**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, 2005
 
 OR
 
 [_]
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
    95-4053296(State or other jurisdiction of
    (I.R.S. EmployerIncorporation or organization)
    Identification
      No.)
 
 10850
Wilshire Boulevard, Suite 1000
 Los
Angeles, California
 90024
 (Address
of principal executive offices)
 (Zip
Code)
 
 (310)
474-5252
 (Registrant’s
telephone number including area code)
 
 N/A
 (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 [ 
]
 
 **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 3,397,845 shares of common
stock, $0.001 par value, issued and outstanding as of March 9,
2005.
 
 Transitional
Small Business Disclosure Format (Check one): Yes [  ] No [ x ]
 
  
  **FORWARD
LOOKING STATEMENTS**
 
 Some of
the statements made in this quarterly report on Form 10QSB 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,” “our future success depends,” “seek 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:
 
 ·
    our
      inability to generate revenues sufficient to sustain our operations or to
      raise capital as and when we need it;
 
 ·
    our
      failure to accurately forecast our capital needs;
 
 ·
    unanticipated
      increases in development, production or marketing expenses related to our
      various business activities;
 
 ·
    our
      inability to effectively compete with other providers of comedic
      entertainment in the marketplace;
 
 ·
    our
      inability to protect our intellectual property from infringement by
      others;
 
 ·
    our
      inability to fully implement our business plan for any reason;
 
 ·
    the
      loss of the services of our Chief Executive Officer and our
      President
 
 and other
factors, such as the general state of the U.S. economy, 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 we believe that the expectations reflected in the
forward-looking statements are reasonable, we 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. We do not undertake to update any of the
forward-looking statements to conform these statements to actual
results.
  
  **PART
I - FINANCIAL INFORMATION**
 
 **Item
1 - Financial Statements**
 
 **NATIONAL
LAMPOON, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
BALANCE SHEETS**
 
 ASSETS
    
    JAN
      31, 2005(UNAUDITED)CURRENT
      ASSETSCash
      and cash equivalents
    
    $
    1,762,709Accounts
      receivable
    
    
    436,781Capitalized
      debt issuance costs
    
    
    633,000Prepaid
      expenses and other current assets
    
    
    172,578Total
      current assets
    
    
    3,005,068NON-CURRENT
      ASSETSCapitalized
      production costs
    
    
    155,543Fixed
      assets, net of accumulated depreciation
    
    
    34,065Intangible
      assets
    
    
    5,964,732Accumulated
      amortization of intangible assets
    
    
    (3,868,578
    )Total
      non-current assets
    
    
    2,285,762TOTAL
      ASSETS
    
    $
    5,290,830
  
  
 LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIESAccounts
      payable
    
    $
    335,279Accrued
      expenses
    
    
    1,642,360Notes
      payable
    
    
    2,845,874Deferred
      income
    
    
    260,000TOTAL
      CURRENT LIABILITIES
    
    
    5,083,513MINORITY
      INTEREST
    
    
    --SHAREHOLDERS’
      EQUITYSeries
      B Convertible Preferred Stock, par value $.0001 per share,68,406 shares authorized, 63,607 shares
    issued.
    
    
    6Series
      C Convertible Preferred Stock, par value $.0001 per share,250,000
      shares authorized, 229,761 shares issued
    
    
    23Common
      Stock, par value $.0001 per share, 60,000,000shares authorized,
      and 3,343,311 shares issued.
    
    
    334Additional
      paid in capital
    
    
    29,293,878Less:
      Deferred compensation
    
    
    (346,012
    )Accumulated
      deficit
    
    
    (28,740,912
    )TOTAL
      SHAREHOLDERS’ EQUITY
    
    
    207,317TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
    
    $
    5,290,830
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  
  
 **NATIONAL
LAMPOON, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF OPERATIONS**
 **(UNAUDITED)**
 
 ****
      ****
    
    **THREE
      MONTHS**
      **ENDED
      JAN. 31,**
    
    **SIX
      MONTHS**
      **ENDED
      JAN. 31,******
    
    **2005**
    
    **2004**
    
    **2005**
    
    **2004**REVENUEProduction
    
    $
    47,000
    
    $
    375,162
    
    $
    148,000
    
    $
    375,163Licensing
    
    
    1,053,809
    
    
    232,173
    
    
    1,171,497
    
    
    288,852Advertising
      and promotion revenues
    
    
    229,935
    
    
    106,795
    
    
    678,181
    
    
    323,045Total
      revenues
    
    
    1,330,744
    
    
    714,130
    
    
    1,997,678
    
    
    987,060COSTS
      AND EXPENSESCosts
      related to production revenue
    
    
    27,304
    
    
    303,080
    
    
    144,408
    
    
    385,070Costs
      related to licensing revenue
    
    
    84,930
    
    
    26,092
    
    
    172,397
    
    
    126,467Production
      costs
    
    
    251,696
    
    
    347,686
    
    
    491,063
    
    
    726,410Amortization
      of intangible assets
    
    
    60,000
    
    
    60,000
    
    
    120,000
    
    
    120,000Selling,
      general & administrative expenses
    
    
    1,445,386
    
    
    1,274,731
    
    
    2,346,426
    
    
    2,106,878Stock,
      warrants, & options issued for services
    
    
    155,029
    
    
    147,765
    
    
    402,092
    
    
    318,116Expense
      associated with modification of warrants
    
    
    177,798
    
    
    --
    
    
    1,082,695
    
    
    --Severance
      costs
    
    
    2,577,497
    
    
    --
    
    
    2,577,497
    
    
    --Total
      costs and expenses
    
    
    4,779,640
    
    
    2,159,354
    
    
    7,336,578
    
    
    3,782,941OPERATING
      LOSS
    
    
    (3,448,896
    )
    
    (1,445,224
    )
    
    (5,338,900
    )
    
    (2,795,881
    )OTHER
      INCOME (EXPENSE)Interest
      income
    
    
    3,364
    
    
    1,440
    
    
    4,804
    
    
    2,881Other
      expense
    
    
    (172,822
    )
    
    --
    
    
    (172,822
    )
    
    --Total
      other income (expense)
    
    
    (169,458
    )
    
    1,440
    
    
    (168,018
    )
    
    2,881LOSS
      BEFORE INCOME TAXES
    
    
    (3,618,354
    )
    
    (1,443,784
    )
    
    (5,506,918
    )
    
    (2,793,000
    )Provision
      for state income taxes
    
    
    2,969
    
    
    --
    
    
    9,138
    
    
    2,400NET
      LOSS
    
    $
    (3,621,32
    )
    $
    (1,443,78
    )
    $
    (5,516,05
    )
    $
    (2,795,400
    )Beneficial
      conversion feature treated as preferred dividend
    
    
    (943,097
    )
    
    --
    
    
    (2,280,906
    )
    
    --Net
      loss attributable to common shareholders
    
    $
    (4,564,42
    )
    $
    (1,443,78
    )
    $
    (7,796,96
    )
    $
    (2,795,400
    )Net
      loss per share attributable to common shareholder— basic and
      diluted
    
    $
    (1.46
    )
    $
    (0.47
    )
    $
    (2.51
    )
    $
    (0.91
    )Weighted
      average number of common shares-- basic and diluted
    
    
    3,133,473
    
    
    3,066,836
    
    
    3,102,878
    
    
    3,060,514
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  
  **NATIONAL
LAMPOON, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
 
 ****
      ****
    
    **FOR
      THE SIX MONTHS**
      **ENDED
      JANUARY 31,******
    
    **2005**
    
    **2004**CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      (loss)
    
    $
    (5,516,056
    )
    $
    (2,795,400
    )Adjustments
      to reconcile net lossto net cash used in operating
      activities:Depreciation
      and amortization
    
    
    138,948
    
    
    134,110Amortization
      of debt issuance costs
    
    
    7,000
    
    
    --Stock,
      options, and warrants issued for services
    
    
    402,092
    
    
    318,116Expense
      associated with the modification of warrants
    
    
    1,082,695
    
    
    --Other
    
    
    5,115
    
    
    (2,880
    )Changes
      in assets and liabilities:(Increase)
      in accounts receivable
    
    
    (384,442
    )
    
    (153,905
    )(Increase)
      in prepaid expenses and other assets
    
    
    (148,116
    )
    
    (778
    )(Increase)
      in production costs
    
    
    (1,396
    )
    
    (141,044
    )Increase/(decrease)
      in accounts payable
    
    
    (67,859
    )
    
    205,378Increase
      in accrued expenses
    
    
    188,826
    
    
    43,583Increase/(decrease)
      in deferred revenues
    
    
    140,000
    
    
    (61,000
    )NET
      CASH AND CASH EQUIVALENTS USED IN OPERATING ACTIVITIES
    
    
    (4,153,193
    )
    
    (2,453,820
    )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
    
    
    --
    
    
    (28,194
    )NET
      CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES
    
    
    --
    
    
    (28,194
    )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from Series C convertible preferred stock issuance
    
    
    3,435,543
    
    
    --Exercise
      of stock options
    
    
    74,083Elimination
      of note receivable on common stock
    
    
    162,980Payments
      on notes payable
    
    
    (
      472,188
    )
    
    --Proceeds
      from notes payable
    
    
    2,715,000
    
    
    2,487,756NET
      CASH AND CASH EQUIVALENTS (USED IN)/ PROVIDED BY FINANCINGACTIVITIES
    
    
    5,915,418
    
    
    2,487,756NET
      INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    1,762,225
    
    
    5,742CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    484
    
    
    140,255CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
    
    $
    1,762,709
    
    $
    145,997
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  Supplemental
      disclosure of investing and financing activities:Stock
      and options issued for services and debt issuance costs
    
    $
    1,042,092
    
    $
    318,116Conversion
      of loans to Series C Convertible Preferred stock with warrants
      attached
    
    $
    4,649,775
  
  **NATIONAL
LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
A — BASIS OF PRESENTATION AND GOING CONCERN**
 
 The
accompanying unaudited consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim
consolidated financial statements. Accordingly, they do not include all of the
information and disclosures required for annual financial statements. In the
opinion of the Company’s management, all adjustments (consisting of normal
recurring accruals) necessary to present fairly the Company’s financial position
as of January 31, 2005, and the results of operations and cash flows for the
three and six month periods ended January 31, 2005 and 2004 have been included.
These consolidated financial statements should be read in conjunction with the
financial statements and related footnotes for the year ended July 31, 2004
included in the National Lampoon, Inc. (the “Company”) annual report on Form
10-K for that period.
 
 The
results of operations for the three and six month periods ended January 31, 2005
are not necessarily indicative of the results to be expected for the full fiscal
year. For further information, refer to the financial statements and related
footnotes included in the Company’s annual report on Form 10-K for the year
ended July 31, 2004.
 
 The
accompanying consolidated financial statements have been prepared assuming the
Company will continue as a going concern. The Company’s net losses of $5,516,056
during the first six months of the 2005 fiscal year and net losses of $5,127,107
and $5,924,836 in the prior two years, negative working capital of $2,078,445
and accumulated deficit of $28,740,912 at January 31, 2005, raise substantial
doubt about the Company's ability to continue as a going concern. In order to
fund operations, the Company has relied on the purchase of securities by Daniel
S. Laikin, our Chief Executive Officer and a director, and Paul Skjodt and
Timothy S. Durham, directors, (collectively referred to as the “NLAG Group”) and
on loans made by Mr. Laikin and Mr. Durham that were subsequently converted to
securities. Subsequent to the reorganization transactions that took place on May
17, 2002, the Company received approximately $4.6 million in loans from Mr.
Laikin and Mr. Durham;
 
 On
December 9, 2004 the Company completed the sale of units consisting of Series C
Convertible Preferred Stock with warrants attached. Through this offering, the
Company received approximately $8.2 million consisting of approximately $3.0
million in cash and approximately $5.2 million from the conversion of debt owed
to Mr. Laikin and Mr. Durham and salary and accrued expenses owed to Mr.
Laikin.
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
A — BASIS OF PRESENTATION AND GOING CONCERN (CONTINUED)**
 
 On
January 28, 2005 the Company borrowed $2.7 million from N. Williams Family
Investments, L.P. The loan was used to fund a severance payment in the amount of
$2,532,800 to James P. Jimirro, the Company’s former President and CEO, and the
current Chairman of the Board of Directors. The balance of the funds were used
for working capital.
 
 Management
believes the following should alleviate the substantial doubt about the
Company's ability to continue as a going concern. On March
10, 2005 the Company filed a registration statement with the Securities and
Exchange Commission for a proposed public offering of an as yet undetermined
number of shares of our common stock. The registration statement has not yet
been declared effective. The Company intends to raise at least $8 million in
this offering, although there is no guarantee that the Company will raise any
money. This information does not constitute an offer to sell or the solicitation
of an offer to buy, nor shall there be any sale of these securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such
jurisdiction.
 
 The
Company’s consolidated financial statements for the fiscal year ended July 31,
2004 contain an explanatory paragraph as to its ability to continue as a going
concern. This explanatory paragraph may impact its ability to obtain future
financing.
 
 **NOTE
B - STOCK OPTIONS**
 
 The
Company has adopted SFAS No. 123, “Accounting for Stock Based Compensation”,
issued in October 1995. In accordance with SFAS No. 123, the Company has elected
to follow Accounting Principles Board (APB) Opinion No. 25, “Accounting for
Stock issued to Employees”, and related interpretation in accounting for its
employee stock options. Under APB Opinion No. 25, because the exercise price of
the Company’s employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. There were no
employee stock options granted during the six months ended Janaury 31, 2004, nor
is there any current period compensation expense to disclose in relation to
previously issued employee stock options, as required under SFAS 148. If the
Company elected to recognize compensation expense based on the fair value of the
options granted on their grant date as prescribed by SFAS No. 123, the Company’s
net income/(loss) and earnings/(loss) per share would have been reduced to the
pro forma amounts as follows:
 
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
B - STOCK OPTIONS (CONTINUED)**
 
 3
      Months Ended January 31,
    
    6
      Months Ended January 31,2005
    
    2004
    
    2005
    
    2004Net
      loss attributable to common shareholders- as reported
    
    $
    (4,564,420
    )
    $
    (1,443,784
    )
    $
    (7,796,962
    )
    $
    (2,795,400
    )APB
      25 expense recognized
    
    
    --
    
    
    --
    
    
    --
    
    
    --Stock
      option compensation under-fair value method
    
    
    (106,468
    )
    
    --
    
    
    (291,047
    )
    
    --Net
      loss attributable to common shareholders-pro forma
    
    $
    (4,670,888
    )
    $
    (1,443,784
    )
    $
    (8,088,009
    )
    $
    (2,795,400
    )Basic
      and diluted earnings/(loss) per share-as reported
    
    $
    (1.46
    )
    $
    (0.47
    )
    $
    (2.51
    )
    $
    (0.91
    )Basic
      and diluted earnings/(loss) per share-pro forma
    
    $
    (1.49
    )
    $
    (0.47
    )
    $
    (2.61
    )
    $
    (0.91
    )
 
 **NOTE
C - NOTES PAYABLE**
 
 On
January 28, 2005 the Company borrowed the sum of $2,700,000 from N. Williams
Family Investments, L.P. The loan accrues interest at the rate of 7% per year.
The maturity date of the loan is the earlier of January 28, 2006 or the date the
Company closes an offering in which the gross cash proceeds to the Company equal
or exceed $2,700,000. The lender may also demand that the loan be immediately
repaid if the Company defaults in its obligations under the promissory note. The
Company is required to prepay the loan to the extent of any proceeds the Company
receives from an equity offering raising less than $2.7 million. The loan is
secured by a lien against all of our assets. The amount of $2,523,800 from the
loan proceeds was used to pay severance benefits to James P. Jimirro, the
Chairman of the Company’s Board of Directors and the Company’s former Chief
Executive Officer and President, as required by his employment agreement dated
May 17, 2002. The remaining proceeds were used for working capital.
 
 **NOTE
D - RECENT ACCOUNTING PRONOUNCEMENTS**
 
 In
November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of
ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify that
abnormal amounts of idle facility expense, freight, handling costs, and wasted
materials (spoilage) should be recognized as current-period charges and require
the allocation of fixed production overheads to inventory based on the normal
capacity of the production facilities. The guidance is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier
application is permitted for inventory costs incurred during fiscal years
beginning after November 23, 2004. Management has evaluated the impact of the
adoption of SFAS 151, and does not believe the impact will be significant to the
Company’s overall results of operations or financial position.
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
D - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)**
 
 In
December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate
Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (“SFAS
152). The amendments made by Statement 152. This Statement amends FASB Statement
No. 66, Accounting for Sales of Real Estate, to reference the financial
accounting and reporting guidance for real estate time-sharing transactions that
is provided in AICPA Statement of Position (SOP) 04-2, Accounting for Real
Estate Time-Sharing Transactions. This Statement also amends FASB Statement No.
67, Accounting for Costs and Initial Rental Operations of Real Estate Projects,
to state that the guidance for incidental operations and costs incurred to sell
real estate projects does not apply to real estate time-sharing transactions.
The accounting for those operations and costs is subject to the guidance in SOP
04-2. This Statement is effective for financial statements for fiscal years
beginning after June 15, 2005, with earlier application encouraged. Management
has evaluated the impact of the adoption of SFAS 152, and does not believe the
impact will be significant to the overall results of the Company’s operations or
financial position.
 
 In
December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Financial Accounting Standards Board believes that exception required that
some nonmonetary exchanges, although commercially substantive, be recorded on a
carryover basis. By focusing the exception on exchanges that lack commercial
substance, the Financial Accounting Standards Board believes this Statement
produces financial reporting that more faithfully represents the economics of
the transactions. The Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Earlier application
is permitted for nonmonetary asset exchanges occurring in fiscal periods
beginning after the date of issuance. The provisions of this Statement shall be
applied prospectively. Management has evaluated the impact of the adoption of
SFAS 152, and does not believe the impact will be significant to the Company’s
overall results of operations or financial position.
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
D - RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)**
 
 In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment”. Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. Statement 123(R) covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. Statement 123(R) replaces FASB Statement No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion 25,
as long as the footnotes to financial statements disclosed what net income would
have been had the preferable fair-value-based method been used. Public entities
(other than those filing as small business issuers) will be required to apply
Statement 123(R) as of the first interim or annual reporting period that begins
after June 15, 2005. Management has evaluated the impact of the adoption of SFAS
123(R) and, although it has not yet finished its estimates to enable it to
quantify the impact, based on contractual obligations, recurring customary
grants such as those to the Board of Directors, and vested options in place,
management believes the impact will be significant to the Company’s overall
results of operations and financial position.
 
 **NOTE
E - EARNINGS PER SHARE**
 
 Diluted
earnings per share amounts are calculated using the treasury method and are
based upon the weighted average number of common and common equivalent shares
outstanding during the period. Basic and diluted earnings per share are the
same, as common equivalent shares have been excluded from the computation, due
to the fact they are anti-dilutive. Options and warrants to purchase 6,914,412
and 92,557 common shares during the three months ended January 31, 2005 and
2004, and 5,735,507 and 149,084 for the six months ended January 31, 2005 and
2004 respectively are not included in the calculation of diluted earnings per
share respectively because their inclusion would be anti-dilutive. 8,178,711 and
3,583,491 shares that would be issuable upon conversion of the Series B and
Series C Convertible Preferred Stock are not included in the calculation of
diluted earnings per share during the three months and six months ended January
31, 2005 and 2004 respectively because their inclusion would be
anti-dilutive.
 
 **NOTE
F - STOCKHOLDER EQUITY**
 
 On
September 15, 2004 the Company’s Board of Directors and stockholders holding a
majority of the Company’s common stock approved a two for one split of the
Company’s common stock. The effect of this stock split has been reflected in all
reported periods.
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
F - STOCKHOLDER EQUITY (CONTINUED)**
 
 On
December 9, 2004 the Company closed an offering of units consisting of Series C
Convertible Preferred Stock and warrants to purchase the Company’s common stock.
The Company received approximately $8.2 million for the units, consisting of
approximately $3 million in cash, $4.7 million from the conversion of debt, and
approximately $492,000 for payment of salaries. At the commitment date, each
unit was purchased for $35.50. Holders of Series C Convertible Preferred Stock
earn a dividend of 9% per annum payable in the form of the Company’s common
stock at the time the holder converts the Series C Convertible Preferred Stock
to common stock. Attached to each share of Series C Convertible Preferred Stock
is a warrant to purchase ten shares of the Company’s common stock.
 
 As part
of the offering of units of Series C Convertible Preferred Stock with warrants
attached, the terms of the warrants granted to the holders of Series B
Convertible Preferred Stock were made identical to the terms of the Series C
Convertible Preferred Stock warrants. Therefore, the term of the warrants
attached to the Series B Convertible Preferred Stock was modified to extend four
years from the issuance of the Series C Convertible Preferred Stock, and the
exercise price was reduced to $1.775 from $2.50. The excess of the value of the
modified warrants as compared to the original warrants was calculated according
to paragraph 188 of FAS 123. The excess amount, which included the right to
purchase 3,583,491 shares of the Company’s common stock, totaled $904,897, which
has been recognized as a charge to operations.
 
 Each
shares of Series C Convertible Preferred Stock is convertible at the option of
the holder into 20 shares of the Company’s common stock. Attached to each share
of Series C Convertible Preferred Stock is a warrant to purchase 10 shares of
the Company’s common stock. The warrants have a term of four years and an
exercise price of $1.775 on a post-split basis. The
relative fair value of the warrants of $1,271,904 was estimated using the
Black-Scholes option pricing model with the following assumptions: average
risk-free interest of 5.50%; dividend yield of 0%; average volatility factor of
the expected market price of the Company’s common stock of 95.7%; and a term of
4 years . The
value of the warrants plus the value of the preferred stock with the conversion
feature of $4,920,977 exceeded the proceeds of the offering. Pursuant to EITF
98-5, “Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios”, as the terms of the Series C
Convertible Preferred Stock are convertible upon issuance, the discount
attributable to the beneficial conversion feature, $943,097 was expensed
immediately in the quarter ended January 31, 2005 in a manner similar to a
dividend at the date of issuance and is included in the Statement of Operations
as a preferred dividend. The total discount attributable to the beneficial
conversion feature for the Series C Convertible Preferred Stock offering for the
six months ended January 31, 2005 was $2,280,906.
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
F - STOCKHOLDER EQUITY (CONTINUED)**
 
 On
January 28, 2005 the Company borrowed $2.7 million from N. Williams Family
Investments, L.P. As part of the loan transaction, N. Williams Family
Investments, L.P. was issued 80,000 shares of the Company’s common stock, and
Christopher Williams, a party related to N. Williams Family Investments, L.P.,
was issued 20,000 shares. In addition Daniel Laikin and Timothy Durham
personally guaranteed certain obligations of the Company relating to the
security for the loan, and as part of this guarantee were each issued 50,000
shares of the Company’s common stock. The expense associated with these stock
grants totaled $640,000, was recognized as debt issuance costs and capitalized.
These costs will be amortized over the one year term of the note, or upon
repayment if earlier.
 
 In
conjunction with his separation from service, the Company agreed to extend the
stock options granted to James P. Jimirro that would otherwise have expired 90
days after the termination of his employment. The excess of the value of the
modified options as compared to the original options was calculated according to
paragraph 188 of FAS 123. The excess amount totaled $177,798, which has been
recognized as a charge to operations for the quarter ended January 31,
2005.
 
 **NOTE
G - SEGMENT INFORMATION**
 
 The
Company operates in three business segments: the production of motion picture,
television, and video/DVD products; the licensing and exploitation of the
“National Lampoon®” trademark and related properties including the sale of
products to consumers; and television production and distribution to college
campuses from which advertising and promotions revenues are derived. Segment
operating income/(loss) excludes the amortization of intangible assets, interest
income, and income taxes. Selling, general and administrative expenses not
specifically attributable to any segment have been allocated equally among the
three segments. Summarized financial information for the three month and six
month periods ended January 31, 2005 and 2004 concerning the Company’s segments
is as follows:
  Production
    
    
    Licensing
    
    
    Television
    
    
    TotalThree
      Months Ended January 31, 2005Segment
      revenue
    
    $
    47,000
    
    $
    1,054,000
    
    $
    230,000
    
    $
    1,331,000Segment
      operating (loss)
    
    
    ($2,104,000
    )
    
    ($1,163,000
    )
    
    ($294,000
    )
    
    ($3,561,000
    )Three
      Months Ended January 31, 2004Segment
      revenue
    
    $
    375,000
    
    $
    232,000
    
    $
    107,000
    
    $
    714,000Segment
      operating(loss)
    
    
    ($313,000
    )
    
    ($179,000
    )
    
    ($893,000
    )
    
    ($1,385,000
    )
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
G - SEGMENT INFORMATION (CONTINUED)**
 
 Six
      Months Ended January 31, 2005Segment
      revenue
    
    $
    148,000
    
    $
    1,172,000
    
    $
    678,000
    
    $
    1,998,000Segment
      operating (loss)
    
    
    ($2,629,000
    )
    
    ($1,647,000
    )
    
    ($1,116,000
    )
    
    ($5,392,000
    )Six
      Months Ended January 31, 2004Segment
      revenue
    
    $
    375,000
    
    $
    289,000
    
    $
    323,000
    
    $
    987,000Segment
      operating(loss)
    
    
    ($604,000
    )
    
    ($442,000
    )
    
    ($1,630,000
    )
    
    ($2,676,000
    )
 
 A
reconciliation of segment operating loss to net income before income taxes for
the three and six month periods ended January 31 2005 and 2004 is as
follows:
 
 FOR
      THE THREE MONTHS ENDEDJAN.
      31, 2005
    
    JAN.
      31, 2004Total
      segment operating (loss)
    
    
    ($3,561,000
    )
    
    ($1,385,000
    )Amortization
      of intangible assets
    
    
    60,000
    
    
    60,000Interest
      income
    
    
    (3,000
    )
    
    (1,000
    )Net
      loss before income taxes
    
    
    ($3,618,000
    )
    
    ($1,444,000
    )
 
 FOR
      THE SIX MONTHS ENDEDJAN.
      31, 2005
    
    JAN.
      31, 2004Total
      segment operating (loss)
    
    
    ($5,392,000
    )
    
    ($2,676,000
    )Amortization
      of intangible assets
    
    
    120,000
    
    
    120,000Interest
      income
    
    
    (5,000
    )
    
    (3,000
    )Net
      loss before income taxes
    
    
    ($5,507,000
    )
    
    ($2,793,000
    )
 
 **NOTE
H - LITIGATION**
 
 On
February 17, 2004, plaintiff Trustin Howard filed a lawsuit against defendants
In-finn-ity Productions, Bud Friedman, National Lampoon Productions and Game
Show Network LLC in the United States District Court for the Central District of
California. The plaintiff alleges that the Company, along with the other
defendants, stole his idea for the show Funny Money and also alleges, among
other things, copyright infringement. He seeks damages and injunctive relief.
The Company believes that it has valid defenses to this action and intends to
vigorously contest this matter.
 
  
  **NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
H - LITIGATION (CONTINUED)**
 
 On
October 27, 2004 Far Horizon Sales and Leasing LLC filed a complaint against the
Company’s subsidiary, National Lampoon Networks, Inc., in the Superior Court for
the County of Los Angeles. The plaintiff alleges that it suffered damages for
breach of contract, negligence and trespass to chattel related to the rental of
a coach bus and damage thereto. The plaintiff alleges damages in excess of
$79,000. Noting the extent of the damages, the value of the vehicle, and the
fact that there is insurance coverage, the Company, in an effort to be
conservative, has accrued $50,000 on its books.
 
 **NOTE
I - SUBSEQUENT EVENTS**
 
 Between
February 1, 2005 and March 11, 2005, options to purchase 2,400 shares of common
were exercised by employees, and 52,134 shares of common stock were issued as
payment for services rendered by various companies.
 
 On March
10, 2005 the Company filed a registration statement with the Securities and
Exchange Commission for a proposed public offering of an as yet undetermined
number of shares of its common stock. The Company intends to use the net
proceeds from the offering for the payment of the loan made to the Company by N.
Williams Family Investments, L.P. as well as for other corporate purposes. The
registration statement has not yet been declared effective. This information
does not constitute an offer to sell or the solicitation of an offer to buy, nor
shall there be any sale of these securities in any jurisdiction in which such
offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such jurisdiction.
 
  
  **Item
2 - Management’s Discussion and Analysis or Plan of
Operation**
 
 Management’s
Discussion and Analysis or Plan of Operation discusses our 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 to
our target audiences. The National Lampoon® brand was initially developed
through years of publication of National Lampoon magazine and the production of
motion pictures, including *National
Lampoon’s Animal House* and *National
Lampoon’s Vacation* . We
believe that the National Lampoon® brand is one of the strongest brands in
media. Our current business objective is to expand the use of the National
Lampoon® brand through motion picture and television development, production and
distribution of entertainment through our subsidiary, National Lampoon Networks,
Inc., a network of affiliated college television stations, expansion into the
home entertainment markets, and licensing our name.
 
 Our
primary business areas are comprised of:
 
 **National
Lampoon Networks**
 
 National
Lampoon Networks develops, produces and distributes comedic television
programming. National Lampoon Networks reaches nearly 4.8 million college
students in their dormitories and other places of residence through a network of
603 affiliated college and other television stations. For advertisers targeting
the young adult audience, National Lampoon Networks sells commercial and field
marketing services, such as product sampling and live promotional events hosted
on college and university campuses.
 
 **Motion
Picture and Television Programming**
 
 We
develop and produce motion pictures and made for television movies and programs.
In recent years, we have derived the bulk of our revenues from license fees
relating to the production of new motion pictures and from contingent
compensation for motion pictures previously produced by us including such movies
as *National
Lampoon’s Animal House* and *National
Lampoon’s Vacation* . We do
not finance the production or distribution of any National Lampoon® motion
pictures. Instead, we rely on third parties to provide motion picture financing
and distribution. To date, 20 motion pictures have been released using the
National Lampoon® name and three additional motion pictures are planned for
release during 2005.
 
 
 
 We are
involved in the production of television programs for broadcast networks, cable
channels, pay-per-view or the syndicated marketplace. We anticipate that
television production will continue to be part of our business plan, as we
create new comedic content and promote the National Lampoon®
trademark.
 
 **Home
Entertainment**
 
 We are
aggressively expanding into the home entertainment market by repackaging
existing material and developing and producing original material for DVD and VHS
distribution. We have partnered with unrelated third parties to produce and
distribute several new titles in 2005. These products may include shows for
broadcast on National Lampoon Networks as well as original National Lampoon®
productions.
 
 **Licensing**
 
 In
addition to motion picture and television programming and publishing, we license
the National Lampoon® brand and content from our library for use in a wide
variety of products including radio broadcasts, recordings, electronic games,
videos and live events.
 
 **Publishing**
 
 We intend
to publish six National Lampoon® books over a three year period. To date, we
have released three of these books, *1964
High School Reunion Year Book* , *National
Lampoon’s Book of Love* , and *National
Lampoon’s Big Book of True Facts.* We
intend to publish the remaining three books by September 2005.
 
 **Internet**
 
 We use
our Internet operations as an integral part of our business to attract fresh
comedic content from unrelated writers and contributors. We use this content in
the development of stories, characters and animation that will be converted into
other media. We also operate a webstore through which consumers can purchase
branded items directly from us.
 
 **National
Lampoon Tours**
 
 We
recently began to offer group travel and entertainment packages. We intend to
achieve a market position in selected high volume, high margin travel
destinations that appeal to college students. We initially prepared packages for
Cabo San Lucas, Mexico and Las Vegas. The packages include professional
entertainment, theme parties and other attractions for young adults. We market
these travel packages directly through National Lampoon Networks, our website
and third party agents.
 
 
 ****
 **Our
Revenue Sources**
 
 The
sources of revenue from our business areas include:
 
 ·
    NATIONAL
      LAMPOON NETWORKS. We earn revenues from the sale of on-air advertising and
      from marketing fees earned through product sampling, promotional events
      and other live events.
 
 ·
    MOTION
      PICTURE AND TELEVISION PROGRAMMING. We earn revenues based on gross
      revenue, profit participation and licensing fees, which vary from project
      to project.
 
 ·
    LICENSING.
      We earn revenues based on royalties generated from licensing the National
      Lampoon® brand.
 
 ·
    HOME
      ENTERTAINMENT. We earn revenues based on royalties from the sale and
      rental of our branded comedic content on DVD and VHS
      videotape.
 
 ·
    PUBLISHING.
      We earn revenues based on royalties generated from the sale of our print
      products.
 
 ·
    INTERNET.
      We generate revenues from our website from the sale of banner ads,
      e-commerce, sponsorships, syndication of content originally developed for
      our website and the sale of branded
merchandise.
 
 ·
    NATIONAL
      LAMPOON TOURS. We anticipate that we will earn revenues from the sale of
      travel packages which are oriented to young adults and marketed on college
      campuses and through our website.
 
 **Strategic
Objectives**
 
 We seek
to continue to provide National Lampoon® comedic content and products to as many
consumers as possible by
 
 ·
    continuing
      to expand National Lampoon Networks by adding new college and university
      affiliate stations, increasing advertising and marketing revenue and
      producing new television shows;
 
 ·
    expanding
      our video and DVD library by increasing the number of products we produce
      and have distributed for home
entertainment;
 
 ·
    capitalizing
      on our reputation and relationships with major studios and other
      multimedia companies to expand the use of the National Lampoon®
      brand;
   
  ·
    creating
      new licensing opportunities in markets outside of publishing, film and
      television, such as games, records, radio programming and live events;
 
 ·
    expanding
      the number of college students purchasing travel packages created by
      National Lampoon Tours, and
 
 ·
    capitalizing
      on opportunities provided by the Internet to merchandise our home
      entertainment and other products.
 
 **Results
of Operations**
 
 **Three
Months Ended January 31, 2005 as compared to the Three Months Ended January
31,**  **2004**
 
 For the
three months ended January 31, 2005 production revenues were $47,000 compared to
$375,162 for the quarter ended January 31, 2004. This was a decrease of 88%.
During the quarter ended January 31, 2004, we recognized $198,000 in revenue
from a television pilot produced for American Movie Classics, $150,000 for four
comedy videos produced for Image Entertainment, and $27,500 for the sponsorship
of a live event during the Sundance Film Festival. During the three months ended
January 31, 2005, we earned $17,000 from a production made for Image
Entertainment and $30,000 for a pilot program for Fox Sports Network. Trademark
revenues for the three months ended January 31, 2005 were $1,053,809 as compared
to $232,173 for the same period in the prior year, representing an increase of
354%. During the three months ended January 31, 2005 we received a royalty
payment in the amount of $365,000 for use
of our name in the film *National
Lampoon’s Animal House* as
compared to a royalty payment of $180,000 during the three months ended January
31, 2004. During the three months ended January 31, 2005, we recognized $394,000
from revenues earned for the use of the National Lampoon® name for VHS tapes and
DVDs delivered pursuant to our agreement with Genius Productions, and $50,000
for use of the name for a video owned by Going the Distance. During the three
months ended January 31, 2005, we also recognized $164,000 for licensing the
National Lampoon® name for use in the movie *National
Lampoon’s Dorm Daze* , $20,000
for licensing the National Lampoon® name for use in the movie *National
Lampoon’s Blackball* , $25,000
from publishing endeavors, $18,000 from a first look agreement we entered into
with Paramount Pictures, and approximately $18,000 for Internet merchandise,
video sales, Internet advertising revenues and the sale of the “Stand Up Reagan”
video. During the three months ended January 31, 2004, other than the annual
royalty in the amount of $180,000 for use of our name in the film *National
Lampoon’s Animal House* , we
received $30,000 from Activision for use of the National Lampoon® name on a
video game, and approximately $20,000 for merchandise, video sales, and Internet
revenues.
 
 During
the three months ended January 31, 2005, National Lampoon Network’s revenues
increased to $229,935 from $106,795 earned during the three months ended January
31, 2004, representing an increase of 115%. National Lampoon Network’s
advertising revenues totaled approximately $113,000 during the three months
ended January 31, 2005 as compared to $59,000 in advertising revenues earned
during the three months ended January 31, 2004 and its promotional and
sponsorship revenues totaled approximately $117,000 during the three months
ended January 31, 2005 as compared to promotional and sponsorship revenues of
approximately $48,000 earned during the three months ended January 31,
2004.
 
 
 
 Costs
related to production revenue during the three months ended January 31, 2005
decreased to $27,304 from $303,080 during the three months ended January 31,
2004, representing a decrease of 91%. The decrease in production revenues during
the three months ended January 31, 2005, specifically the costs associated with
the production of the American Movie Classic pilot program and the Image
Entertainment video production which were incurred during the three months ended
January 31, 2004 but were not repeated during the three months ended January 31,
2005, accounted for the significant decrease in costs. Costs related to
licensing revenues increased to $84,930 during the three months ended January
31, 2005 from $26,092 in costs during the three months ended January 31, 2004,
representing an increase of 226%. These costs included website development and
maintenance, content creation and third party hosting of the website. An accrual
of $50,000 for a claim on a rented vehicle used to promote a production and an
increase in web site writing costs to $34,000 during the three months ended
January 31, 2005, as compared to approximately $26,000 during the three months
ended January 31, 2004, were the primary reasons for the higher costs.
Television production costs of $251,696 during the three months ended January
31, 2005 represented a 28% decrease from television production costs of $347,686
in the corresponding period of the prior year. National Lampoon Networks has
decreased its programming and distribution costs in an effort to increase
profits. Amortization of intangible assets, which consists of the costs of our
acquisition of the “National Lampoon®” trademark, was $60,000 during the three
month periods ended January 31, 2005 and January 31, 2004
 
 Selling,
general and administrative costs increased from $1,274,731 during the three
months ended January 31, 2004 to $1,445,386 during the three months ended
January 31, 2005. This
increase of approximately $171,000 or 13.4% resulted primarily from the payment
of bonuses totaling $220,000 to two employees during the three months ended
January 31, 2005. These bonuses were paid with units of our Series C Convertible
Preferred Stock that we valued at $35.50 per unit. During the three months ended
January 31, 2005, we also accrued a bonus to our President, Douglas S. Bennett,
of $50,000 based upon an employment agreement that took effect on February 1,
2005. These increases were offset by a decrease in general office costs of
approximately $15,000 and a decrease in National Lampoon Networks’ costs of
approximately $48,000, $18,000 of which resulted from decreased personnel costs
and $30,000 of which resulted from decreased marketing costs.
 
 During
the three months ended January 31, 2005, we recorded an expense of $155,029
associated with the granting of stock, options and warrants to advisors and
consultants as compared to $147,765 during the three months ended January 31,
2004, representing an increase of approximately $7,000 or 5%. During the three
months ended January 31, 2005, we modified certain options for the purchase of
common stock granted to James P. Jimirro. Pursuant to the terms of the J2
Communications Amended and Restated 1999 Stock Option, Deferred Stock and
Restricted Stock Plan, the options would have expired, if not exercised, 90 days
following the termination of Mr. Jimirro’s employment. The option agreements
have been amended so that they are not subject to this section of the J2
Communications Amended and Restated 1999 Stock Option, Deferred Stock and
Restricted Stock Plan and will instead expire in accordance with the terms of
the original grant. The expense associated with this modification was $177,798.
There was no corresponding expense during the three months ended January 31,
2004. On January 28, 2005 we recorded a cost of $2,577,497 representing the
final severance costs associated with Mr. Jimirro's separation from
service.  This cost included salary in the amount of $2,523,800 and a
payment in the amount of $53,697 to a leasing company in order to transfer the
ownership of a car to Mr. Jimirro. There were no equivalent severance costs to
Mr. Jimirro in the prior year.
 
 
 
 Interest
income earned during the three months ended January 31, 2005 increased to $3,364
as compared to $1,440 earned during the three months ended January 31, 2004.
This increase resulted from an increase in cash and cash equivalents held during
the period as compared to the same period last year. Other expense of $172,822
incurred during the three months ended January 31, 2005 resulted from
forgiveness of a loan due from James Jimirro to us. This loan forgiveness was
part of the severance benefits paid or transferred to Mr. Jimirro in accordance
with the terms of his employment agreement.
 
 For the
three months ended January 31, 2005, we had a net loss of $(3,621,323) as
compared to a net loss of $(1,443,783) for the three months ended January 31,
2004. This increase in net loss of approximately $2,175,000 or 151% resulted
primarily from severance costs of approximately $2.6 million paid to James
Jimirro, additional compensation to our Chief Executive Officer in the amount of
$200,000, a bonus of $50,000 accrued for our President and an expense of
approximately $178,000 associated with the modification of stock options. These
costs were off-set by an increase in revenues of approximately $617,000 or 86%
to $1,331,000 during the three months ended January 31, 2005 from $714,000
during the three months ended January 31, 2004. For the three months ended
January 31, 2005, we recorded an expense of $943,097 associated with the
beneficial conversion feature attributable to the Series C Convertible Preferred
Stock, which is treated as a preferred dividend, as compared to no such expense
during the three months ended January 31, 2004 . The
addition of this discount resulted in a net loss attributable to common
shareholders of $(4,564,420) or $(1.46) per share for the three months ended
January 31, 2005 as compared to a net loss attributable to common shareholders
of $(1,443,784) or $(0.47) per share for the three months ended January 31,
2004.
 
 **Six
Months Ended January 31, 2005 as compared to the Six Months Ended January 31,
2004**
 
 For the
six months ended January 31, 2005, production revenues were $148,000 as compared
to $375,163 for the same period in 2004. This decrease in production revenues of
approximately $227,000 or 61% resulted primarily from a decrease in projects.
During the six months ended January 31, 2005, we recognized approximately
$68,000 from videos produced for Image Entertainment, $30,000 for a pilot
produced for Fox Sports Network and $50,000 for videos produced for Genius
Productions. During the six months ended January 31, 2004, we recorded
approximately $197,000 for the production of a television pilot for American
Movie Classics, $150,000 for comedy videos produced for Image Entertainment and
$28,000 for the production of a Live Event. Licensing revenues of $1,171,497 for
the six months ended January 31, 2005 represent an increase of $882,645 or 306%
over licensing revenues for the six months ended January 31, 2004. Revenues from
the use of our name in the film *National
Lampoon’s Animal House* increased by approximately $185,000, to $365,000 for the six months ended
January 31, 2005 from $180,000 for the six months ended January 31, 2004.
Additional licensing agreements entered into during the six months ended January
31, 2005 included $394,000 from Genius Productions for videos, a total of
$234,000 for use of the National Lampoon® name on three feature films, $50,000
from Disney Interactive for use of the National Lampoon® name on cell phones,
$38,000 from Paramount as part of a first look television arrangement, and
approximately $16,000 in video, Internet merchandise and Internet advertising
sales. During the six months ended January 31, 2004, in addition to the $180,000
in licensing revenues from the film *National
Lampoon’s Animal House* , there
was approximately $20,000 from Activision for use of the National Lampoon® name
for a video game, $23,000 for Internet merchandise and advertising, $27,000 from
use of the name for television programs, and approximately $26,000 in
publishing.
 
 Advertising
and promotion revenues from National Lampoon Networks were $678,181 during the
six months ended January 31, 2005 as compared to $323,045 for the six months
ended January 31, 2004, representing an increase of $355,136 or 110%.
Advertising revenues increased to approximately $308,000 during the six months
ended January 31, 2005, from $158,000 during the six months ended January 31,
2004, which represents an increase of $150,000 or 95%. Promotional revenues of
$370,181 for the six months ended January 31, 2005 represents an increase of
approximately $205,000 or 124% from the $165,000 in promotional revenues we
received during the six months ended January 31, 2004.
 
 
 
 Costs
related to production revenues of $144,408 for the six months ended January 31,
2005 represented a 62% decrease from the $385,070 in costs related to production
revenues for the six months ended January 31, 2004. During the six months ended
January 31, 2004, costs associated with the television pilot for American Movie
Classics totaled approximately $188,000, costs associated with the video
production for Image Entertainment totaled approximately $115,000 and National
Lampoon Networks’ live event sponsorship revenue costs totaled approximately
$16,000, accounting for the higher costs related to production revenues for that
period. During the six months ended January 31, 2005, production costs included
approximately $46,000 for costs associated with the production for Image
Entertainment, $29,000 for the pilot for Fox Sports Network, and the balance was
made up of production personnel costs. Costs related to licensing revenues of
$172,397 increased by $45,930 or 36% in the six months ended January 31, 2005
from $126,467 in the six months ended January 31, 2004. The primary reason for
this increase relates to our accrual for the potential payment of damages
relating to a legal action filed against us for damage to a vehicle used to
promote a feature project. Production costs of $491,063 in the six months ended
January 31, 2005 represents a decrease of $235,347 or 32% from $726,410 in
production costs from the six months ended January 31, 2004. This decrease
reflects decreased activity in the production of National Lampoon Network
programming. Amortization of intangible assets, namely the costs of our
acquisition of the “National Lampoon®” trademark, was $120,000 during each of
the six months periods ended January 31, 2005 and January 31, 2004.
 
 Selling,
general and administrative costs increased by $319,107 to $2,425,985 during the
six months ended January 31, 2005 from $2,106,878 during the six months ended
January 31, 2004, representing an increase of 15%. This increase resulted
primarily from bonuses totaling $220,000 paid to two employees during the six
months ended January 31, 2005. These bonuses were paid with units of our Series
C Convertible Preferred Stock that we valued at $35.50 per unit. During the six
months ended January 31, 2005, we also accrued a bonus to our President, Douglas
S. Bennett, of $50,000 based upon an employment agreement that took effect on
February 1, 2005. In addition, our costs for legal services increased by
$55,466, from $144,749 during the six months ended January 31, 2004 to $200,215
during the six months ended January 31, 2005, and investor public relations
costs increased during this period by $98,632, to $111,664 from $13,032. These
increases were off-set by a decrease in accrued vacation of approximately
$39,000 due to a new vacation accrual policy, reduced interest expense of
$20,000 due to the conversion of loans to units of Series C Convertible
Preferred Stock with warrants attached, and a reduction of office and travel and
entertainment costs to approximately $41,000.
 
 During
the six months ended January 31, 2005, we recorded an expense of $322,533
associated with the granting of stock, options and warrants to advisors and
consultants as compared to $318,116 in the six months ended January 31, 2004,
representing an increase of approximately $4,000 or 1%. Expense associated with
the modification of warrants was approximately $1,082,695 in the six months
ended January 31, 2005 as compared to zero in the six months ended January 31,
2004. Warrants for the purchase of common stock issued in May 2002 in connection
with the sale of units of our Series B Convertible Preferred Stock were modified
to be identical in price and term with the warrants issued in conjunction with
the offering of our Series C Convertible Preferred Stock. The excess of the
value of the modified warrants as compared to the original warrants was
calculated according to paragraph 188 of FAS 123. The excess amount, which
included the right to purchase 3,583,491 shares of our common stock, totaled
$904,897, which has been recognized as a charge to operations. Further, during
the six months ended January 31, 2005, we modified certain options for the
purchase of common stock granted to James P. Jimirro. Pursuant to the terms of
the J2 Communications Amended and Restated 1999 Stock Option, Deferred Stock and
Restricted Stock Plan, the options would have expired, if not exercised, 90 days
following the termination of Mr. Jimirro’s employment. The option agreements
have been amended so that they are not subject to this section of the J2
Communications Amended and Restated 1999 Stock Option, Deferred Stock and
Restricted Stock Plan and will instead expire in accordance with the terms of
the original grant. The expense associated with this modification was $177,798.
There was no corresponding expense during the six months ended January 31, 2004.
On January 28, 2005 we recorded a cost of $2,577,497 representing the final
severance costs associated with Mr. Jimirro's separation from service. This cost
included salary in the amount of $2,523,800 and a payment in the amount of
$53,697 to a leasing company in order to transfer the ownership of a car to Mr.
Jimirro. There were no equivalent severance costs to Mr. Jimirro in the prior
year.
 
 
 
 Interest
income during the six months ended January 31, 2005 increased to $4,804 from
$2,881 during the six months ended January 31, 2004. This increase of $1,923 or
67% resulted from an increase in cash and cash equivalents held during the six
months ended January 31, 2005 as compared to the six months ended January 31,
2004. Other expense of $172,822 in the six months ended January 31, 2005
resulted from forgiveness of a loan due from James Jimirro to us. This loan
forgiveness was part of the severance benefits paid or transferred to Mr.
Jimirro in accordance with the terms of his employment agreement.
 
 For the
six months ended January 31, 2005, we had a net loss of $5,516,056 as compared
to a net loss of $2,795,400 for the six months ended January 31, 2004,
representing an increase in loss of $2,720,656 or 97%. The increase in net loss
resulted primarily from severance costs of approximately $2.6 million paid to
James Jimirro and the expense of approximately $1,082,695 associated with
modifying the terms of stock options and warrants. An increase in revenues of
$1,010,618 during the six months ended January 31, 2005 to $1,997,678 from
$987,060 in the six months ended January 31, 2004 off set the increase of net
loss. During the six month periods ended January 31, 2005 and 2004, we had no
significant provision for income taxes due to the utilization of deferred tax
valuation allowances. For the six months ended January 31, 2005, we recorded an
expense of $2,280,906 associated with the beneficial conversion feature
attributable to the Series C Convertible Preferred Stock, which is treated as a
preferred dividend as compared to no such expense during the six months ended
January 31, 2004. The addition of this discount results in a net loss
attributable to common shareholders of $(7,796,962) or $(2.51) per share versus
a net loss attributable to common shareholders of $(2,795,400) or $(0.91) per
share for the six months ended January 31, 2004.
 
 **Liquidity
and Capital Resources**
 
 Our
principal source of working capital during the six months ended January 31, 2005
was trademark income and proceeds from the issuance of units of our Series C
Convertible Preferred Stock with warrants attached.
 
 For the
six months ended January 31, 2005, our net cash flow used in operating
activities was $4,153,193 as compared to $2,453,820 of net cash flow used in
operating activities during the six months ended January 31, 2004. The decreased
results are primarily from the severance payout made to James Jimirro, our
former Chief Executive Officer and President. The decrease in the current period
of the expense associated with the granting of stock, warrants, and options and
the expense associated with the modification of stock options and warrants are
not cash related expenses and so were eliminated from the calculation of cash
flow used in operating activities. We had cash and cash equivalents of
$1,762,709 at January 31, 2005 as compared to cash and cash equivalents of
$145,997 at January 31, 2004. The increase in cash is primarily due to the
offering of units of Series C Convertible Preferred Stock with warrants attached
which resulted in an infusion of approximately $3 million in cash.
 
 As of
March 11, 2005 we had cash on hand of approximately $1,036,000 and receivables
totaling $173,000. This amount may not be sufficient to fund operations through
this fiscal year. We anticipate that any shortfall will be covered by the sale
of additional securities.  If we are successful in raising at least $8
million in an offering of our securities, we believe that our cash on hand,
along with the proceeds of the offering and our cash flow from operations, will
provide us with adequate cash to fund our ongoing operations for a period of 24
months.
 
 Our
principal sources of working capital include limited trademark income,
advertising and sponsorship revenues and loans received from the NLAG Group,
which includes three of our directors, in the aggregate amount of $4.4 million.
During the six months ended January 31, 2005, we received an additional $3.0
million in cash proceeds from the offering of units composed of our Series C
Convertible Preferred Stock and warrants to purchase our common stock and we
issued additional units of these securities to pay loans and expenses owed to
Daniel Laikin, our Chief Executive Officer and a director and to Timothy Durham,
a director, in the amount of $2.5 million and $2.1 million, respectively. On
January 28, 2005 we received a loan in the amount of $2.7 million from N.
Williams Family Investments, L.P. The proceeds of this loan were primarily used
to pay certain severance benefits to James P. Jimirro, our former Chief
Executive Officer and President. The loan accrues interest at the rate of 7% and
is due to be repaid on the earlier of January 28, 2006 or the date we close an
offering in which the gross cash proceeds to us equal or exceed $2,700,000. (We
are required to prepay the loan to the extent of any proceeds we receive from an
equity offering raising less than $2.7 million.) The loan is secured by a lien
against all of our assets.
 
 
 
 On May
17, 2003, two notes payable totaling approximately $442,000 at April 30, 2002
were due to be paid in full. The notes represented money owed to legal firms
relating to work done in connection with the reorganization transactions that
took place on May 17, 2002.  Timothy Durham, a director, has paid one of
these notes in full and the liability is now owed to him. As of January 31,
2005, approximately $340,000 in principal remained unpaid. The obligation to Mr.
Durham is payable on demand. To date, no demand has been made. We plan to pay
this obligation with revenues earned by our operations. During December 2004 a
settlement was reached with the remaining noteholder and the obligation, as
re-negotiated, was paid in full.
 
 In recent
years, our operations have been characterized by ongoing capital shortages
caused by expenditures related to the initiation of several new business
activities. We have met these capital shortages by borrowing money from members
of the NLAG Group, which includes three of our directors, and by selling our
securities.
 
 Our
financial statements for the fiscal year ended July 31, 2004 contain 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, 2005, we had no commitments for capital expenditures.
 
 **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.
 
 **ITEM
3 - CONTROLS AND PROCEDURES**
 
 Management,
including our Chief Executive Officer, President and Chief Financial Officer,
carried out an evaluation 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. Based on that evaluation, the Chief Executive Officer, President
and Chief Financial 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.
 
 There
were no significant 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**
 
 On
October 27, 2004 Far Horizon Sales and Leasing LLC filed a complaint against our
subsidiary, National Lampoon Networks, Inc., in the Superior Court for the
County of Los Angeles. The plaintiff alleges that it suffered damages for breach
of contract, negligence and trespass to chattel related to the rental of a coach
bus and damage thereto. The plaintiff alleges damages in excess of $79,000. If
the action is not settled, the trial is scheduled for September 26,
2005.
 
 **Item
2 - Unregistered Sales of Equity Securities and Use of
Proceeds**
 
 On
December 9, 2004 we closed a private offering of our securities, issuing 229,761
units of Series C Convertible Preferred Stock at a price of $35.50 per unit.
Each unit included one share of Series C Convertible Preferred Stock and a
warrant to purchase ten post-split shares of common stock at a price of $1.77
per share. The warrants have a term of four years. As a result of the offering,
we received $3 million in cash and $5.2 million from the conversion of debt,
salary and accrued expenses for a total of $8.2 million. We relied on section
506 of the Securities Act of 1933 to issue the securities, inasmuch as the units
were sold without any form of general solicitation or general advertising and
sales were made only to accredited investors.
 
 On
December 14, 2004, we issued a warrant to APS Financial. The warrant was issued
for consulting services that were rendered to us. The warrant represents the
right to purchase 15,000 shares of our common stock. The warrant may be
exercised at a price of $3.20. The warrant will expire on December 14, 2011. The
right to purchase the warrant shares vests equally over a period of 36 months
from the date of grant. We relied on section 4(2) of the Securities Act of 1933
to issue the securities inasmuch as the warrant was issued without any form of
general solicitation or general advertising and the acquirer was an accredited
investor.
 
 On
December 14, 2004, we issued a warrant to Jonathan Schultz. The warrant was
issued for consulting services that were rendered to us. The warrant represents
the right to purchase 15,000 shares of our common stock. The warrant may be
exercised at a price of $3.20. The warrant will expire on December 14, 2011. The
right to purchase the warrant shares vests equally over a period of 36 months
from the date of grant. We relied on section 4(2) of the Securities Act of 1933
to issue the securities inasmuch as the warrant was issued without any form of
general solicitation or general advertising and the acquirer was an accredited
investor.
 
 On
January 24, 2005, we authorized the issuance to Porter, LeVay & Rose of
9,104 shares of common stock and the issuance to Regal Growth Funding, Inc. of
3,666 shares of common stock. The common stock was authorized for issuance for
consulting services that were rendered to us. The value of the common stock on
the date of grant was $3.20. The common stock was issued after January 31, 2005.
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.
 
 
 
 On
January 28, 2005 we issued 80,000 shares of our common stock to N. Williams
Family Investments, L. P. and 20,000 shares of our common stock to Christopher
R. Williams as consideration for a loan in the amount of $2,700,000. The per
share value of the common stock on the date of grant was $2.90. We issued these
securities in reliance on Section 4(2) of the Securities Act of 1933. There was
no form of general solicitation or general advertising undertaken and the
investors are accredited.
 
 On
January 28, 2005 we issued 50,000 shares of our common stock to Daniel S. Laikin
and 50,000 shares of our common stock to Timothy Durham, both of whom are
directors, in exchange for their agreement to guarantee certain matters relating
to a loan received from N. Williams Family Investments, L.P. The per share value
of the common stock on the date of grant was $2.90. We relied on section 4(2) of
the Securities Act of 1933 to issue the securities inasmuch as we did not engage
in general solicitation or advertising in making this offering and the offerees
occupy an insider status relative to us that affords them effective access to
the information registration would otherwise provide.
 
 **Item
3 - Defaults Upon Senior Securities**
 
 None
 
 **Item
4 - Submission of Matters to a Vote of Security Holders**
 
 We held
an annual meeting of our stockholders on December 14, 2004. The purpose of the
meeting was to elect the following seven directors:
 
 James P.
Jimirro
 Daniel S.
Laikin
 Timothy
S. Durham
 Paul
Skjodt
 Joshua
Finkenberg
 Richard
Irvine
 Ron
Berger
 
 Aside
from electing directors, the stockholders were asked to approve the
following:
 
 ·
    the
      ratification of Stonefield Josephson, Inc. as our auditors for the fiscal
      year ending July 31, 2005;
 
 ·
    the
      approval of an increase in the number of shares of common stock included
      in the J2 Communications Amended and Restated 1999 Stock Option, Deferred
      Stock and Restricted Stock Plan; and
 
 ·
    the
      approval of an increase in the number of shares of common stock included
      in the National Lampoon, Inc. 2004 Consultants Stock
  Plan.
 
 
 
 The votes
cast for, against or withheld as to each director and each other matter is as
follows:
 
 Election
of Directors:
 
 Name
      of Director
    
    Votes
      cast “For”
    
    Votes
      cast “Against”
    
    Votes
      “Withheld”James
      P. Jimirro
    
    
    5,110,060
    
    
    0
    
    
    504Daniel
      S. Laikin
    
    
    5,110,060
    
    
    0
    
    
    584Timothy
      S. Durham
    
    
    5,110,106
    
    
    0
    
    
    538Paul
      Skjodt
    
    
    5,110,014
    
    
    0
    
    
    630Joshua
      Finkenberg
    
    
    5,110,014
    
    
    0
    
    
    630Richard
      Irvine
    
    
    5,110,014
    
    
    0
    
    
    630Ron
      Berger
    
    
    5,110,060
    
    
    0
    
    
    584
 
 Ratification
of Stonefield Josephson, Inc.
 “For”
    “Against”
    “Withheld”5,110,014
    80
    494
  Approval
of an increase in the number of shares of common stock included in the J2
Communications Amended and Restated 1999 Stock Option, Deferred Stock and
Restricted Stock Plan
 “For”
    “Against”
    “Withheld”5,108,904
    1,650
    90
 Approval
of an increase in the number of shares of common stock included in the National
Lampoon, Inc. 2004 Consultants Stock Plan
 “For”
    “Against”
    “Withheld”5,108,590
    1,964
    90
 Shares
which abstained from voting, and shares held in “street name” by brokers or
nominees who indicated on their proxies that they did not have discretionary
authority to vote such shares (“broker non-votes”), were not counted as votes in
favor of the above matters. For purposes of determining whether the affirmative
vote of a majority of the shares present at the meeting and entitled to vote on
a proposal had been obtained, abstentions were included in, and broker non-votes
were excluded from, the number of shares present and entitled to vote.
Accordingly, abstentions had the effect of a vote “against” the matter and
broker non-votes had the effect of reducing the number of affirmative votes
required to achieve the majority vote.
****
 **Item
5 - Other Information**
 
 On March
10, 2005 we filed a registration statement with the Securities and Exchange
Commission for a proposed public offering of an as yet undetermined number of
shares of our common stock. We intend to use the net proceeds from the offering
for the payment of the loan made to us by N.
WilliamsFamily Investments, L.P. as well as for other corporate
purposes. A registration statement relating to these securities has been filed
with the Securities and Exchange Commission but has not yet become effective.
This information does not constitute an offer to sell or the solicitation of an
offer to buy, nor shall there be any sale of these securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such
jurisdiction.
 
  
  **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 (6)4.8
    Series
      C Voting Agreement entered into among the Registrant and purchasers of
      Series C Convertible Preferred Stock (5)10.1
    2005
      Employment Agreement between National Lampoon, Inc. and Daniel Laikin
      (6)10.2
    Employment
      Agreement between National Lampoon, Inc. and Douglas S. Bennett
      (6)10.3
    Secured
      Promissory Note dated January 28, 2005 executed by National Lampoon, Inc.
      in favor of N. Williams Family Investments, L.P. (6)10.4
    Security
      Agreement dated January 28, 2005 by and among National Lampoon, Inc.,
      National Lampoon Networks, Inc. and National Lampoon Tours, Inc. and N.
      Williams Family Investments, L.P. (6)10.5
    Repayment
      Guaranty dated January 28, 2005 executed by National Lampoon Networks,
      Inc. and National Lampoon Tours, Inc. in favor of N. Williams Family
      Investments, L.P. (6)10.6
    Guaranty
      dated January 28, 2005 executed by Daniel S. Laikin and Timothy Durham in
      favor of N. Williams Family Investments, L.P. (6)10.7
    Subordination
      Agreement dated January 28, 2005 executed by National Lampoon, Inc. and
      National Lampoon Networks, Inc. in favor of N. Williams Family
      Investments, L.P. (6)10.8
    Termination
      of Security Agreement dated January 28, 2005 between National Lampoon,
      Inc. and James P. Jimirro (6)10.9
    Series
      C Preferred Stock and Warrant Purchase Agreement (5)10.10
    Piggyback
      Registration Rights Agreement for Series C Preferred Stockholders
      (5)10.11
    Common
      Stock Purchase Warrant for Series C Preferred Stockholders
    (5)31.1
    Certification
      by Chief Executive Officer pursuant to section 302 of the Sarbanes Oxley
      Act of 2002*31.2
    Certification
      by President pursuant to section 302 of the Sarbanes Oxley Act of
      2002*31.3
    Certification
      by Chief Financial Officer pursuant to section 302 of the Sarbanes Oxley
      Act of 2002*32
    Certification
      by Chief Executive Officer, President and 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, 2004 filed with the Securities and Exchange Commission on October
      29, 2004.
 (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, 2004.
 (6)
    Incorporated
      by reference from the Registrant’s Registration Statement on Form SB-2
      filed with the Securities and Exchange Commission on March 10,
    2005.
  
  **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.**Date: March 17,
2005
    By:
    /s/ Daniel S.
  LaikinDaniel S. Laikin, Chief Executive
      Offic


****


By:
    /s/ James TollJames Toll, Chief Financial Officer