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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                               ------------------
                                    FORM 10-K
                               ------------------

                                   (MARK ONE)

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED OCTOBER 31, 2003

                         Commission File Number 0-21785

                             NEW VISUAL CORPORATION
             (Exact name of registrant as specified in its charter)

            UTAH                                           95-4545704
   (State of Incorporation)                 (I.R.S. Employer Identification No.)

      5920 FRIARS ROAD, SUITE 104
         SAN DIEGO, CALIFORNIA                               92108
(Address of principal executive offices)                  (Zip Code)

       Registrant's telephone number, including area code: (619) 692-0333

        Securities registered pursuant to section 12(b) of the Act: None

           Securities registered pursuant to section 12(g) of the Act:

                          Common Stock, $.001 Par Value
          Series A Junior Participating Preferred Stock Purchase Rights
          -------------------------------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter 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 [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes[ ]No [X]

As of January 26, 2004, the registrant had 76,657,851 shares of common stock
outstanding. The aggregate market value of the common stock held by
non-affiliates on January 26, 2004 was approximately $16,433,000.

                       DOCUMENTS INCORPORATED BY REFERENCE
None





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                                    FORM 10-K

                             New Visual Corporation
                                TABLE OF CONTENTS

PART    ITEM                                                               PAGE
  I      1.     BUSINESS...................................................  1
         2.     PROPERTIES................................................. 14
         3.     LEGAL PROCEEDINGS.......................................... 15
         4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........ 15
 II      5.     MARKET FOR REGISTRANT'S COMMON STOCK AND
                  RELATED STOCKHOLDER MATTERS.............................. 16
         6.     SELECTED FINANCIAL DATA.................................... 19
         7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                  CONDITION AND RESULTS OF OPERATIONS...................... 19
         7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK..................................................... 26
         8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 26
         9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                  ON ACCOUNTING AND FINANCIAL DISCLOSURE................... 26
         9A.    CONTROLS AND PROCEDURES.................................... 26
 III    10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... 27
        11.     EXECUTIVE COMPENSATION..................................... 30
        12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                  MANAGEMENT............................................... 34
        13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............. 36
        14.     PRINCIPAL ACCOUNTING FEES AND SERVICES..................... 37
 IV     15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
                  REPORTS ON FORM 8-K...................................... 38

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                           FORWARD-LOOKING STATEMENTS

         CERTAIN STATEMENTS MADE IN THIS ANNUAL REPORT ON FORM 10K, INCLUDING
THOSE CONTAINED UNDER THE "BUSINESS" SECTION AND THE SECTION BELOW ENTITLED
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY TERMINOLOGY SUCH
AS "MAY", "WILL", "SHOULD", "EXPECTS", "INTENDS", "ANTICIPATES", "BELIEVES",
"ESTIMATES", "PREDICTS", OR "CONTINUE" OR THE NEGATIVE OF THESE TERMS OR OTHER
COMPARABLE TERMINOLOGY. YOU SHOULD EXERCISE EXTREME CAUTION WITH RESPECT TO ALL
FORWARD LOOKING STATEMENTS CONTAINED IN THIS REPORT. SPECIFICALLY, THE FOLLOWING
STATEMENTS ARE FORWARD-LOOKING:

     o   STATEMENTS REGARDING OUR OVERALL STRATEGY FOR DEVELOPING AND DEPLOYING
         OUR TECHNOLOGY, INCLUDING, WITHOUT LIMITATION OUR INTENDED MARKETS AND
         FUTURE PROJECTS;

     o   STATEMENTS REGARDING OUR RESEARCH AND DEVELOPMENT EFFORTS;

     o   STATEMENTS REGARDING THE PLANS AND OBJECTIVES OF OUR MANAGEMENT FOR
         FUTURE OPERATIONS, THE PRODUCTION OF PRODUCTS INCORPORATING OUR
         TECHNOLOGY AND THE SIZE AND NATURE OF THE COSTS WE EXPECT TO INCUR AND
         THE PEOPLE AND SERVICES WE MAY EMPLOY;

     o   STATEMENTS REGARDING THE FUTURE OF BROADBAND COMMUNICATIONS AND
         OPPORTUNITIES THEREIN, OUR COMPETITION OR REGULATIONS THAT MAY AFFECT
         US;

     o   STATEMENTS REGARDING OUR ABILITY TO COMPETE WITH THIRD PARTIES;

     o   ANY STATEMENTS OTHER THAN HISTORICAL FACT.

         WE BELIEVE THAT IT IS IMPORTANT TO COMMUNICATE OUR FUTURE EXPECTATIONS
TO OUR SHAREHOLDERS. FORWARD-LOOKING STATEMENTS REFLECT THE CURRENT VIEW OF
MANAGEMENT WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO NUMEROUS RISKS,
UNCERTAINTIES AND ASSUMPTIONS, INCLUDING, WITHOUT LIMITATION, THE FACTORS LISTED
IN "RISKS ASSOCIATED WITH OUR BUSINESS." ALTHOUGH WE BELIEVE THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CAN
GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO BE CORRECT. SHOULD ANY
ONE OR MORE OF THESE OR OTHER RISKS OR UNCERTAINTIES MATERIALIZE OR SHOULD ANY
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS ARE LIKELY TO VARY
MATERIALLY FROM THOSE DESCRIBED IN THIS REPORT. THERE CAN BE NO ASSURANCE THAT
THE PROJECTED RESULTS WILL OCCUR, THAT THESE JUDGMENTS OR ASSUMPTIONS WILL PROVE
CORRECT OR THAT UNFORESEEN DEVELOPMENTS WILL NOT OCCUR. MOREOVER, NEITHER THE
COMPANY NOR ANY OTHER PERSON ASSUMES RESPONSIBILITY FOR THE ACCURACY AND
COMPLETENESS OF THESE FORWARD-LOOKING STATEMENTS. THE COMPANY IS UNDER NO DUTY
TO UPDATE ANY FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS REPORT TO
CONFORM SUCH STATEMENTS TO ACTUAL RESULTS.


                                     PART I

ITEM 1.  BUSINESS

GENERAL

         New Visual Corporation ("New Visual," the "Company," "we," "our" or
"us") is developing advanced transmission technology designed to enable data to
be transmitted across copper telephone wire at speeds and over distances that
exceed those offered by industry-leading DSL technology providers. We intend to
market this breakthrough technology to leading equipment makers in the
telecommunications industry. Our technology is designed to dramatically increase
the capacity of the copper telephone network, allowing telephone companies to
provide enhanced video, data and voice services over the existing copper
telecommunications infrastructure.

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         Through our wholly-owned subsidiary, NV Technology, Inc., a Delaware
corporation ("NV Technology"), we intend to design, develop, manufacture and
license semiconductor hardware and software products based upon our core
intellectual property. We believe that system-level products that use this set
of technologies will have a significant advantage over existing forms of
broadband technologies, such as digital subscriber line ("DSL"), by providing
faster transmission speed capability and by increasing the transmission distance
capability. The technologies underlying our proposed products are in the design
and development stage.

         Through our NV Entertainment, Inc., subsidiary, a Delaware corporation
("NV Entertainment"), we are recognizing gross profit from the revenues from the
hit feature-length documentary, Step into Liquid. According to its distributor,
Artisan Pictures, the film has grossed $3.8 million since its US theatrical
release in August 2003. It is now in theatrical distribution internationally,
and the US DVD release is scheduled for April 2004.

         Our executive offices are located at 5920 Friars Road, Suite 104, San
Diego, California, and our telephone number at that address is (619) 692-0333.
Our Internet website is www.newvisual.com.

OUR TELECOMMUNICATIONS BUSINESS

THE BROADBAND BOTTLENECK

         The great, unfinished task of the telecom industry is to service the
"last mile" gap that prevents businesses and consumers from enjoying the benefit
of the global, high-speed data backbone. The gap occurs where the low-speed
capacity of local loop telephone networks meets the demand for high-speed
services. For example, approximately ninety-three percent of business buildings
are unable to get high-speed data services because the facilities that underlay
them are copper wires.

         Filling the "last mile" gap with fiber is prohibitively expensive, so
New Visual has developed a silicon-based strategy, best described as "Fiber
Avoidance" - if a wireline carrier can avoid deploying fiber optics in
delivering fiber-like services, that carrier can increase its return on assets
in a dramatic way. The value proposition of New Visual can best be summarized as
a solution designed to allow service providers to send digital information
farther and faster, utilizing a low-cost implementation/deployment strategy that
leverages the existing copper infrastructure.

         New Visual's products will address critical gaps in the access portion
of the network at attractive prices for telecom companies anxious to save money
and increase profits. By utilizing the existing copper wire infrastructure, our
products are intended to enable telecom companies to sell high margin services
and deliver bandwidth hungry multimedia applications, such as video, voice, and
data, which otherwise would be unavailable without extraordinary capital
outlays.

WORLDWIDE DEMAND CONTINUES TO GROW

         There are approximately one billion copper loops in the world today.
Two hundred million are in the United States. Europe and Southeast Asia, with
their high levels of telephone density, comprise most of the rest. A remarkable
feature of these lines is that they are being retrofitted to support broadband
data transmission at a quick pace. This retrofit activity is being performed by
leading telephone operating companies in response to demand from end-user
businesses and residences for new services like high-speed data, virtual private
network, voice over Internet protocol, Internet access, video conferencing, and
cable company-like video delivery. These services typically yield higher margins
to the telephone companies than do voice services. For this reason, we believe
telephone companies will be receptive to offers from new semiconductor companies
like New Visual.

         We are developing layer-one, integrated circuit-based solutions to
address the specific needs of both business class and residential markets. We
are entering the market at a time when many companies are promoting solutions to

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enable broadband communications over the local loop, such as the various digital
subscriber line technologies. Still others are sponsoring alternative means for
providing high-speed data communications such as wireless, satellite, fiber
optic and cable modem technologies. We believe the worldwide market for
high-speed communications is growing so quickly that all of these alternative
access technologies can grow while we are also establishing our access
technology.

NEW VISUAL'S "FIBER AVOIDANCE" STRATEGY

         Wireline carriers around the world are experiencing high demand for
data intensive transmission services from enterprises. These services, such as
T1, Frame Relay, ATM Managed Services, Gigabit Ethernet, and other private line
services, are delivered across T1, E1, T1 IMA, N X T1, DS3, E3 and other
transmission protocols. While T1 and E1 can be used to reach the buildings that
are off the fiber ring, these protocols are limited by copper pair's low speed,
high costs, maintenance costs, and poor utilization.

         Much has been made in recent years about the benefits of trenching
fiber to every building, but the reality is that it is financially feasible for
only the largest buildings. Telephone companies find that it is extremely
expensive and impractical to replace the existing copper wire infrastructure
with fiber optic technology to 90% of the offices. New fiber costs $500-$1000
per foot to install, and some municipalities have begun prohibiting new
trenching, making it impossible to start new upgrade projects. Other solutions
to enable broadband communications, such as wireless, satellite, and cable modem
network technologies, often suffer from poor performance, high deployment costs,
and lack of mass marketability. Most importantly, these technologies fail to
allow the telephone companies to leverage their existing investment in the
copper plant.

         New Visual's integrated circuits are being designed to increase the
capacity and range of high-speed services on the existing copper network,
enabling telephone network operators to increase their offering of services and
reduce the cost of network upgrades. Worldwide, this network contains over 950
million copper lines, and currently delivers most of the world's telephone
traffic and broadband access. If service providers can leverage this huge
existing infrastructure, they can avoid the high costs and slow deployments
associated with replacing the local loop with fiber.

NV TECHNOLOGY'S SOLUTION

         We are developing an advanced transmission technology to enable data to
be transmitted across copper telephone wire at faster speeds and over greater
distances than is presently offered by leading DSL technology providers. Our
technology, using the name Embarq(TM), offers significant improvements over
existing broadband technologies by optimizing the bandwidth used and taking
advantage of dynamic changes in the available signal to noise ratio ("SNR").
Bandwidth is maximized by dynamically operating as close as possible to the
available bandwidth, specifically by taking advantage of dynamic improvements in
the SNR. Telephone wiring has a static, known function of attenuation versus
frequency, while there are dynamic characteristics that present both significant
and exploitable dynamic changes during transmission. The NV Technology solution
takes advantage of these exploitable characteristics, resulting in dramatically
improved achievable throughput.

         We intend to develop core technology and chip level solutions to be
licensed or sold to equipment makers that serve the following markets:

     o   SMALL-TO-MID-SIZED ENTERPRISES ("SMES"): defined as a direct connection
         between a small business (20-500 employees) and the telephone central
         office, including those businesses that currently subscribe for T1,
         Multiple T1, or DS3 services. Today, for example, local exchange
         carriers ("LECs") mostly serve their DS3 (45Mbps) customers with
         coaxial cables that are limited to 500 ft. in distance from the
         customer to the source of the DS3 signal (typically a fiber optic
         terminal). For a business in a building that is not on a fiber ring,

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         the LEC must determine if the customer is over 500 ft. from an existing
         fiber optic terminal. If the distance is over 500 ft., the Telco must
         trench fiber to the building and place fiber optic terminals. This
         capital expense renders the DS3 line unprofitable for the first 18
         months of service.

     o   MXU (MTU, MDU, MHU): defined to include multi-tenant units,
         multi-dwelling units, and multi-hotel units, in which a multiplexer
         unit in the building serves bandwidth to multiple users under the
         management of a service provider or the owner of the building. Today,
         LECs serve their densest customer locations with unshielded twisted
         pair copper (UTP) wire that typically runs directly back to the
         telephone company's wire center. LECs have tested a number of new
         technologies that would enable them to serve MDUs and MTUs with network
         elements placed in the LEC-owned wiring closet in the building. A
         common downfall associated with all of these competing solutions is the
         placement of fiber optics.

     o   REMOTE TERMINAL/FEEDER: defined as the connection between a telephone
         central office and remote cabinets such as an RT, DSLAM, SLC, or DLC.
         Today, phone companies (i.e., Local Exchange Carriers or LECs) serve
         30% of their UTP wires with digital loop carriers. These network
         elements communicate with the serving wire center, or central office,
         via digital trunks. All of the physical layer technologies for these
         trunks have drawbacks that frequently cause the LEC to spend scarce
         capital dollars needlessly.

     o   RESIDENTIAL: defined as the home broadband (high-speed access)
         consumers.

         We believe that products based upon our technology will enable
providers of broadband services to these markets to:

     o   ENHANCE THEIR OFFERING OF CONVERGENT SERVICES. We believe that
         deployment of our technology would permit the transmission of
         television, telephone and Internet access services over existing
         telephone lines to a large number of consumers.

     o   REACH MORE CUSTOMERS. The technology could permit service providers
         such as telephone companies and other DSL providers to reach more
         customers as a result of the extended range of their data
         transmissions. For example, VDSL services are presently unavailable to
         a large number of potential residential and business class consumers
         that reside more than 1,000 feet at 52Mbps or 13Mbps at 4,500 feet from
         the central office. Similarly, while standard ADSL services have a
         range of 12,000 to 18,000 feet, capacity decreases the farther the end
         user is from the central office.

     o   LOWER COSTS BY USING EXISTING INFRASTRUCTURE. By deploying products
         built upon our technology, we believe that service providers will be
         able to reduce their technology investment and shorten the length of
         time it takes to recover initial capital outlay. Because our technology
         will increase the range of transmission over copper, providers could
         provide enhanced broadband services to larger markets, yet continue to
         utilize the existing copper infrastructure and existing technologies.

OUR BUSINESS STRATEGY

         Our objective is to initially deploy our technology in the SME, MXU and
Remote Terminal/Feeder business markets, and to subsequently expand into the
Residential market. We believe business class markets offer the nearest revenue
opportunity for commercial applications of our technology because:

     o   many businesses already have existing applications that require greater
         bandwidth,

     o   businesses have demonstrated the ability and willingness to pay for
         premium broadband services,

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     o   spending by the business class markets significantly exceeds spending
         by the residential market, and is projected to continue to do so for
         the foreseeable future, and

     o   the return on investment for service providers is a more attractive
         model (e.g., lower cost of deployment and customer acquisition versus
         revenue).

         Residential broadband demand and DSL deployment is increasing rapidly
and we intend to deploy our technology in the Residential market as that market
matures and new applications continue to drive demand for greater bandwidth.

         We believe that the most prudent strategy for deploying our technology
will involve licensing, equipment sales in the form of evaluation units for
field trials, and integrated circuit ("IC") sales in the form of Application
Specific Integrated Circuits ("ASICs"). We intend to ultimately produce a small,
inexpensive chipset design that can be mass-produced with a high degree of
economic reliability. We expect to benefit from the following revenue models:

     o   joint venture manufacturing relationships with equipment makers and/or
         chip makers;

     o   manufacture and sale of IC's; and/or

     o   licensing our IC "recipe" to chip makers.

Out of these models, we anticipate future revenues will take the form of license
fees and royalty payments, development and support fees, and product sales of
ASICs.

COMPETITION

         The market for high-speed telecommunications products is highly
competitive, and we expect that it will become increasingly competitive in the
future. Our potential competitors consist of some of the largest, most
successful domestic and international telecommunications companies, such as
Broadcom, Metalink, GlobespanVirata, Intel, and Texas Instruments and other
companies with well-established reputations in the broadband telecommunications
industry, such as Infineon Technologies. These and our other potential
competitors possess substantially greater name recognition, financial, sales and
marketing, manufacturing, technical, personnel, and other resources than we
have. These competitors may also have pre-existing relationships with our
customers or potential customers. These competitors may compete effectively with
us because in addition to the above-listed factors, they more quickly introduce
new technologies, more rapidly or effectively address customer requirements or
devote greater resources to the promotion and sale of their products than we do.
Further, in the event of a manufacturing capacity shortage, these competitors
may be able to manufacture products when we are unable to do so.

         We believe we will be able to compete with these companies because our
products will provide advantages not otherwise available, most notably the
ability to significantly increase the speed and extend the range of broadband
transmission over copper telephone wire. It is therefore possible that our
products will enhance the broadband solutions of some of our competitors, and
that these competitors could become our customers or business partners.

         Although we believe we will be able to compete based on the special
features of our products, our products will incorporate new concepts and may not
be successful even if they are superior to those of our competitors. In addition
to facing competition from providers of DSL-based products, our products will
compete with products using other broadband technologies, such as cable modems,
wireless, satellite and fiber optic telecommunications technology. Commercial
acceptance of any one of these competing solutions could decrease demand for our
products.

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         We also face competition from new technologies that are currently under
development that may result in new competitors entering the market with products
that may make ours obsolete. We cannot entirely predict the competitive impact
of these new technologies and competitors.

MANUFACTURING AND SUPPLIERS

         We intend to contract with third party manufacturers to produce our
products and will rely on third party suppliers to obtain the raw materials
essential to our products' production. Manufacturing our products will be a
complex process and we cannot assure you that we will not experience production
problems or delays. Any interruption in operations could materially and
adversely affect our business and operating results.

         There may be a limited number of suppliers of some of the components
necessary for the manufacture of our products. The reliance on a limited number
of suppliers, particularly if such suppliers are foreign, poses several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing, quality and timely delivery of
components. We cannot assure you that we will be able to obtain adequate
supplies of raw materials. Certain key components of our products may involve
long lead times, and in the event of an unanticipated increase in the demand for
our products, we could be unable to manufacture certain products in a quantity
sufficient to satisfy potential demand. If we cannot obtain adequate deliveries
of key components, we may be unable to ship products on a timely basis. Delays
in shipment could damage our relationships with customers and could harm our
business and operating results.

GOVERNMENT REGULATION

         The telecommunications industry is subject to extensive regulation by
federal and state agencies, including the Federal Communications Commission (the
"FCC"), and various state public utility and service commissions. There are some
regulations at present that have been interpreted by our target customers as
discouraging to the technical innovations that we are bringing to market, though
we do not believe this to be the case. Further, regulations affecting the
availability of broadband access services generally, the terms under which
telecommunications service providers conduct their business, and the competitive
environment among service providers, for example, could have a negative impact
on our business.

OUR LEGACY FILM PRODUCTION BUSINESS

         In April 2000, our wholly owned subsidiary, NV Entertainment, Inc. a
Delaware company ("NV Entertainment") entered into a joint venture production
agreement to produce Step Into Liquid, a feature length surfing documentary for
theatrical distribution. NV Entertainment is a fifty-percent owner of Top Secret
Productions, LLC, maker of Step Into Liquid. Artisan Pictures is distributing
the film within the United States and Canada. The definitive agreement includes
a substantial print and advertising promotional commitment for the theatrical
release, distribution fees, performance-driven minimum guarantees for both the
theatrical and video/DVD releases, a modest cash advance and a 10-year license.

         Step into Liquid opened in Hawaii, New York and Los Angeles on August
8, 2003 and played in more than 100 theaters across the United States during its
5-month theatrical run. The per theater average for the opening weekend was more
than $27,000, which ranks Step Into Liquid among the best performing films of
2003. The estimated cumulative total box office revenues for the film's
theatrical run, generated by widening the release to more theaters, amounted to
an estimated $3,681,000. Additional international guarantee fees amount to an
estimated $120,000.

         Based on the performance of the domestic theatrical run, management
believes that the film will continue to generate positive cash flow throughout
2004 and beyond.

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         Under the terms of our joint venture, we agreed to finance the
production of the film for up to $2,250,000. We will receive all net profits
generated by the film until we recover 100% of our initial investment. After we
recoup our investment in the venture, 50% of the net profits generated by the
film will be paid to us. The Company has recognized revenues of $379,980 for the
year ended October 31, 2003 as a result of consolidation of the joint venture.
As of October 31, 2003, the Company had not received any cash distributions from
the joint venture. Subsequent to October 31, 2003 the Company received a
distribution of $50,000.

RESEARCH & DEVELOPMENT

         The Company out-sources all of its research and development to third
party developers. From November 1, 1999 through October 31, 2003, we expended
approximately $7,764,000 on research and development relating to our
semiconductor business. During each of fiscal year 2003 and 2002 we expended
$639,000 and $1,075,000, respectively, relating to our semiconductor business.
Research and development expenditures in fiscal 2002 were higher than 2003 as a
result of the Company prepaying for certain development costs in 2002.

         We have been engaged in the semiconductor field since February 2000.

OUR EMPLOYEES

         We currently have four full-time employees and two part-time employees.
We may, from time to time, supplement our regular work force as necessary with
temporary and contract personnel. None of our employees are represented by a
labor union.

         We anticipate that we will need to retain additional employees and
other personnel in order to achieve the commercialization of our proposed
semiconductor product line. The retention of additional employees is subject to
our raising additional capital.

         Our future performance depends highly upon the continued service of the
senior members of our management team.

         We believe that our future success will also depend upon our continuing
ability to identify, attract, train and retain other highly skilled managerial,
technical, sales and marketing personnel. Hiring for such personnel is
competitive, and there can be no assurance that we will be able to retain our
key employees or attract, assimilate or retain the qualified personnel necessary
for the development of our business.

RISKS ASSOCIATED WITH OUR BUSINESS

OUR OPERATING RESULTS MAY VARY SIGNIFICANTLY DUE TO THE CYCLICALITY OF THE
SEMICONDUCTOR INDUSTRY. ANY SUCH VARIATIONS COULD ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK.

         We operate in the semiconductor industry, which is cyclical and subject
to rapid technological change. Recently, the semiconductor industry has begun to
emerge from a significant downturn characterized by diminished product demand,
accelerated erosion of prices and excess production capacity. The current
downturn and future downturns in the semiconductor industry may be severe and
prolonged. Future downturns in the semiconductor industry, or any failure of
this industry to fully recover from its recent downturn, could seriously impact
our revenues and harm our business, financial condition and results of
operations. This industry also periodically experiences increased demand and
production capacity constraints, which may affect our ability to ship products
in future periods. Accordingly, our quarterly results may vary significantly as
a result of the general conditions in the semiconductor industry, which could
cause our stock price to decline.

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WE HAVE A LIMITED OPERATING HISTORY.

         We have been engaged in the fabless semiconductor business only since
February 2000. We have not yet begun to sell the telecommunication products we
are developing, and therefore have not generated any revenues from our fabless
semiconductor business. As a result, we have no historical financial data that
can be used in evaluating our business prospects and in projecting future
operating results. For example, we cannot forecast operating expenses based on
our historical results, and we are instead required to forecast expenses based
in part on future revenue projections. In addition, our ability to accurately
forecast our revenue going forward is limited.

         You must consider our prospects in light of the risks, expenses and
difficulties we might encounter because we are at an early stage of development
in a new and rapidly evolving market. Many of these risks are described under
the sub-headings below. We may not successfully address any or all of these
risks and our business strategy may not be successful.

WE HAVE A HISTORY OF LOSSES AND AN ACCUMULATED DEFICIT.

         Since inception, we have incurred significant operating losses. We
incurred operating losses of $4,183,522, $7,313,472 and $9,492,584 for the years
ended October 31, 2003, 2002 and 2001, respectively. As of October 31, 2003, we
had an accumulated deficit of $49,684,887. We expect to continue to incur net
losses for the foreseeable future as we continue to further develop and complete
the commercialization of our proposed product line. We are funding our
operations through the sale of our securities and expect to continue doing so
for the foreseeable future. Our ability to generate and sustain significant
additional revenues or achieve profitability will depend upon the factors
discussed elsewhere in this "Risk Factors" section, as well as numerous other
factors outside of our control. We cannot assure you that we will achieve or
sustain profitability or that our operating losses will not increase in the
future. If we do achieve profitability, we cannot be certain that we can sustain
or increase profitability on a quarterly or annual basis in the future. We
expect to expend substantial financial resources on research and development,
engineering, manufacturing, marketing, sales and administration as we continue
to develop and begin to deploy our proposed product line. These expenditures
will necessarily precede the realization of substantial revenues from sales of
our products, which may result in future operating losses. We cannot assure you
that we will achieve or sustain profitability or that our operating losses will
not increase in the future. If we do achieve profitability, we cannot be certain
that we can sustain or increase profitability on a quarterly or annual basis in
the future.

WE WILL NEED ADDITIONAL CAPITAL FINANCING IN THE FUTURE.

        We have sold $1 million in principal amount of our three year 7%
Convertible Debentures ("Convertible Debentures") and upon the effectiveness of
a registration statement (the "Registration Statement") relating to the Common
Stock underlying these debentures, we expect to sell an additional $1 million in
principal amount of such debentures. Although we believe that the net proceeds
from the sale of the Convertible Debentures will be sufficient for our needs
through April 1, 2004, thereafter, we will need to raise additional funds in
order to realize our business plan. In addition, unforeseen contingencies and
developments may arise that will require us to raise additional capital. We may
have difficulty obtaining additional funds, and as if needed, and we may have to
accept terms that would adversely affect our shareholders. Under the terms of
the Convertible Debenture financing, except for certain prospective pre-approved
transactions, we granted to the holders of the Convertible Debentures a right of
first refusal to participate in the purchase of equity securities we propose to
sell to third parties. The existence of these rights may impair our ability to
obtain equity financing from third parties on terms satisfactory to us or at all
because investors may be reluctant to devote the time and expense necessary to
negotiate the terms of a transaction which we may not be able to fully
consummate with them if holders of the Convertible Debentures elect to exercise
its rights. In addition, under the terms of the agreements entered into between

                                       8



<PAGE>

us and the purchasers of the Convertible Debentures, if the Registration
Statement is not declared effective by June 28, 2004, then they are not required
to purchase the $1 million principal amount of Convertible Debentures we
anticipate selling to them following such effectiveness.

         We also may be required to seek additional financing in the future to
respond to increased expenses or shortfalls in anticipated revenues, accelerate
product development and deployment, respond to competitive pressures, develop
new or enhanced products, or take advantage of unanticipated acquisition
opportunities. We cannot be certain we will be able to find such additional
financing on commercially reasonable terms, or at all. If we are unable to
obtain additional financing when needed, we could be required to modify our
business plan in accordance with the extent of available financing. We also may
not be able to accelerate the development and deployment of our products,
respond to competitive pressures, develop or enhance our products or take
advantage of unanticipated acquisition opportunities.

         Our independent accountants have included a "going concern" exception
in their audit reports on our 2003 financial statements. The going concern
exception may make it more difficult for us to raise funds than if we did not
have a "going concern" exception. The financial statements do not include any
adjustment that might result from the outcome of such uncertainty.

OUR SUCCESS IS CONTINGENT UPON THE INCORPORATION OF OUR PROPOSED PRODUCTS INTO
SUCCESSFUL PRODUCTS OFFERED BY LEADING EQUIPMENT MANUFACTURERS.

         Our proposed products will not be sold directly to the end-user;
rather, they will be components of other products. As a result, we must rely
upon equipment manufacturers to design our products into their equipment. We
must further rely on this equipment to be successful. If equipment that
incorporates our products is not accepted in the marketplace, we may not achieve
adequate sales volume of products, which would have a negative effect on our
results of operations. Accordingly, we must correctly anticipate the price,
performance and functionality requirements of these data equipment
manufacturers. We must also successfully develop products that meet these
requirements and make such products available on a timely basis and in
sufficient quantities. Further, if there is consolidation in the data equipment
manufacturing industry, or if a small number of data equipment manufacturers
otherwise dominate the market for data equipment, then our success will depend
upon our ability to establish and maintain relationships with these market
leaders. If we do not anticipate trends in the market for products enabling the
digital transmission of data, voice and video to homes and business enterprises
over existing copper wire telephone lines and meet the requirements of equipment
manufacturers, or if we do not successfully establish and maintain relationships
with leading data equipment manufacturers, then our business, financial
condition and results of operations will be seriously harmed.

BECAUSE WE WILL DEPEND ON THIRD PARTIES TO MANUFACTURE, ASSEMBLE AND TEST OUR
PRODUCTS, WE MAY EXPERIENCE DELAYS IN RECEIVING SEMICONDUCTOR DEVICES.

         We do not own or operate a semiconductor fabrication facility. Rather,
our semiconductor devices will be manufactured at independent foundries. We
intend to rely solely on third-party foundries and other specialist suppliers
for all of our manufacturing, assembly and testing requirements. However, these
parties may not be obligated to supply products to us for any specific period,
in any specific quantity or at any specific price, except as may be provided in
a particular purchase order that has been accepted by one of them. As a result,
we will not directly control semiconductor delivery schedules, which could lead
to product shortages, poor quality and increases in the costs of our products.
In addition, we may experience delays in receiving semiconductor devices from
foundries due to foundry scheduling and process problems. We cannot be sure that
we will be able to obtain semiconductors within the time frames and in the
volumes required by us at an affordable cost or at all. Any disruption in the
availability of semiconductors or any problems associated with the delivery,
quality or cost of the fabrication assembly and testing of our products could
significantly hinder our ability to deliver our products to our customers and
may result in a decrease in sales of our products.

                                       9



<PAGE>

WE MAY INCUR SUBSTANTIAL EXPENSES DEVELOPING PRODUCTS BEFORE WE EARN ASSOCIATED
NET REVENUES AND MAY NOT ULTIMATELY SELL A LARGE VOLUME OF OUR PRODUCTS.

         We will be developing telecommunications products based on forecasts of
demand and will incur substantial product development expenditures prior to
generating associated net revenues. We will receive limited orders for products
during the period that potential customers test and evaluate our products. This
test and evaluation period typically lasts from three to six months or longer,
and volume production of the equipment manufacturer's product that incorporates
our products typically would not begin until this test and evaluation period has
been completed. As a result, a significant period of time may lapse between our
product development and sales efforts and the realization of revenues from
volume ordering of products by customers. In addition, achieving a design win
with a customer does not necessarily mean that this customer will order large
volumes of our products. A design win is not a binding commitment by a customer
to purchase products. Rather, it is a decision by a customer to use our products
in the design process of that customer's products. A customer can choose at any
time to discontinue using our products in that customer's designs or product
development efforts. Even if our products are chosen to be incorporated into a
customer's products, we may still not realize significant net revenues from that
customer if that customer's products are not commercially successful.

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS OR MAY BE SUED BY
THIRD PARTIES FOR INFRINGEMENT OF THEIR PROPRIETARY RIGHTS.

         Our success depends significantly on our ability to obtain and maintain
patent, trademark and copyright protection for our intellectual property, to
preserve our trade secrets and to operate without infringing the proprietary
rights of third parties. If we are not adequately protected, our competitors
could use the intellectual property that we have developed to enhance their
products and services, which could harm our business.

         We will rely on patent protection, as well as a combination of
copyright and trademark laws, trade secrets, confidentiality provisions and
other contractual provisions, to protect our proprietary rights, but these legal
means afford only limited protection. Despite any measures taken to protect our
intellectual property, unauthorized parties may attempt to copy aspects of our
products or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries may not protect our proprietary
rights as fully as do the laws of the United States. If we litigated to enforce
our rights, it would be expensive, divert management resources and may not be
adequate to protect our intellectual property rights.

         The telecommunications industry is characterized by the existence of a
large number of patents and frequent litigation based on allegations of trade
secret, copyright or patent infringement. We may inadvertently infringe a patent
of which we are unaware. In addition, because patent applications can take many
years to issue, there may be a patent application now pending of which we are
unaware that will cause us to be infringing when it is issued in the future.
Although we are not currently involved in any intellectual property litigation,
we may be a party to litigation in the future to protect our intellectual
property or as a result of our alleged infringement of another's intellectual
property, forcing us to do one or more of the following:

     o   Cease selling, incorporating or using products or services that
         incorporate the challenged intellectual property;

     o   Obtain from the holder of the infringed intellectual property right a
         license to sell or use the relevant technology, which license may not
         be available on reasonable terms; or

     o   Redesign those products or services that incorporate such technology.

         A successful claim of infringement against us, and our failure to
license the same or similar technology, could adversely effect our business,
asset value or stock value. Infringement claims, with or without merit, would be
expensive to litigate or settle, and would divert management resources.

                                       10



<PAGE>

OUR MARKET IS HIGHLY COMPETITIVE AND OUR PRODUCTS, TECHNOLOGY AND BUSINESS MAY
NOT BE ABLE TO COMPETE EFFECTIVELY WITH OTHER PRODUCTS OR TECHNOLOGIES.

         The markets for semiconductors and other high-speed telecommunications
products are highly competitive, and we expect that they will become
increasingly competitive in the future. Certain of our potential competitors
operate their own fabrication facilities, have longer operating histories and
possess substantially greater name recognition, financial, sales and marketing,
manufacturing, technical, personnel, and other resources than we have. As a
result, these competitors may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements. They may also be able to
devote greater resources to the promotion and sale of their products. We will
compete with numerous companies with well-established reputations in the
broadband telecommunications industry, such as GlobespanVirata, Alcatel,
PMC-Sierra, Texas Instruments, Infineon Technologies, Motorola and Broadcom. In
all of our target markets, we also may face competition from newly established
competitors, suppliers of products based on new or emerging technologies, and
customers who choose to develop their own silicon solutions. We also expect to
encounter further consolidation in markets in which we compete. Although we
believe we will be able to compete based on the special features of our
products, our products will incorporate new concepts and may not be successful
even if they are superior to those of our competitors.

         In addition to facing competition from the above-mentioned suppliers,
our products will compete with products using other broadband access
technologies, such as cable modems, wireless, satellite and fiber optic
telecommunications technology. Commercial acceptance of any one of these
competing solutions, or new technologies, could decrease demand for our proposed
products. We cannot assure you that we will be able to compete successfully or
that competitive pressures will not materially and adversely affect our
business, financial condition and results of operations.

WE MUST KEEP PACE WITH RAPID TECHNOLOGICAL CHANGES IN THE SEMICONDUCTOR INDUSTRY
AND BROADBAND COMMUNICATIONS MARKET IN ORDER TO REMAIN COMPETITIVE.

         Our future success will depend on our ability to anticipate and adapt
to changes in technology and industry standards. We will also need to develop
and introduce new and enhanced products to meet our customers' changing demands.
The semiconductor industry and broadband communications market are characterized
by rapidly changing technology, evolving industry standards, frequent new
product introductions and short product life cycles. In addition, this industry
and market continues to undergo rapid growth and consolidation. A continued
slowdown in the semiconductor industry or other broadband communications markets
could materially and adversely affect our business, financial condition and
results of operations. Our success will also depend on the ability of our
potential telecommunications equipment customers to develop new products and
enhance existing products for the broadband communications markets and to
introduce and promote those products successfully. The broadband communications
markets may not continue to develop to the extent or in the timeframes that we
anticipate. If new markets do not develop as we anticipate, or if upon their
deployment our products do not gain widespread acceptance in these markets, our
business, financial condition and results of operations could be materially and
adversely affected.

BECAUSE OUR SUCCESS IS DEPENDENT UPON THE BROAD DEPLOYMENT OF DATA SERVICES BY
TELECOMMUNICATIONS SERVICE PROVIDERS, WE MAY NOT BE ABLE TO GENERATE SUBSTANTIAL
SALES OF OUR PRODUCTS IF SUCH DEPLOYMENT DOES NOT OCCUR.

         Our proposed products will be incorporated in equipment that is
targeted at end-users of data services offered by wireline telecommunications
carriers. Consequently, the success of our products depends upon the decision by
telecommunications service providers to broadly deploy data technologies and the
timing of such deployment. If service providers do not offer data services on a
timely basis, or if there are technical difficulties with the deployment of
these services, sales of our products would be adversely affected, which would
have a negative effect on our results of operations. Factors that may impact
data deployment include:

                                       11



<PAGE>

     o   A prolonged approval process, including laboratory tests, technical
         trials, marketing trials, initial commercial deployment and full
         commercial deployment;

     o   The development of a viable business model for data services, including
         the capability to market, sell, install and maintain data services;

     o   Cost constraints, such as installation costs and space and power
         requirements at the telecommunications service provider's central
         office;

     o   Evolving industry standards; and

     o   Government regulation.

THE COMPLEXITY OF OUR PRODUCTS COULD RESULT IN UNFORESEEN DELAYS OR EXPENSE AND
IN UNDETECTED DEFECTS, WHICH COULD ADVERSELY AFFECT THE MARKET ACCEPTANCE OF NEW
PRODUCTS AND DAMAGE OUR REPUTATION WITH PROSPECTIVE CUSTOMERS.

         Highly complex products such as the semiconductors that we expect to
offer frequently contain defects and bugs when they are first introduced or as
new versions are released. If our products contain defects, or have reliability,
quality or compatibility problems, our reputation may be damaged and customers
may be reluctant to buy our semiconductors, which could materially and adversely
affect our ability to retain existing customers or attract new customers. In
addition, these defects could interrupt or delay sales to our customers. In
order to alleviate these problems, we may have to invest significant capital and
other resources. Although our products will be tested by our suppliers, our
customers and ourselves, it is possible that these tests will fail to uncover
defects. If any of these problems are not found until after we have commenced
commercial production of our products, we may be required to incur additional
development costs and product recall, repair or replacement costs. These
problems may also result in claims against us by our customers or others. In
addition, these problems may divert our technical and other resources from other
development efforts. Moreover, we would likely lose, or experience a delay in,
market acceptance of the affected product, and we could lose credibility with
our prospective customers.

WE HAVE NO AGREEMENT RELATING TO REVENUE GENERATING ACTIVITIES

         We presently have no agreement or understanding with any third party as
to commercial exploitation of for our proposed semiconductor line of products,
and no assurance can be provided that we will be successful in concluding any
significant-revenue generating agreement on terms commercially acceptable to us.

WE DEPEND ON ATTRACTING AND RETAINING KEY PERSONNEL

         We are highly dependent on the principal members of our management and
technology staff. The loss of their services might significant delay or prevent
the achievement of development or strategic objectives. Our success depends on
our ability to retain certain key employees and to attract additional qualified
employees. We cannot assure you that we will be able to retain existing
personnel or attract and retain highly qualified employees in the future.

OUR FILM IN DISTRIBUTION MAY NOT PRODUCE THE FINANCIAL RESULTS WE ANTICIPATE.

         Our film in distribution ("Step Into Liquid") may not produce the
financial results we are anticipating and therefore may have an adverse impact
on our financial position. Some of the risks include:

     o   Cash flow assumptions are based on a revenue stream from the film that
         may not materialize due to lower than anticipate box office sales or
         sales of DVD's.

     o   We have contracted with a third party for distribution of the film in
         the United States. We cannot be assured that this distributor will
         perform as expected.

                                       12



<PAGE>

     o   We are contracting with foreign distributors in various countries. We
         are receiving guarantee payments before releasing the film. We cannot
         be assured of accurate reporting of foreign box office sales or that
         moneys due us from box office sales will ever be remitted.

WE CANNOT PREDICT THE EFFECT FUTURE SALES OF OUR COMMON STOCK WILL HAVE ON THE
MARKET PRICE OF OUR COMMON STOCK.

         We cannot predict the effect, if any, that future sales of our Common
Stock will have on the market price of our Common Stock prevailing from time to
time. Sales of substantial amounts of Common Stock or the perception that such
sales could occur may adversely affect prevailing market prices for our Common
Stock.

OUR STOCK PRICE MAY BE VOLATILE.

         The market price of our Common Stock will likely fluctuate
significantly in response to the following factors, some of which are beyond our
control:

     o   Variations in our quarterly operating results;

     o   Changes in financial estimates of our revenues and operating results by
         securities analysts;

     o   Changes in market valuations of telecommunications equipment companies;

     o   Announcements by us of significant contracts, acquisitions, strategic
         partnerships, joint ventures or capital commitments;

     o   Additions or departures of key personnel;

     o   Future sales of our Common Stock;

     o   Stock market price and volume fluctuations attributable to inconsistent
         trading volume levels of our stock;

     o   Commencement of or involvement in litigation; and

     o   Announcements by us or our competitors of technological innovations or
         new products.

         In addition, the equity markets have experienced volatility that has
particularly affected the market prices of equity securities issued by high
technology companies and that often has been unrelated or disproportionate to
the operating results of those companies. These broad market fluctuations may
adversely effect the market price of our common stock.

WE HAVE RELIED ON THE PRIVATE PLACEMENT EXEMPTION TO RAISE SUBSTANTIAL AMOUNTS
OF CAPITAL, AND COULD SUFFER SUBSTANTIAL LOSSES IF THAT EXEMPTION WAS DETERMINED
NOT TO HAVE BEEN PROPERLY RELIED UPON

         We have raised substantial amounts of capital in private placements
from time to time. The securities offered in such private placements were not
registered with the SEC or any state agency in reliance upon exemptions from
such registration requirements. Such exemptions are highly technical in nature
and if we inadvertently failed to comply with the requirements of any of such
exemptive provisions, investors would have the right to rescind their purchase
of our securities or sue for damages. If one or more investors were to
successfully seek such rescission or institute any such suit, we could face
severe financial demands that could materially and adversely affect our
financial position.

                                       13



<PAGE>

WE DO NOT ANTICIPATE PAYING ANY DIVIDENDS ON OUR COMMON STOCK.

         We have not paid any dividends on our common stock since our inception
and do not anticipate paying any dividends on our common stock in the
foreseeable future. Instead, we intend to retain any future earnings for use in
the operation and expansion of our business.

WE HAVE ESTABLISHED SEVERAL ANTI-TAKEOVER MEASURES WHICH COULD DELAY OR PREVENT
A CHANGE OF OUR CONTROL.

         Under the terms of our amended and restated certificate of
incorporation, the board of directors will be authorized, without any need for
action by our stockholders, but subject to any limitations prescribed by law, to
issue shares of our preferred stock in one or more series. Each series may
consist of such number of shares and have the rights, preferences, privileges
and restrictions, such as dividend rights, dividend rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the right to increase or decrease the number of shares of any series, as the
board of directors shall determine. The board of directors may issue preferred
stock with voting or conversion rights that may have the effect of delaying,
deferring or preventing a change in control of our company and that could
adversely affect the market price of the common stock and the voting and other
rights of the holders of common stock. Additionally, our board of directors
adopted a stockholder rights plan and declared a dividend distribution of one
right for each outstanding share of our common stock. Each right, when
exercisable, entitles the registered holder to purchase securities at a
specified purchase price, subject to adjustment. The rights plan may have the
anti-takeover effect of causing substantial dilution to the person or group that
attempts to acquire our company on terms not approved by the board of directors.
The existence of the rights plan could limit the price that certain investors
might be willing to pay in the future for shares of our capital stock and could
delay, defer or prevent a merger or acquisition of our company that stockholders
may consider favorable.

BECAUSE WE ARE SUBJECT TO SEC REGULATIONS RELATING TO LOW-PRICED STOCKS, THE
MARKET FOR OUR COMMON STOCK COULD BE ADVERSELY AFFECTED.

         The Securities and Exchange Commission has adopted regulations
concerning low-priced (or "penny") stocks. The regulations generally define
"penny stock" to be any equity security that has a market price less than $5.00
per share, subject to certain exceptions. If our shares continue to be offered
at a market price less than $5.00 per share, and do not qualify for any
exemption from the penny stock regulations, our shares will continue to be
subject to these additional regulations relating to low-priced stocks.

         The penny stock regulations require that broker-dealers, who recommend
penny stocks to persons other than institutional accredited investors make a
special suitability determination for the purchaser, receive the purchaser's
written agreement to the transaction prior to the sale and provide the purchaser
with risk disclosure documents that identify risks associated with investing in
penny stocks. Furthermore, the broker-dealer must obtain a signed and dated
acknowledgment from the purchaser demonstrating that the purchaser has actually
received the required risk disclosure document before effecting a transaction in
penny stock. These requirements have historically resulted in reducing the level
of trading activity in securities that become subject to the penny stock rules.

         The additional burdens imposed upon broker-dealers by these penny stock
requirements may discourage broker-dealers from effecting transactions in the
common stock, which could severely limit the market liquidity of our common
stock and our shareholders' ability to sell our common stock in the secondary
market.

ITEM 2.  PROPERTIES

         Our corporate headquarters are located at 5920 Friars Road, Suite 104,
San Diego, California. This property is occupied under a five-year lease that
commenced on February 1, 2000. Subsequent to October 31, 2003, we decided to

                                       14



<PAGE>

move our corporate headquarters to Portland, Oregon. The remaining lease cost
(net of projected sublease income) estimated to be $75,530 will be recognized as
a liability in the first fiscal quarter of 2004.

         In anticipation of moving our corporate headquarters to Portland,
Oregon, we have leased 1,000 square feet of space on a month-to-month basis in
Portland.

         We also lease 2,251 square feet of space at 1024 Serpentine Lane,
Pleasanton, California, which was previously used by NV Technology. This
property is occupied under a lease that commenced on May 4, 2001 and which was
amended on September 12, 2001. The lease expires on March 31, 2004. We are
currently trying to find a subtenant for this property and have recognized the
entire liability for the remaining cost ($28,850) of the lease in the financial
statements for the year ended October 31, 2003.

ITEM 3.  LEGAL PROCEEDINGS

         We are not aware of any legal proceedings that would have a material
impact on our financial condition, results of operations, business or prospects.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         The following matters were submitted to a vote of security holders
during the three months ended October 31, 2003:

         (a)      The 2003 annual meeting of the shareholders was held on August
                  25, 2003. Holders of 42,112,150 shares of the Company's common
                  stock were present in person or by proxy at the meeting.

         (b)      Brad Ketch, Ray Willenberg, Jr., C. Rich Wilson III, Ivan
                  Berkowitz, Bruce Brown, Thomas J. Cooper and John Howell were
                  elected directors of the Company.

         (c)

                  i.       Article I of the Articles of Incorporation were
                           amended to change the corporate name to Rim
                           Semiconductor Company.
                  ii.      Article IV of the Articles of Incorporation were
                           amended to increase authorized shares of common stock
                           from 100 million to 500 million.
                  iii.     Marcum and Kliegman, LLP were appointed our
                           independent auditors for fiscal year 2003.

         (d)      The meeting was called for the following purposes:

                  i.       To elect Brad Ketch, Ray Willenberg, Jr., C. Rich
                           Wilson III, Ivan Berkowitz, Bruce Brown, Thomas J.
                           Cooper and John Howell as directors of the Company.
                           This proposal was approved as follows:
<TABLE>
<CAPTION>
                                                                      Votes For      Votes Withheld
                                                                     ------------    --------------
<S>                                 <C>                               <C>                <C>
                                    Brad Ketch                        41,587,421         524,729
                                    Ray Willenberg, Jr.               41,032,731       1,079,419
                                    C. Rich Wilson III (1)            40,885,528       1,226,622
                                    Ivan Berkowitz                    40,563,800       1,548,350
                                    Bruce Brown                       40,500,767       1,611,383
                                    Thomas J. Cooper                  41,336,390        7445,760
                                    John Howell                       40,690,185       1,421,965

                                    (1) Mr. Wilson resigned form his
                                    directorship and all other positions held
                                    with the Company as of December 31, 2003.
</TABLE>
                                       15



<PAGE>

                  ii.      To approve an amendment to Article I of our Articles
                           of Incorporation to change our corporate name to Rim
                           Semiconductor Company.

                           The stockholders approved this proposal with
                           41,970,911 votes cast for and 110,473 votes cast
                           against. There were 30,766 abstentions and 23,767,764
                           broker non-votes.

                  iii.     To approve an amendment to Article IV of our Articles
                           of Incorporation to increase our authorized common
                           stock from 100 million shares to 500 million shares.

                           The stockholders approved this proposal with
                           40,646,156 votes cast for and 1,449,407 votes cast
                           against. There were 16,587 abstentions and 23,767,764
                           broker non-votes.

                  iv.      To ratify the appointment of Marcum & Kliegman, LLP,
                           as our independent auditors for the current fiscal
                           year

                           The stockholders approved this proposal with
                           41,902,493 votes cast for and 191,175 votes cast
                           against. There were 18,482 abstentions and 23,767,764
                           broker non-votes.


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         Our common stock, par value $.001 (the "Common Stock") is currently
traded on the Nasdaq Stock Market's over-the-counter bulletin board (the "OTC
Bulletin Board") under the trading symbol "NVEI."

         The following table shows the quarterly high and low bid prices and
high and low ask prices for our common stock over the last three fiscal years,
as reported on the OTC Bulletin Board. The prices represent quotations by
dealers without adjustments for retail mark-ups, mark-downs or commission and
may not represent actual transactions.

<TABLE>
<CAPTION>
                                                             BID                       ASK
                                                    ---------------------     ----------------------
                                                       HIGH        LOW           HIGH        LOW
                                                      -------     ------        -------     -------
<S>                                                 <C>         <C>           <C>         <C>
         NOVEMBER 2002 THROUGH OCTOBER 2003
         First Quarter                              $     .75   $    .36      $     .77   $     .40
         Second Quarter                                   .45        .27            .46         .29
         Third Quarter                                    .42        .30            .42         .32
         Fourth Quarter                                   .41        .23            .42         .24

         NOVEMBER 2001 THROUGH OCTOBER 2002
         First Quarter                              $     .73   $    .30      $     .80   $     .35
         Second Quarter                                  1.79        .33           1.85         .38
         Third Quarter                                   1.35        .74           1.43         .79
         Fourth Quarter                                   .90        .35            .94         .40
</TABLE>

                                       16



<PAGE>

SHAREHOLDERS

         As of January 26, 2004, there were approximately 1,027 record holders
of the Common Stock of the Company. The Company believes that there are a
significant number of shares of Common Stock held either in nominee name or
street name brokerage accounts and consequently, the Company is unable to
determine the number of beneficial owners of the Common Stock.

DIVIDENDS

         We have not declared or paid any cash dividends on our capital stock
and do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. Payment of dividends on the common stock is within the
discretion of our Board of Directors. The Board currently intends to retain
future earnings, if any, to finance our business operations and fund the
development and growth of our business. The declaration of dividends in the
future will depend upon our earnings, capital requirements, financial condition,
and other factors deemed relevant by the Board.

RECENT SALES OF UNREGISTERED SECURITIES

         Set forth below is a listing of all sales by the Company of
unregistered equity securities during 2003, excluding sales that were previously
reported on a Quarterly Report on Form 10-Q. Unless otherwise indicated, such
sales were exempt from registration under the Securities Act of 1933, as amended
(the "Act"), pursuant to Section 4(2) of the Act, as they were transactions not
involving a public offering.

In January 2004, we:

     o   issued an aggregate of $1,000,000 in convertible promissory notes to
         sixteen investors, which may be converted into shares of common stock
         at an exercise price of $.15;

     o   issued as part of the above transaction warrants to purchase 6,666,667
         shares of common stock at an exercise price of $.25;

     o   issued 1,000,000 shares of common stock to one individual in exchange
         for consulting services valued at $240,000;

     o   issued to our board chair and senior vice president 400,000 shares of
         common stock in lieu of $100,000 in commissions;

     o   issued to our chief executive officer and president 40,000 shares of
         common stock in lieu of $10,000 in deferred compensation;

     o   issued to our chief financial officer 50,000 shares of common stock as
         part of his employment agreement;

     o   issued to our former vice president and secretary and board member
         333,333 shares of common stock as part of his severance agreement; and

     o   sold an aggregate 100,000 shares of common stock to one investor for
         total proceeds of $17,500.

In December 2003, we:

     o   issued 2,800,000 shares of common stock to two companies in exchange
         for consulting services valued at $700,000;

     o   sold an aggregate of 931,667 shares of common stock to six investors
         for total proceeds of $177,500;

     o   issued 106,668 shares of common stock as part of an extension of past
         due convertible notes;

     o   issued 15,000 shares of common stock to one company in exchange for
         past services valued at $2,250; and

                                       17



<PAGE>

     o   cancelled 28,000 shares.

In November 2003, we:

     o   sold aggregate of 232,834 shares of common stock to six investors for
         total proceeds of $40,300.

In October 2003, we:

     o   sold an aggregate of 815,433 shares of common stock to twelve investors
         for total proceeds of $122,315;

     o   issued an aggregate of 450,000 shares of common stock upon conversion
         of convertible promissory notes held by seven investors, resulting in
         the cancellation of $90,000 in principal and interest that would have
         been outstanding under the notes.

In September 2003, we:

     o   sold an aggregate of 593,167 shares of common stock to 15 investors for
         total proceeds of $89,050;

     o   issued an aggregate of 700,000 shares of common stock to one investor
         upon the exercise of warrants at $.06 per share.

In August 2003, we:

     o   sold an aggregate of 450,100 shares of common stock to seven investors
         for total proceeds of $67,515; and

     o   issued an aggregate of 300,000 shares of common stock to one investor
         upon the exercise of warrants at $.06 per share.

         All of the securities issued in the transactions described above were
issued without registration under the Securities Act in reliance upon the
exemption 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. The Company believes the recipients
were all "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.

                                       18



<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

         The selected consolidated financial data set forth below for the five
years in the period ended October 31, 2003 has been derived from the Company's
audited consolidated financial statements. This information should be read in
conjunction with the audited consolidated financial statements and notes
thereto.

<TABLE>
<CAPTION>
                                                                            Year Ended October 31,
                                           -----------------------------------------------------------------------------------------
                                                  2003              2002              2001              2000              1999
                                           ----------------- ----------------- ----------------- ----------------- -----------------
<S>                                        <C>               <C>               <C>               <C>               <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                   $        379,980  $             --  $             --  $         12,200  $        129,845
Cost of Sales                                       192,889                --                --            21,403            81,159
Selling, general and administrative               4,189,348         6,014,912         4,086,795         2,041,942           811,703
Total operating expenses                          4,563,502         7,313,472         9,492,584        12,301,869         2,174,360
Net loss                                        (3,316,500)       (9,467,123)      (11,875,915)      (12,725,316)       (2,044,515)
Basic and diluted net loss per share       $          (.05)  $          (.23)  $          (.46)  $          (.59)  $          (.14)
Weighted average number of common                60,643,489        41,861,295        25,988,990        21,579,916        15,130,000

BALANCE SHEET DATA AT PERIOD-END
Current Assets                             $        324,801  $        323,259  $        560,109  $        247,024  $         94,294
Property and equipment, net                          41,301            64,533           284,896           393,787           102,530
Film in Distribution                              2,142,212                --                --                --                --
Projects under development                               --         2,178,831         1,912,650           638,707            32,883
Total assets                                      8,272,350         8,332,199         2,791,297         1,432,662           335,264
Accounts payable and accrued expenses             1,744,833         2,247,585         1,435,024           446,921           420,699
Redeemable Series B Preferred Stock               3,192,000                --                --                --                --
Total liabilities                                 7,175,194         4,907,502         2,306,910         1,203,807           420,699
Redeemable Series B Preferred Stock                      --         3,192,000                --                --                --
Total shareholders' equity (deficit)       $      1,097,156  $        232,697  $        484,387  $        228,855  $       (85,435)
</TABLE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATION

         THE FOLLOWING COMMENTARY SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES CONTAINED ELSEWHERE IN THIS
FORM 10-K. THE DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS RELATE TO FUTURE EVENTS OR OUR FUTURE
FINANCIAL PERFORMANCE. IN SOME CASES, YOU CAN IDENTIFY THESE FORWARD-LOOKING
STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "PLAN,"
"ANTICIPATE," "BELIEVE," "ESTIMATE," "PREDICT," "POTENTIAL," "INTEND," OR
"CONTINUE," AND SIMILAR EXPRESSIONS. THESE STATEMENTS ARE ONLY PREDICTIONS. OUR
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A VARIETY OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS FORM
10-K.

OVERVIEW

The Company is developing advanced transmission technology to enable data to be
transmitted across copper telephone wire at speeds and over distances that
exceed those offered by industry-leading DSL technology providers. We intend to
market this breakthrough technology to leading equipment makers in the
telecommunications industry. Through our subsidiary, NV Entertainment, we are
recognizing gross profit from the revenues from the feature-length documentary,
"Step into Liquid."

During fiscal 2003 the Company emerged from being a development stage business
as a result of our film "Step Into Liquid" going into distribution. Our
Telecommunications Business continues to be in the development stage.

Fiscal 2003 has been a year of consolidation and cost cutting for the Company.
During the year we cut overhead cost approximately $100,000 per month and
subsequent to year end have cut an additional $50,000 per month. These cost
cutting measures combined with focusing the Company's Telecommunications
Business will allow us to more carefully use moneys raised to complete
development of our technology.

                                       19



<PAGE>

ENTERTAINMENT BUSINESS. The film has completed its domestic theater run grossing
about $3.7 million in box office revenues. The remaining film revenues are
licensing and foreign distribution guarantee fees. The film is currently being
distributed to foreign markets. We anticipate revenues in fiscal 2004 will
exceed fiscal 2003 revenues as we anticipate additional foreign revenues,
television rights and DVD sales. The DVD sales are scheduled for release in the
United States in April 2004. Revenues in 2004 are projected to meet or exceed
our invested capital of $2,250,000. After 2004 revenues will decline. The
Entertainment Business should be cash flow positive in fiscal 2004.

TELECOMMUNICATIONS BUSINESS. We continued development of our technology during
fiscal 2003 and are moving closer to having a semiconductor chip available.
Currently we estimate that we will need to raise an additional $3 million to $4
million in order to complete the technology, produce a semiconductor chip and
market the chip. We believe the Telecommunications Business will begin to
generate revenues in the third or fourth calendar quarter of 2004.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the U.S. The
preparation of these financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to revenue
recognition, bad debts, investments, intangible assets and income taxes. Our
estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. Actual results may
differ from these estimates.

We have identified the accounting policies below as critical to our business
operations and the understanding of our results of operations.

Revenue Recognition

We recognize film revenue from the distribution of our feature films
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:

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

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

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

     o   the arrangement fee is fixed or determinable; and

     o   collection of the arrangement fee is reasonably assured.

Under a rights Agreement with the Company's distributor for its feature length
film entitled "Step into Liquid" the Company shares with the distributor in the
profits of STEP INTO LIQUID 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
respective completed film, that are subject to further increase based on the
actual distribution results in the respective territory.

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 titles
is used solely for the purpose of classification and for identifying previously

                                       20



<PAGE>

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 Production Costs

Statement of Positions SOP-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-method-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 each 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 an individual 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 capital costs exceeds the film's fair value.

The Company commences amortization of capitalized film costs and accrues
(expenses) of participation costs when a film is released and it begins to
recognize revenue from the film.

Stock-Based Compensation

SFAS 123, SFAS 148 and APB 25 (and any related interpretations) will continue to
have impact on our reporting and operating results as the Company has used stock
in the past to raise capital and as a means of compensation to employees. We
believe we will need to continue using stock for these same purposes.

RESEARCH AND DEVELOPMENT.

Research and development expenses relate to the design and development of new
telecommunications products. 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 revenues 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.

RESULTS OF OPERATIONS

COMPARISON OF THE YEAR ENDED OCTOBER 31, 2003 AND THE YEAR ENDED OCTOBER 31,
2002

         REVENUES. Revenues for fiscal 2003 of $380,000 were from our
Entertainment Business. Revenues of $295,000 were in the form of guaranteed and
license payments and the remainder was foreign distribution fees.

                                       21



<PAGE>

         COST OF SALES. Cost of sales for fiscal 2003 of $193,000 is
amortization of film cost for our film in distribution.

         OPERATING EXPENSES. Operating expenses included research and
development expenses, compensatory element of stock issuances, selling, general
and administrative expenses and the costs of settlement of litigation. Total
operating expenses decreased 38% to $4,564,000 for fiscal 2003 from $7,313,000
for fiscal 2002 or a $2,749,000 decrease. Selling, general and administrative
expenses decreased 40% or $1,429,000 primarily as a result of a reduction in
staffing, lower professional fees and lower travel and entertainment expenses.
Research and development costs decreased $1,181,000 to $118,000 as we made
significant advance payments for research and development in fiscal 2002.
Compensatory element of stock issuances decreased 16% from $2,459,000 in fiscal
2002 to $2,062,000 in fiscal 2003 as we better managed the use of stock for
compensation purposes. Projects written off increased by $57,000 (there were
none written off in fiscal 2002) as we determined we would not pursue several
projects.

         OTHER EXPENSES. Other expenses included interest expense, amortization
of unearned financing costs and a non-cash gain on the settlement of a law suit.
Interest expense decreased $766,000 as a primarily as a result of issuing fewer
convertible notes payable in fiscal 2003 that had interest of 50% for the life
of the note due when the notes were paid, causing us to recognize the interest
expense immediately in fiscal 2002. Additionally, including these notes, our
overall debt level was lower in fiscal 2003 compared to fiscal 2002.
Amortization of unearned financing costs decreased to $336,000 from $1,117,000
as a result of the Company issuing less debt with conversion features or
warrants with strike prices less than the market price of the stock at the time
of issuance. We record a non-cash gain of $1,474,000 on the settlement of a law
suit with two former officers and shareholders. The gain was the result of the
former officers returning 2,200,000 shares of stock.

         NET LOSS. The net loss decreased 46% from $6,150,000 to $3,317,000 as
the result of gross profit generated on the film ($187,000), lower operating
expenses ($2,749,000), lower interest costs ($765,000), lower amortization of
financing costs ($791,000) and the non-cash gain recorded as a result of the law
suit settlement ($1,474,000).

COMPARISON OF THE YEAR ENDED OCTOBER 31, 2002 AND THE YEAR ENDED OCTOBER 31,
2001

         REVENUES. Revenues for the fiscal years ended October 31, 2002 and
October 31, 2001 were $0.

         OPERATING EXPENSES. Operating expenses included research and
development expenses, compensatory element of stock issuances, selling, general
and administrative expenses and the costs of settlement of litigation. Total
operating expenses decreased to $7,313,000 for fiscal 2002 from $9,493,000 for
fiscal 2001. The decrease was principally related to reductions in general and
administrative expenses. Compensatory element of stock issuances for general and
administrative expenses decreased from $3,559,000 to $2,459,000 and selling,
general and administrative expenses decreased from $4,087,000 to $3,556,000 as
general and administrative costs associated with our Pleasanton office were
significantly reduced in the fourth quarter of fiscal 2001. Research and
development expenses increased to $1,299,000 in fiscal 2002 from $839,000 in
fiscal 2001. During the second quarter of the 2001 fiscal period, 250,000 shares
of common stock valued at $1,000,000 were issued in connection with certain
disputes arising from a non-consummated merger between New Visual Corporation
and Astounding.com, Inc. There was no similar event during the 2002 fiscal
period.

         OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses decreased from
$2,383,000 in fiscal 2001 to $2,154,000 in fiscal 2002. Interest expense
increased from $337,000 in fiscal 2001 to $1,036,000 in fiscal 2002, primarily
resulting from the interest component of convertible notes payable issued during
the fiscal year ended October 31, 2002. In addition, several of these




<PAGE>

convertible notes were convertible into common stock at a conversion rate lower
than the market price of our common stock at the time of issuance of the notes.
As a result, there was an additional charge to amortization of unearned
financing costs of $654,000. The increases in these expenses were offset by a
reduction in the costs of amortization of unearned financing costs of $322,000
in connection with a long-term debt financing arrangement. During the year ended
October, 31, 2001 the Company paid down long-term debt in connection with this
financing arrangement amounting to $500,000.

         NET LOSS. The Company's net loss was $9,467,000, or $0.23 per common
share, for the fiscal year ended October 31, 2002, a decrease from the net loss
of $11,876,000, or $0.46 per common share, for the fiscal year ended October 31,
2001.

CONTRACTUAL OBLIGATIONS

We are committed to making cash payments in the future in connection with our
operating leases, convertible notes payable, convertible debentures and notes
payable. We have no off-balance sheet debt or other unrecorded obligations and
we have not guaranteed the debt of any other party. Below is a schedule of the
future payments that we are obligated to make based on agreements in place as of
October 31, 2003:

<TABLE>
<CAPTION>
                                                                                                      Contingent
                                Fiscal             Fiscal             Fiscal           Fiscal             Due
                                 2004               2005               2006              2007          Date (1)
                           --------------    ----------------    --------------    -------------   --------------
<S>                        <C>               <C>                 <C>               <C>             <C>
Operating leases           $     103,285     $        15,834     $                 $               $
Convertible notes payable        360,000                                                                 743,000
Convertible debentures           300,000
Notes payable                    740,311
License and Development Fee       95,000
Series B convertible
  preferred stock                                  1,197,000         1,596,000          399,000
                           --------------    ----------------    --------------    -------------   --------------
Total                      $   1,598,596     $     1,212,834     $   1,596,000     $    399,000    $     743,000
                           ==============    ================    ==============    =============   ==============
</TABLE>

(1) Payment is contingent upon the level of receipts the Company receives from
its joint venture that produced the film Step Into Liquid. Dependent upon the
performance of the film in foreign distribution and DVD sales the entirety of
the $743,000 could come due in fiscal 2004.


On January 6, 2004 the Company issued $1,000,000 of 7% convertible debentures
due December 31, 2006. The debentures have a three year term and are convertible
to common stock at $.15 per share. As part of this transaction warrants to
purchase 6,666,667 shares of common stock at an exercise price of $.25 were
issued to the debenture holders.

LIQUIDITY AND CAPITAL RESOURCES

         Cash balances totaled $320,000 as of October 31, 2003 and $312,000 as
of October 31, 2002.

         Net cash used in operating activities was $2,283,000 in fiscal 2003,
$3,986,000 in fiscal 2002 and $4,281,000, in fiscal 2001.

         Operations have been financed principally through sales of common
stock, the exercise of warrants and options to purchase common stock, the
issuance of convertible notes payable and notes payable. Net proceeds from
financing activities amounted to approximately $3,144,000 for fiscal 2003,
$5,201,000 for fiscal 2002 and $5,642,000 for fiscal 2001. Net proceeds from
convertible notes and debentures payable amounted to approximately $551,000 in
fiscal 2003, $1,795,000 in fiscal 2002 and $615,000 in fiscal 2001. Proceeds

                                       22



<PAGE>

from the exercise of options and warrants amounted to approximately $60,000 in
fiscal 2003, $728,000 in fiscal 2002 and $100,000 in fiscal 2001. The Company
received net proceeds from the sale of common stock amounting to approximately
$2,764,000 in fiscal 2003, $1,977,000 in fiscal 2002 and $5,427,000 in fiscal
2001. Notes payable were issued amounting to approximately $0, $700,000 and $0
in fiscal 2003, fiscal 2002 and fiscal 2001, respectively. Notes payable
amounting to $231,000 were repaid in fiscal 2003 and $500,000 were repaid in
fiscal 2001.

         Stock was issued in payment of expenses amounting to approximately
$2,062,000 in fiscal 2003, $2,459,000 in fiscal 2002 and $3,559,000 in fiscal
2001. Stock was returned to the Company in settlement of litigation in the
amount of $1,474,000 during fiscal 2003. Stock was issued in settlement of
litigation in the amount of $1,000,000 during fiscal 2001.

         In April 2000, we entered into a joint venture production agreement to
produce a feature length film for theatrical distribution. Under the agreement,
we are providing the funding for the production in the amount of up to
$2,250,000 and, in exchange, we will receive a 50% share in all net profits from
worldwide distribution and merchandising, after receiving funds equal to our
initial investment of up to $2,250,000. As of October 31, 2003, we had a
receivable from the joint venture in the amount of $2,167,000. The film is now
in distribution. We expect to receive distributions in fiscal 2004 in excess of
$2,167,000.

         Research and development expenses totaled approximately $118,000 in
fiscal 2003, $1,299,000 in fiscal 2002 and $839,000 in fiscal 2001. During the
fiscal year ended October 31, 2003 the Company paid $639,000 in technology
development fees.

         As of October 31, 2003 we have outstanding convertible notes payable
totaling $1,103,000. We agreed to pay the principal and interest in an amount
equal to 50% of the principal if certain milestones are reached from the
distribution of the feature length film currently in production. The notes are
convertible at any time, in whole or in part, into shares of common stock at
conversion prices ranging from $0.40 to $1.00 per share.

         In June 2000, we entered into five long-term credit facilities,
pursuant to which we borrowed $750,000. The balance on these notes at October
31, 2003 is $256,886. The maturity date on these notes has been extended beyond
its original maturity date until we close our next round of financing.

         In April 2002, we entered into a license and development agreement with
Adaptive Networks, Inc., which included development services relating to our
FPGA-based prototype. We agreed to pay Adaptive an aggregate of $1,559,000 for
these services. As of October 31, 2003, the remaining balance due to Adaptive is
$95,000 under the license and development agreement.

         In April 2002, in consideration of the grant of a technology license
from Adaptive Networks, Inc., we assumed certain debt obligations of Adaptive to
Zaiq Technologies, Inc. ("Zaiq"). We then issued 3,192 shares of Series B
Preferred Stock, valued at $3,192,000, with a liquidation preference of $1,000
per share, and paid $250,000 in cash to Zaiq in satisfaction of the Zaiq debt.
We must offer to redeem all of the Series B Preferred Stock if we close a
corporate transaction resulting in a change of control or a financing
transaction of at least $15 million. If we close a financing transaction of at
least $3 million but less than $15 million, we must offer to redeem a portion of
the Series B Preferred Stock based on a fraction, the numerator of which is the
cash proceeds we receive in the financing transaction and the denominator of
which is $15 million. We are also required to offer to redeem the outstanding
Series B Preferred Stock in eight equal quarterly payments beginning March 31,
2005 and ending December 31, 2006.

         In July 2002, we borrowed $500,000 from the Charles R. Cono Trust.
These borrowings are unsecured and bear interest at 10% per annum. Principal and
accrued interest are payable three days after we receive a written demand for
payment. The balance on this note at October 31, 2003 is $483,425.

                                       23



<PAGE>

         On October 31, 2003 the Company entered into a 7% convertible debenture
agreement in the amount of $300,000. The debentures are convertible to common
stock at $.26 per share and are due April 30, 2004. The Company also issued
warrants to the debenture holder at a strike price of $.15 per share. This was
subsequently paid in January 2004.

         On January 6, 2004 the Company issued $1,000,000 of 7% convertible
debentures due December 31, 2006. The debentures have a three year term and are
convertible to common stock at $.15 per share. As part of this transaction
warrants to purchase 6,666,667 shares of common stock at an exercise price of
$.25 were issued to the debenture holders.

         Taking into account the proceeds of the Convertible Debentures, the
Company believes that it has sufficient cash resources available to maintain its
operations through April 2004. Assuming that the proceeds of the Additional
debentures are received, the Company believes that it has sufficient cash
resources available to maintain its operations through July 2004. Thereafter,
unless the Film business generates revenues, the Company will need to raise an
additional $4 million to $5 million to realize its business plan as contemplated
and complete the design, development, and testing of the Company's proposed
semiconductor chip.

         While the Company is actively seeking to raise additional capital, at
the present time it has no commitments for any such financing, and there can be
no assurance that additional capital will be available to the Company on
commercially acceptable terms. The financial statements accompanying this report
for the year ended October 31, 2003, includes an explanatory paragraph relating
to the uncertainty of the Company's ability to continue as a going concern,
which may make it more difficult for the Company to raise additional capital.

         Furthermore, it is anticipated that any successful financing will have
a significant dilutive effect on existing stockholders. The inability to obtain
such financing will have a material adverse effect on the Company, its
operations and future business prospects.

        Management believes funds on hand and available sources of financing
will enable us to meet our liquidity needs for at least the next three months.
However, funding for our operations has become more difficult to secure and more
expensive than in prior periods due to the current economic and stock market
climate, our recent stock price and market volatility, and general market
conditions in the semiconductor and telecommunications industries. Management
continues to take steps to reduce monthly cash outlays through arrangements with
vendors to accept longer payment terms and reductions of recurring expenses,
when possible, including potential staff and management changes. However,
additional cash must be raised in order to continue to meet liquidity needs and
satisfy the Company's proposed business plan. Management is presently
investigating potential financing transactions that it believes can provide
additional cash for operations and lead to profitability in both the short and
long-term. Management also intends to attempt to raise funds through private
sales of common stock and borrowings. Although management believes these efforts
will enable us to meet liquidity needs in the future, there can be no assurance
that these efforts will be successful.

GOING CONCERN CONSIDERATION

         We have continued losses in each of our years of operation, negative
cash flow and liquidity problems. These conditions raise substantial doubt about
our ability to continue as a going concern. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability of reported assets or liabilities should we be unable to continue
as a going concern.

         We have been able to continue based upon our receipt of funds from the
issuance of equity securities and borrowings, and by acquiring assets or paying
expenses by issuing stock. Our continued existence is dependent upon our
continued ability to raise funds through the issuance of our securities or
borrowings, and our ability to acquire assets or satisfy liabilities by the

                                       24



<PAGE>

issuance of stock. Management's plans in this regard are to obtain other debt
and equity financing until profitable operation and positive cash flow are
achieved and maintained. Although management believes, based on the fact that it
raised $10,588,000 through sales of common stock and $3,697,000 from borrowings
from November 1, 2000 through October 31, 2003, that it will be able to secure
suitable additional financing for the company's operations, there can be no
guarantee that such financing will continue to be available on reasonable terms,
or at all.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (" FIN 45"). FIN 45 requires a company, at
the time it issues a guarantee, to recognize an initial liability for the fair
value of obligations assumed under the guarantee and elaborates on existing
disclosure requirements related to guarantees and warranties. The initial
recognition requirements of FIN 45 are effective for guarantees issued or
modified after December 31, 2002 and adoption of the disclosure requirements are
effective for the Company during the first quarter ending January 31, 2003. The
adoption of FIN 45 had no significant impact on its consolidated financial
position or results of operations.

         In January 2003, the FASB issued FASB Interpretation No. 46 (" FIN
46"), "Consolidation of Variable Interest Entities, an Interpretation of ARB No.
51." FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after March 15, 2004. The adoption of FIN 46 had no
significant impact on its consolidated financial position or results of
operations.

         In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments imbedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities, or other securities that do not
yet exist, should be applied to existing contracts as well as new contracts
entered into after June 30, 2003. The adoption of SFAS No. 149 had no
significant impact on its consolidated financial position or results of
operations.

         In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity". SFAS
No. 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS. No 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise, is effective at the
beginning of the first interim period beginning after June 15, 2003. As a result
of implementing SFAS No. 150 the Company has changed the classification of its
Series B Convertible Preferred Stock to a long term liability from previously
being classified between the liability and equity section.

                                       25



<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not currently have any indebtedness or income from foreign
sources that would subject us to market risk. We do not engage in commodity
futures trading or hedging activities and do not participate in derivative
financial instrument transactions for trading or other speculative purposes. In
addition, we do not engage in interest rate swap transactions that could expose
us to market risk. However, to the extent that changes in interest rates and
currency exchange rates affect general economic conditions, we may be affected
by such changes.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         Our audited Consolidated Balance Sheets as of October 31, 2003 and 2002
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended October 31, 2003, 2002 and 2001 are included in
this Annual Report on Form 10-K.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

ITEM 9A. CONTROLS AND PROCEDURES

         The Company maintains disclosure controls and procedures that are
designed to ensure that information required to be disclosed in the Company's
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to the
Company's management, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.

         As indicated in the certifications following the signatures to this
report, the Chief Executive Officer and Chief Financial Officer of the Company
have evaluated the Company's disclosure controls and procedures prior to the
filing of this report. Based on that evaluation, these officers have concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic filings under the Securities Exchange Act of
1934, as amended.

         Subsequent to that evaluation, there have not been changes in the
Company's internal controls or in other factors that could have materially
affected or are reasonably likely to affect internal control over financial
reporting.


                                       26



<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         DIRECTORS AND EXECUTIVE OFFICERS

         The individuals who serve as our executive officers and directors are:

<TABLE>
<CAPTION>
           Name                  Age                     Position(s) Held
----------------------------    -----     --------------------------------------------------
<S>                              <C>      <C>
Brad Ketch                       41       President, Chief Executive Officer and Director
Ray Willenberg, Jr.              52       Chairman of the Board and Executive Vice President
James W. Cruckshank              49       Chief Financial Officer
Ivan Berkowitz                   56       Vice Chairman of the Board(1)
Bruce Brown                      66       Director(1)
Thomas J. Cooper                 54       Director
John Howell                      58       Director
</TABLE>

(1) Member of the Audit Committee and the Compensation Committee.

         BRAD KETCH. Mr. Ketch has served the Company in various roles since
March 2002. In March 2002, Mr. Ketch became a consultant with us on our
broadband technology and served in that capacity until July 2002, when he became
our Chief Marketing Officer. He has served as our President and Chief Executive
Officer, as well as a director, since December 2002. With over 18 years
experience creating shareholder value through broadband telecommunications
products and services, Mr. Ketch, from October 2001 to March 2002, served as CEO
of Kentrox LLC, a manufacturer and marketer of data networking equipment. At
Kentrox, Mr. Ketch was responsible for a company with 260 employees and $90
million in annual revenues. From January 2001 to October 2001 Mr. Ketch
implemented strategic plans for telecom service providers and equipment
manufacturers through his telecommunications consulting company, Brad Ketch &
Associates, of which he was founder and President. From February 1999 to January
2001 he was Senior Vice President of Sales and Marketing for HyperEdge
Corporation, a company he co-founded. HyperEdge acquired and integrated
broadband access equipment manufacturers to further enable service providers to
deliver broadband access to the "Last Mile." From August 1997 through February
1999, Mr. Ketch implemented strategic business and technical plans for
competitive local exchange carrier network access and created products targeted
at the incumbent local exchange carrier market as a consultant to various
telecommunications companies as a consultant with Brad Ketch & Associates. Prior
to August 1997 he served in various capacities at Nortel, Advanced Fibre
Communications and Cincinnati Bell. Mr. Ketch has a Bachelor of Arts degree in
Economics from Wheaton College and a MBA from Northwestern University.

         RAY WILLENBERG, JR. Mr. Willenberg served as our President, Chief
Executive Officer and Chairman of the Board from April 1997 to March 2002, and
was elected a director in October 1996. Mr. Willenberg joined us as Vice
President and corporate Secretary in 1996. He currently serves as our Executive
Vice President and Chairman of the Board of Directors. From 1972 to 1995, Mr.
Willenberg was Chief Executive Officer of Mesa Mortgage Company in San Diego,
California.

         JAMES W. CRUCKSHANK. Mr. Cruckshank has served as our Chief Financial
Officer since December 2003. He holds a B.B.A. in Accounting, Marketing and
Management from the University of Portland and a M.B.A. from The University of
Notre Dame. Since November of 2003, Mr. Cruckshank has been a partner in Tatum
CFO Partners LLP. From March 2003 to December 2003 Mr. Cruckshank was an
independent financial consultant. From November 2001 to March 2003, Mr.
Cruckshank was Vice President of Finance of Christenson Electric, Inc. From
March 2000 to October 2001, Mr. Cruckshank served as Chief Financial Officer for
a number of internet startup companies. From January 1999 to February 2000, Mr.
Cruckshank was Vice President and Chief Financial Officer of Assisted Living

                                       27



<PAGE>

Concepts, Inc. From February 1984 to January 1999, Mr. Cruckshank was Corporate
Controller and Assistant Treasurer of Schnitzer Steel Industries, Inc. a
publicly traded company. Prior to that Mr. Cruckshank was with PriceWaterhouse
Coopers for six years.

         IVAN BERKOWITZ. Mr. Berkowitz has served as a member of our board of
directors since August 2000 and was named Vice Chairman of the Board in June
2001. Since 1993, Mr. Berkowitz has served as the managing general partner of
Steib & Company, a privately held New York-based investment company. Currently,
Mr. Berkowitz serves on the board of directors of ConnectivCorp, a deep content
provider that facilitates online connections between consumers and
health-oriented companies. Since 1989, Mr. Berkowitz has served as President of
Great Court Holdings Corporation, a privately held New York-based investment
company. Mr. Berkowitz holds a B.A. from Brooklyn College, an MBA from Baruch
College, City University of New York, and a Ph.D. in International Law from
Cambridge University.

         BRUCE BROWN. Mr. Brown has served as a member of our board of directors
since June 2000. Over the past 30 years, Mr. Brown has been an independent
director and producer of motion pictures. He was nominated for an Academy Award
in 1971 for directing "ON ANY SUNDAY," a motorcycle adventure film starring
Steve McQueen. Mr. Brown has earned worldwide distinction as the director and
producer of the first of its kind documentary, "ENDLESS SUMMER," which is the
second highest grossing documentary film of all time. Its sequel, "ENDLESS
SUMMER 2," also directed by Mr. Brown, grossed more than $10 million in its
first year of theatrical distribution. Mr. Brown has collaborated with us to
produce a new surfing adventure film for mainstream theatrical release. Mr.
Brown's other movie credits include "SLIPPERY WHEN WET," "SURFIN' SHORTS," "SURF
CRAZY," "SURFIN' HOLLOW DAYS," "BAREFOOT ADVENTURE" and "WATERLOGGED."

         THOMAS J. COOPER. Mr. Cooper has served as a member of our board of
directors since March 2002. From June 1 to December 2, 2002, Mr. Cooper served
as our President and Chief Executive Officer. Mr. Cooper has been engaged in the
development, creation and management of global sales and marketing platforms for
businesses operating in the areas of high technology, real estate, office
automation, and telecommunications for the past 30 years. From 1994 to 2002, Mr.
Cooper served in various high-ranking positions at GlobespanVirata Corporation
(formerly Virata), most recently as Senior Vice President, Corporate Development
(from July 1999 to February 2002), where he was responsible for the development
and implementation of long range growth strategies, including defining global
partnership initiatives; identifying potential acquisition and joint venture
candidates; and directing strategic investment of corporate capital into select
ventures in which the company acquired minority stakes. From 1994 until 1999,
Mr. Cooper served as Virata's Senior Vice President, Worldwide Sales and
Marketing, where he oversaw all aspects of the company's product sales and
marketing, corporate marketing/communications and public relations. During his
tenure, Virata grew its revenues from $8.9 million in 1998, $9.3 million in
1999, and $21.8 million in 2000, to over $120 million in 2001.

         Prior to joining Virata, Mr. Cooper served in senior sales and
management positions at Hewlett-Packard, Trammell Crow Company, Rubloff, Inc.,
Network Equipment Technologies and Pedcom, Inc. He also has seven pending U.S.
patents for networking method or product. Mr. Cooper also serves on the boards
of directors of Bsafeonline.com, Inc., a distributor of Internet filtering and
security applications, and RolaTube Technology, Ltd., the developer and
patent-holder of a new materials technology called Bi-stable Reeled Composite
(BRC) technology, which is headquartered in the United Kingdom. After earning a
Bachelor of Arts degree from Hamilton College, Mr. Cooper graduated MAGNA CUM
LAUDE from the University of Toledo, where he earned his MBA.

         JOHN HOWELL. Mr. Howell has served as a member of our board of
directors since April 2000 and was our Executive Vice President from July 2000
until October 2002. In October 2002, Mr. Howell was named Executive Vice
President of Kingdom Ventures, Inc., a manufacturer and global distributor of
products and services primarily marketed to the faith-based consumer. Mr. Howell
also serves as a director of Kingdom Ventures, Inc. From January 1998 until
October 1998, Mr. Howell served as Vice President of TeraGLOBAL Communications

                                       28



<PAGE>

Corp., a manufacturer of hardware for the convergence of voice, video and data.
From 1997 to 1998, Mr. Howell was Chief Executive Officer of EVERSYS
Corporation, a manufacturer of computer equipment for the local area network.
Mr. Howell has a Bachelor of Science degree in Aerospace Engineering from Oregon
State University.

         C. RICH WILSON III. Mr. Wilson resigned as Vice President, Secretary
and as a member of the Board of Directors effective December 31, 2003. Mr.
Wilson had served as Vice President, Secretary and a member of our Board of
Directors since April 2000.

BOARD OF DIRECTORS; ELECTION OF OFFICERS

         All directors hold office until the next annual meeting of shareholders
and until their successors are duly elected and qualified. Any vacancy occurring
in the Board of Directors may be filled by the shareholders, the Board of
Directors, or if the Directors remaining in office constitute fewer than a
quorum of the Board of Directors, they may fill the vacancy by the affirmative
vote of a majority of the Directors remaining in office. A director elected to
fill a vacancy is elected for the unexpired term of his predecessor in office.
Any directorship filled by reason of an increase in the number of directors
shall expire at the next shareholders' meeting in which directors are elected,
unless the vacancy is filled by the shareholders, in which case the term shall
expire on the later of (i) the next meeting of the shareholders or (ii) the term
designated for the director at the time of creation of the position being
filled.

         Our executive officers are elected by and serve at the pleasure of our
Board of Directors.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires each of our officers and directors and each person who owns more than
10% of a registered class of our equity securities to file with the SEC an
initial report of ownership and subsequent reports of changes in such ownership.
Such persons are further required by SEC regulation to furnish us with copies of
all Section 16(a) forms (including Forms 3, 4 and 5) that they file. Based
solely on our review of the copies of such forms received by us with respect to
fiscal year 2003, or written representations from certain reporting persons, we
believe all of our directors and executive officers met all applicable filing
requirements, except as described in this paragraph. Brad Ketch filed a late
Form 3 for fiscal year 2003.

Audit Committee Financial Expert

         We have no financial expert. It is difficult for a company with a
financial profile such as ours to attract and to afford a director who qualifies
as a financial expert. Nevertheless, our board intends to seek and consider
retaining over fiscal 2004 an appropriate candidate who qualifies as financial
expert.

Code of Ethics

         We have not yet adopted a code of ethics. Our Board of Directors
intends to adopt, during fiscal 2004, establishing a code of ethics that
complies with the applicable guidelines issued by the Securities and Exchange
Commission.

                                       29



<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth all compensation earned by the Company's
Chief Executive Officer and President and the other executive officers of the
Company whose total annual salaries and bonuses exceeded $100,000 for the year
ended October 31, 2003 (the "Named Executive Officers"):
<TABLE>
<CAPTION>
                                                     SUMMARY COMPENSATION TABLE
----------------------------------------------------------------------------------------------------------------------------------
                                                                                               Restricted          Securities
                                                                        Other Annual             Stock             Underlying
 Name and Principal Position(s)     Year           Salary               Compensation            Award(s)            Options
--------------------------------   ------    -------------------     ------------------     ----------------    ------------------
<S>                                 <C>       <C>                     <C>                            <C>           <C>
Brad Ketch                          2003      $    225,833            $         --                   --            1,500,000
President and Chief Executive       2002            60,000                      --                   --              455,000
Officer (1)                         2001                --                      --                   --                   --

Ray Willenberg, Jr.                 2003           177,694   (3)                --                   --                   --
Chairman of the Board, Chief        2002           258,406   (4)                --                   --              350,000
Executive Officer, President        2001           229,167                      --                   --               20,000
and Executive Vice President (2)

C. Rich Wilson III                  2003           156,083                      --                   --                   --
Former Vice President and           2002           166,329   (6)            91,875  (7)              --              600,000
Secretary (5)                       2001           149,580                      --                   --               20,000

Thomas J. Sweeney                   2003           129,848                      --                   --                   --
Former Chief Financial              2002           133,455   (9)                --                   --                   --
Officer (8)                         2001            82,294                      --                   --                   --

Thomas J. Cooper                    2003            71,424                      --                   --                   --
Former Chief Executive              2002           129,500  (11)                --                   --            2,000,000  (12)
Officer (10)                        2001                --                      --                   --                   --
</TABLE>

(1)  Mr. Ketch was appointed Chief Executive Officer on December 2, 2002.
(2)  Mr. Willenberg served as our President and Chief Executive Officer until
     June 1, 2002, when Mr. Cooper became Chief Executive Officer and Mr.
     Willenberg became Executive Vice President.
(3)  Includes $28,106 in commissions paid Mr. Willenberg per his employment
     agreement. The Company owed Mr. Willenberg $463,878 in unpaid commissions
     as of October 31, 2003.
(4)  Includes $14,250 in earned, but deferred payroll unpaid as of October 31,
     2002.
(5)  Mr. Wilson served as Vice President and Secretary from April 2000 until his
     resignation from all positions with the Company on December 31, 2003.
(6)  Includes $29,999 in earned, but deferred payroll unpaid as of October 31,
     2002.
(7)  Represents the issuance to Mr. Wilson in February 2002 of 250,000 shares of
     common stock valued at $0.37 per share.
(8)  Mr. Sweeney served as Chief Financial Officer until his resignation on
     December 12, 2003. Mr. Sweeney's employment was at will.
(9)  Includes $13,514 in earned, but deferred payroll unpaid as of October 31,
     2002.
(10) Mr. Cooper served as our Chief Executive Officer from June 1, 2002 until
     December 2, 2002.
(11) Includes $62,500 in earned, but deferred payroll unpaid as of October 31,
     2002 and $4,500 of consulting fees paid to Mr. Cooper prior to his
     employment with us.
(12) Includes 1,500,000 options cancelled pursuant to Mr. Cooper's Severance
     Agreement. See "Item 13 - Certain Relationships and Related Transactions -
     Thomas J. Cooper."

         In accordance with the rules of the SEC, other compensation in the form
of perquisites and other personal benefits has been omitted for the named
executive officers because the aggregate amount of these perquisites and other
personal benefits was less than the lesser of $50,000 or 10% of annual salary
and bonuses for the named executive officers.

STOCK OPTIONS GRANTED DURING THE YEAR ENDED OCTOBER 31, 2003.

The following table sets forth information with respect to the stock options
granted in the last fiscal year to the persons set forth in the Summary
Compensation Table (the "named executive officers").

                                       30



<PAGE>
<TABLE>
                                                 OPTION GRANTS IN THE LAST FISCAL YEAR
<CAPTION>
                                                       Percent of Total
                             Number of Securities       Options Granted         Exercise or                           Grant Date
                                  Underlying            To Employees In         Base Price         Expiration           Present
                              Options Granted (#)         Fiscal Year           ($/Share)             Date             Value (1)
                             --------------------      ----------------      ----------------     ------------      --------------
<S>                                <C>                        <C>               <C>                <C>   <C>         <C>
Brad Ketch                         1,500,000                  100%              $     0.64         12/03/2012        $    697,332
</TABLE>

(1)  In accordance with SEC rules, the Black-Scholes option pricing model was
     chosen to estimate the grant date present value of the options set forth in
     this table. Our use of this model should not be construed as an endorsement
     of its accuracy at valuing options. All stock option valuation models,
     including the Black-Scholes model, require a prediction about the future
     movement of the stock price. The following assumptions were made for
     purposes of calculating the grant date present value for the options
     granted: expected life of this option of five years, volatility at 72.32%
     dividend yield of 0.0% and discount rate of 1.5%.

YEAR-END OPTION VALUES. The following table sets forth information as of October
31, 2003 concerning options held by the named executive officers.

<TABLE>
                                               AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
                                                      AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
                                                                     Number of Securities                 Value of Unexercised
                                                                Underlying Unexercised Options                In-The-Money
                                                                      at Fiscal Year End               Options at Fiscal Year End
                                                                --------------------------------    --------------------------------
                                  Shares
                               Acquired on
                               Exercise (#)     Realized ($)     Exercisable      Unexercisable      Exercisable       Unexercisable
                              --------------    ------------    -------------    ---------------    -------------    ---------------
<S>                                     <C>            <C>        <C>                <C>            <C>              <C>
Brad Ketch                              --             --           605,000          1,350,000      $         --     $           --
Ray Willenberg, Jr.                     --             --         1,117,500              2,500                --                 --
C. Rich Wilson III                      --             --           742,500              2,500                --                 --
James W. Cruckshank                     --             --                --                 --                --                 --
Thomas J. Sweeney                       --             --                --                 --                --                 --
</TABLE>

COMPENSATION OF DIRECTORS

         It is our policy to pay each outside director $2,000 for each meeting
of our Board of Directors attended and for each committee meeting attended. In
fiscal 2003 the directors waived their board meeting and committee meeting fees
until the Company's financial condition improves. In addition, we have granted
stock and stock options to the directors to compensate them for their services.
Our directors are eligible to receive stock option grants under our 2000 Omnibus
Securities Plan. During 2002, we granted Bruce Brown and Ivan Berkowitz, our
non-employee directors, options to purchase 150,000 and 250,000 shares of our
common stock, respectively at an exercise price of $0.42 per share. The options
were all granted under our 2000 Omnibus Securities Plan and vested quarterly on
April 30, 2002, July 31, 2002, October 31, 2002 and January 31, 2003. We
reimburse our directors for reasonable expenses incurred in traveling to and
from board or committee meetings.

EMPLOYMENT AGREEMENTS WITH EXECUTIVE OFFICERS

         BRAD KETCH. On December 2, 2002, we entered into an employment
agreement with Brad Ketch pursuant to which Mr. Ketch was retained as our Chief
Executive Officer. The agreement entered into with Mr. Ketch in December 2002
replaced the agreements previously entered into with Mr. Ketch (and discussed
below) pursuant to which he was retained in various other capacities. Mr.
Ketch's current agreement with us began on December 2, 2002 for a three-year
term and provided for Mr. Ketch to receive an initial base salary of $250,000,
with an annual bonus to be paid at the discretion of the Board of Directors in
either cash or stock. In addition, the agreement provides for Mr. Ketch to
receive an option to purchase 1,500,000 shares of our Common Stock at a per
share exercise price of $0.64. The options vest in 12 quarterly installments of
125,000, beginning March 1, 2003.

                                       31



<PAGE>

         Mr. Ketch's agreement provided that he may be terminated for "cause,"
as defined in his employment agreement. If Mr. Ketch is terminated without
"cause" or left New Visual for "good reason," each as defined in the agreement,
he will receive a severance payment equal to two years of his base salary on the
date of his termination. If Mr. Ketch is terminated without cause or with good
reason within one year after a "change of control," as defined in the agreement,
he will receive a severance payment equal to two years of his base salary and an
amount equal to two times the amount of his last bonus received.

         Prior to our entering into the agreement with Mr. Ketch retaining his
as our Chief Executive Officer, we entered into several agreements with him
during fiscal year 2002. In March 2002, we entered into a one-year consulting
arrangement with Mr. Ketch, in which we retained Mr. Ketch to provide consulting
and advisory services with respect to our technology for transmitting high speed
data over extended ranges of copper telephone wire. Pursuant to this consulting
agreement, we agreed to pay Mr. Ketch $15,000 per month and granted him an
option to purchase 50,000 shares of our common stock at an exercise price of
$1.02 per share. The option was exercisable upon grant.

         In July 2002, we entered into an employment agreement and a second
stock option agreement with Mr. Ketch whereby he became our Chief Marketing
Officer. This employment agreement, which was for a three year term, began on
July 1, 2002, and provided for a base salary of $15,000 per month, an annual
bonus to be paid at the discretion of the Board of directors in either cash or
stock, and a stock option grant of 405,000 shares, of which 105,000 vested on
the date of grant. The remaining options vest quarterly, beginning on May 31,
2003, in equal amounts of 37,500 shares. These options have an exercise price of
$1.09 per share.

         RAY WILLENBERG, JR. On February 11, 2000, we entered into an employment
agreement with Ray Willenberg, Jr., our Chief Executive Officer during part of
the 2002 fiscal year. The agreement began on April 1, 2000 for a three year term
and provided for Mr. Willenberg to receive an initial base salary of $250,000,
with annual increases of $50,000 each April. Mr. Willenberg agreed to forego
this increase in both 2001 and 2002. On March 22, 2002, in connection with the
hiring of Thomas J. Cooper as our Chief Executive Officer, we entered into a new
employment agreement with Mr. Willenberg. Pursuant to this new agreement, Mr.
Willenberg agreed to continue to serve as our Chief Executive Officer until June
1, 2002 and to serve as an Executive Vice President thereafter. Under the terms
of the new agreement, Mr. Willenberg will continue to serve as our Chairman of
the Board and as the President of our wholly-owned subsidiary, NV Entertainment,
Inc. Mr. Willenberg is entitled to receive a base salary of $175,000 per year.
He is also entitled to an annual bonus based upon the annual revenues we receive
in connection with our feature film production, STEP INTO LIQUID, and the gross
proceeds we receive from sales of our equity or debt securities obtained as a
result of Mr. Willenberg's personal efforts.

         Mr. Willenberg may be terminated for "cause," as defined in his
employment agreement. If Mr. Willenberg is terminated without "cause" or leaves
New Visual for "good reason," each as defined in the agreement, he will receive
a severance payment equal to two years of his base salary on the date of his
termination. If Mr. Willenberg is terminated without cause or with good reason
within one year after a "change of control," as defined in the agreement, he
will receive a severance payment equal to two years of his base salary and an
amount equal to two times the amount of his last bonus received.

         C. RICH WILSON III. On February 25, 2002, we entered into an employment
agreement with C. Rich Wilson III to serve as our Vice President and Secretary.
Mr. Wilson's agreement commenced March 1, 2002 and was for a one-year term,
which provided for automatic renewals for successive one-year terms unless
earlier terminated pursuant to the terms of the agreement or with 60 days notice
prior to the end of its term. Under the agreement, Mr. Wilson's base salary was
$160,000 per year. Mr. Wilson was also entitled to an annual bonus, payable in
cash or stock, in the discretion of the Board, and an annual bonus based upon
the annual revenues we receive in connection with our feature film production,
STEP INTO LIQUID.

                                       32



<PAGE>

         Mr. Wilson's agreement provided that he could be terminated for "cause"
as defined in his employment agreement. If Mr. Wilson were terminated without
"cause" or left the Company for "good reason," each as defined in the agreement,
the agreement provided for him to receive a severance payment equal to the
longer of that period of time remaining in his employment agreement or nine
months. If Mr. Wilson were terminated without cause or with good reason within
one year after a "change of control," as defined in the agreement, he was to
receive a severance payment equal to two years of his base salary plus an amount
equal to two times the amount of his last bonus received. Mr. Wilson resigned as
Vice President, Secretary and as a member of the Board of Directors effective
December 31, 2003. Upon his resignation Mr. Wilson received compensation through
February 25, 2004, a stock grant of 333,333, 1% of the gross received by the
Company from Top Secret Productions, LLC and he was allowed to retain his
options until their scheduled expiration dates.

         THOMAS J. COOPER. On March 22, 2002, we entered into an employment
agreement with Thomas J. Cooper to serve as our Chief Executive Officer
commencing June 1, 2002. Mr. Cooper's agreement, which was for a three-year
term, began on March 22, 2002 and was terminated on December 2, 2002. The
agreement provided for Mr. Cooper to receive an annual base salary of $250,000
per year, commencing June 1, 2002. Prior to that date, the agreement provided
for Mr. Cooper to receive a base salary of $125,000 per year. The agreement also
entitled Mr. Cooper to an annual bonus, payable in cash or stock, in the
discretion of the Board. In addition, the agreement provided for Mr. Cooper to
receive an option to purchase 1,500,000 shares of our common stock. This option
was terminated pursuant to our Separation Agreement with Mr. Cooper, which is
described below under the heading "Certain Relationships and Related
Transactions."

         Mr. Cooper's agreement provided that he could be terminated for
"cause," as defined in his employment agreement. If Mr. Cooper were terminated
without "cause" or left New Visual for "good reason," each as defined in the
agreement, the agreement provided for him to receive a severance payment equal
to two years of his base salary on the date of his termination. If Mr. Cooper
were terminated without cause or with good reason within one year after a
"change of control," as defined in the agreement, he was to receive a severance
payment equal to two years of his base salary and an amount equal to two times
the amount of his last bonus received.

         Mr. Cooper resigned as Chief Executive Officer for personal reasons
effective December 2, 2002. The foregoing termination and severance provisions
were not implicated by Mr. Cooper's resignation. In connection with his
resignation, we entered into a Separation Agreement with Mr. Cooper. See "Item
13--Certain Relationships and Related Transactions - Thomas J. Cooper." The
Board and Compensation Committee believe the terms of the Separation Agreement
were fair to both parties and in the best interests of the Company and its
shareholders.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         There are no compensation committee interlocks between the members of
our Compensation Committee and any other entity. Bruce Brown and Ivan Berkowitz
are the members of the Compensation Committee. None of the current members of
the Compensation Committee was, or has ever been, an officer or employee of ours
or any of our subsidiaries.

         On April 9, 2000, we entered into an agreement with Mr. Brown, as well
as with Dana Brown and John-Paul Beeghly (collectively, the "Brown Partners") in
which we agreed to form a venture and produce our STEP INTO LIQUID motion
picture. In this agreement, we agreed to finance the production of the film for
up to $2,250,000. Upon its release, we will receive all revenues generated by
the film until such time as we recover 100% of our investment in the film. Once
we recoup our investment in the venture, 50% of the net profits generated by the
film will be paid to the Brown Partners and 50% will be paid to the Company.

                                       33



<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth information as of January 26, 2004,
concerning all persons known by us to own beneficially more than 5% of our
common stock and concerning shares beneficially owned by each director and named
executive officer and by all directors and executive officers as a group. Unless
expressly indicated otherwise, each shareholder exercises sole voting and
investment power with respect to the shares beneficially owned. The address for
each of our executive officers and directors is 5920 Friars Road, Suite 104, San
Diego, CA 92108.

         In accordance with the rules of the SEC, the table gives effect to the
shares of common stock that could be issued upon the exercise of outstanding
options and common stock purchase warrants within 60 days of January 26, 2004.
Unless otherwise noted in the footnotes to the table and subject to community
property laws where applicable, the following individuals have sole voting and
investment control with respect to the shares beneficially owned by them. The
address of each executive officer and director is c/o New Visual Corporation,
5920 Friars Road, Suite 104, San Diego, California 92108. We have calculated the
percentages of shares beneficially owned based on 76,657,851 shares of common
stock outstanding at January 26, 2004.

<TABLE>
<CAPTION>
                                                                            SHARES BENEFICIALLY OWNED
                                                                        ---------------------------------
                          PERSON OR GROUP                                    Number          Percent  (1)
--------------------------------------------------------------------    ----------------    -------------
<S>                                                                      <C>                   <C>
Brad Ketch                                                               1,995,000  (2)         2.60%
Ray Willenberg, Jr.                                                      2,929,375  (3)         3.82%
C. Rich Wilson III                                                       1,424,875  (4)         1.86%
Thomas J. Cooper                                                           532,258  (5)             *
John Howell                                                                375,000  (6)             *
Bruce Brown                                                                174,000  (7)             *
Ivan Berkowitz                                                           1,331,875  (8)         1.74%
James W. Cruckshank                                                         50,000                  *
All executive officers and directors as a group (8 persons)              8,812,383  (9)        11.50%
Charles R. Cono                                                          3,904,500  (10)        5.09%
Zaiq Technologies, Inc.                                                  8,184,615  (11)       10.68%
</TABLE>

*        Less than 1%.

(1)  Percentage of beneficial ownership as to any person as of a particular date
     is calculated by dividing the number of shares beneficially owned by such
     person by the sum of the number of shares outstanding as of such date and
     the number of unissued shares as to which such person has the right to
     acquire voting and/or investment power within 60 days.
(2)  Includes options to purchase 1,955,000 shares of common stock.
(3)  Includes options to purchase 1,120,000 shares of common stock.
(4)  Includes options to purchase 745,000 shares of common stock.
(5)  Includes options to purchase 500,000 shares of common stock.
(6)  Includes options to purchase 14,000 shares of common stock.
(7)  Includes options to purchase 160,000 shares of common stock.
(8)  Includes options to purchase 785,000 shares of common stock.
(9)  Includes options to purchase an aggregate 5,405,000 shares of common stock.
(10) Includes 3,904,500 shares of common stock held by the Charles R. Cono
     Trust, of which Mr. Cono is the trustee. Mr. Cono's address is 550
     Baltimore Drive, La Mesa, California 91942-1176.
(11) Reflects common stock issuable on conversion of 3,192 shares of Series B
     Preferred Stock at an assumed conversion price of $0.00039 on February 21,
     2003. The address of Zaiq Technologies, Inc. is 78 Dragon Court, Woburn, MA
     01801.

EQUITY COMPENSATION PLAN INFORMATION

         We have three compensation plans (excluding individual stock option
grants outside of such plans) under which our equity securities are authorized
for issuance to employees, directors and consultants in exchange for services -

                                       34



<PAGE>

the 2000 Omnibus Securities Plan (the "2000 Plan"), the 2001 Stock Incentive
Plan (the "2001 Plan"), and the 2003 Consultant Stock Plan (the "Consultant
Plan") (collectively, the "Plans"). Our shareholders approved the 2000 Plan and
2001 Plan, and the Consultant Plan has not yet been submitted to the
shareholders for approval.

         The following table presents information as of October 31, 2003 with
respect to compensation plans under which equity securities were authorized for
issuance, including the 2000 Plan, the 2001 Plan, the Consultant Stock Plan and
agreements granting options or warrants outside of these plans.

<TABLE>
<CAPTION>
                                                (a)                         (b)                             (c)
                                    ------------------------    -------------------------    ---------------------------------
                                                                                                   Number of Securities
                                      Number of Securities                                       Remaining Available for
                                        to be Issued Upon            Weighted-Average          Future Issuance Under Equity
                                           Exercise of               Exercise Price of        Compensation Plans [Excluding
                                      Outstanding Options,         Outstanding Options,          Securities Reflected in
         Plan Category                 Warrants or Rights           Warrants or Rights                 Column (a)]
--------------------------------    ------------------------    -------------------------    ---------------------------------
<S>                                               <C>           <C>                                                   <C>
Equity compensation plans
  approved by security holders                    2,188,750     $                   1.25                              311,250

Equity compensation plans not
  approved by security holders                    7,135,443     $                   2.33                                   --

                                    ------------------------    -------------------------    ---------------------------------
Total                                             9,324,193     $                   2.08                              311,250
                                    ========================    =========================    =================================
</TABLE>

         NON-SHAREHOLDER APPROVED PLANS. The following is a description of
outstanding options and warrants granted to employees, directors, advisory
directors, consultants and investors outside of the Plans.

         As of October 31, 2003, we have outstanding options and warrants to
purchase an aggregate of 7,135,443 shares of our common stock that were granted
outside of the Plans. Of this number, options to acquire 1,442,500 shares were
granted during fiscal 2000 to eight present or former directors, officers,
employees and advisory directors at exercise prices ranging from $4.00 to $4.40.
These options expire five years from their grant date. 275,000 of these options
vested immediately. 1,027,500 of the options vest in four equal annual
installments, with one quarter vesting upon issuance. Of the remaining options,
35,000 vested immediately and the remainder vested in six quarterly installments
of 17,500 shares each.

         We have outstanding options to purchase 375,000 shares of common stock
that were granted during fiscal 2001 outside of the Plans. These options, which
expire ten years from their grant date, were granted to five advisory directors
at exercise prices ranging from $1.07 to $4.00. 275,000 of these options vested
immediately. The remaining 100,000 options vested one-quarter immediately and
the remainder in three annual installments.

         We have outstanding options to purchase an aggregate of 875,000 shares
of common stock that were granted during fiscal 2002 outside of the Plans to
five directors, executive officers and consultants. These options expire ten
years from their grant date. 500,000 of the options have an exercise price of
$0.39 and vested 50% on the grant date and the remainder in four quarterly
installments. The remaining options have an exercise price of $1.02. 200,000 of
these options vested in installments between April and October 2002, and 175,000
of the options vested on the grant date.

         We have outstanding options to purchase 1,500,000 shares of common
stock that were granted in fiscal 2003 outside of the Plans. These options,
which expire ten years from their grant date, were granted to our current Chief
Executive Officer at an exercise price of $0.64 per share. The options vest over
three years in 12 equal quarterly installments.

                                       35



<PAGE>

         There are outstanding warrants to purchase an aggregate of 1,342,943
shares of common stock that we granted in fiscal 2001 to 23 investors. 1,000,000
of these warrants have a three-year term and have an exercise price of $6.00.
88,000 of these warrants have a three year term and have an exercise price of
lesser of $6.10 per share or 50% of market ($.33 at October 31, 2003). 87,357 of
these warrants have a three-year term and have an exercise price of $4.02.
67,586 of these warrants have a three-year term and have an exercise price of
$5.10. 100,000 of these warrants have a five year term and an exercise price of
$2.50 with respect to 50,000; $5.00 with respect to 25,000 and $10.00 with
respect to 25,000.

         There are outstanding warrants that we granted during fiscal 2002 to
four consultants to purchase an aggregate of 500,000 shares of common stock
outside of the Plans. 200,000 of these warrants have an exercise price of $0.51
and expire in November 2005. 300,000 of these warrants have a three year term
and exercise prices as follows: $0.75 as to 50,000 shares, $1.25 as to 50,000
shares, $1.75 as to 100,000 shares, and $2.25 as to 100,000 shares.

         There are outstanding warrants that we granted during fiscal 2003 to a
shareholder and a consultant. 500,000 of these warrants have a two year term and
an exercise price of $.40. 600,000 of these warrants have a 35-month term (under
certain circumstances the Company may accelerate the expiration date) and an
exercise price of $.15.

         The Consultant Plan was adopted in January 2003 and authorizes the
issuance of up to 6,000,000 non-qualified stock options or stock awards to
consultants to the Company. Directors, officers and employees are not eligible
to participate in the Consultant Plan. To date, we have issued a total of
3,200,000 shares of common stock under the Consultant Plan to four consultants.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         JAMES W. CRUCKSHANK. On December 8, 2003, we entered into an employment
agreement with Mr. Cruckshank to serve as our Chief Financial Officer. Under the
Agreement, Mr. Cruckshank received 50,000 shares of Common Stock and is paid,
with respect to each day actually worked, $700 in cash and $480 Common Stock.
Mr. Cruckshank is also eligible for quarterly stock grants based upon completion
of certain agreed upon objectives. The agreement is cancelable by the Company
immediately for "cause," with 15 days notice without "cause," and with 30 days
notice if he leaves the Company for "good reason," each as defined in the
agreement. In the event cancellation is without "cause" or for "good reason,"
after April 8, 2004 until December 8, 2004 Mr. Cruckshank will receive two
months severance based upon base pay and from December 8, 2004 and thereafter
six months severance based on base pay.

         THOMAS J. COOPER. On December 2, 2002, we entered into a Separation
Agreement with Mr. Cooper relating to his resignation as our Chief Executive
Officer. Mr. Cooper remains a director of the Company. Under the agreement, we
reimbursed Mr. Cooper for expenses of $10,000 incurred during his employment and
paid him deferred salary of $57,692.30 (the "Salary Payment") on or before March
31, 2003. The Salary Payment is payable in two installments, the first of which,
totaling $10,000 was due and paid on or before February 15, 2003. The remainder
of $47,692.30 is due on March 31, 2003. If we fail to make the remaining payment
pursuant to this schedule, we must pay Mr. Cooper interest at a rate of 24% per
year on any unpaid amounts. We also agreed to continue Mr. Cooper's health
insurance benefits for up to six months. Pursuant to the terms of the Separation
Agreement, the 1,500,000 stock options granted to Mr. Cooper in connection with
his role as Chief Executive Officer were terminated. Mr. Cooper retained other
options previously granted to him and remains a director of the Company.

         CHARLES R. CONO. In July 2002, we borrowed $500,000 from the Charles R.
Cono Trust, a significant shareholder. The note reflecting this loan was due and
payable with 10% interest on or before November 1, 2002 (the "July Note"). Also
in July 2002, we entered into a consulting agreement with Mr. Cono in which we
agreed to pay Mr. Cono $250,000 in exchange for his consulting services upon our
receipt of gross revenues of at least $2,250,000 from our motion picture, STEP
INTO LIQUID. On November 13, 2002, and effective as of October 31, 2002, we

                                       36



<PAGE>

entered into a promissory note with the Charles R. Cono Trust in the amount of
$514,520.55 that amended, restated and replaced in all respects the July Note.
This promissory note, which bears interest at 10% per year, is due and payable
upon three days demand by Mr. Cono, which could not be made prior to December
16, 2002. This note is currently outstanding.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

Aggregate fees billed by the Company's principal accountants, Marcum & Kliegman
LLP, for audit services related to the most recent two fiscal years, and for
other professional services billed in the most recent two fiscal years, were as
follows:

                                 FISCAL 2003     FISCAL 2002
                                -------------   -------------
Audit Fees (1)                  $    142,000    $   142,900
Audit-Related Fees (2)                10,720          7,400
Tax Fees (3)                          15,043         15,200
All Other Fees                            --         16,500
                                -------------   ------------
Total                           $    167,763    $   182,000
                                =============   ============

(1)  Comprised of the audit of the Company's annual financial statements and
     reviews of the Company's quarterly financial statements, as well as
     consents related to and reviews of other documents filed with the
     Securities and Exchange Commission.
(2)  Comprised of acquisition due diligence and consultations regarding
     financial accounting and reporting.
(3)  Comprised of services for tax compliance, tax return preparation, tax
     advice and tax planning.

The Audit Committee reviewed the non-audit services rendered by Marcum &
Kliegman LLP in and for fiscal 2002 and fiscal 2003 as set forth in the above
table and concluded that such services were compatible with maintaining the
accountants' independence. Under the Sarbanes-Oxley Act of 2002, all audit and
non-audit services performed by the Company's independent accountants must now
be approved in advance by the Audit Committee to assure that such services do
not impair the accountants' independence from the Company. Accordingly, the
Audit Committee has adopted an Audit and Non-Audit Services Pre-Approval Policy
(the "Policy") which sets forth the procedures and the conditions pursuant to
which services to be performed by the independent accountants are to be
pre-approved. Pursuant to the Policy, certain services described in detail in
the Policy may be pre-approved on an annual basis together with pre-approved
maximum fee levels for such services. The services eligible for annual
pre-approval consist of services that would be included under the categories of
Audit Fees, Audit-Related Fees and Tax Fees in the above table as well as
services for limited review of actuarial reports and calculations. If not
pre-approved on an annual basis, proposed services must otherwise be separately
approved prior to being performed by the independent accountants. In addition,
any services that receive annual pre-approval but exceed the pre-approved
maximum fee level also will require separate approval by the Audit Committee
prior to being performed. The Audit Committee may delegate authority to
pre-approve audit and non-audit services to any member of the Audit Committee,
but may not delegate such authority to management.

                                       37



<PAGE>

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) Index to Financial Statements and financial statement schedules, filed as
    part of this report:

<TABLE>
<CAPTION>
<S>                                                                               <C>
              INDEPENDENT AUDITORS' REPORT                                             F-1

              CONSOLIDATED BALANCE SHEETS
                   At October 31, 2003 and 2002                                        F-2

              CONSOLIDATED STATEMENTS OF OPERATIONS                                    F-3
                   For the Years Ended October 31, 2003, 2002 and 2001

              CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                      F-4 to F-9
                   For the Years Ended October 31, 2003, 2002 and 2001

              CONSOLIDATED STATEMENTS OF CASH FLOWS                                   F-10
                   For the Years Ended October 31, 2003, 2002 and 2001


              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-11 to F-24
</TABLE>

(c) Exhibits.
    ---------

3.1       Articles of Amendment to the Articles of Incorporation of New Visual
          Entertainment, Inc. (incorporated by reference to Exhibit 3.1 of the
          Company's Report on Form 10-Q for the period ended July 31, 2001).

3.2       Restated Articles of Incorporation (incorporated by reference to
          Exhibit 3.1 of the Company's Annual Report on Form 10-KSB/A for the
          fiscal year ended October 31, 1999 (the "1999 10-KSB/A")).

3.3       Certificate of Designation of Series A Preferred Stock (incorporated
          by reference to Exhibit A of Exhibit 4.1 of the Company's Registration
          Statement on Form 8-A, filed with the Commission on August 10, 2000).

3.4       Certificate of Designation of Series B Preferred Stock (incorporated
          by reference to Exhibit 3.1 of the Company's Quarterly Report on Form
          10-Q for the period ended April 30, 2002 (the "April 2002 10-Q"))

3.5       Bylaws of New Visual Corporation, as amended (incorporated by
          reference to Exhibit 3.1 of the Company's Quarterly Report on Form
          10-Q for the period ended January 31, 2002 (the "January 2002 10-Q")).

4.1       Specimen Stock Certificate (incorporated by reference to Exhibit 3.1
          of the 1999 10-KSB/A.

4.2       Rights Agreement by and between New Visual Entertainment, Inc. and
          First Union National Bank, dated August 9, 2000 (incorporated by
          reference to Exhibit 4.2 of the 1999 10-KSB/A).

4.3       Warrant, dated as of October 31, 2003 issued in favor of Melton
          Management Limited (1)

10.1      Agreement to Produce Film, dated April 9, 2000 between New Visual
          Entertainment, Inc., Bruce Brown, Dana Brown and John-Paul Beeghly
          (incorporated by reference to Exhibit 10.2 of the Company's Annual
          Report on Form 10-KSB for the period ended October 31, 2000 (the "2000
          10-KSB")). *

                                       38



<PAGE>

10.2      2000 Omnibus Securities Plan of New Visual Entertainment, Inc.
          (incorporated by reference to Appendix A of the Company's definitive
          Proxy Statement filed with the Commission on May 2, 2000). *

10.3      Form of Credit Agreement dated June 29, 2000 by the Company and each
          of the following trusts: Epics Events Trust, Ltd.; Exodus Systems
          Trust, Ltd.; Prospect Development Trust, Ltd.; Pearl Street
          Investments Trust, Ltd.; and Riviera Bay Holdings Trust, Ltd.
          (incorporated by reference to Exhibit 10.3 of the Company's Report on
          Form 10-Q for the period ended July 31, 2000 (the "July 2000
          10-QSB")).

10.4      Form of Amendment to Credit Agreement dated November 13, 2000 by New
          Visual Entertainment Inc. and each of the following trusts: Epics
          Events Trust, Ltd.; Exodus Systems Trust, Ltd.; Prospect Development
          Trust, Ltd.; Pearl Street Investments Trust, Ltd.; and Riviera Bay
          Holdings Trust, Ltd. (incorporated by reference to Exhibit 10.9 of the
          2000 10-KSB).

10.5      Consulting Agreement dated as of March 6, 2001, by and between New
          Visual Entertainment, Inc. and Strategica Services Corporation
          (incorporated by reference to Exhibit 10.9 of the Company's Annual
          Report for the fiscal year ended October 31, 2001 (the "2001 10-K")).

10.6      Consulting Agreement dated as of May 1, 2001, by and between New
          Visual Entertainment, Inc. and Advisor Associates Inc. (incorporated
          by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for
          the period ended April 30, 2001).

10.7      Office Building Lease dated May 4, 2001, by and between Valley Park
          Associates LLC and New Wheel Technology, Inc., a subsidiary of New
          Visual Entertainment, Inc. (incorporated by reference to Exhibit 10.11
          of the 2001 10-K).

10.8      2001 Stock Incentive Plan for New Visual Corporation (incorporated by
          reference to Exhibit 4.1 of the Company's Registration Statement on
          Form S-8 (No. 333-68716), as filed with the Commission on August 30,
          2001). *

10.9      Consulting Agreement dated August 30, 2001, by and between New Visual
          Corporation and Jack Burstein (incorporated by reference to Exhibit
          10.13 of the 2001 10-K).

10.10     Stock Option Agreement dated August 30, 2001, by and between New
          Visual Corporation and Jack Burstein (incorporated by reference to
          Exhibit 10.14 of the 2001 10-K).

10.11     Promissory Note dated September 6, 2001 by John Howell in favor of New
          Visual Corporation (incorporated by reference to Exhibit 10.15 of the
          2001 10-K). *

10.12     First Amendment to Office Building Lease dated September 12, 2001, by
          and between Valley Park Associates, LLC and New Wheel Technology,
          Inc., a subsidiary of New Visual Entertainment, Inc. (incorporated by
          reference to Exhibit 10.16 of the 2001 10-K).

10.13     Technology Planning and Assistance Agreement dated September 28, 2001,
          by and between New Visual Corporation and Adaptive Networks, Inc.
          (incorporated by reference to Exhibit 10.17 of the 2001 10-K).

10.14     Convertible Promissory Note dated October 10, 2001 by New Visual
          Corporation in favor of Nellie Streeter Crane, Ltd. (incorporated by
          reference to Exhibit 10.18 of the 2001 10-K).

10.15     Warrant Certificate, issued to Advisor Associates, Inc. in October
          2001. (1)

                                       39



<PAGE>

10.16     Convertible Promissory Note dated October 15, 2001 by New Visual
          Corporation in favor of Quail Run Trust Limited (incorporated by
          reference to Exhibit 10.19 of the 2001 10-K).

10.17     Convertible Promissory Note dated October 23, 2001 by New Visual
          Corporation in favor of Charles R. Cono (incorporated by reference to
          Exhibit 10.20 of the 2001 10-K).

10.18     Convertible Promissory Note dated December 14, 2001 by New Visual
          Corporation in favor of the Gerald and Judith Handler Living Trust
          (incorporated by reference to Exhibit 10.21 of the 2001 10-K).

10.19     Convertible Promissory Note dated December 14, 2001 by New Visual
          Corporation in favor of W.P. Lill, Jr. Trust dated 12/22/99
          (incorporated by reference to Exhibit 10.22 of the 2001 10-K).

10.20     Convertible Promissory Note dated December 14, 2001 by New Visual
          Corporation in favor of the Handler Children Trust (incorporated by
          reference to Exhibit 10.23 of the 2001 10-K).

10.21     Employment Agreement dated as of January 1, 2002 by and between New
          Visual Corporation and John Howell (incorporated by reference to
          Exhibit 10.24 of the 2001 10-K). *

10.22     Promissory Note dated as of January 1, 2002, by John Howell in favor
          of New Visual Corporation (incorporated by reference to Exhibit 10.25
          of the 2001 10-K). *

10.23     Warrant Agreement dated February 11, 2002, by and between New Visual
          Corporation and Elite Financial Communications, LLC (incorporated by
          reference to Exhibit 10.6 of the January 2002 10-Q).

10.24     Consulting Agreement dated February 22, 2002, by and between New
          Visual Corporation and Bruce McLeod (incorporated by reference to
          Exhibit 10.19 of the April 2002 10-Q).

10.25     Employment Agreement dated February 25, 2002, by and between New
          Visual Corporation and C. Rich Wilson III (incorporated by reference
          to Exhibit 10.11 of the January 2002 10-Q).*

10.26     Restricted Stock Award Agreement dated as of February 25, 2002, by and
          between New Visual Corporation and John Howell (incorporated by
          reference to Exhibit 10.12 of the January 2002 10-Q).*

10.27     Consulting Agreement dated February 26, 2002, by and between New
          Visual Corporation and Thomas J. Cooper (incorporated by reference to
          Exhibit 10.13 of the January 2002 10-Q). *

10.28     Stock Option Agreement dated February 26, 2002, by and between New
          Visual Corporation and Thomas J. Cooper (incorporated by reference to
          Exhibit 10.14 of the January 2002 10-Q). *

10.29     Convertible Promissory Note dated March 8, 2002, by New Visual
          Corporation in favor of Tony Finn (incorporated by reference to
          Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the
          period ended July 31, 2002 (the "July 2002 10-Q)).

10.30     Convertible Promissory Note dated March 8, 2002, by New Visual
          Corporation in favor of James Joseph Redmon (incorporated by reference
          to Exhibit 10.2 of the July 2002 10-Q).

10.31     Convertible Promissory Note dated March 22, 2002, by New Visual
          Corporation in favor of the M. Lucile Way Trust (incorporated by
          reference to Exhibit 10.3 of the July 2002 10-Q).

10.32     Convertible Promissory Note dated March 22, 2002, by New Visual
          Corporation in favor of D W Construction, Inc. (incorporated by
          reference to Exhibit 10.4 of the July 2002 10-Q).

                                       40



<PAGE>

10.33     Employment Agreement dated March 22, 2002, by and between New Visual
          Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
          10.10 of the April 2002 10-Q). *

10.34     Stock Option Agreement dated March 22, 2002, by and between New Visual
          Corporation and Thomas J. Cooper (incorporated by reference to Exhibit
          10.11 of the April 2002 10-Q). *

10.35     Employment Agreement dated March 22, 2002, by and between New Visual
          Corporation and Ray Willenberg, Jr. (incorporated by reference to
          Exhibit 10.12 of the April 2002 10-Q). *

10.36     Stock Option Agreement dated March 22, 2002, by and between New Visual
          Corporation and Ray Willenberg, Jr. (incorporated by reference to
          Exhibit 10.13 of the April 2002 10-Q). *

10.37     Stock Option Agreement dated March 22, 2002, by and between New Visual
          Corporation and Brad Ketch (incorporated by reference to Exhibit 10.14
          of the April 2002 10-Q). *

10.38     Consulting Agreement dated March 22, 2002, by and between New Visual
          Corporation and Brad Ketch. (1)*

10.39     Convertible Promissory Note dated April 5, 2002, by New Visual
          Corporation in favor of D W Construction, Inc. (incorporated by
          reference to Exhibit 10.5 of the July 2002 10-Q).

10.40     Development and License Agreement dated as of April 17, 2002, by and
          between Adaptive Networks, Inc. and New Visual Corporation
          (Confidential treatment has been granted with respect to certain
          portions of this exhibit. Omitted portions have been filed separately
          with the Commission) (incorporated by reference to Exhibit 10.15 of
          the April 2002 10-Q).

10.41     Right of First Refusal, Credit of Payments and Revenue Sharing
          Agreement dated as of April 17, 2002, by and among New Visual
          Corporation, Adaptive Networks and Certain Shareholders of Adaptive
          Networks, Inc. (incorporated by reference to Exhibit 10.16 of the
          April 2002 10-Q).

10.42     Receivables Purchase and Stock Transfer Restriction Agreement dated as
          of April 17, 2002, by and among New Visual Corporation, Zaiq
          Technologies, Inc. and Adaptive Networks, Inc. (incorporated by
          reference to Exhibit 10.17 of the April 2002 10-Q).

10.43     Receivables Purchase and Stock Transfer Restriction Agreement dated as
          of April 17, 2002, by and among New Visual Corporation, TLSI, Inc. and
          Adaptive Networks, Inc. (incorporated by reference to Exhibit 10.18 of
          the April 2002 10-Q).

10.44     Convertible Promissory Note dated May 21, 2002, by New Visual
          Corporation in favor of John Marsden (incorporated by reference to
          Exhibit 10.6 of the July 2002 10-Q).

10.45     Convertible Promissory Note dated May 21, 2002, by New Visual
          Corporation in favor of Randy Arnett (incorporated by reference to
          Exhibit 10.7 of the July 2002 10-Q).

10.46     Convertible Promissory Note dated May 30, 2002, by New Visual
          Corporation in favor of the M. Lucile Way Trust (incorporated by
          reference to Exhibit 10.8 of the July 2002 10-Q).

10.47     Convertible Promissory Note dated May 31, 2002, by New Visual
          Corporation in favor of Robert E. Casey, Jr. (incorporated by
          reference to Exhibit 10.9 of the July 2002 10-Q).

10.48     Convertible Promissory Note dated June 12, 2002, by New Visual
          Corporation in favor of Bonnie Davis (incorporated by reference to
          Exhibit 10.10 of the July 2002 10-Q).

                                       41



<PAGE>

10.49     Employment Agreement dated July 1, 2002, by and between New Visual
          Corporation and Brad Ketch (incorporated by reference to Exhibit 10.11
          of the July 2002 10-Q).*

10.50     Consulting Agreement dated as of July 17, 2002, by and between New
          Visual Corporation and Charles R. Cono (incorporated by reference to
          Exhibit 10.13 of the July 2002 10-Q).

10.51     Promissory Note dated July 17, 2002, by New Visual Corporation in
          favor of Charles R. Cono Trust, Charles R. Cono, TTEE (incorporated by
          reference to Exhibit 10.14 of the July 2002 10-Q).

10.52     Consulting Agreement dated as of July 30, 2002, by and between New
          Visual Corporation and Advisor Associates, Inc. (incorporated by
          reference to Exhibit 10.15 of the July 2002 10-Q).

10.53     Severance Agreement and General Release dated September 17, 2002 and
          effective September 30, 2002 by and between New Visual Corporation and
          John Howell. (1)*

10.54     Consulting Agreement dated as of September 2002, by and between New
          Visual Corporation and Starburst Innovations, LLC. *

10.55     Agreement dated as of September 2002 by and between New Visual
          Corporation and Starburst Innovations, LLC. (1)

10.56     Regulation S Purchase Agreement dated September 23, 2002 between New
          Visual Corporation and Starz Investments Limited. (1)

10.57     Promissory Note dated October 29, 2002 in favor of Robert E Casey, Jr.
          (incorporated by reference to Exhibit 10.57 of the Annual Report for
          the year ended 2002).

10.58     Severance Agreement and Release dated December 2, 2002, by and between
          New Visual Corporation and Thomas J. Cooper. (incorporated by
          reference to Exhibit 10.58 of the Annual Report for the year ended
          2002).

10.59     Employment Agreement dated December 2, 2002, by and between New Visual
          Corporation and Brad Ketch. (incorporated by reference to Exhibit
          10.59 of the Annual Report for the year ended 2002). *

10.60     Stock Option Agreement dated December 2, 2002, by and between New
          Visual Corporation and Brad Ketch. (incorporated by reference to
          Exhibit 10.60 of the Annual Report for the year ended 2002). *

10.61     Promissory note dated October 31, 2002 in favor of Charles R Cono
          Trust, Charles R. Cono, TTEE (incorporated by reference to Exhibit
          10.1 of the Company's Report on Form 8-K dated October 31, 2002).

10.62     Securities Purchase Agreement dated as of October 31, 2003 by and
          between New Visual and Melton Management Limited (1)

10.63     Employment Agreement dated November 21, 2003, by and between New
          Visual Corporation and James W. Cruckshank (1) *

10.64     Letter agreement between ARTISAN PICTURES INC. and New Visual
          Corporation (1)

21.1      Subsidiaries of the Registrant (incorporated by reference to Exhibit
          21.1 of the Annual Report for the year ended 2002)

23.1      Consent of Marcum & Kliegman LLP, Independent Auditors (1)

31.1      Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
          2002.

                                       42



<PAGE>

31.2      Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
          2002.

32.1      Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002.

32.2      Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
          1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002.

-------------------------
     (1) Filed herewith.
      * Signifies a management agreement or compensatory plan or arrangement.

      2. None.

      3. The management contracts or compensatory plans or arrangements are
followed by an asterisk (*) in the list of Exhibits found in part (c) of this
Item 15.


(b) Reports on Form 8-K
    -------------------

          Form 8-K dated August 25, 2003, was filed pursuant to Item 5 (Other
          Events and Regulation FD Disclosure)

          This 8-K reported on the results of the annual shareholders meeting.

                                       43



<PAGE>

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date:    January 29, 2004              NEW VISUAL CORPORATION

                                       By: /s/ Brad Ketch
                                           -------------------------------------
                                           Brad Ketch
                                           President and Chief Executive Officer

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

          SIGNATURE                                  TITLE                                  DATE
          ---------                                  -----                                  ----
<S>                               <C>                                                  <C>

/s/ Brad Ketch                    President, Chief Executive Officer and Director      January 29, 2004
-----------------------           (PRINCIPAL EXECUTIVE OFFICER)
Brad Ketch


/s/ James W. Cruckshank           Chief Financial Officer (PRINCIPAL FINANCIAL         January 29, 2004
-----------------------           OFFICER AND PRINCIPAL ACCOUNTING OFFICER)
James W. Cruckshank


/s/ Ray Willenberg, Jr.           Chairman of the Board                                January 29, 2004
-----------------------
Ray Willenberg, Jr.


/s/ Ivan Berkowitz                Director                                             January 29, 2004
-----------------------
Ivan Berkowitz


/s/ Bruce Brown                   Director                                             January 29, 2004
-----------------------
Bruce Brown


 /s/ Thomas J. Cooper             Director                                             January 29, 2004
-----------------------
Thomas J. Cooper


 /s/ John Howell                  Director                                             January 29, 2004
-----------------------
John Howell
</TABLE>

                                                    44



<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


                                                                    Page Numbers

INDEPENDENT AUDITORS' REPORT                                             F-1

CONSOLIDATED BALANCE SHEETS
     At October 31, 2003 and 2002                                        F-2

CONSOLIDATED STATEMENTS OF OPERATIONS                                    F-3
     For the Years Ended October 31, 2003, 2002 and 2001

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY                      F-4 to F-9
     For the Years Ended October 31, 2003, 2002 and 2001

CONSOLIDATED STATEMENTS OF CASH FLOWS                                   F-10
     For the Years Ended October 31, 2003, 2002 and 2001

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                          F-11 to F-34

                                       45



<PAGE>

                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------

Board of Directors
New Visual Corporation


We have audited the accompanying consolidated balance sheets of New Visual
Corporation and Subsidiaries (the "Company") as of October 31, 2003 and 2002 and
the related consolidated statements of operations, stockholders' equity, and
cash flows for the years ended October 31, 2003, 2002 and 2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of New Visual
Corporation and Subsidiaries at October 31, 2003 and 2002 and the results of
their operations and their cash flows for each of the three years ended October
31, 2003, 2002 and 2001 in conformity with accounting principles generally
accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As shown in the consolidated
financial statements, the Company incurred net losses of $3,316,500, $9,467,123
and $11,875,915 during the years ended October 31, 2003, 2002 and 2001,
respectively. As of October 31, 2003, the Company had a working capital
deficiency of approximately $3,658,000. These conditions raise substantial doubt
about the Company's ability to continue as a going-concern. Management's plans
in regard to these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.



                                                       /s/ MARCUM & KLIEGMAN LLP

New York, New York
January 21, 2004

                                      F-1




<PAGE>
<TABLE>
                                            NEW VISUAL CORPORATION AND SUBSIDIARIES

                                                  CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                                                                     At October 31,
                                                                                          -------------------------------------
                                                                                                2003                 2002
                                                                                          ----------------     ----------------
<S>                                                                                       <C>                  <C>
                                         ASSETS
                                         ------
Current Assets:
   Cash                                                                                   $       319,786      $       311,577
   Receivable from officers                                                                            --               10,032
   Other current assets                                                                             5,015                1,650
                                                                                          ----------------     ----------------
      Total Current Assets                                                                        324,801              323,259

Property and equipment - net                                                                       41,301               64,533
Technology license and capitalized software development fee                                     5,751,000            5,751,000
Film In Distribution - net                                                                      2,142,212                   --
Projects in Development                                                                                --            2,178,831
Other assets                                                                                       13,036               14,576
                                                                                          ----------------     ----------------
       Total Assets                                                                       $     8,272,350      $     8,332,199
                                                                                          ================     ================

                          LIABILITIES AND STOCKHOLDERS' EQUITY
                          ------------------------------------
Current Liabilities:
   Convertible notes payable                                                              $     1,103,000      $       954,500
   Convertible debentures                                                                         300,000                   --
   Notes payable                                                                                  740,311              971,407
   Accounts payable and accrued expenses                                                        1,744,883            2,247,595
   License and development fees payable                                                            95,000              734,000
                                                                                          ----------------     ----------------
       Total Current Liabilities                                                                3,983,194            4,907,502

Redeemable Series B preferred stock                                                             3,192,000                   --
                                                                                          ----------------     ----------------

Total Liabilities                                                                               7,175,194            4,907,502

Redeemable Series B preferred stock                                                                    --            3,192,000

Commitments, Contingencies and Other Matters

Stockholders' Equity:
Preferred stock - $0.01 par value; 15,000,000 shares
    authorized; Series A junior participating preferred
    stock; -0- shares issued and outstanding                                                           --                   --
Common stock - $0.001 par value; 500,000,000 shares
    Authorized (100,000,000 as of October 31, 2002); 70,676,682
    and 49,787,069 shares issued and outstanding at
    October 31, 2003 and 2002, respectively                                                        70,677               49,787
Additional paid-in capital                                                                     51,131,622           47,097,830
Unearned financing fees                                                                          (15,674)            (214,952)
Unearned compensation                                                                           (404,582)            (331,581)
Accumulated deficit                                                                          (49,684,887)         (46,368,387)
                                                                                          ----------------     ----------------
   Total Stockholders' Equity                                                                   1,097,156              232,697
                                                                                          ----------------     ----------------
       Total Liabilities and Stockholders' Equity                                         $     8,272,350      $     8,332,199
                                                                                          ================    =================

                    The accompanying notes are an integral part of these consolidated financial statements.

                                                              F-2
</TABLE>




<PAGE>
<TABLE>
                                       NEW VISUAL CORPORATION AND SUBSIDIARIES

                                        CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>

                                                                         For the Years Ended October 31,
                                                           ----------------------------------------------------------
                                                                 2003                 2002                 2001
                                                           ----------------     ----------------     ----------------
<S>                                                        <C>                  <C>                  <C>
REVENUES                                                   $       379,980      $            --      $            --

OPERATING EXPENSES:
  Cost of sales                                                    192,889
  Projects written off                                              56,864
  Research and development                                         117,901            1,298,560              839,402
  Compensatory element of stock issuances for selling,
    general and administrative expenses                          2,062,081            2,459,158            3,558,887
  Selling, general and administrative expenses                   2,127,267            3,555,754            4,086,795
  Litigation settlement                                              6,500                   --            1,000,000
  Loss on disposal of equipment                                         --                   --                7,500
                                                           ----------------     ----------------     ----------------
    TOTAL OPERATING EXPENSES                                     4,563,502            7,313,472            9,492,584
                                                           ----------------     ----------------     ----------------
OPERATING LOSS                                                  (4,183,522)          (7,313,472)          (9,492,584)

OTHER (INCOME) EXPENSES:
  Interest expense                                                 270,587            1,036,434              337,378
  Non Cash Gain - Litigation Settlement                         (1,474,000)                  --                   --
  Amortization of unearned financing costs                         336,391            1,117,217            2,045,953
                                                           ----------------     ----------------     ----------------
TOTAL OTHER (INCOME) EXPENSES                                    (867,022)            2,153,651            2,383,331

                                                           ----------------     ----------------     ----------------
NET LOSS                                                   $    (3,316,500)     $    (9,467,123)     $   (11,875,915)
                                                           ================     ================     ================

BASIC AND DILUTED NET LOSS PER COMMON SHARE                $          (.05)     $          (.23)     $          (.46)
                                                           ================     ================     ================

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING            60,643,489           41,861,295           25,988,990
                                                           ================     ================     ================

               The accompanying notes are an integral part of these consolidated financial statements.

                                                         F-3
</TABLE>




<PAGE>
<TABLE>
                                       NEW VISUAL CORPORATION AND SUBSIDIARIES

                                   CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
<CAPTION>

                                                                         Common Stock                    Additional
                                                              -----------------------------------         Paid-In
                                                                  Shares              Amount              Capital
                                                              --------------     ----------------     ---------------
<S>                                                              <C>             <C>                  <C>
Balance - November 1, 2002                                       49,787,069      $        49,787      $   47,097,830

Issuance of common stock for cash ($.13 to $.30
  per share)                                                     17,112,611               17,113           2,919,580
Issuance of common stock for conversion of promissory
  notes and interest ($.15 to $1.00 per share)                    1,225,941                1,226             376,524
Issuance of common stock for deferred payroll                        88,710                   89              54,912
Issuance of common stock under consulting agreements
  ($.32 to $.64 per share)                                        3,621,875                3,622           1,535,628
Cancellation of shares under legal settlement                    (2,200,000)              (2,200)         (1,471,800)
Cashless exercise of warrants                                        40,476                   40                 (40)
Exercise of warrants                                              1,000,000                1,000              59,000
Stock offering costs                                                                                        (172,957)
Value assigned to beneficial conversion                                                                      137,113
Value assigned to warrants issued to consultants                                                             588,232
Value assigned to options issued to consultants                                                                7,600
Amortization of unearned compensation expense
Amortization of unearned financing costs
Net loss

                                                              --------------     ----------------     ---------------
Balance - October 31, 2003                                       70,676,682      $        70,677      $   51,131,622
                                                              ==============     ================     ===============

               The accompanying notes are an integral part of these consolidated financial statements.

                                                         F-4
</TABLE>




<PAGE>
<TABLE>
                                               NEW VISUAL CORPORATION AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                         FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
<CAPTION>

                                                                                                                          Total
                                                             Unearned            Unearned           Accumulated       Stockholders'
                                                          Financing Costs      Compensation           Deficit            Equity
                                                          ----------------    ---------------     ---------------    ---------------
<S>                                                       <C>                 <C>                 <C>                <C>
Balance - November 1, 2002                                $      (214,952)    $     (331,581)     $  (46,368,387)    $      232,697

Issuance of common stock for cash ($.13 to $.30 per
  share)                                                                                                                  2,936,693
Issuance of common stock for conversion of promissory
  notes and interest ($.15 to $1.00 per share)                                                                              377,750
Issuance of common stock for deferred payroll                                                                                55,001
Issuance of common stock under consulting agreements
  ($.32 to $.64 per share)                                                        (1,539,250)                                    --
Cancellation of shares under legal settlement                                                                            (1,474,000)
Cashless exercise of warrants
Exercise of warrants                                                                                                         60,000
Stock offering costs                                                                                                       (172,957)
Value assigned to beneficial conversion                          (137,113)                                                       --
Value assigned to warrants issued to consultants                                    (588,232)                                    --
Value assigned to options issued to consultants                                       (7,600)                                    --
Amortization of unearned compensation expense                                      2,062,081                              2,062,081
Amortization of unearned financing costs                          336,391                                                   336,391
Net loss                                                                                              (3,316,500)        (3,316,500)

                                                          ----------------    ---------------     ---------------    ---------------
Balance - October 31, 2003                                $       (15,674)    $     (404,582)     $  (49,684,887)    $    1,097,156
                                                          ================    ===============     ===============    ===============

                       The accompanying notes are an integral part of these consolidated financial statements.

                                                                 F-5
</TABLE>




<PAGE>
<TABLE>
                                               NEW VISUAL CORPORATION AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                         FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
<CAPTION>

                                                                         Common Stock                 Additional
                                                              -----------------------------------       Paid-In       Subscriptions
                                                                  Shares             Amount             Capital         Receivable
                                                              --------------     ---------------    ---------------   -------------
<S>                                                              <C>             <C>                <C>               <C>
Balance - November 1, 2001                                       30,003,681      $       30,003     $   38,478,279    $    (103,500)

Issuance of common stock under consulting agreements
  ($.40 to $1.24 per share)                                       1,967,312               1,968          1,156,912
Issuance of common stock for cash ($.25 to $1.00 per
  share)                                                          6,448,675               6,449          2,114,476
Cash received for subscription receivable                                                                                   103,500
Issuance of common stock in connection with the exercise
  of warrants ($.25 per share)                                    2,912,000               2,912            725,088
Cashless exercise of warrants                                       736,008                 736               (736)
Issuance of common stock for conversion of promissory
  notes and interest ($.40 to $.70 per share)                     4,497,967               4,498          2,179,128
Issuance of common stock for release of claims                    1,261,946               1,262             (1,262)
Issuance of common stock for technology license
  acquisition                                                       624,480                 624            749,376
Issuance of common stock to employees                             1,035,000               1,035            432,203
Issuance of common stock for financing fee                          300,000                 300            140,700
Stock offering costs                                                                                      (246,993)
Value assigned to beneficial conversion                                                                    653,789
Value assigned to warrants issued to consultants                                                           533,370
Value assigned to options issued to consultants                                                            183,500
Amortization of unearned compensation expense
Amortization of unearned financing costs
Net loss

                                                              --------------    ----------------   ----------------   --------------
Balance - October 31, 2002                                       49,787,069      $       49,787     $   47,097,830    $          --
                                                              ==============    ================   ================   ==============

                       The accompanying notes are an integral part of these consolidated financial statements.

                                                                 F-6
</TABLE>




<PAGE>
<TABLE>
                                               NEW VISUAL CORPORATION AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                         FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
<CAPTION>

                                                                                                                         Total
                                                             Unearned           Unearned           Accumulated       Stockholders'
                                                          Financing Costs     Compensation           Deficit            Equity
                                                          ---------------    ---------------     ---------------    ---------------
<S>                                                       <C>                <C>                 <C>                <C>
Balance - November 1, 2001                                $     (537,380)    $     (481,751)     $  (36,901,264)    $      484,387

Issuance of common stock under consulting agreements
  ($.40 to $1.24 per share)                                                        (344,280)                               814,600
Issuance of common stock for cash ($.25 to $1.00 per
  share)                                                                                                                 2,120,925
Cash received for subscription receivable                                                                                  103,500
Issuance of common stock in connection with the
  exercise of warrants ($.25 per share)                                                                                    728,000
Cashless exercise of warrants                                                                                                   --
Issuance of common stock for conversion of promissory
  notes and interest ($.40 to $.70 per share)                                                                            2,183,626
Issuance of common stock for release of claims                                                                                  --
Issuance of common stock for technology license
  acquisition                                                                                                              750,000
Issuance of common stock to employees                                              (100,000)                               333,238
Issuance of common stock for financing fee                      (141,000)                                                       --
Stock offering costs                                                                                                      (246,993)
Value assigned to beneficial conversion                         (653,789)                                                       --
Value assigned to warrants issued to consultants                                   (467,370)                                66,000
Value assigned to options issued to consultants                                    (183,500)                                    --
Amortization of unearned compensation expense                                     1,245,320                              1,245,320
Amortization of unearned financing costs                       1,117,217                                                 1,117,217
Net loss                                                                                             (9,467,123)        (9,467,123)

                                                          ---------------    ---------------     ---------------    ---------------
Balance - October 31, 2002                                $     (214,952)    $     (331,581)     $  (46,368,387)    $      232,697
                                                          ===============    ===============     ===============    ===============

                       The accompanying notes are an integral part of these consolidated financial statements.

                                                                 F-7
</TABLE>




<PAGE>
<TABLE>
                                               NEW VISUAL CORPORATION AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                         FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
<CAPTION>

                                                                         Common Stock                 Additional
                                                              -----------------------------------       Paid-In       Subscriptions
                                                                  Shares             Amount             Capital         Receivable
                                                              --------------     ---------------    ---------------   -------------
<S>                                                              <C>             <C>                <C>               <C>
Balance - November 1, 2000                                       24,072,455      $       24,072     $   27,813,465    $

Issuance of common stock for cash ($.25 to $5.00 per
  share)                                                          1,212,254               1,212          1,075,763          (3,500)
Issuance of common stock with attached warrants ($4.02
  per share for quarter ended January 31)                           174,714                 175            489,024
Issuance of common stock with attached warrants ($5.10
  per share for quarter ended January 31)                            30,600                  31             85,649
Issuance of common stock with attached warrants ($2.80
  to $5.10 per share for quarter ended April 30)                    104,571                 105            292,695
Issuance of common stock in connection with Private
Placement ($4.35 to $5.50 per share for quarter ended
  January 31)                                                        32,445                  32            151,968
  ($2.60 to $3.37 per share for quarter ended April 30)             207,307                 207            619,793
  ($1.74 to $2.80 per share for quarter ended July 31)            1,446,355               1,446          2,742,008
Issuance of common stock in connection with litigation
  settlement                                                        250,000                 250            999,750
Issuance of stock to Vice-Chairperson of Board of
Directors for services ($1.8984 per share at June 11)               500,000                 500            948,700
Issuance of stock under consulting agreement ($2.90 to
  $3.90 per share at July 31)                                        50,960                  51            171,693
Issuance of stock under consulting agreements ($.41 to
  $.95 per share at October 31)                                   1,175,000               1,175            558,075
Issuance of stock in connection with exercising of
  option ($.27 at September 30)                                     750,000                 750            199,250        (100,000)
Value assigned to warrants issued to consultants at
  quarter ended July 31                                                                                  1,289,250
Value assigned to options issued to consultants at
  August 30                                                                                                540,000
Value assigned to warrants issued to consultants at
  quarter ended October 31                                                                                 380,000
Value assigned to options issued to advisory board
  members at quarter ended October 31                                                                      151,194
Cancellation of common stock issued for cash                         (2,980)                 (3)           (29,998)
Amortization of unearned financing costs
Amortization of unearned compensation expenses
Net loss
                                                              --------------     ---------------    ---------------   -------------
Balance - October 31, 2001                                       30,003,681      $       30,003     $   38,478,279    $   (103,500)
                                                              ==============     ===============    ===============   =============

                       The accompanying notes are an integral part of these consolidated financial statements.

                                                                 F-8
</TABLE>




<PAGE>
<TABLE>
                                               NEW VISUAL CORPORATION AND SUBSIDIARIES

                                           CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                         FOR THE YEARS ENDED OCTOBER 31, 2003, 2002 AND 2001
<CAPTION>

                                                                                                                         Total
                                                             Unearned           Unearned           Accumulated       Stockholders'
                                                          Financing Costs     Compensation           Deficit            Equity
                                                          ---------------    ---------------     ---------------    ---------------
<S>                                                       <C>                <C>                 <C>                <C>
Balance - November 1, 2000                                $   (2,583,333)    $                   $  (25,025,349)    $      228,855

Issuance of common stock for cash ($.25 to $5.00 per
  share)                                                                                                                 1,073,475
Issuance of common stock with attached warrants ($4.02
  per share for quarter ended January 31)                                                                                  489,199
Issuance of common stock with attached warrants ($5.10
  per share for quarter ended January 31)                                                                                   85,680
Issuance of common stock with attached warrants ($2.80
  to $5.10 per share for quarter ended April 30)                                                                           292,800
Issuance of common stock in connection with Private
Placement ($4.35 to $5.50 per share for quarter ended                                                                      152,000
  January 31)
  ($2.60 to $3.37 per share for quarter ended April 30)                                                                    620,000
  ($1.74 to $2.80 per share for quarter ended July 31)                                                                   2,743,454
Issuance of common stock in connection with litigation
  settlement                                                                                                             1,000,000
Issuance of stock to Vice-Chairperson of Board of
Directors for services ($1.8984 per share at June 11)                                                                      949,200
Issuance of stock under consulting agreement ($2.90 to
  $3.90 per share at July 31)                                                                                              171,744
Issuance of stock under consulting agreements ($.41 to
  $.95 per share at October 31)                                                                                            559,250
Issuance of stock in connection with exercising of
  option ($.27 at September 30)                                                                                            100,000
Value assigned to warrants issued to consultants at
  quarter ended July 31                                                                                                  1,289,250
Value assigned to options issued to consultants at
  August 30                                                                        (540,000)                                    --
Value assigned to warrants issued to consultants at
  quarter ended October 31                                                                                                 380,000
Value assigned to options issued to advisory board                                 (151,194)
  members at quarter ended October 31                                                                                      (30,001)
Cancellation of common stock issued for cash                                                                                    --
Amortization of unearned financing costs                       2,045,953                                                 2,045,953
Amortization of unearned compensation expenses                                      209,443                                209,443
Net loss                                                                                            (11,875,915)       (11,875,915)
                                                          ---------------    ---------------     ---------------    ---------------
Balance - October 31, 2001                                $     (537,380)    $     (481,751)     $  (36,901,264)    $      484,387
                                                          ===============    ===============     ===============    ===============

                       The accompanying notes are an integral part of these consolidated financial statements.

                                                                 F-9
</TABLE>


<PAGE>
<TABLE>
                                         NEW VISUAL CORPORATION AND SUBSIDIARIES

                                          CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
                                                                          For the Years Ended October 31,
                                                           -------------------------------------------------------------
                                                                  2003                  2002                 2001
                                                           ------------------     ----------------     -----------------
<S>                                                        <C>                    <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                   $      (3,316,500)     $    (9,467,123)     $    (11,875,915)
  Adjustments to reconcile net loss to net cash used in
operating activities:
  Consulting fees and other compensatory elements of
stock issuances                                                    2,062,081            2,429,659             3,558,887
  Stock issued for litigation settlement                                  --                   --             1,000,000
  Unusual item - gain on Litigation settlement                    (1,474,000)                  --                    --
  Loss on disposal of equipment                                           --                   --                 7,500
  Projects written-off                                                56,864                   --                    --
  Amortization of unearned financing costs                           336,391            1,117,217             2,045,953
  Amortization of film in production costs                           192,889                   --                    --
  Depreciation                                                        23,232               77,260               118,693
Change in Assets (increase) decrease:
  Other current assets                                                (3,365)              92,766              (106,809)
  Due from related parties                                            10,033              160,859              (100,708)
  Other assets                                                         1,540               18,963                83,558
Change in Liabilities increase (decrease):
  Accounts payable and accrued expenses                             (172,462)           1,584,573               988,103
                                                           ------------------     ----------------     -----------------

      NET CASH USED IN OPERATING ACTIVITIES                       (2,283,297)          (3,985,826)           (4,280,738)
                                                           ------------------     ----------------     -----------------

CASH USED IN INVESTING ACTIVITIES
Acquisition of property and equipment                                     --               (2,513)              (17,302)
Proceeds from sale of equipment                                           --              145,616                    --
Projects under development                                          (213,134)            (266,181)           (1,237,999)
Acquisition of license                                              (639,000)          (1,075,000)                   --
                                                           ------------------     ----------------     -----------------

NET CASH USED IN INVESTING ACTIVITIES                               (852,134)          (1,198,078)           (1,255,301)
                                                           ------------------     ----------------     -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from issuance of common stock                           2,936,693            2,224,422             5,426,607
  Offering costs related to stock issuances                         (172,957)            (246,993)                   --
  Proceeds from convertible debentures                               300,000                   --                    --
  Proceeds from convertible notes payable                            287,000            1,795,250               615,000
  Proceeds from notes payable                                             --              700,000                    --
  Repayments of notes payable                                       (231,096)                  --              (500,000)
  Repayments of convertible notes payable                            (36,000)                  --                    --
  Proceeds from exercise of options and warrants                      60,000              728,000               100,000
                                                           ------------------     ----------------     -----------------

      NET CASH PROVIDED BY FINANCING ACTIVITIES                    3,143,640            5,200,679             5,641,607
                                                           ------------------     ----------------     -----------------

INCREASE IN CASH                                                        8,209               16,775               105,568

CASH - BEGINNING OF YEAR                                              311,577              294,802               189,234

                                                           ------------------     ----------------     -----------------
CASH - ENDING OF YEAR                                       $         319,786      $       311,577      $        294,802
                                                           ==================     ================     =================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the period for:
Interest                                                   $              --      $            --      $             --
                                                           ==================     ================     =================
Income taxes                                               $              --      $            --      $             --
                                                           ==================     ================     =================

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Compensation satisfied by issuance of common stock         $          55,001      $        29,500      $             --
                                                           ==================     ================     =================
Notes and interest satisfied by issuance of common
stock                                                      $         377,750      $     2,183,626      $             --
                                                           ==================     ================     =================

Accrued interest added to convertible notes payable        $         156,000      $            --      $             --
                                                           ==================     ================     =================

Common stock issued for acquisition of license             $              --      $       750,000      $             --
                                                           ==================     ================     =================
Redeemable Series B Preferred Stock issued for
acquisition of license                                     $              --      $     3,192,000      $             --
                                                           ==================     ================     =================

                 The accompanying notes are an integral part of these consolidated financial statements.

                                                          F-10
</TABLE>


<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1 - PRINCIPLES OF CONSOLIDATION, BUSINESS AND CONTINUED OPERATIONS

The consolidated financial statements include the accounts of New Visual
Corporation ("New Visual") and its wholly owned operating subsidiaries, NV
Entertainment, Inc. (including its 50% owned subsidiary Top Secret Productions,
LLC), Impact Multimedia, Inc. and NV Technology, Inc. (formerly New Wheel
Technology, Inc.) ("New Wheel") (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated. The Company
consolidates its 50% owned subsidiary Top Secret Productions, LLC due to the
Company's control of management, board of directors and financial matters.

New Visual Corporation was incorporated under the laws of the State of Utah on
December 5, 1985.

In November of 1999, the Company began to focus its business activities on the
development of new content telecommunications technologies. Pursuant to such
plan, in February of 2000, the Company acquired New Wheel, a development
stage-company. As a result of the change in business focus, the Company became a
development stage entity commencing November 1, 1999. With the completion of the
film "Step Into Liquid" and its revenue generation during the fourth quarter of
fiscal 2003 the Company was no longer considered a development stage entity. The
Company's Telecommunication Segment has generated no revenues to date.

The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America, which contemplate continuation of the Company as a going concern.
However, for the years ended October 31, 2003, 2002 and 2001, the Company
incurred net losses of approximately $3,317,000, $9,467,000 and $11,876,000,
respectively, and as of October 31, 2003, had a working capital deficiency of
approximately $3,658,000. As of December 31, 2003, the Company raised $1 million
from the sale of its three-year 7% Convertible Debentures and, upon the
effectiveness of a registration statement relating to the shares of Common Stock
underlying such debentures, which the Company expects to file shortly, the
Company expects to sell an additional $1 million of such debentures.
Notwithstanding the amounts raised, the Company has limited finances and
requires additional funding in order to accomplish its growth objectives and
marketing of its products and services. There is no assurance that the Company
can reverse its operating losses, or that it can raise additional capital on
commercially acceptable terms to allow it to expand its planned operations.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plan in this regard is to obtain other debt and
equity financing until profitable operation and positive cash flows are achieved
and maintained. Except as noted above the Company has no commitment for such
financing.

The Company operates in two business segments, the production of motion
pictures, films and videos (Entertainment Segment) and development of new
content telecommunications technologies (Telecommunication Segment). The success
of the Company's Entertainment Segment is dependent on future revenues from the
Company's film "Step Into Liquid." The success of the Telecommunications Segment
is dependent on the Company's ability to successfully commercialize its
developed technology.

Through its subsidiary NV Entertainment the Company has operating revenues for
its Entertainment Segment, but may continue to report operating losses for this
segment. The Telecommunications 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.

                                      F-11



<PAGE>

The Company funded its operations during 2003, 2002 and 2001 through sales of
its common stock, proceeds from notes and convertible notes and the exercise of
options and warrants resulting in approximate net proceeds to the Company of
$3,411,000, $5,201,000 and $6,142,000, respectively. The Company is exploring
other financing alternatives, including private placements and other offerings.
Subsequent to October 31, 2003, the Company placed $1,000,000 of convertible
debentures (see Note 17).

The Company's ability to continue as a going concern is dependent upon obtaining
additional financing. These financial statements do not include any adjustments
relating to the recoverability of recorded asset amounts that might be necessary
as a result of the above uncertainty.

NOTE 2 - SUMMARY OF ACCOUNTING POLICIES

Accounting Estimates

The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosures of contingent assets and liabilities 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.

Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets for cash,
accounts payable, accrued expenses and convertible notes approximate fair value
because of their immediate or short-term nature. The fair value of long-term
notes payable approximates their carrying value because the stated rates of the
debt either reflect recent market conditions or are variable in nature.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed on a
straight-line method over the estimated useful lives of the assets, which
generally range from five to seven years. Maintenance and repair expenses are
charged to operations as incurred.

Film In Distribution

Statement of Positions 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 each film based on information
received by its distributors, 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 an individual 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

                                      F-12



<PAGE>

unamortized capital costs exceeds the film's fair value. The Company adopted the
standard effective November 1, 2001, which did not have a material effect on the
Company's financial position or results of operations.

The Company commences amortization of capitalized film costs and accrues
(expenses) participation costs when a film is released and it begins to
recognize revenue from the film. The Company had amortization costs of $192,889,
$0 and $0 for the years ended October 31, 2003, 2002 and 2001, respectively.

Project In Development

During the year ended October 31, 2003, several projects under development were
determined to have no estimated realizable value and were accordingly
written-off. Project costs written-off during the year ended October 31, 2003
were $56,864.

Income Taxes

Income taxes are accounted for in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109").
SFAS No. 109 employs an asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to the difference between the
financial statement carrying amounts and the tax bases of existing assets and
liabilities. Under SFAS No. 109, the effect on deferred income taxes of a change
in tax rates is recognized income in the period that includes the enactment
date.

Revenue Recognition

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:

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

Under a rights Agreement with Artisan ("Artian") the Company's domestic
distributor for its feature length film entitled "Step Into Liquid", the Company
shares with Artisan in the profits of STEP INTO LIQUID after Artisan 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. Minimum
guaranteed license fees totaled $200,000 during the year ended October 31, 2003
and was recorded as revenue.

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

                                      F-13



<PAGE>

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 requires
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 Company periodically performs reviews of the recoverability of such
capitalized software 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.

The Company has no amortization expense for the years ended October 31, 2003,
2002 and 2001 for its capitalized software development costs.

Advertising

Advertising costs are charged to operations when incurred. Advertising expense
was $0, $0 and $942 for the years ended October 31, 2003, 2002 and 2001,
respectively.

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. No effect has been given to outstanding options,
warrants or convertible debentures in the diluted computation, as their effect
would be antidilutive.

The number of potentially dilutive securities excluded from computation of
diluted loss per share was approximately 21,387,483, 18,910,000 and 9,828,000
for the years ended October 31, 2003, 2002 and 2001, respectively.

Stock-Based Compensation

The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation."
SFAS No. 123 establishes accounting and reporting standards for stock-based
employee compensation plans. This statement allows companies to choose between
the fair value-based method of accounting as defined in this statement and the
intrinsic value-based method of accounting as prescribed by Accounting
Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees."

The Company has elected to continue to follow the accounting guidance provided
by APB 25, as permitted for stock-based compensation relative to the Company's
employees. Stock and options granted to other parties in connection with
providing goods and services to the Company are accounted for under the fair
value method as prescribed by SFAS 123.

In December 2002, the Financial Accounting Standard Board ("FASB") issued SFAS
No. 148, "Accounting for Stock-Based Compensation -Transition and Disclosure -
an Amendment of FASB Statement No. 123".This statement amends SFAS No. 123 to

                                      F-14



<PAGE>

provide alternative methods of transition for a voluntary change to the fair
value-based method of accounting for stock-based employee compensation. In
addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. SFAS No. 148 also requires that
those effects be disclosed more prominently by specifying the form, content, and
location of those disclosures. The Company has adopted the increased disclosure
requirements of SFAS No. 148 during the year ended October 31, 2003.

<TABLE>
<CAPTION>
                                                                                For the year ended October 31,
                                                               -----------------------------------------------------------
                                                                      2003                 2002                 2001
                                                               ----------------     ----------------     -----------------
<S>                                                            <C>                  <C>                  <C>
     Net loss, as reported                                     $    (3,316,500)     $    (9,467,123)     $    (11,875,915)
     Add:  Stock-based employee compensation expense
       included in reported net loss                                        --                   --                    --
     Less: Total stock-based employee compensation expense
       determined under the fair value-based method for all
       awards                                                         (676,396)          (2,626,550)           (1,962,835)
                                                               ----------------     ----------------     -----------------
     Proforma net loss                                         $    (3,992,896)     $   (12,093,673)     $    (13,838,750)
                                                               ================     ================     =================

     Basic and Diluted Net Loss:
       As reported                                             $          (.05)     $          (.23)     $           (.46)
                                                               ================     ================     =================
       Proforma                                                $          (.07)     $          (.29)     $           (.53)
                                                               ================     ================     =================
</TABLE>

Impairment of Long-Lived Assets

Pursuant to SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of", the Company evaluates its
long-lived assets for financial impairment, and continues to evaluate them as
events or changes in circumstances indicate that the carrying amount of such
assets may not be fully recoverable.

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

Impact of Recently Issued Accounting Standards

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" (" FIN 45"). FIN 45 requires a company, at the time it
issues a guarantee, to recognize an initial liability for the fair value of
obligations assumed under the guarantee and elaborates on existing disclosure
requirements related to guarantees and warranties. The initial recognition
requirements of FIN 45 are effective for guarantees issued or modified after
December 31, 2002 and adoption of the disclosure requirements are effective for
the Company during the first quarter ending January 31, 2003. The adoption of
FIN 45 had no significant impact on its consolidated financial position or
results of operations.

In January 2003, the FASB issued Interpretation No. 46 (" FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have

                                      F-15



<PAGE>

sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after March 15, 2004. The Company does not expect the
adoption of FIN 46 will have a significant impact on its consolidated financial
position or results of operations.



In April 2003, FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under
Statement 133. This Statement is effective for contracts entered into or
modified after June 30, 2003, except as stated below and for hedging
relationships designated after June 30, 2003. The guidance should be applied
prospectively. The provisions of this Statement that relate to Statement 133
Implementation Issues that have been effective for fiscal quarters that began
prior to June 15, 2003 should continue to be applied in accordance with their
respective effective dates. In addition, certain provisions relating to forward
purchases or sales of when-issued securities, or other securities that do not
yet exist, should be applied to existing contracts as well as new contracts
entered into after June 30, 2003. The adoption of SFAS No. 149 had no
significant impact on its consolidated financial position or results of
operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
establishes standards for classification and measurement in the statement of
financial position of certain financial instruments with characteristics of both
liabilities and equity. It requires classification of a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
SFAS. No 150 is effective for financial instruments entered into or modified
after May 31, 2003 and, otherwise, is effective at the beginning of the first
interim period beginning after June 15, 2003. As a result of implementing SFAS
No. 150 the Company has changed the classification of its Series B Convertible
Preferred Stock to a long term liability from previously being classified
between the liability and equity sections.

Comprehensive Income

The Company has no material components of other comprehensive income and,
accordingly, net loss approximates comprehensive loss for all periods
presented.

Reclassifications

Certain prior year balances have been reclassified to conform to the current
year presentation.

NOTE 3 - ACQUISITIONS

NV Technology, Inc.

In February 2000, the Company completed the acquisition of New Wheel, a
development-stage, California-based, technology company. New Wheel was merged
with Astounding Acquisition Corp., a Delaware corporation and wholly owned
subsidiary of New Visual. The Company now uses New Wheel to conduct the
development of its broadband technology ("NV Technology"). An aggregate of
3,000,000 restricted shares of common stock valued at $6,000,000 were issued to
the New Wheel stockholders in consideration of the merger. Accordingly, the
$6,000,000 was charged to operations during the year ended October 31, 2000. See
Note 15 for discussion of a settlement agreement with the former owners of New
Wheel.

                                      F-16



<PAGE>

NOTE 4 - NOTE RECEIVABLE FROM RELATED PARTIES

On September 6, 2001, the Company converted advances made to an officer in the
amount of $99,656 into a promissory note, which was payable on demand and bore
an interest rate of 7.0% per annum. On January 1, 2002, the Company converted
additional advances made to the officer in the amount of $67,631 into a
promissory note, which was payable on demand and bore an interest rate of 7.0%
per annum.

On September 30, 2002, the Company and the officer discussed above mutually
decided to end their relationship. The principal balance of $167,287 and accrued
interest of $11,113 was satisfied by the Company agreeing to provide the officer
with a termination payment equal to the remaining balance of the note receivable
and accrued interest. The $178,400 was charged to selling, general and
administrative expenses for the year ended October 31, 2002.

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment, consists of the following:

                                                         At October 31,
                                                 ----------------------------
                                                     2003             2002
                                                 ------------    ------------
Furniture and fixtures                           $    54,097     $    54,097
Camera equipment                                     298,109         298,109
Office equipment                                     109,515         109,515
                                                 ------------    ------------
                                                     461,721         461,721
Less: Accumulated depreciation                       420,420         397,188
                                                 ------------    ------------
Total                                            $    41,301     $    64,533
                                                 ============    ============

For the years ended October 31, 2003, 2002 and 2001, depreciation expense was
$23,232, $77,260 and $118,693, respectively.

NOTE 6 - TECHNOLOGY LICENSE AND DEVELOPMENT AGREEMENT

On April 17, 2002, the Company entered into a development and license agreement
with Adaptive Networks, Inc. ("ANI") to acquire a worldwide, perpetual license
to ANI's Powerstream technology, intellectual property, and patent portfolio for
use in products relating to all applications in the field of the copper
telephone wire telecommunications network. In consideration of the grant of the
license, the Company assumed certain debt obligations of ANI to Zaiq
Technologies, Inc. ("Zaiq") and TLSI, Inc. ("TLSI"). The Company then issued
3,192 shares of its Series B Preferred Stock, valued at $3,192,000, with a
liquidation preference of $1,000 per share and paid $250,000 in cash to Zaiq in
satisfaction of the Zaiq debt. The Company also issued 624,480 shares of common
stock, valued at $750,000, to TLSI in satisfaction of the TLSI debt. The value
of the consideration issued by the Company in connection with the license
agreement totaled $4,192,000.

The Company also agreed to pay ANI a development fee of $1,559,000 for software
development services and to pay ANI a royalty equal to a percentage of the net
sales of products sold by the Company and license revenue received by the
Company. As of October 31, 2003, $95,000 of this development fee was
outstanding.

The Company capitalized the consideration issued in connection with the license
fee and development fee totaling $5,751,000. The Company's technical employees
and advisors concluded that as of March 2002 the Company had established
technological feasibility for its ultimate telecommunication product to be
marketed (see Note 1). Additional development services and testing, to be
performed principally by ANI, are necessary to complete the product development.

                                      F-17



<PAGE>

The success of the Company's Telecommunication Segment is dependent upon the
successful completion of development and testing of its broadband technology
currently under development by its wholly owned subsidiary, NV Technology, Inc.
No assurance can be given that the Company can complete development of such
technology, or that with respect to such technology that is fully developed, it
can be commercialized on a large-scale basis or at a feasible cost. No assurance
can be given that such technology will receive market acceptance.

NOTE 7 - FILM IN DISTRIBUTION

In April 2000, the Company entered into a joint venture production agreement to
produce a feature length film ("Step Into Liquid") for theatrical distribution.
The Company agreed to provide 100% of the funding for the production in the
amount of up to $2,250,000 and, in exchange, received a 50% share in all net
profits from worldwide distribution and merchandising, after receiving funds
equal to its initial investment of up to $2,250,000. As of October 31, 2003 the
Company has funded a net of $2,335,101 for completion of the film. The film is
currently in distribution. Top Secret has recognized revenues of $379,980 for
the year ended October 31, 2003. As of October 31, 2003 the Company had not
received any cash distributions from the joint venture. The Company's management
believes revenues from the film will more than adequate to cover the capitalized
production costs. The Company had amortization costs of $192,889, $0 and $0 for
the years ended October 31, 2003, 2002 and 2001, respectively, for the film. The
total film production costs and related amounts capitalized are as follows:

<TABLE>
<CAPTION>
                                                                                    October 31,
                                                                          --------------------------------
                                                                               2003               2002
                                                                          --------------     -------------
<S>                                                                       <C>                <C>
      Released films                                                      $   2,335,101      $         --
        Less cumulative amortization of film production costs                   192,889                --
                                                                          --------------     -------------
          Total film production costs capitalized for released films          2,142,212                --
      Films in production                                                            --         2,121,967
      Films in development or pre-production (1)                                     --            56,864
                                                                          --------------     -------------
          Total film production costs capitalized, net                    $   2,142,212      $  2,178,831
                                                                          ==============     =============
</TABLE>

      (1) In the fourth quarter of fiscal 2003 the Company wrote-off $56,864
      in costs capitalized for future film projects, which the Company
      determined would not be put into production.

NOTE 8 - CONVERTIBLE NOTES PAYABLE

During fiscal 2003, 2002 and 2001, the Company entered into several convertible
promissory note agreements with various trusts and individuals. The Company
agreed to pay the principal and an additional amount equal to 50% of the
principal. The notes are due when the Company reaches certain milestones from
the distribution of its motion picture (Note 7). 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 $.33 to $1.00. These
and the Company's other notes are summarized in the table below:

                                      F-18



<PAGE>

<TABLE>
<CAPTION>
                                                                   October 31,
                                                         -------------------------------
                                                              2003              2002
                                                         -------------     -------------
<S>                                                      <C>               <C>
     Note payable (1)                                    $    250,000      $    250,000
     Notes payable (ten notes) (2)                            483,000           704,500
     Note payable, 9% interest (3)                             10,000                --
     Notes payable (four notes), 12% interest (4)             360,000                --
                                                         -------------     -------------
     Total                                               $  1,103,000      $    954,500
                                                         =============     =============
</TABLE>

     (1) Due when receipts received by the Company from the joint venture exceed
         $375,000.
     (2) Due when receipts received by the Company from the joint venture exceed
         $2,250,000.
     (3) Due when receipts received by the Company from the joint venture exceed
         $750,000.
     (4) Notes had an original due date of November 21, 2003. The note holders
         extended the due date until January 7, 2004 in exchange for 160,000
         shares of common stock. In January 2004 the Company paid $180,000 of
         principal payments and further extended the notes until the next round
         of financing is completed.

During the year ended October 31, 2003, holders of convertible notes converted
principal of $258,500 and accrued interest of $119,250 into 1,225,941 shares of
the Company's common stock

Several of the above convertible note agreements that were entered into during
the fiscal year ended October 31, 2003 and 2002, were convertible into common
stock at a conversion rate lower than the market price at the issuance of the
convertible notes. The value of such beneficial conversion features was $137,113
and $653,789, respectively and such amount was charged to financing costs during
the fiscal year ended October 31, 2003 and 2002.

NOTE 9 - CONVERTIBLE DEBENTURES

On October 31, 2003, the Company entered into a 7% convertible debenture
agreement in the amount of $300,000. The debentures are convertible to common
stock at $.26 per share and are due April 30, 2004. The Company also issued
warrants to the debenture holder at a strike price of $.15 per share. The
warrants were convertible into common stock at a conversion rate lower than the
market price at the issuance of the warrants, subject to the holders cashless
exercise rights. The value of such beneficial conversion features was $133,852.

NOTE 10 - NOTES PAYABLE

The Company has the following notes payable outstanding at October 31:

<TABLE>
<CAPTION>
                                                                                 2003                2002
                                                                            -------------      --------------
<S>                                                                         <C>                <C>
     Note Payable (five individual notes with identical terms),
       unsecured, 6% interest, due June 29, 2004                            $    256,886       $     256,886
     Note payable, 10% interest, unsecured, due on demand with
       three days notice                                                         483,425             514,521
     Note payable, unsecured, 10% interest, due April 29, 2003                        --             200,000
                                                                            -------------      --------------
     Total                                                                  $    740,311       $     971,407
                                                                            =============      ==============
</TABLE>

                                      F-19



<PAGE>

NOTE 11 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued liabilities consist of the following:

                                                          At October 31,
                                                 ------------------------------
                                                      2003             2002
                                                 -------------    -------------
Accrued Officers Compensation, bonuses
  and payroll                                    $    494,248     $    515,903
Professional fees                                     471,213          623,044
Interest payable                                      478,289          541,350
Consulting fees                                        45,251           62,018
Miscellaneous                                         255,882          505,280
                                                 -------------    -------------
                                                 $  1,744,883     $  2,247,595
                                                 =============    =============

NOTE 12 - PREFERRED STOCK

REDEEMABLE SERIES B PREFERRED STOCK

On April 10, 2002, the Company amended its Articles of Incorporation and
designated 4,000 of its authorized preferred stock as a Series B Preferred
Stock, with a liquidation preference of $1,000 per share.

The Company may redeem any or all of the shares of Series B Preferred Stock at
any time or from time to time at a per share redemption price equal to the
preference amount.

The Series B Preferred Stock are mandatorily redeemable by the Company at the
liquidation preference as follows:

(i)      Closing of financing transaction of at least $15 million.

(ii)     Closing of a corporate transaction, (such as a merger, consolidation,
         reorganization, sale of significant assets, etc.) resulting in a change
         of control.

(iii)    In the event the Company completes a financing, which is at least $3
         million but less than $15 million, the Company must partially redeem
         the Series B Preferred Stock based on a fraction, the numerator of
         which is the net cash proceeds received by the Company, as a result of
         the financing transaction, and the denominator of which is $15 million.

(iv)     The Company is obligated to redeem any outstanding Series B Preferred
         Stock at its liquidation preference, in eight equal quarterly payments,
         commencing on March 31, 2005 and ending on December 31, 2006.

Holders of Series B Preferred Stock are entitled to receive dividends if, as and
when declared by the Company's Board of Directors in preference to the holders
of its common stock and of any other stock ranking junior to the Series B
Preferred Stock with respect to dividends.

The Company cannot declare or pay any dividend or make any distribution on its
common stock unless a dividend or distribution of at least two times the
dividend paid on the common stock is also paid on the Series B Preferred Stock.
Holders of Series B Preferred Stock are also entitled to share pro-rata (based
on the aggregate liquidation preference) in any dividend, redemption or other
distribution made to any other series of the Company's preferred stock. The
Series B Preferred Stock does not have voting rights, except as required by law.

Each share of the Series B Preferred Stock is convertible into shares of the
Company's common stock by dividing $1,000 by the conversion price. The
conversion price is the fair market value of the Company's common stock at the
time of conversion, but not to be less than $.34 per share, subject to

                                      F-20



<PAGE>

adjustment, and not to exceed $4.00 per share, subject to adjustment. Holders of
the Series B Preferred Stock were granted piggy-back registration rights to
register common shares reserved for such conversion.

In April 2002, the Company issued 3,192 shares of its Series B Preferred Stock,
with redemption and liquidation preference of $3,192,000, in connection with the
development and license agreement discussed in Note 6. As of October 31, 2003
and 2002, there were 4,000 authorized shares Series B Preferred Stock and 3,192
shares issued and outstanding. Based on the Company's evaluation relating to
SFAS No. 150, the Series B Preferred Stock was reclassified to liabilities
during the fourth quarter ended October 31, 2003.

SERIES C, SERIES D, SERIES E, SERIES F AND SERIES G CONVERTIBLE PREFERRED STOCK

On February 24, 2003 the Company amended its Articles of Incorporation and
designated 100,000 shares of its authorized preferred stock as Series C
Preferred Stock. On May 16, 2003, the Company amended this designation and fixed
the number of shares designated as Series C Preferred Stock as 57,894.201. On
June 13, 2003 and June 27, 2003, the Company amended its Articles of
Incorporation and designated 9,090.909 shares of its authorized preferred stock
as Series D Preferred Stock and 25,000 shares of its authorized preferred stock
as Series E Preferred Stock. All of the designated Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock were issued in May and
June 2003, to collateralize proposed loans to the Company of approximately
$1,500,000, $400,000 and $500,000.

The shares are returnable to the Company upon demand in the event the proposed
loans are not completed. The Company has not received any monies from the
proposed loans.

The 57,894.201 shares of Series C preferred were returned to the Company. In
November 2003 the Company issued 15,152 shares of Series C preferred, to
collateralize a proposed loan to the Company of $2,000,000. The shares are
returnable to the Company upon demand in the event the proposed loan is not
completed.

On August 7, 2003 the Company amended its Articles of Incorporation and
designated 10,297.118 shares of its authorized preferred stock as Series F
Preferred Stock and 10,297.118 shares of its authorized preferred stock as
Series G Preferred Stock. All of the designated Series F Preferred Stock and
Series G Preferred Stock were issued in August 2003, to collateralize proposed
loans to the Company of approximately $1,000,000. All Series F and Series G
Preferred Stock have been returned to the Company.

None of these Series C, D, E, F and G are classified as outstanding as of
October, 31, 2003 as such shares are issuable upon the funding of the loans. If
the loans are not funded by January 31, 2004, all such shares are to be returned
to the Company.

The terms of the Series C, Series D, Series E, Series F and Series G Preferred
Stock are substantially the same. None of the series is entitled to receive
dividends or to vote, except as required by Utah law, and none of the series is
subject to mandatory redemption. The aggregate liquidation preference of each
series is equal to the unpaid balance of principal and interest on the proposed
loan to be collateralized by the shares of such series. In the event of a
default under such proposed loan, the Series C, Series D, Series E, Series F or
Series G Preferred Stock, as applicable, can be converted into common stock of
the Company to liquidate the unpaid balance of the loan and related interest.

NOTE 13 - STOCKHOLDERS' EQUITY

Preferred Stock and Rights Dividend

Effective June 22, 2000, the Company amended its Articles of Incorporation to
decrease the number of authorized shares of preferred stock from 200,000,000 to
15,000,000, and to decrease the par value of the preferred stock from $30.00 to
$0.01 per share.

The Company adopted a stockholder rights plan, in which one right was
distributed on August 21, 2000 as a dividend on each outstanding share of common
stock to stockholders of record on that date. Each right will entitle the

                                      F-21



<PAGE>

stockholders to purchase 1/1000th of a share of a new series of junior
participating preferred stock of the Company at an exercise price of $200 per
right. The rights will be exercisable only if another person acquires or
announces its intention to acquire beneficial ownership of 20% or more of the
Company's common stock. After any such acquisition or announcement, the
Company's stockholders, other than the acquirer, could then exercise each right
they hold to purchase the Company's common stock at a 50% discount from the
market price. In addition, if, after another person becomes an acquiring person,
the Company is involved in a merger or other business combination in which it is
not the surviving corporation, each right will entitle its holder to purchase a
number of shares of common stock of the acquiring company having a market value
equal to twice the exercise price of the right. Prior to the acquisition by a
person or group of beneficial ownership of 20% or more of the Company's common
stock, at the option of the Board of Directors, the rights are redeemable for
$0.001 per right. The rights will expire on August 21, 2004.

On July 27, 2000, the Company created a series of preferred stock, designated as
"Series A Junior Participating Preferred Stock". 200,000 shares of the Series A
Junior Participating Preferred Stock are initially reserved for issuance upon
exercise of the rights. Subject to the rights of the holders of any shares of
any series of preferred stock ranking prior and superior to the Series A
Preferred Stock with respect to dividends, the holders of shares of Series A
Preferred Stock, in preference to the holders of common stock, shall be entitled
to receive, when, as and if declared by the Board of Directors, quarterly
dividends payable in cash on the last day of each quarter in each year,
commencing on the first quarterly dividend payment date after the first issuance
of a share or fraction of a share of Series A Preferred Stock, in an amount per
share equal to the greater of $1.00 or 1,000 times the aggregate per share
amount of all cash and non-cash dividends or other distributions, other than a
dividend payable in shares of common stock. Each share of Series A Preferred
Stock shall entitle the holder to 1,000 votes. Upon any liquidation, no
distribution shall be made to the holders of shares of stock ranking junior to
the Series A Preferred, unless the holders of shares of Series A Preferred Stock
shall have received $1,000 per share, plus an amount equal to accrued and unpaid
dividends and distributions thereon. The shares of Series A Preferred Stock
shall not be redeemable. No Series A Preferred Stock was issued during the years
ended October 31, 2003, 2002 and 2000, respectively.

Common Stock

Effective November 12, 2003, the Company amended its Articles of Incorporation
and increased the authorized number of common stock from 100,000,000 to
500,000,000.

Common Stock Issuances During the Year Ended October 31, 2003:

In December 2002, 2.2 million shares of the Company's common stock previously
issued to the former owners of New Wheel and former officers of the Company were
returned to the Company, resulting in a non-cash gain of $1,474,000.

During the quarter ended January 31, 2003, the Company issued 88,710 shares of
common stock to two officers of the Company in satisfaction of $55,001 in
accrued compensation.

During the year ended October 31, 2003, the Company sold 17,112,611 shares of
common stock to investors for cash proceeds of $2,936,693, as indicated below.

         During the quarter ended January 31, 2003, the Company sold 4,328,587
         shares of common stock for $908,406.

         During the quarter ended April 30, 2003, the Company sold 6,668,339
         shares of common stock for $1,116,299.

         During the quarter ended July 31, 2003, the Company sold 4,256,485
         shares of common stock for $633,108.

         During the quarter ended October 31, 2003, the Company sold 1,859,200
         shares of common stock for $278,880.

                                      F-22



<PAGE>

During the year ended October 31, 2003, principal and accrued interest of
several convertible promissory notes, totaling $377,750, were converted into
1,225,941 shares of the Company's common stock (Note 8).

During the quarter ended January 31, 2003, the Company issued 421,875 shares of
its common stock valued at $245,250, in connection with various consulting
agreements and services.

During the quarter ended April 30, 2003, the Company issued 3,200,000 shares of
its common stock valued at $1,294,000, in connection with various consulting
agreements and services.

During the quarter ended October 31, 2003, warrants to purchase 1,000,000 share
of common stock were exercised at $.06 per share, resulting in proceeds to the
Company totaling $60,000.

During the quarter ended April 30, 2003, the Company issued 40,476 shares of its
common stock due to a cashless exercise of warrants to purchase 100,000 shares
of common stock.

Common Stock Issuances During the Year Ended October 31, 2002:

In February 2002, the Company issued an aggregate of 1,261,946 shares of its
common stock to seven individuals who purchased common stock of the Company in a
private placement completed in March 2001 and contended that they were entitled
to receive these additional shares in connection with their initial purchase
agreements. The parties reached an amicable resolution of the matter and the
Company received a full and complete release from each investor.

In February 2002, the Company issued a stock award of 500,000 shares of common
stock to an executive officer in consideration of his services to the Company.
The stock award was granted pursuant to the Company's 2000 Plan. The executive
officer purchased the shares for $.001 per share. The value assigned to the
stock award was $225,000 and was charged to operations during the year ended
October 31, 2002.

In February 2002, the Company issued 485,000 shares of restricted common stock
to two employees in consideration of their services to the Company. The value
assigned to the common stock totaled $178,738 and was charged to operations for
the year ended October 31, 2002.

During October 2002, the Company issued 50,000 shares of common stock, valued at
$29,500, for deferred salary due to an employee.

During the year ended October 31, 2002, the Company sold 6,448,675 shares of
common stock to investors for cash proceeds of $2,120,925, as indicated below.
Such sales were sold in private transactions in reliance on various exemptions
from the registration requirements of the Securities Act.

During the quarter ended January 31, 2002, the Company sold 1,445,015 shares of
common stock for $409,501.

During the quarter ended April 30, 2002, the Company sold 4,123,989 shares of
common stock for $1,275,224.

During the quarter ended July 31, 2002, the Company sold 284,671 shares of
common stock for $190,200.

During the quarter ended October 31, 2002, the Company sold 595,000 shares of
common stock for $246,000.

During the quarter ended January 31, 2002, the Company issued 950,000 shares of
its common stock as consideration for consulting services performed by four
consultants. Shares issued under these arrangements were valued at $494,898,
which was all charged to operations during the year ended October 31, 2002.

                                      F-23



<PAGE>

During the quarter ended April 30, 2002, the Company issued 306,250 shares of
its common stock as consideration for consulting services performed by two
consultants. Shares issued under these arrangements were valued at $131,500,
which was all charged to operations during the year ended October 31, 2002.

During the quarter ended July 31, 2002, the Company issued 359,500 shares of its
common stock as consideration for consulting services performed by two
consultants at prices ranging from $.95 to $1.24 per share, totaling $344,280.

During the quarter ended October 31, 2002, the Company issued 351,562 shares of
its common stock as consideration for consulting services performed by two
consultants at prices from $.45 to $.64 per share, totaling $188,202.

During March 2002, the Company issued 736,008 shares of its common stock due to
a cashless exercise of warrants to purchase 1,000,000 shares of common stock.

During the year ended October 31, 2002, warrants to purchase 2,912,000 shares of
common stock were exercised at $.25 per share, resulting in proceeds totaling
$728,000.

During the year ended October 31, 2002, principal and accrued interest of
several convertible promissory notes, totaling $2,183,626, was converted into
4,497,967 shares of the Company's common stock.

During April 2002, the Company issued 624,480 shares of common stock, valued at
$750,000, in connection with its technology license agreement with ANI (Note 6).

Common Stock Issuances During the Year Ended October 31, 2001:

Private Placement:

On November 17, 2000, and as amended on January 22, 2001, the Company entered
into a private placement agreement with various investors to sell $5,000,000 of
the Company's common stock in several tranches at a purchase price equal to 87%
of the average market price of the Company's common stock over the five days
preceding the closing of each drawdown.

The Company can sell stock to the investors in five-day intervals not to exceed
$500,000 per sale. The investor may refuse to purchase the stock in the event
the average purchase price is below $2.00 per share, or if the trading volume is
below a certain number of shares within the period, or if the Company sells
capital stock in excess of $5,000,000.

The Company may not apply any portion of the draw downs towards payment of any
costs related to its production of the Company's pending motion picture project.

In addition, the investors received warrants to purchase 4,000,000 shares of
common stock to be issued in two series (3,000,000 Series A warrants and
1,000,000 Series B warrants). Each Series A warrant can be exercised at a price
per share equal to the lesser of $6.00 or 50% of the average of the closing
sales price of the Company's common stock over the five consecutive trading days
immediately preceding the date of the exercise of the warrants. Each Series B
warrant can be exercised at a price per share of $6.00. The Series B warrants
have a cashless exercise provision. Both the Series A and Series B warrants
expired on November 17, 2003.

For the years ended October 31, 2001 and 2000, the Company has sold 1,686,107
and 77,248 shares of its common stock, respectively, under the above agreement
and received proceeds of $3,515,454 and $415,000, respectively. As of October
31, 2001, this private placement was terminated. The Company does not expect any
future proceeds from this private placement.

Other:

During the year ended October 31, 2001, the Company issued 1,212,254 shares of
restricted common stock to investors for cash proceeds of $1,073,475, as
indicated below.

                                      F-24



<PAGE>

During December 2000, the Company sold 219,904 shares of common stock for
$600,000.

During January 2001, the Company sold 21,000 shares of common stock for
$105,000.

In August of 2001, the Company issued 221,966 shares of common stock for
$166,475.

In October of 2001, the Company issued 749,384 shares of common stock for
$205,500. The Company received $202,000 in October of 2001 and the remaining
$3,500 was recorded as a subscription receivable and collected subsequent to
October 31, 2001.

In February of 2001, the Company issued 250,000 shares of common stock valued at
$1,000,000 pursuant to a litigation settlement agreement with Astounding.com,
Inc. and Jack Robinson. This settlement has been recorded during the three
months ended January 31, 2001.

During January 2001, the Company issued 30,600 shares of common stock with
15,300 attached warrants for $85,680. The attached warrants have an exercise
price of $5.10 per share and expire in January 2004.

During January 2001, the Company issued 174,714 shares of common stock with
87,357 attached warrants for $489,199. The warrants have an exercise price of
$4.02 per share and expire in January 2004.

In April of 2001, the Company cancelled 2,980 shares for which the Company was
to receive $30,001. The shares issued were recorded by the Company but never
issued to the investor.

During March and April 2001, the Company issued 104,571 shares of common stock
with 52,286 attached warrants for total proceeds of $292,800. The warrants have
an exercise price of $5.10 per share and expire in 3 years from the date of
their respective issuances.

In May of 2001, the Company issued 500,000 shares to its Board of Directors'
Vice Chairperson for past services, which were valued at $1.89 per share, or
$949,200, and all of which was charged to operations during the year ended
October 31, 2001.

During the quarter ended July 31, 2001, the Company issued 50,960 shares of
common stock between $2.90 and $3.90 per share for consulting services, valued
at $171,744 and all of which was charged to operations during the year ended
October 31, 2001.

During September and October of 2001, the Company issued to various consultants
1,175,000 shares of common stock for consulting services valued at $559,250 and
all of which was charged to operations during the year ended October 31, 2001.

Stock Option Plans

Stock Options

During 2000, the Board of Directors and the stockholders of the Company approved
the 2000 Omnibus Securities Plan (the "2000 Plan"), which provides for the
granting of incentive and nonstatutory options and restricted stock for up to
2,500,000 shares of common stock to officers, employees, directors and
consultants of the Company.

During August of 2001, the Board of Directors of the Company approved the 2001
Stock Incentive Plan (the "2001 Plan" and together with the 2000 Plan, the
"Plans"), which provides for the granting of incentive and non-statutory
options, restricted stock, dividend equivalent rights and stock appreciation
rights for up to 2,500,000 shares of common stock to officers, employees,
directors and consultants of the Company. The Stockholders of the Company
ratified the 2001 Plan in July 2002.

                                      F-25



<PAGE>

In January 2003, the Board of Directors of the Company approved the 2003
Consultant Stock Plan and authorizes the issuance of up to 6,000,000
non-qualified stock options or stock awards to consultants to the Company.
Directors, officers and employees are not eligible to participate in the
Consultant Plan. A total of 3,200,000 shares of common stock have been issued
under the Consultant Plan to four consultants. As of October 31, 2003 no options
have been awarded under the 2003 Plan.

On February 25, 2002, the Company granted non-qualified stock options under its
2000 Plan to purchase 862,500 shares of common stock to employees and employee
directors of the Company at an exercise price of $.42 per share. The options
vest in four equal quarterly installments starting April 30, 2002. All options
expire on February 25, 2012. During the year ended October 31, 2002, 2,500
options were cancelled.

On February 25, 2002, the Company granted two directors options under its 2000
Plan to purchase 400,000 shares of its common stock at an exercise price of $.42
per share. The options vest in four equal quarterly installments starting April
30, 2002. These options also expire on February 25, 2012.

On February 25, 2002, the Company granted to an advisory board member, options
under the Company's 2000 Omnibus Securities Plan to purchase 40,000 shares of
its common stock at an exercise price of $.42 per share. The options vest
immediately and expire ten years from the grant date. The fair value of stock
options estimated on the date of grant using the Black-Scholes option pricing
model was $.30 per share, or $12,000.

On July 1, 2002, the Company granted its Chief Marketing Officer non-qualified
stock options under its 2000 Plan to purchase 405,000 shares of common stock at
an exercise price of $1.09 per share. Options covering 105,000 shares are
exercisable immediately and the remaining vest in eight equal quarterly
installments starting May 31, 2003. These options expire on July 1, 2012.

On April 30, 2003, the Company granted one of its advisory board member options
under the Company's 2000 Omnibus Securities Plan to purchase 40,000 shares of
its common stock at an exercise price of $.31 per share. The options vest in
annual installments of 13,334, 13,333 and 13,334 commencing April 30, 2004. The
fair value of stock options estimated on the date of grant using the
Black-Scholes option pricing model was $.19 per share, or $7,600.

Options Outside of the Plan:

On February 25, 2002, the Company granted its then Chief Executive Officer
options outside the Company's stock option plans to purchase 500,000 shares of
its common stock at $.39. The options vest in four equal quarterly installments
starting April 30, 2002. These options expire on February 25, 2012.

On February 22, 2002, the Company granted non-qualified stock options to
purchase 250,000 shares of common stock to a consultant at an exercise price of
$.40 per share. The options vest in five equal quarterly installments starting
February 22, 2002. These options expire on February 22, 2012. The fair value of
stock options estimated on the date of grant using the Black-Scholes option
pricing model was $.32, or $80,000. On September 11, 2002, the consulting
agreement was cancelled and the Company cancelled 50,000 of the above options.

On March 22, 2002, the Company granted outside the Company's stock option plans
to a director and employee who became its Chief Executive Officer on June 1,
2002, options to purchase 1,500,000 shares of its common stock at $1.02. The
options vest in four equal quarterly installments starting June 1, 2002. These
options were to expire on March 22, 2012. During December 2002, the above
Officer terminated his employment with the Company and forfeited his 1,500,000
options.

On March 22, 2002, the Company granted its Chief Executive Officer on that date
options outside the Company's stock option plans to purchase 100,000 shares of
its common stock at $1.02. The options vest immediately and expire on March 22,
2012.

                                      F-26



<PAGE>

On March 22, 2002, the Company granted two consultants options outside the
Company's stock option plans to purchase 75,000 shares of its common stock at
$1.02. The options vest immediately and expire on March 22, 2012. The fair value
of stock options estimated on the date of grant using the Black-Scholes option
pricing model was $1.16, or $87,000.

On December 3, 2002, the Company granted the Company's Chief Executive Officer
options outside the Company's stock option plans to purchase 1,500,000 shares of
its common stock at $.64. The options vest 125,000 each quarter commencing March
1, 2003.

A summary of the Company's stock option activity and related information
follows:

<TABLE>
<CAPTION>
                                                  Under the         Weighted Average        Outside the        Weighted Average
                                                    Plans            Exercise Price            Plans            Exercise Price
                                               ---------------    --------------------    ---------------    --------------------
<S>                                                 <C>           <C>                         <C>            <C>
Balance at October 31, 2000                                --      $               --          1,563,750     $              4.10
 Options granted:
    2000 Plan                                         516,000                    3.92                 --                      --
    2001 Plan                                         750,000                     .27                 --                      --
    Outside the option plans                               --                      --            375,000                    3.37
 Options expired/cancelled:
    2000 Plan                                          (3,750)                   3.92                 --                      --
 Options exercised:
    2001 Plan                                        (750,000)                    .27                 --                      --
                                               ---------------    --------------------    ---------------    --------------------
Balance at October 31, 2001                           512,250                    3.92          1,938,750                    3.96
 Options granted:
    In the Plans                                    1,707,500                     .58                 --                      --
    Outside the option plans                               --                      --          2,425,000                     .83
 Options expired/cancelled:
    In the Plans                                      (51,000)                   3.74                 --                      --
    Outside the option plans                               --                      --           (171,250)                   3.55
 Options exercised in the plans                            --                      --                 --                      --
                                               ---------------    --------------------    ---------------    --------------------
Balance at October 31, 2002                         2,168,750                    1.29          4,192,500                    2.16
 Options granted:
    In the Plans                                       40,000                     .31                 --
    Outside the option plans                                                                   1,500,000                     .64
 Options expired/cancelled:
    In the Plans                                     (20,000)                    3.92                 --
    Outside the option plans                                                                  (1,500,000)                   1.02
 Options exercised in the plans
                                               ---------------    --------------------    ---------------    --------------------
Balance at October 31, 2003                         2,188,750     $              1.25          4,192,500     $              2.03
                                               ===============    ====================    ===============    ====================

Exercisable at October 31, 2003                     1,823,438      $             1.15          3,059,166     $              2.54
                                               ===============    ====================    ===============    ====================
Exercisable at October 31, 2004                     2,087,084     $              1.27          3,567,500     $              2.27
                                               ===============    ====================    ===============    ====================
Exercisable at October 31, 2005                     2,175,417     $              1.26          4,067,500     $              2.04
                                               ===============    ====================    ===============    ====================
Exercisable at October 31, 2006                     2,188,750     $              1.25          4,192,500     $              2.03
                                               ===============    ====================    ===============    ====================
</TABLE>

The exercise price for options outstanding as of October 31, 2003 ranged from
$0.31 to $4.40.

At October 31, 2003, 311,250 options are available under the 2000 Plan, 0
options are available under the 2001 Plan and 2,800,000 options or stock awards
are available under the 2003 Plan.

The weighted average fair value at date of grant for options granted during 2003
and 2002 was $0.44 and $0.72 per option, respectively. The fair value of options
at date of grant was estimated using the Black-Scholes option pricing model
utilizing the following assumptions:

                                      F-27



<PAGE>

<TABLE>
<CAPTION>
                                                        2003                   2002                   2001
                                                 -------------------    -------------------    -------------------
<S>                                              <C>                     <C>                    <C>
     Risk-free interest rates                      1.00% to 1.50%         5.00% to 5.50%         5.00% to 5.50%
     Expected option life in years                       5                      5                      5
     Expected stock price volatility             72.32% to 228.70%       51.65% to 53.89%       47.25% to 96.25%
     Expected dividend yield                             0%                     0%                     0%
</TABLE>

Warrants Granted

On November 5, 2001, the Company granted two companies warrants to purchase
200,000 shares of its common stock at an exercise price of $.51. The warrants
vested immediately and expire on November 5, 2005. The fair value of stock
warrants estimated on the date of grant using the Black-Scholes option pricing
model is $.33 per share, or $66,000.

On February 11, 2002, the Company granted a company warrant to purchase 300,000
shares of its common stock at an exercise price ranging from $.75 to $2.25. The
fair value of stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $4,500.

On July 30, 2002, the Company granted a consulting company warrants to purchase
1,000,000 shares of its common stock at an exercise price of $.75. These
warrants replaced warrants covering 1,000,000 shares of common stock issued to
the consulting company in May 2001 that had exercise prices of $2.50 (as to
500,000 shares), $5.00 (as to 250,000 shares) and $10.00 (as to 250,000 shares).
The fair value of stock warrants estimated on the date of grant using the
Black-Scholes option pricing model is $.47 per share, or $467,370.

On February 12, 2003, the Company granted a warrants to purchase 500,000 shares
of its common stock at an exercise price of $.40 in connection with the sale of
500,000 shares of its common stock. The fair value of the stock warrants
estimated on the date of grant using the Black-Scholes option pricing model is
approximately $.14 per share or $173,919.

On November 21, 2002, the Company granted warrants to purchase 100,000 shares of
its common stock at an exercise price of $.25. The warrants vested immediately
and expire on November 21, 2007. The fair value of the stock warrants estimated
on the date of grant using the Black-Scholes option pricing model is $.37 per
share, or $36,952.

On April 29, 2003, the Company granted a consulting firm a warrants to purchase
1,000,000 shares of its common stock at an exercise price of $0.06. The warrants
vested immediately and expire on May 3, 2006. In exchange for the issuance, the
Company cancelled warrants to purchase 1,000,000 shares of its common stock,
which were issued on July 30, 2002 at an exercise price of $0.75. The fair value
of stock warrants estimated on the date of the grant using the Black-Scholes
option pricing model is $.02 per share or $243,461.

On October 31, 2003 the Company granted a warrant to purchase 600,000 shares of
its common stock at an exercise price of $.15 in connection with the placement
of $300,000 of convertible debentures. The fair value of the stock warrants
estimated on the date of grant using the Black-Scholes option pricing model is
$.22 per share or $133,900.

Warrants Exercised

During the year ended October 31, 2002, warrants to purchase 2,912,000 shares of
common stock were exercised at $.25 per share, resulting in proceeds totaling
$728,000.

During March 2002, warrants to purchase 1,000,000 shares of common stock were
exercised on a cashless basis, for which the Company issued 736,008 shares of
common stock.

During the year ended October 31, 2003, warrants to purchase 1,000,000 shares of
common stock were exercised at $.06 per share, resulting in proceeds totaling
$60,000.

                                      F-28



<PAGE>

During February 2003, warrants to purchase 100,000 shares of common stock were
exercised on a cashless basis, for which the Company issued 40,476 shares of
common stock.

At October 31, 2003, the Company had outstanding warrants to purchase shares of
common stock as follows:

<TABLE>
<CAPTION>
                                            Number              Exercise               Expiration
                 Grant Date               of Shares              Price                    Date
         ---------------------------    -------------    --------------------    ----------------------
<S>                                        <C>           <C>                     <C>
             November 17, 2000             1,000,000     $              6.00        November 17, 2003
             November 17, 2000                88,000                      (1)       November 17, 2003
               March 12, 2001                 67,586                    5.10         March 12, 2004
               March 12, 2001                 87,357                    4.02         March 12, 2004
               June 14, 2001                  50,000                    2.50          June 30, 2006
               June 14, 2001                  25,000                    5.00          June 30, 2006
               June 14, 2001                  25,000                   10.00          June 30, 2006
              November 5, 2001               200,000                    0.51        November 5, 2005
             February 11, 2002                50,000                    0.75        February 11, 2004
             February 11, 2002                50,000                    1.25        February 11, 2004
             February 11, 2002               100,000                    1.75        February 11, 2004
             February 11, 2002               100,000                    2.25        February 11, 2004
             February 12, 2003               500,000                    0.40        February 12, 2005
              October 31, 2003               600,000                    0.15     September 30, 2006 (2)

                                        -------------    --------------------
               Exercisable at                                                     November 17, 2003 to
              October 31, 2003             2,942,943        $0.15 to $10.00        September 30, 2006
                                        =============    ====================
</TABLE>

         (1) Lesser of $6.00 or 50% of market ($0.17 at 10/31/03).
         (2) Under certain conditions the Company may accelerate the expiration
         date.

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                           2,942,943
         Options to purchase common stock                            6,381,250
         Convertible notes payable and accrued interest              2,675,055
         Series B Preferred stock (based on a floor
            conversion price of $.34 at October 31, 2003)            9,388,235
                                                                 --------------
         Total as of October 31, 2003                               21,387,483
                                                                 ==============

         Substantial issuances after October 31, 2003
           through January 23, 2004:


         Common stock issable upon conversion of
           convertible note and warrants issued in
           conjunction with new financing                           13,333,334
                                                                 ==============
         Common stock issued in connection with
           consulting agreements                                     3,800,000
                                                                 ==============

         Convertible notes payable and accrued interest                106,668
                                                                 ==============

         Sale of common stock for cash                               1,264,501
                                                                 ==============
         Common stock issued for deferred salaries
           and for past services                                       838,333
                                                                 ==============

                                      F-29



<PAGE>

NOTE 14 - INCOME TAXES

At October 31, 2003, the Company had approximately $39,555,000 of net operating
loss carry forwards for income tax purposes, which expire as follows:

                                 Year                     Net Operating
                              ----------                     Losses
                                 2011                   $      1,583,000
                                 2012                          4,714,000
                                 2018                          4,472,000
                                 2019                          1,698,000
                                 2020                          4,759,000
                                 2021                          9,503,000
                                 2022                         10,229,000
                                 2023                          2,597,000
                                                        -----------------
                                                        $     39,555,000
                                                        =================

At October 31, 2003 and 2002, the Company has a deferred tax asset of
approximately $19,716,000 and $18,826,000, respectively, representing the
benefits of its net operating loss and certain expenses not currently deductible
for tax purposes, principally related to the granting of stock options and
warrants and the difference in tax basis of certain intangible assets. The
Company's deferred tax asset has been fully reserved by a valuation allowance
since realization of its benefit is uncertain. The difference between the
Federal statutory tax rate of 34% and the Company's effective Federal tax rate
of 0% is due to the increase in the valuation allowance of $890,000 (2003),
$4,550,000 (2002) and $4,204,000 (2001). The Company's ability to utilize its
carry forwards may be subject to any annual limitation in future periods,
pursuant to Section 382 of the Internal Revenue Code of 1986, as amended.

NOTE 15 - COMMITMENTS, CONTINGENCIES AND OTHER MATTERS

Employment Agreements

On February 25, 2002, the Company entered into a one-year employment agreement
with its Vice President and Secretary, C. Rich Wilson III. The agreement
provides for the Company to pay a base salary of $13,383 per month. The employee
may receive an annual bonus to be determined at the sole discretion of the Board
of Directors. Mr. Wilson resigned as Vice President and Secretary and from the
Company's board of directors effective December 31, 2003.

On March 22, 2002, the Company entered into a new three-year employment
agreement with its Chief Executive Officer at the time, Ray Willenberg, Jr.
Pursuant to the agreement, Mr. Willenberg continued to serve as the Company's
Chief Executive Officer until June 1, 2002, at which time Mr. Willenberg stepped
down as CEO and became an Executive Vice President of the Company. The
employment agreement provides for a base salary of $14,583 per month and options
to purchase 100,000 shares of common stock at $1.02 per share. All options are
exercisable immediately and expire ten years from the grant date. In addition,
the employment agreement provides for a bonus based on monies raised by the
Company from debt or equity offerings.

On March 22, 2002, the Company entered into a three-year employment agreement
with its then Chief Executive Officer, Thomas Cooper. Pursuant to the agreement,
Mr. Cooper worked part-time until June 1, 2002, at which time he assumed the
role of Chief Executive Officer. The Company agreed to pay a base salary of
$10,417 per month prior to June 1, 2002 and $20,833 per month after June 1,
2002. In addition, Mr. Cooper may receive an annual bonus based on his
performance as determined at the sole discretion of the Board of Directors.
Pursuant to the terms of the agreement, Mr. Cooper was issued options to
purchase 1,500,000 shares of the Company's common stock at $1.02 per share. The
options vest in twelve equal quarterly installments starting June 1, 2002. These
options were to expire on March 22, 2012 but were forfeited subsequent to
October 31, 2002 when Mr. Cooper terminated his employment with the Company.

                                      F-30



<PAGE>

On July 1, 2002, the Company entered into a three-year employment agreement with
its then Chief Marketing Officer, Brad Ketch. Brad Ketch subsequently became the
Company's Chief Executive Officer and entered into a new employment agreement.
Pursuant to the agreement, the Company will pay Mr. Ketch a base salary of
$15,000 per month and an annual bonus based upon his performance, as determined
at the sole discretion of the Board of Directors. In addition, the employment
agreement provides non-qualified stock options to purchase 405,000 shares of
common stock at $1.09 per share. Options with respect to 105,000 shares are
exercisable immediately and the remaining vest in eight equal quarterly
installments, starting May 31, 2003. These options expire on July 1, 2012.

On December 2, 2002, the Company entered into a new three-year employment
agreement with its Chief Marketing Officer replacing the executive's former
employment agreement. Under the terms of the new agreement, the executive will
become the Company's President and Chief Executive Officer and receive a base
salary of $20,833 per month. In addition, the employment agreement provides that
the executive will be entitled to receive an annual bonus at the discretion of
the Board of Directors of the Company. Pursuant to the terms of the agreement,
the executive was issued options to purchase 1,500,000 shares of the Company's
common stock at $.64 per share. The options vest in twelve equal, quarterly
installments starting March 1, 2003. The options expire on December 2, 2012.

Leases

On January 3, 2000, the Company entered into an operating lease for office space
in San Diego, California. The lease commenced on February 1, 2000 and expires in
January 2005. The lease provides for a minimum annual rental of approximately
$54,000, with a 3% annual increase each year, starting on February 1, 2001 and
each year thereafter. Subsequent to October 31, 2003, the Company decided to
move its corporate headquarters to Portland, Oregon. The remaining lease cost
(net of projected sublease income) estimated to be $75,530 will be recognized as
a liability in the first fiscal quarter of 2004.

In anticipation of moving its corporate headquarters to Portland, Oregon, the
Company has leased space on a month-to-month basis in Portland.

On May 4, 2001, the Company terminated an operating lease for office space in
Livermore, California, which commenced on March 1, 2000. Meanwhile, the Company
entered into an operating lease for office space in Pleasanton, California. The
lease commenced on June 1, 2001 and expires on March 31, 2004. The lease
provides for a minimum annual rental of approximately $120,000 for the first
year and $156,000 the following years. During August 2001, the Company reduced
its rental space and amended its lease agreement in Pleasanton. The amended
lease provides for a minimum annual rental at approximately $43,000 for the
first year, $56,000 for the second year and $69,240 in the last year.

The Company's future minimum lease payments are as follows:

              Years Ending October 31:
              ------------------------
                        2004               $     103,285
                        2005                      15,834
                                           --------------
                                           $     119,119
                                           ==============

Rent expense for the years ended October 31, 2003, 2002 and 2001 was $177,462,
$115,500 and $136,000, respectively.

Concentration of Credit Risk

The Company maintains cash balances in two financial institutions. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000 per
institution. From time to time, the Company's balances may exceed these limits.
At October 31, 2003 and 2002, uninsured cash balances were approximately $0 and
$212,000, respectively. The Company believes it is not exposed to any
significant credit risk for cash.

                                      F-31



<PAGE>

Settled Legal Proceedings

On June 28, 2002, the Company entered into a settlement agreement and mutual
releases in certain litigation filed by the former owners of New Wheel and
former officers of the Company ("Blevins and Shepperd"). Under the terms of the
settlement agreement, Blevins and Shepperd returned to the Company in December
2002, 2.2 million shares of the Company's common stock previously issued to them
in connection with the acquisition of New Wheel (Note 3). During the quarter
ended January 31, 2003, the Company recorded a gain from this settlement
agreement of $1,474,000.


NOTE 16 - SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
                                            Telecommunication          Entertainment
                                                 Business                 Business            Unallocable            Totals
                                           --------------------     -------------------   ----------------     -----------------
<S>                                        <C>                      <C>                   <C>                  <C>
For the Year Ended October 31, 2003:

Net Sales                                  $                --      $         379,980     $            --      $       379,980

Operating Loss                             $          (334,746)     $        (211,681)    $    (3,637,096)     $    (4,183,522)

Depreciation                               $             8,212      $          13,686     $         1,334      $        23,232

Total Identifiable Assets                  $         5,761,429      $       2,181,161     $       328,760      $     8,272,350


For the Year Ended October 31, 2002:

Net Sales                                  $                --      $              --     $            --      $            --

Operating Loss                             $        (1,869,946)     $              --     $    (5,443,526)     $    (7,313,472)

Depreciation                               $            14,913      $          14,792     $        47,555      $        77,260

Total Identifiable Assets                  $         5,783,427      $       2,226,787     $       321,985      $     8,332,199


For the Year Ended October 31, 2001:

Net Sales                                  $                --      $              --     $            --      $            --

Operating Loss                             $          (846,902)     $              --     $    (8,645,682)     $    (9,492,584)

Depreciation                               $            14,007      $          16,893     $        87,793      $       118,693

Total Identifiable Assets                  $            57,723      $       2,069,457     $       664,117      $     2,791,297
</TABLE>


NOTE 17 - SUBSEQUENT EVENTS

Common Stock

In January 2004, the Company:

     o   issued an aggregate of $1,000,000 in convertible promissory notes to
         sixteen investors, which may be converted into shares of common stock
         at an exercise price of $.15;

     o   issued as part of the above transaction warrants to purchase 6,666,667
         shares of common stock at an exercise price of $.25; and

     o   issued 1,000,000 shares of common stock to one individual in exchange
         for consulting services valued at $240,000;

     o   issued to its board chair and senior vice president 400,000 shares of
         common stock in lieu of $100,000 in commissions;

                                      F-32



<PAGE>

     o   issued to its chief executive officer and president 40,000 shares of
         common stock in lieu of $10,000 in deferred compensation;

     o   issued to its chief financial officer 50,000 shares of common stock as
         part of his employment agreement;

     o   issued to its former vice president and secretary and board member
         333,333 shares of common stock as part of his severance agreement;

     o   sold an aggregate 100,000 shares of common stock to one investor for
         total proceeds of $17,500.

In December 2003, the Company:

     o   issued 2,800,000 shares of common stock to two companies in exchange
         for consulting services valued at $700,000;

     o   sold an aggregate of 931,667 shares of common stock to six investors
         for total proceeds of $177,500;

     o   issued 106,668 shares of common stock as part of an extension of past
         due convertible debentures;

     o   issued 15,000 shares of common stock to one company in exchange for
         past services valued at $2,250; and

     o   cancelled 28,000 shares.

In November 2003, the Company:

     o   sold aggregate of 232,834 shares of common stock to six investors for
         total proceeds of $40,300.


Consulting Agreements

On December 31, 2003 the Company entered into a two month agreement with a
consultant for an investor relations program. On December 2, 2003 the Company
renewed consulting contracts with two investor relation firms.

New Employment Agreement

In December 2003, the Company entered into an employment agreement with Mr.
Cruckshank to serve as its Chief Financial Officer. Under the Agreement, Mr.
Cruckshank received a 50,000 share stock grant upon employment and will receive
$700 in cash and $480 per day in common stock for actual days worked. Mr.
Cruckshank is also eligible for quarter stock grants based upon completion of
certain agreed upon objectives. This agreement commenced December 8, 2003 and is
cancelable immediately for "cause," with 15 days notice without "cause," and
with 30 days notice if he leaves the Company for "good reason," each as defined
in the agreement. In the event cancellation is without "cause" or for "good
reason," after April 8, 2004 until December 8, 2004, Mr. Cruckshank will receive
two months severance based upon base pay and from December 8, 2004 and
thereafter six months severance based on base pay.

Vice President and Corporate Secretary resigned

Mr. Wilson resigned as Vice President and Secretary and from the Company's board
of directors effective December 31, 2003.

                                      F-33



<PAGE>

NOTE 18 - QUARTERLY RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                             Quarter Ended
                              -----------------------------------------------------------------------------
                                 January 31           April 30             July 31            October 31              Total
                              -----------------   ----------------     ----------------    ----------------     -----------------
<S>                           <C>                 <C>                  <C>                 <C>                  <C>
           2003
Revenues                      $            --     $            --      $            --     $       379,980      $        379,980
Net Income (Loss)             $       175,234     $    (1,430,042)     $    (1,022,387)    $    (1,039,305)     $     (3,316,500)
Income (Loss) per share -
  Basic and Diluted (a)       $            --     $         (0.02)     $         (0.02)    $         (0.02)     $           (.05)

           2002
Revenues                      $            --     $            --      $            --     $            --      $             --
Net Loss                      $    (1,941,584)    $    (3,182,061)     $    (2,282,532)    $    (2,060,946)     $     (9,467,123)
Loss per share -
  Basic and Diluted (a)       $         (0.06)    $         (0.08)     $         (0.05)    $         (0.04)     $          (0.23)

</TABLE>

(a) Per common share amounts for the quarters and full year have been calculated
separately. Accordingly, quarterly amounts do not add to the annual amount
because of differences in the weighted average common shares outstanding during
each period due to the effect of the Company's issuing shares of its common
stock during the year.


                                      F-34