008 we announced that Teleconnect GmbH of Dresden, Germany, had chosen our Cupria™ transport processor for its new product line of high-speed data equipment. This new family of gigabit Ethernet transport equipment is being developed by Teleconnect at the request of a large European customer, which has not yet been formally announced by Teleconnect.

 

 

In June 2008 we announced that we received a purchase order for $1,050,000. The customer is a manufacturer of equipment that is used in the telecom and data industry.  We cannot fulfill this order at the present time.  Our ability to satisfy this order is dependent on our receipt of additional financing.  We will not recognize revenues from this order until we obtain such financing and build and ship the ordered products.

CRITICAL ACCOUNTING POLICIES

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Our estimates are based on historical experience, other information that is currently available to us and various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions and the variances could be material.

Our critical accounting policies are those that affect our condensed consolidated financial statements materially and involve difficult, subjective or complex judgments by management. We have identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Derivative Financial Instruments

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

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

We account for embedded conversion options that no longer meets the conditions of EITF Issue No. 00-19 to be classified as a liability under EITF Issue No. 06-7, “Issuer’s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities” (“EITF Issue No. 06-7”). Under EITF Issue No. 06-7, when an embedded conversion option previously accounted for as a derivative under SFAS 133 no longer meets the bifurcation criteria, we reclassify the amount of the embedded conversion option to stockholders’ deficiency.

Registration Payment Arrangements

We account for registration payment arrangements in accordance with FASB Staff Position (FSP) No. EITF 00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”), which specifies that contingent obligations to make future payments or otherwise transfer consideration under a registration payment arrangement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies”.  SFAS No. 5 requires loss contingencies to be accrued and expensed if they are probable and reasonably estimable.  As of April 30, 2008, we have accrued $181,003 within accounts payable and accrued expenses for liquidated damages in connection with registration payment arrangements.

 

 

Stock-Based Compensation

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

SFAS 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statement of operations. 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 granted during the three months ended April 30, 2008 and 2007 was $101,514 and $117,183 respectively, and $201,128 and $227,948 for the six months ended April 30, 2008 and 2007, respectively.

As stock-based compensation expense recognized in the consolidated statement of operations for the six months ended April 30, 2008 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.

Research and Development

Research and development expenses relate to the design and development of advanced transmission technology products. Prior to establishing technological feasibility, software development costs are expensed to research and development costs and to cost of sales subsequent to confirmation of technological feasibility. Internal development costs are capitalized to software development costs once technological feasibility is established. Technological feasibility is evaluated on a product-by-product basis. Research and development expenses generally consist of salaries, related expenses for engineering personnel and third-party development costs incurred. Amounts allocated to acquired in-process research and development costs, from business combinations, are charged to operations at the consummation of the acquisition.

Together, our outsourced and employed engineer head count on April 30, 2008 totaled six full-time equivalent personnel.  From time to time we outsource some of the development activities with respect to our products to independent third party developers.  During the three months ended April 30, 2008 and 2007, we expended $130,845 and $161,946, respectively, for research and development of our semiconductor technology.  During the six months ended April 30, 2008 and 2007, we expended $550,257 and $809,620, respectively, for research and development of our semiconductor technology.

Technology Licenses

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

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

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

 

 

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

In January 2008 we obtained a license to include BDSI’s technology in the Cupria™ family of transport processors.  The technology relates to an algorithm designed to enhance power allocation in telecommunications systems that use multicarrier modulation protocol. IPSL, ADSL, VDSL and DSL systems are all examples of multicarrier modulation protocols. The algorithm serves to improve the achievable data rate or the signal-to-noise ratio, reducing errors in the transmission. Under the exclusive license agreement relating to such technology, BDSI is obligated to pay the University of Illinois royalties based on achievement of certain sales levels for products utilizing the technology. Unless earlier terminated by a party pursuant to the terms of the license agreement, the license expires upon the expiration or termination of all of the University of Illinois patent rights underlying the technology. The license agreement also permits BDSI to sublicense the technology and obligates BDSI to make royalty payments to the University of Illinois based on a percentage of payments received by BDSI from sublicensees.

In March 2008 we obtained a license to include MCCI’s technology in the Cupria™ family of transport processors.  The technology relates to multiple advanced algorithms for the transmission of digital data across metallic media, such as copper wires. Under the License Agreement (the “Uniquest License Agreement”) relating to such technology, MCCI is obligated to pay royalties based on achievement of certain sales levels for products utilizing the technology.  Royalty obligations of MCCI are subject to certain minimum amounts. Unless earlier terminated by a party pursuant to the terms of the Uniquest License Agreement, the license expires upon the day before the date of expiration of all of the patent rights underlying the technology or 20 years from the date of the Uniquest License Agreement for unpatented technology. The Uniquest License Agreement also permits MCCI to sublicense the technology with the consent of Uniquest and obligates MCCI to make royalty payments to Uniquest based on a percentage of payments received by MCCI from sublicensees.

RESULTS OF OPERATIONS

COMPARISON OF THE SIX AND THREE MONTHS ENDED APRIL 30, 2008 AND THE SIX AND THREE MONTHS ENDED APRIL 30, 2007

REVENUES.   No revenues were recorded in connection with our semiconductor business during the six months ended April 30, 2008 and 2007.

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

Total operating expenses increased 79% or $1,456,689 to $3,296,757 for the three months ended April 30, 2008 from $1,840,068 for the three months ended April 30, 2007.  This increase in total operating expenses for the three months ended April 30, 2008 was due primarily to the acquired in-process research and development in connection with the acquisition of MCCI and an increase in selling, general and administrative expenses, offset by decreases in the amortization of technology licenses and capitalized software development fees and research and development expenses.

Total operating expenses increased 58% or $2,437,733 to $6,625,253 for the six months ended April 30, 2008 from $4,187,520 for the six months ended April 30, 2007.  This increase in total operating expenses for the six months ended April 30, 2008 was due primarily to the acquired in-process research and development in connection with the acquisitions of BDSI and MCCI and an increase in selling, general and administrative expenses, offset by decreases in the amortization of technology licenses and capitalized software development fees and research and development expenses.

There was no amortization of technology licenses and capitalized software development fees for the three and six months ended April 30, 2008 as compared to $270,363 and $530,666 for the three and six months ended April 30, 2007, respectively.  The decrease was due to the Company recognizing a loss on the impairment of technology licenses and capitalized software development costs during the year ended October 31, 2007 that reduced the carrying value to $0.

 

 

Research and development expenses decreased 19% or $31,101 to $130,845 for the three months ended April 30, 2008 from $161,946 for the three months ended April 30, 2007 due to a reduction in supplies, facilities, and legal expenses, offset by an increase in consulting expenses.  Research and development expenses decreased 32% or $259,363 to $550,257 for the six months ended April 30, 2008 from $809,620 for the six months ended April 30, 2007.  This decrease is primarily due to the decrease in stock based compensation offset primarily by increases in salaries and wages.  Stock based compensation recognized for research and development for the six months ended April 30, 2007 was $443,432, the majority of which was accounted for by a share-based payment valued at $395,000 to eSilicon, the initial payment required to commence pre-production work for Release 2.0 of the Cupria product line.  For the six months ended April 30, 2008, stock based compensation recognized for research and development was only $23,932.  Salaries and wages related to research and development increased during the six months April 30, 2008 due primarily to the costs being expensed during the period, whereas during the six months ended April 30, 2008 these costs were being capitalized as capitalized software based on the technology’s stage of development.

Total selling, general and administrative expenses increased 6% or $83,153 to $1,490,912 for the three months ended April 30, 2008 from $1,407,759 for the three months ended April 30, 2007.  This increase is primarily due to an increase in salaries and wages, legal and accounting fees, and fees related to the extension of maturity dates on convertible debentures, offset by a decrease in stock based compensation from $589,382 to $460,805 and a reduction in travel, meals, lodging and consulting fees.

Total selling, general and administrative expenses increased 7% or $212,762 to $3,059,996 for the six months ended April 30, 2008 from $2,847,234 for the six months ended April 30, 2007. This increase is primarily due to the increase in stock based compensation recognized for selling, general and administrative expenses from $1,058,791 to $1,173,025 and increases in salaries and wages, accounting fees, and fees related to the extension of maturity dates on convertible debentures, offset by decreases in legal and consulting fees.

OTHER (INCOME) EXPENSES.  Other expenses-net included interest income, interest expense, the change in fair value of derivative liabilities, and amortization of deferred financing costs.  In total, other income – net increased by 24% or $407,133 to $2,125,702 for the three months ended April 30, 2008 from $1,718,569 for the three months ended April 30, 2007. In total, for the six months ended April 30, 2008, there was income of $1,151,356 as compared with a loss of $3,716,722 for the six months ended April 30, 2007.  Changes in individual line items changed for the reasons below.

Interest expense increased 292% or $450,181 to $604,197 for the three months ended April 30, 2008 from $154,016 for the three months ended April 2007.  This increase is due primarily to additional interest expense and amortization of debt discount related to the 2007 Debentures.  Interest expense decreased 42% or $1,221,182 to $1,719,335 for the six months ended April 30, 2008 from $2,940,517 for the six months ended April 2007.  The decrease is primarily due to the amortization and write-off of debt discount due to increased conversions of the 2006 Debentures during the six months ended April 30, 2007 as compared to the six months ended April 30, 2008, offset by increases in interest expense and amortization of debt discount related to the 2007 Debentures.

We recognized a gain of $2,846,664 on the change in fair value of derivative liabilities for the three months ended April 30, 2008, an increase of $946,270 from a gain of $1,900,394 for the three months ended April 30, 2007.  In addition, we recognized a gain of $3,123,293 on the change in fair value of derivative liabilities for the six months ended April 30, 2008, an increase of $2,761,546 from a gain of $361,747 for the six months ended April 30, 2007.  The increased gains were primarily due to a larger number of derivative instruments, primarily warrants, outstanding as of April 30, 2008 and a larger decrease in the market price of our common stock during the three and six months ended April 30, 2008 as compared to the change during the three and six months ended April 30, 2007.  In general, increases in the market price of our common stock as compared to the exercise price of our warrants or options results in increases in the fair value of the warrant or option as estimated using the Black-Scholes model.

The amortization of deferred financing costs increased 184% or $75,697 to $116,858 for the three months ended April 30, 2008 from $41,161 for the three months ended April 30, 2007. This increase is due primarily to the amortization of deferred financing costs related to the 2007 Debentures that did not occur during the six months ended April 30, 2007.  The amortization of deferred financing costs decreased 78% or $911,900 to $253,947 for the six months ended April 30, 2008 from $1,165,847 for the six months ended April 30, 2007. The decrease for the six months ended April 30, 2008 is primarily a result of the conversions of the 2006 Debentures during the three months ended January 31, 2007. 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.

 

 

NET LOSS.   For the three months ended April 30, 2008 our net loss increased 863% or $1,051,223 to $1,173,042 from $121,819 for the three months ended April 30, 2007, primarily as the result of increases in interest expense, amortization of deferred financing costs, acquired in-process research and development, and selling, general and administrative expenses, offset by decreases in amortization of technology licenses and capitalized software development fees, research and development expenses, and an increase in the gain on the change in fair value of derivative liabilities.

For the six months ended April 30, 2008 our net loss decreased 31% or $2,443,174 to $5,469,129 from $7,912,303 for the six months ended April 30, 2007, primarily as the result of increases in the gain on the change in fair value of derivative liabilities, decreases in interest expense, amortization of deferred financing costs, amortization of technology licenses and capitalized software development fees, and research and development expenses, offset by the acquired in-process research and development and an increase in selling, general and administrative expenses.

The impact of discontinued operations was not significant for the three and six months ended April 30, 2008 or 2007.

LIQUIDITY AND CAPITAL RESOURCES

Overview

During the three months ended April 30, 2008, and during the period from May 1, 2008 to June 20, 2008, we have experienced a worsening financial position, a significant decline in the market price of our common stock (from closing prices of $0.012 at May 1, 2008 to $0.0011 at June 20, 2008), and increased difficulty in securing additional financing.  Although we were successful in raising $302,000 over the three months ended April 30, 2008 and $277,000 from May 1, 2008 through June 20, 2008, through private placements of common stock and loans, and obtained $300,000 in cash when we acquired MCCI on March 24, 2008, our need for additional financing remains acute.

Cash and cash equivalents balances totaled approximately $50,082 as of June 20, 2008, $1,621 as of April 30, 2008, and $35,368 as of October 31, 2007.  We need to raise additional funds on an immediate basis in order to comply with the terms of certain outstanding agreements, keep current essential suppliers and vendors, and to maintain our operations as presently conducted.  If we are unable to raise these funds, we will not be able to maintain operations as presently conducted and may cease operating as a going concern.  Management’s plans in this regard are to obtain other debt and equity financing until profitable operation and positive cash flow are achieved and maintained.  Even if we are able to raise additional funds through the issuance of debt or other means, our cash needs could be heavier than anticipated in which case we could be forced to raise additional capital.  Even after we receive orders for our products, we will require additional financing before we can fulfill such orders, and 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.  We may have difficulty obtaining additional funds as and if needed, and we may have to accept terms that would adversely affect our stockholders.  Additional equity financings are likely to be extremely dilutive to holders of our common stock and debt financing may involve significant payment obligations and covenants that restrict how we operate our business.  Covenants in our agreements with certain holders of our debentures issued in March 2006 and December 2007 may impede our ability to obtain additional financing.

Interest payments of approximately $193,000 are due June 30, 2008 on our 2007 Debentures.  We do not presently have sufficient funds to make these interest payments.  If we cannot raise sufficient funds to make these interest payments by July 8, 2008, or reach an agreement with our lenders to extend the interest payment date, we would be in default on the 2007 Debentures.  To secure our obligations under the 2007 Debentures, we granted a security interest in substantially all of our assets, including our intellectual property, in favor of the investors under the terms and conditions of a Security Agreement dated as of December 5, 2007.  If we are unable to perform our obligations under the 2007 Debentures, the investors could seek to foreclose and obtain possession or force the sale of substantially all of our assets, including our products under development.  If this were to occur, we could not continue in our current line of business.

 

 

We also have unsecured debt that is either past due or will be due in the next several months.  We require additional financing or accommodations from our lenders to satisfy these obligations or avoid or waive a default.  Interest payments of approximately $16,400 are due June 30, 2008 on our Senior Secured 7% convertible debentures issued in March 2006 (“2006 Debentures”).  As described below, $50,000 principal amount of our three year 7% convertible debentures (“7% Debentures”) matured in May 2007 and have not yet been repaid.  In addition, $4,280 principal amount of our Senior Secured 7% convertible debentures issued in May 2005 (“2005 Debentures”) matured in May 2008 and have not yet been repaid.  We have a note payable with an outstanding principal balance of $200,000 that will mature on July 31, 2008, and $275,000 and $85,000 principal amount of our 2006 Debentures that will mature on July 10, 2008 and September 17, 2008, respectively.

 

An additional $150,000 principal amount of 2006 Debentures will mature June 30, 2009.  Our 10% Secured Convertible Notes issued in December 2007 (the “2007 Debentures”) will mature in December 2009.  As of June 20, 2008, approximately $3,465,450 principal amount of such debentures was outstanding.

Review of Certain Outstanding Debt Securities

Since inception, we have funded our operations primarily through the issuance of our common stock and debt securities.  As a result of our issuances of debt securities, we have significant repayment obligations in 2008 and 2009 that will affect our liquidity position.

In December 2003, April 2004 and May 2004, we sold $1,350,000 in aggregate principal amount and received net proceeds of approximately $1,024,000 from the private placement to certain private and institutional investors of our 7% Debentures. As of April 30, 2008, there was $50,000 of principal amount of the 7% Debentures outstanding.  The 7% Debentures matured in May 2007, however, they have not yet been repaid.

In March 2006, we sold $6,000,000 in aggregate principal amount of our 2006 Debentures, receiving net proceeds of approximately $4.5 million after the payment of offering related costs.  As of April 30, 2008, there was $600,000 of principal amount of the 2006 Debentures outstanding. The 2006 Debentures originally were due and payable on March 10, 2008, but the maturity date was extended pursuant to agreements with the four remaining debenture holders.

Effective March 17, 2008, we entered into amendment agreements with two investors holding 2006 Debentures with an aggregate principal amount of $200,000 (the “March 17 Amendments”).  The March 17 Amendments amend the terms of the two subject 2006 Debentures to:  (1) extend the maturity date until September 17, 2008, (2) obligate us to pay all interest accrued on such debentures as of June 30, 2008 in cash; (3) extend the payment date for interest that will have accrued on such debentures as of June 30, 2008 until September 17, 2008; and (4) increase the outstanding amount of unconverted principal on such debentures by 20%, however, the 20% principal premium and interest accruing thereon must be paid in cash and may not be converted by such investors into Company common stock.  The March 17 Amendments also included waivers of any event of default that may have occurred under the terms of such 2006 Debentures prior to the date thereof.

Effective March 19, 2008, we entered into amendment agreements with the other two investors holding unconverted 2006 Debentures with an aggregate principal amount of $425,000 (the “March 19 Amendments”).  In exchange for aggregate cash consideration of $23,181, the March 19 Amendments amend the terms of the two subject 2006 Debentures to extend the maturity date on such debentures until April 10, 2008.  The March 19 Amendments also included waivers of any event of default relating to failure to pay amounts due that may have occurred under the terms of such 2006 Debentures prior to the date thereof.

Effective April 17, 2008, we entered into amendment agreements with the two investors that were parties to the March 19 Amendments (the “April 17 Amendments”).  In exchange for aggregate cash consideration of $23,181, the April 17 Amendments amend the terms of the two subject 2006 Debentures to extend the maturity date on such debentures until May 10, 2008.  The April 17 Amendments also included waivers of any event of default relating to failure to pay amounts due that may have occurred under the terms of such 2006 Debentures prior to the date thereof.

 

 

Effective May 29, 2008, we entered into amendment agreements with the two investors that were parties to the March 19 Amendments (the “May 29 Amendments”).  In exchange for aggregate cash consideration of $23,181, the May 29 Amendments amend the terms of the two subject 2006 Debentures to extend the maturity date on such debentures until June 10, 2008.  The May 29 Amendments also included waivers of any event of default relating to failure to pay amounts due that may have occurred under the terms of such 2006 Debentures prior to the date thereof.

In June 2008, we reached an agreement with one investor holding unconverted 2006 Debentures with an aggregate principal amount of $275,000 to extend the maturity date one month (the “June Extension”).  In exchange for aggregate cash consideration of $15,000, the June Extension amends the terms of the subject 2006 Debenture to extend the maturity date on such debenture until July 10, 2008.  The June Extension also included waivers of any event of default relating to failure to pay amounts due that may have occurred under the terms of such 2006 Debenture prior to the date thereof.

In June 2008, we reached an agreement with an investor holding unconverted 2006 Debentures with an aggregate principal amount of $100,551 (the “June Amendment”).  In the June Amendment, the maturity date of the subject 2006 Debenture was extended to June 30, 2009 and the variable conversion price of the subject 2006 Debenture was changed.  Such 2006 Debenture is convertible into shares of common stock at a conversion price for any such conversion equal to the lower of (x) 75% of the closing bid price of the common stock on the trading day immediately preceding the conversion date or (y) if we enter into certain financing transactions, the lowest purchase price or conversion price applicable to that transaction.  The conversion price is subject to adjustment.

In May 2005, we sold $3.5 million in aggregate principal amount of our 2005 Debentures in a private placement to certain private and institutional investors. As of April 30, 2008, there was $4,280 of principal amount of the 2005 Debentures outstanding.  The 2005 Debentures matured in May 2008, however, they have not yet been repaid.

In May 2007, we received $400,000 in proceeds from the issuance of a note payable which originally matured on August 22, 2007. The maturity date on this note payable was originally extended to October 31, 2007. As of April 30, 2008, the unpaid balance of the note was $200,000. The lender has agreed to waive any existing default on the promissory note and to extend the maturity date to July 31, 2008.  In addition, the Company has agreed to use its best efforts to make monthly principal payments of at least $50,000, plus any accrued interest on such prepayments.

In December 2007, we sold $3,527,778 in aggregate principal amount of our 10% Secured Convertible Notes and warrants, receiving net proceeds of approximately $1.7 million (the “2007 Debentures”), after the payment of offering related fees and expenses of $345,000 and after the repayment in full of $1,100,000 principal and accrued interest on bridge loans issued in July 2007.  The 2007 Debentures mature in December 2009.

Review of Condensed Consolidated Statements of Cash Flows

Net cash used in operating activities was $2,581,983 for the six months ended April 30, 2008, compared to $1,921,580 for the six months ended April 30, 2007. The increase in cash used in operations was principally the result of the following items:

·	a decrease in the net loss from continuing operations, which was $5,473,897 for the six months ended April 30, 2008, as compared to $7,904,242 for the six months ended April 30, 2007; and

·	a net decrease for the six months ended April 30, 2008 in other current assets, other assets, due to related party and accounts payable and accrued liabilities of $30,896 representing decreased cash inflows, compared to a net increase of $241,111 for the six months ended April 30, 2007;

impacted primarily by the following non-cash items:

·

decreased consulting fees and other compensatory elements of stock issuances, which were $1,196,957 for the six months ended April 30, 2008, compared to $1,502,223 for the six months ended April 30, 2007, principally due to the issuance of common stock during the six months ended April 30, 2007 with a value of $395,000 in exchange for services;

 

 

·	a gain on the change in fair value of derivative liabilities of $3,123,293 for the six months ended April 30, 2008, compared to a gain of $361,747 for the six months ended April 30, 2007, due to the reasons noted above;

·	the acquired in-process research and development of $3,015,000 in the six months ended April 30, 2008 which did not occur during the six months ended April 30, 2007;

·	interest expense related to the fair value of warrants issued in connection with the 2007 debentures in excess of debt discount of $369,721 for the six months ended April 30, 2008 which did not occur during the six months ended April 30, 2007;

·

decreased amortization of deferred financing costs, which were $253,947 for the six months ended April 30, 2008, compared to $1,165,847 for the six months ended April 30, 2007, principally due to significant conversions of the 2006 Debentures during the six months ended April 30, 2007 and the amortization of the related deferred financing costs;

·

decreased amortization of debt discount on notes, which was $1,115,471 for the six months ended April 30, 2008, compared to $2,893,510 for the six months ended April 30, 2007, principally due to significant conversions of the 2006 Debentures during the six months ended April 30, 2007 and the amortization of the related debt discount; and

·

amortization of technology licenses and capitalized software development fees of $530,666 for the six months ended April 30, 2007, compared to $0 for the six months ended April 30, 2008, due to the Company recognizing a loss on the impairment of technology licenses and capitalized software development costs during the year ended October 31, 2007 that reduced the carrying value to $0.

Net cash provided by investing activities was $690,750 for the six months ended April 30, 2008 compared to $560,794 for the six months ended April 30, 2007.  The net increase was due primarily to cash acquired in connection with the acquisitions of BDSI and MCCI of $700,000 and reduced capital expenditures during the six months ended April 30, 2008, as compared to proceeds from the maturity of short-term investments and from the sale of certain trademark rights, offset by capitalization of research and development costs and software development fees, as well as the purchase of equipment and leasehold improvements related to the buildout of our headquarters office facility during the six months ended April 30, 2007.

Net cash provided by financing activities of $1,852,000 for the six months ended April 30, 2008 was the result of proceeds from convertible debentures of $3,175,000, advances from an officer of $49,000, and the issuance of common stock of $273,000, offset by capitalized financing costs of $345,000 and the repayment of notes payable in the amount of $1,300,000.  This represents an increase of $1,237,000 from net cash provided by financing activities for the six months ended April 30, 2007 of $566,000 which was the result of proceeds from a $300,000 note payable and from the issuance of common stock of $300,000, offset by capitalized financing costs of $34,000.

Going Concern Qualification

We have incurred significant net losses since inception, negative cash flows and liquidity problems.  These conditions raise substantial doubt about our ability to continue as a going concern. Due to the fact that there is substantial doubt about our ability to continue as a going concern, our independent registered public accounting firm’s audit report accompanying our 2007 financial statements includes an explanatory paragraph to the uncertainty of our ability to continue as a going concern. The financial statements do not include any adjustment that might result from the outcome of such uncertainty. This uncertainty may make it more difficult for us to raise additional capital than if such uncertainty did not exist.

Impact of Recently Issued Accounting Standards

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

 

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. The objective of SFAS 159 is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. Generally accepted accounting principles have required different measurement attributes for different assets and liabilities that can create artificial volatility in earnings.  SFAS 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities.  SFAS 159 does not eliminate disclosure requirements included in other accounting standards, including requirements for disclosures about fair value measurements included in SFAS 157 and SFAS No. 107, “Disclosures about Fair Value of Financial Instruments.” SFAS 159 is effective for us as of the beginning of fiscal year 2009. We have not yet determined the impact SFAS 159 may have on our consolidated financial position, results of operations, or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141 (R) replaces SFAS No. 141, “Business Combinations”, and is effective for us for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. SFAS 141(R) requires the new acquiring entity to recognize all assets acquired and liabilities assumed in the transactions; establishes an acquisition-date fair value for acquired assets and liabilities; and fully discloses to investors the financial effect the acquisition will have.  SFAS 141(R) would have an impact on accounting for any business acquired after the effective date of this pronouncement.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 requires all entities to report minority interests in subsidiaries as equity in the consolidated financial statements, and requires that transactions between entities and noncontrolling interests be treated as equity. SFAS 160 is effective for us as of the beginning of fiscal 2010. We are evaluating the impact of this pronouncement on our consolidated financial position, results of operations and cash flows.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161 “Disclosure about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (“SFAS 161”).  SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities.  Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows.  The guidance in SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption.  We are evaluating the impact of this pronouncement on our consolidated financial position, results of operations and cash flows.

ITEM 3.  CONTROLS AND PROCEDURES

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

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

CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING. There have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to affect these controls during the three months ended April 30, 2008.

 

 

PART II - OTHER INFORMATION

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

During the three months ended April 30, 2008, we issued:

(i)	17,950,000 shares of common stock to ten investors for total cash proceeds of $253,000;

(ii)	2,098,709 shares of common stock to one institutional investor upon conversion of our 7% Debentures with a principal amount of $25,000 and interest of $7,530;

(iii)

603,712 shares of common stock to one institutional investor in payment of $5,388 in interest due on the 2007 Debentures;

(iv)	9,072,503 shares of common stock to three institutional investors upon conversion of our 2006 Debentures with a principal amount of $92,000 and interest of $3,711;

(v)	15,000,000 shares of common stock to one company in payment of services valued at $345,000;

(vi)	150,000,000 shares of common stock to UTEK Corporation in connection with our acquisition of MCCI valued at $1,975,000; and

(vii)

Warrants to purchase 17,503,759 shares of common stock at an exercise price of $0.15 per share to investors in connection with the issuance of restricted common stock.  The fair value of the stock warrants estimated on the date of grant using the Black-Scholes model is $0.008 per share or $132,616.

In May 2008, subsequent to the three months ended April 30, 2008, we issued:

(i)	4,500,000 shares of common stock to three investors for total cash proceeds of $45,000;

(ii)	1,185,712 shares of common stock to one investor upon conversion of our 2006 Debentures with a principal amount of $10,000 and interest of $250;

(iii)

65,000,000 shares of common stock in settlement of two lawsuits with an investor holding 2006 Debentures with an aggregate principal amount of $50,000; and

(iv)

Warrants to purchase 4,000,000 shares of common stock at an exercise price of $0.15 per share were granted to investors in connection with the issuance of restricted common stock.  The fair value of the stock warrants estimated on the date of grant using the Black-Scholes model is $0.007 per share or $28,008.

In June 2008, subsequent to the three months ended April 30, 2008, we issued:

(i)	24,017,875 shares of common stock upon conversion of 2007 Debentures with a principal amount of $62,791 and interest of $14,795;

(ii)	1,134,517 shares of common stock upon conversion of 2006 Debentures with a principal amount of $5,000 and interest of $162;
(iii)	5,000,000 shares of restricted common stock in exchange for cash proceeds of $75,000; and

(iv)	60,000,000 shares of restricted stock in settlement of one lawsuit with an investor holding 2006 Debentures with a principal amount of $25,000 and interest of $786.

These securities were issued without registration under the Securities Act in reliance upon the exemptions provided in Section 4(2) or Section 3(a)(10) of the Securities Act. Appropriate legends were affixed to the share certificates issued in all of the above transactions effected in reliance upon Section 4(2).  The Company believes that each of the recipients was an “accredited investor” within the meaning of Rule 501(a) of Regulation D under the Securities Act, or had such knowledge and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in our common stock. All recipients had adequate access, through their relationships with the Company and its officers and directors, to information about the Company. None of the transactions described above involved general solicitation or advertising.

 

 

ITEM 5.  Other Events

Reduction of Principal Amount of 2006 Debentures; Settlement of Litigation

In May and June 2008, Outboard Investments, Ltd. (“Outboard”), an assignee of a portion of $500,000 in 2006 Debentures originally held by Double U Master Fund, L.P. filed three separate lawsuits against the Company in the Circuit Court for the Twelfth Judicial Circuit in and for Sarasota County, Florida (the “Outboard Lawsuits”).  The Outboard Lawsuits were filed on May 8, 2008 (the “First Outboard Lawsuit”), May 29, 2008 (the “Second Outboard Lawsuit”) and June 12, 2008 (the “Third Outboard Lawsuit”).  In each of the Outboard Lawsuits, the plaintiff alleged that it was damaged by our failure to perform according to the terms of the 2006 Debentures.  Due to a lack of sufficient cash to satisfy the claims made and to defend such lawsuits, and without admitting any wrongdoing, we agreed to settle each of the Outboard Lawsuits by the payment of common stock.  These shares were issued without registration in reliance upon Section 3(a)(10) of the Securities Act.  On May 8, 2008, May 29, 2008 and June 12, 2008, respectively, the Florida court approved the settlements of the First Outboard Lawsuit, Second Outboard Lawsuit and Third Outboard Lawsuit, respectively, and the fairness of each settlement to Outboard.  In settlement of the First Outboard Lawsuit, we issued 25 million shares of common stock.  This resulted in the cancellation of $25,000 in principal plus interest of the 2006 Debentures.  In settlement of the Second Outboard Lawsuit, we issued 40 million shares of common stock.  This resulted in the cancellation of $25,000 of principal and interest owed under the 2006 Debentures.  In settlement of the Third Outboard Lawsuit, we issued 60 million shares of common stock.  This resulted in the cancellation of $25,786 in principal and interest owed under the 2006 Debentures.  The settlement of the Outboard Lawsuits resulted in a reduction of $75,000 in principal amount we owe on the 2006 Debentures.

Amendment to Promissory Note

On March 20, 2008, we entered into a written letter agreement extending to July 31, 2008 the maturity date of a promissory note originally due August 22, 2007, and subsequently extended to October 31, 2007 (see Note 6 to the accompanying condensed consolidated financial statements).  Prior to this time the Company had a verbal agreement with the Lender to extend the maturity date.

Change in Conversion Price

The subscription agreement entered into in connection with the issuance of our 2007 Debentures provides that in the event we issue any common stock to a person or entity at a price per share less than the stated conversion price in the 2007 Debentures (a “Lower Conversion Price”), without the consent of each of the 2007 Debenture holders, then we shall (i) in the event the holder has converted debentures or exercised warrants, issue additional shares to the holder so that the average price per share still held by the holder following conversion or exercise is equal to the Lower Conversion Price, and (ii) reset the conversion price of the outstanding 2007 Debentures and the exercise price of the outstanding warrants issued in connection with the 2007 Debentures to the Lower Conversion Price.  In addition, the terms of the 2007 Debentures provide that in the event we issue common stock for consideration less than the maximum conversion price at the time of issuance, the conversion price will be reduced to the Lower Conversion Price.  In February 2008, we issued shares at a price of $0.0155 per share, which resulted in the resetting of the conversion price to no higher than $0.0155.  We also believe that the issuance of shares in connection with the settlement of the Outboard Lawsuits results in the lowering of the conversion price and maximum conversion price for the 2007 Debentures and the exercise price of the warrants issued in connection therewith.  However, due to ambiguities in the subscription agreement and the circumstances surrounding the issuances of shares in connection with the Outboard Lawsuits, it is unclear as to how the shares issued in the Outboard Lawsuits will be valued.  Therefore, it is unclear what price the conversion price, the maximum conversion price and warrant exercise price will reset to with respect to the 2007 Debentures.  We intend to engage in discussions with the holders of the 2007 Debentures to clarify and resolve this issue.

In addition, the terms of our outstanding warrants issued in connection with our April 2007 Bridge Loan (the “April 2007 Bridge Loan Warrants”) have repriced in accordance with a similar provision, which gives the holder of such warrants the benefit of the lowest price issued in a new transaction.  Therefore, the exercise price of the April 2007 Bridge Loan Warrants has been reset to $0.0155 and will reset again upon resolution of the Outboard Lawsuits valuation described above.

 

 

We do not believe the shares issued in settlement of the Outboard Lawsuits should be valued based solely upon the value of the 2006 Debenture principal and interest that was cancelled as part of each settlement.  If the valuation was made on that basis, however, the lowest price at which shares could be deemed issued by us would be $0.00043 per share, and the conversion price and maximum conversion price for the 2007 Debentures, the exercise price of the warrants issued in connection therewith, and the exercise price of the April 2007 Bridge Loan Warrants would reset to that price.  If the exercise price of all such warrants were reduced to $0.00043 per share we would recognize a gain based on the change in fair value of the warrants.  At June 20, 2008, the amount of such gain would have been approximately $1,591,000.

Increase in Authorized Shares

On June 3, 2008 shareholders approved an amendment to our Articles of Incorporation to increase the number of authorized shares from 900,000,000 to 4,000,000,000.

There is an inverse relationship between our stock price and the number of shares issuable upon conversion of our debentures.  That is, the higher the market price of the common stock at the time a debenture is converted, the fewer shares we would be required to issue, and the lower the market price of the common stock at the time a debenture is converted, the more shares we would be required to issue.  If the maximum conversion price of the 2007 Debentures is reduced as a result of the issuance of stock in the Outboard Lawsuit settlements, or our stock price does not improve, we would need to further increase the number of shares of common stock authorized in order to honor our obligations to issue shares to the debenture holders and other holders of options, warrants, convertible promissory notes and other derivative securities.

Advances from Chairman

From time to time during 2008, our Chairman of the Board and Executive Vice President, Ray Willenberg, Jr., has advanced funds to the Company, which have been repaid when we receive additional funding.  As of April 30, 2008 and as of the date of this Report, we owed Mr. Willenberg $49,000.  We do not have a written agreement with Mr. Willenberg regarding these advances, which are non-interest bearing.

 

 

ITEM 6.  Exhibits

3.1	Articles of Amendment to the Articles of Incorporation of the Company*
10.1