<PAGE>

================================================================================

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

                               -------------------
                                    FORM 10-Q
                               -------------------


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

                  FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002

                         COMMISSION FILE NUMBER 0-21785

                               -------------------


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


                 UTAH                                      95-4543704
   (State or other jurisdiction of                      (I.R.S. employer
   incorporation or organization)                      identification no.)

      5920 FRIARS ROAD, SUITE 104
      SAN DIEGO, CALIFORNIA 92108                        (619) 692-0333
(Address of principal executive offices,         (Registrant's telephone number,
         including zip code)                          including area code)


                               -------------------


     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
                                   ---       ---


     The number of shares of the issuer's Common Stock, par value $.001 per
share, outstanding as of September 12, 2002 was 48,433,938.

================================================================================

<PAGE>

PART I - FINANCIAL INFORMATION:

         ITEM I - FINANCIAL STATEMENTS


                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                               INDEX TO FORM 10-Q

                                  JULY 31, 2002

                                                                       Page Nos.
                                                                       ---------

CONDENSED CONSOLIDATED BALANCE SHEETS                                        1
    At July 31, 2002 (Unaudited) and October 31, 2001


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                  2
    For the Nine Months Ended July 31, 2002 and 2001
    For the Period from November 1, 1999 to July 31, 2002


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)                  3
    For the Three Months Ended July 31, 2002 and 2001


CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)        4-5
    For the Nine Months Ended July 31, 2002


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)                 6-7
    For the Nine Months Ended July 31, 2002 and 2001
    For the Period from November 1, 1999 to July 31, 2002


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)           8-27


ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                  28
         CONDITION AND RESULTS OF OPERATIONS


PART II - OTHER INFORMATION                                                 31

<PAGE>

<TABLE>
                                   NEW VISUAL CORPORATION AND SUBSIDIARIES
                          (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                                    CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                    ASSETS
                                                    ------
                                                                                 At July 31,    At October 31,
                                                                                    2002             2001
                                                                                -------------   -------------
                                                                                 (Unaudited)
<S>                                                                             <C>             <C>
Current Assets:
   Cash                                                                         $     77,096    $    294,802
   Notes receivable from related party                                               176,332         100,708
   Other receivable from officers                                                     36,994          70,183
   Other current assets                                                               23,437          94,416
                                                                                -------------   -------------

       Total Current Assets                                                          313,859         560,109

Property and Equipment - Net                                                         221,876         284,896
Technology License                                                                 5,751,000              --
Other assets                                                                          14,140          33,642
Projects under development                                                         2,046,309       1,912,650
                                                                                -------------   -------------

       Total Assets                                                             $  8,347,184    $  2,791,297
                                                                                =============   =============

                                    LIABILITIES AND STOCKHOLDERS' EQUITY
                                    ------------------------------------

Current Liabilities:
   Convertible notes payable                                                    $    763,000    $    615,000
   Accounts payable and accrued expenses                                           2,043,489       1,435,024
   License and development fees payable                                              844,000              --
   Notes payable                                                                     756,886              --
                                                                                -------------   -------------

       Total Current Liabilities                                                   4,407,375       2,050,024

Notes payable                                                                             --         256,886
                                                                                -------------   -------------

       Total Liabilities                                                           4,407,375       2,306,910
                                                                                -------------   -------------

Redeemable Series B Preferred Stock (Note 8)                                       3,192,000              --
                                                                                -------------   -------------

Commitments, Contingencies and Other Matters (Notes 6, 7, 8, 9 and 10)

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; 100,000,000 shares authorized;
       48,234,237 shares issued and 48,124,904 shares outstanding at July 31,
       2002 and 30,003,681 shares issued and outstanding at October 31, 2001,
       respectively                                                                   48,233          30,003
   Additional paid-in capital                                                     45,900,953      38,478,279
   Subscription receivable                                                                --        (103,500)
   Unearned financing fees                                                          (295,559)       (537,380)
   Unearned compensation                                                            (550,609)       (481,751)
   Accumulated deficit at October 31, 1999                                       (12,300,033)    (12,300,033)
   Deficit accumulated during the development stage                              (31,973,176)    (24,601,231)
   Treasury stock, at cost, 109,333 shares at July 31, 2002 and -0- at
       October 31, 2001                                                              (82,000)             --
                                                                                -------------   -------------

       Total Stockholders' Equity                                                    747,809         484,387
                                                                                -------------   -------------

       Total Liabilities and Stockholders' Equity                               $  8,347,184    $  2,791,297
                                                                                =============   =============

See notes to condensed consolidated financial statements.

                                                      1
</TABLE>
<PAGE>

<TABLE>
                               NEW VISUAL CORPORATION AND SUBSIDIARIES
                      (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                             (UNAUDITED)
<CAPTION>

                                                    For the Nine Months Ended
                                                             July 31,             For the Period from
                                                  -----------------------------   November 1, 1999 to
                                                       2002            2001          July 31, 2002
                                                  -------------   -------------      -------------
<S>                                               <C>             <C>                <C>
REVENUES                                          $         --    $         --       $     12,200
                                                  -------------   -------------      -------------

OPERATING EXPENSES:
   Cost of sales                                            --              --             21,403
   Project costs written-off                                --              --            114,613
   Acquired in-process research and
     development expenses                                   --              --          6,050,000
   Compensatory element of stock issuances           1,601,295       2,410,194          8,418,731
      principally related to selling and
      general and administrative expenses
   Research and development                         1,400,019       1,190,348          3,054,783
   Selling, general and administrative expenses      2,504,605       2,663,235          8,633,342
   Litigation settlement                                    --       1,000,000          1,000,000
   Loss on disposal of equipment                            --              --              7,500
                                                  -------------   -------------      -------------

       TOTAL OPERATING EXPENSES                      5,505,919       7,263,777         27,300,372
                                                  -------------   -------------      -------------

OPERATING LOSS                                      (5,505,919)     (7,263,777)       (27,288,172)
                                                  -------------   -------------      -------------

OTHER EXPENSES:
   Interest expense                                  1,004,986          27,179          1,361,344
   Amortization of unearned financing costs            861,040         750,000          3,323,660
                                                  -------------   -------------      -------------

       TOTAL OTHER EXPENSES                          1,866,026         777,179          4,685,004
                                                  -------------   -------------      -------------

NET LOSS                                          $ (7,371,945)   $ (8,040,956)      $(31,973,176)
                                                  =============   =============      =============

BASIC AND DILUTED NET LOSS PER
   COMMON SHARE                                   $      (0.19)   $      (0.32)
                                                  =============   =============

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES OUTSTANDING                               39,398,658      25,153,198
                                                  =============   =============

See notes to condensed consolidated financial statements.

                                                 2
</TABLE>
<PAGE>

<TABLE>
                             NEW VISUAL CORPORATION AND SUBSIDIARIES
                    (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                           (UNAUDITED)
<CAPTION>

                                                                      For the Three Months Ended
                                                                               July 31,
                                                                    -----------------------------
                                                                         2002            2001
                                                                    -------------   -------------
<S>                                                                 <C>             <C>
REVENUES                                                            $         --    $         --
                                                                    -------------   -------------

OPERATING EXPENSES:
   Compensatory element of stock issuances principally related to        139,142       2,410,194
selling and general and administrative expenses
   Research and development                                              121,088         528,254
   Selling, general and administrative expenses                        1,128,897       1,456,582


       TOTAL OPERATING EXPENSES                                        1,389,127       4,395,030
                                                                    -------------   -------------

OPERATING LOSS                                                        (1,389,127)     (4,395,030)
                                                                    -------------   -------------

OTHER EXPENSES:
   Interest expense                                                      555,677           8,749
   Amortization of unearned financing costs                              337,728         250,000
                                                                    -------------   -------------

       TOTAL OTHER EXPENSES                                              893,405         258,749
                                                                    -------------   -------------

NET LOSS                                                            $ (2,282,532)   $ (4,653,779)
                                                                    =============   =============

BASIC AND DILUTED NET LOSS PER COMMON SHARE                         $      (0.05)   $      (0.18)
                                                                    =============   =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING                                                        47,470,923      26,230,086
                                                                    =============   =============

See notes to condensed consolidated financial statements.

                                               3
</TABLE>
<PAGE>

<TABLE>
                                       NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                               CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                                     (UNAUDITED)

                                       FOR THE NINE MONTHS ENDED JULY 31, 2002
<CAPTION>

                                                               Common Stock                     Treasury Stock
                                                       ----------------------------      ----------------------------
                                                         Shares            Amount          Shares            Amount
                                                       -----------      -----------      -----------      -----------
<S>                                                    <C>              <C>                 <C>           <C>
Nine Months Ended July 31, 2002:
-------------------------------

Balance - November 1, 2001                             30,003,681       $   30,003               --       $       --
Issuance of common stock under consulting
   agreement ($.40 to $.66 per share)                   1,256,250            1,256               --               --
Issuance of common stock for cash
   ($.25 to $1.00 per share)                            5,569,004            5,569               --               --
Cash received for subscription receivable                      --               --               --               --
Issuance of common stock in connection with the
   exercise of warrants ($.25 per share)                2,912,000            2,912               --               --
Cashless exercise of warrants                             736,008              736               --               --
Issuance of common stock for conversion of
   promissory notes ($.40 to $.70 per share)            3,797,322            3,797               --               --
Issuance of common stock for release of claims          1,261,946            1,262               --               --
Issuance of common stock for technology
   license acquisition                                    624,480              624               --               --
Issuance of common stock for consideration of
   services                                               985,000              985               --               --
Issuance of common stock under consulting
   agreement ($.95 to $1.24 per share)                    359,500              360               --               --
Issuance of common stock for cash
   ($.60 to $.83 per share)                               284,671              285               --               --
Issuance of common stock for conversion of
   promissory notes ($.40 to $1.00 per share)             444,375              444               --               --
Stock offering costs                                           --               --               --               --
Value assigned to beneficial conversion                        --               --               --               --
Value assigned to warrants issued to consultants               --               --               --               --
Value assigned to options issued to consultants                --               --               --               --
Shares repurchased                                             --               --          109,333          (82,000)
Amortization of unearned compensation expense                  --               --               --               --
Amortization of unearned financing cost                        --               --               --               --
Net loss                                                       --               --               --               --
                                                       -----------      -----------      -----------      -----------

Balance - July 31, 2002                                48,234,237       $   48,233          109,333       $  (82,000)
                                                       ===========      ===========      ===========      ===========

See notes to condensed consolidated financial statements.

                                                          4
</TABLE>
<PAGE>

<TABLE>
                                            NEW VISUAL CORPORATION AND SUBSIDIARIES
                                    (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                                    CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                                           (UNAUDITED)

                                             FOR THE NINE MONTHS ENDED JULY 31, 2002
<CAPTION>

                                                         Additional                             Unearned              Unearned
                                                          Paid-in          Subscription         Financing          Compensation
                                                          Capital           Receivable            Costs               Expense
                                                       -------------       -------------       -------------       -------------
<S>                                                    <C>                 <C>                 <C>                 <C>
Nine Months Ended July 31, 2002:
-------------------------------

Balance - November 1, 2001                             $ 38,478,279        $   (103,500)       $   (537,380)       $   (481,751)
Issuance of common stock under consulting
   agreement ($.40 to $.66 per share)                       625,142                  --                  --                  --
Issuance of common stock for cash
   ($.25 to $1.00 per share)                              1,679,156                  --                  --                  --
Cash received for subscription receivable                        --             103,500                  --                  --
Issuance of common stock in connection with the
   exercise of warrants ($.25 per share)                    725,088                  --                  --                  --
Cashless exercise of warrants                                  (736)                 --                  --                  --
Issuance of common stock for conversion of
   promissory notes ($.40 to $.70 per share)              1,753,078                  --                  --                  --
Issuance of common stock for release of claims               (1,262)                 --                  --                  --
Issuance of common stock for technology
   license acquisition                                      749,376                  --                  --                  --
Issuance of common stock for consideration of
   services                                                 402,753                  --                  --            (100,000)
Issuance of common stock under consulting
   agreement ($.95 to $1.24 per share)                      343,920                  --                  --            (344,280)
Issuance of common stock for cash
   ($.60 to $.83 per share)                                 189,915                  --                  --                  --
Issuance of common stock for conversion of
   promissory notes ($.40 to $1.00 per share)               282,306                  --                  --                  --
Stock offering costs                                       (241,518)                 --                  --                  --
Value assigned to beneficial conversion                     619,219                  --            (619,219)                 --
Value assigned to warrants issued to consultants            112,737                  --                  --             (46,737)
Value assigned to options issued to consultants             183,500                  --                  --                  --
Shares repurchased                                               --                  --                  --                  --
Amortization of unearned compensation expense                    --                  --                  --             422,159
Amortization of unearned financing cost                          --                  --             861,040                  --
Net loss                                                         --                  --                  --                  --
                                                       -------------       -------------       -------------       -------------

Balance - July 31, 2002                                $ 45,900,953        $         --        $   (295,559)       $   (550,609)
                                                       =============       =============       =============       =============

See notes to condensed consolidated financial statements.

                                                               5
</TABLE>
<PAGE>

<TABLE>
                              NEW VISUAL CORPORATION AND SUBSIDIARIES
                     (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                      CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                            (UNAUDITED)

                              FOR THE NINE MONTHS ENDED JULY 31, 2002
<CAPTION>

                                                                                         Total
                                                                   Accumulated        Stockholders'
                                                                     Deficit             Equity
                                                                  -------------       -------------
<S>                                                               <C>                 <C>
Nine Months Ended July 31, 2002:
-------------------------------

Balance - November 1, 2001                                        $(36,901,264)       $    484,387
Issuance of common stock under consulting agreement
   ($.40 to $.66 per share)                                                 --             626,398
Issuance of common stock for cash ($.25 to $1.00 per share)                 --           1,684,725
Cash received for subscription receivable                                   --             103,500
Issuance of common stock in connection with the exercise
   of warrants ($.25 per share)                                             --             728,000
Cashless exercise of warrants                                               --                  --
Issuance of common stock for conversion of promissory
   notes ($.40 to $.70 per share)                                           --           1,756,875
Issuance of common stock for release of claims                              --                  --
Issuance of common stock for technology license acquisition                 --             750,000
Issuance of common stock for consideration of services                      --             303,738
Issuance of common stock under consulting
   agreement ($.95 to $1.24 per share)                                      --                  --
Issuance of common stock for cash
   ($.60 to $.83 per share)                                                 --             190,200
Issuance of common stock for conversion of
   promissory notes ($.40 to $1.00 per share)                               --             282,750
Stock offering costs                                                        --            (241,518)
Value assigned to beneficial conversion                                     --                  --
Value assigned to warrants issued to consultants                            --              66,000
Value assigned to options issued to consultants                             --             422,159
Shares repurchased                                                          --             (82,000)
Amortization of unearned compensation expense                               --             183,500
Amortization of unearned financing cost                                     --             861,040
Net loss                                                            (7,371,945)         (7,371,945)
                                                                  -------------       -------------

Balance - July 31, 2002                                           $(44,273,209)       $    747,809
                                                                  =============       =============

Accumulated deficit as of October 31, 1999                        $(12,300,033)

Accumulated deficit during development stage (November 1,
   1999 to July 31, 2002)                                          (31,973,176)
                                                                  -------------

Total accumulated deficit as of July 31, 2002                     $(44,273,209)
                                                                  =============

See notes to condensed consolidated financial statements.

                                                 6
</TABLE>
<PAGE>

<TABLE>
                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                                    CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (UNAUDITED)

                                    FOR THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
                                 AND THE PERIOD FROM NOVEMBER 1, 1999 TO JULY 31, 2002
<CAPTION>

                                                                   For the Nine Months Ended
                                                                            July 31,                 For the Period from
                                                               ---------------------------------     November 1, 1999 to
                                                                   2002                2001             July 31, 2002
                                                               -------------       -------------        -------------
<S>                                                            <C>                 <C>                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                    $ (7,371,945)       $ (8,040,956)        $(31,973,176)
   Adjustments to reconcile net loss to net cash used in
       operating activities:
          Compensatory elements of stock issuances                1,601,295           2,410,194            8,418,731
          Stock issued for acquired in-process research
             and development                                             --                  --            6,050,000
          Stock issued for litigation settlement                         --           1,000,000            1,000,000
          Project costs written-off                                      --                  --              114,613
          Amortization of unearned financing costs                  861,040             750,000            3,323,660
          Depreciation of property and equipment                     61,937              97,842              277,802
          Disposal of property and equipment                          3,596                  --                3,596
          Loss on disposal of equipment                                  --                  --                7,500
          Accrued interest related to convertible notes             497,375                  --              497,375

       Changes in Assets (Increase) Decrease:
          Other current assets                                       70,979             (36,796)             (23,437)
          Due from related party                                    (42,435)           (100,198)            (181,904)
          Projects under development                               (133,659)           (788,000)          (2,027,177)
          Other assets                                               19,502             (20,933)              (9,140)
       Changes in Liabilities Increase (Decrease):
          Accounts payable and accrued expenses                     790,965             252,557            1,805,291
                                                               -------------       -------------        -------------

       NET CASH USED IN OPERATING ACTIVITIES                     (3,641,350)         (4,476,290)         (12,716,266)
                                                               -------------       -------------        -------------

CASH USED IN INVESTING ACTIVITIES
   Acquisition of property and equipment                             (2,513)                 --             (408,548)
   Acquisition of license and related development fee              (965,000)            (17,303)            (965,000)
                                                               -------------       -------------        -------------

       NET CASH USED IN INVESTING ACTIVITIES                       (967,513)            (17,303)          (1,373,548)
                                                               -------------       -------------        -------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of common stock                         1,978,925           5,058,133           10,554,920
   Offering costs related to stock issuances                       (241,518)                 --             (241,518)
   Proceeds from notes payable                                      500,000                  --            1,256,866
   Repayment of note payable                                             --            (500,000)            (500,000)
   Proceeds from exercise of warrants                               728,000                  --              993,000
   Proceeds from convertible notes payable                        1,507,750                  --            2,134,500
   Purchase of treasury stock                                       (82,000)                 --              (93,750)
                                                               -------------       -------------        -------------

       NET CASH PROVIDED BY FINANCING
          ACTIVITIES                                              4,391,157           4,558,133           14,104,038
                                                               -------------       -------------        -------------

NET (DECREASE) INCREASE IN CASH                                    (217,706)             64,540               14,224

CASH AND CASH EQUIVALENTS - BEGINNING                               294,802             189,234               62,872
                                                               -------------       -------------        -------------

CASH AND CASH EQUIVALENTS - ENDING                             $     77,096        $    253,774         $     77,096
                                                               =============       =============        =============

See notes to condensed consolidated financial statements.

                                                           7
</TABLE>
<PAGE>

<TABLE>
                                         NEW VISUAL CORPORATION AND SUBSIDIARIES
                                (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

                                     CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       (UNAUDITED)

                                     FOR THE NINE MONTHS ENDED JULY 31, 2002 AND 2001
                                  AND THE PERIOD FROM NOVEMBER 1, 1999 TO JULY 31, 2002
<CAPTION>

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

                                                                      For the Nine Months Ended
                                                                               July 31,                For the Period from
                                                                  ---------------------------------    November 1, 1999 to
                                                                       2002                2001           July 31, 2002
                                                                  --------------      --------------      --------------
<S>                                                               <C>                 <C>                 <C>
Cash paid during the period for:
   Interest                                                       $          --       $          --       $         526
                                                                  ==============      ==============      ==============

   Income taxes                                                   $          --       $          --       $          --
                                                                  ==============      ==============      ==============

NON-CASH INVESTING AND FINANCING ACTIVITIES:

   Principal and interest on convertible notes satisfied by
       issuance of common stock                                   $   2,039,625       $          --       $   2,039,625
                                                                  ==============      ==============      ==============

   Issuance of  3,192 shares of series B preferred stock
       and 624,480 shares of common stock for the
       acquisition of license                                     $   3,942,000       $          --       $   3,942,000
                                                                  ==============      ==============      ==============

See notes to condensed consolidated financial statements.

                                                            8
</TABLE>
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 1 -          PRINCIPLES OF CONSOLIDATION AND BUSINESS AND CONTINUED
                  OPERATIONS

                  PRINCIPLES OF CONSOLIDATION

                  The condensed consolidated financial statements include the
                  accounts of New Visual Corporation and its wholly-owned
                  operating subsidiaries, NV Entertainment, Inc., 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.

                  BUSINESS AND CONTINUED OPERATIONS

                  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 Technology,
                  Inc., a development stage, California-based, technology
                  company, which now operates as the Company's wholly-owned
                  subsidiary, NV Technology, Inc., a Delaware corporation. As a
                  result of the change in business focus, the Company became a
                  development stage entity commencing November 1, 1999. The
                  Company also produces and distributes 2-D and 3-D filmed
                  entertainment.

                  The accompanying condensed 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 nine months ended July 31, 2002, the Company
                  incurred a net loss of $7,371,945 and, as of July 31, 2002,
                  had a working capital deficiency of $4,093,516. 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 to allow it to expand its planned
                  operations. These factors raise substantial doubt about the
                  Company's ability to continue as a going concern.

                  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 business is dependent on future revenues from
                  the Company's current joint venture production agreement to
                  produce a feature-length film for theatrical distribution.

                                       9
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


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

                  BUSINESS AND CONTINUED OPERATIONS (CONTINUED)

                  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.

                  Until the commencement of sales from either segment, the
                  Company will have no operating revenues, but will continue to
                  incur substantial operating expenses, capitalized costs and
                  operating losses.

                  Management's business plan will require additional financing.
                  To support its operations during the nine months ended July
                  31, 2002, the Company borrowed $2,007,750 from various trusts
                  and individuals and issued convertible promissory notes.

                  During the nine months ended July 31, 2002, the Company
                  received $1,978,925 from the sale of 5,853,675 shares of its
                  common stock and $728,000 from the exercise of 2,912,000
                  warrants. The Company is exploring other financing
                  alternatives, including private placements and public
                  offerings.

                  The Company's ability to continue as a going concern is
                  dependent upon obtaining additional financing. These
                  consolidated 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.

                  The accompanying unaudited condensed consolidated financial
                  statements have been prepared in accordance with generally
                  accepted accounting principles for interim financial
                  information and with the instructions to Form 10-Q and Article
                  10 of Regulation S-X. Accordingly, they do not include all of
                  the information and footnotes required by generally accepted
                  accounting principles for complete financial statements. In
                  the opinion of management, all adjustments (consisting of
                  normal recurring accruals) considered necessary for a fair
                  presentation, have been included. Operating results for the
                  nine-month period ended July 31, 2002 are not necessarily
                  indicative of the results that may be expected for the year
                  ending October 31, 2002.

                  The condensed consolidated balance sheet at October 31, 2001
                  has been derived from the audited consolidated financial
                  statements at that date, but does not include all of the
                  information and footnotes required by generally accepted
                  accounting principles for complete financial statements.

                                       10
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


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

                  BUSINESS AND CONTINUED OPERATIONS (CONTINUED)

                  For further information, refer to the consolidated financial
                  statements and footnotes thereto included in the Company's
                  Annual Report on Form 10-K for the year ended October 31,
                  2001.

NOTE 2 -          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  USE OF ESTIMATES

                  The preparation of financial statements in conformity 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 and disclosure of contingent assets and
                  liabilities at the date of the financial statements and the
                  reported amounts of revenues and expenses during the reporting
                  period. Actual results could differ from those estimates.

                  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.

                  LOSS PER SHARE

                  Basic earnings per share is computed by dividing net income
                  available to common stockholders by the weighted average
                  number of common shares outstanding during the period. Diluted
                  earnings per share gives effect to all dilutive potential
                  common shares outstanding during a period. No effect has been
                  given to outstanding options, warrants or convertible notes in
                  the diluted computation, as their effect would be
                  antidilutive.

                  STOCK-BASED COMPENSATION

                  As permitted by Statement of Financial Accounting Standards
                  (`SFAS') No. 123, "Accounting for Stock-Based Compensation,"
                  the Company accounts for its stock-based compensation
                  arrangements pursuant to APB Opinion No. 25, "Accounting for
                  Stock Issued to Employees." In accordance with the provisions
                  of SFAS No. 123, the Company discloses the pro forma effects
                  of accounting for these arrangements using the Black-Scholes
                  option pricing model to determine fair value.

                                       11
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 2 -          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  IMPAIRMENT OF LONG-LIVED ASSETS

                  The Company reviews long-lived assets and certain identifiable
                  intangibles for impairment whenever events or changes in
                  circumstances indicate that the total amount of an asset may
                  not be recoverable. An impairment loss is recognized when
                  estimated future cash flows expected to result from the use of
                  the asset and its eventual disposition are less than its
                  carrying amount.

                  SEGMENT REPORTING

                  Effective January 1, 1998, the Company adopted the provisions
                  of SFAS No. 131, "Disclosures About Segments of an Enterprise
                  and Related Information." SFAS No. 131 establishes standards
                  for the way public enterprises report information about
                  operating segments in annual financial statements and requires
                  those enterprises to report selected information about
                  operating segments in interim financial reports issued to
                  stockholders.

                  RECLASSIFICATIONS

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

                  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

                  In April 2002, the Financial Accounting Standards Board
                  ("FASB") issued SFAS No. 145, "Rescission of FASB Statement
                  No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
                  Technical Corrections". SFAS No. 145 requires that gains and
                  losses from extinguishment of debt be classified as
                  extraordinary items only if they meet the criteria in
                  Accounting Principles Board Opinion No. 30 ("Opinion No. 30").
                  Applying the provisions of Opinion No. 30 will distinguish
                  transactions that are part of an entity's recurring operations
                  from those that are unusual and infrequent that meet the
                  criteria for classification as an extraordinary item. The
                  Company is required to adopt SFAS No. 145 no later than the
                  first quarter of fiscal 2003, although early adoption is
                  allowed. The Company has not yet evaluated the impact from
                  SFAS No. 145 on its financial position and results of
                  operations.

                                       12
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  2 -         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

                  In June 2002, the FASB issued SFAS No. 146, "Accounting for
                  Costs Associated with Exit or Disposal Activities." SFAS No.
                  146 addresses financial accounting and reporting for costs
                  associated with exit or disposal activities and nullified
                  Emerging Issues Task Force Issue No. 94-3, "Liability
                  Recognition for Certain Employee Termination Benefits and
                  Other Costs to Exit an Activity (including certain costs
                  incurred in a restructuring."" SFAS No. 146 requires that a
                  liability for a cost associated with an exit or disposal
                  activity be recognized when the liability is incurred. These
                  costs include lease, costs to consolidate facilities or
                  relocate employees, and certain termination benefits provided
                  to employees that are involuntarily terminated under the terms
                  of a one-time benefit arrangement. A fundamental conclusion
                  reached by the FASB in this statement is that an entity's
                  commitment to a plan, by itself, does not create a present
                  obligation to others that meets the definition of a liability.
                  SFAS No. 146 also establishes that fair value is the objective
                  for initial measurement of the liability. The provisions of
                  this statement are effective for exit or disposal activities
                  that are initiated after December 31, 2002, with early
                  application encouraged. The Company has not yet determined the
                  impact of SFAS No. 146 on its financial position and results
                  of operations.

NOTE  3 -         NOTES RECEIVABLE FROM RELATED PARTY

                  On September 6, 2001, the Company converted advances made to
                  an officer in the amount of $99,656 into a promissory note,
                  which is payable on demand and bears an interest rate of 7.0%
                  per annum.

                  On January 1, 2002, the Company converted advances made to an
                  officer in the amount of $67,631 into a promissory note, which
                  is payable on demand and bears an interest rate of 7.0% per
                  annum.

                  As of July 31, 2002, the outstanding amount from the above
                  notes was $176,332, of which $9,045 represented accrued
                  interest.

                                       13
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 4 -          PROPERTY AND EQUIPMENT, NET

                  Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                  At July 31,      At October 31,
                                                                     2002               2001
                                                               ----------------   ----------------
<S>                                                            <C>                <C>
                          Furniture and fixtures               $        54,097    $        51,584
                          Camera equipment                             540,169            544,664
                          Office equipment                             109,430            109,460
                                                               ----------------   ----------------
                                                                       703,696            705,708
                          Less:  Accumulated depreciation              481,820            420,812
                                                               ----------------   ----------------

                                 Total                         $       221,876    $       284,896
                                                               ================   ================
</TABLE>

                  For the nine months ended July 31, 2002 and 2001, depreciation
                  expense was $61,937 and $97,842, respectively.

NOTE 5 -          DEVELOPMENT AND LICENSE 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 additional 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. Through July 31, 2002, $844,000 of this development
                  fee remained to be paid.

                                       14
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 5 -          DEVELOPMENT AND LICENSE AGREEMENT (CONTINUED)

                  The Company capitalized the consideration issued in connection
                  with the license fee and development fee totalling $5,751,000.
                  The Company is in the process of selecting a firm to complete
                  a valuation of such license and development agreement.

NOTE 6 -          ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                  Accounts payable and accrued expenses consist of the
                  following:

<TABLE>
<CAPTION>
                                                        At July 31,       At October 31,
                                                           2002                2001
                                                     ----------------    ---------------
<S>                                                  <C>                 <C>
                            Accrued bonuses          $       340,955     $           --
                            Professional fees                509,403            606,807
                            Interest payable                 590,268            356,601
                            Consulting fees                   71,855            204,192
                            Miscellaneous                    531,008            267,424
                                                     ----------------    ---------------

                                                     $     2,043,489     $    1,435,024
                                                     ================    ===============
</TABLE>

NOTE 7 -          CONVERTIBLE NOTES PAYABLE AND LOAN PAYABLE

                  During 2001 and 2002, the Company entered into several
                  convertible promissory note agreements with various trusts and
                  individuals, totalling $2,134,500. 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, which
                  is currently in production. 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 a conversion price
                  ranging from $.40 to $1.00. During the nine months ended July
                  31, 2002, principal and unpaid interest on eighteen
                  convertible promissory notes, totalling $2,039,625, of which
                  $679,875 represented accrued interest, were converted into
                  4,241,697 shares of the Company's common stock. The remaining
                  principal balance was $763,000 at July 31, 2002.

                  Several of the above convertible note agreements, that were
                  entered into during the nine months ended July 31, 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 $765,719 and
                  such amount was charged to financing costs during the nine
                  months ended July 31, 2002.

                  On July 17, 2002, the Company entered into a promissory note
                  agreement with an individual totalling $500,000. The Company
                  agreed to pay the principal and interest at 10% per annum on
                  November 1, 2002.

                                       15
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 8 -          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 Series B Preferred Stock, par value $.01 per share,
                  with a liquidation preference of $1,000 per share.

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

                  (i)      Closing of a 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.

                                       16
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 8 -          REDEEMABLE SERIES B PREFERRED STOCK (CONTINUED)

                  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 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 a development and license
                  agreement discussed in Note 5. As of July 31, 2002, there were
                  4,000 authorized shares Series B Preferred Stock and 3,192
                  issued and outstanding. Based on the redemption term, the
                  Series B Preferred Stock is not included in stockholders'
                  equity.

NOTE 9 -          STOCKHOLDERS' EQUITY

                  SIGNIFICANT COMMON STOCK ISSUANCES DURING THE NINE MONTHS
                  ENDED JULY 31, 2002

                  In February 2002, the Company issued an aggregate of 1,261,946
                  restricted 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.

                  On February 25, 2002, the Company issued a restricted stock
                  award of 500,000 shares of common stock to an executive
                  officer in consideration of his services to the Company. The
                  restricted stock award was granted pursuant to the Company's
                  2000 Plan. The executive officer purchased the shares for
                  $.001 per share, which are subject to a risk of forfeiture
                  until they vest. The executive officer will not receive
                  possession of the certificates representing the shares, and
                  may not sell any of the shares until such shares vest, which
                  will occur quarterly, 125,000 shares per quarter, beginning
                  April 30, 2002. The Company has the right, pursuant to the
                  terms of the restricted stock award, to repurchase any
                  unvested shares issued pursuant to the award for $.002 per
                  share in the event the executive officer is terminated, or if
                  there is a change of control of the Company. The compensatory
                  value recognized during the nine months ended July 31, 2002
                  was $125,000.

                  On February 25, 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 $178,238.

                                       17
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 9 -          STOCKHOLDERS' EQUITY (CONTINUED)

                  SIGNIFICANT COMMON STOCK ISSUANCES DURING THE NINE MONTHS
                  ENDED JULY 31, 2002 (CONTINUED)

                  During the nine months ended July 31, 2002, the Company issued
                  1,615,750 shares of its common stock as consideration for
                  consulting services performed by various consultants at prices
                  ranging from $.40 to $1.24 per share, totalling $970,678.

                  During the nine months ended July 31, 2002, the Company issued
                  5,853,675 shares of restricted common stock to investors for
                  cash proceeds of $1,874,925.


                  STOCK OPTION PLANS

                  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
                  non-statutory 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.

                  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.

                  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. The options vest in
                  four equal quarterly installments starting April 30, 2002.
                  These options also expire on February 25, 2012.

                                       18
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 9 -          STOCKHOLDERS' EQUITY (CONTINUED)

                  STOCK OPTION PLANS (CONTINUED)

                  On February 25, 2002, the Company granted its new 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 25, 2002, the Company granted an advisory board
                  member options under the Company's 2000 Omnibus Securities
                  Plan to purchase 40,000 shares of its common stock at $.42.
                  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, or $12,000.

                  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 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 expire on March 22, 2012.

                  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.

                  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 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.

                                       19
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 9 -          STOCKHOLDERS' EQUITY (CONTINUED)

                  STOCK OPTIONS

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

<TABLE>
<CAPTION>
                                                                          Weighted                          Weighted
                                                         In the Plan       Average     Outside the Plan     Average
                                                       Stock Options   Exercise Price    Stock Options   Exercise Price
                                                       -------------   --------------    -------------   --------------
<S>                                                       <C>            <C>               <C>              <C>
                  Outstanding - November 1, 2001            512,250      $   3.92          1,938,750        $   3.96

                  Options granted - 11/01 - 07/31/02:
                     In the Plans                         1,707,500           .58                 --              --
                  Options granted - 11/01 - 07/31/02:
                     Outside the Plans                           --            --          2,425,000             .83
                  Options expired/cancelled:
                     In the Plans                           (28,500)         3.92                 --              --
                     Outside the Plans                           --            --           (120,000)           4.86
                                                        ------------     ---------        -----------       ---------

                  Outstanding - July 31, 2002             2,191,250      $   1.32          4,243,750        $   2.15
                                                        ============     =========        ===========       =========

                  Exercisable at July 31:
                     2002                                 1,054,375      $   1.41          2,232,396        $   2.90
                     2003                                 1,875,188      $   1.25          3,335,416        $   2.45
                     2004                                 2,003,750      $   1.36          3,868,750        $   2.25
                     2005                                 2,191,250      $   1.32          4,243,750        $   2.15
</TABLE>

                  The exercise price for options outstanding as of July 31, 2002
                  ranged from $.39 to $4.40.

                  Had the Company elected to recognize compensation cost based
                  on the fair value of the options at the date of grant, as
                  prescribed by Statement of Financial Accounting Standards No.
                  123, "Accounting for Stock-Based Compensation," net loss as of
                  July 31, 2002 would have been $10,707,173, or $0.27 per share.

                  EXPIRED OPTIONS

                  In November 2001, an aggregate of 78,500 options to purchase
                  the Company's common stock held by four former employees of NV
                  Technology, Inc. were terminated. Under the terms of the
                  option agreements with these employees, the options terminated
                  three months after the employees were terminated.

                  In January 2002, the Company cancelled its employment
                  agreement with an Executive Vice President, which in turn
                  cancelled 70,000 unvested options.

                                       20
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 9 -          STOCKHOLDERS' EQUITY (CONTINUED)

                  WARRANTS

                  At July 31, 2002, the Company had outstanding warrants to
                  purchase shares of common stock as follows:

<TABLE>
<CAPTION>
                                                  Number of       Exercise        Expiration
                            Grant Date             Shares           Price            Date
                           ------------         ------------    ------------     ------------
<S>                     <C>                       <C>           <C>              <C>
                        June 7, 2000                 50,000     $       7.00     June 7, 2003
                        June 7, 2000                 50,000             8.50     June 7, 2003
                        June 7, 2000                 50,000            10.00     June 7, 2003
                        June 7, 2000                 50,000            11.50     June 7, 2003
                        November 17, 2000         1,000,000             6.00     November 17, 2003
                        November 17, 2000            88,000    Lesser of $6.00   November 17, 2003
                                                                  or 50% of
                                                                market ($.72
                                                                at 07/31/02)
                        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 14, 2006
                        June 14, 2001                25,000             5.00     June 14, 2006
                        June 14, 2001                25,000            10.00     June 14, 2006
                        November 5, 2001            200,000              .51     November 5, 2005

                        February 11, 2002            50,000              .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
                        July 30, 2002             1,000,000              .75     July 30, 2007
                                                ------------     ------------

                                                  3,042,943     $0.20-$11.50     June 7, 2003 - July 30, 2007
                                                ============     ============

                        Exercisable at
                          July 31, 2002           3,042,943
                                                ============
</TABLE>

                  WARRANTS EXERCISED

                  During the nine months ended July 31, 2002, 2,912,000 warrants
                  were exercised at $.25 per share, totaling $728,000.

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

                                       21
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 10 -         COMMITMENTS AND CONTINGENCIES

                  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, or $66,000.

                  On February 11, 2002, the Company granted a company warrants
                  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 $.047, or $46,737.

                  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:

<TABLE>
<CAPTION>
<S>                                                                           <C>
                         Warrants to purchase common stock                    3,042,943
                         Options to purchase common stock                     6,435,000
                         Convertible notes payable and accrued interest       2,332,167
                         Series B Preferred stock                             4,161,700
                                                                            ------------

                         Total as of July 31, 2002                           15,971,810
                                                                            ============
</TABLE>

                  NEW EMPLOYMENT AGREEMENTS

                  On January 1, 2002, the Company entered into a new one-year
                  employment agreement with an Executive Vice President,
                  replacing the Executive Vice President's former employment
                  agreement. Under the terms of the new agreement, the Executive
                  Vice President receives a base salary of $10,417 per month. In
                  addition, the employment agreement provides that the Executive
                  Vice President will receive an annual bonus that will be
                  applied to two promissory notes he made in favor of the
                  Company. The Executive Vice President owed $100,708 under the
                  first promissory note at October 31, 2001. The second note was
                  issued to the Company on January 1, 2002 for $67,631. All
                  options granted and vested to the Executive Vice President
                  under the former agreement were retained (140,000 options) and
                  all unvested options granted under the former agreement were
                  cancelled.

                                       22
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 10 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  NEW EMPLOYMENT AGREEMENTS (CONTINUED)

                  On February 25, 2002, the Company entered into a one year
                  employment agreement with its Vice President and Secretary.
                  The agreement provides for the Company to pay a base salary of
                  $13,383.33 per month. The employee may receive an annual bonus
                  to be determined at the sole discretion of the Board of
                  Directors.

                  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. In addition, 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.

                  On March 22, 2002, the Company entered into a three-year
                  employment agreement with its current 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
                  expire on March 22, 2012.

                  On July 1, 2002, the Company entered into a three-year
                  employment agreement with its Chief Marketing Officer, Brad
                  Ketch. Pursuant to the agreement, the Company will pay Mr.
                  Ketch a base salary at the rate 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.

                                       23
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 10 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  CONSULTING AGREEMENT

                  On February 11, 2002, the Company entered into a one-year
                  consulting agreement for financial communications services,
                  pursuant to which the Company agreed to pay the consultant
                  $10,000 in cash per month. The consulting agreement provides
                  that the Company may terminate the consulting services at any
                  time following 90 consecutive days of representation by the
                  consultant. Pursuant to the agreement, the Company granted the
                  consultant warrants to purchase 300,000 shares of its common
                  stock at exercise prices ranging from $.75 to $2.25. All of
                  the warrants are exercisable immediately, hold piggy-back
                  registration rights and expire two years from the grant date.
                  The fair value of stock options estimated on the date of grant
                  using the Black-Scholes option pricing model is $4,500.

                  On March 22, 2002, the Company entered into a consulting
                  agreement with an individual for advisory services relating to
                  the Company's technology for transmitting high speed data over
                  extended ranges of copper telephone wire. The Company agrees
                  to pay the consultant $15,000 per month and options to
                  purchase 50,000 shares of its common stock at an exercise
                  price of $1.02. All of the options are exercisable 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 is $1.16, or $58,000.

                  On July 17, 2002, the Company entered into a one-year
                  consulting agreement with an individual for consulting,
                  advisory and related services. The Company agreed to pay the
                  consultant a one-time payment of $250,000 in the event the
                  Company receives gross revenue in the amount of at least
                  $2,250,000 from the distribution of the Company's motion
                  picture.

                  On July 30, 2002, the Company entered into a five-month
                  consulting agreement with a consulting company for consulting
                  and advisory services in connection with strategic business
                  planning. The Company agreed to issue 350,000 restricted
                  shares of the Company's common stock and warrants to purchase
                  an aggregate of 1,000,000 shares of the Company's common stock
                  at an exercise price of $.75 per share. All of the warrants
                  are exercisable immediately and expire five years from the
                  grant date. The fair value of warrants estimated on the date
                  of grant using the Black-Scholes option pricing model is
                  $46,737.

                                       24
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 10 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  ROYALTY PAYMENTS

                  The Company's projects under development stipulate royalty
                  payments that are based on percentages of revenue.

                  JOINT VENTURE PRODUCTION AGREEMENT

                  In April 2000, the Company entered into a joint venture
                  production agreement to produce a feature length film for
                  theatrical distribution. The Company will provide the funding
                  for the production in the amount of $2,250,000 and, in
                  exchange, will receive 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. The
                  Company's management currently expects to receive revenue from
                  the film in three categories. These categories are upfront
                  distribution licenses, product or title sponsorships, and, of
                  course, box-office ticket sales. Initial revenues are expected
                  late in calendar 2002 or early 2003. The Company has agreed to
                  deposit into a separate account, on a monthly basis, funds to
                  assure a minimum balance of $200,000 at the beginning of each
                  month, until the total of $2,250,000 has been deposited into
                  the account. As of July 31, 2002, the Company has funded
                  approximately $1,980,000 of production and other costs, which
                  was included in projects under development in the accompanying
                  consolidated balance sheet. In addition, approximately
                  $266,000 was funded to purchase camera equipment.

                                       25
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 10 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  LEGAL PROCEEDINGS AND SETTLEMENT

                  On February 4, 2002, a lawsuit was filed against the Company
                  by Creditors Adjustment Bureau, Inc., a California
                  corporation, who was allegedly assigned rights to any
                  judgement collected on amounts allegedly owed to Arter &
                  Hadden, LLP, the Company's former legal counsel. The plaintiff
                  seeks damages in the amount of $110,559.86, plus 10% interest,
                  costs of the suit and reasonable attorney's fees. The Company
                  does not believe the resolution of this matter will have a
                  material adverse effect on the Company's financial position or
                  results of operation.

                  Subsequent to July 31, 2002, the Company reached an agreement
                  to settle the above lawsuit. The Company agreed to pay
                  Creditors Adjustment Bureau, Inc. an aggregate of $80,000 in
                  eight monthly installments beginning in October 2002, or an
                  aggregate of $70,000 if the Company pays the entire amount due
                  on or before December 31, 2002.

                  On June 28, 2002, the Company entered into a settlement
                  agreement and mutual release in certain litigation filed by
                  Allan Blevins and Michael Shepperd, former officers of the
                  Company. Under the terms of settlement, Blevins and Shepperd
                  will return to the Company 2.2 million shares of its common
                  stock, which will then be cancelled by the Company. The
                  parties agreed that a total of 500,000 shares of the Company's
                  common stock would be purchased from Blevins and Shepperd for
                  $375,000 ($.75 per share), payable in four equal installments
                  of $93,750, due on August 1, September 15, November 1 and
                  December 15, 2002. The Company retained the right to purchase
                  the 500,000 shares or to assign such right to a third party.
                  The Company also agreed to pay the attorney for Blevins and
                  Shepperd $75,000 in four equal installments payable on August
                  1, September 15, November 1 and December 15, 2002. The Company
                  has entered into an agreement with an entity to purchase at
                  least $293,000 of the shares to be purchased from Blevins and
                  Shepperd. Accordinagly, the accompanying financial statements
                  reflect the Company's remaining obligation to purchase 109,333
                  shares of stock from Blevins and Shepperd for $82,000. The
                  legal fees have been accrued in full at July 31, 2002 and the
                  accounting for the stock transaction will be determined at the
                  time of settlement

                  Blevins and Shepperd will continue to hold a total of 300,000
                  shares of the Company's common stock issued at the time of a
                  February 2000 merger. They have contractually agreed that
                  these shares will be subject to a lockup and will only become
                  available for public sale at specified dates and amounts
                  between now and January 2004.

                                       26
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE 10 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  On August 2, 2002, a lawsuit was filed in California Superior
                  Court in Santa Clara County against New Visual Corporation and
                  NV Technology, by Brad Lundahl (d/b/a Lundahl Engineering)
                  alleging that the Company breached a contract for consulting
                  services it entered into with Mr. Lundahl in July 2000, by
                  failing to pay Mr. Lundahl for his services as provided under
                  the agreement. The lawsuit sought to compel arbitration based
                  upon a provision mandating arbitration contained in the
                  contract in question. The Company has agreed to arbitrate and
                  intends to vigorously dispute whether any amount is due to Mr.
                  Lundahl. The amount in controversy is not stipulated in the
                  lawsuit, but is believed to be approximately $40,000. The
                  Company does not believe that the resolution of this matter
                  will have a material adverse effect on the Company's financial
                  condition or results of operations.

NOTE 11 -         SEGMENT INFORMATION

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

<TABLE>
<CAPTION>
                  For the Nine Months Ended July 31, 2002:

                                              Telecommunication  Entertainment   Unallocable
                                                   Business         Business       Expenses          Totals
                                                ------------     ------------    ------------     ------------
<S>                                             <C>              <C>             <C>              <C>
                  Net Sales                     $        --      $        --     $        --      $        --

                  Operating Loss                $(1,400,019)     $        --     $(4,105,900)     $(5,505,919)

                  Depreciation and
                    Amortization                $   872,202      $    11,250     $    39,525      $   922,977

                  Interest Expense              $        --      $ 1,004,986     $        --      $ 1,004,986

                  Total Identifiable Assets     $ 5,856,372      $ 2,197,076     $   293,736      $ 8,347,184


                  For the Nine Months Ended July 31, 2001:

                                              Telecommunication  Entertainment   Unallocable
                                                   Business         Business       Expenses          Totals
                                                ------------     ------------    ------------     ------------

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

                  Operating Loss                $(1,190,348)     $        --     $(6,073,429)     $(7,263,777)

                  Depreciation and
                    Amortization                $   760,526      $    12,190     $    74,406      $   847,842

                  Interest Expense              $        --      $    27,179     $        --      $    27,179

                  Total Identifiable Assets     $    95,390      $ 1,590,651     $   676,549      $ 2,362,590
</TABLE>

NOTE 12 -         SUBSEQUENT EVENTS

                  On September 4, 2002, a total of 225,000 shares of the
                  Company's common stock was sold for gross proceeds of
                  $150,000.

                                       27
<PAGE>

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following is a discussion and analysis of our results of operations
and should be read in conjunction with the financial statements and related
notes contained in this Form 10-Q.

RESULTS OF OPERATIONS

COMPARISON OF THE NINE MONTHS ENDED JULY 31, 2002 AND 2001.

         REVENUES. We are a development-stage company. There were no revenues
for the nine months ended July 31, 2002 or the nine months ended July 31, 2001.

         OPERATING EXPENSES. Operating expenses included the compensatory
element of stock issuances, research and development expenses, the costs of a
litigation settlement and selling, general and administrative expenses. Total
operating expenses decreased to approximately $5,506,000 for the nine months
ended July 31, 2002, from approximately $7,264,000 for the nine months ended
July 31, 2001. The larger expense in 2001 resulted primarily from a $1,000,000
charge relating to stock issued in a litigation settlement during the nine
months ended July 31, 2001. The Company issued 250,000 shares of common stock
valued at $1,000,000 in a February 2001 settlement with Astounding.com, Inc. and
Jack Robinson 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 nine months ended July 31, 2002. Also, the issuance of
common stock for consulting services declined from approximately $2,410,000 for
the nine months ended July 31, 2001 to approximately $1,601,000 for the nine
months ended July 31, 2002. Selling, general and administrative expenses
amounted to approximately $2,505,000 and $2,663,000 for the nine-month periods
ended July 31, 2002 and July 31, 2001, respectively. The decreases in operating
expenses were offset by an increase in research and development expenses from
approximately $1,190,000 for the nine months ended July 31, 2001 to
approximately $1,400,000 for the nine months ended July 31, 2002.

         OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses increased to
approximately $1,866,000 for the nine months ended July 31, 2002 from
approximately $777,000 for the nine months ended July 31, 2001. The increase was
primarily due to an increase in interest expense of approximately $900,000
resulting from the interest component of convertible notes payable issued during
the nine months ended July 31, 2002. In addition, several of these convertible
notes were convertible into common stock at a conversion rate lower than the
market price at the time of issuance of the notes. As a result, there was an
additional charge to amortization of unearned financing costs of approximately
$766,000. The increases in these expenses were offset by a reduction in the
costs of amortization of unearned financing costs of approximately $508,000 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. Our net loss was approximately $7,372,000, or $0.19 per
common share, for the nine months ended July 31, 2002, a decrease from our net
loss of approximately $8,041,000, or $0.32 per common share, for the same period
last year.

COMPARISON OF THE THREE MONTHS ENDED JULY 31, 2002 AND 2001.

         REVENUES. We are a development-stage company. There were no revenues
for the three months ended July 31, 2002 or the three months ended July 31,
2001.

                                       28
<PAGE>

         OPERATING EXPENSES. Operating expenses included the compensatory
element of stock issuances, research and development expenses and selling,
general and administrative expenses. Total operating expenses decreased to
approximately $1,389,000 for the three months ended July 31, 2002, from
approximately $4,395,000 for the three months ended July 31, 2001. The decrease
resulted primarily from a reduction in the issuance of common stock for
consulting services from approximately $2,410,000 for the three months ended
July 31, 2001 to approximately $139,000 for the three months ended July 31,
2002. Research and development expenses decreased by approximately $407,000 to
approximately $121,000 for the three-month period ended July 31, 2002 compared
to the prior year. This amount does not include $615,000 of development fees
paid to Adaptive Networks during this period, which are being capitalized.
Selling, general and administrative expenses decreased to approximately
$1,129,000 for the three months ended July 31, 2002 from approximately
$1,457,000 for the three months ended July 31, 2001.

         OTHER EXPENSES. Other expenses included amortization of unearned
financing costs and interest expense. Total other expenses increased to
approximately $893,000 for the three months ended July 31, 2002 from
approximately $259,000 for the three months ended July 31, 2001. The increase
was principally due to an increase in interest expense of approximately $454,000
resulting from the interest component of convertible notes payable issued during
the three months ended July 31, 2002. In addition, several of these convertible
notes were convertible into common stock at a conversion rate lower than the
market price at the time of issuance of the notes. As a result, there was an
additional charge to amortization of unearned financing costs of approximately
$404,000. The increases in these expenses were offset by a reduction in the
costs of amortization of unearned financing costs of approximately $169,000 in
connection with a long-term debt financing arrangement. During the year ended
October 31, 2001 we paid down long-term debt in connection with this financing
arrangement amounting to $500,000.

         NET LOSS. Our net loss was approximately $2,283,000, or $0.05 per
common share, for the three months ended July 31, 2002, a decrease from our net
loss of approximately $4,654,000, or $0.18 per common share, for the same period
last year.


LIQUIDITY AND CAPITAL RESOURCES.

         Net cash used in operating activities was approximately $3,641,000 and
$4,476,000 for the nine months ended July 31, 2002 and July 31, 2001,
respectively. Cash balances totaled approximately $295,000 as of October 31,
2001 and $77,000 as of July 31, 2002.

         Operations have been financed principally through sales of common
stock, the exercise of warrants to purchase common stock, loans, the issuance of
convertible notes payable and notes payable. Net proceeds from financing
activities amounted to approximately $4,391,000 for the nine months ended July
31, 2002, including sales of common stock of approximately $1,979,000, exercise
of warrants of approximately $728,000, the issuance of notes payable of
approximately $500,000 and the issuance of convertible notes payable of
approximately $1,508,000. Net proceeds from financing activities amounted to
approximately $4,558,000 for the nine months ended July 31, 2001. During the
nine-month period ended July 31, 2001 sales of common stock amounted to
approximately $5,058,000 and notes payable amounting to approximately $500,000
were repaid.

         Stock was issued in payment of expenses amounting to approximately
$1,601,000 and $2,410,000 for the nine-month periods ended July 31, 2002 and
July 31, 2001, respectively. Stock was issued in settlement of litigation in the
amount of $1,000,000 during the nine months ended July 31, 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 $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 July 31, 2002, we had funded approximately
$2,246,000 of the production costs towards this project, which included the
purchase of camera equipment of approximately $266,000.

                                       29
<PAGE>

         Research and development expenses totaled approximately $1,400,000 and
$1,190,000 for the nine months ended July 31, 2002 and the nine months ended
July 31, 2001, respectively. This amount does not include $715,000 of
development fees paid to Adaptive Networks during this period, which are being
capitalized.

         During the nine months ended July 31, 2002, we issued convertible notes
payable totaling approximately $1,508,000. 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. Because several of the notes were convertible into common stock at a
conversion rate lower than the market price at the time of issuance of the
notes, additional expense was recorded in the approximate amount of $766,000.
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. During
the three months ended July 31, 2002, four convertible notes were converted into
210,000 shares of our common stock, resulting in the cancellation of $189,000 in
principal and interest that would have been outstanding under the notes.

         In June 2000, we entered into five long-term credit facilities,
pursuant to which we borrowed $750,000. We repaid $500,000 of these borrowings
during fiscal 2001. The remaining principal and interest at 6% per year will be
due in June 2003.

         In April 2002, we entered into an agreement with Adaptive Networks,
Inc. for development services relating to our FPGA-based prototype. We agreed to
pay Adaptive an aggregate of $1,559,000 for these services. As of July 31, 2002,
the remaining balance due to Adaptive is $844,000.

         In April 2002, we issued 3,192 shares of Series B Preferred Stock to
Zaiq Technologies, Inc. in connection with our purchase of a receivable due to
Zaiq from Adaptive Networks, Inc. We then forgave the receivable as partial
payment for a worldwide, perpetual technology license from Adaptive. 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. All principal
and interest will be due in a lump sum on or before November 1, 2002.

         Management has observed over the last several months that 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, funding for our operations has become more
difficult to secure and more expensive than in prior periods. Management is
presently taking 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. Our management
team also agreed in August to temporarily defer a portion of executive salaries
in order to reduce monthly cash expenditures while the Company continues to
pursue additional financing. However, additional cash must be raised in order to
continue to meet liquidity needs and satisfy our proposed business plan.
Management is presently investigating potential financing transactions that it
believes can provide additional cash for operations and be profitable 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 our 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.

                                       30
<PAGE>

         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
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 approximately $10,555,000 through sales of common stock and $3,673,000
from borrowings from November 1, 1999 through July 31, 2002, 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.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

         There have been no material changes to the Company's market risk for
the nine months ended July 31, 2002. See the Company's Annual Report on Form
10-K for the fiscal year ended October 31, 2001 for additional discussions
regarding quantitative and qualitative disclosures about market risk.


                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

         On June 28, 2002, we settled a lawsuit pending in California Superior
Court brought by Allan L. Blevins and Michael Shepperd, in which New Visual
Corporation and Ray Willenberg, Jr., our Chairman and an executive officer, were
defendants. The lawsuit stemmed from a dispute regarding a February 2000 merger
agreement and three million shares of our common stock issued to Messrs. Blevins
and Shepperd under the merger agreement. Pursuant to the terms of the
settlement, Messrs. Blevins and Shepperd agreed to return 2.2 million of the 3
million shares to us. Upon receipt, the 2.2 million returned shares of our
common stock will be cancelled and cease to be outstanding. The Company or its
assignee will purchase from Messrs. Blevins and Shepperd a total of 500,000
shares of common stock for $375,000 ($0.75 per share). We also agreed to pay
$75,000 in attorneys' fees to Messrs. Blevins' and Shepperd's attorneys. These
purchases and payments are to occur in four equal installments in August,
September, November and December 2002.

         We have entered into an agreement with a company to assign our right
and obligation to purchase at least $293,000 of common stock from Messrs.
Blevins and Shepperd under the settlement agreement. Accordingly, the
accompanying financial statements reflect our remaining obligation to repurchase
109,333 shares of common stock from Messrs. Blevins and Shepperd for $82,000.

         Messrs. Blevins and Shepperd will continue to hold 300,000 shares of
our common stock acquired in the merger, which, pursuant to the terms of the
settlement, will be subject to a lockup arrangement and only become available
for public sale in installments between now and January 2004. The settlement
agreement also grants us a right of first refusal to purchase the shares held by
Messrs. Blevins and Shepperd as they become available for resale under the
lockup arrangement. Finally, we agreed to transfer certain assets related to the
merger agreement to Messrs. Blevins and Shepperd. We do not believe any of the
transferred assets are material to our financial condition, results of
operations, business or prospects.

         Subsequent to July 31, 2002, a lawsuit was filed in California Superior
Court in Santa Clara County against New Visual Corporation and NV Technology, by
Brad Lundahl (d/b/a Lundahl Engineering) alleging that we breached a contract
for consulting services entered into between us and Mr. Lundahl in July 2000, by
failing to pay Mr. Lundahl for his services as provided under the agreement. The
lawsuit sought to compel arbitration based upon a provision mandating
arbitration contained in the contract in question. We have agreed to arbitrate
this matter and intend to vigorously dispute whether any amount is due to Mr.
Lundahl. The amount in controversy is not stipulated in the lawsuit but is
believed to be approximately $40,000. We do not believe the resolution of this
matter will have a material adverse effect on our financial condition or results
of operations.

         Subsequent to July 31, 2002, we reached an agreement to settle a
lawsuit was filed against us in February 2002 by Creditors Adjustment Bureau,
Inc., a California corporation, who was allegedly assigned rights to any
judgement collected on amounts allegedly owed by us to Arter & Hadden, LLP, our
former legal counsel. The plaintiff sought damages in the amount of $110,559.86,
plus 10% interest, costs of the suit and reasonable attorney's fees. In the

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<PAGE>

settlement, we agreed to pay Creditors Adjustment Bureau, Inc. an aggregate of
$80,000 in eight monthly installments beginning in October 2002, or an aggregate
of $70,000 if we pay the entire amount due on or before December 31, 2002. We do
not believe the resolution of this matter will have a material adverse effect on
our financial condition or results of operations.


ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c)      During the three months ended July 31, 2002, the Company sold
         unregistered securities as follows:

         In  May 2002, we:
         o        issued 9,500 shares of common stock to one individual for
                  services rendered;
         o        issued 234,375 shares of common stock upon conversion of a
                  convertible note held by one investor, resulting in the
                  cancellation of $93,750 in principal and interest that would
                  have been outstanding under the note;
         o        sold 84,337 shares of common stock to one investor for total
                  proceeds of $70,000; and
         o        issued an aggregate of $450,000 principal amount of
                  convertible promissory notes to seven investors, which notes
                  are convertible into our common stock at a conversion price of
                  $1.00 per share.

         In June 2002, we:
         o        issued 105,000 shares of common stock upon conversion of two
                  promissory notes held by two investors, resulting in the
                  cancellation of $105,000 in principal and interest that would
                  have been outstanding under the notes; and
         o        issued an aggregate of $138,000 principal amount of
                  convertible notes to seven investors, which notes are
                  convertible into shares of our common stock at conversion
                  prices ranging from $.90 to $1.00 per share.

         In July 2002, we:
         o        issued 105,000 shares of common stock upon conversion of two
                  promissory notes held by two investors, resulting in the
                  cancellation of $81,000 in principal and interest that would
                  have been outstanding under the notes;
         o        sold 200,334 shares of common stock to four investors for
                  total proceeds of $120,200;
         o        issued a convertible promissory note with a principal amount
                  of $26,000 to one investor, which may be converted into shares
                  of our common stock at a conversion price of $.65 per share;
                  and
         o        issued 350,000 shares of common stock to a company in
                  consideration of consulting services.

         Following the quarter ended July 31, 2002, during August 2002, we:
         o        issued an aggregate of $35,000 principal amount of convertible
                  promissory notes to four investors, which may be converted
                  into shares of our common stock at exercise prices ranging
                  from $.70 to $.82 per share.

         In September 2002, we:
         o        issued 225,000 shares of common stock to one investor for
                  total proceeds of $150,000;
         o        issued an aggregate of $46,000 principal amount of convertible
                  promissory notes to two investors, which notes are convertible
                  into shares of our common stock at $.60 and $.65 per share;
                  and
         o        issued 9,869 shares of common stock upon conversion of a
                  convertible promissory note held by one investor, resulting in
                  the cancellation of $7,500 in principal and interest that
                  would have been outstanding under the note.

         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 such Securities Act. 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
and appropriate legends were affixed to the share certificates issued in such
transactions. The Company believes the recipients were all "accredited
investors" within the meaning of Rule 501(a) of Regulation D under the

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<PAGE>

Securities Act, or had such knowledge and experience in financial and business
matters as to be able to evaluate the merits and risks of an investment in its
common stock. All recipients had adequate access, through their relationships
with the Company and its officers and directors, to information about the
Company. None of the transactions described above involved general solicitation
or advertising.

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

         The Company submitted the following matters to a vote of its
shareholders at its annual meeting, which was held July 12, 2002.

         (a) The Company's shareholders were asked to vote for the election of
Ivan Berkowitz, Bruce Brown, Thomas J. Cooper, John Howell, Ray Willenberg, Jr.
and C. Rich Wilson III to the Board of Directors of the Company, to hold office
until the 2003 Annual Meeting of Shareholders. The nominees were all elected
pursuant to the following votes:

             ------------------------- ------------------- ---------------------
                                               For           Withheld Authority
             ------------------------- ------------------- ---------------------
             Ivan Berkowitz                32,403,675            4,590,897
             ------------------------- ------------------- ---------------------
             Bruce Brown                   33,129,026            3,865,546
             ------------------------- ------------------- ---------------------
             Thomas J. Cooper              35,150,499            1,844,073
             ------------------------- ------------------- ---------------------
             John Howell                   32,854,345            4,140,227
             ------------------------- ------------------- ---------------------
             Ray Willenberg, Jr.           32,479,031            4,515,541
             ------------------------- ------------------- ---------------------
             C. Rich Wilson III            32,747,847            4,246,725
             ------------------------- ------------------- ---------------------

         (b) The Company's shareholders were asked to ratify the Company's 2001
Stock Incentive Plan. The ratification of the 2001 Stock Incentive Plan was
approved with 15,629,017 votes cast for, 6,616,577 votes cast against, and
278,047 abstentions.

         (c) The Company's shareholders were asked to ratify the selection of
Grassi & Co., CPAs, P.C. as the Company's independent auditors for the fiscal
year ending October 31, 2002. The shareholders ratified the selection of the
independent auditors with 35,322,924 votes cast for, 1,684,245 votes cast
against, and 173,403 abstentions.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(a)      Exhibits:

         10.1     Convertible Promissory Note dated March 8, 2002 by New Visual
                  Corporation in favor of Tony Finn.

         10.2     Convertible Promissory Noted dated March 8, 2002 by New Visual
                  Corporation in favor of James Joseph Redmon.

         10.3     Convertible Promissory Note dated March 22, 2002, by New
                  Visual Corporation in favor of the M. Lucile Way Trust.

         10.4     Convertible Promissory Note dated March 22, 2002 by New Visual
                  Corporation in favor of D W Construction, Inc.

         10.5     Convertible Promissory Note dated April 5, 2002 by New Visual
                  Corporation in favor of D W Construction, Inc.

         10.6     Convertible Promissory Note dated May 21, 2002 by New Visual
                  Corporation in favor of John Marsden.

         10.7     Convertible Promissory Note dated May 21, 2002 by New Visual
                  Corporation in favor of Randy Arnett.

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<PAGE>

         10.8     Convertible Promissory Note dated May 30, 2002 by New Visual
                  Corporation in favor of the M. Lucile Way Trust.

         10.9     Convertible Promissory Note dated May 31, 2002 by New Visual
                  Corporation in favor of Robert E. Casey, Jr.

         10.10    Convertible Promissory Note dated June 12, 2002 by New Visual
                  Corporation in favor of Bonnie Davis.

         10.11    Employment Agreement dated July 1, 2002, by and between New
                  Visual Corporation and Brad Ketch.

         10.12    Stock Option Agreement dated July 1, 2002, by and between New
                  Visual Corporation and Brad Ketch.

         10.13    Consulting Agreement dated as of July 17, 2002, by and between
                  New Visual Corporation and Charles R. Cono.

         10.14    Promissory Note dated July 17, 2002, by New Visual Corporation
                  in favor of Charles R. Cono Trust, Charles R. Cono, TTEE.

         10.15    Consulting Agreement dated as of July 30, 2002, by and between
                  New Visual Corporation and Advisor Associates, Inc.

(b)      Reports on Form 8-K:

         o        Form 8-K dated July 12, 2002, was filed pursuant to Item 5
                  (Other Events and Regulation FD Disclosure).
         o        Form 8-K dated September 6, 2002, was filed pursuant to Item 4
                  (Changes in Registrant's Certifying Accountant).


                                   SIGNATURES

         Pursuant to the requirements 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.

                                       NEW VISUAL CORPORATION
                                       (Registrant)


Dated:   September 16, 2002            By:  /s/ THOMAS J. COOPER
                                           -------------------------------------
                                           THOMAS J. COOPER
                                           President and Chief Executive Officer
                                           (PRINCIPAL EXECUTIVE OFFICER)


Dated:   September 16, 2002            By:  /s/ THOMAS J. SWEENEY
                                           -------------------------------------
                                           THOMAS J. SWEENEY
                                           Chief Financial Officer
                                           (PRINCIPAL FINANCIAL OFFICER)

                                       34
<PAGE>

                                 CERTIFICATIONS

I, Thomas J. Cooper, Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of New Visual Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and

 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.


September 16, 2002                     /S/ THOMAS J. COOPER
                                       -----------------------------------------
                                       Thomas J. Cooper, Chief Executive Officer


I, Thomas J. Sweeney, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of New Visual Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report; and

 3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.


September 16, 2002                    /S/ THOMAS J. SWEENEY
                                      ------------------------------------------
                                      Thomas J. Sweeney, Chief Financial Officer

                                       35
<PAGE>

                                  EXHIBIT INDEX

10.1     Convertible Promissory Note dated March 8, 2002 by New Visual
         Corporation in favor of Tony Finn.

10.2     Convertible Promissory Noted dated March 8, 2002 by New Visual
         Corporation in favor of James Joseph Redmon.

10.3     Convertible Promissory Note dated March 22, 2002, by New Visual
         Corporation in favor of the M. Lucile Way Trust.

10.4     Convertible Promissory Note dated March 22, 2002 by New Visual
         Corporation in favor of D W Construction, Inc.

10.5     Convertible Promissory Note dated April 5, 2002 by New Visual
         Corporation in favor of D W Construction, Inc.

10.6     Convertible Promissory Note dated May 21, 2002 by New Visual
         Corporation in favor of John Marsden.

10.7     Convertible Promissory Note dated May 21, 2002 by New Visual
         Corporation in favor of Randy Arnett.

10.8     Convertible Promissory Note dated May 30, 2002 by New Visual
         Corporation in favor of the M. Lucile Way Trust.

10.9     Convertible Promissory Note dated May 31, 2002 by New Visual
         Corporation in favor of Robert E. Casey, Jr.

10.10    Convertible Promissory Note dated June 12, 2002 by New Visual
         Corporation in favor of Bonnie Davis.

10.11    Employment Agreement dated July 1, 2002, by and between New Visual
         Corporation and Brad Ketch.

10.12    Stock Option Agreement dated July 1, 2002, by and between New Visual
         Corporation and Brad Ketch.

10.13    Consulting Agreement dated as of July 17, 2002, by and between New
         Visual Corporation and Charles R. Cono.

10.14    Promissory Note dated July 17, 2002, by New Visual Corporation in favor
         of Charles R. Cono Trust, Charles R. Cono, TTEE.

10.15    Consulting Agreement dated as of July 30, 2002, by and between New
         Visual Corporation and Advisor Associates, Inc.