<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, 2001

                         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 13, 2001 was 28,044,129.

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

<PAGE>

                                TABLE OF CONTENTS

                                                                            PAGE
                         PART I - FINANCIAL INFORMATION

Item 1.  Financial Statements................................................. 1
Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations............................................37
Item 3.  Quantitative and Qualitative Disclosures About Market Risk...........39

                           PART II - OTHER INFORMATION

Item 2.  Changes in Securities and Use of Proceeds............................39
Item 4.  Submission of Matters to a Vote of Securities Holders................40
Item 6.  Exhibits and Reports on Form 8-K ....................................40
Signatures....................................................................41

<PAGE>
<TABLE>

                         PART I - FINANCIAL INFORMATION.
      ITEM 1.  FINANCIAL STATEMENTS.

                                  NEW VISUAL CORPORATION AND SUBSIDIARIES
                        (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                         (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                        CONSOLIDATED BALANCE SHEETS
<CAPTION>

                                                  ASSETS
                                                  ------

                                                                         October 31,         July 31,
                                                                            2000               2001
                                                                        -------------      -------------
                                                                                            (Unaudited)
<S>                                                                     <C>                <C>
Current Assets:
  Cash                                                                  $    189,234       $    253,774
  Receivable from related parties                                             27,563            127,761
  Other current assets                                                        30,227             67,023
                                                                        -------------      -------------

      Total Current Assets                                                   247,024            448,558

Property and equipment - net of accumulated depreciation                     393,787            313,248
Other assets                                                                 117,200            138,133
Film and video library                                                        35,944                  -
Projects under development                                                   638,707          1,462,651
                                                                        -------------      -------------

     Total Assets                                                       $  1,432,662       $  2,362,590
                                                                        =============      =============

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

Current Liabilities:
  Accounts payable and accrued expenses                                 $    446,921       $    699,479
                                                                        -------------      -------------

     Total Current Liabilities                                               446,921            699,479
                                                                        -------------      -------------

Long-term debt                                                               756,886            256,886
                                                                        -------------      -------------

     Total Liabilities                                                     1,203,807            956,365
                                                                        -------------      -------------

Commitments, Contingencies and Other Matters
   (Notes 2, 6, 7, 8 and 9)

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; 24,072,455 and 27,107,331 shares issued and
     outstanding at October 31, 2000 and July 31, 2001, respectively          24,072             27,107
  Additional paid-in capital                                              27,813,465         36,278,756
  Unearned financing fees                                                 (2,583,333)        (1,833,333)
  Accumulated deficit at October 31, 1999                                (12,300,033)       (12,300,033)
  Deficit accumulated during the development stage                       (12,725,316)       (20,766,272)
                                                                        -------------      -------------

     Total Stockholders' Equity                                              228,855          1,406,225
                                                                        -------------      -------------

     Total Liabilities and Stockholders' Equity                         $  1,432,662       $  2,362,590
                                                                        =============      =============
</TABLE>

See notes to consolidated financial statements.

                                       1
<PAGE>
<TABLE>

                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                         CONSOLIDATED STATEMENT OF OPERATIONS
                                                      (UNAUDITED)
<CAPTION>

                                                              For the Nine Months Ended   For the Period from
                                                                               July 31,   November 1, 1999 to
                                                             2000                  2001         July 31, 2001
                                                             ----                  ----         -------------
<S>                                                     <C>                <C>                <C>
REVENUES                                                $      7,700       $          -       $     12,200
                                                        -------------      -------------      -------------
OPERATING EXPENSES:
    Cost of sales                                                  -                  -             21,403
    Amortization of costs of projects                         51,242                  -                  -
    Projects costs written off                                10,844                  -            114,613
    Depreciation of property and equipment                    63,610             97,842             97,842
    Acquired in-process research and development
        expenses                                           6,050,000                  -          6,050,000
    Compensatory element of stock issuances                2,468,428          2,410,194          5,668,743
    Research and development                                 362,906          1,190,348          2,005,710
    Selling, general and administrative expenses           1,200,746          2,565,393          4,607,335
                                                        -------------      -------------      -------------

    TOTAL OPERATING EXPENSES                              10,207,776          6,263,777         18,565,646
                                                        -------------      -------------      -------------

OPERATING LOSS                                           (10,200,076)        (6,263,777)       (18,553,446)
                                                        -------------      -------------      -------------
OTHER EXPENSES:

   Interest expense                                            3,806             27,179             46,159
   Amortization of unearned financing costs                  166,667            750,000          1,166,667
   Litigation settlement in shares of common stock
      (Note 7)                                                     -          1,000,000          1,000,000
                                                        -------------      -------------      -------------
     TOTAL OTHER EXPENSES                                    170,473          1,777,179          2,212,826
                                                        -------------      -------------      -------------

NET LOSS                                                $(10,370,549)      $ (8,040,956)      $(20,766,272)
                                                        =============      =============      =============

BASIC AND DILUTED NET LOSS PER
   COMMON SHARE                                         $      (0.50)      $      (0.32)
                                                        =============      =============

WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING                                    20,700,263         25,153,198
                                                        =============      =============
</TABLE>

See notes to consolidated financial statements.

                                       2
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                      CONSOLIDATED STATEMENT OF OPERATIONS
                                   (UNAUDITED)


                                                     For the Three Months Ended
                                                                       July 31,
                                                        2000               2001
                                                  -------------    -------------
REVENUES                                          $        900     $          -
                                                  -------------    -------------

OPERATING EXPENSES:
   Cost of sales                                             -                -
   Amortization costs of projects                       15,507                -
   Depreciation of property and equipment               29,068           28,029
   Acquired in-process research and development              -                -
   Compensatory element of stock issuances             619,650        2,410,194
   Research and development                            182,697          528,254
   Selling, general and administrative expenses        547,781        1,428,553
                                                  -------------    -------------

       TOTAL OPERATING EXPENSES                      1,394,703        4,395,030
                                                  -------------    -------------

OPERATING LOSS                                      (1,393,803)      (4,395,030)
                                                  -------------    -------------

OTHER EXPENSES:
   Interest expense                                      3,806            8,749
   Amortization of unearned financing costs            166,667          250,000
                                                  -------------    -------------

       TOTAL OTHER EXPENSES                            170,473          258,749
                                                  -------------    -------------

NET LOSS                                          $ (1,564,276)    $ (4,653,779)
                                                  =============    =============

BASIC AND DILUTED LOSS PER SHARE                  $      (0.07)    $      (0.18)
                                                  =============    =============

WEIGHTED AVERAGE NUMBER OF COMMON SHARES
   OUTSTANDING                                      22,028,085       26,230,086
                                                  =============    =============

See notes to consolidated financial statements.

                                       3
<PAGE>
<TABLE>

                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                      (UNAUDITED)
                             FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
                                     THE NINE MONTHS ENDED JULY 31, 2000 AND 2001

<CAPTION>
                                                                     Common Stock       Additional
                                                    -----------------------------          Paid-in
                                                         Shares           Amount           Capital
                                                    ------------     ------------     ------------
                                                                          (1)
<S>                                                  <C>             <C>              <C>
Balance - October 31, 1999                           17,224,049      $    17,224      $12,197,374

Issuance of common stock for cash
  ($1.00 to $4.00 per share)                            805,994              805        2,733,583
Issuance of common stock for services:
  ($1.00 to $1.40 per share for quarter ended
     January 31)                                         29,765               30           34,020
  ($1.20 to $12.00 per share for quarter ended
     April 30)                                        1,161,065            1,161        1,813,568
  ($3.00 to $7.88 per share for quarter ended
     July 31)                                           109,000              109          619,541
  ($.25 to $12.50 per share for quarter ended
     October 31)                                         84,084               84           28,038
Acquisition of Impact Pictures, Inc.
  ($4.00 per share)                                      12,500               13           49,987
Acquisition of New Wheel Technology, Inc.
  ($2.00 per share)                                   3,000,000            3,000        5,997,000
Issuance of common stock under consulting
  agreement ($2.00 per share)                         1,500,000            1,500        2,998,500
Issuances of common stock upon exercise of
  warrants ($2.40 per share)                             68,750               69          164,931
Issuance of common stock in connection with
  private placement ($5.00 to $5.50 per share)           77,248               77          414,923
Value assigned to issuance of 200,000 warrants                -                -          762,000
Amortization of unearned financing costs                      -                -                -
Net loss                                                      -                -                -
                                                    ------------     ------------     ------------

Balance - October 31, 2000                           24,072,455      $    24,072      $27,813,465
                                                    ============     ============     ============
</TABLE>

(1) Share amounts have been restated to reflect the 1-for-4 reverse stock split
effected on June 22, 2000.

See notes to consolidated financial statements.

                                       4
<PAGE>
<TABLE>

                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                      (UNAUDITED)
                             FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
                                     THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
<CAPTION>

                                                              Unearned                                 Total
                                                             Financing        Accumulated      Stockholders'
                                                                 Costs            Deficit             Equity
                                                         -------------      -------------      -------------
<S>                                                      <C>                <C>                <C>
Balance - October 31, 1999                               $          -       $(12,300,033)      $    (85,435)

Issuance of common stock for cash
  ($1.00 to $4.00 per share)                                        -                  -          2,734,388
Issuance of common stock for services:
  ($1.00 to $1.40 per share at January 31)                          -                  -             34,050
  ($1.20 to $12.00 per share at April 30)                           -                  -          1,814,729
  ($3.00 to $7.88 per share at July 31)                             -                  -            619,650
  ($.25 to $12.50 per share at October 31)                          -                  -             28,122
Acquisition of Impact Pictures, Inc.
  ($4.00 per share)                                                 -                  -             50,000
Acquisition of New Wheel Technology, Inc.
  ($2.00 per share)                                                 -                  -          6,000,000
Issuance of common stock under consulting
  agreement ($2.00 per share)                              (3,000,000)                 -                  -
Issuances of common stock upon exercise of warrants
  ($2.40 per share)                                                 -                  -            165,000
Issuance of common stock in connection with private
  placement ($5.50 per share)                                       -                  -            415,000
Value assigned to issuance of 200,000 warrants                      -                  -            762,000
Amortization of unearned financing costs                      416,667                  -            416,667
Net loss                                                            -        (12,725,316)       (12,725,316)
                                                         -------------      -------------      -------------

Balance - October 31, 2000                               $ (2,583,333)      $(25,025,349)      $    228,855
                                                         =============      =============      =============


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

 Accumulated deficit during development stage
  (year ended October 31, 2000)                                              (12,725,316)
                                                                            -------------

 Total Accumulated Deficit as of October 31, 2000                           $(25,025,349)
                                                                            =============
</TABLE>

See notes to consolidated financial statements.

                                       5
<PAGE>
<TABLE>

                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                      (UNAUDITED)
                             FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
                                     THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
<CAPTION>


                                                                     Common Stock         Additional
                                                 --------------------------------            Paid-in
                                                     Shares                Amount            Capital
                                                 -------------      -------------      -------------
<S>                                                <C>              <C>                <C>
Balance - October 31, 1999                         17,224,049       $     17,224       $ 12,197,374

Issuance of common stock for cash
  ($1.00 to $4.00 per share)                          770,994                771          2,593,617
Issuance of common stock for services:
  ($1.00 to $1.40 per share at January 31)             29,765                 30             34,020
  ($1.20 to $12.00 per share at April 30)           1,161,065              1,161          1,813,568
  ($3.00 to $7.88 per share at July 31)               109,000                109            619,541
Acquisition of Impact Pictures, Inc.
  ($4.00 per share)                                    12,500                 12             49,988
Acquisition of New Wheel Technology, Inc.
  ($2.00 per share)                                 3,000,000              3,000          5,997,000
Issuance of common stock under consulting
  agreement ($2.00 per share)                       1,500,000              1,500          2,998,500
Issuances of stock for exercise of warrants
  ($2.40 per share)                                    68,750                 69            164,931
Amortization of unearned financing costs                    -                  -                  -
Net loss                                                    -                  -                  -
                                                 -------------      -------------      -------------

Balance - July 31, 2000                            23,876,123       $     23,876       $ 26,468,539
                                                 =============      =============      =============


                                                      Unearned                                 Total
                                                     Financing        Accumulated      Stockholders'
                                                         Costs            Deficit             Equity
                                                 -------------      -------------      -------------
Balance - October 31, 1999                       $          -       $(12,300,033)      $    (85,435)

Issuance of common stock for cash
  ($1.00 to $4.00 per share)                                -                  -          2,594,388
Issuance of common stock for services:
  ($1.00 to $1.40 per share at January 31)                  -                  -             34,050
  ($1.20 to $12.00 per share at April 30)                   -                  -          1,814,729
  ($3.00 to $7.88 per share at July 31)                     -                  -            619,650
Acquisition of Impact Pictures, Inc.
  ($4.00 per share)                                         -                  -             50,000
Acquisition of New Wheel Technology, Inc.
  ($2.00 per share)                                         -                  -          6,000,000
Issuance of common stock under consulting
  agreement ($2.00 per share)                      (3,000,000)                 -                  -
Issuances of stock for exercise of warrants
  ($2.40 per share)                                         -                  -            165,000
Amortization of unearned financing costs              166,667                  -            166,667
Net loss                                                    -        (10,370,549)       (10,370,549)
                                                 -------------      -------------      -------------

Balance - July 31, 2000                          $ (2,833,333)      $(22,670,582)      $    988,500
                                                 =============      =============      =============
</TABLE>


See notes to consolidated financial statements.

                                       6
<PAGE>
<TABLE>

                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                      (UNAUDITED)
                             FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
                                     THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
<CAPTION>

                                                                        Common Stock         Additional
                                                    --------------------------------            Paid-in
                                                           Shares             Amount            Capital
                                                    -------------      -------------      -------------
                                                                          (1)
 Nine Months Ended July 31, 2001:
 -------------------------------

<S>                                                   <C>              <C>                <C>
Balance - October 31, 2000                            24,072,455       $     24,072       $ 27,813,465

Issuance of common stock for cash
  ($2.68 to $5.00 per share)                             240,904                241            704,759
Issuance of common stock with attached
  warrants ($4.02 per share for quarter ended
  January 31)                                            174,714                175            489,024
Issuance of common stock with attached
  warrants ($5.10 per share for quarter ended
  January 31)                                             30,600                 31             85,649
Issuance of common stock with attached
  warrants ($2.80 to $5.10 per share for
  quarter ended April 30)                                104,571                105            292,695
Issuance of common stock in connection with
  Private Placement ($4.35 to $5.50 per share
  for quarter ended January 31)                           32,445                 32            151,968
Issuance of common stock in connection with
  Private Placement($2.60 to $3.37 per share
  for quarter ended April 30)                            207,307                207            619,793
Issuance of common stock in connection with
  Private Placement ($1.74 to $2.80 per share
 for quarter ended July 31)                            1,446,355              1,446          2,742,008
Issuance of common stock in connection with
  litigation settlement                                  250,000                250            999,750
Issuance of stock to Vice-Chairperson of Board
  of Directors for services ($1.8984 per share
  at June 11)                                            500,000                500            948,700
Issuance of stock under consulting agreement
  ($2.90 to $3.90 per share at July 31)                   50,960                 51            171,693
Value assigned to warrants issued to
  consultants at July 31                                       -                  -          1,289,250
Cancellation of common stock issued for cash              (2,980)                (3)           (29,998)
Amortization of unearned financing costs                       -                  -                  -
Net loss                                                       -                  -                  -
                                                    -------------      -------------      -------------

Balance - July 31, 2001                               27,107,331       $     27,107       $ 36,278,756
                                                    =============      =============      =============
</TABLE>

(1) Share amounts have been restated to reflect the 1-for-4 reverse stock split
effected on June 22, 2000.

See notes to consolidated financial statements.

                                       7
<PAGE>
<TABLE>

                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                                      (UNAUDITED)
                             FOR THE PERIOD FROM NOVEMBER 1, 1999 TO OCTOBER 31, 2000 AND
                                     THE SIX MONTHS ENDED APRIL 30, 2000 AND 2001
<CAPTION>

                                                          Unearned                                 Total
                                                         Financing        Accumulated      Stockholders'
                                                             Costs            Deficit             Equity
                                                     -------------      -------------      -------------

 Nine Months Ended July 31, 2001:
 -------------------------------
<S>                                                  <C>                <C>                <C>
Balance - October 31, 2000                           $ (2,583,333)      $(25,025,349)      $    228,855

Issuance of common stock for cash
  ($2.68 to $5.00 per share)                                    -                  -            705,000
Issuance of common stock with attached
  warrants ($4.02 per share for quarter ended
  January 31)                                                   -                  -            489,199
Issuance of common stock with attached
  warrants ($5.10 per share for quarter ended
  January 31)                                                   -                  -             85,680
Issuance of common stock with attached warrants
  ($2.80 to $5.10 per share for quarter ended
  April 30)                                                     -                  -            292,800
Issuance of common stock in connection with
  Private Placement ($4.35 to $5.50 per share
  for quarter ended January 31)                                 -                  -            152,000
Issuance of common stock in connection with
  Private Placement ($2.60 to 3.37 per share
  for quarter ended April 30)                                   -                  -            620,000
Issuance of common stock in connection with
  Private Placement ($1.74 to $2.80 per share
  for quarter ended July 31)                                    -                  -          2,743,454
Issuance of common stock in connection with
  litigation settlement                                         -                  -          1,000,000
Issuance of stock to Vice Chairperson of Board
  of Directors for services ($1.8984 per share
  at May 31)                                                    -                  -            949,200
Issuance of stock under consulting agreement
  ($2.90 to $3.90 per share at July 31)                         -                  -            171,744
Value assigned to warrants issued to consultant
  at July 31                                                    -                  -          1,289,250
Cancellation of common stock issued for cash                    -                  -            (30,001)
Amortization of unearned financing costs                  750,000                  -            750,000
Net loss                                                        -         (8,040,956)        (8,040,956)
                                                     -------------      -------------      -------------

Balance - July 31, 2001                              $ (1,833,333)      $(33,066,305)      $  1,406,225
                                                     =============      =============      =============


 Accumulated deficit as of October 31, 2000
                                                                        $(12,300,033)
 Accumulated deficit during development stage
   (November 1, 1999 to July 31, 2001)                                   (20,766,272)
                                                                         -----------

 Total accumulated deficit as of July 31, 2001                          $(33,066,305)
                                                                        =============
</TABLE>


See notes to consolidated financial statements.

                                       8
<PAGE>
<TABLE>

                                        NEW VISUAL CORPORATION AND SUBSIDIARIES
                              (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
                               (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                                         CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                      (UNAUDITED)
                               FOR THE PERIOD FROM NOVEMBER 1, 1999 TO JULY 31, 2001 AND
                                     THE NINE MONTHS ENDED JULY 31, 2000 AND 2001
<CAPTION>

                                                                         For the Nine Months Ended  For the Period from
                                                                                          July 31,  November 1, 1999 to
                                                                           2000               2001        July 31, 2001
                                                                  -------------      -------------      ---------------
<S>                                                               <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                       $(10,370,549)      $ (8,040,956)      $(20,766,272)
   Adjustments to reconcile net loss to net cash used in
       operating activities:
           Compensatory elements of stock issuances                  2,468,428          2,410,194          5,668,743
           Stock issued for acquired in-process research and
               development                                           6,050,000                  -          6,050,000
           Stock issued for litigation settlement                            -          1,000,000          1,000,000
           Projects costs written-off                                   10,884                  -            114,613
           Amortization of unearned financing costs                    166,667            750,000          1,166,667
           Depreciation of property and equipment                       63,610             97,842            195,014
           Amortization of costs of projects                            51,242                  -                  -

           Increase (decrease) from changes in:
              Prepaid expenses and other current assets                (11,244)           (36,796)           (67,023)
              Other assets                                              (4,091)           (20,933)          (133,133)
              Due from related parties                                  18,722           (100,198)           (96,339)
              Projects under development                              (488,901)          (788,000)        (1,443,519)
              Accounts payable and accrued expenses                   (290,252)           252,557            278,780
                                                                  -------------      -------------      -------------

               NET CASH USED IN OPERATING ACTIVITIES                (2,335,484)        (4,476,290)        (8,032,469)
                                                                  -------------      -------------      -------------

CASH USED IN INVESTING ACTIVITIES
    Capital expenditures                                              (253,007)           (17,303)          (406,036)
                                                                  -------------      -------------      -------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from issuance of common stock                           2,594,388          5,058,133          8,207,521
    Proceeds from note payable                                         529,000                  -            756,886
    Repayment of note payable                                                -           (500,000)          (500,000)
    Proceeds from exercise of warrants                                 165,000                  -            165,000
                                                                  -------------      -------------      -------------

               NET CASH PROVIDED BY FINANCING
                    ACTIVITIES                                       3,288,388          4,558,133          8,629,407
                                                                  -------------      -------------      -------------

INCREASE IN CASH                                                       699,897             64,540            190,902

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

CASH AND CASH EQUIVALENTS - ENDING                                $    762,769       $    253,774       $    253,774
                                                                  =============      =============      =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

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

    Income taxes                                                  $          -       $          -       $        800
                                                                  =============      =============      =============
</TABLE>

See notes to consolidated financial statements.

                                       9
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)


NOTE  1-          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  BASIS OF PRESENTATION

                  The accompanying financial statements are unaudited. These
                  statements have been prepared in accordance with the rules and
                  regulations of the Securities and Exchange Commission (the
                  "SEC"). Certain information and footnote disclosures normally
                  included in the financial statements prepared in accordance
                  with generally accepted accounting principles have been
                  condensed or omitted pursuant to such rules and regulations.
                  In the opinion of management, the financial statements reflect
                  all adjustments (which include only normal recurring
                  adjustments) necessary to state fairly the Company's financial
                  position and results of operations as of and for the periods
                  indicated. These financial statements should be read in
                  conjunction with the Company's financial statements and notes
                  thereto for the year ended October 31, 2000, included in the
                  Company's annual report on Form 10-KSB as filed with the SEC.

                  PRINCIPLES OF CONSOLIDATION

                  The consolidated financial statements include the accounts of
                  New Visual Corporation ("NVC") and its operating subsidiaries,
                  NV Entertainment, Inc. ("NV"), Impact Multimedia, Inc. ("IP")
                  and NV Technology, Inc. (formerly, New Wheel Technology, Inc.)
                  ("New Wheel") (collectively, the "Company"). All significant
                  intercompany balances and transactions have been eliminated.

                  DESCRIPTION OF BUSINESS

                  The Company was incorporated under the laws of the State of
                  Utah on December 5, 1985. Prior to June 29, 2001, the
                  Company's name was New Visual Entertainment, Inc.

                  In November of 1999, the Company began to focus its business
                  activities on the development of new content
                  telecommunications technologies. Pursuant to such plan, the
                  Company acquired New Wheel Technology, Inc., a development
                  stage, California-based, technology company in February of
                  2000 (Note 2). 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.

                  CONCENTRATION OF CREDIT RISK

                  Financial instruments, which potentially subject the Company
                  to concentrations of credit risks, are principally trade
                  accounts receivable. The Company maintains an allowance for
                  uncollectible accounts receivable and generally does not
                  require collateral. At July 31, 2001 and October 31, 2000, no
                  allowance for uncollectible accounts was deemed necessary by
                  management.

                                       10
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  1 -         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  CASH AND CASH EQUIVALENTS

                  The Company considers all short-term highly liquid investments
                  with a maturity of three months or less when purchased to be
                  cash or cash equivalents.

                  PROPERTY AND EQUIPMENT

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

                  FILM AND VIDEO LIBRARY AND PROJECTS UNDER DEVELOPMENT

                  Film and video library and projects under development are
                  stated at the lower of amortized cost or market. Upon
                  completion, costs are amortized on an individual production
                  basis in the proportion that current gross revenues bear to
                  management's estimate of total gross revenues, with such
                  estimates being reviewed at least quarterly. In prior years,
                  several projects under development were determined to have no
                  estimated realizable value and were accordingly written-off.
                  Project costs written-off during the nine months ended July
                  31, 2000 and 2001, were $10,884 and $-0-, respectively. For
                  the nine months ended July 31, 2000 and 2001, amortization
                  expense related to the film and video library was $62,086 and
                  $-0-, respectively.

                  INCOME TAXES

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

                                       11
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  1 -         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  ACCOUNTING ESTIMATES

                  The preparation of financial statements in accordance with
                  accounting principles generally accepted in the United States
                  of America requires management to make estimates and
                  assumptions that affect the reported amounts of assets and
                  liabilities, disclosures of contingent assets and liabilities
                  at the date of the financial statements and the reported
                  amounts of revenues and expenses during the reporting period.
                  Actual results could differ from those estimates.

                  FAIR VALUE OF FINANCIAL INSTRUMENTS

                  The financial statements include various estimated fair value
                  information at July 31, 2001, as required by Statement of
                  Financial Accounting Standards No.107, "Disclosures about Fair
                  Value of Financial Instruments." Such information, which
                  pertains to the Company's financial instruments, is based on
                  the requirements set forth in that Statement and does not
                  purport to represent the aggregate net fair value to the
                  Company.

                  The following methods and assumptions were used to estimate
                  the fair value of each class of financial instruments for
                  which it is practicable to estimate that value:

                  Cash and Cash Equivalents: The carrying amount approximates
                  fair value because of the short-term maturity of those
                  instruments.

                  Receivables and Payables: The carrying amounts approximate
                  fair value because of the short maturity of those instruments.

                  All of the Company's financial instruments are held for
                  purposes other than trading.

                  REVENUE RECOGNITION

                  Substantially all revenues are derived from the production of
                  multimedia content, videos and commercial films. Revenue is
                  recognized over the shorter of the license term or the
                  expected revenue term.

                  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.

                                       12
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  1 -         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  ADVERTISING

                  Advertising costs are charged to operations when incurred.
                  Advertising expense for the nine months ended July 31, 2000
                  and 2001 was $67,833 and $942, respectively.

                  LOSS PER SHARE

                  Basic earnings per share ("Basic EPS") 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 ("Diluted EPS") gives effect to all
                  dilutive potential common shares outstanding during a period.
                  In computing diluted EPS, the treasury stock method is used in
                  determining the number of shares assumed to be purchased from
                  the conversion of common stock equivalents.

                  REVERSE STOCK SPLITS

                  On October 18, 1995, the Company approved a one-for-two
                  reverse split of its issued and outstanding common stock. On
                  June 22, 2000, the Company effected a one-for-four reverse
                  split of its issued and outstanding common stock. The
                  accompanying consolidated financial statements, notes and
                  other references to share and per share data have been
                  retroactively restated to reflect the reverse stock splits for
                  all periods presented.

                  STOCK-BASED COMPENSATION

                  As permitted by 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.

                  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.

                                       13
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  1 -         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  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. Adoption of SFAS No. 131 did not have a material
                  effect on the Company's financial position or results of
                  operations.

                  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

                  In June 1998, the Financial Accounting Standards Board issued
                  Statement of Financial Accounting Standard No. 133,
                  "Accounting for Derivative Instruments and Hedging Activities"
                  (SFAS NO.133), which establishes accounting and reporting
                  standards for derivative instruments and hedging activities.
                  It requires that an entity recognize all derivatives as either
                  assets or liabilities in the balance sheet and measure those
                  instruments at fair value. In June 1999, the FASB issued SFAS
                  No. 137, Accounting for Derivative Instruments -- Deferral of
                  the Effective Date of SFAS Statement No.133 and in June 2000,
                  the FASB issued SFAS No.138, Accounting for Certain Derivative
                  Instruments -- an amendment of SFAS No.133, Accounting for
                  Derivative Instruments and Hedging Activities. As a result of
                  SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be effective
                  for all fiscal quarters of all fiscal years beginning after
                  June 15, 2000. The Company's adoption of the above Financial
                  Accounting Standards had no material impact on the Company's
                  financial statements for the nine months ended July 31, 2001.

                  In June 2000, the American Institute of Certified Public
                  Accountants issued Statement of Position 00-2, Accounting by
                  Producers or Distributors of Films (SOP 00-2), which
                  established new accounting standards for producers and
                  distributors of film and supersedes Statement of Financial
                  Accounting Standards ("SFAS") No. 53, "Financial Reporting by
                  Producers and Distributors of Motion Picture Films." SOP 00-2
                  changes the accounting standards for costs to produce and
                  distribute film and television properties. The Company expects
                  to adopt the new standard effective November 1, 2001, and is
                  evaluating the effect that such adoption may have on its
                  consolidated results of operations and financial position.

                  In June 2000, the Financial Accounting Standards Board issued
                  SFAS No. 139 which rescinds SFAS No. 53 and requires public
                  companies to follow the guidance provided by SOP 00-2.

                                       14
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  1 -         SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

                  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONTINUED)

                  In March 2000, the Financial Accounting Standards Board issued
                  FASB Interpretation No. 44 (FIN 44), Accounting for Certain
                  Transactions Involving Stock Compensation -- an interpretation
                  of APB Opinion No.25. FIN 44 clarifies the application of
                  Opinion 25 for (a) the definition of employee for purposes of
                  applying Opinion 25, (b) the criteria for determining whether
                  a plan qualifies as a noncompensatory plan, (c) the accounting
                  consequence of various modifications to the terms of a
                  previously fixed stock option or award, and (d) the accounting
                  for an exchange of stock compensation awards in a business
                  combination. The Company adopted FIN 44 effective July 1,
                  2000. The adoption of the provisions of FIN 44 did not have a
                  material effect on the financial position or results of
                  operations of the Company.

                  COMPREHENSIVE INCOME

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

NOTE  2 -         ACQUISITIONS

                  IMPACT PICTURES, INC.

                  In January 2000, the Company completed the acquisition of 100%
                  of the common stock of Impact Pictures, Inc. ("Impact"), a
                  small development-stage San Diego-based multi-media production
                  firm, for 12,500 shares of the Company's common stock, valued
                  at $50,000. The Company has accounted for this acquisition
                  under the purchase method of accounting. As of the acquisition
                  date, Impact had no tangible assets and its intangible assets
                  were in the development stage. Accordingly, the $50,000 was
                  charged to operations, under the caption "Acquired in-process
                  research and development expenses," during the nine months
                  ended July 31, 2000.

                  Historical and proforma information have not been provided
                  because the operations of the acquired business were not
                  material.

                                       15
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  2 -         ACQUISITIONS (CONTINUED)

                  NEW WHEEL TECHNOLOGY, INC.

                  In February 2000, the Company completed the acquisition of New
                  Wheel Technology, Inc. ("New Wheel"), a development-stage
                  California-based technology company. New Wheel was merged with
                  the Company's Astounding Acquisition Corp. subsidiary, which
                  changed its name to New Wheel Technology, Inc. On July 13,
                  2001, New Wheel changed its name to NV Technology, Inc. An
                  aggregate of 3,000,000 restricted shares of common stock were
                  issued to the New Wheel stockholders in consideration of the
                  merger. Also, additional compensation would be paid to the New
                  Wheel stockholders if New Wheel's high speed digital
                  transmission technology generates revenues for the Company in
                  excess of $1 billion, or if there is a sale of assets or
                  stock, or a merger of New Visual or any of its affiliates, in
                  which the New Wheel technology comprises at least 15% of the
                  consideration. As of April 30, 2000, the Company recorded the
                  issuance of the full 3,000,000 shares, which were valued at
                  $6,000,000. The Company has accounted for this acquisition
                  under the purchase method of accounting. As of the acquisition
                  date, New Wheel had no tangible assets and its intangible
                  assets were in the development stage. Accordingly, the
                  $6,000,000 was charged to operations under the caption
                  "Acquired in-process research and development expenses,"
                  during the nine months ended July 31, 2000.

                  Historical and proforma information have not been provided
                  because the operations of the acquired business were not
                  material.

NOTE  3 -         PROPERTY AND EQUIPMENT, NET

                  Property and equipment consists of the following:


                                                 October 31,          July 31,
                                                        2000              2001
                                                   ---------         ---------

                  Furniture and fixtures           $ 51,584          $ 55,151
                  Camera equipment                  544,664           544,664
                  Office equipment                   99,658           113,394
                                                   ---------         ---------
                                                    695,906           713,209
                  Less: Accumulated depreciation    302,119           399,961
                                                   ---------         ---------

                                Total              $393,787          $313,248
                                                   =========         =========

                  For the nine months ended July 31, 2000 and 2001, depreciation
                  expense was $63,610 and $97,842, respectively.

                                       16
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  4 -         ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

                  Accounts payable and accrued liabilities consist of the
                  following:

                                                 October 31,         July  31,
                                                        2000              2001
                                                  ----------        ----------
                  Professional fees               $ 300,000         $ 319,891
                  Payroll and related taxes          47,511                 -
                  Interest                           17,906            45,350
                  Miscellaneous                      81,504           334,238
                                                  ----------        ----------

                                                  $ 446,921         $ 699,479
                                                  ==========        ==========

NOTE  5 -         LONG-TERM DEBT

                  On June 29, 2000, the Company entered into five credit
                  agreements, each of which granted the Company a credit
                  facility of up to $300,000. As of October 31, 2000, the
                  Company had borrowed $756,886 under these facilities, payable
                  on June 29, 2003 in one payment, together with all accrued and
                  unpaid interest at 6% per annum.

                  On November 13, 2000, the above five credit agreements were
                  amended, reducing the Company's credit facility to $756,886 in
                  aggregate. The credit agreements terminate on June 29, 2003
                  and all accrued interest and unpaid interest, along with the
                  principal, is due in full on June 29, 2003.

                  During July 2001, the Company repaid $500,000 under the above
                  five credit agreements.

NOTE  6 -         STOCKHOLDERS' EQUITY

                  PREFERRED STOCK AND RIGHTS DIVIDEND

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

                                       17
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  PREFERRED STOCK AND RIGHTS DIVIDEND (CONTINUED)

                  The Company adopted a shareholder rights plan, in which one
                  right was distributed on August 21, 2000 as a dividend on each
                  outstanding share of common stock to shareholders of record on
                  that date. Each right will entitle the shareholders to
                  purchase 1/1000th of a share of a new series of junior
                  participating preferred stock of the Company at an exercise
                  price of $200 per right. The rights will be exercisable only
                  if another person acquires or announces its intention to
                  acquire beneficial ownership of 20% or more of the Company's
                  common stock. After any such acquisition or announcement, the
                  Company's shareholders, other than the acquirer, could then
                  exercise each right they hold to purchase the Company's common
                  stock at a 50% discount from the market price. In addition,
                  if, after another person becomes an acquiring person, the
                  Company is involved in a merger or other business combination
                  in which it is not the surviving corporation, each right will
                  entitle its holder to purchase a number of shares of common
                  stock of the acquiring company having a market value equal to
                  twice the exercise price of the right. Prior to the
                  acquisition by a person or group of beneficial ownership of
                  20% or more of the Company's common stock, at the option of
                  the Board of Directors, the rights are redeemable for $0.001
                  per right. The rights will expire on August 21, 2004.

                  On July 27, 2000, the Company created a series of preferred
                  stock, par value $0.01 per share, designated as "Series A
                  Junior Participating Preferred Stock." The number of shares
                  constituting the Series A Junior Participating Preferred Stock
                  is 200,000, initially reserved for issuance upon exercise of
                  the rights discussed in Note 6. Subject to the rights of the
                  holders of any shares of any series of preferred stock ranking
                  prior and superior to the Series A Preferred Stock with
                  respect to dividends, the holders of shares of Series A
                  Preferred Stock, in preference to the holders of common stock,
                  shall be entitled to receive, when, as and if declared by the
                  Board of Directors, quarterly dividends payable in cash on the
                  last day of each quarter in each year, commencing on the first
                  quarterly dividend payment date after the first issuance of a
                  share or fraction of a share of Series A Preferred Stock, in
                  an amount per share equal to the greater of $1.00 or 1,000
                  times the aggregate per share amount of all cash and non-cash
                  dividends or other distributions, other than a dividend
                  payable in shares of common stock. Each share of Series A
                  Preferred Stock shall entitle the holder to 1,000 votes. Upon
                  any liquidation, no distribution shall be made to the holders
                  of shares of stock ranking junior to the Series A Preferred
                  Stock, unless the holders of shares of Series A Preferred
                  Stock shall have received $1,000 per share, plus an amount
                  equal to accrued and unpaid dividends and distributions
                  thereon. The shares of Series A Preferred Stock shall not be
                  redeemable.

                                       18
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  COMMON STOCK

                  On April 30, 2000, the Board of Directors authorized, and on
                  May 31, 2000, a majority vote of the shareholders approved, a
                  one-for-four reverse stock-split of the Company's outstanding
                  common stock. The reverse stock-split was effected on June 22,
                  2000.

                  COMMON STOCK ISSUANCES DURING THE YEAR ENDED OCTOBER 31, 2000

                  During the year ended October 31, 2000, the Company issued
                  805,994 shares of restricted common stock to investors for
                  cash proceeds of $2,734,388, as indicated below. Such sales
                  were sold in private transactions in reliance on various
                  exemptions from the registration requirements of the
                  Securities Act.

                  During the three months ended January 31, 2000, the Company
                  sold 177,463 shares of common stock for $211,909.

                  During the quarter ended April 30, 2000, the Company sold
                  278,699 shares of common stock for $1,318,079.

                  During the quarter ended July 31, 2000, the Company sold
                  314,832 shares of common stock for $1,064,400.

                  During the quarter ended October 31, 2000, the Company sold
                  35,000 shares of common stock for $140,000.

                  During the three months ended January 31, 2000, the Company
                  issued 29,765 shares of common stock between $1.00 and $1.40
                  for consulting services totaling $34,050.

                  During the three months ended January 31, 2000, the Company
                  issued 12,500 shares of common stock valued at $4.00 per share
                  for the acquisition of Impact Pictures, Inc. (Note 2)

                  On February 17, 2000, the Company issued 3,000,000 shares of
                  common stock valued at $2.00 per share for the acquisition of
                  New Wheel Technology, Inc. (Note 2)

                                       19
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  COMMON STOCK ISSUANCES DURING THE YEAR ENDED OCTOBER 31, 2000
                  (CONTINUED)

                  In connection with the acquisition of New Wheel, the Company
                  entered into an agreement with lenders to provide loans of up
                  to $1.5 million. As consideration for these loans and other
                  services under the agreement, in April of 2000 the Company
                  issued 1,500,000 shares of its common stock to the lenders
                  valued at $3,000,000. The Company accounted for the $3,000,000
                  as unearned financing costs as a reduction of stockholders'
                  equity as of April 30, 2000. During the quarter ended July 31,
                  2000, the Company began to draw money down from the credit
                  facilities and accordingly, the Company at such time, began to
                  amortize the unearned financing costs over the three-year
                  period ended June of 2003. Amortization of the unearned
                  financing costs for the nine months ended July 31, 2001 was
                  $750,000.

                  During the quarter ended April 30, 2000, the Company issued
                  1,161,065 shares of common stock between $1.20 and $12.00 for
                  consulting and professional services totaling $1,814,729.

                  During the quarter ended July 31, 2000, the Company issued
                  109,000 shares of common stock between $3.00 and $7.88 for
                  consulting and professional services totaling $619,650.

                  On June 12, 2000, 68,750 warrants were exercised at $2.40 per
                  share totaling $165,000.

                  During the quarter ended October 31, 2000, the Company issued
                  84,084 shares of common stock between $.25 and $12.50 for
                  consulting services, totaling $28,122.

                  On October 31, 2000, the Company issued 77,248 shares of
                  common stock between $5.00 and $5.50 per share pursuant to the
                  Company's November 17, 2000 private placement agreement.

                  COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
                  2001

                  -  Private Placement:

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

                                       20
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
                  2001 (CONTINUED)

                  -  Private Placement: (Continued)

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

                  The Company may not apply any portion of the drawdowns towards
                  payment of any costs related to its production of the
                  Company's pending motion picture project. This agreement
                  terminates on November 17, 2002.

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

                  As of July 31, 2001, the Company has received proceeds under
                  this agreement of $3,930,454 from the investors in
                  consideration for the purchase of 1,736,355 shares of the
                  Company's common stock. The following are common stock
                  issuances for the nine months ended July 31, 2001, pursuant to
                  the Company's November 17, 2001 Private Placement Agreement.

                  o        On November 17, 2000, the Company issued 9,456 shares
                           of common stock for $5.50 per share.

                  o        On November 27, 2000, the Company issued 22,989
                           shares of common stock for $4.35 per share.

                  o        On March 13, 2001, the Company issued 29,639 shares
                           of common stock for $3.37 per share.

                  o        On March 27, 2001, the Company issued 62,661 shares
                           of common stock for $3.19 per share.

                                       21
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
                  2001 (CONTINUED)

                  -  Private Placement:  (Continued)

                  o        On April 6, 2001, the Company issued 57,773 shares of
                           common stock for $2.60 per share.

                  o        On April 11, 2001, the Company issued 33,287 shares
                           of common stock for $3.00 per share.

                  o        On April 25, 2001, the Company issued 23,947 shares
                           of common stock for $2.92 per share.

                  o        On May 1, 2001, the Company issued 14,288 shares of
                           common stock for approximately $2.80 per share.

                  o        On May 2, 2001, the Company issued 34,600 shares of
                           common stock for approximately $2.75 per share.

                  o        On May 6, 2001, the Company issued 23,674 shares of
                           common stock for approximately $2.75 per share.

                  o        On May 13, 2001, the Company issued 22,105 shares of
                           common stock for approximately $2.71 per share.

                  o        On May 29, 2001, the Company issued 120,728 shares of
                           common stock for approximately $2.48 per share.

                  o        On May 31, 2001, the Company issued 41,375 shares of
                           common stock for approximately $2.42 per share.

                  o        On June 12, 2001, the Company issued 63,011 shares of
                           common stock for approximately $1.95 per share.

                  o        On June 7-13, 2001, the Company issued 785,000 shares
                           of common stock for approximately $1.74 per share.

                  o        On July 20, 2001, the Company issued 341,574 shares
                           of common stock for approximately $1.74 per share.

                                       22
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  COMMON STOCK ISSUANCES DURING THE NINE MONTHS ENDED JULY 31,
                  2001 (CONTINUED)

                  -  Other

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

                  In February of 2001, the Company issued 250,000 shares of
                  common stock valued at $1,000,000 for the litigation
                  settlement agreement with Astounding.com, Inc. and Jack
                  Robinson (Note 7). This settlement has been recorded during
                  the three months ended January 31, 2001.

                  During January 2001, the Company issued 30,600 shares of
                  common stock with 15,300 attached warrants with an exercise
                  price of $5.10 per share, expiring in 3 years for $85,680.

                  During January 2001, the Company issued 174,714 shares of
                  common stock with 87,357 attached warrants with an exercise
                  price of $4.02 per share, expiring in 3 years for $489,199.

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

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

                  In March of 2001, the Company issued 46,250 shares of common
                  stock with 23,125 attached warrants with an exercise price of
                  $5.10 per share, expiring in 3 years for $129,500.

                  During April 2001, the Company issued 58,321 shares of common
                  stock with 29,161 attached warrants with an exercise price of
                  $5.10 per share expiring in 3 years for $163,300.

                  In May of 2001, the Company issued 500,000 shares to its Board
                  of Director's Vice Chairperson for past services, which were
                  valued at approximately $1.89 per share.

                  During the quarter ended July 31, 2001, the Company issued
                  50,960 shares of common stock between $2.90 and $3.90 per
                  share for consulting services, totaling $171,744.

                                       23
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  STOCK OPTION PLANS

                  -  2000 Omnibus Securities Plan:

                  During April 2000, the Board of Directors adopted, and
                  subsequently on May 31, 2000, the shareholders of the Company
                  approved, the 2000 Omnibus Securities Plan. The 2000 Omnibus
                  Securities Plan authorizes the granting of stock options and
                  restricted stock awards. The 2000 Omnibus Securities Plan may
                  be administered by the Board of Directors or a committee
                  appointed by the Board. A total of 2,500,000 shares of common
                  stock are reserved for issuance under the 2000 Omnibus
                  Securities Plan. Options granted under the option plan may be
                  either (i) options intended to constitute incentive stock
                  options under Section 422 of the Internal Revenue Code of
                  1986, as amended, or any corresponding provisions of
                  succeeding law (the "Code"), or (ii) non-qualified stock
                  options.

                  The exercise price for each stock option is determined by the
                  Board. Incentive stock options must have an exercise price of
                  at least 100% (or at least 110% in the case of incentive stock
                  options granted to certain employees owning more than 10% of
                  the outstanding voting stock) of the fair market value of the
                  common stock on the date the stock option is granted. Under
                  the 2000 Omnibus Securities Plan, fair market value of the
                  common stock for a particular date will generally be the
                  closing sale price for the stock if the common stock is listed
                  on an established stock exchange. If the common stock is not
                  listed on an established stock exchange on a particular date,
                  the fair market value of the common stock will be the average
                  of the closing bid and asked prices per share for the stock as
                  quoted by The NASDAQ SmallCap market or on the OTC Bulletin
                  Board of the National Association of Securities Dealers or in
                  the NQB Pink Sheets published by the National Quotation Bureau
                  Incorporated.

                  No stock option may be exercised after the expiration of ten
                  years from the date of grant (or five years in the case of
                  incentive stock options granted to certain employees owning
                  more than 10% of the outstanding voting stock). Pursuant to
                  the 2000 Omnibus Securities Plan, the aggregate fair market
                  value of the common stock for which one or more incentive
                  stock options granted to any participant may, for the first
                  time, become exercisable as incentive stock options under the
                  federal tax laws during any one calendar year shall not exceed
                  $100,000.

                  As of July 31, 2001, the Company granted Non-Qualified Stock
                  options under this plan to purchase a total of 516,000 common
                  shares at exercise prices ranging from $3.92 to $4.00 per
                  share. The options are exercisable over a ten-year period.

                                       24
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  STOCK OPTIONS

                  - Options Outside of the Plan:

                  As of October 31, 2000, the Company granted options outside
                  the Plan to purchase a total of 1,563,750 common shares at
                  exercise prices ranging from $1.00 to $5.50 per share.

                  On November 13, 2000, the Company granted to a consultant
                  options to acquire 100,000 shares of its common stock. The
                  exercise price for the options is $4.00 per share. All options
                  became vested immediately and expire on November 13, 2010. In
                  addition, the consultant is additionally compensated for each
                  day of service up to $1,300 per day. The consulting agreement
                  may be terminated at any time by either party upon thirty
                  days' written notice to the other party.

                  On May 15, 2001, the Company granted an advisory board member
                  options to acquire 50,000 shares of its common stock. The
                  exercise price for the options is $3.92 per share. All options
                  became exercisable immediately and expire on May 15, 2011.

                  On June 7, 2001, the Company granted options to purchase
                  50,000 shares of its common stock to an advisory board member.
                  The exercise price is $2.30 per share, with 25,000 vesting and
                  exercisable immediately and the remaining 25,000 vesting and
                  exercisable equally on the anniversary date over the next
                  three years. All options expire on June 7, 2011.

                  Since the exercise price of the options was not less than the
                  fair market value of the Company's common stock on each date
                  of grant, no compensation expense has been recorded. If the
                  Company had elected to record the issuance of stock options
                  using the fair value method, the Company's net loss and loss
                  per share would be as follows:

                                                        Nine Months Ended
                                                            July 31, 2001
                                                            -------------

                            Net Loss:
                                As reported                  $ 8,040,956
                                Proforma                     $(8,355,956)

                            Loss Per Share:
                                As reported                  $     (0.32)
                                Proforma                     $     (0.33)

                                       25
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  STOCK OPTIONS (CONTINUED)

                  -  Options Outside of the Plan: (Continued)

                  The fair value of stock options granted during the nine months
                  ended July 31, 2001 was estimated on the date of grant using
                  the Black-Scholes option-pricing model. The weighted average
                  fair value and related assumptions were as follows:

<TABLE>
<CAPTION>

                                                                                                         Grant Date
                                                 ------------------------------------------------------------------
                                                 February 11,    July 1,  October 27,   November 13,   November 30,
                                                         2000       2000         2000           2001           2001
                                                         ----       ----         ----           ----           ----
                    <S>                               <C>        <C>          <C>            <C>            <C>
                    Expected volatility                 33.0%      33.0%        33.0%          33.0%          33.0%
                    Risk-free interest rate              5.5%       5.5%         5.5%           5.5%           5.5%
                    Expected lives                    3 years    3 years      3 years        3 years        3 years
                    Dividend yield                        -0-        -0-          -0-            -0-            -0-
</TABLE>

                  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 - October 31, 2000                    -           $   -         1,563,750           $2.61

                  Options granted - 11/01 - 07/31/01:
                    In the plan                               516,000            3.93                 -
                  Options granted - 11/01 - 07/31/01:
                    Outside the option plan                         -               -           200,000            3.55
                  Outside expired/cancelled:
                    In the plan                                 3,750            3.94                 -               -
                                                              -------          ------         ---------           -----
                  Outstanding - July 31, 2001                 512,250           $3.94         1,763,750           $2.72
                                                              =======           =====         =========           =====
                  Exercisable at July 31:
                     2001                                     276,188           $3.96         1,044,375           $3.29
                     2002                                     354,876           $3.95         1,354,063           $3.04
                     2003                                     433,564           $3.94         1,763,750           $2.72
                     2004                                     512,250           $3.94         1,763,750           $2.72
</TABLE>

                  The exercise price for options outstanding as of July 31, 2001
                  ranged from $1.00 to $5.50.

                                       26
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  6 -         STOCKHOLDERS' EQUITY (CONTINUED)

                  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                             5,557,600
                  Options to purchase common stock                              2,276,000
                                                                                ---------

                  Total as of July 31, 2001                                     7,833,600
                                                                                =========


                  Substantial issuances after July 31, 2001 through
                     September 14, 2001:

                  Options granted outside Plans                                    50,000
                  Warrants granted in connection with consulting agreement        100,000
                  Options granted in connection with 2001 stock incentive plan    750,000
                  Sale of common stock for cash                                   188,633
</TABLE>

NOTE  7 -         COMMITMENTS AND CONTINGENCIES

                  ASTOUNDING.COM, INC.

                  In September 1999, the Company entered into a merger agreement
                  with Astounding.com, Inc. The merger agreement provided for
                  the Company to issue 10,000,000 (pre-June 22, 2000 reverse
                  split) shares of its common stock for all of the outstanding
                  shares of Astounding. The closing of the merger was subject to
                  various conditions including the receipt of a debt or equity
                  financing of at least $1,000,000 and requisite shareholders
                  approval.

                  During the three months ended January 31, 2000, the Company
                  terminated its previously announced merger with
                  Astounding.com, Inc. because certain conditions had not been
                  satisfied.

                                       27
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  7 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  ASTOUNDING.COM, INC. (CONTINUED)

                  On March 22, 2000, the Company filed a lawsuit in the State
                  District Court in Dallas, Texas against Astounding.com, Inc.
                  and Jack Robinson. The Company's complaint alleged that, among
                  other things, Astounding.com, Inc. and Robinson breached
                  certain contractual obligations to New Visual and engaged in
                  negligent and/or fraudulent misrepresentation to induce New
                  Visual to enter into the merger agreement. New Visual sought a
                  court order confirming that the merger agreement was null and
                  void, and an award of unspecified damages, court costs and
                  attorneys fees. Robinson and Astounding.com filed a
                  counterclaim against New Visual alleging breach of contract
                  and unjust enrichment and seeking unspecified damages, court
                  costs and attorney fees. This litigation was settled in
                  February 2001.

                  Pursuant to the settlement agreement, the Company issued to
                  Jack D. Robinson and his attorneys 250,000 restricted shares
                  of its common stock, valued at $1,000,000. The Company in
                  return received all the issued and outstanding common stock of
                  Astounding.com, Inc. The Company also agreed to file a
                  registration statement for these 250,000 shares of its common
                  stock by March 31, 2001 and to cause the registration
                  statement to become effective and the shares to become freely
                  tradable no later than June 29, 2001. This settlement was
                  recorded during the three months ended January 31, 2001.

                  As of February 16, 2001, Astounding .com, Inc. had no
                  liabilities and was engaged in no business activities.

                  INTELECON SERVICES, INC.

                  On March 31, 2000, the Company signed a definitive merger
                  agreement to acquire Intelecon Services, Inc. ("Intelecon"), a
                  provider of entertainment and business communication
                  technology and value-added services, in a stock transaction.

                  On September 26, 2000, the Company formally terminated its
                  merger agreement with Intelecon.

                                       28
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  7 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  INTELECON SERVICES, INC. (CONTINUED)

                  The Company advanced to Intelecon monies to purchase certain
                  equipment on behalf of the Company. Intelecon did not purchase
                  the equipment and, therefore, breached its contract and was
                  unjustly enriched. The Company brought a claim against
                  Intelecon for $105,000.

                  During April 2001, the Company reached a settlement with
                  Intelecon for $117,000, payable in the amount of $15,000 per
                  month, until $117,000 has been paid in full. As of July 31,
                  2001, the Company has received $35,000 under this settlement.

                  CONSULTING AGREEMENTS

                  In June 2000, the Company entered into a marketing and public
                  relations agreement to publicize the Company to brokers,
                  prospective investors, institutional investors, analysts and
                  others, for a term of six months. In consideration of the
                  above services, the Company has paid the consultant $50,000.
                  In addition, the consultant was issued 50,000 shares of the
                  Company's common stock. The consultant was also issued a
                  warrant entitling it to purchase, in the aggregate, up to
                  200,000 shares of the Company's common stock. The warrant is
                  divided into four tranches of fifty thousand (50,000) shares
                  each, with each tranche to have the following exercise prices:
                  Tranche 1 - $7.00 per share; Tranche 2 - $8.50 per share;
                  Tranche 3 - $10.00 per share; and Tranche 4 - $11.50 per
                  share. The consultant and the Company entered into a
                  registration rights agreement with respect to the registration
                  of the above common stock and Warrant Shares. The consultant
                  has not exercised any of these warrants as of April 30, 2001.

                  The warrants were assigned a value of $762,000, which was
                  charged to operations during the year ended October 31, 2000.

                  In March 2001, the Company entered into a consulting agreement
                  with a company for developing a new corporate positioning
                  strategy and identifying an enhanced brand platform. The
                  Company agreed to pay $10,000 prior to the consulting company
                  commencing work, $7,500 upon delivery of the first stage and
                  $7,500 upon fulfillment of the contract.

                                       29
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  7 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  CONSULTING AGREEMENTS (CONTINUED)

                  During March 2001, the Company entered into a consulting
                  agreement with a company to provide financial advice and to
                  arrange for equity investments or other funding. The company
                  will pay for such services by providing the consultant with
                  fees equal to (i) 5% of the gross amount of any cash financing
                  obtained for the Company, payable in cash; (ii) a number of
                  shares of stock equal to 10% of the stock issued in connection
                  with any financing obtained for the Company; and (iii) a
                  number of warrants equal to 10% of the warrants issued in
                  connection with any financing obtained for the Company. The
                  term of this agreement is six months. Under the above terms,
                  the Company granted warrants to purchase 100,000 shares of
                  common stock at an exercise price from $2.50 per share to
                  $10.00 per share. The exercise period is five years. The fair
                  market value of the stock warrants are estimated on the date
                  of grant using the Black-Scholes option-pricing model ranging
                  from $.70 to $1.41.

                  In April 2001, the Company entered into a consulting agreement
                  with a company for a comprehensive level of international
                  communications services. The Company agreed to pay minimums of
                  $15,000 per month plus related hard costs for services and
                  expenses. During May 2001, the Company and the consulting
                  company mutually agreed to cancel the above agreement.

                  In May 2001, the Company entered into a one-year consulting
                  agreement with a company for providing consulting and advisory
                  services in connection with strategic business planning and
                  related matters. The Company agreed to grant warrants to
                  purchase 500,000 shares of common stock at an exercise price
                  of $2.50 per share, 250,000 shares of common stock at an
                  exercise price of $5.00 per share, and 250,000 shares of
                  common stock at an exercise price at $10.00 per share. The
                  exercise period is five years. The fair value of stock
                  warrants are estimated on the date of grant using the
                  Black-Scholes option-pricing model ranging from $.32 to $1.73.

                                       30
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  7 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  EMPLOYMENT AGREEMENTS

                  On February 11, 2000, the Company entered into an employment
                  agreement with its current Chief Executive Officer. The
                  agreement, effective April 1, 2000, is a three-year employment
                  contract that provides for base compensation in the first
                  contract year of $250,000; in the second contract year, base
                  compensation of $300,000; and in the third year and during any
                  renewal term, base compensation of $350,000. The employee is
                  also entitled to an annual bonus based upon his performance,
                  which will be at the sole discretion of the Board of
                  Directors. The annual bonus to the CEO shall be payable in
                  cash or in an amount of shares of the Company's common stock
                  that equals the amount of the bonus based upon the market
                  price of the employer's common stock on the date that the
                  bonus is paid.

                  In connection with its New Wheel acquisition, in February
                  2000, the Company entered into two employment agreements for
                  executive services. The agreements provide for the Company to
                  pay base salaries of $208,000 each per annum and a bonus of
                  $12,500 each upon the execution of the agreement. The
                  agreements were to expire in September 2000, but have been
                  extended through February 2001. The above agreement was
                  subsequently not renewed (Note 9).

                  On June 20, 2000, the Company entered into a three-year
                  employment agreement with its Executive Vice President
                  commencing July 1, 2000, whereby the Executive Vice President
                  shall receive a base salary of $15,000 per year and options to
                  purchase 210,000 shares of common stock at $4.40 per share. Of
                  these stock options, 35,000 vested on July 1, 2000, and the
                  balance vests straight-line on the last day of each quarter
                  beginning September 30, 2000 and ending December 31, 2002, or
                  17,500 per quarter. The options expire on July 1, 2005.

                  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
                  film is to be completed and ready for a Summer 2002 release.
                  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, 2001, the
                  Company has funded approximately $1,373,000 of production and
                  other costs, which was included in projects under development
                  in the accompanying consolidated balance sheet.

                                       31
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  7 -         COMMITMENTS AND CONTINGENCIES (CONTINUED)

                  LEASES

                  On January 3, 2000, the Company entered into an operating
                  lease for office space in San Diego, California. The lease
                  commenced on February 1, 2000 and expires in January 2005. The
                  lease provides for a minimum annual rental of approximately
                  $54,000, with a 3% annual increase each year, starting on
                  February 1, 2001 and each year thereafter.

                  On May 4, 2001, the Company terminated an operating lease for
                  office space in Livermore, California, which commenced on
                  March 1, 2000. Meanwhile, the Company entered into an
                  operating lease for office space in Pleasanton, California.
                  The lease commenced on June 1, 2001 and expires on May 31,
                  2004. The lease provides for a minimum annual rental at
                  approximately $120,000 for the first year and $156,000 the
                  following years. During August 2001, the Company closed its
                  office in Pleasanton, along with other proactive measures to
                  re-organize its technology development efforts, and is
                  currently in negotiation to sublease a portion of this space.

                  Rent expense for the nine months ended July 31, 2000 and 2001
                  was $48,353 and $80,581, respectively.

                  ROYALTY PAYMENTS

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

                  CONCENTRATION OF CREDIT RISK

                  Financial instruments which potentially subject the Company to
                  concentrations of credit risk are primarily cash and cash
                  equivalents. At July 31, 2001, the Company had a bank balance
                  in excess of federally insured limits by approximately
                  $126,200.

                                       32
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  8 -         BUSINESS RISKS AND SEGMENT INFORMATION

                  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.

                  The success of the Company's telecommunication segment is
                  dependent upon the successful completion of development and
                  testing of its New Wheel technology. No assurances 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.

                  The Company funded its operations during the nine months ended
                  July 31, 2001 through sales of its common stock, resulting in
                  net proceeds to the Company of $5,058,133. Sales of common
                  stock during the nine months ended July 31, 2001 were sold in
                  private transactions in reliance on various exemptions from
                  the registration requirements of the Securities Act. The
                  Company is exploring other financing alternatives, including
                  private placements and public offerings.

                  Under an agreement which was concluded in November of 2000,
                  the Company has obtained an equity line of credit of up to $5
                  million to fund its telecommunication segment. The equity line
                  has various limits on amounts of drawdowns and, under certain
                  circumstances, the purchaser may not be obligated to purchase
                  stock offered for sale by the Company (Note 6).

                                       33
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  8 -         BUSINESS RISKS AND SEGMENT INFORMATION (CONTINUED)

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

<TABLE>

                  For the Nine Months Ended July 31, 2001:
                  ---------------------------------------
<CAPTION>
                                                Telecommunication     Entertainment      Unallocable
                                                         Business          Business         Expenses            Totals
                                                         --------          --------         --------            ------
                  <S>                                <C>               <C>              <C>               <C>
                  Net Sales                          $         -       $         -      $         -       $         -

                  Operating Loss                     $(1,190,348)      $         -      $(6,850,608)      $(8,040,956)

                  Depreciation and Amortization      $   760,526       $    12,910      $    74,406       $   847,842

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


                  For the nine months ended July 31, 2000, the Company's only
                  reportable segment consisted of the entertainment business.

NOTE  9 -         SUBSEQUENT EVENTS

                  COMMON STOCK

                  During August 2001, the Company received approximately
                  $141,500 for the issuance of 188,633 shares of common stock to
                  investors.

                  PROMISSORY NOTE RECEIVABLE

                  On September 6, 2001, the Company converted advances of
                  $99,656 to an officer to a promissory note payable on demand
                  at a rate of seven percent per annum. The balance on July 31,
                  2001 was approximately $92,500, which is included in
                  receivables from related parties.

                                       34
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  9 -         SUBSEQUENT EVENTS (CONTINUED)

                  EMPLOYEE TERMINATIONS/OFFICE CLOSING

                  On August 3, 2001, the Company terminated the employment of
                  the six employees located at its office in Pleasanton,
                  California, including the Company's former chief operating
                  officer and chief technology officer. The Company made $25,807
                  in severance payments in connection with the termination of
                  employees other than the former officers.

                  2001 STOCK INCENTIVE PLAN

                  During August 2001, the Board of Directors adopted the 2001
                  Stock Incentive Plan. The 2001 Stock Incentive Plan authorized
                  the granting of stock options, restricted, unrestricted and
                  performance stock awards, dividend equivalent rights and stock
                  appreciation rights. The 2001 Stock Incentive Plan may be
                  administered by the Board of Directors or a committee
                  appointed by the Board. A total of 2,500,000 shares of common
                  stock are reserved for issuance under the 2001 Stock Incentive
                  Plan. Options granted under the option plan may be either (i)
                  options intended to constitute incentive stock options under
                  Section 422 of the Code, or (ii) non-qualified stock options.

                  The exercise price for each stock option is determined by the
                  Board. Incentive stock options must have an exercise price of
                  at least 100% (or at least 110% in the case of incentive stock
                  options granted to certain employees owning more than 10% of
                  the outstanding voting stock) of the fair market value of the
                  common stock on the date the stock option is granted.

                  No stock option may be exercised after the expiration of ten
                  years from the date of grant (or five years in the case of
                  incentive stock options granted to certain employees owning
                  more than 10% of the outstanding voting stock). Pursuant to
                  the 2001 Stock Incentive Plan, the aggregate fair market value
                  of the common stock for which one or more incentive stock
                  options granted to any participant may, for the first time,
                  become exercisable as incentive stock options under the
                  federal tax laws during any one calendar year shall not exceed
                  $100,000.

                                       35
<PAGE>

                     NEW VISUAL CORPORATION AND SUBSIDIARIES
           (FORMERLY NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES)
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)



NOTE  9 -         SUBSEQUENT EVENTS (CONTINUED)

                  STOCK OPTIONS

                  On August 3, 2001, the Company granted options to purchase
                  50,000 shares of its common stock to an advisory board member.
                  The exercise price is $1.07 per share with 25,000 vesting and
                  exercisable immediately and the remaining 25,000 vesting and
                  exercisable equally on the anniversary date over the next
                  three years. All options expire on August 3, 2011.

                  On August 30, 2001, the Company granted non-qualified stock
                  options under its 2001 Stock Incentive Plan to purchase
                  750,000 shares of common stock to a consultant for advice
                  regarding the Company's business strategy, organization,
                  business prospects and growth initiatives. The exercise price
                  will be 80% of the market price for the common stock on the
                  date the optionee elects to exercise its options. All options
                  expire on August 30, 2006.

                  CONSULTING AGREEMENT

                  On August 3, 2001, the Company entered into a consulting
                  agreement to collaborate with the Company's engineering
                  consultants to expedite the design and commercialization
                  efforts of the Company's broad-band transmission technology
                  over telephone wire. In consideration of the above services,
                  the Company has paid the consultant $50,000. The term of this
                  agreement is four months with the option to renew for
                  consecutive one-month terms.

                                       36
<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

For the Nine Months Ended July 31, 2001 vs. the Nine Months Ended July 31, 2000
-------------------------------------------------------------------------------

         REVENUES. Revenues for the nine months ended July 31, 2001 were $-0-.
Revenues for the nine months ended July 31, 2000 were $7,700.

         OPERATING EXPENSES. Operating expenses include amortization of project
costs, writedown of project costs, depreciation of property and equipment,
compensatory element of stock issuances, acquired in-process research and
development expenses, research and development expenses, and selling, general
and administrative costs. Total operating expenses decreased to $6,263,777 for
the nine months ended July 31, 2001, from $10,207,776 for the nine months ended
July 31, 2000. The decrease was primarily related to the effect of acquired
in-process research and development costs for the nine months ended July 31,
2000 in the amount of $6,050,000. There were increases in research and
development costs and selling, general and administrative expense of $827,442
and $1,364,647, respectively, for the nine months ended July 31, 2001 resulting
from increased research and development activities and an increase in the
Company's corporate infrastructure associated with operations from two separate
office spaces.

         The acquired in-process research and development costs in 2000 were
associated with the acquisitions of New Wheel Technology ($6,000,000) and Impact
Pictures ($50,000).

         OTHER EXPENSES. Other expenses included amortization of unearned
financing fees, interest expense and settlement of litigation. Total other
expenses increased from $170,473 for the nine months ended July 31, 2000 to
$1,777,179 for the nine months ended July 31, 2001. The increase was principally
related to an increase of $583,333 in amortization of unearned financing fees
and a settlement of litigation for shares of common stock amounting to
$1,000,000. The Company issued 250,000 shares of common stock valued at
$1,000,000 for the February 16, 2001 settlement reached with Astounding.com,
Inc. and Jack Robinson in connection with certain disputes arising from a
non-consummated merger between us and Astounding.com, Inc.

For the Three Months Ended July 31, 2001 vs. the Three Months Ended July 31,
-----------------------------------------------------------------------------
2000
----

         REVENUES. Revenues for the three months ended July 31, 2001 were $-0-.
Revenues for the three months ended July 31, 2000 were $900.

         OPERATING EXPENSES. Operating expenses include amortization of project
costs, depreciation of property and equipment, compensatory element of stock
issuances, acquired in-process research and development expenses, and selling,
general and administrative costs. Total operating expenses increased from
$1,394,703 for the three months ended July 31, 2000 to $4,395,030 for the three
months ended July 31, 2001. The increase was principally related to an increase
of $1,790,544 in the compensatory element of stock issuances, an increase of
$345,557 in research and development costs and an increase of $880,772 in
selling, general and administrative expense. The increase in selling, general
and administrative expense was due to an increase in the Company's corporate
infrastructure, which includes two separate office spaces.

                                       37
<PAGE>

         OTHER EXPENSES. Other expenses included amortization of unearned
financing fees and interest expense. Total other expenses increased from
$170,473 for the three months ended July 31, 2000 to $258,749 for the three
months ended July 31, 2001 due primarily to an increase of $83,333 in
amortization of unearned financing costs.

LIQUIDITY AND CAPITAL RESOURCES

         As of July 31, 2001, we had cash of approximately $254,000 compared to
approximately $189,000 at October 31, 2000. We had accounts payable and accrued
expenses of approximately $699,500 at July 31, 2001 and $447,000 at October 31,
2000.

         We operate in two business segments - an entertainment segment
involving the production of motion pictures, films and videos, and a
telecommunications segment involving the development of transmission
technologies. The success of our entertainment segment is dependent on future
revenues from a feature-length film for theatrical distribution that is the
subject of the joint venture production agreement discussed below. The success
of our telecommunications segment is dependent upon the successful completion of
development and testing of, and the receipt of future revenues derived from, our
transmission technology.

         During the nine months ended July 31, 2001, we incurred operating
expenses of approximately $6.3 million, of which approximately $3.9 million were
cash expenses and $2.4 million were non-cash expenses relating to compensatory
charges for stock issuances. Until we begin to receive revenues from our
business segments, we will have no operating revenues, but will continue to
incur substantial operating expenses, capitalized costs and operating losses.

         Operations have been financed through private sales of common stock and
loans, resulting in net proceeds of approximately $5,058,000 and $2,594,000 for
the nine months ended July 31, 2001 and July 31, 2000, respectively. In
addition, during the nine months ended July 31, 2000, a portion of expenses was
paid by the issuance of stock.

         Management is exploring a variety of financing alternatives in order to
fund operations, and presently intends to raise additional funds through private
equity and/or debt financings. While we believe that we will be able to secure
such additional financing, we cannot be certain that we will be able to find
such financing on reasonable terms. If we are unable to obtain additional
financing, we would be required to decrease expenses and otherwise modify our
business plan in accordance with the extent of available financing.

         In April 2000, we entered into a joint venture production agreement to
produce a feature length film for theatrical distribution. Under the agreement,
we will provide 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. The film is to be completed and ready for a
Summer 2002 release. We have 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, 2001, we had funded approximately $1,404,287 of the production
costs towards this project.

         Research and development expenses for the Company amounted to
$1,190,348 and $362,906 for the nine months ended July 31, 2001 and the nine
months ended July 31, 2000, respectively.

         On November 17, 2000, and as amended on January 22, 2001, we entered
into a private placement agreement with various investors, to sell $5,000,000 of
our common stock in several tranches at a purchase price equal to 87% of the
average market price of our common stock over the five days preceding the
closing of each draw down. We can sell stock to the investors in 5-day intervals
not to exceed $500,000 per sale. The investor may refuse to purchase the stock
in the event the average purchase price is below $2.00 per share, or if the
trading volume of our common stock is below a certain number of shares within
the period, or if we sell capital stock in excess of $5,000,000, exclusive of
any funding for our pending motion picture project. We may not apply any portion
of the draw downs towards payment of any costs related to the production of our
pending motion picture project. In May 2001, the original investors assigned
their rights and obligations under the agreement to two institutional investors.
This agreement terminates on November 17, 2002.

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

         Through July 31, 2001, we received proceeds under this agreement of
$3,930,454 from the investors in consideration of the purchase of 1,736,355
shares of our common stock.

IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
-- Deferral of the Effective Date of SFAS Statement No. 133" and in June 2000,
the FASB issued SFAS 138, "Accounting for Certain Derivative Instruments -- an
amendment of SFAS 133, Accounting for Derivative Instruments and Hedging
Activities". As a result of SFAS No. 137, SFAS No. 133 and SFAS No. 138 will be
effective for all fiscal quarters of all fiscal years beginning after June 15,
2000. We do not expect that the adoption of this standard will have a material
impact on our financial position and results of operations.

                                       38
<PAGE>

         In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain
Derivative Instruments -- an amendment of FAS 133, Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 138 will be effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. We do not
expect that the adoption of this standard will have a material impact on our
financial position and results of operations.

         In June 2000, the Financial Accounting Standards Board issued SFAS No.
139, which rescinds SFAS No. 53 and requires public companies to follow the
guidance provided by SOP 00-2.

         In March 2000, the FASB issued FASB Interpretation No. 44 ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation -- an
interpretation of APB Opinion No. 25". FIN 44 clarifies the application of
Opinion 25 with respect to (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. We adopted FIN 44 effective July 1, 2000. The adoption of the
provisions of FIN 44 did not have a material effect on our financial position or
results of operations.

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, 2001. See the Company's Annual Report on Form
10-KSB for the fiscal year ended October 31, 2000 for additional discussions
regarding quantitative and qualitative disclosures about market risk.

                           PART II - OTHER INFORMATION

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c)      During the three months ended July 31, 2001, the Company sold
         unregistered securities as follows:

1.       On Noveber 17, 2000, the Company entered into a Securities Purchase
         Agreement with eight investors to sell up to $5,000,000 of the
         Company's common stock in several tranches over the next two years. On
         May 22, 2001, we entered into an Assignment and Assumption Agreement in
         which the eight investors assigned their rights and obligations to
         purchase the Company's common stock under the Securities Purchase
         Agreement to two of the original investors. During the three months
         ended July 31, 2001, the Company received approximately $2,743,000
         under this agreement in consideration for the issuance of 1,653,662
         shares of common stock.

2.       In May and June 2001, the Company issued 50,960 shares of common stock
         valued at $171,744 to Strategica Services Corporation for consulting
         services.

3.       On June 2, 2001, the Company issued 500,000 shares of common stock to
         Ivan Berkowitz, a director of the Company, in consideration of Mr.
         Berkowitz's services to the Company. The shares had a value at the time
         of issuance of $945,000.

All transactions described above were deemed to be exempt from registration
under the Securities Act of 1933 in reliance on Section 4(2) of such Securities
Act as transactions by an issuer not involving any public offering. All
purchasers were "accredited investors" within the meaning of Regulation D under
the Securities Act of 1933. All of the securities issued in these transactions
contained a restrictive legend to the effect that they could not be sold or
transferred without registration or an applicable exemption.

                                       39
<PAGE>

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 June 27, 2001.

         (a) The Company's shareholders were asked to vote for the election of
Ivan Berkowitz, Lilly Beter, Allan Blevins, Bruce Brown, John Howell, Celso B.
Suarez, Jr., Ray Willenberg, Jr. and C. Rich Wilson III to the Board of
Directors of the Company, to hold office until the 2002 Annual Meeting of
Shareholders. The shareholders elected each director with 21,524,369 votes cast
for, 1,704,140 votes cast against, and 54,902 abstentions.

         (b) The Company's shareholders were asked to approve an amendment to
Article I of the Company's Articles of Incorporation to change the name of the
Company from New Visual Entertainment, Inc. to New Visual Corporation. This
amendment to the Company's Articles of Incorporation was approved with
23,259,347 votes cast for, 19,753 votes cast against, and 4,311 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, 2001. The shareholders ratified the selection of the
independent auditors with 23,259,010 votes cast for, 36,100 votes cast against,
and 18,301 abstentions.

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

(a)      Exhibits:

         3.1      Articles of Amendment to the Articles of Incorporation of New
                  Visual Entertainment, Inc., as filed on July 3, 2001.

(b)      Reports on Form 8-K:

         None

                                       40
<PAGE>

                                   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 14, 2001            By:  /s/ RAY WILLENBERG, JR.
                                           -------------------------------------
                                           RAY WILLENBERG, JR.
                                           President and Chief Executive Officer
                                           (PRINCIPAL EXECUTIVE OFFICER)


Dated:   September 14, 2001            By:  /s/ THOMAS J. SWEENEY
                                           -------------------------------------
                                           THOMAS J. SWEENEY
                                           Chief Financial Officer
                                           (PRINCIPAL FINANCIAL OFFICER)

                                       41