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


                                    FORM 10-Q

(MARK ONE)

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

         For the quarterly period ended January 31, 2001

                                       OR

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

         For the transition period from _______ to _______

                                   ----------
                             COMMISSION FILE NUMBER
                                     0-21785
                                   ----------

                         NEW VISUAL ENTERTAINMENT, INC.
             (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
               (Address of Principal Executive Offices) (Zip Code)


                                 (619) 692-0333
              (Registrant's Telephone Number, 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 |_|


         Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 24,782,771 shares of
the registrant's Common Stock, $.001 par value, were outstanding as of March 6,
2001.


<PAGE>

<TABLE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES

                               INDEX TO FORM 10-Q

<CAPTION>

PART I.  FINANCIAL INFORMATION
------------------------------
<S>                                                                               <C>
ITEM 1.  FINANCIAL STATEMENTS                                                     PAGE

         Consolidated Balance Sheets
             At October 31, 2000 and January 31, 2001................................3

         Consolidated Statements of Operations
             For the three months ended January 31, 2000 and 2001
             For the period from November 1, 1999 to January 31, 2001................4

         Consolidated Statements of Stockholders' Equity For the period from
             November 1, 1999 to January 31, 2001
             For the three months ended January 31, 2000 and 2001....................5

         Consolidated Statements of Cash Flows For the three months ended
             January 31, 2000 and 2001
             For the period from November 1, 1999 to January 31, 2001................9

         Notes to Consolidated Financial Statements.................................10

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS........................................31

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................33


PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS..........................................................33

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS..................................33

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES............................................34

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................34

ITEM 5.  OTHER INFORMATION..........................................................34

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K...........................................34

SIGNATURES..........................................................................36
----------

</TABLE>

                                       2
<PAGE>


ITEM 1.   FINANCIAL STATEMENTS
          --------------------

<TABLE>

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

                                     ASSETS
                                     ------
<CAPTION>
                                                                October 31,     January 31,
                                                                   2000            2001
                                                               -------------   -------------
                                                                                (Unaudited)
<S>                                                            <C>             <C>
Current Assets:
  Cash                                                         $    189,234    $    241,419
  Receivable from related parties                                    27,563          30,200
  Other current assets                                               30,227           8,394
                                                               -------------   -------------

      Total Current Assets                                          247,024         280,014

Property and equipment - net of accumulated depreciation            393,787         358,907
Other assets                                                        117,200         157,876
Film and video library                                               35,944               -
Projects under development                                          638,707         974,651
                                                               -------------   -------------

     Total Assets                                              $  1,432,662    $  1,771,447
                                                               =============   =============

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


Current Liabilities:
  Accounts payable and accrued expenses                        $    446,921    $    259,325
                                                               -------------   -------------

     Total Current Liabilities                                      446,921         259,325
                                                               -------------   -------------

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

     Total Liabilities                                            1,203,807       1,016,211
                                                               -------------   -------------

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 24,801,118 shares issued and
     Outstanding at October 31, 2000 and January 31, 2001,
     Respectively                                                    24,072          24,801
  Additional paid-in capital                                     27,813,465      30,244,615
  Unearned financing fees                                        (2,583,333)     (2,333,333)
  Accumulated deficit at October 31, 1999                       (12,300,033)    (12,300,033)
  Deficit accumulated during the development stage              (12,725,316)    (14,880,814)
                                                               -------------   -------------

     Total Stockholders' Equity                                     228,855         755,236
                                                               -------------   -------------

     Total Liabilities and Stockholders' Equity                $  1,432,662    $  1,771,447
                                                               =============   =============
</TABLE>


See notes to consolidated financial statements.

                                        3
<PAGE>
<TABLE>

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

<CAPTION>
                                                    For the Three Months Ended
                                                            January 31,          For the Period from
                                                   ----------------------------- November 1, 1999 to
                                                       2000            2001       January 31, 2001
                                                   -------------   -------------   -------------
<S>                                                <C>             <C>             <C>
REVENUES                                           $          -    $          -    $     12,200
                                                   -------------   -------------   -------------

OPERATING EXPENSES:
    Cost of sales                                             -               -          21,403
    Amortization of costs of projects                    15,406               -               -
    Projects costs written off                           10,884               -         114,613
    Depreciation of property and equipment               15,469          34,880         132,052
    Acquired in-process research and development
        Expenses                                         50,000               -       6,050,000
    Compensatory element of stock issuances              34,050               -       3,258,549
    Research and development                                  -         362,702       1,178,064
    Selling, general and administrative expenses        157,724         500,472       2,445,242
                                                   -------------   -------------   -------------

    TOTAL OPERATING EXPENSES                            283,533         898,054      13,199,923
                                                   -------------   -------------   -------------

OPERATING LOSS                                         (283,533)       (898,054)    (13,187,723)
                                                   -------------   -------------   -------------

OTHER EXPENSES:
   Interest expense                                           -           7,444          26,424
   Amortization of unearned financing costs                   -         250,000         666,667
   Litigation settlement in shares of common
     stock (Note 9)                                           -       1,000,000       1,000,000
                                                   -------------   -------------   -------------

     TOTAL OTHER EXPENSES                                     -       1,257,444       1,693,091
                                                   -------------   -------------   -------------

NET LOSS                                           $   (283,533)   $ (2,155,498)   $(14,880,814)
                                                   =============   =============   =============

BASIC AND DILUTED NET LOSS PER COMMON
   SHARE                                           $       (.02)   $       (.09)
                                                   =============   =============

WEIGHTED AVERAGE NUMBER OF COMMON
    SHARES OUTSTANDING                               17,351,598      24,247,164
                                                   =============   =============
</TABLE>


See notes to consolidated financial statements.

                                        4
<PAGE>
<TABLE>

                 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 THREE MONTHS ENDED JANUARY 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 stock for exercise of warrants
  ($2.40 per share)                                           68,750            69       164,931
Issuance of 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.

                                        5

See notes to consolidated financial statements.

<PAGE>
<TABLE>

                 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 THREE MONTHS ENDED JANUARY 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 stock for exercise of warrants
  ($2.40 per share)                                           -               -         165,000
Issuance of 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.

                                        6
<PAGE>
<TABLE>

                 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 THREE MONTHS ENDED JANUARY 31, 2000 AND 2001
<CAPTION>

                                                      Common Stock          Additional
                                               --------------------------    Paid-in
                                                  Shares        Amount       Capital
                                               ------------  ------------  ------------
                                                   (1)
<S>                                            <C>           <C>           <C>
Three Months Ended January 31, 2000:
-----------------------------------

Balance - October 31, 1999                      17,224,049   $    17,224   $12,197,374

Issuance of common stock for cash
 ($1.00 to 1.40 per share)                         177,462           177       211,732
Issuance of common stock for services
 ($1.00 to $1.40 per share)                         29,765            30        34,020
Acquisition of Impact Pictures, Inc.
 ($4.00 per share)                                  12,500            13        49,987
Net loss                                                 -             -             -
                                               ------------  ------------  ------------

Balance - January 31, 2000                      17,443,776   $    17,444   $12,493,113
                                               ============  ============  ============


Three Months Ended January 31, 2001:
------------------------------------

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)                       174,714           175       489,024
Issuance of common stock with attached
  Warrants ($5.10 per share)                        30,600            31        85,649
Issuance of stock in connection with Private
  Placement ($4.35 to $5.50 per share)              32,445            32       151,968
Issuance of shares in connection with
  litigation settlement                            250,000           250       999,750
Amortization of unearned financing costs                 -             -             -
Net loss                                                 -             -             -
                                               ------------  ------------  ------------

Balance - January 31, 2001                      24,801,118   $    24,801   $30,244,615
                                               ============  ============  ============
</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 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 THREE MONTHS ENDED JANUARY 31, 2000 AND 2001
<CAPTION>

                                                     Unearned                        Total
                                                    Financing      Accumulated    Stockholders'
                                                      Costs          Deficit         Equity
                                                  -------------   -------------   -------------
<S>                                               <C>             <C>             <C>

Three Months Ended January 31, 2000:
-----------------------------------

Balance - October 31, 1999                        $          -    $(12,300,033)   $    (85,435)

Issuance of common stock for cash
 ($1.00 to 1.40 per share)                                   -               -         211,909
Issuance of common stock for services
 ($1.00 to $1.40 per share)                                  -               -          34,050
Acquisition of Impact Pictures, Inc.
 ($4.00 per share)                                           -               -          50,000
Net loss                                                     -        (283,533)       (283,533)
                                                  -------------   -------------   -------------

Balance - January 31, 2000                        $          -    $(12,583,566)   $    (73,009)
                                                  =============   =============   =============


Three Months Ended January 31, 2001:
------------------------------------

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)                                 -               -         489,199
Issuance of common stock with attached
  Warrants ($5.10 per share)                                 -               -          85,680
Issuance of stock in connection with Private
  Placement ($4.35 to $5.50 per share)                       -               -         152,000
Issuance of shares in connection with
  litigation settlement                                      -               -       1,000,000
Amortization of unearned financing costs               250,000               -         250,000
Net loss                                                     -      (2,155,498)     (2,155,498)
                                                  -------------   -------------   -------------

Balance - January 31, 2001                        $ (2,333,333)   $(27,180,847)   $    755,236
                                                  =============   =============   =============


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

Accumulated deficit during development stage
  (November 1, 1999 to January 31, 2001)                           (14,880,814)
                                                                  -------------

Total accumulated deficit as of January 31,2001                   $(27,180,847)
                                                                  =============

</TABLE>

See notes to consolidated financial statements.

                                        8
<PAGE>
<TABLE>

                 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 OCTOBER 31, 2000 AND
                THE THREE MONTHS ENDED JANUARY 31, 2000 AND 2001

<CAPTION>
                                                         For the Three Months Ended
                                                                  January 31,         For the Period from
                                                        ----------------------------- November 1, 1999 to
                                                             2000           2001       January 31, 2001
                                                        -------------   -------------   -------------
<S>                                                     <C>             <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                             $   (283,533)   $ (2,155,498)   $(14,880,814)
   Adjustments to reconcile net loss to net cash used
      In operating activities:
        Compensatory elements of stock issuances              34,050               -       3,258,549
        Stock issued for acquired in-process research
           and development                                    50,000               -       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                   -         250,000         666,667
        Depreciation of property and equipment                15,469          34,880         132,052
        Amortization of costs of projects                     15,406               -               -

    Increase (decrease) from changes in:
        Other current assets                                       -          21,833          (8,394)
        Due from related parties                                   -          (2,638)          1,221
        Projects under development                           (15,143)       (300,000)       (955,519)
        Accounts payable and accrued expenses                (75,000)       (187,596)       (161,373)
        Other assets                                          (4,500)        (40,676)       (152,876)
                                                        -------------   -------------   -------------

          NET CASH USED IN OPERATING ACTIVITIES             (252,367)     (1,379,695)     (4,935,874)
                                                        -------------   -------------   -------------

CASH USED IN INVESTING ACTIVITIES
    Acquisition of property and equipment                     (3,452)              -        (388,733)
                                                        -------------   -------------   -------------
CASH FLOWS FROM FINANCING ACTIVITIES
   Proceeds from issuance of common stock                    211,909       1,431,880       4,581,268
   Proceeds from note payable                                      -               -         756,886
   Proceeds from exercise of warrants                              -               -         165,000
                                                        -------------   -------------   -------------

         NET CASH PROVIDED BY FINANCING ACTIVITIES           211,909       1,431,880       5,503,154
                                                        -------------   -------------   -------------

(DECREASE) INCREASE IN CASH                                  (43,910)         52,185         178,547

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

CASH AND CASH EQUIVALENTS - ENDING                      $     18,962    $    241,419    $    241,419
                                                        =============   =============   =============


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

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

    Income taxes                                        $          -    $        800    $        800
                                                        =============   =============   =============

</TABLE>

See notes to consolidated financial statements.

                                        9
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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 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
         Form 10-KSB as filed with the SEC.

         PRINCIPLES OF CONSOLIDATION

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

         DESCRIPTION OF BUSINESS

         The Company (previously known as Bellwether Investment Inc.) was
         incorporated under the laws of the State of Utah on December 5, 1985.

         In November of 1999, the Company began to focus its business activities
         on the development of new content telecommunications technologies.
         Pursuant to such plan, 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 has become 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
         January 31, 2001 and October 31, 2000, no allowance for uncollectible
         accounts was deemed necessary by management.

                                       10
<PAGE>


                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         DESCRIPTION OF BUSINESS (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 three months ended January 31, 2000 and 2001
         were $10,884 and $-0-, respectively. For the three months ended January
         31, 2000 and 2001, amortization expense related to the film and video
         library was $15,406 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 difference between the financial statement carrying
         amounts and the tax bases of existing assets and liabilities. Under
         SFAS No. 109, the effect on deferred income taxes of a change in tax
         rates is recognized income in the period that includes the enactment
         date.

                                       11
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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 January 31, 2001, as required by Statement of Financial
         Accounting Standards 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 ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         ADVERTISING

         Advertising costs are charged to operations when incurred. Advertising
         expense for the three months ended January 31, 2000 and 2001 was
         $15,528 and $-0-, 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 ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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" (FAS 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 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. The Company's adoption of the above
         Financial Accounting Standards had no material impact on the Company's
         financial statements for the three months ended January 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 ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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 three months
         ended January 31, 2000.

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


                                       15
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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, for 500,000 restricted shares of New Visual common
         stock. New Wheel was merged with the Company's Astounding Acquisition
         Corp. subsidiary, which changed its name to New Wheel Technology, Inc.
         An additional 2,500,000 restricted shares of common stock have been
         issued and placed with an escrow agent to be released to the New Wheel
         stockholders upon the achievement by New Wheel of a technological
         development milestone. 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 six months ended April 30, 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,      January 31,
                                                       2000              2001
                                                    -----------      -----------

            Furniture and fixtures                  $   51,584       $   51,584
            Camera equipment                           544,664          544,664
            Office equipment                            99,658           99,658
                                                    -----------      -----------
                                                       695,906          695,906
            Less: Accumulated depreciation             302,119          336,999
                                                    -----------      -----------

                          Total                     $  393,787       $  358,907
                                                    ===========      ===========

         For the three months ended January 31, 2000 and 2001, depreciation
         expense was $15,469 and $34,880, respectively.

                                       16
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 4 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

         Accounts payable and accrued liabilities consist of the following:


                                                     October 31,     January 31,
                                                        2000             2001
                                                     -----------     -----------

               Professional fees                     $  300,000      $  138,251
               Payroll and related taxes                 47,511               -
               Interest                                  17,906          25,350
               Miscellaneous                             81,504          96,550
                                                     -----------     -----------

                                                     $  446,921      $  259,325
                                                     ===========     ===========

NOTE 5 - LONG-TERM DEBT

         On June 29, 2000, the Company entered into five credit agreements, each
         of which granting the Company a credit facility of up to $300,000. As
         of October 31, 2000, the Company 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.

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 ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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 shall be 200,000, initially reserved for
         issuance upon exercise of the rights discussed in Note 8. 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 ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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.

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

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

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

         o        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 totalling $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 ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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 three months
         ended January 31, 2001 was $250,000.

         During the quarter ended April 2000, the Company issued 1,161,065
         shares of common stock between $1.20 and $12.00 for consulting and
         professional services totalling $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 totalling $619,650.

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


                                       20
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

         COMMON STOCK ISSUANCES DURING THE THREE MONTHS ENDED JANUARY 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
         draw down.

         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 draw downs 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 January 31, 2001, the Company has received proceeds under this
         agreement of $567,000 from the investors in consideration for the
         purchase of 109,693 shares of the Company's common stock.

         o        On November 17, 2000, the company issued 9,456 shares of
                  common stock for $5.50 per share, pursuant to the Company's
                  November 17, 2000 Private Placement agreement.

         o        On November 27, 2000, the Company issued 22,989 shares of
                  common stock for $4.35 per share, pursuant to the Company's
                  November 17, 2000 Private Placement agreement.

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

                                       21
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

         COMMON STOCK ISSUANCES DURING THE THREE MONTHS ENDED JANUARY 31, 2001
         (CONTINUED)

         - Private Placement: (Continued)

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

         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 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 February 2001, the Company issued 250,000 shares of common stock
         valued at $1,000,000 in consideration of the litigation settlement with
         Astounding.com, Inc. and Jack Robinson (Note 9). This settlement has
         been recorded during the three months ended January 31, 2001.

         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.

                                       22
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

         STOCK OPTION PLANS (CONTINUED)

         - 2000 Omnibus Securities Plan: (Continued)

         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 January 31, 2001, no options have been granted under this plan.

         - Options Outside of the Plan:

         STOCK OPTIONS

         On November 30, 2000, the Company granted to an advisory director
         options to acquire 125,000 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 30, 2010.

         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.


                                       23
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

         - Options Outside of the Plan: (Continued)

         STOCK OPTIONS (CONTINUED)

         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:


                                                             Three Months
                                                                 Ended
                                                            January 31, 2001
                                                            ----------------

              Net Loss:
                  As reported                                 $(2,155,498)
                  Proforma                                    $(3,338,873)

              Loss Per Share:
                  As reported                                     $ (0.09)
                  Proforma                                        $ (0.14)

         The fair value of stock options granted during the three months ended
         January 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>
                                       24
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 6 - STOCKHOLDERS' EQUITY (CONTINUED)

         - Options Outside of the Plan: (Continued)

         STOCK OPTIONS (CONTINUED)

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

<TABLE>
<CAPTION>

                                                                          Weighted
                                                         Shares Under     Average
                                                            Option     Exercise Price
                                                         ------------   ------------
         <S>                                               <C>                <C>
         Balance at October 31, 2000:                      1,563,750          $2.61
            Granted                                          225,000           4.00
            Exercised                                              -              -
            Cancelled                                              -              -
                                                         ------------   ------------

         Balance at January 31, 2001                       1,788,750          $2.78

         Exercisable At January 31:
            2001                                             887,188          $3.45
            2002                                           1,204,375          $3.14
            2003                                           1,531,563          $2.96
            2004                                           1,788,750          $2.78

</TABLE>

         The exercise price for options outstanding as of January 31, 2001
         ranged from $4.00 to $5.50.


                                       25
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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                                    4,302,657
            Options to purchase common stock                                     1,788,750
                                                                                -----------

            Total as of January 31, 2001                                         6,091,407
                                                                                ===========

            Substantial issuances after January 31, 2001 through March 6, 2001:

            Options granted to purchase common stock                              137,400
                                                                                ===========

            Warrants issued in connection with stock issuances                      29,161
                                                                                ===========

            Sale of common stock for cash                                           58,321
                                                                                ===========

</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.


                                       26
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

         ASTOUNDING.COM, INC. (CONTINUED)

         The Company, on March 22, 2000, filed a lawsuit in the State District
         Court in Dallas, Texas against Astounding.com, Inc. and Jack Robinson.
         The Company's complaint alleges 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 is seeking a court order confirming that the
         merger agreement is null and void, and an award of unspecified damages,
         court costs and attorneys fees. Robinson and Astounding.com have filed
         a counterclaim against New Visual alleging breach of contract and
         unjust enrichment and seeking unspecified damages, court costs and
         attorney fees. The Company denies liability and intends to vigorously
         prosecute its claim and defend itself against the counterclaim. This
         litigation was settled in February 2001. See Note 9, "Subsequent
         Events."

         INTELECON SERVICES, INC.

         On March 31, 2000, the Company signed a definitive merger agreement for
         it 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.

         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
         has brought forward a claim against Intelecon for $105,000, which is
         included in other assets at January 31, 2001.

         CONSULTING AGREEMENT

         In June 2000, the Company entered into a marketing and public relations
         agreement to publicize the Company to brokers, prospective investors,
         institutional investors, analysis 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 shall enter 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 January 31, 2001.

                                       27
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

         CONSULTING AGREEMENT (CONTINUED)

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

         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 with the Company
         that provides for base compensation in the first contract year of
         $250,000; in the second contract year, the base compensation of
         $300,000; and in the third year and during any renewal term, the 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.

         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.

                                       28
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 7 - COMMITMENTS AND CONTINGENCIES (CONTINUED)

         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 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 January 31, 2001, the Company has funded approximately $885,000 of
         production and other costs, which was included in projects under
         development in the accompanying consolidated balance sheet.

         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 February 16, 2000, the Company entered into an operating lease for
         office space in Livermore, California. The lease commenced on March 1,
         2000 and expires on February 28, 2002. The lease provides for a minimum
         annual rental of approximately $25,700 for the first year and $26,800
         the following year.

         Rent expense for the three months ended January 31, 2000 and 2001 was
         $2,000 and $20,346, 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 January 31, 2001, the Company had a bank balance in excess of
         federally insured limits by approximately $113,616.

                                       29
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



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. Even though subsequently the Company
         has received independent third party verification that this technology
         does work, there is 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 revenues, capitalized costs and operating losses.

         The Company funded its operations during the three months ended January
         31, 2001 through sales of its common stock, resulting in net proceeds
         to the Company of $1,431,880. Sales of common stock during the three
         months ended January 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
         (see Note 6).


                                       30
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 8 - BUSINESS RISKS AND SEGMENT INFORMATION (CONTINUED)

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

         For the Three Months Ended January 31, 2001:
         -------------------------------------------
<TABLE>
<CAPTION>
                                                Telecommunication  Entertainment   Corporate
                                                    Business          Business    Headquarters      Totals
                                                  ------------     ------------   ------------   ------------
          <S>                                     <C>              <C>            <C>            <C>
          Net Sales                               $         -      $         -    $         -    $         -

          Operating Loss                          $  (362,702)     $         -    $  (792,796)   $(1,155,498)

          Depreciation and Amortization           $   253,307      $     4,340    $    27,233    $   284,880

          Total Identifiable Assets               $    80,484      $ 1,234,842    $   456,121    $ 1,771,447
</TABLE>


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

NOTE 9 - SUBSEQUENT EVENTS

         RELEASE OF ESCROWED MERGER CONSIDERATION

         As per the February 2000 merger agreement with New Wheel, 2,500,000
         restricted shares of common stock were placed with an escrow agent to
         be released to the New Wheel stockholders upon the achievement of a
         technological development milestone specified in the merger agreement.
         In February 2001, the Company released these shares to the New Wheel
         shareholders as a result of the achievement of this milestone.

         ASTOUNDING.COM AND JACK ROBINSON SETTLEMENT

         On February 16, 2001, the company reached a settlement agreement with
         Astounding.com and Jack Robinson in connection with certain disputes
         arising from a non-consummated merger between the Company and
         Astounding.com, Inc. This litigation was settled by the Company
         agreeing to issue to Jack Robinson and his attorneys 250,000 restricted
         shares of its common stock. The Company in return will receive all the
         issued and outstanding common stock of Astounding.com, Inc. The Company
         also agreed to file a registration statement for all of 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 tradeable no later than June 29, 2001.

         In February 2001, the Company issued 250,000 shares of common stock
         valued at $1,000,000 in consideration of this litigation settlement.
         This settlement has been recorded during the three months ended January
         31, 2001.

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

                                       31
<PAGE>

                 NEW VISUAL ENTERTAINMENT, INC. AND SUBSIDIARIES
            (A DEVELOPMENT-STAGE COMPANY COMMENCING NOVEMBER 1, 1999)
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)
                                JANUARY 31, 2001



NOTE 9 - SUBSEQUENT EVENTS

         STOCK OPTIONS

         On March 5, 2001, the Company granted to certain employees, directors
         and advisory directors options under its 2000 Omnibus Securities Plan
         to acquire 137,400 shares of its common stock. The exercise price for
         the options, which vest over time, is $3.92 per share.


                                       32

<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 THREE MONTHS ENDED JANUARY 31, 2001 VS. THE THREE MONTHS ENDED
JANUARY 31, 2000

         REVENUES. There were no revenues for the three months ended January 31,
2001 and January 31, 2000.

         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 increased to $898,000 for the
three months ended January 31, 2001, from $284,000 for the three months ended
January 31, 2000. The increase was from research and development costs of
$363,000 related to our New Wheel subsidiary, which was acquired in February
2000, and an increase of $343,000 in selling, general and administrative expense
due to increase in our corporate infrastructure which includes two separate
office spaces.

         The acquired in-process research and development costs for the three
months ended January 31, 2000 were associated with the acquisition of Impact
Pictures ($50,000) and represent the value of the common stock issued in
connection with the acquisition. The acquisition of Impact Multimedia was in
exchange for 12,500 shares of common stock valued at $50,000.

         OTHER EXPENSES. Other expenses included amortization of unearned
financing fees, interest expense and settlement of litigation. Total other
expenses increased from $-0- for the three months ended January 31, 2000 to
$1,257,444 for the three months ended January 31, 2001. 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 the Company
and Astounding.com, Inc. This settlement has been recorded during the three
months ended January 31, 2001.

LIQUIDITY AND CAPITAL RESOURCES

         Operations have been financed through private sales of common stock and
loans, resulting in net proceeds of approximately $1,432,000 and $212,000 for
the three months ended January 31, 2001 and January 31, 2000, respectively. In
addition, during the three months ended January 31, 2000, a portion of expenses
were paid by the issuance of stock.

         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 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. 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 January 31, 2001, we had funded approximately $885,000 of the production
costs towards this project.

         Research and development expenses related to operations of our New
Wheel subsidiary totaled $363,000 and $-0- for the three months ended January
31, 2001 and the three months ended January 31, 2000, respectively.

                                       33
<PAGE>

         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. 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 January 31, 2001, we received proceeds under this agreement of
$567,000 from the investors in consideration of the purchase of 109,693 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. The Company's adoption of the above Financial Accounting Standards had no
material impact on the Company's financial statements for the three months ended
January 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 expect to
adopt the new standard effective November 1,2001, and is evaluating the effect
that such adoption may have on its consolidated and 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.

         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.

                                       34
<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         We do not engage in trading market risk sensitive instruments and do
not purchase as investments, as hedges, or for purposes "other than trading,"
instruments that are likely to expose us to market risk, whether it be from
interest rate, foreign currency exchange, commodity price or equity price risk.
We have not entered into any forward or futures contracts, purchased options or
entered into swaps. Accordingly, we do not believe our exposure to market risk
is material.


                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.
         -----------------

         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 and
Robinson breached certain contractual obligations made to the Company and
engaged in negligent and/or fraudulent misrepresentation to induce the Company
to enter into a merger agreement. The Company sought a court order confirming
that the merger agreement is null and void, and an award of unspecified damages,
court costs and attorneys fees. Astounding.com and Robinson filed a counterclaim
against the Company that alleged breach of contract and unjust enrichment, and
sought unspecified damages, court costs and attorney fees.

         On February 16, 2001, the Company, Astounding.com and Robinson entered
into a settlement agreement (the "Agreement"), pursuant to which, among other
things, (i) the parties mutually released each other from any and all claims
relating to the merger agreement and the above-referenced litigation, and (ii)
the Company acquired the outstanding stock of Astounding.com in exchange for
250,000 restricted shares of the Company's common stock issued to Robinson and
his attorneys. The Company also agreed to file a registration statement for
these shares by March 31, 2001 and to cause the registration statement to become
effective by June 29, 2001.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS
         -----------------------------------------

         During the three months ended January 31, 2001, the Company sold
unregistered securities as follows:

         1.   On November 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 at a purchase price equal to 87% of the average market
              price of the Company's common stock over the five days preceding
              each draw down. As of January 31, 2001, the Company has received
              proceeds of $567,000 under this agreement in consideration for the
              issuance of 109,693 shares of common stock.

         2.   In December 2000, the Company sold an aggregate of 219,904 shares
              of common stock to two individuals for aggregate proceeds of
              $600,000.

         3.   In January 2001, the Company sold unregistered securities as
              follows:

              o   an aggregate of 21,000 shares of common stock to six investors
                  for aggregate proceeds of $105,000;

              o   an aggregate of 174,714 shares of common stock and warrants to
                  purchase 87,357 shares (exercisable at $4.02 per share) to
                  five of the above investors and four other investors for
                  aggregate proceeds of $489,199; and

              o   an aggregate of 30,600 shares of common stock and warrants to
                  purchase 15,300 shares (exercisable at $5.10 per share) to
                  five individuals for aggregate proceeds of $85,680.

                                       35
<PAGE>

         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 represented that they 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.


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
         -------------------------------

         Not applicable.

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

         Not applicable.

ITEM 5.  OTHER INFORMATION
         -----------------

         None.

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

         (a)      Exhibits:

                  Exhibit Number        Description
                  --------------        -----------

                  10.1                  Form of Amendment to Credit Agreement
                                        dated November 13, 2000 by New Visual
                                        Entertainment, Inc. and each of the
                                        following trusts: Epic Events Trust,
                                        Ltd.; Exodus Systems Trust, Ltd.;
                                        Prospect Development Trust, Ltd.; Pearl
                                        Street Investments trust, Ltd.; and
                                        Riviera Bay Holdings Trust (incorporated
                                        by reference to Exhibit 10.9 of the
                                        Company's Annual Report on Form 10-KSB
                                        for the fiscal year ended October 31,
                                        2000 (the "2000 10-KSB")).

                  10.2                  Securities Purchase Agreement dated
                                        November 17, 2000 by and among New
                                        Visual Entertainment, Inc., Lilly Beter
                                        Capital Group, Ltd., International
                                        Caribbean Trust Limited, Cutting Edge
                                        Trust Limited, Wind & Sea Trust Limited,
                                        Montgomery Landing Trust Limited, Quail
                                        Run Trust Limited, and Tru Color Trust
                                        Limited (incorporated by reference to
                                        Exhibit 10.1 of the Company's Current
                                        Report on Form 8-K filed with the
                                        Commission on November 27, 2000).

                  10.3                  First Amendment to Securities Purchase
                                        Agreement dated January 22, 2001 by and
                                        among New Visual Entertainment, Inc.,
                                        Lilly Beter Capital Group, Ltd.,
                                        International Caribbean Trust Limited,
                                        Cutting Edge Trust Limited, Wind & Sea
                                        Trust Limited, Montgomery Landing Trust
                                        Limited, Quail Run Trust Limited, and
                                        Tru Color Trust Limited (incorporated by
                                        reference to Exhibit 10.11 of the 2000
                                        10-KSB).


                                       36
<PAGE>

         (b)      Reports on Form 8-K:

         The Company did not file any reports on Form 8-K during the quarter
ended January 31, 2001.


                                       37
<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 ENTERTAINMENT, INC.



Date:    March 19, 2001                    By:  /s/ James Kesaris
                                                ------------------------
                                                James Kesaris
                                                Chief Financial Officer and
                                                Duly Authorized Officer



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