**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: October 31, 2005





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
            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 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 6,769,451 shares of common
      stock, $0.0001 par value, issued and outstanding as of December 5,
      2005.





Transitional
      Small Business Disclosure Format (Check one):


Yes
o
      No x











**FORWARD
      LOOKING STATEMENTS**





Some
      of
      the statements made in this quarterly report on Form 10QSB discuss future events
      and developments, including the Company’s future business strategy and its
      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,”“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 the Company’s 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 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,





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





·
            unanticipated
                increases in development, production or marketing expenses related
                to the
                Company’s various business
                activities,





and
      other
      factors which will be outside of the Company’s 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.











**PART
      I - FINANCIAL INFORMATION**





**Item
      1 - Consolidated Financial Statements**




**NATIONAL
        LAMPOON, INC. AND SUBSIDIARIES**


CONSOLIDATED
        BALANCE SHEETS


As
                ofASSETS
            
            31-Oct-05(UNAUDITED)CURRENT
                ASSETSCash
            
            $
            3,351,500Accounts
                receivable, net of $160,095 of allowance for doubtful
                accounts
            
            
            420,741Prepaid
                expenses and other current assets
            
            
            48,941Total
                current assets
            
            
            3,821,182NON-CURRENT
                ASSETSFixed
                assets, net of accumulated depreciation
            
            
            16,022Capitalized
                production costs, net of $869,750 film financing and $95,350
                amortization
            
            
            1,403,773Intangible
                assets, net of $4,048,578 of amortization
            
            
            1,916,154Total
                non-current assets
            
            
            3,335,949TOTAL
                ASSETS
            
            
            7,157,131




The
        accompanying notes are an integral part of these consolidated financial
        statements.


1








LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIESAccounts
                payable
            
            $
            593,809Accrued
                expenses
            
            
            69,179Payroll
                accrual
            
            
            146,917Accrued
                royalties
            
            
            396,250Accrued
                dividends
            
            
            1,441,669Notes
                payable (Note C & D) - related party, including interest of $37,617
            
            
            152,617Deferred
                income
            
            
            370,000TOTAL
                CURRENT LIABILITIES
            
            
            3,170,441MINORITY
                INTEREST
            
            
            197,557SHAREHOLDERS'
                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, 60,000,000 shares authorized and
                6,769,451 shares issued.
            
            
            677Additional
                paid-in capital
            
            
            37,601,124Less:
                Deferred compensation
            
            
            (39,632
            )Accumulated
                deficit
            
            
            (33,773,065
            )TOTAL
                SHAREHOLDERS' EQUITY
            
            
            3,789,133TOTAL
                LIABILITIES AND SHARESHOLDERS' EQUITY
            
            
            7,157,131




The
        accompanying notes are an integral part of these consolidated financial
        statements.





2




**NATIONAL
        LAMPOON, INC. AND SUBSIDIARIES**


CONSOLIDATED
      STATEMENTS OF OPERATIONS





Three
                MonthsEnded
                October 31,2005
            
            2004(UNAUDITED)
            
            (UNAUDITED)REVENUESProduction
            
            $
            51,333
            
            $
            101,000Licensing
            
            
            190,320
            
            
            117,689Tours
            
            
            2,534
            
            
            -Advertising
            
            
            124,316
            
            
            194,778Promotion
            
            
            469,685
            
            
            253,468Publishing
            
            
            4,643
            
            
            -Total
                revenues
            
            
            842,831
            
            
            666,935COSTS
                AND EXPENSESCosts
                related to licensing revenue
            
            
            86,440
            
            
            87,467Costs
                related to tours revenues
            
            
            34,864
            
            
            -Costs
                related to advertising and promotion revenues
            
            
            661,165
            
            
            330,892Amortization
                of capitalized television production costs
            
            
            95,350
            
            
            70,000Amortization
                of intangible assets
            
            
            60,000
            
            
            60,000Amortization
                debt issuance costs
            
            
            313,000
            
            
            -Provision
                for doubtful accounts
            
            
            76,345
            
            
            -Selling,
                general and administrative expenses
            
            
            1,416,111
            
            
            936,180Stock,
                warrants & options issued for services
            
            
            68,735
            
            
            167,504Expense
                associated with modification of warrants
            
            
            -
            
            
            904,897Total
                costs and expenses
            
            
            2,812,010
            
            
            2,556,940OPERATING
                LOSS
            
            
            (1,969,179
            )
            
            (1,890,005
            )OTHER
                INCOMEInterest
                income
            
            
            33,671
            
            
            1,440Other
                income
            
            
            4,220
            
            
            -Total
                other income
            
            
            37,891
            
            
            1,440NET
                LOSS BEFORE MINORITY INTEREST
            
            $
            (1,931,288
            )
            $
            (1,888,565
            )MINORITY
                INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY
            
            
            52,250
            
            
            -LOSS
                BEFORE INCOME TAXES
            
            $
            (1,879,038
            )
            $
            (1,888,565
            )Provision
                for state income taxes
            
            
            -
            
            
            6,169NET
                LOSS
            
            
            (1,879,038
            )
            
            (1,894,734
            )Accrued
                dividends (Note F)
            
            
            (328,150
            )
            
            -Beneficial
                conversion feature treated as preferred dividend (Note F)
            
            
            -
            
            
            (1,337,809
            )Net
                loss attributable to common shareholders
            
            $
            (2,207,188
            )
            $
            (3,232,543
            )Net
                loss per share attributable to common shareholder - basic and
                diluted
            
            $
            (0.34
            )
            $
            (1.05
            )Weighted
                average number of common shares - basic and diluted
            
            
            6,479,708
            
            
            3,072,284




The
          accompanying notes are an integral part of these consolidated financial
          statements.


3




**NATIONAL
        LAMPOON, INC. AND SUBSIDIARIES**
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS





Three
                MonthsEnded
                October 31,2005
            
            2004(UNAUDITED)
            
            (UNAUDITED)CASH
                FLOWS FROM OPERATING ACTIVITIESNet
                Loss
            
            $
            (1,879,038
            )
            $
            (1,894,734
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
            
            
            4,440
            
            
            68,067Amortization
                of intangible assets
            
            
            60,000
            
            
            -Amortization
                of debt issuance costs
            
            
            313,000
            
            
            -Amortization
                of capitalized production costs
            
            
            95,350
            
            
            -Stock,
                options and warrants issued for services
            
            
            68,739
            
            
            167,504Expense
                associated with the modification of warrants
            
            
            -
            
            
            904,897Provision
                for doubtful accounts
            
            
            76,345
            
            
            -Changes
                in assets and liabilities:(Increase)/decrease
                in accounts receivable
            
            
            (174,762
            )
            
            (158,219
            )(Increase)/decrease
                in prepaid expenses and other assets
            
            
            143,777
            
            
            (46,333
            )(Increase)/decrease
                in production costs
            
            
            (752,690
            )
            
            63,555Increase/(decrease)
                in accounts payable
            
            
            131,163
            
            
            (146,413
            )Increase/(decrease)
                in accrued expenses
            
            
            (513,015
            )
            
            165,751Increase/(decrease)
                in deferred revenues
            
            
            370,000
            
            
            (2,500
            )NET
                CASH USED IN OPERATING ACTIVITIES
            
            
            (2,056,691
            )
            
            (878,425
            )CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchase
                of fixed assets
            
            
            (4,988
            )
            
            -NET
                CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES
            
            
            (4,988
            )
            
            -CASH
                FLOWS FROM FINANCING ACTIVITIES:Film
                financing
            
            
            444,250
            
            
            -Minority
                interest in income/(loss) of consolidated subsidiary
            
            
            (52,250
            )
            
            -Proceeds
                from issuance of common stock (Note G)
            
            
            9,600,000
            
            
            -Payments
                related to the issuance of common stock (Note G)
            
            
            (1,279,341
            )
            
            -Payments
                of notes payable
            
            
            (3,412,383
            )
            
            -Proceeds
                from the exercise of stock options
            
            
            2,208
            
            
            8,167Proceeds
                from Series C convertible preferred stock issuance
            
            
            -
            
            
            2,270,699NET
                CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            5,302,484
            
            
            2,278,866NET
                INCREASE IN CASH
            
            
            3,240,805
            
            
            1,400,441CASH
                AT BEGINNING OF PERIOD
            
            
            110,695
            
            
            484CASH
                AT END OF PERIOD
            
            $
            3,351,500
            
            $
            1,400,925Supplemental
                disclosures of cash flow information:Cash
                paid for Taxes
            
            $
            -
            
            $
            -Interest
                paid
            
            $
            111,847
            
            $
            -Stock
                and options issued for services and debt issuance costs
            
            $
            68,739
            
            $
            165,751Conversion
                of loans to Series C Convertible Preferred stock with warrants
                attached
            
            $
            -
            
            $
            2,236,951


The
          accompanying notes are an integral part of these consolidated financial
          statements.


4


**NATIONAL
        LAMPOON, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)**





**NOTE
      A — BASIS OF PRESENTATION AND GOING CONCERN**





The
      accompanying unaudited consolidated financial statements of National Lampoon,
      Inc. (the “Company”) have been prepared in accordance with the rules and
      regulations of the Securities and Exchange Commission 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 October 31, 2005, and the results of operations and cash flows for the
      three-month periods ended October 31, 2005 and 2004 have been included. The
      results of operations for the three-month period ended October 31, 2005 are
      not
      necessarily indicative of the results to be expected for the full fiscal year.
      These consolidated financial statements should be read in conjunction with
      the
      financial statements and related footnotes for the year ended July 31, 2005
      included in the Company’s Annual Report on Form 10-KSB for that
      period.





The
      accompanying consolidated financial statements have been prepared assuming
      the
      Company will continue as a going concern. The Company’s net losses of $8,669,170
      and $5,127,107 in the prior two years, net loss of $ 1,879,038 during
      the first three months of the 2006 fiscal year, and accumulated deficit of
      $33,773,065 at October 31, 2005, raise concerns about its ability to continue
      as
      a going concern, which are addressed by the equity transaction discussed
      in the following paragraph.





On
      March
      10, 2005 the Company filed a registration statement for a public offering of
      3,200,000 shares of common stock. The registration statement was declared
      effective on August 1, 2005. The Company raised $9.6 million in gross proceeds
      in this offering. The Company received net proceeds of approximately $8,321,000
      on August 8, 2005, the closing date of the offering. Based on internal
      projections for the upcoming year, management believes that cash on hand plus
      estimated revenues will be sufficient to support the Company’s operations
      through the next 12 months. Management believes this should alleviate the doubt
      about the Company’s ability to continue as a going concern. Net proceeds from
      the offering, after repayment of the loan from N. Williams Family Investments,
      LP in the amount of approximately $2,812,000 (see Note C), were approximately
      $5,508,659.




Certain
      amounts from the three months ended October 31,
      2004 have been reclassified to correspond to the three months ended October
      31,
      2005.





**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 is
      no
      current-period compensation expense to disclose in relation to previously issued
      employee stock options, as required under SFAS 148, and there were 200,000
      stock
      options granted during the three months ended October 31, 2005. If the Company
      elected to recognize compensation expense based on the fair value of the options
      granted on the grant date as prescribed by SFAS No. 123, the Company’s net loss
      and loss per share would have been reduced to the pro forma amounts as
      follows:





5





**NATIONAL
        LAMPOON, INC. AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)**


Three
                Months Ended October 31,2005
            
            2004Net
                loss attributable to common shareholders- as reported
            
            $
            (2,138,453
            )
            $
            (3,065,039
            )APB
                25 expense recognized
            
            
            -
            
            
            -Stock
                option compensation under-fair value method
            
            
            (359,561
            )
            
            (184,578
            )Net
                loss attributable to common shareholders-pro forma
            
            $
            (2,566,749
            )
            $
            (3,417,121
            )Basic
                and diluted earnings/(loss) per share-as reported
            
            $
            (0.34
            )
            $
            (1.05
            )Basic
                and diluted earnings/(loss) per share-pro forma
            
            $
            (0.40
            )
            $
            (1.11
            )




The
      relative fair value of the options 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 91.2% to 130.9%; and a term of six to 10
      years for the three months ended October 31, 2005; and 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 127.3% to 170.0%; and a
      term of seven to 10 years for the three months ended October
      31,
      2004.





**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 accrued interest at the rate of 7% per year.
      The maturity date of the loan was the earlier of January 28, 2006 or the date
      the Company closed an offering in which the gross cash proceeds to the Company
      equaled or exceeded $2,700,000. If the Company closed an offering in which
      the
      gross cash proceeds were less than $2,700,000, then all of the net proceeds
      of
      the offering were to be used toward payment of the loan. On August 31, 2005,
      principal and interest due in the amount of approximately $2,812,000 were paid
      in full.





Between
      the months of June and July 2005 the Company borrowed the aggregate sum of
      $600,000 from Timothy S. Durham, a director. No interest was accrued and on
      August 10, 2005 the entire amount was paid in full.





**NOTE
      D - FILM FINANCING**





Pursuant
      to an agreement entered into between the Company and Majestic Entertainment,
      Inc. in December 2004, the parties formed National Lampoon Clubhouse,
      Inc., a consolidated company, on December 16, 2004. The entity was
      incorporated in Nevada and is owned equally by National Lampoon, Inc. and
      Majestic Entertainment, Inc. In connection with this agreement the entity is
      producing the feature film “Trick
      or Treat”.
      The total budget for the film, $1,800,000, as to be funded equally by each
      party, as they agreed. As of October 31, 2005, National Lampoon Clubhouse
      received $891,750 in funding from Majestic Entertainment, Inc. toward the
      production of the film. Of this amount, $725,500 was
      received during the fiscal year ended July 31, 2005 and $166,250 was
      received during the three months ended October 31, 2005. Each party was to
      invest $300,000 into the company, which was recorded to minority interest,
      while
      $591,750 was recorded against capitalized production costs.





6
 
  **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)**


On
        May 6,
        2005, the Company signed a Deal Memorandum with Laughter Heals Productions,
        Inc.
        and Newco (an entity to be formed) with respect to the financing, development
        and production of a film tentatively titled “Totally Baked.” On August 5,
        2005 the parties formed Totally Baked LLC, which is consolidated, and through
        which the film will be made. Pursuant to the Deal Memorandum, Newco
        will
        provide the funds for the production. The total budget for the production
        is
        currently estimated to be $275,000. As of October 31, 2005, Newco had funded
        $240,000 toward the production. The Deal Memorandum provides that gross revenue
        earned from the project will be distributed as follows: (i) first, for the
        payment of distribution and sales fees and expenses; (ii) secondly, Newco
        will
        be reimbursed the amount of its investment, plus 5% interest; (iii) thirdly,
        National Lampoon, Inc. will receive a trademark fee of 8%; and (iv) Laughter
        Heals Productions, Inc. will receive a producer fee of 8%. Once these payments
        have been made, 50% of any remaining revenues will be distributed to Newco
        and
        50% will be distributed first to mutually approved net profit participants
        and,
        after making such payments, the balance will be distributed equally between
        National Lampoon, Inc. and Newco.


As
      of
      October 31, 2005, interest accrual totaled $2,475. The production financing
      was
      recorded against capitalized production costs.





**NOTE
      E - NET INCOME OR LOSS 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 10,004,139
      and
      4,556,603 common shares during the three months ended October 31, 2005 and
      2004,
      respectively, are not included in the calculation of diluted earnings per share
      because their inclusion would be anti-dilutive. 8,178,711 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 three months ended
      October 31, 2005 and 2004, respectively, because their inclusion would be
      anti-dilutive.





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





Dividends
      accrue on our 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 our Series B and Series C Convertible Preferred Stock
      must be paid with our common stock. At October 31, 2005, the Company had accrued
      $1,441,669 for Series B and C Convertible Preferred Stock
      dividends.





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 our common stock is traded, on the trading date
      immediately preceding the date that we become liable to pay the dividend. If
      no
      trades were made on that date, then the number of shares to be issued will
      be
      computed using the closing price of the last date on which trades were made
      and
      reported.





**NOTE
      G - STOCKHOLDER EQUITY**





During
      the three months ended October 31, 2005, 1,333 shares of the Company’s common
      stock were purchased through the exercise of stock options that resulted in
      cash
      proceeds to the Company of approximately $2,000.





As
      we
      reported in our Quarterly Report on Form 10-QSB for the period ended April
      30,
      2005, on April 18, 2005, the Company authorized for issuance 20,000 shares
      of
      restricted common stock to Stephan Latieyre, an investor relations consultant,
      and 20,000 shares of restricted common stock to George Vandeman, a consultant,
      in exchange for services rendered. On August 26, 2005, the Company issued 20,000
      shares of restricted common stock each to George Vandeman and Stephan Latieyre.
      On August 31, 2005, the Company issued 200 shares of common stock from the
      1999
      Employee Stock Option Plan to Traci Adler, in exchange for services. The common
      stock issued was valued at $85,000, $85,000 and $520, respectively, which was
      the closing price of the common stock on the date the grant was
      approved by the Board of Directors.





7
 
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)**


On
      March
      10, 2005 the Company filed a registration statement for a public offering of
      3,200,000 shares of common stock. The registration statement was declared
      effective on August 1, 2005. The Company raised $9.6 million in gross proceeds
      in this offering. Net proceeds from the offering, after the payment of expenses
      totaling $1,279,341, were $8,320,659.





**NOTE
      H - SEGMENT INFORMATION**





The
      Company operates in four business segments: licensing and exploitation of the
      National LampoonTM trademark and related properties including the sale of
      products to consumers; advertising and promotion through field marketing, live
      events and the distribution of television programming on college campuses;
      production of motion picture, television, and DVD products; and the sale of
      travel packages to young adults. 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 four segments. Summarized financial
      information for the three months ended October 31, 2005 and 2004 concerning
      the
      Company’s segments is as follows:





Licensing
            
            Advertising
                & Promotion
            
            Production
            
            Travel
                Services
            
            TotalThree
                Months Ended October 31, 2005Segment
                revenue
            
            $
            195,000
            
            $
            594,000
            
            $
            51,000
            
            $
            2,500
            
            $
            842,500Segment
                operating (loss)
            
            $
            (905,000
            )
            $
            (598,000
            )
            $
            (343,000
            )
            $
            (63,000
            )
            $
            (1,909,000
            )Three
                Months Ended October 31, 2004Segment
                revenue
            
            $
            118,000
            
            $
            448,000
            
            $
            101,000
            
            $
            —
            
            $
            667,000Segment
                operating (loss)
            
            $
            (576,000
            )
            $
            (627,000
            )
            $
            (633,000
            )
            $
            —
            
            $
            (1,836,000
            )





A
      reconciliation of segment operating loss to net income before income taxes
      for
      the three month periods ended October 31, 2005 and 2004 is as
      follows:


Three
                  Months Ended October 31,2005
              
              2004Total
                  segment operating (loss)
              
              $
              (1,909,000
              )
              $
              (1,836,000
              )Amortization
                  of intangible assets
              
              $
              (60,000
              )
              $
              (60,000
              )Interest/other
                  income
              
              $
              38,000
              
              $
              1,000Net
                  loss before income taxes and minority interest
              
              $
              (1,931,000
              )
              $
              (1,885,000
              )





8
 
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)**


**NOTE
      I - LITIGATION**





On
      May
      12, 2005 All Comedy Networks, Inc. filed a complaint in the Superior Court
      for
      the State of California, County of Los Angeles, against eight defendants,
      including National Lampoon Radio Networks and National Lampoon Networks. The
      complaint alleges that one of the defendants, Kent Emmons, was a founder,
      shareholder, promoter and fiduciary of All Comedy Networks, Inc. The complaint
      alleges that Mr. Emmons negotiated an agreement with National Lampoon Networks
      to use the Company’s trademark in competition with All Comedy Networks, Inc. All
      Comedy Networks, Inc. seeks actual damages in an amount to be proved at trial,
      punitive damages, and an injunction to prohibit any of the defendants from
      contacting its employees, investors and advertisers. The Company believes this
      was brought as a nuisance action against National Lampoon Radio Networks and
      National Lampoon Networks and the Company intends to vigorously defend any
      attempt by All Comedy Networks, Inc. to prosecute the action against those
      entities. As of October 31, 2005, there were no new developments regarding
      this
      claim.





9





**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 LampoonTM 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:





*Licensing*





We
      derive
      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* .
      We
      license the National LampoonTM 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.





For
      the
      quarter ended October 31, 2005, revenues derived from our licensing and
      royalties (exclusive of revenues derived from our home entertainment products)
      totaled $185,903, or approximately 22.06% of all the revenues we earned during
      the period.





*National
      Lampoon Networks*





Our
      subsidiary, National Lampoon Networks, Inc., through its network of 618
      affiliated college and other television stations, reaches nearly 4.8 million
      college students in their dormitories and other places of residence. For those
      retailers targeting the college market, National Lampoon Networks provides
      an
      integrated marketing approach that includes advertising during the airing of
      our
      television programming, field marketing such as product sampling, live events
      hosted on college and university campuses throughout the United States, and
      Internet promotions.





Aside
      from providing an outlet for advertisers targeting the college market, National
      Lampoon Networks develops, produces and distributes comedic television
      programming to college audiences through its network. *Tooned
      Up, Greek Games, College Town* and *Master
      Debaters* are
      among
      the television programming that we developed and produced and that we are now
      distributing in the retail market.





For
      the
      quarter ended October 31, 2005, revenues derived from National Lampoon Networks,
      exclusive of licensing revenues and Internet advertising revenues, totaled
      $593,343, or approximately 70.4% of all the revenues we earned during the
      period.





10


*Home
      Entertainment*





We
      provide branded National LampoonTM comedic content, including television
      programming, motion pictures and live comedic events, for the home entertainment
      market. This segment of our business generates revenues primarily from royalty
      fees from the sale of DVDs and the use of our content. We also use National
      Lampoon Networks to promote the release of these products.





For
      the
      quarter ended October 31, 2005, revenues derived from our home entertainment
      products totaled $4,417, or approximately 0.52% of all the revenues we earned
      during the period.





*Travel
      Services*





We
      offer
      group travel and entertainment packages through our subsidiary, National Lampoon
      Tours, Inc. The destinations of our first two travel packages, timed to coincide
      with most college and university spring breaks, were Las Vegas and Cabo San
      Lucas, Mexico. The packages included professional entertainment, theme parties
      and other attractions for young adults. We are currently promoting our travel
      and entertainment packages for the 2005-2006 academic year.





For
      the
      quarter ended October 31, 2005, we earned $2,534 from National Lampoon Tours,
      or
      approximately 0.30 % of all the revenues we earned during the
      period.





*Publishing*





We
      have
      been licensing our brand and content for the publication of books since
      1972 and, to date, over 28 titles, including our four most recent publications, *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* ,
      have
      been published.





For
      the
      quarter ended October 31, 2005, revenues derived from our publishing activities
      totaled $4,643, or approximately 0.55 % of all the revenues we earned during
      the
      period.





*Radio*





We
      hold a
      25% interest in NL Radio, LLC, which was formed in March 2005. NL Radio, LLC
      plans to launch 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 and we are continuing to produce
      radio programming for use by NL Radio, LLC. Throughout the summer and fall
      of
      2005, 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 will
      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. The programming is
      currently scheduled to be distributed in January 2006. We earn a licensing
      fee
      of 8% of gross revenues generated from syndication advertising sales, direct
      response, network subscription fees, satellite, sponsorship and promotion,
      as
      well as 25% of net revenue.





For
      the
      quarter ended October 31, 2005, we earned no revenues from NL Radio,
      LLC.





*Internet
      Advertising*





Our
      Internet operations do not currently generate significant revenue. Aside from
      providing entertainment and information about us, our website allows writers
      who
      are unrelated to us to submit comedic content to us. We may use this content
      in
      the development of stories, characters and animation that may be the basis
      for
      films, television programming or other products we develop or brand. We earn
      revenues from our website from banner advertising and from the sale of our
      branded merchandise.





11


In
      an
      effort to increase revenues from our Internet operations, we are in the process
      of developing the National Lampoon Humor Network website, an advertiser-driven
      affiliate network of comedy websites with National Lampoon branding. We
      anticipate that we will begin generating revenues from affiliate membership
      and
      increased banner advertising by the second quarter of the 2006 fiscal
      year.





For
      the
      quarter ended October 31, 2005, Internet advertising revenues totaled $658,
      or
      less than 0.08% of all the revenues we earned during the period.





*Motion
      Picture Production*





We
      produce feature films. We have interests in two entities, National Lampoon
      Clubhouse, Inc., which is producing the film *Trick
      or Treat* and
      Totally Baked, LLC, which is producing the film currently titled *Totally
      Baked* .
      Both
      motion pictures are expected to be released in the second half of the 2006
      fiscal year.





To
      date,
      we have recognized producer/manager fees and product placement revenues from
      our
      activities relating to third party productions. Once the films are released,
      we
      expect to also earn revenues from foreign sales, theatrical release, home video
      and DVD sales and rentals and pay-per-view. During the quarter ended October
      31,
      2005, revenues derived from producer/manager fees and product placement totaled
      $51,333 or 6.09 % of all the revenues we earned during the period.





*Motion
      Picture and Television Programming*





With
      the
      exception of films produced by National Lampoon Clubhouse, Inc., motion pictures
      that carry our brand have been produced and financed by third parties.
      Twenty-five motion pictures have been released using the National LampoonTM name
      and four additional motion pictures are planned for release during the 2006
      fiscal year. As of October 31, 2005 none of the four additional motion pictures
      had been released.





We
      are
      developing programming for television although, to date, none of our programming
      has been acquired by any distributor or broadcaster of television programming.
      We had a “first-look” agreement with CBS Paramount International Television, a
      division of Viacom Productions Inc. referred to in this discussion as Paramount
      Television, for television programming. A “first look” agreement allows a studio
      or production company, for a period of time, to look at and agree to develop
      and
      produce programming ideas in the form of treatments before the treatments may
      be
      offered to other studio or production companies. Pursuant to this agreement,
      we
      provided treatments for television shows to Paramount Television. Prior to
      the
      expiration of the first look agreement, Paramount Television exercised its
      right
      to develop and produce four of these treatments. To date, Paramount Television
      has not developed and produced the television programming and there is no
      assurance that the programs will be produced in the future. Any treatment not
      developed by March 8, 2006 will be returned to us. For the quarter ended October
      31, 2005, we earned no revenues from our television programming. We intend
      to
      continue to develop programming for television broadcast.





For
      the
      quarter ended October 31, 2005, we earned no revenues from motion picture and
      television programming.





*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.





12


**Business
      Objective**





We
      intend
      to provide National LampoonTM 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
                college
                and university affiliate stations, increasing advertising and marketing
                revenue and producing new television shows. We currently have eight
                employees and two independent contractors who continually market
                to
                college and university affiliate stations to carry our programming
                and we
                intend to continue this practice for the foreseeable future. As we
                add new
                stations, we expect our advertising and marketing revenue to increase.
                However, we do not have long-term agreements with college and university
                affiliate stations, and these stations may terminate their relationships
                with us at any time.





·
            We
                intend to expand our DVD library by increasing the number of products
                we
                produce and have distributed for home entertainment. We currently
                have
                distribution agreements with three distributors, Genius Products,
                Inc.,
                Image Entertainment and Studioworks/Ventura Distribution. Our distributors
                pay us to provide the creative content for designated projects. Once
                the
                project is completed, the distributor is not required to work with
                us on
                additional projects, therefore management is continually seeking
                to build
                relationships with additional
                distributors.





·
            We
                plan to capitalize on our reputation and relationships with independent
                studios and other multimedia companies to expand the use of the National
                LampoonTM 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. We have hired a person to work on product placement
                and
                licensing.





·
            We
                intend to attract an increased number of college students purchasing
                travel packages created by National Lampoon Tours. Our organizing
                activities are now complete, and we are fully promoting the travel
                packages we will offer during the 2005-2006 spring break. We do this
                by
                advertising on our website, hosting a self-service travel website
                and
                through field marketing.





·
            We
                plan to capitalize on opportunities provided by the Internet to
                merchandise our home entertainment and other products and to sell
                advertising.





·
            NL
                Radio, LLC plans to launch an entertainment radio format under our
                brand.
                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
      consolidated financial statements.





13


*Production
      Costs*





As
      provided by SOP 00-2, “Accounting by Producers or Distributor of Films,” film
      and television production costs are capitalized based on ultimate estimates
      for
      productions with multiple episodes or if there are advertising agreements in
      place from which the production will generate revenues. As a result, feature
      film production costs are capitalized and amortized pro-rata upon revenue
      recognition proportionate to the ultimate estimates and the production costs
      incurred by our network operations are capitalized by an amount equal to
      remaining ultimate revenues or to the extent of the revenues generated by those
      agreements. The balance of the production costs is expensed during the period
      as
      the anticipated revenues are earned.





**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 four business segments, namely, licensing and exploitation of the
      National LampoonTM trademark and related properties including the sale of
      products to consumers; advertising and promotion through field marketing, live
      events and the distribution of television programming on college campuses;
      production of motion picture, television, and DVD products; and the sale of
      travel packages to young adults.





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
      four segments.





**Three
      Months Ended October 31, 2005 as compared to the Three Months Ended October
      31,**  **2004**





Summarized
      financial information for the three month periods ended October 31, 2005 and
      2004 for our segments is as follows:





Licensing
            
            Advertising
                & Promotion
            
            Production
            
            Travel
                Services
            
            TotalThree
                Months Ended October 31, 2005Segment
                revenue
            
            $
            195,000
            
            $
            594,000
            
            $
            51,000
            
            $
            2,500
            
            $
            842,500Segment
                operating (loss)
            
            $
            (905,000
            )
            $
            (598,000
            )
            $
            (343,000
            )
            $
            (63,000
            )
            $
            (1,909,000
            )Three
                Months Ended October 31, 2004Segment
                revenue
            
            $
            118,000
            
            $
            448,000
            
            $
            101,000
            
            $
            -
            
            $
            667,000Segment
                operating (loss)
            
            $
            (576,000
            )
            $
            (627,000
            )
            $
            (633,000
            )
            $
            -
            
            
            ($
                1,836,000
            )





14





**Licensing
      Revenues**





Licensing
      revenues for the three months ended October 31, 2005 were $195,000 as compared
      to $118,000 for the three months ended October 31, 2004, representing an
      increase of 66%. This increase was attributable to the receipt of $150,000
      that
      was paid for the use of our name on the film *National
      Lampoon’s Cattle Call* ,
      a
      royalty payment of $23,000 from Hill & Brand for video and television sales
      of *National Lampoon’s Dorm Daze* and
      various royalties from publishing and videos totaling less than $5,000 each.
      During the three months ended October 31, 2004, licensing revenues included
      $50,000 from Disney, $35,000 from Activision, $18,750 from Paramount Television
      for a “first look” at television programming ideas, and various royalties from
      publishing and videos totaling less than $5,000 each.





Costs
      related to licensing revenues increased to $86,000 during the three months
      ended
      October 31, 2005 from $87,000 in costs during the three month period ended
      October 31, 2004, representing an increase of 6%. An increase in development
      costs of $40,000 during the three months ended October 31, 2005 was offset
      by a
      decrease in video production costs of $42,000 during the three months ended
      October 31, 2004.





**Advertising
      and Promotion Revenues**





During
      the three months ended October 31, 2005, National Lampoon Network’s revenues
      increased to $594,000 from $448,000 earned during the three months ended October
      31, 2004, representing an increase of 33%. National Lampoon Network’s
      advertising revenues totaled approximately $124,000 during the three months
      ended October 31, 2005 as compared to $194,000 in advertising revenues earned
      during the three months ended October 31, 2004, and its promotion and
      sponsorship revenues totaled approximately $470,000 during the three months
      ended October 31, 2005 as compared to promotion and sponsorship revenues of
      approximately $253,000 earned during the three months ended October 31, 2004.
      The decrease in advertising revenues and the increase in promotion revenues
      for
      the three months ended October 31, 2005 resulted from our decision to redirect
      the efforts of our sales personnel from selling advertising to generating
      promotion revenues related to the Dis-Orientation Tour, a nationwide campus
      event, and third-party feature films. We anticipate that advertising revenues
      will increase during the second quarter of the 2006 fiscal year as a result
      of
      the launch of National Lampoon Humor Network. We also finalized an agreement
      to
      provide promotion services for the film *BloodRayne* .
      We have
      reported these revenues as deferred. We expect to fully recognize these revenues
      during the second quarter 2006 fiscal year.





We
      incur
      costs related to advertising revenues based on amortization of capitalized
      television production costs. We incur costs related to promotion based on direct
      costs of live events and promotion of third-party feature films, which are
      expensed as they are incurred. Costs related to advertising and promotion
      revenue for the three months ended October 31, 2005 were $661,000 in direct
      costs and $95,000 in amortization of capitalized television production costs,
      compared to costs related to advertising and promotion revenue of $331,000
      in
      direct costs and $70,000 in amortization of capitalized television production
      costs for the three months ended October 31, 2004. Costs related to advertising
      revenue for the three months ended October 31, 2004, previously reported as
      $169,000, have been increased to $331,000. This increase resulted from the
      reclassification of $117,000 from costs previously allocated to production
      revenues and the reclassification of website consulting fees totaling $45,000
      previously allocated to selling, general and administrative expense. The website
      consulting fees were incurred for the purpose of generating Internet advertising
      revenues. These changes were made in order to conform our reporting of costs
      related to advertising and promotion revenues for the three months ended October
      31, 2004 to our manner of reporting costs related to advertising and promotion
      revenues for the three months ended October 31, 2005.





The
      increase in costs related to advertising and promotion revenue is primarily
      due
      to $348,000 in costs incurred for the “Dis-Orientation Tour.” This event took
      place at 24 colleges and universities around the country. The increase in these
      costs is also attributable to $26,000 in costs incurred from the development
      of
      the National Lampoon Humor Network. These increases were offset by a decrease
      in
      website consultant fees of $16,000 and a decrease in promotion costs related
      to
      third-party feature films. Promotion and advertising costs for the three months
      ended October 31, 2005 included $38,000 attributable to the film *National
      Lampoon’s Adam & Eve* ,
      $50,000
      attributable to the film *BloodRayne* and
      $33,000 attributable to the film *National
      Lampoon’s Barely Legal* ,
      compared to promotion and advertising costs for the three months ended October
      31, 2004 that included $95,000 in video and DVD reproduction costs and $69,000
      for advertising and promotion of *National
      Lampoon’s Gold Diggers* and the
“Lost Reality” series. The increase in amortization of capitalized production
      costs during the three months ended October 31, 2005 resulted from an overall
      increase in production costs.





15


**Production
      Revenues**





For
      the
      three months ended October 31, 2005 production revenues were $51,000 compared
      to
      $101,000 for the three months ended October 31, 2004. We generated new
      production revenues for manager/producer fees of $18,000 for the film *Trick
      or Treat* and
      $33,000 from SJD Media. This increase in manager/producer revenues was offset
      by
      a decrease in distribution revenues because no new product had been picked
      up
      for distribution under our distribution agreements.





**Travel
      Services Revenues**





During
      the three months ended October 31, 2005, National Lampoon Tours recognized
      revenues of $2,500. National Lampoon Tours began business in December
      2004.





Direct
      costs related to National Lampoon Tours’ revenues were $34,864 during the three
      months ended October 31, 2005 as compared to $0 costs during the three-months
      ended October 31, 2004. These costs included advertising, web development and
      start-up costs for the 2006 spring break travel season.





**Other
      Costs and Expenses**





Amortization
      of intangible assets, which consists of the costs of our acquisition of the
      “National LampoonTM” trademark, was $60,000 during each of the three months ended
      October 31, 2005 and October 31, 2004.





Selling,
      general and administrative costs increased to $1,416,000 during the three months
      ended October 31, 2005 from $936,000 during the three months ended October
      31,
      2004. Selling, general and administrative expense for the three months ended
      October 31, 2004 was previously reported as $980,000 and has been decreased
      to
      $936,000 due to the reallocation of website consulting fees to costs related
      to
      advertising revenues. The increase of approximately $480,000 or 52% resulted
      primarily from an increase of $73,000 in professional fees and fees for investor
      relations services, an increase of $76,000 in salary expense, an increase of
      $13,000 in vacation pay, an increase of $20,000 in consulting fees, an increase
      of $25,000 in health insurance costs and an increase of $27,000 in travel and
      entertainment expenses. There were also expense increases related to National
      Lampoon Networks including an increase in payroll of $93,000 due to the addition
      of three sales employees, an increase of $40,000 in consulting fees and an
      increase of $9,000 in travel and entertainment costs, as well as expense
      increases related to the operations of National Lampoon Clubhouse which included
      increases in advertising and marketing costs of $62,500 and the payment of
      producer and manager fees of $40,000.





During
      the three months ended October 31, 2005, expenses totaling $68,735 were incurred
      from grants of stock, options and warrants to advisors and consultants as
      compared to expenses totaling $167,500 attributable to grants of stock, options
      and warrants that were incurred during the three-months ended October 31, 2004.
      The decrease is primarily due to a change in payment terms, from payment with
      stock to payment with cash, to a provider of legal services.





16


Interest
      income of $33,671 was earned during the three months ended October 31, 2005
      as
      compared to interest income of $1,440 earned during the three months ended
      October 31, 2004. The increase in interest income is due to the increased cash
      as a result of the public offering completed on August 8, 2005. Other
      income/(expense) of $4,220 resulted from the write off of incorrectly accrued
      expenses of $6,700 offset by $2,500 in interest expense in Totally Baked LLC.
      Due to the payment in full of the loan from Williams Family Trust, the remaining
      balance of $313,000 of capitalized debt issuance costs was amortized during
      the
      three months ended October 31, 2005.





For
      the
      three months ended October 31, 2005, we had a net loss of $1,879,039 compared
      to
      a net loss of $1,894,734 for the three months ended October 31,
      2004.





**Liquidity
      and Capital Resources**





Our
      principal source of working capital during the three months ended October 31,
      2005 was proceeds from the public offering of our common stock, which we
      completed on August 8, 2005. We raised $9.6 million in gross proceeds from
      this
      offering of our securities. As of December 5, 2005 we had cash on hand of
      approximately $2,832,000 and receivables totaling $478,000. We believe that
      our
      cash on hand will provide us with adequate cash to fund our ongoing operations
      and capital requirements for at least 24 months from the closing date of the
      offering.





For
      the
      three months ended October 31, 2005, our net cash flow used in operating
      activities was $2,056,691 as compared to $878,425 of net cash flow used in
      operating activities during the three months ended October 31, 2004. The
      increase is primarily attributable to an increase in production costs as well
      as
      a significant pay down of accrued legal, accounting and other expenses. We
      had
      cash and cash equivalents of $3,351,500 at October 31, 2005 as compared to
      cash
      and cash equivalents of $1,400,925 at October 31, 2004. The increase in cash
      is
      primarily due to the public offering of our common stock, which resulted in
      an
      infusion of approximately $8 million in cash.





Prior
      to
      the offering we completed on August 8, 2005, our principal source of working
      capital had been loans received from Daniel S. Laikin, our Chief Executive
      Officer and a director, and Timothy S. Durham, a director. The aggregate amount
      of the loans owed to Mr. Laikin and Mr. Durham totaled $4.6 million in December
      2004. These loans were paid with Series C Convertible Preferred units on
      December 9, 2004.





During
      the year ended July 31, 2005, we received $3.6 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 the loans discussed above and expenses owed to Mr.
      Laikin





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 benefits to James P. Jimirro, our former Chief Executive Officer
      and President, upon his separation from service. The loan accrued interest
      at
      the rate of 7% and was due to be repaid on the earlier of January 28, 2006
      or
      the date we closed an offering in which the gross cash proceeds to us equal
      or
      exceed $2,700,000. The loan was secured by a lien against all of our assets.
      On
      August 31, 2005 the loan and all accrued interest was paid in full.





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 Transaction. We
      reached a settlement with one noteholder in December 2004 and paid that note,
      as
      it was re-negotiated, in full. Timothy S. Durham, a director, paid the amount
      due under the note to the second noteholder in full and the liability is now
      owed to him. As of October 31, 2005, approximately $115,000 in principal and
      $35,142 in interest 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.





17


**Commitments
      For Capital Expenditures**





As
      of
      October 31, 2005, our capital expenditures are projected to be $125,000 for
      the
      fiscal year 2006. These expenditures will relate to the purchase of fixed assets
      such as equipment and furniture.





**Off-Balance
      Sheet Arrangements**





The
      Company does 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 its credit rating, earnings, cash flows or stock price,
      including requirements to perform under standby agreements.





**ITEM
      3 - CONTROLS AND PROCEDURES**





Management,
      including the Company’s Chief Executive Officer, President and its Chief
      Financial Officer, carried out an evaluation of the effectiveness of the design
      and operation of its 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 the Chief Financial Officer concluded that the Company’s
      disclosure controls and procedures are effective to ensure that information
      required to be disclosed in its reports that it files or submits 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 the Company’s internal controls or in other
      factors that could significantly affect internal controls subsequent to the
      date
      of their evaluation.





18





**PART
      II - OTHER INFORMATION**





**Item
      1 - Legal Proceedings**





Not
      applicable.





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





On
      August
      1, 2005 our registration statement, number 333-123238, was declared effective
      by
      the Securities and Exchange Commission. The sale of our common stock commenced
      on August 3, 2005 and terminated on August 5, 2005. All of the securities
      registered, with the exception of the shares registered for the underwriter’s
      over allotment option, were sold. The name of the managing underwriter was
      Merriman Curhan Ford & Co. We registered one class of securities, namely
      3,200,000 shares of common stock. The offering price of the common stock was
      $3.00 per share, for an aggregate offering price and gross proceeds of
      $9,600,000.





We
      paid
      the following expenses in connection with the issuance and distribution of
      the
      common stock:





Payee
            
            Amount
                PaidUnderwriting
                Discount
            
            $
            672,000Underwriter’s
                Non-Accountable Expense
            
            $
            338,000Fees
                paid to Underwriter’s Counsel
            
            $
            12,938Postage
                and Delivery
            
            $
            23,000Fees
                paid to Company’s Counsel
            
            $
            140,847Fees
                paid to Auditor
            
            $
            68,446Fees
                paid to Transfer Agent
            
            $
            22,910State
                and SEC Fees
            
            $
            1,200TOTAL
                EXPENSES
            
            $
            1,279,341





The
      net
      proceeds of the offering after deducting the total expenses described above
      totaled $8,320,659. The following table shows the manner in which the net
      proceeds from the offering were used through October 31, 2005:





Payee
            
            Amount
                PaidRepayment
                of Loan to N. Williams Family Partnership
            
            $
            2,811,847Film
                Production Funding
            
            $
            828,257Fees
                paid to Company’s Counsel
            
            $
            248,120Printer
                fees
            
            $
            69,793TOTAL
                PAYMENTS
            
            $
            3,958,018





As
      we
      reported in our Quarterly Report on Form 10-QSB for the period ended April
      30,
      2005, on April 18, 2005 we authorized for issuance 20,000 shares of restricted
      common stock to Stephan Latieyre, an investor relations consultant, in exchange
      for services rendered. These shares were issued on August 26, 2005. The per
      share value of the common stock on the date of grant was $4.48. 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
      acquirer was an accredited investor.





As
      we
      reported in our Quarterly Report on Form 10-QSB for the period ended April
      30,
      2005, on April 18, 2005 we authorized for issuance 20,000 shares of restricted
      common stock to George Vandeman, a consultant, in exchange for services
      rendered. These shares were issued on August 26, 2005. The per share value
      of
      the common stock on the date of grant was $4.48. 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 acquirer was
      an
      accredited investor.





19


**Item
      3 - Defaults Upon Senior Securities**





Not
      applicable.





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





Not
      applicable.





**Item
      5 - Other Information**





Not
      applicable.





**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, 20024.8
            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 President/Chief Financial Officer pursuant to section 302 of the
                Sarbanes Oxley Act of 2002*32
            Certification
                by Chief Executive Officer and President/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.





20





**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.


Date:
              December 15, 2005
            NATIONAL LAMPOON, INC.By:
            /s/
              Daniel S. LaikinDaniel
              S. Laikin, Chief Executive
              Officer


By:
            /s/
              Douglas S. BennettDouglas
                S. Bennett, Chief Financial Officer





21