UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549




FORM
10-Q




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


For the
quarterly period ended: January 31, 2009




OR




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


For the
transition period from _______________________ to
_______________________________




Commission
file number: 0-15284






NATIONAL
LAMPOON, INC.


(Exact
name of registrant as specified in its charter)




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




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




Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes x No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).  Yes
[  ] No [  (The registrant is not subject to this
Regulation.)]





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.




Large
      accelerated filer
               ̈
              Accelerated
      filer
               ̈Non-accelerated
      filer
               ̈
              Smaller
      reporting company
              x(Do
      not check if a smaller reporting company)




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




Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.  The registrant had
9,499,495 shares of common stock, $0.0001 par value, issued and outstanding as
of September 24, 2009.














FORWARD
LOOKING STATEMENTS




This
Quarterly Report on Form 10-Q contains “forward-looking statements”. These
forward-looking statements are based on our current expectations, assumptions,
estimates and projections about our business and our industry. Words such as
“believe,” “anticipate,” “expect,” “intend,” “plan,” “may,” and other similar
expressions identify forward-looking statements. In addition, any statements
that refer to expectations, projections or other characterizations of future
events or circumstances are forward-looking statements. These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those reflected in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to the following:





·
            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 and when we need
  it,





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





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





·
            whether
      we will continue to receive the services of our executive officers and
      directors, particularly our Chief Executive Officer, Tim
      Durham,·
            the
      outcome of various legal actions to which we are currently a
      party;·
            unanticipated
      increases in development, production or marketing expenses related to our
      various business activities,





and other
factors, some of which will be outside our control. You are cautioned not to
place undue reliance on these forward-looking statements, which relate only to
events as of the date on which the statements are made.  We undertake
no obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof.  You should
refer to and carefully review the information in future documents we file with
the Securities and Exchange Commission, including our Annual Report on Form
10-K.














PART
I - FINANCIAL INFORMATION




Item
1 - Condensed Consolidated Financial Statements




NATIONAL LAMPOON, INC. AND
    SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSAs
      of
            
            
            As
      ofJanuary
      31,
            
            
            July
      31,2009
            
            
            2008(UNAUDITED)ASSETSCURRENT
      ASSETSCash
            
            $
            1,168
            
            
            $
            2,267Accounts
      receivable, net of reserves of $545,642 and $181,619,
      respectively
            
            
            1,313,925
            
            
            
            1,640,994Canadian
      tax credits receivable
            
            
            203,661
            
            
            
            226,729Prepaid
      expenses and other current assets
            
            
            88,455
            
            
            
            78,464Total
      current assets
            
            
            1,607,209
            
            
            
            1,948,454Fixed
      assets, net of accumulated depreciation of $205,017 and $193,738,
      respectively
            
            
            35,688
            
            
            
            39,283Capitalized
      production costs, net of $ 5,764,600 and $5,709,969 of amortization,
      respectively
            
            
            5,036,920
            
            
            
            5,017,567Capitalized
      publishing costs, net of $607,052 and $496,477 of amortization,
      respectively
            
            
            9,251
            
            
            
            104,278Intangible
      assets, net of accumulated amortization of $4,932,204 and $4,719,119,
      respectively
            
            
            1,750,280
            
            
            
            1,956,871Fair
      value of available-for-sale securities
            
            
            282,461
            
            
            
            588,461Total
      non-current assets
            
            
            7,114,600
            
            
            
            7,706,460TOTAL
      ASSETS
            
            $
            8,721,809
            
            
            $
            9,654,914LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIENCY)CURRENT
      LIABILITIESAccounts
      payable
            
            $
            1,719,216
            
            
            $
            1,340,157Accrued
      expenses
            
            
            341,399
            
            
            
            310,691Notes
      payable secured by Canadian tax credits receivable
            
            
            203,661
            
            
            
            226,729Deferred
      income
            
            
            1,677,640
            
            
            
            1,007,960Notes
      payable - related party, including interest of $106,878 and $64,036,
      respectively
            
            
            1,422,120
            
            
            
            1,169,015Production
      loans – including interest of $4,932 and $0, respectively
            
            
            154,932
            
            
            
            -Production
      loans – related party, including interest of $212,826 and $168,837,
      respectively
            
            
            1,093,013
            
            
            
            1,147,763Total
      current liabilities
            
            
            6,611,981
            
            
            
            5,202,315Production
      loans – including interest of $49,151 and $0, respectively
            
            
            1,549,150
            
            
            
            -Production
      loans – related party, including interest of $410,401and $321,347,
      respectively
            
            
            2,161,774
            
            
            
            2,145,204TOTAL
      LIABILITIES
            
            
            10,322,905
            
            
            
            7,347,519Accrued
      dividends payable in common stock
            
            
            292,335COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS'
      EQUITY (DEFICIENCY)Series
      B Convertible Preferred Stock, par value $.0001 per share, 68,406 shares
      authorized, 61,832 and 61,832 shares issued and outstanding,
      respectively
            
            
            6
            
            
            
            6Series
      C Convertible Preferred Stock, par value $.0001 per share, 250,000 shares
      authorized, 190,247 and 190,247 shares issued and outstanding,
      respectively
            
            
            18
            
            
            
            18Series
      D Convertible Preferred Stock, par value $.0001 per share, 500,000 shares
      authorized, 163,261 and 148,247 shares issued and outstanding,
      respectively
            
            
            16
            
            
            
            15Common
      Stock, par value $.0001 per share, 60,000,000 shares authorized, 9,499,495
      and 9,325,087 shares issued and outstanding, respectively
            
            
            951
            
            
            
            933Common
      stock issuable, 859,886 and 812,143 shares of common stock,
      respectively
            
            
            1,201,468
            
            
            
            1,161,364Additional
      paid-in capital
            
            
            43,657,433
            
            
            
            43,500,856Accumulated
      Other Comprehensive income
            
            
            282,461
            
            
            
            588,461Accumulated
      deficit
            
            
            (47,035,784
            )
            
            
            (42,944,258
            )TOTAL
      SHAREHOLDERS' EQUITY (DEFICIENCY)
            
            
            (1,893,431
            )
            
            
            2,307,395TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
            
            $
            8,721,809
            
            
            $
            9,654,914The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.







1









NATIONAL
      LAMPOON, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(UNAUDITED)Three
      months ended
            
            
            Six
      months endedJanuary
      31,
            
            
            January
      31,2009
            
            
            2008
            
            
            2009
            
            
            2008REVENUESProduction
            
            $
            30,395
            
            
            $
            -
            
            
            $
            49,855
            
            
            $
            -Licensing
            
            
            503,459
            
            
            
            309,874
            
            
            
            659,457
            
            
            
            555,416Advertising
      & Promotion
            
            
            129,432
            
            
            
            156,542
            
            
            
            884,441
            
            
            
            606,175Publishing
            
            
            34,770
            
            
            
            (78,301
            )
            
            
            31,479
            
            
            
            34,150Distribution
            
            
            72,729
            
            
            
            5,058
            
            
            
            222,580
            
            
            
            5,058Tours
            
            
            
            
            
            
            110,000
            
            
            
            -
            
            
            
            110,000Total
      revenues
            
            
            770,785
            
            
            
            503,173
            
            
            
            1,847,812
            
            
            
            1,310,799COSTS
      AND EXPENSESCosts
      related to production revenue
            
            
            10,279
            
            
            
            6,272
            
            
            
            61,918
            
            
            
            19,048Costs
      related to licensing revenue
            
            
            (29
            )
            
            
            25,235
            
            
            
            34,941
            
            
            
            43,150Costs
      related to advertising and promotion revenues
            
            
            134,834
            
            
            
            133,315
            
            
            
            286,494
            
            
            
            335,613Costs
      related to publishing revenues
            
            
            124,838
            
            
            
            4,610
            
            
            
            128,108
            
            
            
            48,044Costs
      related to distribution revenues
            
            
            108,694
            
            
            
            14,500
            
            
            
            123,665
            
            
            
            14,500Amortization
      of capitalized production costs
            
            
            8,495
            
            
            
            521
            
            
            
            50,993
            
            
            
            521Amortization
      of intangible assets
            
            
            94,222
            
            
            
            61,219
            
            
            
            213,085
            
            
            
            122,383Impairment
      of capitalized production costs
            
            
            20,001
            
            
            
            -
            
            
            
            2,371,575
            
            
            
            -Selling,
      general and administrative expenses
            
            
            1,050,680
            
            
            
            1,489,195
            
            
            
            2,567,755
            
            
            
            3,120,659Total
      costs and expenses
            
            
            1,552,014
            
            
            
            1,734,867
            
            
            
            5,838,534
            
            
            
            3,703,918OPERATING
      LOSS
            
            
            (781,229
            )
            
            
            (1,231,694
            )
            
            
            (3,990,722
            )
            
            
            (2,393,119
            )OTHER
      INCOME (EXPENSE)Interest
      expense
            
            
            (61,760
            )
            
            
            (25,893
            )
            
            
            (129,202
            )
            
            
            (45,705
            )Write
      off of royalty payable
            
            
            -
            
            
            
            396,250
            
            
            
            -
            
            
            
            396,250Other
      income
            
            
            13,713
            
            
            
            10,378
            
            
            
            28,398
            
            
            
            26,284Total
      other income/(expense)
            
            
            (48,047
            )
            
            
            380,735
            
            
            
            (100,804
            )
            
            
            376,829NET
      LOSS
            
            
            (829,276
            )
            
            
            (850,959
            )
            
            
            (4,091,526
            )
            
            
            (2,016,290
            )Preferred
      stock dividends
            
            
            (292,335
            )
            
            
            (297,771
            )
            
            
            (584,671
            )
            
            
            (595,542
            )Net
      loss attributable to common shareholders
            
            $
            (1,121,611
            )
            
            $
            (1,148,730
            )
            
            $
            (4,676,197
            )
            
            $
            (2,611,832
            )Net
      loss per share attributable to common shareholder - basic and
      diluted
            
            $
            (0.11
            )
            
            $
            (0.14
            )
            
            $
            (0.45
            )
            
            $
            (0.32
            )Weighted
      average number of common shares - basic and diluted
            
            
            10,348,815
            
            
            
            8,332,672
            
            
            
            10,296,752
            
            
            
            8,282,809The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




2






NATIONAL LAMPOON, INC. AND
      SUBSIDIARIESCONSOLIDATED
      STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)FOR
      THE SIX MONTHS ENDED JANUARY 31, 2009(UNAUDITED)AccumulatedPreferred
            
            
            
            
            
            Common
            
            
            Common
            
            
            Additional
            
            
            OtherSeries
      B
            
            
            Series
      C
            
            
            Series
      D
            
            
            Stock
            
            
            Common
            
            
            Stock
            
            
            Stock
            
            
            Paid-in
            
            
            Comprehensive
            
            
            AccumulatedShares
            
            
            Shares
            
            
            Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Issuable
            
            
            Capital
            
            
            Income
            
            
            Deficit
            
            
            TotalBalance
      at August 1, 2008
            
            
            61,832
            
            
            
            190,247
            
            
            
            148,247
            
            
            $
            39
            
            
            
            9,325,087
            
            
            $
            933
            
            
            $
            1,161,364
            
            
            $
            43,500,856
            
            
            $
            588,461
            
            
            $
            (42,944,258
            )
            
            $
            2,307,395Fair
      value of stock issued for services
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            89,086
            
            
            
            9
            
            
            
            -
            
            
            
            93,721
            
            
            
            -
            
            
            
            -
            
            
            
            93,730Exercise
      of warrants for common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            85,322
            
            
            
            9
            
            
            
            -
            
            
            
            151,429
            
            
            
            -
            
            
            
            -
            
            
            
            151,438Fair
      value vesting of options and warrants issued to
consultants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,865
            
            
            
            -
            
            
            
            -
            
            
            
            13,865Fair
      value of vesting of employee stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            230,003
            
            
            
            -
            
            
            
            -
            
            
            
            230,003Preferred
      stock dividend accrual
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (584,671
            )
            
            
            -
            
            
            
            -
            
            
            
            (584,671
            )Payment
      of Series B and Series C dividends into Series D Shares
            
            
            -
            
            
            
            -
            
            
            
            15,014
            
            
            
            1
            
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            252,230
            
            
            
            -
            
            
            
            -
            
            
            
            252,231Common
      stock issuable on conversion of accrued dividends on preferred stock into
      Common Shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40,104
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            40,104Decrease
      in fair value of available-for-sale securities
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (306,000
            )
            
            
            -
            
            
            
            (306,000
            )Net
      Loss for the period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (4,091,526
            )
            
            
            (4,091,526
            )Balance
      at January 31,
              2009
            
            
            61,832
            
            
            
            190,247
            
            
            
            163,261
            
            
            $
            40
            
            
            
            9,499,495
            
            
            $
            951
            
            
            $
            1,201,468
            
            
            $
            43,657,433
            
            
            $
            282,461
            
            
            $
            (47,035,784
            )
            
            $
            (1,893,431
            )The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.






3









NATIONAL
      LAMPOON, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Six
      months endedJanuary
      31,2009
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Loss
            
            $
            (4,091,526
            )
            
            $
            (2,016,290
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            11,279
            
            
            
            8,596Amortization
      of intangible assets
            
            
            213,085
            
            
            
            122,383Fair
      value of shares issued for services
            
            
            93,730
            
            
            
            435,270Fair
      value of vested stock, options and warrants
            
            
            243,868
            
            
            
            926,990Amortization
      of capitalized production costs
            
            
            50,993
            
            
            
            -Provision
      for doubtful accounts
            
            
            375,668
            
            
            
            -Write-off
      of royalty payable
            
            
            -
            
            
            
            (396,250
            )Impairment
      of capitalized film costs
            
            
            2,371,575
            
            
            
            -Changes
      in assets and liabilities(Increase)
      in accounts receivable
            
            
            (48,599
            )
            
            
            (1,055,370
            )Decrease
      in Canadian tax credits receivable
            
            
            23,068(Increase)
      in prepaid expenses and other assets
            
            
            (9,991
            )
            
            
            (32,854
            )Decrease
      / (Increase) in publishing costs
            
            
            95,027
            
            
            
            (76,066
            )(Increase)
      in production costs
            
            
            (2,441,921
            )
            
            
            (696,513
            )Increase
      in accounts payable
            
            
            379,059
            
            
            
            323,697Increase
      / (Decrease) in accrued expenses
            
            
            30,708
            
            
            
            (33,961
            )Increase
      in deferred revenues
            
            
            669,680
            
            
            
            1,584,557NET
      CASH USED IN OPERATING ACTIVITIES
            
            
            (2,034,297
            )
            
            
            (905,811
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
            
            
            (7,684
            )
            
            
            (6,028
            )Purchase
      of intangible assets
            
            
            (6,495
            )
            
            
            (34,163
            )NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (14,179
            )
            
            
            (40,191
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      on notes payable, secured by Canadian tax credits
    receivable
            
            
            (23,068
            )Borrowings
      on production loans
            
            
            1,704,082Payments
      of notes payable, related party
            
            
            (157,159
            )
            
            
            (137,305
            )Proceeds
      from notes payable, related party
            
            
            410,264
            
            
            
            715,550Borrowings
      on production loans, related party
            
            
            912,199
            
            
            
            429,550Payments
      on production loans, related party
            
            
            (950,379
            )
            
            
            (180,178
            )Proceeds
      from the exercise of stock options
            
            
            
            
            
            
            8,000Proceeds
      from the exercise of warrants
            
            
            151,438
            
            
            
            33,434NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            2,047,377
            
            
            
            869,051NET
      (DECREASE) IN CASH
            
            
            (1,099
            )
            
            
            (76,951
            )CASH
      AT BEGINNING OF PERIOD
            
            
            2,267
            
            
            
            85,706CASH
      AT END OF PERIOD
            
            $
            1,168
            
            
            $
            8,755SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for:Taxes
            
            $
            -
            
            
            $
            -Interest
            
            $
            8,091
            
            
            $
            2,472Non-cash
      investing and financing activities:Accrued
      dividends on preferred stock payable in common shares and Series D
      Convertible preferred stock
            
            $
            584,671
            
            
            $
            595,542Common
      stock to be issued as payment of accrued dividends on preferred
      stock
            
            $
            40,104
            
            
            $
            -Stock
      issued in exchange for intangible assets
            
            $
            -
            
            
            $
            1,425(Decrease)
      in fair value of available-for-sale securities
            
            $
            (306,000
            )
            
            $
            -Series
      D preferred stock issued as payment for accrued dividends on preferred
      stock
            
            $
            252,231
            
            
            $
            -The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




4


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)




NOTE
A - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




Basis of
Presentation.The
interim condensed consolidated financial statements are unaudited, but in the
opinion of management of the Company, contain all adjustments, which include
normal recurring adjustments, necessary to present fairly the financial position
at January 31, 2009 and the results of operations for the three and six months
ended January 31, 2009 and 2008 and cash flows for the six months ended January
31, 2009 and 2008.





Certain
information and footnote disclosures normally included in financial statements
that have been presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission with respect to interim financial
statements, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading.  For further information, refer to
the consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2008, as
filed with the Securities and Exchange Commission.





The
Company’s results of operations for the three and six months ended January 31,
2009 are not necessarily indicative of the results of operations to be expected
for the full fiscal year ending July 31, 2009.





The
condensed consolidated financial statements of the Company include the accounts
of National Lampoon, Inc., its wholly owned subsidiaries, National Lampoon
Networks, Inc. and National Lampoon Tours, Inc. along with its 50% ownership in
National Lampoon Clubhouse, Inc., and its 100% ownership in Bagboy Productions,
Inc, Ratko Productions, Inc. and 301 Productions, Inc. The Company has the full
and exclusive control of the management and operation of the business of each
subsidiary and participates in 100% of the revenues and losses of its
subsidiaries. The Company participates in 50% of the revenues and net losses of
National Lampoon Clubhouse, Inc. Inter-company balances and transactions have
been eliminated in consolidation.




Going
Concern. The accompanying condensed consolidated financial statements
have been prepared assuming the Company will continue as a going concern. The
Company had a net loss of $4,091,526 for the six months ended January 31, 2009,
as well as negative working capital of $5,004,772 and a stockholder’s deficiency
of $1,893,431  as of January 31, 2009, along with net losses for the
prior two years of $1,686,974 and $2,504,170. Additionally, on December 15, 2008
the United States Securities and Exchange Commission issued a release, and the
United States Attorney for the Eastern District of Pennsylvania announced, that
they had charged seven individuals and two corporations with engaging in three
separate fraudulent schemes to manipulate the market for publicly traded
securities through the payment of prearranged kickbacks. The defendants include
National Lampoon, Inc. and Daniel S. Laikin (see Note G). Also on December 15,
2008, the United States Attorney for the Eastern District of Pennsylvania
separately announced criminal charges involving the same conduct. Furthermore,
on January 9, 2009 our board of directors decided to voluntarily delist our
common stock, par value $0.0001 per share, from NYSE Amex Equities. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. The condensed consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset amounts, or amounts and classification of liabilities that might result
from this uncertainty.






5


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)




Historically,
our principal sources of funds used for operations and working capital have been
revenues and loans received from Daniel S. Laikin, our former Chief Executive
Officer, and Timothy Durham, our current Chief Executive Officer. The aggregate
amount of the loans and accrued interest owed to Mr. Laikin and Mr. Durham at
January 31, 2009 was $1,499,308 as compared to $1,244,178 at July 31, 2008.
These two individuals have made no further commitment to provide loans to us to
meet any immediate working capital requirements.




Our
ability to continue as a going concern is dependent upon our ability to develop
additional sources of capital and revenue. The accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Our capital requirements for the
next 12 months will continue to be significant. We will need to obtain financing
to fund our cash needs and continue our operations. Additional financing may not
be available, or if available, may be on terms unacceptable to us. Our ability
to maintain sufficient liquidity to continue our operations is dependent on our
ability to raise additional capital.  We currently have no committed
sources of capital.




As of
January 31, 2009, we had  cash  of  $1,168 and
receivables totaling $1,313,925. We are currently delivering ten films for which
the minimum guarantees, license fees and home video sales revenues are due upon
notice of delivery, acceptance of delivery or home video accounts receivables
payments received. During the second quarter ended January 31, 2009, we received
$659,457 in license fees and we expect additional payments to be received by the
end of the 2009 fiscal year.




We
completed an audit of Warner Bros. Entertainment, Inc. relating to its
exploitation of the films National Lampoon’s Vacation,
National Lampoon’s European
Vacationand National
Lampoon’s Christmas Vacation and we are currently reviewing those results
to determine how we will proceed. The Company has not recorded an estimate
of any amount that it believes may be owed.




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




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




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




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




Concentration.The Company maintains its cash balances at financial institutions that
are federally insured; however, at times such balances may exceed federally
insured limits. The Company has not experienced any losses in such accounts. The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk
for the amounts of funds held in bank accounts in excess of the insurance limit.
In assessing the risk, the Company’s policy is to maintain cash balances with
high quality financial institutions.






6


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)





During
the six months ended January 31, 2009 one customer accounted for $461,222, (25%)
of total revenue. During the six months ended January 31, 2008, three customers
accounted for $259,117 (20%), $198,500 (15%) and $150,000 (11%) of total
revenue.




As of
January 31, 2009, the Company had $500,000 (38%) and $144,305 (11%) of accounts
receivable due from its largest customers.




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




Fair Value of
Financial Instruments.The Company partially adopted SFAS 157, “Fair
Value of Financial Instruments,” on January 1, 2008, delaying application
for non-financial assets and non-financial liabilities as permitted. This
statement establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.




SFAS 157
establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value into three levels as follows:




Level 1:
quoted prices (unadjusted) in active markets for identical asset or
liabilities that the Company has the ability to access as of the measurement
date. Financial assets and liabilities utilizing Level 1 inputs include active
exchange-traded securities and exchange-based derivatives.




Level 2:
inputs other than quoted prices included within Level 1 that are directly
observable for the asset or liability or indirectly observable through
corroboration with observable market data. Financial assets and liabilities
utilizing Level 2 inputs include fixed income securities, non-exchange-based
derivatives, mutual funds, and fair-value hedges.




Level 3:
unobservable inputs for the asset or liability only used when there is little,
if any, market activity for the asset or liability at the measurement date.
Financial assets and liabilities utilizing Level 3 inputs include
infrequently-traded, non-exchange-based derivatives and commingled investment
funds and are measured using present value pricing models.




In
accordance with SFAS 157, the Company determines the level in the fair value
hierarchy within which each fair value measurement in its entirety falls, based
on the lowest level input that is significant to the fair value measurement in
its entirety.





The
following table represents certain financial instruments of the Company measured
and recorded at fair value on the Company’s condensed consolidated balance
sheets on a recurring basis and their level within the fair value hierarchy as
of January 31, 2009:


Level
      1
            
            Level
      2
            
            Level
      3
            
            TotalAssets:Available
      for sale securities at fair value
            
            $
            282,461
            
            
            $
            —
            
            
            $
            —
            
            
            $
            282,461




Comprehensive
Income (Loss).SFAS No. 130, "Reporting Comprehensive Income",
established rules for the reporting and display of comprehensive income and its
components. SFAS No. 130 requires unrealized gains or losses on the Company's
available-for-sale securities adjustments to be reported as a separate component
(comprehensive income/loss) of shareholders' equity. The components of
comprehensive income (loss) are as follows:




Three
      months ended January 31,
            
            
            Six
      months ended January 31,2009
            
            
            2008
            
            
            2009
            
            
            2008Net  (Loss)
            
            $
            (829,276
            )
            
            $
            (850,959
            )
            
            $
            (4,091,526
            )
            
            $
            (2,016,290
            )Fair
      value adjustment on available-for-sale securities
            
            
            47,076
            
            
            
            -
            
            
            
            (306,000
            )Comprehensive
      (Loss)
            
            $
            (782,200
            )
            
            $
            (850,959
            )
            
            $
            (4,397,526
            )
            
            $
            (2,016,290
            )







7




NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)





Recent
Accounting Pronouncements.





In
December 2007, the FASB issued FASB Statement No. 141(R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. Statement 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited.





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





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(SFAS 161). This statement requires enhanced disclosures about an entity’s
derivative and hedging activities, including (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133,“Accounting for Derivative
Instruments and Hedging Activities” (SFAS 133), and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This standard is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with generally accepted accounting principles in the United States
for non-governmental entities. SFAS No. 162 is effective 60 days following
approval by the U.S. Securities and Exchange Commission of the Public Company
Accounting Oversight Board's amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.”





In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF 03-6-1”).  FSP EITF 03-6-1 concludes that unvested share-based
payment awards that contain rights to receive non-forfeitable dividends or
dividend equivalents are participating securities, and thus, should be included
in the two-class method of computing earnings per share (“EPS”).





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosure about Fair
Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments
that are within the scope of FAS 107, “Disclosures about the Fair Value of
Financial Instruments.” Additionally, FSP 107-1/APB 28-1 requires disclosure of
the methods and significant assumptions used to estimate the fair value of
financial instruments on an interim basis as well as changes of the methods and
significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change
the accounting treatment for these financial
instruments





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP 157-4).  FSP 157-4
provides guidance on how to determine the fair value of assets and liabilities
when the volume and level of activity for the asset/liability has significantly
decreased.  FSP 157-4 also provides guidance on identifying
circumstances that indicate a transaction is not orderly.  In
addition, FSP 157-4 requires disclosure in interim and annual periods of the
inputs and valuation techniques used to measure fair value and a discussion of
changes in valuation techniques





In June
2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB
Statement No. 162," and approved—the FASB Accounting Standards CodificationTM (Codification) as the single
source of authoritative nongovernmental US GAAP. The Codification does not
change current US GAAP, but is intended to simplify user access to all
authoritative US GAAP by providing all the authoritative literature related to a
particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered non-authoritative. For the Company, the
Codification is effective July 1, 2009 and will require future references to
authoritative US GAAP to coincide with the appropriate section of the
Codification.






8


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)





In June
2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)," which revised the consolidation guidance for variable-interest entities.
The modifications include the elimination of the exemption for qualifying
special purpose entities, a new approach for determining who should consolidate
a variable-interest entity, and changes to when it is necessary to reassess who
should consolidate a variable-interest entity.





The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s condensed consolidated results of
operations, financial position, or cash flows.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.




Net Income or
Loss per Share.Basic loss per share is calculated by dividing net loss
available to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted loss per share is calculated assuming the
issuance of common shares under the treasury stock method, if dilutive,
resulting from the exercise of stock options and warrants. Basic and diluted
losses per share are the same at January 31, 2009 and 2008, as common equivalent
shares have been excluded from the computation due to the fact that they are
anti-dilutive. Options and warrants to purchase 6,416,056 and 6,465,726 common
shares during the six months ended January 31, 2009 and 2008, respectively, are
not included in the calculation of diluted earnings per share because their
inclusion would be anti-dilutive. 7,288,431 and 7,402,431 shares that would be
issuable upon conversion of the convertible preferred stock are not included in
the calculation of diluted earnings per share during the six months ended
January 31, 2009 and 2008, respectively, because their inclusion would be
anti-dilutive. Basic earnings per share for the six months ended January 31,
2009 includes 859,886 common shares to be issued.




At
January 31, 2009, there are 61,832 Series B Convertible Preferred Shares
outstanding, 190,247 Series C Convertible Preferred Shares outstanding and
163,261 Series D Convertible Preferred Shares outstanding. Upon conversion of
the 61,832 Series B Convertible Preferred Shares, 3,483,491 common shares would
be issuable. Upon conversion of the 190,247 Series C Convertible Preferred
Shares, 3,804,940 common shares would be issuable. Upon conversion of the
163,261 Series D Convertible Preferred Shares, 3,265,220 common shares would be
issuable.




Each
Series B Convertible Preferred Share is convertible into 56.338 common shares.
Each Series C Convertible Preferred Share is convertible into 20 common shares.
Warrants attached to the Series B and Series C Convertible Preferred Stock are
not included in the calculation of diluted earnings per share during the six
months ended January 31, 2009 because their inclusion would be
anti-dilutive.




NOTE
B - CAPITALIZED PRODUCTION COSTS




The following table summarizes the net capitalized
film costs in various stages of production at:





January
      31,
            
            
            July
      31,2009
            
            
            2008In
      development - theatrical
            
            $
            3,030,430
            
            
            $
            2,677,872Completed
      - theatrical
            
            
            2,006,490
            
            
            
            2,339,695Total
      film costs
            
            $
            5,036,920
            
            
            $
            5,017,567





The
Company expects to amortize within three to five years 90% of capitalized film
costs based on the estimated costs and ultimate revenue projected. The portion
of the costs of the Company's films that was amortized during the three and six
months ended January 31, 2009 was $8,495 and $50,993, respectively, and during
the three and six months ended January 31, 2008, was $521. During the six months
ended January 31, 2009, the Company also reflected an impairment charge of
$2,371,575 based upon a revision of its forecasted film revenues. The portion of
the costs of the Company's films that are expected to be amortized during the
upcoming 12 months is approximately $932,552.




NOTE
C - NOTES PAYABLE TO RELATED PARTIES AND ACCRUED INTEREST




Notes
payable to related parties and accrued interest consist of the following
at:





January
      31,
            
            
            July
      31,2009
            
            
            2008(A)
      Payable to Daniel Laikin
            
            $
            480,904
            
            
            $
            412,070(B)
      Payable to Timothy Durham
            
            
            941,216
            
            
            
            756,945$
            1,422,120
            
            
            $
            1,169,015






9


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)


(A) As of
January 31, 2009, the Company owed Daniel Laikin, the Company's former Chief
Executive Officer, $423,033 in principal and $57,871 in interest. As of July 31,
2008, the Company owed Mr. Laikin $369,720 in principal and $42,350 in
interest. The loans bear interest at the rate of 6% per annum. The obligations
to Mr. Laikin are unsecured and payable on demand. During the six months ending
January 31, 2009, the Company made payments of $119,109 to Mr.
Laikin.





(B) As of
January 31, 2009, the Company owed Timothy Durham, who is currently its Chief
Executive Officer, $892,209 in principal and $49,007 in interest. As of July 31,
2008, the Company owed Mr. Durham $735,259 in principal and $21,686 in
interest. The loans bear interest at the rate of 6% to 6.75% per annum. The
obligations to Mr. Durham are unsecured and payable on demand. During the six
months ending January 31, 2009, the Company made payments of $38,050 to Mr.
Durham.





NOTE
D - PRODUCTION LOANS FROM RELATED PARTIES AND ACCRUED INTEREST





Outstanding
production loans from related parties and accrued interest consist of the
following as of:





January
      31,
            
            
            July
      31,Related Party
            
            2009
            
            
            2008(A)  Red
      Rock Productions, Inc. - Bag Boy Productions, Inc.
            
            $
            803,634
            
            
            $
            1,070,854(B)
      Red Rock Productions, Inc. - Ratko Productions, Inc.
            
            
            2,243,842
            
            
            
            2,146,950(C)
      Dan Laikin
            
            
            77,188
            
            
            
            75,163(D)
      Reno Rolle
            
            
            130,123
            
            
            
            -3,254,787
            
            
            
            3,292,967Less
      current portion
            
            
            (1,093,013
            )
            
            
            (1,147,763
            )$
            2,161,774
            
            
            $
            2,145,204





(A)
            On
      October 26, 2006, the Company entered into a financing agreement with Red
      Rock Productions Inc. (Red Rock) regarding the financing of the theatrical
      motion picture National
      Lampoon's Bag Boy.Red Rock's parent, Red Rock Pictures Holdings,
      Inc., is a publicly traded company and related party. In accordance with
      the initial agreement, Red Rock agreed to loan the Company up to
      $2,000,000 (unless otherwise agreed to by both parties) to fund this film,
      with payments to be made on an approved cash flow as provided by the
      Company. Red Rock will be entitled to recoup its investment plus interest
      at 10% accruing on the average daily balance from the date the loan is
      provided to the Company. Red Rock will also be entitled to contingent
      participation of 25% of all net contingent proceeds from the picture. Red
      Rock has a security interest in the film to the extent of the actual
      amount of the funding as long as there is an unpaid balance on the
      loan.  As a result of a modification to this financing agreement that
      was entered into on October 31, 2008, payment of this loan will now be
      made no later than March, 14, 2011.  The payments are to be made from
      the proceeds from the release of the film over an estimated revenue
      cycle of three years, as follows:  first the Company is to
      receive a 20% distribution fee; thereafter, the Company is to receive
      recoupment of all prints and advertising expenses incurred in connection
      with the distribution of the picture. The remaining gross receipts are to
      be split equally between the Company and Red Rock until such time as Red
      Rock has recouped its investment entirely. As of January 31, 2009, the
      Company had a loan balance of $518,399 in principal and $285,235
      in interest under this financing agreement for a total of $803,634. 
      Under the terms of the agreement and based on the expected cash flows of
      the film, the loan is expected to be repaid as
      follows: $267,878  as of January 31 2010,
      $355,840  as of January 31, 2011 , and $179,916  as of
      January 31, 2012. As of July 31, 2008, the Company owed $813,756 in
      principal and $257,098 in interest under this financing
      agreement.





(B)
            On
      October 26, 2006, the Company entered into a financing agreement with Red
      Rock Productions Inc. (Red Rock) regarding the financing of the theatrical
      motion picture National
      Lampoon's Ratko.Red Rock's parent, Red Rock Pictures Holdings,
      Inc., is a publicly traded company and related party. In accordance with
      the initial agreement, Red Rock agreed to loan the Company $2,000,000
      (unless otherwise agreed to by both parties) to fund this film, with
      payments to be made on an approved cash flow as provided by the Company.
      Red Rock will be entitled to recoup its investment plus interest at 10%
      accruing on the average daily balance from the date the loan is provided
      to the Company. Red Rock will also be entitled to contingent participation
      of 25% of all net contingent proceeds from the picture. Red Rock has a
      security interest in the film to the extent of the actual amount of the
      funding as long as there is an unpaid balance on the loan. As a result of
      a modification to this financing agreement that was entered into on
      October 31, 2008, payment of this loan will now be made no later
      than January 31, 2012.  The payments are to be made from the
      proceeds from the release of the film over an estimated revenue
      cycle of three years, as follows: first the Company is to receive a
      20% distribution fee; thereafter, the Company is to receive recoupment of
      all prints and advertising expenses incurred in connection with the
      distribution of the picture. The remaining gross receipts are to be split
      equally between the Company and Red Rock until such time as Red Rock has
      recouped its investment entirely. As of January 31, 2009, the
      Company had a loan balance of $1,921,161 in principal and
      $322,681 in interest under this financing agreement for a total of
      $2,243,842. Under the terms of the agreement and based on the expected
      cash flows of the film, the loan is expected to be repaid as
      follows: $747,947  as of January 31, 2010 , $993,548 as of
      January 31, 2011 , and $502,347 as of January 31, 2012.  As of July
      31, 2008, the Company owed $1,922,028 in principal and $224,922 in
      interest under this financing
agreement.






10


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)


(C)
            Mr.
      Laikin, the Company's former Chief Executive Officer, has made various
      loans to us for film financing. As of January 31, 2009, he was owed
      $67,000 in principal and $10,188 in interest for a total of $77,188 in
      production loans. The loans bear interest at the rate of 6% per annum. As
      of July 31, 2008, he was owed $67,000 in principal and $8,163 in interest
      for production loans.




(D)
            Mr.
      Rolle, an officer and shareholder of Red Rock, made a loan to the Company
      for the financing of the film National Lampoon’s the Legend
      of Awesomest Maximus. As of January 31, 2009, he was owed $125,000
      in principal and $5,123 in interest for a total of $130,123 in production
      loans. Under the terms of the agreement the loan bears interest at the
      rate of 10% per annum and Mr. Rolle will also be entitled to contingent
      participation of 11.5% of all net contingent proceeds from the picture.
      Mr. Rolle has a security interest in the film to the extent of the actual
      amount of the funding as long as there is an unpaid balance on the loan.
      The loan is to be repaid in full on June 30,
  2010.





The
aggregate maturities of production loans from related parties and accrued
interest for each of the next five years and thereafter are as follows as of
January 31, 2009:





Year
            
            Amount2010
            
            $
            1,093,0132011
            
            
            1,479,5112012
            
            
            682,263$
            3,254,787




NOTE
E - PRODUCTION LOANS AND ACCRUED INTEREST




Production
loans and accrued interest consist of the following at:





January
      31,
            
            
            July
      31,Non-Related Party
            
            2009
            
            
            2008(A)
      Gerald Daigle
            
            $
            622,795
            
            
            $
            -(B)
      VS Investments B, LLC  (VSIB)
            
            
            613,479(C)
      Voodoo Production Services
            
            
            467,808
            
            
            
            -1,704,082
            
            
            
            -Less
      current portion
            
            
            (154,932
            )
            
            
            -$
            1,549,150
            
            
            $
            -





(A) Mr.
Daigle made a loan to the Company for the financing of the film National Lampoon’s the Legend of
Awesomest Maximus. As of January 31, 2009, he was owed $600,000 in
principal and $22,795 in interest for a total of $622,795 in production loans.
Under the terms of the agreement the loans bear interest at the rate of 10% per
annum and Mr. Daigle will also be entitled to contingent participation of 11.5%
of all net contingent proceeds from the picture. Mr. Daigle has a security
interest in the film to the extent of the actual amount of the funding as long
as there is an unpaid balance on the loan. The loan is expected to be repaid as
follows: $154,932  as of January 2010  and
$467,863   as of January 2011.




(B)  VS
Investments B, LLC (VSIB) made loans to the Company for the financing of the
film National Lampoon’s the
Legend of Awesomest Maximus. As of January 31, 2009, VSIB was owed
$600,000 in principal and $13,479 in interest for a total of $613,479 in
production loans. Under the terms of the agreement the loans bear interest at
the rate of 10% per annum and VSIB will also be entitled to contingent
participation of 11.5% of all net contingent proceeds from the picture. VSIB has
a security interest in the film to the extent of the actual amount of the
funding as long as there is an unpaid balance on the loan. The loan is expected
to be repaid as of January, 2011.






11




NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)


(C)
VooDoo Production Services made loans to the Company for the financing of the
film National Lampoon’s the
Legend of Awesomest Maximus. As of January 31, 2009, VooDoo was owed
$450,000 in principal and $17,808 in interest for a total of $467,808 in
production loans. Under the terms of the agreement the loans bear interest at
the rate of 10% per annum and Voo Doo Production Services will also be entitled
to contingent participation of 11.5% of all net contingent proceeds from the
picture. Voo Doo Production Services has a security interest in the film to the
extent of the actual amount of the funding as long as there is an unpaid balance
on the loan. The loan is expected to be repaid  as of January
2011..





The
aggregate maturities of production loans from non-related parties and accrued
interest for each of the next five years and thereafter are as follows as of
January 31, 2009:





Year
            
            Amount2010
            
            $
            154,9322011
            
            
            1,549,150$
            1,704,082





NOTE
F - SHAREHOLDERS’ EQUITY (DEFICIENCY)





Preferred
Stock




During
the six-month periods ended January 31, 2009 and 2008, the Company accrued
$584,671 and $595,542, respectively, of Series B Stock and Series C Stock
dividends.





During
the six months ended January 31, 2009, the Company issued 15,014 shares of
Series D Stock, valued at $252,231. In addition 47,743 common shares valued at
$40,104 were issuable in connection with the payment of the Series B Stock and
Series C Stock dividends. The shares issued and issuable are as
follows:





·
            During
      the six months ended January 31, 2009, accrued dividends of the Company's
      Series B Stock of $17,399 were converted to 20,713 shares of the Company’s
      common stock and accrued dividends of the Company's Series B Stock of
      $121,722 were converted to 7,246 shares of the Company’s Series D stock.
      The accrued dividends were converted into the Company’s common stock based
      on the closing price of the Company’s common stock on the trading day
      preceding the payment date.





·
            During
      the six months ended January 31, 2009, accrued dividends of the Company's
      Series C Stock of $22,705 were converted to 27,030 shares of the Company’s
      common stock and accrued dividends of the Company's Series C Stock of
      $130,509 were converted to 7,768 shares of the Company’s Series D stock.
      The accrued dividends were converted into the Company’s common stock based
      on the closing price of the Company’s common stock on the trading day
      preceding the payment date.





During
the six months ended January 31, 2009, 64,058 shares of the Company’s common
stock were issued upon the exercise of 1,137 warrants that were issued in
conjunction with the Company’s sale of its Series B Stock.  The
warrants had an exercise price of $1.775 resulting in cash proceeds to the
Company of approximately $113,702.





During
the six months ended January 31, 2009, 21,264 shares of the Company’s common
stock were issued upon the exercise of 2,126 warrants that were issued in
conjunction with the Company’s sale of its Series C Stock.  The
warrants had an exercise price of $1.775 resulting in cash proceeds to the
Company of approximately $37,736.





During
the six months ended January 31, 2008, warrants issued in conjunction with the
sale of the Series C Stock were exercised to purchase 18,835 shares of the
Company’s common stock. The exercise price per share was $1.775. The proceeds
received from the exercise of the warrants totaled $33,434.





Common
Stock





During
the six months ended January 31, 2009, 89,086 shares of common stock with a
value of $93,730 were issued for services as follows: 70,323 shares of
restricted common stock at stock prices ranging from $0.70 to $1.39 per share
with a value of $68,630 were issued to consultants for monthly consulting
services, 15,000 shares of common stock at stock prices ranging from $0.92 to
$1.70 per share with a value of $21,600 were issued to consultants for one-time
consulting fees, and 3,763 shares of common stock at a price of $0.93 per share
with a value of $3,500 were issued to an employee as a bonus.





During
the six months ended January 31, 2008, 196,760 shares of common stock with a
value of $435,270 were issued for services as follows: 125,274 shares of common
stock at stock prices ranging from $1.65 to $2.55 with a value of $281,446 were
issued to various consultants for monthly consulting services, 4,171 shares of
common stock at a stock price of $2.15 per share with a value of $8,969 were
issued to Board members for fees owed, 43,389 shares at a stock price of $2.00
per share valued at $86,778 were issued to a professional services firm for
services they provided, 7,826 shares of common stock at a stock price of $2.40
per share with a value of $18,782 were issued to a former executive for services
provided, 9,000 shares at a stock price of $2.52 per share with a value of
$22,680 were issued to a consultant for one-time consulting fees, and 7,100
shares of common stock at a stock price of $2.34 per share with a value of
$18,782 were issued to employees as a bonus.






12


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)




During
the six months ended January 31, 2008, 750 shares of common stock at $1.90 per
share with a value of $1,425 were issued to various parties in connection with
the acquisition of intangible assets.





During
the six months ended January 31, 2008, 5,000 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 $8,000.




NOTE G -
COMMITMENTS AND CONTINGENCIES




Litigation





United States Securities and
Exchange Commission v. National Lampoon, Inc.On December 15, 2008 the
United States Securities and Exchange Commission (the "Commission") issued a
release stating that it had charged seven individuals and two corporations with
engaging in three separate fraudulent schemes to manipulate the market for
publicly traded securities through the payment of prearranged kickbacks. The
defendants include National Lampoon, Inc. and Daniel S. Laikin, our former Chief
Executive Officer, as well as stock promoters, a consultant, and an officer of
another company. Also on December 15, 2008, the United States Attorney for the
Eastern District of Pennsylvania separately announced criminal charges involving
the same conduct.




The
Commission's complaint alleges that, from at least March 2008 through June 2008,
Mr. Laikin and others engaged in a fraudulent scheme to manipulate the market
for the Company's common stock. Specifically, the Commission has charged that
Mr. Laikin and others paid kickbacks in exchange for generating or causing
purchases of the Company's common stock to a stock promoter and others to give
the false impression of a steady demand for the stock.




The
complaint alleges that Mr. Laikin and others paid at least $68,000 to cause the
purchase of at least 87,500 shares of the Company's common stock. In addition to
paying others to purchase the stock, the complaint alleges that Mr. Laikin
shared confidential financial information regarding the Company, non-public news
releases, and confidential shareholder lists, and coordinated the release of
news with the illegal purchases in the stock. The complaint also alleges that
the Company and Mr. Laikin made materially misleading statements in a tender
offer.




The
complaint alleges violations of Section 17(a) of the Securities Act of 1933,
Sections 9(a)(2), 10(b) and 13(e) of the Securities Exchange Act of 1934 and
Rules 10b-5 and 13e-4 thereunder. The complaint seeks permanent injunctions
against all defendants, disgorgement of ill-gotten gains, together with
prejudgment interest and civil penalties from the individual defendants, and an
officer and director bar against Mr. Laikin. On September 23, 2009 Mr. Laikin
pled guilty to a charge of conspiring to violate Title 17, Code of Federal
Regulations, Section 240.10b-5.


Trading
in the Company's common stock was suspended by the Securities and Exchange
Commission through December 29, 2008. Trading in the Company’s common stock
resumed on the Pink Sheets on February 5, 2009.




NOTE H - STOCK
OPTIONS AND WARRANTS




A)  
      Stock
      Options





On
January 30, 2002, the Company’s board of directors adopted the Amended and
Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan (the "1999
Plan"), as approved by the Company's shareholders at its annual meeting on April
25, 2002 . The options are granted from time to time by the Compensation
Committee. Individuals eligible to receive options include employees of the
Company, consultants to the Company and directors of the Company. The options
will have a fixed price, which will not be less than 100% of the fair market
value per share on the grant date. The total number of options authorized is
11,000,000.





During
the six months ended January 31, 2009, the Company did not grant options to
purchase shares of the Company's common stock to employees and consultants under
the 1999 Plan. During the six months ended January 31, 2008, the Company granted
options to purchase 1,063,389 shares of the Company's common stock at $2.16 per
share to employees and consultants under the 1999 Plan. The aggregate value of
the options vesting during the six months ended January 31, 2009 and 2008 was
$243,868 and $915,725, respectively, and has been reflected as compensation
cost. As of January 31, 2009, the aggregate value of unvested options was
$523,979, which will be amortized as compensation cost as the options vest, over
3 years.





The fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table.
Expected volatility is based on the volatility of the Company’s share price
during the year preceding the issuance date of the option. For purposes of
determining the expected life of the option, the full contract life of the
option is used; average risk-free interest of 5.50%; and dividend yield of
0%.




13


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)




The
weighted-average grant-date fair value of options granted during the six months
ended January 31, 2009 and 2008 was $0.00 and $0.98, respectively.





Six
      months ended
              January
      31, 2009
            
            Six
      months ended
              January
      31, 2008Expected
      volatility
            
            
            -%
            
            
            39.5%
      - 55.6%Weighted
      average volatility
            
            
            -%
            
            
            49.2%5Expected
      dividends
            
            
            -%
            
            
            0%Expected
      term (in years)
            
            
            -%
            
            
            4-7Risk
      free rate
            
            
            -%
            
            
            5.5%





A summary
of option activity as of January 31, 2009 and changes during the six months then
ended is presented below:




Shares
                  
                  
                  Weighted-
                    Average
                    Exercise
      Price
                  
                  
                  Weighted-Average
                    Remaining
                    Contractual
                    Terms
      (Years)
                  
                  
                  Aggregate
                    Intrinsic
                    Value
      (1)Outstanding
      at August 1, 2008
                  
                  
                  5,760,995
                  
                  
                  $
                  2.44
                  
                  
                  
                  
                  
                  $
                  -Granted
                  
                  
                  -
                  
                  
                  
                  -Exercised
                  
                  
                  -
                  
                  
                  
                  -Forfeited
      or expired
                  
                  
                  (92,666
                  )
                  
                  
                  2.32Outstanding
      at January 31, 2009
                  
                  
                  5,668,329
                  
                  
                  $
                  2.44
                  
                  
                  
                  3.62
                  
                  
                  $
                  -Exercisable
      at January 31, 2009
                  
                  
                  5,026,997
                  
                  
                  $
                  2.48
                  
                  
                  
                  3.27
                  
                  
                  $
                  -




(1) The
aggregate intrinsic value was calculated, as of January 31, 2009, as the
difference between the market price and the exercise price of the Company’s
stock for the options outstanding and exercisable which were in the
money.  As of January 31, 2009 there were no options outstanding and
exercisable which were in the money.





Additional
information regarding options outstanding as of January 31, 2009 is as
follows:





Options outstanding
            
            Options
      exercisableExercise
      price
            
            Number
              outstanding
            
            Weighted
              average
              remaining
              contractual
              life
      (years)
            
            Weighted
              average
              exercise
      price
            
            Number
              exercisable
            
            Weighted
              average
              exercise
      price$1
      to $2
            
            
            2,208,940
            
            
            2.99
            
            $
            1.75
            
            
            2,132,273
            
            $
            1.75$2
      to $3
            
            
            2,139,389
            
            
            5.40
            
            
            2.26
            
            
            1,584,724
            
            
            2.28$3
      to $4
            
            
            988,000
            
            
            1.62
            
            
            3.26
            
            
            978,000
            
            
            3.26$4
      to $5
            
            
            132,000
            
            
            3.60
            
            
            4.13
            
            
            132,000
            
            
            4.13$5
      to $6
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -$6
      to $7
            
            
            100,000
            
            
            2.06
            
            
            6.41
            
            
            100,000
            
            
            6.41$7
      to $8
            
            
            100,000
            
            
            0.91
            
            
            7.38
            
            
            100,000
            
            
            7.38Total
            
            
            5,668,329
            
            
            3.62
            
            $
            2.44
            
            
            5,026,997
            
            $
            2.48





A summary
of the status of the Company’s non-vested shares granted under the Company’s
stock option plan as of January 31, 2009 and changes during the six months ended
January 31, 2009 is presented below:




Non-vested
      Shares
              
              Shares
              
              
              Weighted-Average
      Grant
                Date
      Fair ValueNon-vested
      at August 1, 2008
              
              
              986,332
              
              
              $
              1.10Granted
              
              
              -
              
              
              
              -Vested
              
              
              (288,334
              )
              
              
              1.10Forfeited
              
              
              (56,666
              )
              
              
              1.07Non-vested
      at January 31, 2009
              
              
              641,332
              
              
              $
              1.08


14


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)




B)         
      Warrants





During
the six months ended January 31, 2009, the Company did not grant warrants to
purchase the Company’s common stock. During the six months ended January 31,
2008, the Company granted warrants to purchase 40,000 shares of the Company’s
common stock at $1.75 per share. The aggregate value of the warrants vesting
during the six months ended January 31, 2009 and 2008 was $0 and $11,265,
respectively, and has been reflected as compensation cost. As of January 31,
2009, the aggregate value of unvested warrants was $31,795, which will be
amortized as compensation cost as the warrants vest, in accordance with certain
milestones to be met.





The fair
value of each warrant is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table.
Expected volatility is based on the volatility of the Company’s share price
during the year preceding the issuance date of the warrant. For purposes of
determining the expected life of the warrant, the full contract life of the
warrant is used; average risk-free interest of 5.50%; and dividend yield of 0%.





Six
      months ended
              January
      31, 2009
            
            Six
      months ended
              January
      31, 2008Expected
      volatility
            
            
            -%
            
            
            43.5%Weighted
      average volatility
            
            
            -%
            
            
            43.5%Expected
      dividends
            
            
            -%
            
            
            -%Expected
      term (in years)
            
            
            -%
            
            
            2%Risk
      free rate
            
            
            -%
            
            
            5.50%





The
weighted-average grant date fair value of warrants granted during the six-month
periods ended January 31, 2009 and 2008 was $0.00 and $0.60
respectively.





A summary
of warrant activity as of January 31, 2009 and changes during the six months
then ended is presented below:


Shares
              
              
              Weighted-
                Average
                Exercise
      Price
              
              
              Weighted-Average
                Remaining
                Contractual
                Terms
      (Years)
              
              
              Aggregate
                Intrinsic
                Value (1)Outstanding
      at August 1, 2008
              
              
              747,727
              
              
              $
              3.08
              
              
              
              
              
              $
              -Granted
              
              
              -Exercised
              
              
              -Forfeited
      or expired
              
              
              -Outstanding
      at January 31, 2009
              
              
              747,727
              
              
              $
              3.08
              
              
              $
              2.41
              
              
              
              -Exercisable
      at January 31, 2009
              
              
              681,060
              
              
              $
              3.09
              
              
              
              2.64




(1)   The
aggregate intrinsic value was calculated, as of January 31, 2009, as the
difference between the market price and the exercise price of the Company’s
stock for warrants which were in-the-money. As of January 31, 2009, there were
no warrants outstanding or exercisable which were in-the-money.





Additional
information regarding warrants outstanding as of January 31, 2009 is as
follows:





Warrants outstanding
            
            Warrants
      exercisableExercise
      price
            
            Number
              outstanding
            
            Weighted
              average
              remaining
              contractual
              life
      (years)
            
            Weighted
              average
              exercise
      price
            
            Number
              exercisable
            
            Weighted
              average
              exercise
      price$1
      to $2
            
            
            60,000
            
            
            0.85
            
            $
            1.83
            
            
            60,000
            
            $
            1.83$2
      to $3
            
            
            175,000
            
            
            6.82
            
            
            2.58
            
            
            175,000
            
            
            2.58$3
      to $4
            
            
            512,727
            
            
            1.09
            
            
            3.40
            
            
            446,060
            
            
            3.46Total
            
            
            747,727
            
            
            2.41
            
            $
            3.08
            
            
            681,060
            
            $
            3.09





A summary of the status of the
Company’s non-vested shares granted as warrants as of January 31, 2009 and
changes during the six months then ended is presented below:







15


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)


Non-vested
      Shares
            Shares
            
            Weighted-Average
      GrantDate
      Fair ValueNon-vested
      at August 1, 2008
            66,667
            
            $
            0.48Granted
            -
            
            
            -Vested
            -
            
            
            -Forfeited
            -
            
            
            -Non-vested
      at January 31, 2009
            66,667
            
            $
            0.48




NOTE
I - SEGMENT INFORMATION




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




Summarized
financial information for the three and six months ended January 31, 2009 and
2008 concerning the Company's segments is as follows:




Licensing

                &
                Publishing
                (1)
              
              Advertising
      &

                Promotion
                (2)
              
              Production

                (3)
              
              
              Travel

                Services
                (4)
              
              Distribution
                (5)
              
              TotalThree
      Months Ended January 31, 2009Segment
      revenue
              
              $
              538,229
              
              
              $
              129,432
              
              
              $
              30,395
              
              
              $
              -
              
              
              $
              72,729
              
              
              $
              770,785Segment
      operating (loss)
              
              $
              (344,169
              )
              
              $
              (181,835
              )
              
              $
              (22,667
              )
              
              $
              -
              
              
              $
              (138,336
              )
              
              $
              (687,007
              )Depreciation
      expense
              
              $
              5,266
              
              
              $
              394
              
              
              $
              -
              
              
              
              
              
              
              $
              -
              
              
              $
              5,660Three
      Months Ended January 31, 2008Segment
      revenue
              
              $
              231,573
              
              
              $
              156,542
              
              
              $
              -
              
              
              $
              110,000
              
              
              $
              5,058
              
              
              $
              503,173Segment
      operating (loss)
              
              $
              (483,637
              )
              
              $
              (440,075
              )
              
              $
              (6,794
              )
              
              $
              (215,556
              )
              
              $
              (24,412
              )
              
              $
              (1,170,474
              )Depreciation
      expense
              
              $
              3,502
              
              
              $
              876
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              4,378Six
      Months Ended January 31, 2009Segment
      revenue
              
              $
              690,936
              
              
              $
              884,441
              
              
              $
              49,855
              
              
              $
              -
              
              
              $
              222,580
              
              
              $
              1,847,812Segment
      operating (loss)
              
              $
              (1,580,112
              )
              
              $
              (641,974
              )
              
              $
              (226,934
              )
              
              $
              -
              
              
              $
              (1,328,617
              )
              
              $
              (3,777,637
              )Depreciation
      expense
              
              $
              10,406
              
              
              $
              873
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              11,279Six
      Months Ended January 31, 2008Segment
      revenue
              
              $
              589,566
              
              
              $
              606,175
              
              
              $
              -
              
              
              $
              110,000
              
              
              $
              5,058
              
              
              $
              1,310,799Segment
      operating (loss)
              
              $
              (910,166
              )
              
              $
              (1,101,032
              )
              
              $
              (19,569
              )
              
              $
              (215,556
              )
              
              $
              (24,412
              )
              
              $
              (2,270,735
              )Depreciation
      expense
              
              $
              6,829
              
              
              $
              1,767
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              8,596


NOTE J –
SUBSEQUENT EVENTS




Subsequent
to January 31, 2009 the following legal actions were filed against the
Company:




David Weisburd, derivatively on
behalf of Nominal Defendant National Lampoon, Inc. v The Board of Directors and
National Lampoon, Inc. On or about February 24, 2009, David Weisburd
filed a Shareholder Derivative Complaint for Breach of Fiduciary Duty, CA No
BC408377, in the Superior Court of the State of California County of Los
Angeles, alleging breach of fiduciary duty by the Board of Directors of National
Lampoon (“Defendants”) and National Lampoon, Inc. (“Nominal Defendant”). Damages
sought include: “A finding that the defendants have violated their fiduciary
duties to the Company and its shareholders; an Order requiring the Company to
comply with applicable rules and regulators regarding management and oversight
procedures and/or controls; a finding against the defendants for an amount of
damages sustained by the Company as a result of the defendants’ breaches of
fiduciary duty in an amount to be determined at trial, together with prejudgment
interest; an award to Plaintiff of reasonable attorneys’ fees, expert fees and
other reasonable costs and expenses; and an Order granting all such additional
and different relief as this Court deems just and proper.”






16


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SIX
MONTHS ENDING JANUARY 31, 2009 AND 2008
 (UNAUDITED)


Majestic Entertainment, Lorenzo
Doumani and Eleonore Doumani v. National Lampoon, Inc. and
Dan Laikin  This case was filed on July 31, 2009 in Los
Angeles Superior Court (Case No. SC104240), with causes of action for breach of
contract, fraud, negligent misrepresentation, breach of fiduciary duty, unfair
business practices and violation of Corporations Code section 25400, involving
two different contracts dated in 2004. The first contract  involved a
joint venture entitled “National Lampoon Clubhouse” and the other contract
involved a preferred stock purchase agreement.





Breaking the Rules, LLC v. National
Lampoon, Inc. On or about July 30, 2009, the claimant served a Demand for
Arbitration with the Independent Film & Television Alliance, claiming breach
of contract and fraud, involving a distribution agreement for a film titled
"National Lampoon’s One, Two
Many."  The claimant seeks the termination of the agreement,
unspecified compensatory and exemplary damages, attorneys' fees and
costs.





Chermak v. Emmons, et al.
This action is pending in the Los Angeles Superior Court, West District, Beverly
Hills Courthouse and bears case number (LASC Case No. 07C02106).  This
action was originally filed on May 29, 2007 against Kent Emmons, Emmons Media
Group, NL Radio, LLC, Comedy Express Networks, Studio Funny Films, K Tahoe
Investments, National Lampoon Networks, Inc. and National Lampoon Radio Networks
for failure to pay invoices for legal services allegedly provided.  On or
about November 25, 2008, a judgment was entered against all named defendants for
the principal sum of $101.298.49.  On or about August 17, 2009, the
plaintiff filed a motion seeking to enforce her judgment against National
Lampoon, Inc.  The plaintiff’s motion was granted on September 30,
2009.  The Company is currently evaluating whether it will appeal this
order.







17





Item
2 - Management's Discussion and Analysis of Financial Condition and Results of
Operations




Management's
Discussion and Analysis of Financial Condition and Results of Operations
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 Magazineand later through the use of our name on motion pictures, including National Lampoon's Animal Houseand 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 earn the majority of our revenues from the following
business activities:




Motion
Picture Production and Distribution




We
produce feature films. Historically, motion pictures that carry our brand had
been produced and financed by third parties. We decided to develop, produce and
distribute motion pictures under the National Lampoon name in order to control
both the creative process and the distribution of the films and also to build a
film library and to expand our brand visibility.





As part
of our plan to increase the visibility of our brand in the film industry and to
expand our film library we also began acquiring and branding third-party films
for distribution in the U.S. and internationally.  For third party
films we pay finishing and prints and advertising costs that are recouped
through U.S. theatrical, home entertainment and international
sales.





In
October 2006 we invested in Red Rock Pictures Holdings, Inc. (“Red
Rock”).  We currently own approximately 14% of Red Rock’s outstanding
capital stock.  Red Rock was formed for the purpose of providing
financing and consulting services related to the production and exploitation of
motion pictures.   We have completed production on two films in partnership
with Red Rock, National
Lampoon’s Bag Boyand National Lampoon’s Ratko, The
Dictator’s Son. National Lampoon’s Bag Boywas delivered during the year
ended July 31, 2008 and National Lampoon’s Ratko, The
Dictator’s Sonis currently expected to be delivered the second quarter
of 2010.





We are
also in post production on our third title, National Lampoon’s The Legend of
Awesomest Maximus. We expect to deliver this motion picture
during the second or third quarter of the 2010 fiscal year.





We
acquired distribution rights for seven films produced by unrelated third parties
including National Lampoon's
Jake's Booty Call, National Lampoon's Homo Erectus, National Lampoon
Presents Beach Party at the Threshold of Hell, National Lampoon Presents
Electric Apricot, National Lampoon Presents One, Two Many, National Lampoon’s
Robodocand National
Lampoon’s Bar Starz.By releasing these films through various media
channels, including theatrical, home entertainment, foreign distribution and
digital distribution, we earn distribution fees.





During
the six months ended January 31, 2009, we released 2 motion pictures, National
Lampoon's “Stoned Aged / Homo Erectus” which is being distributed by Paramount
Pictures and “Bag Boy” which is being distributed by National Lampoon and Arts
Alliance.





We have
an interest in National Lampoon Clubhouse, Inc., a production entity, which
produced the film Monster
Nightaka Trick or
Treat. Monster Nightwas released in the fall of 2006. During the 2007 fiscal year we licensed
the domestic and foreign video sales to a sub-distributor and terminated our
production agreement with Majestic Entertainment. We will no longer produce
films through National Lampoon Clubhouse, Inc.





The
following is a list of the 11 motion pictures in our library that we either
produced or acquired:





YearTitle
            
            Released
            
            Financier/DistributorNational
      Lampoon’s Monster Night
            
            2006
            
            National
      Lampoon Clubhouse, Inc.National
      Lampoon’s Bag Boy
            
            2008
            
            National
      Lampoon, Inc.National
      Lampoon’s Ratko the Dictator’s Son
            
            2009
            
            National
      Lampoon, Inc.National
      Lampoon’s Jake’s Booty Call
            
            2006
            
            The
      Romp, Inc.National
      Lampoon’s Electric Apricot: The Quest for Festaroo
            
            2007
            
            Bait
      ProductionsNational
      Lampoon’s Beach Party at the Threshold of Hell
            
            2008
            
            Threshold
      Productions, LLCNational
      Lampoon’s Homo Erectus
            
            2009
            
            Burnt
      Orange Development, LLCNational
      Lampoon’s One, Two, Many
            
            2008
            
            Breaking
      the Rules, LLCNational
      Lampoon’s Robodoc
            
            2009
            
            Robodoc,
      LLC.National
      Lampoon’s Bar Starz
            
            2009
            
            OBX
      ProductionsNational
      Lampoon’s The Legend of Awesomest Maximus
            
            2009
            
            National
      Lampoon, Inc.






18





We also
earn revenues from providing production services on our own productions as well
as third party productions that we acquire.  Our production services
are included in the production budget and are recorded as the production’s
capitalized production costs.





We are
currently developing for production and/or acquiring approximately four projects
per year which will carry the National Lampoon name. We have motion picture
output agreements with a domestic home video distributor and a cable television
broadcast company.  An output agreement guarantees a negotiated
payment or advance for the distribution rights for films in
development.  The minimum guarantee or advance may be paid over
various points of production of the film or upon full delivery of the finished
product.





We have
agreements with independent third parties for the limited platform theatrical
release and subsequent distribution of our films to home entertainment. During the six months
ended January 31, 2009, we released two films as “platform theatrical releases”
which is the release of a motion picture in a small number of theaters in order
to promote the home entertainment sales.





For the
six months ended January 31, 2009, revenues derived from motion picture
production and distribution totaled approximately $272,435 or approximately 15%
of all the revenues we earned during the period.




Licensing




We
license our National Lampoon trademark for use in the titles of
films.  We receive a license fee at the time we enter into an
agreement allowing use of the National Lampoon trademark.  Depending
on our agreement with the motion picture studio or distributor, we also may
receive royalties.  Some of our agreements provide us with “first
dollar gross” participation, meaning that we receive a percentage of all money
received by the distributor from the distribution of the motion picture in any
type of media, while other agreements provide for participation solely in net
profits or in gross profits.  Net profit participation is based upon a
negotiated definition of net revenues after deducting certain costs of a film,
including distribution fees, financing costs and general corporate expenses,
while gross profit participation is based upon gross revenues, before any costs
such as distribution fees, financing costs and other corporate costs are
deducted.  It may take years for the studio or the distributor to
recoup the license fee, minimum guarantee or advance and the expenses, or these
costs may never be recovered by the studio.





We
currently are a party to 31 feature film branding
agreements.  Pursuant to these agreements, once the film is released
and begins earning revenues, the studio or distributor is entitled to recoup any
licensing fee, minimum guarantee or advance it paid to us under the agreement
and, if included in the agreement, interest.  Once this amount is
recouped, our participation in the revenues earned by the film may
begin.





The
following is a list of the 31 motion pictures bearing our brand:





YearTitle
            
            Released
            
            Financier/DistributorNational
      Lampoon’s Animal House
            
            1979
            
            Universal
      StudiosNational
      Lampoon Goes to the Movies
            
            1981
            
            United
      ArtistsNational
      Lampoon’s Class Reunion
            
            1982
            
            ABC/DisneyNational
      Lampoon’s Vacation
            
            1983
            
            Warner
      Bros.National
      Lampoon’s European Vacation
            
            1985
            
            Warner
      Bros.National
      Lampoon’s Class of ’86
            
            1986
            
            ParamountNational
      Lampoon’s Christmas Vacation
            
            1989
            
            Warner
      Bros.National
      Lampoon’s Loaded Weapon I
            
            1993
            
            New
      Line CinemaNational
      Lampoon’s Last Resort
            
            1994
            
            Trimark
      StudiosNational
      Lampoon’s Attack of the 52 Women
            
            1994
            
            ShowtimeNational
      Lampoon’s Senior Trip
            
            1995
            
            New
      Line CinemaNational
      Lampoon’s Favorite Deadly Sins
            
            1995
            
            ShowtimeNational
      Lampoon’s Dad’s Week Off
            
            1997
            
            ParamountNational
      Lampoon’s The Don’s Analyst
            
            1997
            
            ParamountNational
      Lampoon’s Men in White
            
            1998
            
            FoxNational
      Lampoon’s Golf Punks
            
            1998
            
            FoxNational
      Lampoon’s Van Wilder
            
            2001
            
            ArtisanNational
      Lampoon Presents Dorm Daze
            
            2003
            
            IndependentNational
      Lampoon’s Gold Diggers
            
            2005
            
            Lady
      P&A LLCNational
      Lampoon’s Blackball
            
            2005
            
            First
      Look EntertainmentNational
      Lampoon’s Going the Distance
            
            2005
            
            Think
      FilmsNational
      Lampoon’s Adam & Eve
            
            2006
            
            MRG
      Ent.National
      Lampoon’s Barely Legal
            
            2006
            
            Motion
      Picture Corp./Sony Pic. Rel.National
      Lampoon’s Cattle Call
            
            2006
            
            Cattle
      Call LLCNational
      Lampoon’s RepliKate
            
            2003
            
            Silver
      NitrateNational
      Lampoon’s Pledge This!
            
            2006
            
            Street
      Alien/Silver NitrateNational
      Lampoon’s Pucked (formerly Trouble with Frank)
            
            2006
            
            National
      Lampoon, Inc,National
      Lampoon’s Jake’s Booty Call
            
            2006
            
            National
      Lampoon, Inc.National
      Lampoon’s Dorm Daze II
            
            2006
            
            IndependentNational
      Lampoon’s Van Wilder II
            
            2006
            
            Lion’s
      GateNational
      Lampoon’s Van Wilder III: Freshman Year
            
            2009
            
            Tapestry
      Films, Inc./Paramount







19




We have
derived a substantial portion of our revenues from license fees relating to the
use of our name on new motion pictures and from royalties from previously
released motion pictures bearing our brand, including movies such as National Lampoon's Animal Houseand National Lampoon's
Vacation. Releasing a film with our brand enhances its ability to find
distribution outlets. Once a film is released with our brand, we earn revenues
from foreign sales, theatrical release, home video and DVD sales and rentals and
pay-per-view.





For the
six months ended January 31, 2009, revenues derived from licensing, exclusive of
publishing revenues, totaled $659,457 or approximately 36% of all the revenues
we earned during the period.





Internet
Activities





Our
Internet properties comprise several Internet destination sites. These include
NationalLampoon.com, DrunkUniversity.com, TOGATV.com and KnuckleheadVideo.com.
We have acquired other websites and we continue making such acquisitions on a
regular basis. We have focused substantial resources toward launching these
websites, and we plan to continue doing so on an ongoing basis. These
destination sites are also part of National Lampoon’s online networks, which
include the National Lampoon Humor Network and the Drunk University Network.
These are aggregated online networks of more than 200 of the most popular humor
and college lifestyle destination sites on the Internet. We sell advertising
space on our websites and networks in the form of video streamed advertisements,
full page takeover advertisements and banner advertisements. We also are
actively engaged in creating “branded entertainment” as well as custom
promotional content production and distribution for these Internet
destinations.





In May
2007 we announced the launch of the National Lampoon Video Network where we
entered into content distribution agreements with several Internet video portals
including AOL, Joost, Veoh, Yahoo!, YouTube and others.  These
partners sell advertising space including video streaming and we receive a
portion of the revenues earned.





For the
six months ended January 31, 2009, revenues derived from our Internet activities
totaled $534,731 or approximately 29% of all the revenues we earned during the
period.




Discontinued
Operations




In the
past we also earned revenues from National Lampoon Networks, which delivered
college television programming and performed field marketing activities, from
publishing books and from NL Radio, LLC.  While we earned some
revenues from these operations during the six months ended January 31, 2009, as
of various dates from January 2009 to May 2009 we are no longer engaged in any
of these activities and we do not expect to re-enter these markets in the
future.




Trends,
Events and Uncertainties




We have
experienced a number of challenges during the six months ended January 31,
2009.  In December 2008 the Securities and Exchange Commission and the
U.S. Department of Justice brought actions against us and Daniel Laikin, our
former Chief Executive Officer, for alleged fraudulent schemes to manipulate the
market for our securities.  As a result, in December 2008 Mr. Laikin
resigned and Timothy Durham was appointed as our Chief Executive Officer. . On
September 23, 2009 Mr. Laikin pled guilty to a charge of conspiring to violate
Title 17, Code of Federal Regulations, Section 240.10b-5.  The defense
of these legal actions, as well as other legal actions that have been filed
since December 2008, continues to require a significant amount of management’s
time and attention.  Mr. Laikin and Mr. Durham were also our primary
sources of financing for many of our operations however neither Mr. Laikin nor
Mr. Durham is required to continue providing funding to us.  Since
December 2008 Mr. Laikin has provided no further financing to us. Our operations
have also been adversely effected by the global economic recession, which
resulted in slower payment of fees owed to us and, in at least 3 cases, the
failure to pay fees owed to us at all, as well as fewer distribution
arrangements.  We expect these matters to continue to impact our
operations for at least the next 12 months.


Aside
from the legal actions we have disclosed in this and in previous reports, since
January 31, 2009 we have been made a party to the following material legal
actions:




David Weisburd, derivatively on
behalf of Nominal Defendant National Lampoon, Inc. v The Board of Directors and
National Lampoon, Inc. On or about February 24, 2009, David Weisburd
filed a Shareholder Derivative Complaint for Breach of Fiduciary Duty, CA No
BC408377, in the Superior Court of the State of California County of Los
Angeles, alleging breach of fiduciary duty by the Board of Directors of National
Lampoon (“Defendants”) and National Lampoon, Inc. (“Nominal Defendant”). Damages
sought include a finding that the defendants have violated their fiduciary
duties to the Company and its shareholders; an order requiring the Company to
comply with applicable rules and regulators regarding management and oversight
procedures and/or controls; a finding against the defendants for an amount of
damages sustained by the Company as a result of the defendants’ breaches of
fiduciary duty in an amount to be determined at trial, together with prejudgment
interest; an award to the plaintiff of reasonable attorneys’ fees, expert fees
and other reasonable costs and expenses; and an order granting all such
additional and different relief as this Court deems just and
proper.”






20






Majestic Entertainment, Lorenzo
Doumani and Eleonore Doumani v. National Lampoon, Inc. and Daniel Laikin.
This case was filed on July 31, 2009 in Los Angeles Superior Court (Case No.
SC104240), with causes of action for breach of contract, fraud, negligent
misrepresentation, breach of fiduciary duty, unfair business practices and
violation of Corporations Code section 25400, involving two different contracts
dated in 2004.  One contract involved a joint venture entitled
National Lampoon Clubhouse and the other contract involved a purchase of
preferred stock.





Breaking the Rules, LLC v. National
Lampoon, Inc.  On or about July 30, 2009, the claimant served a
Demand for Arbitration with the Independent Film & Television Alliance,
claiming breach of contract and fraud, involving a distribution agreement
for the film titled National
Lampoon’s One, Two Many.   The claimant seeks the
termination of the agreement, unspecified compensatory and exemplary damages,
attorneys' fees and costs.





Chermak v. Emmons, et
al.  This action is pending in the Los Angeles Superior Court,
West District and bears case number (LASC Case No. 07C02106).  This action
was originally filed on May 29, 2007 against Kent Emmons, Emmons Media Group, NL
Radio, LLC, Comedy Express Networks, Studio Funny Films, K Tahoe Investments,
National Lampoon Networks, Inc. and National Lampoon Radio Networks for failure
to pay invoices for legal services allegedly provided.  On or about
November 25, 2008, a judgment was entered against all named defendants for the
principal sum of $101,298.49.  On or about August 17, 2009, the plaintiff
filed a motion seeking to enforce her judgment against National Lampoon,
Inc.  The plaintiff’s motion was granted on September 30,
2009.  We are currently evaluating whether we will appeal this
order.




The
defense of these actions will be both costly and time consuming.  We
cannot be certain that we will successfully defend or settle any of the actions
that have not been resolved.




Other
trends, events and uncertainties that may impact our operations are included in
the discussion of our results of operations.




Critical Accounting Policies




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




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




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




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




Investments.We account for our investments in equity securities under SFAS 115,
“Accounting for Certain Investments in Debt and Equity
Securities.”  We have classified our investments as available for sale
securities, and such securities are carried at fair value.  The fair
values for marketable equity securities are based on quoted market
prices.  Unrealized gains or losses, net of tax, are included as a
component of accumulated other comprehensive income in stockholders’
equity.  Realized gains and losses and declines in value considered to
be other than temporary on available for sale securities are included in other
income (loss).




Results of
Operations




We
operate in five business segments, namely, licensing and exploitation of the
National Lampoon trademark and related properties including the sale of products
to consumers and publishing of copyrighted material; advertising and promotion
through our Internet websites, field marketing, live events and television
programming on college campuses; production of film and television products;
travel services; and distribution.







21






Segment
operating income (loss) excludes the amortization of intangible assets, interest
income, interest expense, other income and expenses, minority interest, equity
in investee loss and income taxes.  Selling, general and
administrative expenses not specifically attributable to any segment have been
prorated among the five segments. Amortization of capitalized production costs
and impairment of capitalized production costs have been prorated based upon
revenue among the licensing and publishing, production and distribution
segments.





Summarized
financial information for the three and six months ended January 31, 2009 and
2008 for our segments is as follows:





Licensing

                &
                Publishing
                (1)
              
              Advertising
      &
                Promotion
                (2)
              
              Production
                (3)
              
              
              Travel
                Services
                (4)
              
              Distribution
                (5)
              
              TotalThree
      Months Ended January 31, 2009Segment
      revenue
              
              $
              538,229
              
              
              $
              129,432
              
              
              $
              30,395
              
              
              $
              -
              
              
              $
              72,729
              
              
              $
              770,785Segment
      operating (loss)
              
              $
              (344,169
              )
              
              $
              (181,835
              )
              
              $
              (22,667
              )
              
              $
              -
              
              
              $
              (138,336
              )
              
              $
              (687,007
              )Depreciation
      expense
              
              $
              5,266
              
              
              $
              393
              
              
              $
              -
              
              
              
              
              
              
              $
              -
              
              
              $
              5,660Three
      Months Ended January 31, 2008Segment
      revenue
              
              $
              231,573
              
              
              $
              156,542
              
              
              $
              -
              
              
              $
              110,000
              
              
              $
              5,058
              
              
              $
              503,173Segment
      operating (loss)
              
              $
              (483,637
              )
              
              $
              (440,075
              )
              
              $
              (6,794
              )
              
              $
              (215,556
              )
              
              $
              (24,412
              )
              
              $
              (1,170,474
              )Depreciation
      expense
              
              $
              3,502
              
              
              $
              876
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              4,378Six
      Months Ended January 31,2009Segment
      revenue
              
              $
              690,936
              
              
              $
              884,441
              
              
              $
              49,855
              
              
              $
              -
              
              
              $
              222,580
              
              
              $
              1,847,812Segment
      operating (loss)
              
              $
              (1,580,112
              )
              
              $
              (641,974
              )
              
              $
              (226,934
              )
              
              $
              -
              
              
              $
              (1,328,617
              )
              
              $
              (3,777,637
              )Depreciation
      expense
              
              $
              10,406
              
              
              $
              873
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              11,279Six
      Months Ended January 31, 2008Segment
      revenue
              
              $
              589,566
              
              
              $
              606,175
              
              
              $
              -
              
              
              $
              110,000
              
              
              $
              5,058
              
              
              $
              1,310,799Segment
      operating (loss)
              
              $
              (910,166
              )
              
              $
              (1,101,032
              )
              
              $
              (19,569
              )
              
              $
              (215,556
              )
              
              $
              (24,412
              )
              
              $
              (2,270,735
              )Depreciation
      expense
              
              $
              6,829
              
              
              $
              1,767
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              8,596





In the
table above, licensing and publishing revenues include the licensing of our name
and sale of our books; advertising and promotion revenues include online and
cable advertising as well as advertising and promotion of the films released;
production revenues include films, television and home entertainment; travel
services represents the revenue earned by National Lampoon Tours, Inc., and
distribution revenues includes theatrical, home entertainment and digital
distribution of our titles.We no longer offer
travel services or field marketing campaigns nor do we publish
books.  We do not expect to re-enter any of these markets in the
future.





A
reconciliation of segment operating loss to net loss before income taxes for the
periods ended January 31, 2009 and 2008 is as follows:





January
      31, 2009
            
            
            January
      31, 2008Total
      segment operating (loss)
            
            $
            (3,777,637
            )
            
            $
            (2,270,735
            )Amortization
      of intangible assets
            
            
            (213,085
            )
            
            
            (122,383
            )Interest
      expense
            
            
            (129,202
            )
            
            
            (45,705
            )Other
      income/expense
            
            
            28,398
            
            
            
            422,533Net
      loss before minority interest and income taxes
            
            $
            (4,091,526
            )
            
            $
            (2,016,290
            )




Three
months ended January 31, 2009as compared to the three months ended January 31,
2008.




Licensing and
Publishing Revenues




Licensing
and publishing revenues were $538,229 for the three months ended January 31,
2009, as compared to $231,573 for the three months ended January 31, 2008,
representing an increase of $306,656 or 132%.





The
increase for the three-month period was partly attributable to an increase in
video royalty revenues, which were $245,745 for the three months ended January
31, 2009, as compared to $5,638 for the three months ended January 31, 2008,
representing an increase of $240,107 or 4,259%. This increase was primarily due
to the receipt of royalties of $152,514 generated by the exploitation of National Lampoon’s Animal
House and royalties of $93,231 generated by the exploitation of National Lampoon’s Cattle Callduring the three months ended January 31, 2009 as compared to the receipt
of royalties of $5,638 generated by the exploitation of National Lampoon’s Dorm Dazeduring the three months ended  January 31, 2008.






22





The
increase for the three-month period was also attributable to an increase in
revenues derived from sales of international distribution licenses for our
various titles, which totaled $74,500 during the three months ended January 31,
2009, while no such revenues were generated for the three months ended January
31, 2008, representing an increase of $74,500 or 100%. This revenue was derived
from National Lampoon's Bag
Boyin the amountof $36,000, as well as
from National Lampoon Presents
Beach Party on the Threshold of HellandNational Lampoon's Homo Erectusin the amount of $38,500.





The
increase for the three-month period was partially offset by a decrease in
revenues derived from motion picture royalties, which totaled $145,651 during
the three months ended January 31, 2009 as compared to $275,216 in such revenues
for the three months ended January 31, 2008, representing a decrease of $129,565
or 47%.





Motion
picture royalties decreased by $129,565 from $275,216 for the three months ended
January 31, 2008 to $145,651 for the three months ended January 31, 2009.
Royalties in the amount of $259,117 received during the three months ended
January 31, 2008 represented a one-time payment thatresulted from a settlement
that we reached with Universal Studios during the 2007 fiscal year for unpaid
royalties related to the exploitation of National Lampoon’s Animal
House. We received no such payment during the three months ended January
31, 2009.





Publishing
revenues net of reserve for returns were $34,770 for the three months ended
January 31, 2009, as compared to $(78,301) for the three months ended January
31, 2008, representing an increase of $113,071 or 144%.  There were
fewer returns during the three-months ended January 31, 2009 as opposed to
returns that exceeded publishing revenues during the three months ended January
31, 2008.





Costs
related to licensing revenues were $(29) for the three months ended January 31,
2009, as compared to $25,235 for the three months ended January 31, 2008,
representing a decrease of $25,264 or 100%.The decrease in costs related to
licensing revenues resulted primarily from a decrease in license fees from
$26,960 during the three months ended January 31, 2008 to $0 during the three
months ended January 31, 2009. Commissions increased to $7,788 during the three
months ended January 31, 2009 from a net commission repayment of $5,999 during
the three months ended January 31, 2008. Royalties accrued to Harvard Lampoon
were $4,273 during the three months ended January 31, 2008 compared to a royalty
credit of $7,817 during the three months ended January 31, 2009.





Amortization
of capitalized production costs was $8,495 for the three months ended January
31, 2009 compared to $521 for the three months ended January 31, 2008.
Amortization for current productions begins upon theatrical and/or home video
release. The increase was primarily due to the amortization of capitalized
production costs to revenue recognition for domestic and international licensing
of six film titles.





Costs
related to publishing revenues were $124,838 for the three months ended January
31, 2009, compared to $4,610 for the three months ended January 31, 2008,
representing an increase of $120,228. The increase in costs related to
publishing revenues for the three months ended January31, 2009, as compared to
the three months ended January 31, 2008, consisted of an increase of $27,298 in
direct publishing costs and an increase in amortized publishing
costs.




Advertising
and Promotion Revenues




Advertising
and promotion revenues totaled $129,432 during the three months ended January
31, 2009, as compared to $156,542 for the three months ended January 31, 2008,
representing a decrease of $27,110 or 17%.  The decrease in revenue
was mainly due to a decrease in Internet advertising on our new websites and a
decrease  in prints and advertising revenues charged on the release of
our titles. We continue to expand and improve our digital distribution and
entertainment capabilities resulting in increased revenue from our network and
affiliate network of Internet websites. Going forward, we expect to focus our
resources on increasing revenues generated from our Internet websites and from
product placement. We do not intend to continue providing field promotion
services at events held by third parties or to produce field promotion events in
the future.





Costs of
advertising and promotion revenue were $134,834 during the three months ended
January 31, 2009 compared to $133,315 for the three months ended January 31,
2008, representing an increase of $1,519 or 1%.




Production Revenues




For the
three months ended January 31, 2009, production revenue was $30,395, as compared
to $0 for the same period in 2008. Production revenues increased by $30,395 or
100%, primarily due to production revenues of $25,000 earned from live events
and $5,395 earned for post production services during the three months ended
January 31, 2009. The increase in production revenues from live events was due
to a joint production agreement with Mania TV pursuant to which shows made for
Mania TV and Capazoo were also used on our Internet network. We traditionally do
not produce product unless we have a presale, minimum guarantee or co-production
agreement in place. This reduces our financial risk as productions tend to be
capital intensive. The output arrangement guarantees a pre-negotiated minimum
guarantee or sales price for the licensing of a specific media and territory. As
these output arrangements are signed, we will allocate additional internal
resources to this segment of our business.





Costs
related to production revenues were $10,279 during the three months ended
January 31, 2009, compared to $6,272 for the three months ended January 31,
2008, for a difference of $4,007. Although there were no production revenues
during the three months ended January 31, 2008, there were remaining costs
related to television production revenues from prior periods.






23





Distribution
Revenues





For the
three months ended January 31, 2009, distribution revenue was $72,729 as
compared to $5,058 for the same period in 2008. Distribution revenues primarily
resulted from the DVD release of five of our titles on our distribution network,
which includes theatrical, home entertainment and digital
distribution.





For the
three months ended January 31, 2009, costs related to distribution revenues were
$108,694 as compared to $14,500 for the same period in 2008. Costs related to
distribution revenues are primarily due to the distribution fees plus the costs
of manufacturing, marketing and pick, pack and ship directly related to the DVD
release.





Travel
Services Revenues





During
the three months ended January 31, 2008, travel services revenues were $110,000
compared to $0 for the three months ended January 31, 2009. During the three
months ended January 31, 2008 we settled a legal action in exchange for a
payment of $110,000 to be made upon execution of the settlement agreement. The
settlement amount was recognized as revenue. Prior to the settlement we
discontinued our travel services business and no further revenues are expected
to be earned from this segment.




Other
Costs and Expenses




Selling,
general and administrative expenses during the three months ended January 31,
2009 were $1,050,680 as compared to $1,489,195 for the three months ended
January 31, 2008, a decrease of $438,515 or approximately 30%. During the three
months ended January 31, 2009, approximately 56% of our selling, general and
administrative expenses consisted of salary expense totaling $576,578, as
compared to salary expense of approximately $1,054,350, which represented 71% of
selling, general and administrative expenses for the three months ended January
31, 2008. The decrease of $477,772, or 45%, in salary expense for the three
months ended January 31, 2009 was primarily due to the separation from service
of various employees as well as the closure of our New York office. During the
three months ended January 31, 2009, selling, general and administrative
expenses also included consulting fees of $74,237 as compared to $122,749 during
the same period in the prior year for a decrease of $48,512 as we continued to
reduce our reliance on consultants. Legal fees increased by $82,193, or 296%,
from $27,803 during the three months ended January 31, 2008 to $109.996 for the
same period in 2009. Investor and public relations costs decreased by $90,421,
or 68%, from $133,250 during the three months ended January 31, 2008 to $42,829
for the same period in 2009.





Selling,
general and administrative expenses not specifically attributable to any segment
have been allocated among the five segments pro-rata according to percent of
revenues. Segment operating income (loss) excludes the amortization of
intangible assets, interest income and income taxes.





Amortization of
intangible assets, which consists of the costs of our acquisition and protection
of the “National Lampoon” trademark, as well as the acquisition of websites,
domain names and other intangible assets was approximately $94,222 during the
three months ended January 31, 2009 and $61,219 for the three months ended
January 31, 2008. The increase was due to the acquisition of
websites.





During
the three months ended January 31, 2009, we recorded expenses of $114,979
associated with the granting of stock options and warrants to employees,
advisors and consultants as compared to expenses of $334,418 incurred for the
three months ended January 31, 2008, for a decrease of $219,439 or 66%. The
decrease is primarily due to a reduced number of grants of options to our
directors, employees and consultants.





During
the three months ended January 31, 2009, we recorded expenses of $36,330
associated with stock issued for services as compared to expenses of $252,886
incurred for the three months ended January 31, 2008, for a decrease of $216,556
or 86%. The decrease is primarily due to the reduction in the number of
consultants and vendors being paid with shares of our common stock.





There was
an increase of $35,867 in interest expense to $61,760 during the three months
ended January 31, 2009, from $25,893 during the three months ended January 31,
2008. The increase in interest expense is primarily due to an increase in
production and prints and advertising loans from related parties.





Other
income decreased by $392,915 or 97% to $13,713 during the three months ended
January 31, 2009 compared to $406,628 for the six months ended January 31,
2008.  The significant other income we recognized for the three-month
period ended January 31, 2008 was primarily due to the write off of a stale
accrued royalty. In July 1987, NLI granted the right to produce National Lampoon
television programming to GPEC. The royalty was recognized as an expense in
prior years. Approximately $396,250 remained on the books as a liability and was
written off during the three months ended January 31, 2008.





For the
three months ended January 31, 2009, we had a net loss of $829,276 as compared
to a net loss of $850,959 for the three months ended January 31, 2008,
representing a decrease in net loss of $21,683 or 3%. The decrease in net loss
for the three-month period resulted primarily from a significant increase in
revenues from licensing and publishing along with an increase in distribution
revenues and a decrease in expenses for the quarter.





During
the quarters ended January 31, 2009 and 2008, we had no provision for income
taxes due to the significant net operating losses incurred in prior periods and
related carry forward to the current period. We also accrued dividends of
$292,335 during the three months ended January 31, 2009 and $297,771, during the
same period in 2008 for a decrease of $5,436 or 2%. The decrease was primarily
due to the conversion of our Series B or Series C Convertible Preferred Stock to
common stock. The addition of the accrued dividend resulted in a net loss
attributable to common shareholders of $1,121,611 or $(0.11) per basic and fully
diluted share for the three months ended January 31, 2009, as compared to a net
loss attributable to common shareholders of $1,148,730 or $(0.14) per basic and
fully diluted share for the three months ended January 31, 2008.






24




Six
months ended January 31, 2009 as compared to the six months ended January 31,
2008




Licensing
and Publishing Revenues




Licensing
and publishing revenues were $690,936 for the six months ended January 31, 2009,
as compared to $589,566 for the six months ended January 31, 2008, representing
an increase of $101,370 or 17%.





The
increase for the six-month period was partly attributable to a increase in video
royalty revenues, which were $245,745 for the six months ended January 31, 2009,
as compared to $54,473 for the six months ended January 31, 2008, representing
anincrease of $191,272 or 351%. The increase was also attributable to an
increase in revenues derived from sales of international distribution licenses
for our various titles, which totaled $186,040 during the six months ended
January 31, 2009 as compared to $150,000 in such revenues for the six months
ended January 31, 2008, representing an increase of $36,040 or
24%.  These increases were offset by a decrease in motion picture
licensing fees of $129,808 for the six months ended January 31, 2009 which were
$145,651 for the period ended January 31,2009, as compared to $275,459 for the
six months ended January 31, 2008 representing a 47% decrease.





Publishing
revenues net of reserve for returns were $31,479 for the six months ended
January 31, 2009, as compared to $34,150 for the six months ended January 31,
2008, representing a increase of $2,671 or 8%.





Costs
related to licensing revenues were $34,941 for the six months ended January 31,
2009, as compared to $43,150 for the six months ended January 31, 2008,
representing a decrease of $8,209 or19 %. The decrease in costs related to
license revenues resulted primarily from a decrease in royalties and
commissions.





Amortization
of capitalized production costs was $50,993 for the six months ended January 31,
2009 compared to $521 for the six months ended January 31, 2008. Amortization
for current productions begins upon theatrical and/or home video release. The
increase was primarily due to the amortization of capitalized production costs
due to revenue recognition for domestic and international licensing of six film
titles. The amortization was offset by a decrease in the disposal of Totally Baked due to a refund
of production costs that was received during the six months ended January 31,
2009. Impairment of capitalized production costs was $2,351,575 for the six
months ending January 31, 2009 compared to $0 for the six months ending January
31, 2008. The impairment of capitalized production costs was due to the write
down of domestic and international licensing ultimate revenues from the release
of National Lampoon’s
Bagboy and National
Lampoon’s Ratko, The Dictator’s Sonbased upon a review of our estimates
with current contracts, and was expensed to “impairment of capitalized
production costs”. The remaining amount of $465,943 in capitalized production
costs for National Lampoon’s
Bagboy will be expensed during the 2010 and 2011 fiscal
years.





Costs
related to publishing revenues were $128,108 for the six months ended January
31, 2009, compared to $48,044 for the six months ended January 31, 2008,
representing an increase of $80,064 or 167%. The increase in costs related to
publishing revenues for the six months ended January 31, 2009, as compared to
the six months ended January 31, 2008, consisted of an increase in direct
publishing costs and an increase in amortized publishing
costs.




Advertising
and Promotion Revenues




Advertising
and promotion revenues totaled $884,441 during the six months ended January 31,
2009, as compared to $606,175 for the six months ended January 31, 2008,
representing an increase of $278,266 or46 %. The increase in revenue was the
result of an increase in promotion revenues mainly due to Internet advertising
on our new websites and an increase in prints and advertising revenues charged
on the release of our titles. These increases were partially offset by a
decrease in sponsored production shoots and field promotion events. We continue
to expand and improve our digital distribution and entertainment capabilities
resulting in increased revenue from our network and affiliate network of
Internet websites. Going forward, we expect to focus our resources on increasing
revenues generated from our Internet websites and from product placement. We do
not intend to continue providing field promotion services at events held by
third parties nor do we intend to produce field promotion events in the
future.





Costs of
advertising and promotion revenue were $286,494 during the six months ended
January 31, 2009 compared to $335,613 for the six months ended January 31, 2008,
representing a decrease of $49,119 or15 %. The decrease in costs of advertising
and promotion was the result of a number of factors.  Due to an
improvement of our Internet capabilities, web development and Internet service
fees decreased along with web design fees during the six months ended January
31, 2009.




Production
Revenues




For the
six months ended January 31, 2009, production revenue was $49,855, as compared
to $0 for the same period in 2008. Production revenues increased by $49,855 or
100%, primarily due to production revenues of $40,000 earned from live events
and $9,855 earned for post production services during the six months ended
January 31, 2009. The increase in production revenues from live events was due
to a joint production agreement with Mania TV pursuant to which shows made for
Mania TV and Capazoo were also used on our Internet network. We traditionally do
not produce product unless we have a presale, minimum guarantee or co-production
agreement in place. This reduces our financial risk as productions tend to be
capital intensive. The output arrangement guarantees a pre-negotiated minimum
guarantee or sales price for the licensing of a specific media and territory. As
these output arrangements are signed, we will allocate additional internal
resources to this segment of our business.






25





Costs
related to production revenues were $61,918 during the six months ended January
31, 2009, compared to $19,048 for the six months ended January 31, 2008, for a
difference of $42,870. Although there were no production revenues during the six
months ended January 31, 2008, there were remaining costs related to television
production revenues from prior periods.





Distribution
Revenues





For the
six months ended January 31, 2009, distribution revenue was $222,580 as compared
to $5,058 for the same period in 2008. Distribution revenues primarily resulted
from the DVD release of five of our titles on our distribution network, which
includes theatrical, home entertainment and digital distribution, during the six
months ended January 31, 2009.





For the
six months ended January 31, 2009, costs related to distribution revenues were
$123,665 as compared to $14,500 for the same period in 2008. Costs related to
distribution revenues are primarily due to the distribution fees plus the costs
of manufacturing, marketing and pick, pack and ship directly related to the DVD
release.





Travel
Services Revenues





During
the six months ended January 31, 2008, travel services revenues were $110,000
compared to $0 for the six months ended January 31, 2009. During the six months
ended January 31, 2008 we agreed to dismiss a legal action in exchange for a
payment of $110,000 to be made upon execution of the settlement agreement. The
settlement amount was recognized as revenue. Prior to the settlement we
discontinued our travel services business and no further revenues are expected
to be earned from this segment.




Other
Costs and Expenses




Selling,
general and administrative expenses during the six months ended January 31, 2009
were $2,567,755 as compared to $3,120,659 for the six months ended January 31,
2008, a decrease of $552,904 or approximately18 %. During the six months ended
January 31, 2009, approximately 47% of our selling, general and administrative
expenses consisted of salary expense totaling $1,207,644, as compared to salary
expense of approximately $1,054,350, which represented 34% of selling, general
and administrative expenses for the six months ended January 31, 2008. The
increase of $153,294, or14 %, in salary expense for the six months ended January
31, 2009 was primarily due to the separation from service of various employees
as well as the closure of our New York office which required additional payouts
for separation. During the six months ended January 31, 2009, selling, general
and administrative expenses also included consulting fees of $150,461 as
compared to $122,749 during the same period in the prior year for an increase of
$27,712. Legal fees increased by $155,861, or561 %, from $27,803 during the six
months ended January 31, 2008 to $183,664 for the same period in 2009. Investor
and public relations costs decreased by $38,959, or29 %, from $133,250 during
the six months ended January 31, 2008 to $94,291 for the same period in
2009.





Selling,
general and administrative expenses not specifically attributable to any segment
have been allocated among the five segments pro-rata according to percent of
revenues. Segment operating income (loss) excludes the amortization of
intangible assets, interest income and income taxes.





Amortization
of intangible assets, which consists of the costs of our acquisition and
protection of the “National Lampoon” trademark, as well as the acquisition of
websites, domain names and other intangible assets was approximately $213,085
during the six months ended January 31, 2009 and $122,383 for the six months
ended January 31, 2008. The increase was due to the acquisition of
websites.





During
the six months ended January 31, 2009, we recorded expenses of $243,868
associated with the granting of stock options and warrants to employees,
advisors and consultants as compared to expenses of $926,990 incurred for the
six months ended January 31, 2008, for a decrease of $683,122 or 74%. The
decrease is primarily due to a reduced number of grants of options to our
directors, employees and consultants.





During
the six months ended January 31, 2009, we recorded expenses of $93,730
associated with stock issued for services as compared to expenses of $435,270
incurred for the six months ended January 31, 2008, for a decrease of $341,540
or 78%. The decrease is primarily due to the reduction in the number of
consultants and vendors being paid with shares of our common stock.





There was
an increase of $83,497 in interest expense to $129,202 during the six months
ended January 31, 2009, from $45,705 during the six months ended January 31,
2008. The increase in interest expense is primarily due to an increase in
production and prints and advertising loans from related parties.





Other
income decreased by $394,136 during the six months ended January 31, 2009, to
$28,398 as compared to $422,534 for the six months ended January 31,
2008.  The significant other income we accrued during the six-month
period ended January 31, 2008 was primarily due to the write off of a stale
accrued royalty. In July 1987, NLI granted the right to produce National Lampoon
television programming to GPEC. The royalty was recognized as an expense in
prior years. Approximately $396,250 remained on the books as a liability and was
written off during the six months ended January 31, 2008.






26





For the
six months ended January 31, 2009, we had a net loss of $4,091,526 as compared
to a net loss of $2,016,290 for the six months ended January 31, 2008,
representing an increase in net loss of $2,075,236 or 103%. The increase in net
loss for the six-month period resulted primarily from a significant increase in
costs and expenses. The increase in expenses was a result of the impairment of
capitalized production costs of $2,371,575., partially offset by decreases in
costs related to SG&A, advertising and promotion costs, and
amortization.





During
the six months ended January 31, 2009 and 2008, we had no provision for income
taxes due to the significant net operating losses incurred in prior periods and
related carry forward to the current period. We also accrued dividends of
$584,671 during the six months ended January 31, 2009 and $595,542, during the
same period in 2008 for a decrease of $10,871 or 2%. The decrease was primarily
due to the conversion of our Series B or Series C Convertible Preferred Stock to
common stock. The addition of the accrued dividend resulted in a net loss
attributable to common shareholders of $4,676,197 or $(0.45) per basic and fully
diluted share for the six months ended January 31, 2009, as compared to a net
loss attributable to common shareholders of $2,611,832 or $(0.32) per basic and
fully diluted share for the six months ended January 31, 2008.




Liquidity
and Capital Resources




With the
exception of the first quarter of the fiscal year ended July 31, 2007, we have
not generated positive cash flows from operations over the past few years. Our
principal sources of working capital during the six months ended January 31,
2009 consisted of revenues, loans from our officers and directors and production
loans from Red Rock Pictures Holdings, Inc.




Net cash
used in operating activities was $2,034,297 for the six months ended January 31,
2009, as compared to $905,811 for the six months ended January 31, 2008. The
increase in cash flow used in operations was primarily attributable to an
increase in production costs, offset by increases in accounts payable and
deferred revenues. Cash provided by financing activities was $2,047,377 for the
six months ended January 31, 2009, as compared to $869,051 for the six months
ended January 31, 2008. The funds were obtained from officers and directors, Red
Rock Pictures Holdings, Inc. and investors and were partially offset by
repayments to each of them.




The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company had a current
net loss of $4,091,526 for the six months ended January 31, 2009, as well as
negative working capital of $5,004,772 and a stockholder’s deficiency of
$1,893,431 as of January 31, 2009, along with net losses for the prior two years
of $1,686,974 and $2,504,170. Additionally, on December 15, 2008 the United
States Securities and Exchange Commission issued a release, and the United
States Attorney for the Eastern District of Pennsylvania announced, that they
had charged seven individuals and two corporations with engaging in three
separate fraudulent schemes to manipulate the market for publicly traded
securities through the payment of prearranged kickbacks. The defendants include
National Lampoon, Inc. and Daniel S. Laikin.  Furthermore, on January
9, 2009 our board of directors decided to voluntarily delist our common stock,
par value $0.0001 per share, from NYSE Amex Equities. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts, or
amounts and classification of liabilities that might result from this
uncertainty.




Historically,
our principal sources of funds used for operations and working capital have been
revenues and loans received from Daniel S. Laikin, our former Chief Executive
Officer, and Timothy Durham, our current Chief Executive Officer. The aggregate
amount of the loans and accrued interest owed to Mr. Laikin and Mr. Durham at
January 31, 2009 was $1,499,308 as compared to $1,244,178 at July 31, 2008.
These two individuals have made no further commitment to provide loans to us to
meet any immediate working capital requirements.




Our
ability to continue as a going concern is dependent upon our ability to develop
additional sources of capital and revenue. The accompanying condensed
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty. Our capital requirements for the
next 12 months have been and will continue to be significant. We will need to
obtain financing to fund our cash needs and continue our operations. Additional
financing, whether through public or private equity or debt financing or loans
from our stockholders or other sources may not be available, or if available,
may be on terms unacceptable to us. We do not currently have any committed
sources of financing available. Our ability to maintain sufficient liquidity to
continue our operations is dependent on our ability to raise additional
capital.




As of
January 31, 2009, we had cash of  $1,168 and receivables totaling
$1,313,925. We are currently delivering ten films for which the minimum
guarantees, license fees and home video sales revenues are due upon notice of
delivery, acceptance of delivery or upon receipt of payment of accounts
receivables by sub-distributors for home video sales. During the second quarter
ended January 31, 2009, we received $659,457 in license fees and we expect
additional payments to be received by the end of the third and fourth quarter of
the 2009 fiscal year.




Recent Accounting Pronouncements




In December 2007, the FASB issued FASB
Statement No. 141(R), “Business Combinations” (FAS 141(R)), which
establishes accounting principles and disclosure requirements for all
transactions in which a company obtains control over another business. Statement
141(R) applies prospectively to business combinations for which the acquisition
date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2008. Earlier adoption is
prohibited.







27




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





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(SFAS 161). This Statement requires enhanced disclosures about an entity’s
derivative and hedging activities, including (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133,“Accounting for Derivative
Instruments and Hedging Activities” (SFAS 133), and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” This standard is intended to improve financial reporting
by identifying a consistent framework, or hierarchy, for selecting accounting
principles to be used in preparing financial statements that are presented in
conformity with generally accepted accounting principles in the United States
for non-governmental entities. SFAS No. 162 is effective 60 days following
approval by the U.S. Securities and Exchange Commission of the Public Company
Accounting Oversight Board's amendments to AU Section 411, “The Meaning of
Present Fairly in Conformity with Generally Accepted Accounting
Principles.”





In June
2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF 03-6-1”).  FSP EITF 03-6-1 concludes that unvested share-based
payment awards that contain rights to receive non-forfeitable dividends or
dividend equivalents are participating securities, and thus, should be included
in the two-class method of computing earnings per share
(“EPS”).





In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosure about Fair
Value of Financial Instruments” (FSP 107-1/APB 28-1). FSP 107-1/APB 28-1
requires interim disclosures regarding the fair values of financial instruments
that are within the scope of FAS 107, “Disclosures about the Fair Value of
Financial Instruments.” Additionally, FSP 107-1/APB 28-1 requires disclosure of
the methods and significant assumptions used to estimate the fair value of
financial instruments on an interim basis as well as changes of the methods and
significant assumptions from prior periods. FSP 107-1/APB 28-1 does not change
the accounting treatment for these financial
instruments





In April
2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly” (FSP 157-4).  FSP 157-4
provides guidance on how to determine the fair value of assets and liabilities
when the volume and level of activity for the asset/liability has significantly
decreased.  FSP 157-4 also provides guidance on identifying
circumstances that indicate a transaction is not orderly.  In
addition, FSP 157-4 requires disclosure in interim and annual periods of the
inputs and valuation techniques used to measure fair value and a discussion of
changes in valuation techniques





In June
2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
CodificationTM and the
Hierarchy of Generally Accepted Accounting Principles a replacement of FASB
Statement No. 162," and approved—the FASB Accounting Standards CodificationTM (Codification) as the single
source of authoritative nongovernmental US GAAP. The Codification does not
change current US GAAP, but is intended to simplify user access to all
authoritative US GAAP by providing all the authoritative literature related to a
particular topic in one place. All existing accounting standard documents will
be superseded and all other accounting literature not included in the
Codification will be considered non-authoritative. For the Company, the
Codification is effective July 1, 2009 and will require future references to
authoritative US GAAP to coincide with the appropriate section of the
Codification.





In June
2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No.
46(R)," which revised the consolidation guidance for variable-interest entities.
The modifications include the elimination of the exemption for qualifying
special purpose entities, a new approach for determining who should consolidate
a variable-interest entity, and changes to when it is necessary to reassess who
should consolidate a variable-interest entity.






28





We do not
believe that the adoption of the above recent pronouncements will have a
material effect on our condensed consolidated results of operations, financial
position, or cash flows.





Other
recent accounting pronouncements issued by the FASB (including its Emerging
Issues Task Force), the AICPA, and the SEC did not or are not believed by
management to have a material impact on the Company's present or future
consolidated financial statements.





Item
3.  Quantitative and Qualitative Disclosures About Market
Risk





As a
smaller reporting company we are not required to provide this
information.





Item
4.    Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





We
conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “Exchange
Act”) as of January 31, 2009, to ensure that information required to be
disclosed by us in the reports filed or submitted by us under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms, including
to ensure that information required to be disclosed by us in the reports filed
or submitted by us under the Exchange Act is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
decisions regarding required disclosure.  Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that as
of January 31, 2009, our disclosure controls and procedures were not effective
at the reasonable assurance level due to the material weaknesses described
below.





In
October 2008, we engaged an internal controls consultant to assist in our
compliance with the Sarbanes-Oxley Act of 2002. Specifically, the consultant was
engaged to document our system of internal controls, identify material
weaknesses, propose and implement remediation of the weaknesses, develop tests
of our key controls, analyze the testing and train our personnel to maintain the
system and tests. In October 2008, we received a report from our internal
controls consultant that stated we have material weaknesses in our system of
internal controls. A material weakness, as defined in standards established by
the Public Company Accounting Oversight Board (United States), is a deficiency
in internal control over financial reporting that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. Based upon the report of the
consultant and management assessment, we have identified the following material
weaknesses:




Insufficient
disaster recovery or backup of core business functions,





Lack of
segregation of duties,





Lack of a
purchase order system or procurement process, and





Lack of
documented and reviewed system of internal controls.





To
address these material weaknesses, management performed additional analyses and
other procedures to ensure that the financial statements included herein fairly
present, in all material respects, our financial position, results of operations
and cash flows for the periods presented.





Changes
in Internal Control





No change
in internal control over financial reporting was made during the second quarter
of the 2009 fiscal year that materially affected, or is likely to materially
affect, the Company's internal control over financial reporting.




PART II - OTHER INFORMATION






Item
1 - Legal Proceedings






Information
relating to the settlement of the action titled American Cinema Distribution
Corporation v. National Lampoon, Inc. is included in our Quarterly Report
on Form 10-Q for the three months ended October 31, 2008.




United States Securities and
Exchange Commission v. National Lampoon, Inc.On December 15, 2008 the
United States Securities and Exchange Commission (the "Commission") issued a
release stating that it had charged seven individuals and two corporations with
engaging in three separate fraudulent schemes to manipulate the market for
publicly traded securities through the payment of prearranged kickbacks. The
defendants include National Lampoon, Inc. and Daniel S. Laikin, our former Chief
Executive Officer, as well as stock promoters, a consultant, and an officer of
another company. Also on December 15, 2008, the United States Attorney for the
Eastern District of Pennsylvania separately announced criminal charges involving
the same conduct.




The
Commission's complaint alleges that, from at least March 2008 through June 2008,
Mr. Laikin and others engaged in a fraudulent scheme to manipulate the market
for the Company's common stock. Specifically, the Commission has charged that
Mr. Laikin and others paid kickbacks in exchange for generating or causing
purchases of the Company's common stock to a stock promoter and others to give
the false impression of a steady demand for the stock.






29






The
complaint alleges that Mr. Laikin and others paid at least $68,000 to cause the
purchase of at least 87,500 shares of the Company's common stock. In addition to
paying others to purchase the stock, the complaint alleges that Mr. Laikin
shared confidential financial information regarding the Company, non-public news
releases, and confidential shareholder lists, and coordinated the release of
news with the illegal purchases in the stock. The complaint also alleges that
the Company and Mr. Laikin made materially misleading statements in a tender
offer.




The
complaint alleges violations of Section 17(a) of the Securities Act of 1933,
Sections 9(a)(2), 10(b) and 13(e) of the Securities Exchange Act of 1934 and
Rules 10b-5 and 13e-4 thereunder. The complaint seeks permanent injunctions
against all defendants, disgorgement of ill-gotten gains, together with
prejudgment interest and civil penalties from the individual defendants, and an
officer and director bar against Mr. Laikin.  On September 23, 2009
Mr. Laikin pled guilty to a charge of conspiring to violate Title 17, Code of
Federal Regulations, Section 240.10b-5.


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




On
November 18, 2008, we issued 6,000 shares of restricted common stock to American
Capital Ventures having a total value of $5,100.




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




Item
3 - Defaults Upon Senior Securities




None.




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




None.




Item
5 - Other Information




None.




Item
6 - Exhibits




3.1
            Certificate
      of Incorporation of National Lampoon, Inc. (1)3.2
            Bylaws
      of National Lampoon, Inc. adopted August 27, 2002 (1)3.3
            First
      Amendment of Certificate of Incorporation of National Lampoon, Inc.
      (2)3.4
            Second
      Amendment to Certificate of Incorporation of National Lampoon, Inc.
      (6)3.5
            Third
      Amendment to Certificate of Incorporation of National Lampoon, Inc.
      (6)4.1
            Certificate
      of Designations, Preferences, Rights and Limitations of Series C
      Convertible Preferred Stock of National Lampoon, Inc.
  (2)4.2
            First
      Amendment to Certificate of Designations, Preferences, Rights and
      Limitations of Series C Convertible Preferred Stock of National Lampoon,
      Inc. (6)4.3
            Second
      Amendment to Certificate of Designations, Preferences, Rights and
      Limitations of Series C Convertible Preferred Stock of National Lampoon,
      Inc. (6)4.4
            Certificate
      of Designations, Preferences, Rights and Limitations of Series D
      Convertible Preferred Stock (6)4.5
            NLAG
      Registration Rights Agreement dated May 17, 2002 among the Registrant and
      members of the NLAG Group and GTH Capital, Inc. (3)4.6
            Jimirro
      Registration Rights Agreement dated May 17, 2002 (3)4.7
            Piggyback
      Registration Rights Agreement dated September 3, 2002 between the
      Registrant and Constellation Venture Capital, L.P. as agent for certain
      individuals. (4)4.8
            Piggyback
      Registration Rights Agreement entered into among the Registrant and the
      purchasers of Series C Convertible Preferred Stock (5)4.9
            J2
      Communications Voting Agreement dated May 17, 2002 among members of the
      NLAG Group and James P. Jimirro (3)4.10
            First
      Amendment to Voting Agreement dated June 7, 20024.11
            Series
      C Voting Agreement entered into among the Registrant and purchasers of
      Series C Convertible Preferred Stock (5)10.1
            Secured
      Promissory Note dated November 7, 2008 executed by 301 Productions, Inc.
      in favor of VS Investment B, LLC*10.2
            Profit
      Participation Agreement dated November 7, 2008 between 301 Productions,
      Inc. and VS Investment B, LLC *10.3
            Notice
      of Security Interest in and Collateral Assignment of Copyrights dated
      November 7, 2008 executed by 301 Productions, Inc. in favor of VS
      Investment B, LLC*10.4
            Promissory
      Note dated November 2008 executed by 301 Productions, Inc. in favor of the
      Alfred J. Ferro Trust*10.5
            Loan
      and Security Agreement dated November 7, 2008 between 301 Productions,
      Inc. and National Lampoon, Inc. and the Alfred J. Ferro
    Trust*   30
   10.6
            Secured
      Promissory Note dated November 7, 2008 executed by 301 Productions, Inc.
      in favor of Gerald J. Daigle*10.7
            Secured
      Promissory Note dated November 7, 2008 executed by 301 Productions, Inc.
      in favor of VooDoo Production Services, L.L.C.*10.8
            Loan
      and Security Agreement dated November 7, 2008 between 301 Productions,
      Inc. and National Lampoon, Inc. and Gerald J. Daigle,
  Jr.*10.9
            Loan
      and Security Agreement dated November 7, 2008 between 301 Productions,
      Inc. and National Lampoon, Inc. and VooDoo Productions Services,
      L.L.C.*31.1
            Certification
      by Chief Executive Officer pursuant to section 302 of the Sarbanes Oxley
      Act of 2002*31.2
            Certification
      by Chief Financial Officer pursuant to section 302 of the Sarbanes
      Oxley Act of 2002*32
            Certification
      by Chief Executive Officer 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 Annual Report on Form 10-K/A for the
      fiscal year ended July 31, 2003 filed with the Securities and Exchange
      Commission on December 19, 2003, file no. 001-32584.(2)
            Incorporated
      by reference from the registrant's Annual Report on Form 10-K for the
      fiscal year ended July 31, 2005 filed with the Securities and Exchange
      Commission on October 29, 2005, file no. 001-32584.(3)
            Incorporated
      by reference from the registrant's Current Report on Form 8-K filed with
      the Securities and Exchange Commission on May 31, 2002, file no.
      001-32584.(4)
            Incorporated
      by reference from the registrant's Current Report on Form 8-K filed with
      the Securities and Exchange Commission on September 9, 2002, file no.
      001-32584.(5)
            Incorporated
      by reference from the registrant's Quarterly Report on Form 10-QSB filed
      with the Securities and Exchange Commission on December 22, 2006, file no.
      001-32584.(6)
            Incorporated
      by reference from the registrant’s Annual Report on Form 10-K filed with
      the Securities and Exchange Commission on November 10, 2008, file no.
      001-32584.(7)
            Incorporated
      by reference from the registrant’s Current Report on Form 8-K filed on
      October 30, 2008, file no. 001-32584.







31









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.October
      1, 2009
            By:
            /s/ Timothy
      DurhamTimothy
      Durham,
              Chief
      Executive Officer





October
      1, 2009
            By:
            /s/ Rick
      SnowRick
      Snow,
              Interim
      Chief Financial Officer













32