**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON, D.C. 20549





**FORM
      10-QSB**





**x** **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





For
      the
      quarterly period ended: January 31, 2008





OR





**o** **TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**


**EXCHANGE
      ACT OF 1934**





*Commission
      file number: 0-15284*





**NATIONAL
      LAMPOON, INC.**


(Exact
      name of registrant as specified in its charter)





Delaware
              (State
                or other jurisdiction of
              Incorporation
                or organization)
            95-4053296
              (I.R.S.
                Employer
              Identification
                No.)8228
                Sunset Boulevard
              Los
                Angeles, CA 90046
              (Address
                of principal executive offices)
              (Zip
                Code)
              
              (310)
                474-5252
              (Registrant's
                telephone number including area code)








(Former
      name, former address and former fiscal year, if changed since last report)





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No x





**APPLICABLE
      ONLY TO CORPORATE ISSUERS**





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: The registrant had  8,449,206
      shares of common stock, $0.0001 par value, issued and outstanding as of March
      3,
      2008.





Transitional
      Small Business Disclosure Format (Check one):  Yes o No x









**FORWARD
      LOOKING STATEMENTS**





This
      Quarterly Report on Form 10-QSB contains “forward-looking statements” within the
      meaning of the Private Securities Litigation Reform Act of 1995 as codified
      in
      Section 27A of the Securities Act of 1933 and Section 21E of the Securities
      Exchange Act of 1934. Forward-looking statements discuss future events and
      developments, including our future business strategy and our ability to generate
      revenue, income and cash flow. In some cases, you can identify forward-looking
      statements by words or phrases such as "may," "could," "should," "expects,"
      "plans," "anticipates," "believes," "estimates," "predicts," "potential,"
      "continue," "the Company's future success depends," "seeks to continue," or
      the
      negative of these words or phrases, or comparable words or phrases. These
      statements are only predictions that are based, in part, on assumptions
      involving judgments about future economic, competitive and market conditions
      and
      future business decisions, all of which are difficult or impossible to predict
      accurately. Actual events or results may differ materially. Some of the factors
      that could cause our actual results to vary from the forward-looking statements
      include:





·
            a
                decline in the general state of the economy, which impacts the amount
                of
                money spent by consumers for entertainment products,





·
            whether
                we will be able to raise capital or debt for film financing as we
                need it,





·
            whether
                the entertainment products we produce or to which we license our
                brand
                will generate significant sales,





·
            whether
                our subsidiary, National Lampoon Networks, Inc., will be able to
                continue
                its relationships with its current advertisers and continue to attract
                new
                advertisers,





·
            our
                overall ability to successfully compete in our market and our industry,





·
            whether
                we will continue to receive the services of our executive officers
                and
                directors, particularly our Chief Executive Officer, Daniel S. Laikin,





·
            unanticipated
                increases in development, production or marketing expenses related
                to our
                various business activities,





and
      other
      factors, some of which will be outside of our control. In evaluating
      forward-looking statements, you should consider the factors identified above
      as
      well as those risks outlined in the section of this quarterly report titled
      "Management's Discussion and Analysis or Plan of Operation". Although the
      Company believes that the expectations reflected in the forward-looking
      statements are reasonable, it cannot guarantee future results, levels of
      activity, performance or achievements. You are cautioned not to place undue
      reliance on these forward-looking statements, which speak only as of the date
      on
      which they are made. The Company does not undertake to update any of the
      forward-looking statements to conform these statements to actual results. You
      should carefully review the risk factors included in the Company's Annual Report
      on Form 10-KSB and in other documents it files from time to time with the
      Securities and Exchange Commission.




2








**PART
      I - FINANCIAL INFORMATION**





**Item
      1 - Condensed Consolidated Financial Statements**





**NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**CONDENSED
                CONSOLIDATED BALANCE SHEET(UNAUDITED)




As
                ofASSETS
            
            January
                31, 2008CURRENT
                ASSETSCash
            
            $
            8,755Accounts
                receivable, net of reserves of $248,122
            
            
            1,413,712Prepaid
                expenses and other current assets
            
            
            98,036Total
                current assets
            
            
            1,520,503Fixed
                assets, net of accumulated depreciation of $186,106
            
            
            34,863Capitalized
                production costs, net of $4,355,712 of amortization
            
            
            6,180,021Capitalized
                publishing costs, net of $400,552 of amortization
            
            
            138,245Intangible
                assets, net of accumulated amortization of $4,594,170
            
            
            1,521,704Total
                non-current assets
            
            
            7,874,833TOTAL
                ASSETS
            
            $
            9,395,336LIABILITIES
                AND SHAREHOLDERS' DEFICITCURRENT
                LIABILITIESAccounts
                payable
            
            $
            1,253,303Accrued
                expenses
            
            
            122,488Notes
                payable - related party, including interest of $88,315
            
            
            1,837,107Production
                loans - related party, including interest of $271,282
            
            
            3,977,917Deferred
                income
            
            
            2,820,330TOTAL
                CURRENT LIABILITIES
            
            
            10,011,145COMMITMENTS
                AND CONTINGENCIESAccrued
                dividends payable in common stock
            
            
            4,028,205SHAREHOLDERS'
                DEFICITSeries
                B Convertible Preferred Stock, par value $.0001 per share, 63,607
                shares
                authorized, issued and outstanding
            
            
            6Series
                C Convertible Preferred Stock, par value $.0001 per share, 250,000
                shares
                authorized, 190,947 shares issued and outstanding
            
            
            18Common
                Stock, par value $.0001 per share, 60,000,000 shares authorized,
                8,429,167
                shares issued and outstanding
            
            
            843Additional
                paid-in capital
            
            
            38,628,693Accumulated
                deficit
            
            
            (43,273,574
            )TOTAL
                SHAREHOLDERS' DEFICIT
            
            
            (4,644,014
            )TOTAL
                LIABILITIES AND SHAREHOLDERS' DEFICIT
            
            $
            9,395,336The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.




3





**NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)




Three
                months ended
            
            Six
                months endedJanuary
                31,
            
            January
                31,2008
            
            2007
            
            2008
            
            2007REVENUESProduction
            
            $
            -
            
            $
            5,500
            
            $
            -
            
            $
            44,500Licensing
            
            
            309,874
            
            
            311,842
            
            
            555,416
            
            
            3,421,637Advertising
                & Promotion
            
            
            156,542
            
            
            638,092
            
            
            606,175
            
            
            1,480,822Publishing
            
            
            (78,301
            )
            
            31,954
            
            
            34,150
            
            
            170,202Distribution
            
            
            5,058
            
            
            -
            
            
            5,058
            
            
            -Tours
            
            
            110,000
            
            
            -
            
            
            110,000
            
            
            -Total
                revenues
            
            
            503,173
            
            
            987,388
            
            
            1,310,799
            
            
            5,117,161COSTS
                AND EXPENSESCosts
                related to production revenue
            
            
            6,272
            
            
            -
            
            
            19,048
            
            
            3,000Costs
                related to licensing revenue
            
            
            25,235
            
            
            96,621
            
            
            43,150
            
            
            157,816Costs
                related to advertising and promotion revenues
            
            
            133,315
            
            
            501,532
            
            
            335,613
            
            
            1,217,000Costs
                related to publishing revenues
            
            
            4,610
            
            
            -
            
            
            48,044
            
            
            -Costs
                related to distribution
            
            
            14,500
            
            
            -
            
            
            14,500
            
            
            -Amortization
                of capitalized production costs
            
            
            521
            
            
            405,897
            
            
            521
            
            
            420,269Amortization
                of intangible assets
            
            
            61,219
            
            
            60,000
            
            
            122,383
            
            
            121,140Selling,
                general and administrative expenses
            
            
            1,489,195
            
            
            1,676,204
            
            
            3,120,659
            
            
            3,203,562Total
                costs and expenses
            
            
            1,734,867
            
            
            2,740,254
            
            
            3,703,918
            
            
            5,122,787OPERATING
                LOSS
            
            
            (1,231,694
            )
            
            (1,752,866
            )
            
            (2,393,119
            )
            
            (5,626
            )OTHER
                INCOME (EXPENSE)Interest
                income
            
            
            -
            
            
            4,501
            
            
            -
            
            
            4,501Interest
                expense
            
            
            (25,893
            )
            
            (14,926
            )
            
            (45,705
            )
            
            (28,838
            )Write
                off of stale royalty
            
            
            396,250
            
            
            -
            
            
            396,250
            
            
            -Equity
                in investee loss
            
            
            -
            
            
            (800
            )
            
            -
            
            
            (800
            )Other
                income
            
            
            10,378
            
            
            21,412
            
            
            26,284
            
            
            21,412Total
                other income/(expense)
            
            
            380,735
            
            
            10,187
            
            
            376,829
            
            
            (3,725
            )NET
                LOSS
            
            
            (850,959
            )
            
            (1,742,679
            )
            
            (2,016,290
            )
            
            (9,351
            )Preferred
                stock dividends
            
            
            (297,771
            )
            
            (322,040
            )
            
            (595,542
            )
            
            (643,015
            )Net
                loss attributable to common shareholders
            
            $
            (1,148,730
            )
            $
            (2,064,719
            )
            $
            (2,611,832
            )
            $
            (652,366
            )Net
                loss per share attributable to common shareholder - basic and
                diluted
            
            $
            (0.14
            )
            $
            (0.28
            )
            $
            (0.32
            )
            $
            (0.09
            )Weighted
                average number of common shares - basic and diluted
            
            
            8,332,672
            
            
            7,356,420
            
            
            8,282,809
            
            
            7,253,967The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.





4





**NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**CONDENSED
                CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT(UNAUDITED)




Series
            
            Series
            
            Preferred
            
            
            
            Common
            
            AdditionalB
            
            C
            
            Stock
            
            Common
            
            Stock
            
            Paid
                in
            
            AccumulatedShares
            
            Shares
            
            Amount
            
            Stock
            
            Amount
            
            Capital
            
            Deficit
            
            Total**Balance
                at August 1, 2007**
            
            
            63,607
            
            
            190,947
            
            $
            24
            
            
            8,207,822
            
            $
            821
            
            $
            37,819,138
            
            $
            (41,257,284
            )
            $
            (3,437,301
            )Stock
                issued for services
            
            
            -
            
            
            -
            
            
            -
            
            
            196,760
            
            
            20
            
            
            435,250
            
            
            -
            
            
            435,270Exercise
                of options for common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            5,000
            
            
            0
            
            
            8,000
            
            
            -
            
            
            8,000Exercise
                of warrants for common stock
            
            
            -
            
            
            -
            
            
            -
            
            
            18,835
            
            
            2
            
            
            33,432
            
            
            -
            
            
            33,434Stock
                issued in exchange for intangible assets
            
            
            -
            
            
            -
            
            
            -
            
            
            750
            
            
            0
            
            
            1,425
            
            
            -
            
            
            1,425Fair
                value of options & warrants issued to consultants
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            660,369
            
            
            -
            
            
            660,369Fair
                value of vesting of employee stock options
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            266,621
            
            
            -
            
            
            266,621Series
                B Dividend accrual
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (309,310
            )
            
            -
            
            
            (309,310
            )Series
                C Dividend accrual
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (286,232
            )
            
            -
            
            
            (286,232
            )Net
                Loss for the period
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,016,290
            )
            
            (2,016,290
            )**Balance
                at January 31, 2008**
            
            
            63,607
            
            
            190,947
            
            $
            24
            
            
            8,429,167
            
            $
            843
            
            $
            38,628,693
            
            $
            (43,273,574
            )
            $
            (4,644,014
            )The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.





5





**NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)




Six
                months endedJanuary
                31,2008
            
            2007CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                Loss
            
            $
            (2,016,290
            )
            $
            (9,351
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            8,596
            
            
            6,328Amortization
                of intangible assets
            
            
            122,383
            
            
            121,140Fair
                value of shares issued for services
            
            
            435,270
            
            
            901,565Fair
                value of vested stock, options and warrants
            
            
            926,990
            
            
            -Amortization
                of capitalized production costs
            
            
            -
            
            
            424,519Provision
                for doubtful accounts
            
            
            -
            
            
            149,566Write-off
                of stale royalty payable
            
            
            (396,250
            )
            
            -Undistributed
                loss of equity investment
            
            
            -
            
            
            800Changes
                in assets and liabilitiesIncrease
                in accounts receivable
            
            
            (1,055,370
            )
            
            (44,426
            )(Increase)/decrease
                in prepaid expenses and other assets
            
            
            (32,854
            )
            
            21,041(Increase)/decrease
                in publishing costs
            
            
            (76,066
            )
            
            53,952Increase
                in production costs
            
            
            (696,513
            )
            
            (2,331,174
            )Increase/(decrease)
                in accounts payable
            
            
            323,697
            
            
            (132,031
            )(Decrease)/increase
                in accrued expenses
            
            
            (33,961
            )
            
            62,008Increase
                in deferred revenues
            
            
            1,584,557
            
            
            243,732NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (905,811
            )
            
            (532,331
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of fixed assets
            
            
            (6,028
            )
            
            (10,702
            )Purchase
                of intangible assets
            
            
            (34,163
            )
            
            (3,652
            )Investments
                in equity securities
            
            
            -
            
            
            (800
            )NET
                CASH USED IN INVESTING ACTIVITIES
            
            
            (40,191
            )
            
            (15,154
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Payments
                of production loans
            
            
            (180,178
            )
            
            -Borrowings
                on production loans
            
            
            429,550
            
            
            5,034Payments
                of notes payable, related party
            
            
            (137,305
            )
            
            (623,933
            )Proceeds
                from notes payable, related party
            
            
            715,550
            
            
            1,596,096Proceeds
                from the exercise of stock options
            
            
            8,000
            
            
            131,810Proceeds
                from the exercise of warrants
            
            
            33,434
            
            
            9,000NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            869,051
            
            
            1,118,007NET
                (DECREASE)/INCREASE IN CASH
            
            
            (76,951
            )
            
            570,522CASH
                AT BEGINNING OF PERIOD
            
            
            85,706
            
            
            74,601CASH
                AT END OF PERIOD
            
            $
            8,755
            
            $
            645,123SUPPLEMENTAL
                DISCLOSURES OF CASH FLOW INFORMATIONCash
                paid for:Taxes
            
            $
            -
            
            $
            6,850Interest
            
            $
            2,472
            
            $
            45,294Non-cash
                investing and financing activities:Stock
                and options issued for services and debt issuance costs
            
            $
            -
            
            $
            901,565Accrued
                dividends on preferred stock payable in common shares
            
            $
            595,542
            
            $
            643,015Conversion
                of accrued dividends on Series C Convertible Preferred Stock to common
                stock
            
            $
            -
            
            $
            220,104Stock
                issued in exchange for intangible assets
            
            $
            1,425
            
            $
            -The
                accompanying notes are an integral part of these condensed consolidated
                financial statements.




6





**NATIONAL
      LAMPOON, INC. AND SUBSIDIARIES**





**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**SIX
      MONTHS ENDING JANUARY 31, 2008 AND 2007**


**(UNAUDITED)**





**NOTE
      A - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**





***Basis
      of Presentation*** **.** The
      interim condensed consolidated financial statements are unaudited, but in the
      opinion of management of the Company, contain all adjustments, which include
      normal recurring adjustments, necessary to present fairly the financial position
      at January 31, 2008 and the results of operations for the three and six months
      ended January 31, 2008 and 2007 and cash flows for the six months ended January
      31, 2008 and 2007.





Certain
      information and footnote disclosures normally included in financial statements
      that have been presented in accordance with generally accepted accounting
      principles have been condensed or omitted pursuant to the rules and regulations
      of the Securities and Exchange Commission with respect to interim financial
      statements, although management of the Company believes that the disclosures
      contained in these financial statements are adequate to make the information
      presented therein not misleading.  For further information, refer to
      the consolidated financial statements and notes thereto included in the
      Company’s Annual Report on Form 10-KSB for the fiscal year ended July 31, 2007,
      as filed with the Securities and Exchange Commission.





The
      Company’s results of operations for the three and six months ended January 31,
      2008 are not necessarily indicative of the results of operations to be expected
      for the full fiscal year ending July 31, 2008.





The
      condensed consolidated financial statements of the Company include the accounts
      of National Lampoon, Inc., its wholly owned subsidiaries, National Lampoon
      Networks, Inc. and National Lampoon Tours, Inc. along with its 50% ownership
      in
      National Lampoon Clubhouse, Inc., and its 100% ownership in Bagboy, LLC and
      Ratko, LLC. During the 2007 fiscal year, the Company disposed of its interest
      in
      Totally Baked, LLC pursuant to a settlement agreement with Laughter Heals,
      Inc.
      The Company has the full and exclusive control of the management and operation
      of the business of each subsidiary and participates in 100% of the revenues
      and
      losses of its subsidiaries. The Company participates in 50% of the revenues
      and
      net losses of National Lampoon Clubhouse, Inc. Inter-company balances and
      transactions have been eliminated in consolidation.





***Organization.*** **** The
      Company was formed in California in 1986 and was primarily engaged in the
      acquisition, production and distribution of videocassette programs for retail
      sale. During the 1991 fiscal year, the Company acquired all of the outstanding
      shares of National Lampoon, Inc. (NLI). NLI was incorporated in 1967 and was
      primarily engaged in publishing National Lampoon Magazine and related
      activities. Subsequent to the Company's acquisition of NLI, it de-emphasized
      its
      videocassette business and publishing operations and began to focus primarily
      on
      exploitation of the National Lampoon(TM) trademark. The Company reincorporated
      in Delaware under the name National Lampoon, Inc. in November 2002.





On
      May
      17, 2002 a group of investors gained voting control of the Company through
      the
      acquisition of its Series B Convertible Preferred Stock and warrants to purchase
      its common stock (the "Reorganization Transaction"). Since the Reorganization
      Transaction, the Company's business has expanded to include operations other
      than licensing. On September 3, 2002, the Company's subsidiary, National Lampoon
      Networks, Inc., acquired Burly Bear Network, Inc. to gain access to campus
      television stations. The division has since expanded to the internet and now
      sells advertising space on a number of National Lampoon websites. The vast
      majority of our programming is developed for both the college network and the
      internet. Aside from providing programming to the college stations and the
      internet, National Lampoon Networks, Inc. provides an integrated marketing
      approach to retailers who wish to target the college market. The Company has
      also entered the feature film and home entertainment market, producing original
      motion pictures. In 2004, the Company began to offer travel services during
      spring break through its subsidiary, National Lampoon Tours, Inc. The Company
      has discontinued these services, however, National Lampoon Tours may continue
      to
      maintain a significant presence at Spring Break events so that we may offer
      advertising, distribute promotional material and hold live events for our
      advertisers and other customers. In 2006 the Company began publishing its own
      books and has also expanded its licensing activities by licensing its name
      to
      other books, content displayed over wireless communications devices and
      electronic games.




7





***Going
      Concern*** .
      The
      accompanying condensed consolidated financial statements have been prepared
      assuming the Company will continue as a going concern. The Company's current
      net
      loss of $2,016,290 for the six months ended January 31, 2008 along with the
      prior two years net losses of $2,504,170 and $6,859,085 as well as negative
      working capital of $8,490,642 and shareholders’ deficiency of $4,644,014 at
      January 31, 2008, raises substantial doubt about its ability to continue as
      a
      going concern. We are currently devoting efforts to raising additional capital
      and achieving profitable operations. Our ability to continue as a going concern
      is dependent upon our ability to develop additional sources of capital and
      revenue. The accompanying financial statements do not include any adjustments
      that might result from the outcome of this uncertainty. As of March 3, 2008,
      we
      had cash on hand of approximately $(38,658) and receivables totaling $1,667,438.
      We also had $1,187,092 in minimum guarantee payments due from domestic and
      foreign distributors including Comedy Central (US), Pueblo Film Distribution
      (Australia) and Beta Cinema (Germany), of which $920,142 is based on €620,000
      due at an exchange rate of $1.4841 on January 31, 2008. We are currently
      delivering two films for which the minimum guarantee payments are due upon
      notice of delivery and we expect payments to be received by the third quarter
      of
      fiscal 2008.





Our
      principal sources of funds used for operations and working capital have been
      revenues and loans received from Daniel S. Laikin, our Chief Executive Officer,
      and Timothy
      Durham, a director. The aggregate amount of the loans and accrued interest
      owed
      to Mr. Laikin and Mr. Durham at January 31, 2008 is $1,819,690 as compared
      to
      $1,241,937 at July 31, 2007. These two individuals have expressed their
      continued support to provide loans to us to meet any immediate working capital
      requirements.




***Revenue
      Recognition.***Royalty
      income from film contracts is derived from the sale of DVDs or from the
      licensing of film rights to third parties. A significant portion of royalty
      income is paid to the Company based on the timetable associated with royalty
      statements generated by third party processors, and is not typically known
      by
      the Company on a timely basis. This revenue is consequently not recognized
      until
      the amount is either known or reasonably estimable or until receipt of the
      statements from the third parties. The Company contracts with various agencies
      to facilitate collection of royalty income. When the Company is entitled to
      royalties based on gross receipts, revenue is recognized before deduction of
      agency fees, which are included as a component of cost of revenue.





The
      Company recognizes revenue from television and film productions pursuant to
      American Institute of Certified Public Accountants Statement of Position 00-2,
      “Accounting by Producers or Distributors of Films” (“SOP 00-2”). The following
      conditions must be met in order to recognize revenue under SOP 00-2:
      (i) persuasive evidence of a sale or licensing arrangement exists;
      (ii) the program is complete and has been delivered or is available for
      immediate and unconditional delivery; (iii) the license period of the
      arrangement has begun and the customer can begin its exploitation, exhibition
      or
      sale; (iv) the arrangement fee is fixed or determinable; and
      (v) collection of the arrangement fee is reasonably assured. Advance
      payments of $2,820,330 that have been received as of January 31, 2008 from
      buyers or licensees are included in the financial statements as a component
      of
      deferred revenue.





***Film
      Costs.*** ** Investment
      in film costs includes the capitalization of costs incurred to produce the
      film
      content including direct negative costs, production overhead, interest and
      development. These costs are recognized as operating expenses on an individual
      film basis in the ratio that the current year’s gross revenues bear to
      management’s estimate of total ultimate gross revenues from all sources to be
      earned over a seven-year period. Capitalized production costs are stated at
      the
      lower of unamortized cost or estimated fair value on an individual film basis.
      Revenue forecasts, based primarily on historical sales statistics, are
      continually reviewed by management and revised when warranted by changing
      conditions. When estimates of total revenues and other events or changes in
      circumstances indicate that a film has a fair value that is less than its
      unamortized cost, an impairment loss is recognized in the current period for
      the
      amount by which the unamortized cost exceeds the film’s fair value.




8





***Use
      of Estimates.*** The
      preparation of condensed consolidated financial statements in conformity with
      generally accepted accounting principles requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the condensed
      consolidated financial statements and the reported amounts of revenues and
      expenses during the reporting period. Actual results could differ from those
      estimates. Management makes estimates that effect reserves for allowance for
      doubtful accounts, estimated useful life of property and equipment, accrued
      expenses, fair value of equity instruments, reserves for any commitments or
      contingencies, debt issue costs, capitalized film costs, calculation of
      impairment, amortization expense and deferred income taxes.





***Concentrations.*** The Company maintains its cash balances at financial institutions that are
      federally insured; however, at times such balances may exceed federally insured
      limits. The Company has not experienced any losses in such accounts. The
      Company’s cash balances on deposit with banks are guaranteed by the Federal
      Deposit Insurance Corporation up to $100,000. The Company may be exposed to
      risk
      for the amounts of funds held in bank accounts in excess of the insurance limit.
      In assessing the risk, the Company’s policy is to maintain cash balances with
      high quality financial institutions. The Company had  cash
      balances in excess of the $100,000 guarantee during the six months ended January
      31, 2008.





During
      the six months ended January 31, 2008 three customers accounted for $259,117
      (20%), $198,500 (15%) and $150,000 (11%) of total revenue. During the six months
      ended January 31, 2007, one customer accounted for 62% of total revenue.





As
      of
      January 31, 2008, the Company had $920,142 (55%) and $250,000 (15%) of gross
      accounts receivable due from its largest customers.





The
      Company currently does not rely on a single vendor for a majority of its
      productions. The Company has different vendors that can be replaced if the
      need
      arises. A change in vendors would not cause a significant delay in the
      production process that would ultimately affect operating results. ****





***Fair
      Value of Financial Instruments.*** The
      carrying amount of the Company’s financial instruments including cash, accounts
      receivable, accounts payable, and accrued expenses approximate their fair value
      as of January 31, 2008 due to their short maturities. The carrying amounts
      of production loans and notes payable approximate fair value because the related
      effective interest rates on these instruments approximate the rates currently
      available to the Company.





***Intangible
      Assets.*** Intangible
      assets consist primarily of the National Lampoon trademark which is being
      amortized on a straight-line basis over twenty-five years. The Company
      continually evaluates whether events or circumstances have occurred that
      indicate the remaining estimated useful life of intangible assets should be
      revised or the remaining balance of intangible assets may not be recoverable.
      Factors that would indicate the occurrence of such events or circumstances
      include current period operating or cash flow losses, a projection or forecast
      of future operating or cash flow losses, or the inability of the Company to
      identify and pursue trademark licensing opportunities on terms favorable to
      the
      Company. Gross intangibles were approximately $6,115,874 with accumulated
      amortization of approximately $4,594,170 at January 31, 2008, which includes
      approximately $122,383 of amortization being expensed during the six months
      ended January 31, 2008. The estimated aggregate amortization expense for each
      of
      the six succeeding fiscal years is $243,000 per year, which primarily represents
      the original acquired intangible relating to the National Lampoon trademark,
      amortized over twenty-five years.




9





As
      of
      January 31, 2008, the Company has determined and tested for impairment in
      accordance with SFAS 141, paragraphs 16-21, and concluded that the expected
      future cash flows relating to its intangible assets will result in the recovery
      of the carrying value of such asset. The continued realization of these
      intangible assets, however, is dependent upon the continued exploitation of
      the
      National Lampoon trademark for use in motion pictures, television, the internet,
      merchandising and other appropriate opportunities. If these and other ventures
      that the Company may enter into do not result in sufficient revenues to recover
      the associated intangible assets, the Company's future results of operations
      may
      be adversely affected by adjustments to the carrying values of such intangible.





***Recently
      Adopted Accounting Pronouncements.*** Effective
      August 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
      Accounting for Income Taxes” (“FIN 48”). FIN 48 addresses the determination of
      whether tax benefits claimed or expected to be claimed on a tax return should
      be
      recorded in the financial statements. Under FIN 48, the Company may recognize
      the tax benefit from an uncertain tax position only if it is more likely than
      not that the tax position will be sustained on examination by the taxing
      authorities, based on the technical merits of the position. The tax benefits
      recognized in the financial statements from such a position should be measured
      based on the largest benefit that has a greater than fifty percent likelihood
      of
      being realized upon ultimate settlement. FIN 48 also provides guidance on
      de-recognition, classification, interest and penalties on income taxes,
      accounting in interim periods and requires increased disclosures. At the date
      of
      adoption, and as of January 31, 2008, the Company does not have a liability
      for
      unrecognized tax benefits, and no adjustment was required at adoption.





The
      Company files income tax returns in the U.S. federal jurisdiction and various
      states. The Company is subject to U.S. federal or state income tax examinations
      by tax authorities for years after 2002. During the periods open to examination,
      the Company has net operating loss and tax credit carry-forwards for U.S.
      federal and state tax purposes that have attributes from closed periods. Since
      these net operating loss and tax credit carry-forwards may be utilized in future
      periods, they remain subject to examination.





The
      Company’s policy is to record interest and penalties on uncertain tax provisions
      as income tax expense. As of January 31, 2008, the Company has no accrued
      interest or penalties related to uncertain tax positions. Additionally, tax
      years 2003 through 2007 remain open to examination by the major taxing
      jurisdictions to which the Company is subject.





***Recent
      Accounting Pronouncements.*** In
      February 2007, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities — including an amendment of FASB Statement
      No. 115” (FAS 159). ** FAS 159,
      which becomes effective for the Company on January 1, 2008, permits
      companies to choose to measure many financial instruments and certain other
      items at fair value and report unrealized gains and losses in earnings. Such
      accounting is optional and is generally to be applied instrument by instrument.
      The Company does not anticipate that election, if any, of this fair-value option
      will have a material effect on its consolidated financial condition, results
      of
      operations, cash flows or disclosures.





In
      September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
      Value Measurements,” which establishes a framework for measuring fair value in
      accordance with GAAP and expands disclosures about fair value measurements.
      FAS
      157 does not require any new fair value measurements but rather eliminates
      inconsistencies in guidance found in various prior accounting pronouncements.
      FAS 157 is effective for fiscal years beginning after November 15, 2007.
      The Company is currently evaluating the impact this standard will have on its
      consolidated ** financial
      condition, results of operations, cash flows or disclosures.





In
      December 2007, the FASB issued FASB Statement No. 141(R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141(R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008.
      Earlier adoption is prohibited. The Company is in the process of determining
      the
      effect, if any, that the adoption of FAS 141(R) will have on its results of
      operations or financial position.




10





In
      December 2007, the FASB issued SFAS No. 160, *“* Non-controlling
      Interests in Consolidated Financial Statements, an amendment of ARB
      No. 51”. SFAS No. 160 establishes accounting and reporting standards
      that require that the ownership interests in subsidiaries held by parties other
      than the parent be clearly identified, labeled, and presented in the
      consolidated statement of financial position within equity, but separate from
      the parent’s equity; the amount of consolidated net income attributable to the
      parent and to the non-controlling interest be clearly identified and presented
      on the face of the consolidated statement of income; and changes in a parent’s
      ownership interest while the parent retains its controlling financial interest
      in its subsidiary be accounted for consistently. SFAS No. 160 also requires
      that any retained non-controlling equity investment in the former subsidiary
      be
      initially measured at fair value when a subsidiary is deconsolidated. SFAS
      No. 160 also sets forth the disclosure requirements to identify and
      distinguish between the interests of the parent and the interests of the
      non-controlling owners. SFAS No. 160 applies to all entities that prepare
      consolidated financial statements, except not-for-profit organizations, but
      will
      affect only those entities that have an outstanding non-controlling interest
      in
      one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160
      is effective for fiscal years, and interim periods within those fiscal years
      beginning on or after December 15, 2008. Earlier adoption is prohibited.
      SFAS No. 160 must be applied prospectively as of the beginning of the
      fiscal year in which it is initially applied, except for the presentation and
      disclosure requirements. The presentation and disclosure requirements are
      applied retrospectively for all periods presented. The Company does not have
      a
      non-controlling interest in one or more subsidiaries. Accordingly, the Company
      does not anticipate that the initial application of SFAS No. 160 will have
      an impact on the Company.





***Net
      Income or Loss per Share.*** Basic
      loss per share is calculated by dividing net loss available to common
      stockholders by the weighted average number of common shares outstanding during
      the period. Diluted loss per share is calculated assuming the issuance of common
      shares under the treasury stock method, if dilutive, resulting from the exercise
      of stock options and warrants. Basic and diluted losses per share are the same
      at January 31, 2008 and 2007, as common equivalent shares have been excluded
      from the computation due to the fact that they are anti-dilutive. Options and
      warrants to purchase 6,465,726 and 8,304,039 common shares during the six months
      ended January 31, 2008 and 2007, respectively, are not included in the
      calculation of diluted earnings per share because their inclusion would be
      anti-dilutive. 7,402,431 and 7,450,431 shares that would be issuable upon
      conversion of the convertible preferred stock are not included in the
      calculation of diluted earnings per share during the six months ended January
      31, 2008 and 2007, respectively, because their inclusion would be anti-dilutive.





At
      January 31, 2008, there are 63,607 Series B Convertible Preferred Shares and
      190,947 Series C Convertible Preferred Shares. Upon conversion of the 63,607
      Series B Convertible Preferred Shares, 3,583,491common shares would be issuable.
      Upon conversion of the 190,947 Series C Convertible Preferred Shares, 3,818,940
      common shares would be issuable. This would result in a diluted weighted average
      number of shares of 17,124,996 for the six months ended January 31, 2008.





Each
      Series B Convertible Preferred Share is convertible into 56.338 common shares.
      Each Series C Convertible Preferred Share is convertible into 20 common shares.
      Warrants attached to the Series B and Series C Convertible Preferred Stock
      are
      not included in the calculation of diluted earnings per share during the three
      and six months ended January 31, 2008 because their inclusion would be
      anti-dilutive.





***Stock
      Based Compensation*** **.** The
      Company periodically issues stock options and warrants to employees and
      non-employees in non-capital raising transactions for services and for financing
      costs. The Company adopted Statement of Financial Accounting Standards (SFAS)
      No. 123R effective January 1, 2006 and is using the modified prospective method
      in which compensation cost is recognized beginning with the effective date
      (a)
      based on the requirements of SFAS No. 123R for all share-based payments granted
      after the effective date and (b) based on the requirements of SFAS No. 123R
      for
      all awards granted to employees prior to the effective date of SFAS No. 123R
      that remained unvested on the effective date. The Company accounts for stock
      option and warrant grants issued and vesting to non-employees in accordance
      with
      EITF No. 96-18: “Accounting for Equity Instruments that are Issued to Other Than
      Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
      EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity
      Instruments Granted to Other Than Employees” whereas the value of the stock
      compensation is based upon the measurement date as determined at either a)
      the
      date at which a performance commitment is reached, or b) at the date at which
      the necessary performance to earn equity instruments is complete.




11





The
      Company recognizes compensation cost for equity-based compensation for all
      new
      modified grants issued after December 31, 2005. In addition, commencing January
      1, 2006, the Company recognized the unvested portion of the grant date fair
      value of awards issued prior to adoption of SFAS No. 123R based on the fair
      values previously calculated for disclosure purposes over the remaining vesting
      period of the outstanding stock options and warrants.





The
      fair
      value of options was estimated on the date of grant using the Black-Scholes
      option pricing model with the following weighted-average assumptions for the
      six
      months ended January 31, 2008 and 2007:




January
                31
            
            January
                312008
            
            2007Dividend
                yield
            
            —
            
            —Risk-free
                interest rate
            
            
            5.5
            %
            
            5.5
            %Expected
                volatility
            
            
            49.25
            %
            
            68.4
            %Expected
                life of options (years)
            
            
            4
                - 10
            
            
            6





**NOTE
      B - CAPITALIZED PRODUCTION COSTS**





The
      following table summarizes the net capitalized film and television costs in
      various stages of production at January 31, 2008:





January
                31,
              2008Development-television
            
            $
            -Development-theatrical
            
            
            6,062,470Completed-theatrical
            
            
            117,551Total
                film and television costs
            
            $
            6,180,021





The
      Company expects to amortize within three years 90% of capitalized film costs
      based on the estimated costs and ultimate revenue projected. The portion of
      the
      costs of the Company's films that are expected to be amortized during the
      upcoming 12 months is approximately $2,689,241.





**NOTE
      C - FIXED ASSETS**





Fixed
      assets are comprised of the following as of January 31, 2008:





January
                31,
              2008Computer
                equipment
            
            $
            176,883Camera
                and lighting equipment
            
            
            39,869Furniture
                and office equipment
            
            
            4,217220,969Accumulated
                depreciation
            
            
            (186,106
            )$
            34,863






12




Depreciation
      expense for the six months ended January 31, 2008 and 2007 was $8,596 and
      $6,328, respectively.





**NOTE
      D - NOTES PAYABLE TO RELATED PARTIES AND ACCRUED INTEREST**





Notes
      payable to related parties and accrued interest consist of the following at
      January 31, 2008:





January
                31,
              2008(A)
                Payable to Daniel Laikin
            
            $
            1,146,072(B)
                Payable to Timothy Durham
            
            
            600,454(C)
                Payable to Christopher Williams
            
            
            90,581$
            1,837,107





(A)
      As of
      January 31, 2008, the Company owed Daniel Laikin, the Company's Chief Executive
      Officer, $1,080,640 in principal and $65,432 in interest. The loans bear
      interest at the rate of 6% per annum. The obligation to Mr. Laikin is unsecured
      and payable on demand. During the six months ending January 31, 2008, the
      Company received additional net advances of $110,640 from Mr. Laikin.





(B)
      As of
      January 31, 2008, the Company owed Timothy Durham, a director, $584,819 in
      principal and $15,635 in interest. The loans bear interest at the rate of 6%
      per
      annum. The obligation to Mr. Durham is unsecured and payable on demand. During
      the six months ending January 31, 2008, the Company received advances of
      $422,025 from Mr. Durham.





(C)
      As of
      January 31, 2008, the Company owed Christopher R. Williams, a shareholder,
      $83,333 in principal and $7,248 in interest. The loans bear interest at the
      rate
      of 6% per annum. The obligation to Mr. Williams is payable on demand. During
      the
      six months ending January 31, 2008, no principal and no interest had been paid
      to Mr. Williams.





**NOTE
      E - PRODUCTION LOANS FROM RELATED PARTIES AND ACCRUED INTEREST**





Outstanding
      production loans from related parties and accrued interest consist of the
      following as of January 31, 2008:





January
                31,
              2008(A) Red
                Rock Productions, Inc. - Bag Boy Productions, Inc.
            
            $
            1,784,210(B)
                Red Rock Productions, Inc. - Ratko Productions, Inc.
            
            
            2,120,543(C)
                Dan Laikin
            
            
            73,164$
            3,977,917





(A)
            On
                October 26, 2006, the Company entered into a financing agreement
                with Red
                Rock Productions Inc. (Red Rock) regarding the financing of the theatrical
                motion picture*Bag
                Boy*.
                Red Rock Pictures Holdings, Inc. is a publicly traded company and
                related
                party (See Note G). In accordance with the agreement, Red Rock agreed
                to
                loan the Company up to $2,000,000 (unless otherwise agreed to by
                both
                parties) to fund this film, with payments to be made according to
                an
                approved production cash flow as provided by the Company. Red Rock
                will be
                entitled to recoup its investment plus interest at 10% accruing on
                the
                average daily balance from the date the loan is provided to the Company.
                Red Rock will also be entitled to contingent participation of 25%
                of all
                net contingent proceeds from the picture. Red Rock has a security
                interest
                in the film to the extent of the actual amount of the funding as
                long as
                there is an unpaid balance on the loan. As of January 31, 2008, advances
                to the Company totaled $1,784,210, under this financing agreement.




13




(B)
            On
                October 26, 2007, the Company entered into a financing agreement
                with Red
                Rock regarding the financing of the theatrical motion picture*Ratko*.
                In accordance with the agreement, Red Rock agreed to loan the Company
                up
                to $2,000,000 to fund this film, with payments to be made according
                to an
                approved production cash flow as provided by the Company. Red Rock
                will be
                entitled to recoup its investment plus interest at 10% accruing on
                the
                average daily balance from the date the loan is provided to the Company.
                Red Rock will also be entitled to contingent participation of 25%
                of all
                net contingent proceeds from the picture. Red Rock has a security
                interest
                in the film to the extent of the actual amount of the funding as
                long as
                there is an unpaid balance on the loan. As of January 31, 2008, advances
                to the Company totaled $2,120,543 under this financing agreement.





(C)
            Mr.
                Laikin, the Company's Chief Executive Officer, has made various loans
                to
                us for film financing. As of January 31, 2008, he was owed $67,000
                in
                principal and $6,164 in interest for these production loans. The
                loans
                bear interest at the rate of 6% per annum.





**NOTE
      F - ACCRUED SERIES B AND C DIVIDENDS**





Dividends
      accrue on the Company's Series B and Series C Convertible Preferred Stock.
      The
      Company accrued dividends on a daily basis and will continue to do so until
      the
      date at which the Series B or Series C Convertible Preferred Stock is converted,
      until a liquidation event occurs, or, in the case of the Series C Convertible
      Preferred Stock, until the redemption date (although the redemption date is
      not
      defined and there is no right of redemption as to the Series C Convertible
      Preferred Stock). Dividends accrue at the rate of 9% per annum on the sum of
      the
      original purchase price of the Series B or Series C Convertible Preferred Stock
      plus all accumulated and unpaid dividends thereon (compounding annually).
      Dividends that accrue on the Company's Series B and Series C Convertible
      Preferred Stock must be paid with our common stock. During the six-month periods
      ended January 31, 2008, the Company had accrued $595,542 of Series B and Series
      C dividends.





At
      January 31, 2008, the Company had accrued $4,028,205 representing the total
      value of the dividends for Series B and Series C convertible preferred stock
      dividends.





On
      conversion of the Series B and Series C Convertible Preferred Stock, the Company
      becomes liable to pay dividends. Conversion of dividends on the Series B and
      Series C Convertible Preferred Stock are computed using the closing price of
      the
      common stock, as reported by the exchange or regulated quotation service on
      which the Company's common stock is traded, on the trading date immediately
      preceding the date that the Company becomes liable to pay the dividend. If
      no
      trades were made on that date, then the number of shares to be issued is
      computed using the closing price of the last date on which trades were made
      and
      reported.




14





**NOTE
      G - INVESTMENT IN RED ROCK**





In
      October 2006, the Company invested $800 in Red Rock Pictures Holdings, Inc.,
      (“Red Rock”) which was then merged into a publicly traded entity. The investment
      represents 11,769,236 shares or approximately 18% of the total outstanding
      shares of Red Rock. Three members of National Lampoon’s board of directors,
      Robert Levy, Tim Durham and Daniel Laikin, also own stock in Red Rock. The
      Company recorded the transaction under the equity method due to the
      determination it had significant influence, and recognized its proportionate
      share of the investee’s losses not to exceed the $800 investment. In addition,
      the Company’s investment had been determined to not be a variable interest
      entity in accordance with FIN46(R) since Red Rock was not formed for the primary
      benefit of the Company, and the Company does not have an obligation to absorb
      the losses, nor receive any return. The fair market value of each share of
      Red
      Rock is $0.06 as of January 31, 2008. Included in the accompanying balance
      sheet
      as of January 31, 2008 are notes payable to Red Rock of $3,904,753. In September
      2006, Red Rock entered into a sub lease agreement with National Lampoon, Inc.
      for office space at $2,000 per month. In August 2007 Red Rock hired a consultant
      who is also a shareholder of National Lampoon, to provide marketing services.
      The consultant hired National Lampoon to provide marketing services for a total
      of $198,500, which is included in revenue for the six months ended January
      31,
      2008.





**NOTE
      H - ISSUANCE OF COMMON STOCK**





During
      the six months ended January 31, 2008, 56,545 shares of restricted stock were
      issued at market prices ranging from $1.90 to $2.52 with a total value of
      $135,111 to various consultants of the Company for services rendered. In
      addition, 136,044 shares of registered stock were issued at market prices
      ranging from $1.65 to $2.55 with a total value of $291,189 to various
      consultants of the Company for services rendered. Furthermore, 4,171 shares
      of
      registered stock were issued at a market price of $2.15, having a total
      value of $8,968, for fees owed to the Board of Directors.





During
      the six months ended January 31, 2008, 5,000 shares of restricted stock were
      issued upon the exercise of options at an exercise price of $1.60 resulting
      in
      proceeds of $8,000. In addition, 18,835 shares of restricted stock were issued
      upon the exercise of 18,835 warrants attached to the Series C Convertible
      Preferred Stock at an exercise price of $1.775 resulting in proceeds of $33,432.
      Furthermore, 750 restricted shares were issued at a market price of $1.90 with
      a
      total value of $1,425 for the purchase of intangible assets.





**NOTE
      I - COMMITMENTS AND CONTINGENCIES**





*Film
      Financing Commitments*





As
      of
      January 31, 2008, the Company had obtained $3,904,753 of funding under finance
      agreements with Red Rock for its motion picture projects, *National
      Lampoon’s* *Bag
      Boy* and *National
      Lampoon’s* *Ratko:
      The Dictator’s Son* .
      The
      terms of the financing provide for the investor to recoup its contribution
      plus
      interest from the first proceeds of these films. After all costs are
      recouped by the Company, the investor is entitled to 25% of the net profits
      paid to the Company, but the investor does not have any ownership rights in
      the
      film (See Note E).





The
      Company has also entered into various distribution agreements for the marketing
      and distribution of certain films listed below. The Company will receive varying
      distribution fees ranging from 20% to 25% relating to the exploitation and
      distribution of these films. These films will require the Company to contribute
      certain production and print and advertising costs for the completion and
      distribution of these films as follows:





Funding
                CommitmentsPrints
                & Advertising
            
            TotalFilm
            
            Production
            
            Lower
            
            Upper
            
            Lower
            
            UpperHomo
                Erectus
            
            $
            90,000
            
            $
            200,000
            
            $
            400,000
            
            $
            290,000
            
            $
            490,000Beach
                Party at the Threshold of Hell
            
            
            50,000
            
            
            300,000
            
            
            500,000
            
            
            350,000
            
            
            550,000Electric
                Apricot - The Quest for Festaroo
            
            
            -
            
            
            300,000
            
            
            300,000
            
            
            300,000
            
            
            300,000One,
                Two, Many
            
            
            105,000
            
            
            300,000
            
            
            300,000
            
            
            405,000
            
            
            405,000$
            245,000
            
            $
            1,100,000
            
            $
            1,500,000
            
            $
            1,345,000
            
            $
            1,745,000




15




*Litigation*





National
      Lampoon, Inc. v. Alma Investments (d/b/a Bahia Mar Hotel) (Los Angeles Superior
      Court Case No. BC 356118). The Company filed this complaint on July 27, 2006.
      The action arises from an agreement the Company had with Bahia Mar Hotel
      pursuant to which we were to provide to Bahia Mar Hotel an entertainment package
      for the 2006 spring break. We have alleged that Bahia Mar Hotel failed to
      support the program, and, in fact, diverted some of the business to our
      competitors. In our complaint, we have alleged causes of action for fraud,
      breach of contract, promissory estoppel, quantum meruit and breach of the
      covenant of good faith and fair dealing. On February 4, 2008, the Company
      entered into a settlement agreement with Alma Investments. The Company agreed
      to
      dismiss the complaint against Alma Investments in exchange for a payment of
      $110,000 to be made upon execution of the settlement agreement. The settlement
      amount was recognized as revenue and applied entirely towards approximately
      $143,000 in legal fees directly related to the case and the remaining balance
      was written off by our attorneys.





Cinergy
      Creative, Inc. and Leslie Allen v. National Lampoon Clubhouse, Inc., National
      Lampoon, Inc., Majestic Entertainment, Inc. and Lorenzo Doumani (Los Angeles
      Superior Court Case No. SC091496). This complaint was filed on October 20,
      2006.
      The plaintiffs allege causes of action for alter ego, breach of written
      contract, breach of oral contract, breach of the implied covenant of good faith
      and fair dealing, quantum meruit, fraud and deceit based on promises made
      without intention to perform, intentional misrepresentation, slander per se,
      libel per se, breach of confidence, declaratory relief, conversion, untrue
      or
      misleading advertising, unfair competition and negligence. Specifically, the
      plaintiffs allege that we and our co-defendants induced them to set aside other
      projects so that they would spend their time working on projects for the benefit
      of us and our co-defendants. The plaintiffs also allege that they were promised
      a share of profits from the projects and/or a "partnership" interest in them.
      The plaintiffs allege that their damages are in excess of $2,000,000. The
      Company entered into a settlement agreement with the plaintiffs dated November
      5, 2007. The plaintiffs agreed to dismiss the complaint against the Company
      in
      exchange for a payment of $50,000 to be made within 90 days from the execution
      of the settlement agreement. The Company’s portion of the payment was made
      during February 2008. The remaining defendants have reached settlements as
      well.





Screen
      Actor’s Guild v. National Lampoon Clubhouse, Inc. During late 2006, the Screen
      Actor’s Guild (“SAG”) filed claims against National Lampoon Clubhouse, Inc.
      (“Clubhouse”) for unpaid wages and pension, health and welfare benefits incurred
      for the filming of “Monster House” aka “Trick or Treat”. SAG alleges that
      certain actors were not paid in full and are owed more compensation, expenses
      and benefit payments under the SAG agreement. Clubhouse disputes these claims
      and intends to vigorously defend this action. An arbitration with SAG is
      scheduled for April 2008.





American
      Cinema Distribution Corporation v. National Lampoon, Inc. In August 2007, the
      American Cinema Distribution Corporation (“ACDC”) filed claims against National
      Lampoon, Inc. for costs incurred on the release of “National Lampoon’s Pucked”.
      ACDC alleges that the Company did not perform distribution services as agreed
      and that ACDC should be reimbursed for distribution costs it incurred estimated
      at $65,000. ACDC also alleges that it does not owe distribution fees to the
      Company for marketing, publicity, promotional and advertising services the
      Company provided which services the Company alleges have a value in excess
      of
      $290,000. The Company disputes these claims and has filed a demand for
      arbitration against ACDC as the agreement calls for and intends to vigorously
      defend this action.




16




**NOTE
      J - STOCK OPTIONS AND WARRANTS**





On
      January 30, 2002, the Company adopted the Amended and Restated 1999 Stock
      Option, Deferred Stock and Restricted Stock Plan (the "1999 Plan"), which was
      thereafter approved by the Company's shareholders at its annual meeting on
      April
      25, 2002. The options may be granted from time to time by the Compensation
      Committee. Individuals eligible to receive options include employees of the
      Company, consultants to the Company and directors of the Company. The
      options must have a fixed price, which may not be less than 100% of
      the fair market value per share on the grant date. The total number
      of shares of common stock reserved for awards is 6,500,000.





At
      January 31, 2008 options outstanding are as follows:





Number
                of
              options
            
            Weighted
              average
              exercise
              price
            
            Aggregate
              intrinsic
              value
                (1)Balance
                at August 1, 2007
            
            
            5,369,606
            
            $
            2.55Granted
            
            
            1,063,389
            
            
            2.16Exercised
            
            
            (5,000
            )
            
            1.60Forfeited
            
            
            (660,000
            )
            
            2.71Expired
            
            
            (40,000
            )
            
            3.65Balance
                at January 31, 2008
            
            
            5,727,995
            
            $
            2.46
            
            $
            323,906





(1)
      The
      aggregate intrinsic value was calculated as the difference between the market
      price and the exercise price of the Company’s stock for the 2,051,606 options
      outstanding which were in-the-money.





Additional
      information regarding options outstanding as of January 31, 2008 is as follows:





Options
                outstanding
            
            Options
                exercisableExercise
                price
            
            Number
              outstanding
            
            Weighted
              average
              remaining
              contractual
              life
                (years)
            
            Weighted
              average
              exercise
                price
            
            Number
              exercisable
            
            Weighted
              average
              exercise
                price$1
                to $2
            
            
            2,201,606
            
            
            3.98
            
            $
            1.75
            
            
            2,101,606
            
            $
            1.75$2
                to $3
            
            
            2,119,389
            
            
            6.38
            
            
            2.26
            
            
            1,081,724
            
            
            2.31$3
                to $4
            
            
            1,073,000
            
            
            2.47
            
            
            3.25
            
            
            1,053,000
            
            
            3.25$4
                to $5
            
            
            132,000
            
            
            4.60
            
            
            4.13
            
            
            98,667
            
            
            4.12$5
                to $6
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -$6
                to $7
            
            
            102,000
            
            
            3.00
            
            
            6.41
            
            
            102,000
            
            
            6.41$7
                to $8
            
            
            100,000
            
            
            1.91
            
            
            7.38
            
            
            100,000
            
            
            7.38**Total**
            
            
            5,727,995
            
            
            4.55
            
            $
            2.46
            
            
            4,536,997
            
            $
            2.53







17




At
      January 31, 2008 warrants outstanding are as follows:





Number
                of
              warrants
            
            Weighted
              average
              exercise
                price
            
            Aggregate
              intrinsic
                value
              (1)Balance
                at August 1, 2007
            
            
            1,286,731
            
            $
            3.59Granted
            
            
            40,000
            
            
            1.75Cancelled
            
            
            (589,000
            )
            
            4.07Balance
                at January 31, 2008
            
            
            737,731
            
            $
            3.10
            
            $
            3,000





(1)
      The
      aggregate intrinsic value was calculated as the difference between the market
      price and the exercise price of the Company’s stock for the 40,000 warrants
      outstanding which were in-the-money.





Additional
      information regarding warrants outstanding as of January 31, 2008 is as follows:





Warrants
                outstanding
            
            Warrants
                exercisableExercise
                price
            
            Number
              outstanding
            
            Weighted
              average
              remaining
              contractual
              life
                (years)
            
            Weighted
              average
              exercise
                price
            
            Number
              exercisable
            
            Weighted
              average
              exercise
                price$1
                to $2
            
            
            40,000
            
            
            1.64
            
            $
            1.75
            
            
            20,000
            
            $
            1.75$2
                to $3
            
            
            185,004
            
            
            7.21
            
            
            2.58
            
            
            185,004
            
            
            2.58$3
                to $4
            
            
            512,727
            
            
            2.10
            
            
            3.40
            
            
            446,060
            
            
            3.46**Total**
            
            
            737,731
            
            
            3.36
            
            $
            3.10
            
            
            651,064
            
            $
            3.15





Stock
      based compensation expense related to the vesting of stock options and
      warrants of $926,990 and $722,940 was recognized during the six months
      ended January 31, 2008 and 2007, respectively. As of January 31, 2008, the
      unamortized value of these option awards and warrants was $1,236,619, which
      will
      be amortized as stock based compensation cost over the average of approximately
      three years as the options and warrants vest.





**NOTE
      K - SEGMENT INFORMATION**





Segment
      Reporting - SFAS No. 131, “Disclosures About Segments of an Enterprise and
      Related Information” results in the use of a management approach in identifying
      segments of an enterprise. The Company operates in five business segments:
      (i)
      licensing and exploitation of the National Lampoon(TM) trademark and related
      properties including the sale of products to consumers; (ii) advertising and
      promotion through field marketing, live events and the distribution of
      television programming on college campuses; (iii) production of DVD and
      television products; (iv) travel services; and (v) distribution. Segment
      operating income/(loss) excludes the amortization of intangible assets, interest
      expense, interest income, other income and expenses and income taxes.
      Selling, general and administrative expenses not specifically attributable
      to
      any segment have been prorated based on revenue among the five segments.




18





Summarized
      financial information for the three and six months ended January 31, 2008 and
      2007 concerning the Company's segments is as follows:




Licensing
              &
              Publishing
              (1)
            
            Advertising
              &
              Promotion
              (2)
            
            Production
              (3)
            
            Travel
                Services
              (4)
            
            Distribution
              (5)
            
            TotalThree
                Months Ended January 31, 2008Segment
                revenue
            
            $
            231,573
            
            $
            156,543
            
            $
            -
            
            $
            110,000
            
            $
            5,058
            
            $
            503,174Segment
                operating (loss)
            
            $
            (483,637
            )
            $
            (440,075
            )
            $
            (6,794
            )
            $
            (215,556
            )
            $
            (24,412
            )
            $
            (1,170,474
            )Depreciation
                expense
            
            $
            3,502
            
            $
            876
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            4,379Three
                Months Ended January 31, 2007Segment
                revenue
            
            $
            343,796
            
            $
            638,092
            
            $
            5,500
            
            $
            -
            
            $
            -
            
            $
            987,388Segment
                operating (loss)
            
            $
            (336,457
            )
            $
            (946,675
            )
            $
            (409,734
            )
            $
            -
            
            $
            -
            
            $
            (1,692,866
            )Depreciation
                expense
            
            $
            1,767
            
            $
            1,623
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            3,390Six
                Months Ended January 31, 2008Segment
                revenue
            
            $
            589,566
            
            $
            606,175
            
            $
            -
            
            $
            110,000
            
            $
            5,058
            
            $
            1,310,799Segment
                operating (loss)
            
            $
            (910,166
            )
            $
            (1,101,032
            )
            $
            (19,569
            )
            $
            (215,556
            )
            $
            (24,412
            )
            $
            (2,270,735
            )Depreciation
                expense
            
            $
            6,829
            
            $
            1,767
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            8,596Six
                Months Ended January 31, 2007Segment
                revenue
            
            $
            3,591,839
            
            $
            1,480,822
            
            $
            44,500
            
            $
            -
            
            $
            -
            
            $
            5,117,161Segment
                operating income/(loss)
            
            $
            1,649,131
            
            $
            (1,145,460
            )
            $
            (388,158
            )
            $
            -
            
            $
            -
            
            $
            115,513Depreciation
                expense
            
            $
            3,129
            
            $
            3,199
            
            $
            -
            
            $
            -
            
            $
            -
            
            $
            6,328





**NOTE
      L - SUBSEQUENT EVENTS**





Subsequent
      to January 31, 2008, we issued 15,039 shares of registered stock at market
      prices ranging from $1.94 to $2.16 with a total value of $30,492 to various
      consultants and employees of the Company for services rendered.





On
      February 26, 2008, the Company issued 5,000 shares of restricted stock at a
      market price of $2.00 with a total value of $10,000 to purchase assets of a
      company. The Company has the option to purchase the remaining assets of the
      acquired company by issuing restricted stock with a total value of $65,000
      within 60 days of the effective date of the agreement, which is January 16,
      2008.





On
      February 27, 2008 we received a letter from the American Stock Exchange which
      indicated that we do not meet certain of the American Stock Exchange’s continued
      listing standards as set forth in Part 10 of the Amex Company Guide.
      Specifically, we are not in compliance with Section 1003(a)(iv) of the Company
      Guide because we have sustained losses which are substantial in relation to
      our
      overall operations or our existing financial resources, or our financial
      condition has become so impaired that it appears questionable, in the opinion
      of
      the American Stock Exchange, as to whether we will be able to continue our
      operations and/or meet our obligations as they mature.





We
      have
      until March 27, 2008 to provide the American Stock Exchange with a specific
      plan
      to achieve and sustain compliance with the continued listing standards.
      Compliance must be achieved no later than August 27, 2008. If we either fail
      to
      submit a plan or if we submit a plan and the staff of the American Stock
      Exchange determines that it does not adequately address these issues, we may
      be
      subject to delisting proceedings. Furthermore, if our plan is accepted but
      we
      are not in compliance with the continued listing standards at the conclusion
      of
      the plan period or if we do not make progress consistent with the plan during
      the plan period, the staff of the American Stock Exchange will initiate
      delisting proceedings as appropriate. We may appeal the staff determination
      to
      initiate delisting proceedings.





We
      expect
      to submit a plan to the American Stock Exchange to regain compliance with the
      continued listing standards on or before March 27, 2008.




19




**Item
      2 - Management's Discussion and Analysis or Plan of Operation**





Management's
      Discussion and Analysis or Plan of Operation discusses the Company's
      consolidated financial statements, which have been prepared in accordance with
      accounting principles generally accepted in the United States. The preparation
      of these financial statements requires management to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      the
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. On an on-going basis, management evaluates its estimates
      and
      judgments. Management bases its estimates and judgments on historical experience
      and on various other factors that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying value of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions.





**Overview**





We
      are a
      media and entertainment company that creates and distributes comedic content.
      The National Lampoon(TM) brand was initially developed in 1970 through
      publication of *National
      Lampoon Magazine* and
      later
      through the use of our name on motion pictures, including *National
      Lampoon's Animal House* and *National
      Lampoon's Vacation* .
      Our
      plan is to expand the use of our brand in order to increase the revenues we
      generate through license fees, advertising and other sources. We are pursuing
      this plan as follows:





*Motion
      Picture Production and Distribution*





We
      produce feature films. Historically, with the exception of the film produced
      by
      National Lampoon Clubhouse, Inc., motion pictures that carry our brand have
      been
      produced and financed by third parties. Thirty four motion pictures have been
      released using the National Lampoon(TM) name.





We
      decided to produce and finance motion pictures under the National Lampoon name
      in order to control both the creative process and the distribution of the film,
      to build a film library, and to expand our brand awareness.





We
      have
      an interest in National Lampoon Clubhouse, Inc., a production entity, which
      produced the film *Monster
      Night* aka *Trick
      or Treat* . *Monster
      Night* was
      released in the fall of 2006. We also own 18% of Red Rock Picture Holdings,
      Inc.
      (sometimes referred to in this report as “Red Rock”), a development-stage
      company formed in August 2006. Red Rock was formed for the purpose of providing
      financing and consulting services relating to the production and exploitation
      of
      motion pictures. We entered into a non-exclusive agreement with Red Rock whereby
      it provides financing for National Lampoon motion picture productions.





Approximately
      seven additional motion pictures are planned for release during the 2008 fiscal
      year, all of which will be distributed by the Company. Additionally, three
      of
      the films will be financed and produced directly by us.





We
      are
      now delivering on a feature film currently titled *National
      Lampoon’s Bag Boy* which
      was
      financed by National Lampoon and Red Rock and is expected to be released during
      the third quarter of the fiscal year. We are in post production on the film *National
      Lampoon’s Ratko: The Dictator’s Son* which
      is
      expected to be released during the second half of the 2008 fiscal year. We
      have
      also acquired distribution rights for third-party films including *National
      Lampoon’s Jake’s Booty Call* , *National
      Lampoon’s Homo Erectus* , *National Lampoon’s Beach Party at the Threshold of Hell* and *National
      Lampoon’s One, Two Many* for
      which
      we earn licensing and distribution fees for television, video and foreign
      distribution.





During
      the three and six months ended January 31, 2008, revenues derived from
      distribution fees totaled approximately $5,058, or less than 1% of all the
      revenues we earned during this period.





During
      the 2006 fiscal year we provided creative services, such as writing, and
      production services to develop projects for which we received a fee. For the
      three and six months ended January 31, 2008, we earned no revenues from
      providing production and creative services.




20





*Licensing*





We
      have
      derived a substantial portion of our revenues from license fees relating to
      the
      use of our name on new motion pictures and from royalties from previously
      released motion pictures bearing our brand, including movies such as *National
      Lampoon's Animal House* and *National
      Lampoon's Vacation* .
      Releasing a film with our brand enhances its ability to find distribution
      outlets. Once a film is released with our brand, we earn revenues from foreign
      sales, theatrical release, home video and DVD sales and rentals and
      pay-per-view. With the exception of two films in production as of January 31,
      2008, and a film produced by National Lampoon Clubhouse, Inc., motion pictures
      that carry our brand have historically been produced and financed by third
      parties. We have licensed the National Lampoon(TM) brand, as well as content
      from our library, for use in a wide variety of products including movies,
      television programming, live events, radio broadcasts, recordings, electronic
      games, and other consumer products. We anticipate granting fewer new licenses
      as
      we begin increasing the number of our own productions in the future.





For
      the
      three and six months ended January 31, 2008, revenues derived from our licensing
      and royalties (exclusive of revenues derived from our publishing activities)
      totaled approximately $309,874 and $555,416 or approximately 62% and 42% of
      the
      revenues we earned during the period. A significant portion of this revenue
      was
      realized from distribution licenses of recent National Lampoon films.





*National
      Lampoon Networks*





National
      Lampoon Networks, Inc. (sometimes referred to in this report as "NLN") includes
      our internet, television and field marketing activities. We believe that we
      provide an appealing platform to advertisers who want their commercial messages
      to reach the college age market.





For
      those
      businesses targeting the college market, NLN provides an integrated marketing
      platform that includes internet advertisers, on-air advertising, and field
      marketing.





NLN’s
      internet properties are comprised of several internet destination sites with
      the
      names NationalLampoon.com, DrunkUniversity.com, TOGATV.com,
      NationalLampoonSplog.com and KnuckleheadVideo.com. These destination sites
      are
      also part of the National Lampoon Humor Network, an aggregated network of more
      than forty of the most popular humor destinations on the internet. We sell
      advertising space on these sites in the form of video streamed advertisements,
      full page takeover advertisements and banner advertisements.





We
      recently announced the launch of the National Lampoon Video Network where we
      entered into content distribution agreements and launched branded channels
      with
      several internet video portals including AOL, Joost, Veoh, Yahoo!, YouTube
      and
      others. These partners sell advertising space, including video streaming, and
      we
      receive a portion of the revenues earned. During the three and six months ended
      January 31, 2008, we earned $308 and $4,439, or less than 1% of the revenues
      we
      earned during the periods from these partners.





NLN’s
      television activities include delivering programming during the standard
      academic school year to more than 200 affiliated college and other television
      stations, reaching nearly two million college students in their dormitories
      and
      other places of residence.





Aside
      from providing an outlet for advertisers targeting the college market, NLN
      develops, produces and distributes comedic internet and television programming
      to audiences through its network.





For
      the
      three and six month periods ended January 31, 2008, revenues derived from
      National Lampoon Networks, exclusive of licensing revenues, totaled
      approximately $155,929 and $405,955 or approximately 31% and 31% of all the
      revenues we earned during the periods, respectively.




21





*Publishing*





In
      October 2002, we entered into an agreement with Rugged Land, LLC to publish
      six
      National Lampoon books over a three-year period based on new and established
      National Lampoon comedic content. We have released four books under this
      agreement, including *1964
      High School Reunion Year Book* , *National
      Lampoon's Book of Love* , *National
      Lampoon's Big Book of True Facts* and *National
      Lampoon's Encyclopedia of Humor.* During
      the 2007 fiscal year the Company and Rugged Land agreed to terminate this
      agreement and no additional books are expected to be released pursuant to it.





During
      the 2006 fiscal year we began publishing our books. As of January 31, 2008,
      we
      have released twelve books including*National
      Lampoon's Saddam Dump[Saddam Hussein's Trial Blog]*,*National
      Lampoon's Magazine Rack*,*National
      Lampoon's Jokes Jokes Jokes*,*National
      Lampoon’s Not Fit For Print*,*National
      Lampoon’s Favorite Cartoons of the 21**st**Century, National Lampoon’s Van Wilder Guide to Graduating College In Eight
      Years or More, National Lampoon’s Road Trip*,*National
      Lampoon’s Animal House, National Lampoon’s Help!, National Lampoon’s Jokes Jokes
      Jokes 2, National Lampoon’s Balls!*and*National
      Lampoon’s Pimp it Yourself*.





For
      the
      three and six months ending January 31, 2008, revenues derived from our
      publishing activities totaled approximately ($78,301) and $34,150, or
      approximately (16%) and 3% of all the revenues we earned during the periods,
      respectively.





*Radio*





In
      March
      2005, NL Radio, LLC was formed. We hold a 25% interest in this entity. In
      October 2006, NL Radio, LLC launched an entertainment radio format under our
      brand. We have licensed the content of our radio library, as well as certain
      domain names, URLs and websites to NL Radio, LLC for this purpose. NL Radio,
      LLC
      used samples of the programming, called "pilot programming," to introduce the
      format and content to radio networks and local stations. If the programming
      is
      sold to a network it may be syndicated, meaning that it would be distributed
      to
      stations affiliated with the network. Purchasers of the programming may
      broadcast segments of the programming at their discretion, such as during "drive
      time" or as late night programming. Programming was launched on XM radio during
      the fiscal year ended July 31, 2007. Our radio library includes approximately
      80
      hours of National Lampoon radio programming consisting primarily of one to
      two
      minute short comedy routines and one hour comedy sketches and parodies. Revenue
      will be earned from ad sales, direct response advertising and product promotion
      arrangements. We receive a licensing fee equal to 8% of the gross receipts
      received by NL Radio, LLC from all sources in connection with any use of our
      brand.





For
      the
      three and six months ending January 31, 2008, revenues derived from NL Radio
      totaled approximately $105 and $342, or less than 1% of all the revenues we
      earned during the periods, respectively.





*Library*





Our
      library includes 247 issues of *National
      Lampoon Magazine* ,
      which
      we continue to use to generate new content for movies, television programming
      and other licensing opportunities. Our library also consists of television
      programming, including more than 300 hours of footage produced for National
      Lampoon Networks, radio programming, recordings and other materials.





**Business
      Objective**





We
      intend
      to provide National Lampoon(TM) comedic content to as many consumers as possible
      by expanding the use of our brand. The following describes the ways in which
      we
      plan to achieve this goal.





·
            We
                plan to continue to expand National Lampoon Networks by adding new
                affiliate internet sites as well as acquiring internet sites and
                driving
                traffic to thesesites.
                We have over 40 affiliates and have acquired over 10 websites to
                date. We
                will concentrate our efforts on measured marketing and sell available
                advertising and marketing space on our expanding
                network. We will continue to create, produce and acquire programming
                for
                all of our web sites as well as our college television network and
                capitalize on our expertise in the college and young adult market
                to
                continue to grow revenue in these areas.





22




·
            We
                intend to expand our film library by increasing the number of film
                products we produce internally. We currently have two films in production
                and are actively developing several new projects and have finalized
                domestic and international distribution arrangements. The domestic
                distribution arrangement includes a number of home video distributors
                and
                retailers and a domestic cable provider. In some cases we are guaranteed
                a
                minimum payment upon delivery of the film to the respective broadcaster
                or
                distributor.





·
            We
                plan to capitalize on our reputation and relationships with independent
                studios and other multimedia companies to expand the use of the National
                Lampoon(TM) brand.





·
            We
                plan to create new licensing opportunities in markets outside of
                publishing, film and television, such as games, records, radio programming
                and live events.





·
            National
                Lampoon Networks continues to maintain a presence at third-party
                events
                and provide field marketing campaigns for various advertisers. However,
                we
                no longer produce our own events.





·
            We
                began publishing and distributing books we created to continue
                capitalizing on the National Lampoon brand. During the 2007 fiscal
                year we
                published eight books and during the six months ended January 31,
                2008 we
                published three more books, however, going forward we plan to release
                only
                four books per year.





·
            During
                the 2007 fiscal year, NL Radio, LLC launched an entertainment radio
                format
                using our brand with a 24 hour/7 day-a-week channel on XM Satellite
                Radio.
                We own a 25% interest in NL Radio, LLC.





**Critical
      Accounting Policies**





Management
      believes the following critical accounting policies, among others, affect its
      more significant judgments and estimates used in the preparation of our
      condensed consolidated financial statements.





***Revenue
      Recognition.*** Royalty
      income from film contracts is derived from the sale of DVDs or from the
      licensing of film rights to third parties. Because a significant portion of
      royalty income is based on the timetable associated with royalty statements
      generated by third party processors, we do not typically know on a timely basis
      when royalties may be paid or the amount of payment. This revenue is
      consequently not recognized until the amount is either known or reasonably
      estimable or until receipt of the statements from the third parties. We contract
      with various agencies to facilitate collection of royalty income. When we are
      entitled to royalties based on gross receipts, revenue is recognized before
      deduction of agency fees, which are included as a component of cost of revenue.





We
      recognize revenue from television and film productions pursuant to American
      Institute of Certified Public Accountants Statement of Position 00-2,
“Accounting by Producers or Distributors of Films” (“SOP 00-2”). The following
      conditions must be met in order to recognize revenue under SOP 00-2:
      (i) persuasive evidence of a sale or licensing arrangement exists;
      (ii) the program is complete and has been delivered or is available for
      immediate and unconditional delivery; (iii) the license period of the
      arrangement has begun and the customer can begin its exploitation, exhibition
      or
      sale; (iv) the arrangement fee is fixed or determinable; and
      (v) collection of the arrangement fee is reasonably assured. Advance
      payments received from buyers or licensees are included in the financial
      statements as a component of deferred revenue.





***Film
      Costs.*** ** Investment
      in film costs includes the capitalization of costs incurred to produce the
      film
      content including direct negative costs, production overhead, interest and
      development. These costs are recognized as operating expenses on an individual
      film basis in the ratio that the current year’s gross revenues bear to
      management’s estimate of total ultimate gross revenues from all sources to be
      earned over a seven year period. Capitalized production costs are stated at
      the
      lower of unamortized cost or estimated fair value on an individual film basis.
      Revenue forecasts, based primarily on historical sales statistics, are
      continually reviewed by management and revised when warranted by changing
      conditions. When estimates of total revenues and other events or changes in
      circumstances indicate that a film has a fair value that is less than its
      unamortized cost, an impairment loss is recognized in the current period for
      the
      amount by which the unamortized cost exceeds the film’s fair value.




23





**Reorganization
      Transaction**





In
      the
      discussion below, we sometimes refer to the “Reorganization Transaction”. The
      Reorganization Transaction occurred on May 17, 2002, when a group of investors
      that we refer to as “the NLAG Group” completed the acquisition of our Series B
      Convertible Preferred Stock and warrants to purchase our common stock, thereby
      gaining voting control of our company.





**Results
      of Operations**





We
      operate in five business segments, namely,





·
            licensing
                and exploitation of the National Lampoon(TM) trademark and related
                properties including the sale of products to consumers;





·
            advertising
                and promotion on our internet websites, field marketing, live events
                and
                the distribution of television programming on college campuses;





·
            travel
                services





·
            production
                of motion pictures, television and DVD products;





·
            distribution
                of motion pictures, television and DVD
                products;








**Three
      months ended January 31, 2008 as compared to the three months ended January
      31,
      2007**





**Licensing
      and Publishing Revenues**





Licensing
      and publishing revenues for the three months ended January 31, 2008 were
      $231,573 compared to $343,796 for the three months ended January 31, 2007,
      representing a decrease of $112,223 or approximately 32%. The decrease in
      licensing and publishing revenues was primarily due to an increased number
      of
      book returns totaling $111,799 recorded against revenues during the three months
      ended January 31, 2008, whereas a provision for bad debt in the amount of
      $122,075 was recorded as an expense during the three months ended January 31,
      2007.





Costs
      related to licensing revenues were $25,235 during the three months ended January
      31, 2008 compared to $96,621 for the three months ended January 31, 2007. This
      represents a decrease of $71,386 or approximately 74%. Costs related to
      publishing revenues were $4,610 during the three months ended January 31, 2008
      compared to $0 during the three months ended January 31, 2007. The decrease
      in
      costs related to licensing and publishing also resulted from an overall decrease
      of $37,297 in commissions paid due to decreased sales staff, offset by an
      increase in licensing costs of $26,990 for costs incurred for the Capazoo
      licensing program.





**Advertising
      and Promotion Revenues**





During
      the three months ended January 31, 2008, advertising and promotion revenues
      were
      $156,542 compared to $638,092 for the three months ended January 31, 2007.
      This
      represents a decrease of $481,550 or 75%. A portion of this decrease resulted
      from a decrease of $200,000 in presence marketing revenues during live events
      for*Pledge
      This*.
      The
      reduction of our New York sales staff also resulted in a decrease in revenues
      from Network TV advertising spots to $0 for the three months ended January
      31,
      2008 from $122,957 during the three months ended January 31, 2007, and a
      decrease of $80,940 in internet advertising, to $155,929 during the three months
      ended January 31, 2008 from $236,869 during the three months ended January
      31,
      2007. Due to the reduced number of live events we are producing there was a
      decrease in revenues from field events to $0 for the three months ended January
      31, 2008 from $29,930 during the three months ended January 31, 2007 and a
      decrease in revenue from sponsored production shoots to $0 for the three months
      ended January 31, 2008 from $12,518during
      the three months ended January 31, 2007.




24





Costs
      of
      advertising and promotion revenue were $133,315 during the three months ended
      January 31, 2008 compared to $501,532 for the three months ended January 31,
      2007, representing a decrease of $368,217 or 73%. The decrease in costs of
      advertising and promotion resulted primarily from a decrease of $191,241 in
      costs of live events promoting *Pledge
      This* ,
      which
      were partially reimbursed in the following quarter, as well as a decrease of
      $26,488 due to the reduced number of live events that we produced. Although
      we
      produced fewer live events we continue to provide sponsorship opportunities
      at
      live events organized by third parties. The decrease in costs of advertising
      and
      promotion also resulted from a decrease in overall costs due to a reduction
      of
      our sales staff in New York including a decrease in salaries for web development
      of $16,877 and a decrease in sales commissions of $74,140. However this
      reduction also resulted in lower internet revenues. Costs associated with our
      internet operations decreased by $67,143 to $19,255 during the three months
      ended January 31, 2008 from $87,399 during the three months ended January 31,
      2007 due to reduced internet service fees as we improve our internet
      capabilities, offset by an increase of $40,210 in royalties paid to affiliate
      websites under the Humor Network, to $83,140 during the three months ended
      January 31, 2008 from $42,930 during the three months ended January 31, 2007,
      due to the continued expansion of the network.





We
      continue to expand and improve our digital distribution and entertainment
      capabilities which we expect to result in increased revenue from our network
      and
      affiliate network of internet websites. We intend to hire additional sales
      representatives to increase our internet advertising revenues. Going forward,
      we
      expect to focus our resources on increasing revenues generated from our internet
      websites and from product placement. While we intend to continue providing
      field
      promotion services at events held by third parties, we no longer produce field
      promotion events.





Costs
      related to advertising revenues include bandwidth usage fees, website
      development costs, and content conversion costs along with amortization of
      capitalized television production costs. We incur costs related to promotion
      revenues based on direct costs of live events and promotion of third-party
      feature films, which are expensed as they are incurred.





**Travel
      Services**





During
      the three months ended January 31, 2008, travel services revenues were $110,000
      compared to $0 for the three months ended January 31, 2007. This increase
      resulted from the settlement of a complaint whereby the Company agreed to
      dismiss the complaint in exchange for a payment of $110,000 to be made upon
      execution of the settlement agreement. The settlement amount was recognized
      as
      revenue. Prior to the settlement the Company discontinued travel services and
      no
      further revenues are expected to be earned.





**Production
      and Distribution Revenues**





We
      no
      longer offer production services on third-party films. We may receive producer
      fees on our own productions. We produce our own films for which we have a
      presale, minimum guarantee or co-production agreement in place. This reduces
      our
      risk as productions tend to be capital intensive. However, we are expanding
      our
      productions and we have negotiated an output arrangement with a domestic cable
      provider which guarantees us a cable distribution outlet for our new product
      along with a minimum return on each new motion picture release. The output
      arrangement provides for a pre-negotiated minimum guarantee or sales price
      for
      the licensing of a specific media and territory. We have also negotiated home
      video distribution with a number of domestic retailers and distributors and
      have
      licensed international rights in several territories with minimum guarantees.
      For the video distribution, there is no minimum price guarantee but the
      arrangement provides us with a video distribution outlet for our new product.
      In
      addition, we are negotiating with Red Rock to provide production financing.
      As
      these output and financing arrangements are signed, we will allocate additional
      internal resources to this segment of our business. For the three and six months
      ended January 31, 2008, production revenues from production services to third
      parties decreased due to the allocation of internal personnel to the production
      of two feature films.




25





For
      the
      three months ended January 31, 2008, there were no production revenues as
      compared to $5,500 for the three months ended January 31, 2007. The decrease
      in
      production revenues resulted from no longer offering production services to
      third party production companies.





Costs
      related to production revenue during the three months ended January 31, 2008
      increased $6,272 to $6,272 from $0, for the three months ended January 31,
      2007.
      The increase was primarily due to materials related to delivery of TV
      programming to college networks.





There
      was
      no amortization of capitalized film production costs for the three months ended
      January 31, 2008 compared to $405,897 for the three month period ended January
      31, 2007. The decrease in amortization of capitalized film production costs
      was
      primarily due to the permanent impairment to our film *Monster
      Night* aka *Trick
      or Treat* during
      the three months ended January 31, 2007, whereas amortization for current
      productions begins upon theatrical and/or home video release. The release of *National
      Lampoon’s Bagboy* is
      scheduled for the third quarter of the 2008 fiscal year and the release of *National
      Lampoon’s Ratko: the Dictator’s Son* is
      scheduled for the second half of the 2008 fiscal year.





Amortization
      of capitalized television production costs for the three months ended January
      31, 2008 was $521 compared to $0 for the three month period ended January 31,
      2007.





**Other
      Costs and Expenses**





Amortization
      of intangible assets, which consists of the costs of acquisition and protection
      of the "National Lampoon(TM)" trademark, was $59,048 during the three months
      ended January 31, 2008. Amortization of intangible assets was $60,000 during
      the
      three months ended January 31, 2007.





Amortization
      of intangible assets, which consists of the costs of our acquisition and
      protection of websites and domain names, was $2,171 during the three months
      ended January 31, 2008 and $0 during the three months ended January 31,
      2007.





Stock
      issued for services increased $177,136, or 234%, to $252,886 during the three
      months ended January 31, 2008, from $75,750, for the three months ended January
      31, 2007. The increase is primarily due to shares of common stock issued to
      new
      consultants hired for investor relations and internet services. Expenses from
      the vesting of options and warrants issued for services decreased $65,977,
      or
      16% to $334,418 during the three months ended January 31, 2008 from $400,395
      for
      the three months ended January 31, 2007. The decrease was primarily due to
      a
      decrease in employee count.





There
      was
      no provision for doubtful accounts for the three months ended January 31, 2008
      compared to $122,075 for the three months ended January 31, 2007. The provision
      for the three months ended January 31, 2007 is primarily attributable to
      accounts we deemed to be uncollectible.





Other
      selling, general and administrative costs decreased by $176,093, or 16%, to
      $901,891 during the three months ended January 31, 2008 from $1,077,984 for
      the
      three months ended January 31, 2007. The decrease in selling, general and
      administrative costs resulted from a decrease in payroll and related payroll
      taxes of $125,311 due to a reduction in our employee count, a decrease of
      $24,674 in employee health benefits, a decrease in office expense of $13,472,
      a
      decrease of $56,095 in amortization and depreciation expense, and a decrease
      in
      travel and entertainment of $29,530. The decrease in selling, general and
      administrative costs was offset by an increase in rent expense of $37,930 and
      marketing expense of $33,723.




26





Other
      income increased by $396,250 during the three months ended January 31, 2008
      compared to $0 for the three months ended January 31, 2007. The increase for
      the
      three-month period ended January 31, 2008 was primarily due to the write off
      of
      the stale accrued royalty. In July 1987, NLI granted the right to produce
      National Lampoon television programming to GPEC. The royalty was recognized
      as
      an expense in prior years and approximately $396,250 remained on the books
      as a
      liability and was written off during the three months ended January 31, 2008.





For
      the
      three months ended January 31, 2008, we had a net loss of $850,959, as compared
      to a net loss of $1,742,679 for the three months ended January 31, 2007. This
      represents a decrease in net loss of $891,720 for the three months ended January
      31, 2008. The decrease in net loss for the three months ended January 31, 2008
      resulted from a decrease in costs related to licensing revenue primarily due
      to
      a write off of a stale debt. The decrease was also due to decreases in
      advertising and promotion costs and selling, general and administrative costs.
      The decrease in costs related to licensing revenue and expenses was partially
      offset by an increase in the issuance of stock, warrants and options as
      compensation as well as a decrease in revenues from advertising and promotion
      due to the reduction of sales staff.





During
      the three months ended January 31, 2008 and 2007, we had no provision for income
      taxes due to the significant net operating losses incurred in prior periods
      and
      carried forward into the current period. We also accrued dividends for preferred
      shareholders of $297,771 during the three months ended January 31, 2008 and
      $322,040 during the same period in 2007. The addition of the accrued dividends
      resulted in a net loss attributable to common shareholders of $1,148,730 or
      $0.14 per basic and fully diluted share for the three months ended January
      31,
      2008, compared to net loss attributable to common shareholders of $2,064,719
      or
      $0.28 per basic and fully diluted share for the three months ended January
      31,
      2007.





**Six
      months ended January 31, 2008 as compared to the six months ended January 31,
      2007**





**Licensing
      and Publishing Revenues**





Licensing
      and publishing revenues for the six months ended January 31, 2008 were $589,566
      compared to $3,591,839 for the six months ended January 31, 2007, representing
      a
      decrease of $ 3,002,273 or
      approximately 83%. During the six months ended January 31, 2007, we received
      a
      one-time payment of approximately $2.9 million in settlement of a royalty
      dispute. No such payment occurred during the six months ended January 31, 2008.
      The decrease in licensing and publishing revenues was also due to an overall
      reduction in publishing revenues of $138,248 attributable to significant book
      returns totaling $148,280 that was recorded against publishing revenues during
      the three months ended January 31, 2008, whereas, a provision for bad debt
      in
      the amount of $156,075 was recorded to expenses during the six months ended
      January 31, 2007. This decrease was offset by an increase of $12,228 in
      publishing revenues, compared to no book returns recorded during the three
      months ended January 31, 2008.





Costs
      related to licensing revenues were $43,150 during the six months ended January
      31, 2008 compared to $157,816 for the six months ended January 31, 2007. This
      represents a decrease of $114,666 or approximately 73%. Costs related to
      publishing revenues were $48,044 during the six months ended January 31, 2008
      compared to $0 during the six months ended January 31, 2007. The decrease in
      costs related to licensing and publishing also resulted from an overall decrease
      in publishing costs due to the decrease in the number of books released during
      the period and a decrease of $28,269 in commissions paid due to decreased sales
      staff. These decreases were offset by an increase in licensing costs of $26,990
      which represents costs incurred for the Capazoo licensing program.




27





**Advertising
      and Promotion Revenues**





During
      the six months ended January 31, 2008, advertising and promotion revenues were
      $606,175 compared to $1,480,822 for the six months ended January 31, 2007.
      This
      represents a decrease of $874,647 or 59%. The decrease was primarily the result
      of a decrease of $200,000 in presence marketing revenues for *Pledge
      This!* offset
      by
      an increase in marketing and promotions revenue from Red Rock of $198,500.
      The
      reduction in our New York sales staff also resulted in a decrease in revenues
      from Network TV advertising spots to $0 for the six months ending January 31,
      2008 from $127,699 during the six months ended January 31, 2007 and a decrease
      of $227,728 in internet advertising to $395,954 during the six months ended
      January 31, 2008 from $623,682 during the six months ended January 31, 2007.
      Due
      to the reduced number of live events we are producing there was a decrease
      of
      $180,200 in revenues from field events and presence marketing and a decrease
      in
      revenue from sponsored production shoots of $323,018.





Costs
      of
      advertising and promotion revenue were $335,613 during the six months ended
      January 31, 2008 compared to $1,217,000 for the six months ended January 31,
      2007, representing a decrease of $881,387 or 72%. The decrease in costs of
      advertising and promotion resulted primarily from a decrease of $192,032 in
      costs of live events to promote *Pledge
      This!* ,
      which
      costs were partially reimbursed in the following quarter, as well as a decrease
      of $394,103 due to a reduction in the number of live events that we produced.
      Although we produced fewer live events we continue to provide sponsorship
      opportunities at live events organized by third parties. The decrease in costs
      of advertising and promotion also resulted from a decrease in overall costs
      due
      to a reduction in the size of the New York office including a decrease of
      $32,844 in salaries for web development, to $46,686 for the six months ended
      January 31, 2008 from $79,530 during the six months ended January 31, 2007,
      and
      a decrease in sales commission of $147,574, to $116,486 for the six months
      ended
      January 31, 2008 from $264,060 during the six months ended January 31, 2007.
      However this also resulted in lower internet revenues. Costs associated with
      our
      internet operations decreased by $29,229 to $96,659 during the six months ended
      January 31, 2008 from $125,888 during the six months ended January 31, 2007
      due
      to reduced internet service fees as we improve our internet capabilities. This
      reduction was offset by an increase of $101,498 in royalties paid to affiliate
      websites under the Humor Network due to the continued expansion of the
      network.





We
      continue to expand and improve our digital distribution and entertainment
      capabilities which we expect to result in increased revenue from our network
      and
      affiliate network of internet websites. We intend to hire additional sales
      representatives to increase our internet advertising revenues. Going forward,
      we
      expect to focus our resources on increasing revenues generated from our internet
      websites and from product placement. While we intend to continue providing
      field
      promotion services at events held by third parties, we no longer produce field
      promotion events.





Costs
      related to advertising revenues include bandwidth usage fees, website
      development costs, and content conversion costs along with amortization of
      capitalized television production costs. We incur costs related to promotion
      revenues based on direct costs of live events and promotion of third-party
      feature films, which are expensed as they are incurred.





**Travel
      Services**





During
      the six months ended January 31, 2008, travel services revenues were $110,000
      compared to $0 for the six months ended January 31, 2007. This increase resulted
      from the settlement of a complaint whereby the Company agreed to dismiss the
      complaint in exchange for a payment of $110,000 to be made upon execution of
      the
      settlement agreement. The settlement amount was recognized as revenue. Prior
      to
      the settlement the Company discontinued travel services and no further revenues
      are expected to be earned.





**Production
      and Distribution Revenues**





We
      no
      longer offer production services on third-party films. We may receive producer
      fees on our own productions. We produce our own films for which we have a
      presale, minimum guarantee or co-production agreement in place. This reduces
      our
      risk as productions tend to be capital intensive. However, we are expanding
      our
      productions and we have negotiated an output arrangement with a domestic cable
      provider which guarantees us a cable distribution outlet for our new product
      along with a minimum return on each new motion picture release. The output
      arrangement provides for a pre-negotiated minimum guarantee or sales price
      for
      the licensing of a specific media and territory. We have also negotiated home
      video distribution with a number of domestic retailers and distributors and
      have
      licensed international rights in several territories with minimum guarantees.
      For the video distribution, there is no minimum price guarantee but the
      arrangement provides us with a video distribution outlet for our new product.
      In
      addition, we are negotiating with Red Rock to provide production financing.
      As
      these output and financing arrangements are signed, we will allocate additional
      internal resources to this segment of our business. For the three and six months
      ended January 31, 2008, production revenues from production services to third
      parties decreased due to the allocation of internal personnel to the production
      of two feature films.




28





For
      the
      six months ended January 31, 2008, there were no production revenues as compared
      to $44,500 for the six months ended January 31, 2007. The decrease in production
      revenues resulted from no longer offering production services to third party
      production companies.





Costs
      related to production revenue during the six months ended January 31, 2008
      increased $16,048 to $19,048 from $3,000, or 534% for the six months ended
      January 31, 2007. The increase was primarily due to materials related to
      delivery of TV programming to college networks.





There
      was
      no amortization of capitalized film production costs for the six months ended
      January 31, 2008 compared to $405,897 for the six month period ended January
      31,
      2007. The decrease in amortization of capitalized film production costs was
      primarily due to the permanent impairment to our film *Monster
      Night* aka *Trick
      or Treat* during
      the six months ended January 31, 2007 whereas amortization for current
      productions begins upon theatrical and/or home video release. The release of *National
      Lampoon’s Bagboy* is
      scheduled for the third quarter of the 2008 fiscal year and the release of *National
      Lampoon’s Ratko: the Dictator’s Son* is
      scheduled for the second half of the 2008 fiscal year.





Amortization
      of capitalized television production costs for the six months ended January
      31,
      2008 was $521 compared to $14,372 for the six month period ended January 31,
      2007. No further write-down of capitalized television production costs was
      required during the quarter ended January 31, 2008.





**Other
      Costs and Expenses**





Amortization
      of intangible assets, which consists of the costs of protection of the "National
      Lampoon(TM)" trademark, was $120,212 during the six months ended January 31,
      2008. Amortization of intangible assets was $121,140 during the six months
      ended
      January 31, 2007.





Amortization
      of intangible assets, which consists of the costs of our acquisition and
      protection of websites and domain names, was $2,171 during the six months ended
      January 31, 2008 and $0 during the six months ended January 31,
      2007.





Stock
      issued for services increased by $256,701, or 144%, to $435,270 during the
      six
      months ended January 31, 2008, from $178,569, for the six months ended January
      31, 2007. The increase is primarily due to shares of common stock issued to
      new
      consultants hired for investor relations and internet services. Expenses from
      the vesting of options and warrants issued for services increased $204,050,
      or
      28% to $926,990 during the three months ended January 31, 2008 from $722,940
      for
      the six months ended January 31, 2007. The increase is primarily due to the
      implementation of SFAS No. 123R and grants of 320,000 options to members of
      our
      board of directors and consultants conveying the right to purchase 320,000
      shares of our common stock.





There
      was
      no provision for doubtful accounts for the six months ended January 31, 2008
      compared to $156,075 for the six months ended January 31, 2007. The provision
      for the six months ended January 31, 2007 is primarily attributable to accounts
      we deemed to be uncollectible.





Other
      selling, general and administrative costs decreased by $387,579, or 18%, to
      $1,758,399 during the six months ended January 31, 2008 from $2,145,978 for
      the
      six months ended January 31, 2007. The decrease in selling, general and
      administrative costs resulted from a decrease in payroll and related payroll
      taxes of $149,785 due to a reduction in our employee count, a decrease of
      $31,745 in employee health benefits, a decrease in fees to financial consultants
      and accountants of $120,933, a decrease of $139,479 in amortization and
      depreciation expense, a decrease in office expense of $43,481 and a decrease
      in
      travel and entertainment of $44,621. The decrease in selling, general and
      administrative costs was offset by an increase in marketing expense of $44,878,
      an increase in rent expense of $53,914, an increase in interest expense of
      $22,363 and an increase in international sales and distribution expenses of
      $48,469.




29





Other
      income increased by $396,250 during the six months ended January 31, 2008
      compared to $0 for the six months ended January 31, 2007. The increase for
      the
      six-month period ended January 31, 2008 was primarily due to the write off
      of
      the stale accrued royalty. In July 1987, NLI granted the right to produce
      National Lampoon television programming to GPEC. The royalty was recognized
      as
      an expense in prior years. Approximately $396,250 remained on the books as
      a
      liability and was written off during the three months ended January 31, 2008.





For
      the
      six months ended January 31, 2008, we had a net loss of $2,016,290, as compared
      to a net loss of $9,351 for the six months ended January 31, 2007. This
      represents an increase in net loss of $2,006,939 for the six months ended
      January 31, 2008. The increase in net loss for the six months ended January
      31,
      2008 resulted primarily from the significant increase in revenue we
      received during the three months ended January 31, 2007 which was
      associated with the settlement of disputed license fees. Aside from the
      settlement, other license fees increased while decreases occurred in revenues
      for field marketing and live event advertising and promotion, production and
      publishing. The decrease in costs and expenses for the six months ended January
      31, 2008 was a result of decreases in costs related to advertising and promotion
      revenue and selling, general and administrative costs which was partially offset
      by an increase in the issuance of stock, warrants and options as compensation.





During
      the six months ended January 31, 2008 and 2007, we had no provision for income
      taxes due to the significant net operating losses incurred in prior periods
      and
      carried forward into the current period. We also accrued dividends for preferred
      shareholders of $595,542 during the six months ended January 31, 2008 and
      $643,015 during the same period in 2007. The addition of the accrued dividends
      resulted in a net loss attributable to common shareholders of $2,611,832 or
      $0.32 per basic and fully diluted share for the six months ended January 31,
      2008, compared to net loss attributable to common shareholders of $652,366
      or
      $0.09 per basic and fully diluted share for the six months ended January 31,
      2007.





**Liquidity
      and Capital Resources**





With
      the
      exception of the first quarter of the fiscal year ended July 31, 2007, we have
      not generated positive cash flows from operations over the past few years.
      Our
      principal sources of working capital during the six months ended January 31,
      2008 consisted of revenues, loans from our officers and directors and production
      loans from Red Rock Pictures Holdings, Inc.





Net
      cash
      used in operating activities was $905,811 for the six months ended January
      31,
      2008, as compared to $532,331 for the six months ended January 31, 2007. The
      increase in cash flow used in operations was primarily attributable to an
      increase in accounts receivable, offset by a decrease in production costs and
      an
      increase in deferred revenue. Cash provided by financing activities was $869,051
      for the six months ended January 31, 2008, as compared to $1,118,007 for the
      six
      months ended January 31, 2007. The funds for the current period were obtained
      from officers and directors and Red Rock Pictures Holdings, Inc. and were
      partially offset by repayments to each of them.





As
      of
      March 3, 2008, we had negative cash on hand of approximately $38,658. We believe
      revenues we earn as well as collections of $1,187,092 in minimum guarantee
      payments currently due from domestic and foreign distributors including Comedy
      Central (US), Pueblo Film Distribution (Australia) and Beta Cinema (Germany),
      and additional loans from our Chief Executive Officer and one member of our
      board of directors will be adequate to fund our ongoing operations and capital
      requirements for the next twelve months. However, we have no commitment for
      these loans and our Chief Executive Officer and director are not required to
      make additional loans to us. If we do not receive these loans and if alternate
      sources of financing cannot be found, then we may not be able to continue to
      operate as a going concern.




30





Historically,
      our principal source of funds used for operations and working capital has been
      loans received from Daniel S. Laikin, our Chief Executive Officer, and Timothy
      Durham, a director, and a shareholder. The aggregate amount of the loans and
      accrued interest owed to these individuals at January 31, 2008 is approximately
      $1,910,271. These obligations are payable on demand. We plan to satisfy and
      pay
      these obligations from future revenues. In addition, Red Rock Picture Holdings,
      Inc. has provided the Company with funds for movie production. The aggregate
      amount of the loans and accrued interest owed to Red Rock at January 31, 2008
      is
      approximately $3,904,753.





Our
      financial statements for the fiscal year ended July 31, 2007 contained an
      explanatory paragraph as to our ability to continue as a "going concern." This
      qualification may impact our ability to obtain future financing.





**Commitments
      for Capital Expenditures**





As
      of
      January 31, 2008, our capital expenditures are projected to be $100,000 for
      the
      2008 fiscal year. These expenditures will relate to the purchase of fixed assets
      such as equipment and furniture.





**Off-Balance
      Sheet Arrangements**





We
      do not
      have any off-balance sheet transactions such as guarantees, commitments, lease
      and debt agreements or other agreements that could trigger an adverse change
      in
      our credit rating, earnings, cash flows or stock price, including requirements
      to perform under standby agreements.





**Contractual
      Obligations**





The
      table
      below sets forth our contractual obligations as of January 31, 2008.





Payments
                Due by PeriodLess
                than
            
            1
                -
                3
            
            3
                -
                5
            
            More
                thanTotal
            
            1
                year
            
            years
            
            years
            
            5
                yearsProduction
                loan, related party
            
            $
            3,977,917
            
            $
            3,977,917
            
            $
            --
            
            $
            --
            
            $
            --Notes
                Payable, related party
            
            $
            1,837,107
            
            $
            1,837,107
            
            $
            --
            
            $
            --
            
            $
            --





**Recent
      Accounting Pronouncements**




In
      February 2007, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities — including an amendment of FASB Statement
      No. 115” (FAS 159). ** FAS 159,
      which becomes effective for the Company on January 1, 2008, permits
      companies to choose to measure many financial instruments and certain other
      items at fair value and report unrealized gains and losses in earnings. Such
      accounting is optional and is generally to be applied instrument by instrument.
      The Company does not anticipate that election, if any, of this fair-value option
      will have a material effect on its consolidated ** financial
      condition, results of operations, cash flows or disclosures.





In
      September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
      Value Measurements,” which establishes a framework for measuring fair value in
      accordance with GAAP and expands disclosures about fair value measurements.
      FAS
      157 does not require any new fair value measurements but rather eliminates
      inconsistencies in guidance found in various prior accounting pronouncements.
      FAS 157 is effective for fiscal years beginning after November 15, 2007.
      The Company is currently evaluating the impact this standard will have on its
      consolidated financial condition, results of operations, cash flows or
      disclosures.




31





In
      December 2007, the FASB issued FASB Statement No. 141(R), “Business
      Combinations” (FAS 141(R)), which establishes accounting principles and
      disclosure requirements for all transactions in which a company obtains control
      over another business. Statement 141(R) applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008.
      Earlier adoption is prohibited. The Company is in the process of determining
      the
      effect, if any, that the adoption of FAS 141(R) will have on its results of
      operations or financial position.





In
      December 2007, the FASB issued SFAS No. 160, *“* Non-controlling
      Interests in Consolidated Financial Statements, an amendment of ARB
      No. 51”. SFAS No. 160 establishes accounting and reporting standards
      that require that the ownership interests in subsidiaries held by parties other
      than the parent be clearly identified, labeled, and presented in the
      consolidated statement of financial position within equity, but separate from
      the parent’s equity; the amount of consolidated net income attributable to the
      parent and to the non-controlling interest be clearly identified and presented
      on the face of the consolidated statement of income; and changes in a parent’s
      ownership interest while the parent retains its controlling financial interest
      in its subsidiary be accounted for consistently. SFAS No. 160 also requires
      that any retained non-controlling equity investment in the former subsidiary
      be
      initially measured at fair value when a subsidiary is deconsolidated. SFAS
      No. 160 also sets forth the disclosure requirements to identify and
      distinguish between the interests of the parent and the interests of the
      non-controlling owners. SFAS No. 160 applies to all entities that prepare
      consolidated financial statements, except not-for-profit organizations, but
      will
      affect only those entities that have an outstanding non-controlling interest
      in
      one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160
      is effective for fiscal years, and interim periods within those fiscal years
      beginning on or after December 15, 2008. Earlier adoption is prohibited.
      SFAS No. 160 must be applied prospectively as of the beginning of the
      fiscal year in which it is initially applied, except for the presentation and
      disclosure requirements. The presentation and disclosure requirements are
      applied retrospectively for all periods presented. The Company does not have
      a
      non-controlling interest in one or more subsidiaries. Accordingly, the Company
      does not anticipate that the initial application of SFAS No. 160 will have
      an impact on the Company.





**Item
      3 - Controls and Procedures**





We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and our interim Chief
      Financial Officer of the effectiveness of the design and operation of our
      disclosure controls and procedures as of the end of the period covered by this
      report. The evaluation was undertaken in consultation with our accounting
      personnel. Based on the evaluation, the interim Chief Financial Officer and
      the
      Chief Executive Officer concluded that our disclosure controls and procedures
      are effective to ensure that information required to be disclosed by us in
      the
      reports that we file or submit under the Securities Exchange Act of 1934 is
      recorded, processed, summarized and reported within the time periods specified
      in the Securities and Exchange Commission’s rules and forms.





Other
      than as described above, there were no changes in our internal controls or
      in
      other factors that could significantly affect internal controls subsequent
      to
      the date of their evaluation.





**PART
      II - OTHER INFORMATION**





**Item
      1 - Legal Proceedings**





*National
      Lampoon, Inc. v. Alma Investments* (d/b/a
      Bahia Mar Hotel) (Los Angeles Superior Court Case No. BC 356118). We filed
      this
      complaint on July 27, 2006. The action arises from an agreement we had with
      Bahia Mar Hotel pursuant to which we were to provide to Bahia Mar Hotel an
      entertainment package for the 2006 spring break. We alleged that Bahia Mar
      Hotel
      failed to support the program and that Bahia Mar Hotel diverted some of the
      business to our competitors. On February 4, 2008, the Company entered into
      a
      settlement agreement with Alma Investments. The Company agreed to dismiss the
      complaint against Alma Investments in exchange for a payment of $110,000 to
      be
      made upon execution of the settlement agreement. The settlement amount was
      recognized as revenue and applied entirely towards approximately $143,000 in
      legal fees directly related to the case and the remaining balance was written
      off by our attorneys.




32





*Cinergy
      Creative, Inc. and Leslie Allen v. National Lampoon Clubhouse, Inc., National
      Lampoon, Inc., Majestic Entertainment, Inc. and Lorenzo Doumani* (Los
      Angeles Superior Court Case No. SC091496). This complaint was filed on October
      20, 2006. The plaintiffs allege causes of action for breach of written contract,
      breach of oral contract, breach of the implied covenant of good faith and fair
      dealing, quantum meruit, fraud and deceit based on promises made without
      intention to perform, intentional misrepresentation, slander per se, libel
      per
      se, breach of confidence, declaratory relief, conversion, untrue or misleading
      advertising, unfair competition and negligence. Specifically, the plaintiffs
      allege that we and our co-defendants induced them to set aside other projects
      so
      that they would spend their time working on projects for the benefit of us
      and
      our co-defendants. The plaintiffs also allege that they were promised a share
      of
      profits from the projects and/or a "partnership" interest in them. The
      plaintiffs allege that their damages are in excess of $2,000,000. The Company
      entered into a settlement agreement with the plaintiffs dated November 5, 2007.
      The plaintiffs agreed to dismiss the complaint against the Company in exchange
      for a payment of $50,000 to be made within 90 days from the execution of the
      settlement agreement. The Company’s portion of the payment was made during
      February 2008. The remaining defendants have reached settlements as well.





Screen
      Actor’s Guild v. National Lampoon Clubhouse, Inc. During late 2006, the Screen
      Actor’s Guild (“SAG”) filed claims against National Lampoon Clubhouse, Inc.
      (“Clubhouse”) for unpaid wages and pension, health and welfare benefits incurred
      for the filming of “Monster House” aka “Trick or Treat”. SAG alleges that
      certain actors were not paid in full and are owed approximately $30,000 more
      in
      compensation, expenses and benefit payments under the SAG agreement. Clubhouse
      disputes these claims and intends to vigorously defend this action. An
      arbitration with SAG was originally scheduled for February 2008 but has been
      rescheduled for April 25, 2008.





American
      Cinema Distribution Corporation v. National Lampoon, Inc. In August 2007, the
      American Cinema Distribution Corporation (“ACDC”) filed claims against National
      Lampoon, Inc. for costs incurred on the release of “National Lampoon’s Pucked”.
      ACDC alleges that the Company did not perform distribution services as agreed
      and that ACDC should be reimbursed for distribution costs it incurred which
      are
      estimated to be approximately $65,000. ACDC also alleges that it does not owe
      distribution fees to the Company for marketing, publicity, promotional and
      advertising services the Company provided which services the Company alleges
      have a value in excess of $290,000. The Company disputes these claims, has
      filed
      for arbitration against ACDC as the agreement calls for and intends to
      vigorously defend this action.





**Item
      2 - Unregistered Sales of Equity Securities and Use of Proceeds**





During
      the three months ended January 31, 2008, 5,000 shares of restricted stock were
      issued upon the exercise of options at an exercise price of $1.60 resulting
      in
      proceeds of $8,000. In addition, 18,835 shares of restricted stock were issued
      upon the exercise of 18,835 warrants attached to the Series C Convertible
      Preferred Stock at an exercise price of $1.775 resulting in proceeds of $33,432.
      Furthermore, 750 restricted shares were issued at a market price of $1.90 with
      a
      total value of $1,425 for the purchase of intangible assets.





In
      March
      2007 we entered into an agreement with Sam Elhag to provide consulting services
      to us. In exchange for his services, we will issue 10,000 shares of restricted
      common stock to the consultant during the service period. During the three
      months ended January 31, 2008 we issued a total of 3,332 shares of restricted
      common stock to Mr. Elhag having a total value of $6,331.





In
      September 2007 we entered into an agreement with American Capital Ventures
      to
      provide consulting services to us. In exchange for their services, we will
      issue
      60,000 shares of restricted common stock to the consultant during the twelve
      month service period. The consultant received 20,000 restricted common shares
      upon execution of the agreement with the balance being issued monthly at the
      rate of 3,636 shares per month. During the three months ended January 31, 2008
      we issued a total of 18,180 shares of restricted common stock having a total
      value of $40,541. The consultant will also be paid a fee of $3,500 per month
      over the twelve month service period. In addition, the consultant will be issued
      warrants to purchase 40,000 shares of restricted common stock over the twelve
      month service period.




33





Unless
      otherwise noted, we relied on section 4(2) of the Securities Act of 1933 to
      issue the securities inasmuch as the common stock was issued without any form
      of
      general solicitation or general advertising and the acquirers were accredited
      investors.





**Item
      3 - Defaults Upon Senior Securities**





None.





**Item
      4 - Submission of Matters to a Vote of Security Holders**





None.




**Item
      5 - Other Information**





None.





**Item
      6 - Exhibits**





3.1
            Certificate
                of Incorporation of National Lampoon, Inc. (1)





3.2
            Bylaws
                of National Lampoon, Inc. adopted August 27, 2002 (1)





3.3
            First
                Amendment of Certificate of Incorporation of National Lampoon, Inc.
                (2)





4.1
            Certificate
                of Designations, Preferences, Rights and Limitations of Series C
                Convertible Preferred Stock of National Lampoon, Inc. (2)





4.2
            NLAG
                Registration Rights Agreement dated May 17, 2002 among the Registrant
                and
                members of the NLAG Group and GTH Capital, Inc. (3)





4.3
            Jimirro
                Registration Rights Agreement dated May 17, 2002 (3)





4.4
            Piggyback
                Registration Rights Agreement dated September 3, 2002 between the
                Registrant and Constellation Venture Capital, L.P. as agent for certain
                individuals. (4)





4.5
            Piggyback
                Registration Rights Agreement entered into among the Registrant and
                the
                purchasers of Series C Convertible Preferred Stock (5)





4.6
            J2
                Communications Voting Agreement dated May 17, 2002 among members
                of the
                NLAG Group and James P. Jimirro (3)





4.7
            First
                Amendment to Voting Agreement dated June 7, 2002





4.8
            Series
                C Voting Agreement entered into among the Registrant and purchasers
                of
                Series C Convertible Preferred Stock (5)





31.1
            Certification
                by Chief Executive Officer pursuant to section 302 of the Sarbanes
                Oxley
                Act of 2002*





31.2
            Certification
                by Interim Chief Financial Officer pursuant to section 302 of
                the Sarbanes Oxley Act of 2002*





34




32
            Certification
                by Chief Executive Officer and Interim Chief Financial Officer pursuant
                to
                section 906 of the Sarbanes Oxley Act of 2002*





*Filed
      herewith.





(1)
            Incorporated
                by reference from the Registrant's Form 10-K/A for the fiscal year
                ended
                July 31, 2003 filed with the Securities and Exchange Commission on
                December 19, 2003.





(2)
            Incorporated
                by reference from the Registrant's Form 10-K for the fiscal year
                ended
                July 31, 2005 filed with the Securities and Exchange Commission on
                October
                29, 2005.





(3)
            Incorporated
                by reference from the Registrant's Form 8-K filed with the Securities
                and
                Exchange Commission on May 31, 2002.





(4)
            Incorporated
                by reference from the Registrant's Form 8-K filed with the Securities
                and
                Exchange Commission on September 9, 2002.





(5)
            Incorporated
                by reference from the Registrant's Form 10-QSB filed with the Securities
                and Exchange Commission on December 22, 2006.





**SIGNATURES**





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




NATIONAL
                LAMPOON, INC.March
                14, 2008
            By:
            /s/ Daniel
              S.
              LaikinDaniel
                S. Laikin,
              Chief
                Executive Officer




March
                14, 2008
            By:
            /s/ Lorraine
              EvanoffLorraine
                Evanoff,
              Interim
                Chief Financial Officer


35