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: October 31, 2008




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 o 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 o                                                                                                          
Accelerated filer o





Non-accelerated
filer   o                                                                                                           
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 Sepember 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
      ofOctober
      31,
            
            
            July
      31,2008
            
            
            2008(UNAUDITED)ASSETSCURRENT
      ASSETSCash
            
            $
            2,287
            
            
            $
            2,267Accounts
      receivable, net of reserves of $542,142 and $181,619,
      respectively
            
            
            793,021
            
            
            
            1,640,994Canadian
      tax credits receivable
            
            
            203,889
            
            
            
            226,729Prepaid
      expenses and other current assets
            
            
            66,681
            
            
            
            78,464Total
      current assets
            
            
            1,065,878
            
            
            
            1,948,454Fixed
      assets, net of accumulated depreciation of $199,358 and $193,738,
      respectively
            
            
            40,455
            
            
            
            39,283Capitalized
      production costs, net of $5,752,411 and $5,709,969 of amortization,
      respectively
            
            
            5,112,050
            
            
            
            5,017,567Capitalized
      publishing costs, net of $500,372 and $496,477 of amortization,
      respectively
            
            
            117,158
            
            
            
            104,278Intangible
      assets, net of accumulated amortization of $4,837,984 and $4,719,119,
      respectively
            
            
            1,838,005
            
            
            
            1,956,871Fair
      value of available-for-sale securities
            
            
            235,385
            
            
            
            588,461Total
      non-current assets
            
            
            7,343,053
            
            
            
            7,706,460TOTAL
      ASSETS
            
            $
            8,408,931
            
            
            $
            9,654,914LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIENCY)CURRENT
      LIABILITIESAccounts
      payable
            
            $
            1,810,669
            
            
            $
            1,340,157Accrued
      expenses
            
            
            342,432
            
            
            
            310,691Notes
      payable secured by Canadian tax credits receivable
            
            
            203,889
            
            
            
            226,729Deferred
      income
            
            
            1,324,140
            
            
            
            1,007,960Notes
      payable - related party, including interest of $85,521 and $64,036,
      respectively
            
            
            1,493,155
            
            
            
            1,169,015Production
      loans – including interest of $1,151 and $0, respectively
            
            
            151,151
            
            
            
            -Production
      loans – related party, including interest of $202,943 and $168,837,
      respectively
            
            
            1,124,029
            
            
            
            1,147,763Total
      current liabilities
            
            
            6,449,465
            
            
            
            5,202,315Production
      loans – including interest of $12,986 and $0, respectively
            
            
            912,986
            
            
            
            -Production
      loans – related party, including interest of $383,510 and $321,347,
      respectively
            
            
            2,016,684
            
            
            
            2,145,204TOTAL
      LIABILITIES
            
            
            9,379,135
            
            
            
            7,347,519COMMITMENTS
      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, 9,456,427
      and 9,325,087 shares issued and outstanding, respectively
            
            
            946
            
            
            
            933Common
      stock issuable, 859,886 and 812,143 shares of common stock,
      respectively
            
            
            1,201,468
            
            
            
            1,161,364Additional
      paid-in capital
            
            
            43,798,465
            
            
            
            43,500,856Accumulated
      Other Comprehensive income
            
            
            235,385
            
            
            
            588,461Accumulated
      deficit
            
            
            (46,206,508
            )
            
            
            (42,944,258
            )TOTAL
      SHAREHOLDERS' EQUITY  (DEFICIENCY)
            
            
            (970,204
            )
            
            
            2,307,395TOTAL
      LIABILITIES AND SHAREHOLDERS'
    EQUITY  (DEFICIENCY)
            
            $
            8,408,931
            
            
            $
            9,654,914The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.




1







NATIONAL LAMPOON, INC. AND
    SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSUNAUDITEDThree
      months ended October 31,2008
            
            
            2007REVENUESProduction
            
            $
            19,460
            
            
            $
            -Licensing
            
            
            155,998
            
            
            
            245,542Advertising
      & Promotion
            
            
            755,009
            
            
            
            449,633Publishing
            
            
            (3,292
            )
            
            
            112,451Distribution
            
            
            149,851
            
            
            
            -Total
      revenues
            
            
            1,077,026
            
            
            
            807,626COSTS
      AND EXPENSESCosts
      related to production revenue
            
            
            51,639
            
            
            
            12,775Costs
      related to licensing revenue
            
            
            34,970
            
            
            
            17,915Costs
      related to advertising and promotion revenues
            
            
            151,659
            
            
            
            202,297Costs
      related to publishing revenues
            
            
            3,270
            
            
            
            43,434Costs
      related to distribution revenues
            
            
            14,971
            
            
            
            -Amortization
      of capitalized production costs
            
            
            42,497
            
            
            
            -Impairment
      of capitalized film costs
            
            
            2,351,575
            
            
            
            -Amortization
      of intangible assets
            
            
            118,866
            
            
            
            61,165Selling,
      general and administrative expenses
            
            
            1,517,072
            
            
            
            1,631,465Total
      costs and expenses
            
            
            4,286,519
            
            
            
            1,969,051OPERATING
      LOSS
            
            
            (3,209,493
            )
            
            
            (1,161,425
            )OTHER
      INCOME (EXPENSE)Interest
      expense
            
            
            (67,442
            )
            
            
            (19,813
            )Other
      income
            
            
            14,685
            
            
            
            15,906Total
      other income/(expense)
            
            
            (52,757
            )
            
            
            (3,907
            )NET
      LOSS
            
            
            (3,262,250
            )
            
            
            (1,165,332
            )Preferred
      stock dividends
            
            
            (292,335
            )
            
            
            (297,771
            )NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
            
            $
            (3,554,585
            )
            
            $
            (1,463,103
            )Net
      loss per share attributable to common shareholder - basic and
      diluted
            
            $
            (0.35
            )
            
            $
            (0.18
            )Weighted
      average number of common shares - basic and diluted
            
            
            10,244,689
            
            
            
            8,232,946The
      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 THREE MONTHS ENDED OCTOBER 31, 2008(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
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            46,018
            
            
            
            4
            
            
            
            -
            
            
            
            57,396
            
            
            
            -
            
            
            
            -
            
            
            
            57,400Exercise
      of warrants for common stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            85,322
            
            
            
            9
            
            
            
            -
            
            
            
            151,429
            
            
            
            -
            
            
            
            -
            
            
            
            151,438Fair
      value vesting of options and warrants issued to
consultants
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            10,266
            
            
            
            -
            
            
            
            -
            
            
            
            10,266Fair
      value of vesting of employee stock options
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            118,623
            
            
            
            -
            
            
            
            -
            
            
            
            118,623Preferred
      stock dividend accrual
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (292,335
            )
            
            
            -
            
            
            
            -
            
            
            
            (292,335
            )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
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (353,076
            )
            
            
            -
            
            
            
            (353,076
            )Net
      Loss for the period
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,262,250
            )
            
            
            (3,262,250
            )Balance
      at October 31, 2008
            
            
            61,832
            
            
            
            190,247
            
            
            
            163,261
            
            
            $
            40
            
            
            
            9,456,427
            
            
            $
            946
            
            
            $
            1,201,468
            
            
            $
            43,798,465
            
            
            $
            235,385
            
            
            $
            (46,206,508
            )
            
            $
            (970,204
            )The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.






3




NATIONAL LAMPOON, INC. AND
    SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITEDThree
      months ended October 31,2008
            
            
            2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Loss
            
            $
            (3,262,250
            )
            
            $
            (1,165,332
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
            
            
            5,620
            
            
            
            4,217Amortization
      of intangible assets
            
            
            118,866
            
            
            
            61,165Fair
      value of shares issued for services
            
            
            57,400
            
            
            
            182,384Fair
      value of vested stock, options and warrants
            
            
            128,889
            
            
            
            592,572Amortization
      of capitalized production costs
            
            
            42,497
            
            
            
            -Provision
      For doubtful accounts
            
            
            372,168
            
            
            
            -Impairment
      of capitalized film costs
            
            
            2,351,575
            
            
            
            -Changes
      in assets and liabilitiesDecrease/(increase)
      in accounts receivable
            
            
            475,805
            
            
            
            (52,096
            )Decrease
      in Canadian tax credits receivable
            
            
            22,840
            
            
            
            -Decrease
      in prepaid expenses and other assets
            
            
            11,783
            
            
            
            22,488Increase
      in publishing costs
            
            
            (12,880
            )
            
            
            (69,675
            )Increase
      in production costs
            
            
            (2,488,555
            )
            
            
            (407,613
            )Increase
      in accounts payable
            
            
            470,512
            
            
            
            148,739Increase
      in accrued expenses
            
            
            31,741
            
            
            
            85,602Increase
      in deferred revenues
            
            
            316,180
            
            
            
            100,015NET
      CASH USED IN OPERATING ACTIVITIES
            
            
            (1,357,809
            )
            
            
            (497,534
            )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
            
            
            (6,792
            )
            
            
            (2,894
            )NET
      CASH USED IN INVESTING ACTIVITIES
            
            
            (6,792
            )
            
            
            (2,894
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Borrowings
      on production loans
            
            
            1,064,137
            
            
            
            -Payments
      of production loans - related party
            
            
            (486,700
            )
            
            
            (51,219
            )Borrowings
      on production loans - related party
            
            
            334,446
            
            
            
            190,219Payments
      of notes payable, related party
            
            
            (64,767
            )
            
            
            (43,085
            )Proceeds
      from notes payable, related party
            
            
            388,907
            
            
            
            343,030Payments
      on notes payable, secured by Canadian tax credits
    receivable
            
            
            (22,840
            )
            
            
            -Proceeds
      from the exercise of warrants
            
            
            151,438
            
            
            
            -NET
      CASH PROVIDED BY FINANCING ACTIVITIES
            
            
            1,364,621
            
            
            
            438,945NET
      (DECREASE)/INCREASE IN CASH
            
            
            20
            
            
            
            (61,483
            )CASH
      AT BEGINNING OF PERIOD
            
            
            2,267
            
            
            
            85,706CASH
      AT END OF PERIOD
            
            $
            2,287
            
            
            $
            24,223SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for:Taxes
            
            $
            -
            
            
            $
            -Interest
            
            $
            221
            
            
            $
            794Non-cash
      investing and financing activities:Accrued
      dividends on preferred stock payable in common shares and Series D
      Convertible Preferred Stock
            
            $
            292,335
            
            
            $
            297,771Decrease
      in fair value of available-for-sale securities
            
            $
            353,076
            
            
            $
            -Common
      stock to be issued as payment of accrued dividends on preferred
      stock
            
            $
            40,104
            
            
            $
            -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 (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)


NOTE
A - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES




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





Certain
information and footnote disclosures normally included in financial statements
that have been presented in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission with respect to interim financial
statements, although management of the Company believes that the disclosures
contained in these financial statements are adequate to make the information
presented therein not misleading.  For further information, refer to
the consolidated financial statements and notes thereto included in the
Company’s Annual Report on Form 10-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 months ended October 31, 2008 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 $3,262,250 for the three months ended October 31,
2008, as well as negative working capital of $5,383,587 and a stockholder’s
deficiency of $970,204 as of October 31, 2008, 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 (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (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
October 31, 2008 was $1,569,329 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
October 31, 2008, we had  cash  of  $2,287 and
receivables totaling $793,021. As of October 31,2008we have agreements to
deliver 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 first quarter ended
October 31, 2008, we received $155,998 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. We are currently reviewing those results to
determine how we will proceed. The Company has not recorded an estimate of
any amount that 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 (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)




During
the three months ended October 31, 2008 two customers accounted for $449,222,
(42%) and $150,000, (14%) of total revenue. During the three months ended
October 31, 2007, four customers accounted for $198,500 (25%), $150,000 (19%),
$112,451 (14%) and $88,026 (11%) of total revenue.




As of
October 31, 2008, the Company had $250,000 (32%) 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 October 31, 2008:




Level
      1
            
            Level
      2
            
            Level
      3
            
            TotalAssets:Available
      for sale securities at fair value
            
            $
            235,385
            
            
            $
            —
            
            
            $
            —
            
            
            $
            235,385







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 October 31,2008
            
            
            2007Net
      Loss
            
            
            $  (3,262,250)
            
            
            $ 
      (1,165,332)Fair
      value adjustment on available-for-sale securities
            
            
            (353,076)
            
            
            -Comprehensive
      Loss
            
            
            $  (3,615,326)
            
            
            $ 
      (1,165,332)





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.







7


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)




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.





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.






8


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)




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 October 31, 2008 and 2007, as common equivalent
shares have been excluded from the computation due to the fact that they are
anti-dilutive. Options and warrants to purchase 6,508,722 and 6,597,337 common
shares during the three months ended October 31, 2008 and 2007, respectively,
are not included in the calculation of diluted earnings per share because their
inclusion would be anti-dilutive. 7,288,432 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 three months ended
October 31, 2008 and 2007, respectively, because their inclusion would be
anti-dilutive. Basic earnings per share for the three months ended October 31,
2008 includes 859,886 common shares to be issued.




At
October 31, 2008, 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 three
months ended October 31, 2008 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:





October
      31,
            
            
            July
      31,2008
            
            
            2008In
      development - theatrical
            
            $
            4,200,246
            
            
            $
            2,677,872Completed
      - theatrical
            
            
            911,804
            
            
            
            2,339,695Total
      film costs
            
            $
            5,112,050
            
            
            $
            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 months
ended October 31, 2008 and 2007 was $42,497 and $0, respectively. During the
three months ended October 31, 2008, the Company also recorded an impairment
charge of $2,351,575 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 $1,412,534.




NOTE
C - NOTES PAYABLE TO RELATED PARTIES AND ACCRUED INTEREST




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





October
      31,
            
            
            July
      31,2008
            
            
            2008(A)
      Payable to Daniel Laikin
            
            $
            560,617
            
            
            $
            412,070(B)
      Payable to Timothy Durham
            
            
            932,538
            
            
            
            756,945$
            1,493,155
            
            
            $
            1,169,015





(A) As of
October 31, 2008, the Company owed Daniel Laikin, the Company's former Chief
Executive Officer, $510,575 in principal and $50,042 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 three months
ending October 31, 2008, the Company made payments of $31,567 to Mr.
Laikin.





(B) As of
October 31, 2008, the Company owed Timothy Durham, who is currently its Chief
Executive Officer, $897,059 in principal and $35,479 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 three
months ending October 31, 2008, the Company made payments of $33,200 to Mr.
Durham.







9


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)


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:





October
      31,
            
            
            July
      31,Related Party
            
            2008
            
            
            2008(A)  Red
      Rock Productions, Inc. - Bag Boy Productions, Inc.
            
            $
            650,348
            
            
            $
            1,070,854(B)
      Red Rock Productions, Inc. - Ratko Productions, Inc.
            
            
            2,184,218
            
            
            
            2,146,950(C)
      Dan Laikin
            
            
            76,174
            
            
            
            75,163(D)
      Robert Levy
            
            
            103,000
            
            
            
            -(E)
      Reno Rolle
            
            
            126,973
            
            
            
            -3,140,713
            
            
            
            3,292,967Less
      current portion
            
            
            (1,124,029
            )
            
            
            (1,147,763
            )$
            2,016,684
            
            
            $
            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 October 31, 2008, the
      Company had a loan balance of $352,277 in principal and $298,071
      in interest under this financing agreement for a total of $650,348. 
      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: $216,782 as
      of October 31, 2009, $278,396 as of October 31, 2010, and $155,170 as of
      October 31, 2011. 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 October 31, 2008, the
      Company had a loan balance of $1,909,983 in principal and
      $274,235 in interest under this financing agreement for a total of
      $2,184,218. 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: $728,073 as of October 31, 2009, $935,005 as of October 31,
      2010, and $521,140 as of October 31, 2011.  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 (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)





(C)
            Mr.
      Laikin, the Company's former Chief Executive Officer, has made various
      loans to us for film financing. As of October 31, 2008, he was owed
      $67,000 in principal and $9,174 in interest for a total of $76,174 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.
      Levy, a shareholder and board member, made a loan for film financing. The
      loan is secured by a bond paid to the Screen Actors Guild for National Lampoon’s the Legend
      of Awesomest Maximus. As of October 31, 2008, he was owed $100,000
      in principal and $3,000 in interest for a total of $103,000 in production
      loans. The loan accrued a one-time premium of 3%. On November 24, 2008 the
      loan was repaid in full.





(E)
            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 October 31, 2008, he was owed $125,000
      in principal and $1,973 in interest for a total of $126,973 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
October 31, 2008:





Year
            
            Amount2009
            
            $
            1,124,0292010
            
            
            1,340,3742011
            
            
            676,310$
            3,140,713




NOTE
E - PRODUCTION LOANS AND ACCRUED INTEREST




Production
loans and accrued interest consist of the following at:





October
      31,
            
            
            July
      31,Non-Related Party
            
            2008
            
            
            2008(A)
      Gerald Daigle
            
            $
            607,671
            
            
            $
            -(B)
      Voodoo Production Services
            
            
            456,466
            
            
            
            -1,064,137
            
            
            
            -Less
      current portion
            
            
            (151,151
            )
            
            
            -$
            912,986
            
            
            $
            -





(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 October 31, 2008, he was owed $600,000 in
principal and $7,671 in interest for a total of $607,671 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 to be repaid as
follows: $151,151 as of October 31, 2009 and $456,520 as of October 31,
2010.





(B)
VooDoo Production Services made loans to the Company for the financing of the
film National Lampoon’s the
Legend of Awesomest Maximus. As of October 31, 2008, VooDoo was owed
$450,000 in principal and $6,466 in interest for a total of $456,466 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 to be repaid during the 2010 fiscal
year.





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
October 31, 2008:





Year
            
            Amount2009
            
            $
            151,1512010
            
            
            912,986$
            1,064,137






11


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)


NOTE
F - SHAREHOLDERS’ EQUITY (DEFICIENCY)





Preferred
Stock





During
the three-month periods ended October 31, 2008 and 2007, the Company accrued
$292,335 and $297,771, respectively, of Series B Stock and Series C Stock
dividends.





During
the three months ended October 31, 2008, 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 three months ended October 31, 2008, 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 three months ended October 31, 2008, 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 three months ended October 31, 2008, 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 three months ended October 31, 2008, 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.





Common
Stock





During
the three months ended October 31, 2007, 80,605 shares of common stock with a
value of $182,384 were issued for services as follows: 76,434 shares of common
stock at stock prices ranging from $1.65 to $2.55 per share with a value of
$173,415 were issued to consultants for monthly consulting services, and 4,171
shares of common stock at a stock price of $2.15 per share with a value of
$8,969 were issued to members of the board of directors for fees
owed.





During
the three months ended October 31, 2008, 46,018 shares of common stock with a
value of $57,400 were issued for services as follows: 31,018 shares of common
stock at stock prices ranging from $0.89 to $1.39 per share with a value of
$35,800 were issued to various consultants for monthly consulting services and
15,000 shares at a stock prices ranging from $0.92 to $1.70 per share valued at
$21,600 were issued to various consultants for one-time consulting
fees.




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.






12


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)




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.




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




American Cinema Distribution
Corporation v. National Lampoon, Inc.In August 2007, the American Cinema
Distribution Corporation ("ACDC") filed claims against the Company for costs
incurred on the release of "National Lampoon's Pucked". ACDC alleged that the
Company did not perform distribution services as agreed and that ACDC should be
reimbursed for distribution costs it incurred estimated at $65,000. ACDC also
alleged that it did not owe distribution fees to the Company for marketing,
publicity, promotional and advertising services the Company provided which
services the Company alleged have a value in excess of $290,000. On September
23, 2008 the Company entered into a settlement agreement with the plaintiffs
dated July 16, 2008. The Company agreed to dismiss the complaint against the
plaintiffs in exchange for a payment of $20,000 to be made immediately upon the
execution of the settlement agreement. Pursuant to the terms of the settlement
the Company shall also retain 75% of the receipts after payments to unions and
guilds until the Company has been paid the sum of $180,000 in addition to the
$20,000.




NOTE H -
SEGMENT INFORMATION




Segment
Reporting - SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" results in the use of a management approach in identifying
segments of an enterprise. The Company operates in four 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; and (iv) distribution. Segment operating income/(loss)
excludes the amortization of intangible assets, interest expense, interest
income, other income and expenses and income taxes. Selling, general and
administrative expenses not specifically attributable to any segment have been
prorated based on revenue among the four segments. Amortization of capitalized
production costs and impairment of capitalized film costs have been prorated
based upon revenue among the licensing and publishing, production and
distribution segments.




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




Licensing
            
            Advertising&
            
            &Publishing
            
            Promotion
            
            Production
            
            Distribution(1)
            
            (2)
            
            (3)
            
            (4)
            
            TotalThree
      Months Ended October 31, 2008Segment
      revenue
            
            $
            152,706
            
            
            $
            755,009
            
            
            $
            19,460
            
            
            $
            149,851
            
            
            $
            1,077,026Segment
      operating (loss)
            
            $
            (1,235,942
            )
            
            $
            (460,138
            )
            
            $
            (204,267
            )
            
            $
            (1,190,280
            )
            
            $
            (3,090,627
            )Depreciation
      expense
            
            $
            5,140
            
            
            $
            480
            
            
            $
            -
            
            
            $
            -
            
            
            $
            5,620Three
      Months Ended October 31, 2007Segment
      revenue
            
            $
            357,993
            
            
            $
            449,633
            
            
            $
            -
            
            
            $
            -
            
            
            $
            807,626Segment
      operating (loss)
            
            $
            (426,529
            )
            
            $
            (660,956
            )
            
            $
            (12,775
            )
            
            $
            -
            
            
            $
            (1,100,260
            )Depreciation
      expense
            
            $
            3,326
            
            
            $
            891
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,217




NOTE I - SUBSEQUENT EVENTS




Common Stock
Issued





Subsequent
to October 31, 2008, the Company issued 43,068 shares of the Company’s common
stock to various consultants for services rendered during this
period.  The Company expensed $36,330 for these services. The shares
were priced at the fair market value of the shares on the date of issuance or
upon the value determined by an agreement.






13


NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 THREE
MONTHS ENDING OCTOBER 31, 2008 AND 2007
 (UNAUDITED)


Production Loans and Accrued
Interest





Subsequent
to October 31, 2008, 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 April 30, 2009, VSIB was owed $600,000 in
principal and $28,109 in interest for a total of $628,109 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.




Subsequent
to October 31, 2008 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 Company’s board of directors
(“defendants”) and the Company, which is designated as a “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 regulations
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.





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.  One 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.  We are currently evaluating whether we will appeal this
order.







14









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 nine months ended April 30, 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.






15





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 three
months ended October 31, 2008, 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
three months ended October 31, 2008, revenues derived from motion picture
production and distribution totaled approximately $169,311 or approximately 16%
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







16




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
three months ended October 31, 2008, revenues derived from licensing, exclusive
of publishing revenues, totaled $155,998 or approximately 14% 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
three months ended October 31, 2008, revenues derived from our Internet
activities totaled $405,299 or approximately 38% 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 three months ended October 31, 2008,
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 three months ended January 31,
2008.  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, 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.”






17




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 four 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; and
distribution.





18




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 four segments. Amortization of capitalized production costs
and impairment of capitalized film costs have been prorated based upon revenue
among the licensing and publishing, production and distribution
segments.




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




Summarized
financial information for the three months ended October 31, 2008 and 2007 for
our segments is as follows:





Licensing
              &
            
            
            Advertising
      &Publishing
            
            
            Promotion
            
            
            Production
            
            
            Distribution
            
            
            TotalFiscal
      Year Ended October 31, 2008Segment
      revenue
            
            $
            152,706
            
            
            $
            755,009
            
            
            $
            19,460
            
            
            $
            149,851
            
            
            $
            1,077,026Segment
      operating loss
            
            $
            (1,235,942
            )
            
            $
            (460,138
            )
            
            $
            (204,267
            )
            
            $
            (1,190,280
            )
            
            $
            (3,090,627
            )Depreciation
      expense
            
            $
            5,140
            
            
            $
            480
            
            
            $
            -
            
            
            $
            -
            
            
            $
            5,620Fiscal
      Year Ended October 31, 2007Segment
      revenue
            
            $
            357,993
            
            
            $
            449,633
            
            
            $
            -
            
            
            $
            -
            
            
            $
            807,626Segment
      operating (loss)
            
            $
            (426,529
            )
            
            
            (660,956
            )
            
            
            (12,775
            )
            
            $
            -
            
            
            $
            (1,100,260
            )Depreciation
      expense
            
            $
            3,326
            
            
            $
            891
            
            
            $
            -
            
            
            $
            -
            
            
            $
            4,217





In the table above, licensing and
publishing revenues include the licensing of our name and sale of our
books; advertising and promotion revenues which include online and cable
advertising as well as advertising and promotion of the films released;
production revenues include films, television and home entertainment; and
distribution revenues includes theatrical, home entertainment and digital
distribution of our titles.





A
reconciliation of segment operating loss to net loss before income taxes for the
periods ended October 31, 2008 and 2007 is as follows:





October
      31, 2008
            
            
            October
      31, 2007Total
      segment operating (loss)
            
            $
            (3,090,627
            )
            
            $
            (1,100,260
            )Amortization
      of intangible assets
            
            
            (118,866
            )
            
            
            (61,165
            )Interest
      expense
            
            
            (67,442
            )
            
            
            (19,813
            )Other
      income/expense
            
            
            14,685
            
            
            
            15,906Net
      loss
            
            $
            (3,262,250
            )
            
            $
            (1,165,332
            )




Licensing
and Publishing Revenues




Licensing
and publishing revenues were $152,706 for the three months ended October 31,
2008, as compared to $357,993 for the three months ended October 31, 2007,
representing a decrease of $205,287 or 57%.





The
decrease for the three-month period was partly attributable to a decrease in
video royalty revenues, which were $0 for the three months ended October 31,
2008, as compared to $48,834 for the three months ended October 31, 2007,
representing a decrease of $48,834 or 100%. The video royalties recognized
during the three months ended October 31, 2007 related to the films National Lampoon’s Van Wilder
and National Lampoon’s Dorm
Daze. The decrease was also attributable to a decrease in revenues
derived from sales of international distribution licenses for our various
titles, which totaled $111,546 during the three months ended October 31, 2008 as
compared to $150,000 in such revenues for the three months ended October 31,
2007, representing a decrease of $38,454 or 26%. The decrease was primarily due
to losses on foreign exchange and credits applied during the quarter ended
October 31, 2008.





Publishing
revenues net of reserve for returns were ($3,292) for the three months ended
October 31, 2008, as compared to $112,451 for the three months ended October 31,
2007, representing a decrease of $115,743 or 103%. The decrease for the
three-month period was due to returns that exceeded publishing
revenues.





Costs
related to licensing revenues were $34,970 for the three months ended October
31, 2008, as compared to $17,915 for the three months ended October 31, 2007,
representing an increase of $17,055 or 95%. The increase in costs related to
licensing revenues resulted primarily from an increase to $29,504 in royalties
accrued to Harvard Lampoon during the three months ended October 31, 2008, from
$0 in royalties accrued during the three months ended October 31, 2007. This was
partially offset by a decrease of $12,419 in commission expense incurred during
the three months ended October 31, 2008, as compared to the three months ended
October 31, 2007.




Amortization
of capitalized production costs was $42,497 for the three months ended October
31, 2008 compared to $0 for the three months ended October 31, 2007.
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
amount of ($4,496) in the disposal of Totally Baked due to a refund
of production costs that was received during the three months ended October 31,
2008. Impairment of capitalized production costs was $2,351,575 for the three
months ending October 31, 2008 compared to $0 for the three months ending
October 31, 2007. 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 was expensed to “impairment of capitalized production costs”.
The remaining amount of $459,379 in capitalized production costs for National Lampoon’s Bagboy
will be expensed during the 2009 and 2010 fiscal years.






19





Costs
related to publishing revenues were $3,270 for the three months ended October
31, 2008, compared to $43,434 for the three months ended October 31, 2007,
representing a decrease of $40,164 or 92 %. The decrease in costs related to
publishing revenues for the three months ended October 31, 2008, as compared to
the three months ended October 31, 2007, consisted of a decrease of $41,343 in
direct publishing costs partially offset by an increase of $1,179 in amortized
publishing costs. We recorded these costs against sales during the
three months ended October 31, 2007.




Advertising
and Promotion Revenues




Advertising
and promotion revenues totaled $755,009 during the three months ended October
31, 2008, as compared to $449,633 for the three months ended October 31, 2007,
representing an increase of $305,376 or68%. The increase in revenue was the result of
a $168,917 increase in promotion revenues mainly due to Internet advertising on
our new websites and an increase of $150,722 in prints and advertising revenues
charged on the release of our titles. These increases were partially offset by a
decrease of $50,000 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 or to produce field promotion events and we do not
expect to re-enter this business activity.





Costs of
advertising and promotion revenue were $151,659 during the three months ended
October 31, 2008 compared to $202,297 for the three months ended October 31,
2007, representing a decrease of $50,638 or 25%. 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 by $47,758, to $41,102 for the three months ended October
31, 2008 from $88,860 during the three months ended October 31,
2007.  Sales commissions declined by $4,346 to $5,432 for the three
months ended October 31, 2008 from $9,778 during the three months ended October
31, 2007.




Production Revenues




For the
three months ended October 31, 2008, production revenue was $19,460, as compared
to $0 for the same period in 2007. Production revenues increased by $19,460 or
100%, primarily due to production revenues of $15,000 earned from live events
and $4,460 earned for post production services during the three months ended
October 31, 2008. 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 $51,639 during the three months ended
October 31, 2008, compared to $12,775 for the three months ended October 31,
2007, for a difference of $38,864. Although there were no production revenues
during the three months ended October 31, 2007, there were remaining costs
related to television production revenues from prior periods.





Distribution
Revenues





For the
three months ended October 31, 2008, distribution revenue was $149,851 as
compared to $0 for the same period in 2007. 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 three months ended October 31, 2008.





Costs
related to distribution revenues in the amount of $14,971 are primarily due to
the distribution fees plus the costs of manufacturing, marketing and pick, pack
and ship directly related to the DVD release.




Other
Costs and Expenses




Selling,
general and administrative expenses during the three months ended October 31,
2008 were $1,517,072 as compared to $1,631,465 for the three months ended
October 31, 2007, a decrease of $114,393 or approximately 7%. During the three
months ended October 31, 2008, approximately 42% of our selling, general and
administrative expenses consisted of salary expense totaling $631,066, as
compared to salary expense of approximately $1,054,350, which represented 65% of
selling, general and administrative expenses for the three months ended October
31, 2007. The decrease of $423,284, or 40%, in salary expense for the three
months ended October 31, 2008 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 October 31, 2008, selling, general and administrative
expenses also included consulting fees of $76,224 as compared to $122,749 during
the same period in the prior year for a decrease of $46,525 as we continued to
reduce our reliance on consultants. Legal fees increased by $45,864, or 165%,
from $27,803 during the three months ended October 31, 2007 to $73,667 for the
same period in 2008. Investor and public relations costs decreased by $81,788,
or 61%, from $133,250 during the three months ended October 31, 2007 to $51,462
for the same period in 2008.







20




Selling,
general and administrative expenses not specifically attributable to any segment
have been allocated among the four 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 $118,866 during the
three months ended October 31, 2008 and $61,165 for the three months ended
October 31, 2007. The increase was due to the acquisition of
websites.





During
the three months ended October 31, 2008, we recorded expenses of $128,889
associated with the granting of stock options and warrants to employees,
advisors and consultants as compared to expenses of $592,572 incurred for the
three months ended October 31, 2007, for a decrease of $463,683 or 78%. The
decrease is primarily due to a reduced number of grants of options to our
directors, employees and consultants.





During
the three months ended October 31, 2008, we recorded expenses of $57,400
associated with stock issued for services as compared to expenses of $182,384
incurred for the three months ended October 31, 2007, for a decrease of $124,984
or 69%. 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 $47,629 in interest expense to $67,442 during the three months
ended October 31, 2008, from $19,813 during the three months ended October 31,
2007. 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 $1,221 or 8% to $14,685 during the three months ended
October 31, 2008 compared to $15,906 for the three months ended October 31,
2007.





For the
three months ended October 31, 2008, we had a net loss of $3,262,250 as compared
to a net loss of $1,165,332 for the three months ended October 31, 2007,
representing a increase in net loss of $2,096,918 or 180%. The increase in net
loss for the three-month period resulted primarily from a significant increase
in expenses for the quarter offset by increases in revenues from advertising and
promotion along with an increase in distribution revenues. The increase in
expenses was a result of increases in costs related to distribution revenues and
amortization of intangible assets offset by decreases in the fair value of
common stock issued for services, the vesting of stock options and a decrease in
publishing costs. The increases in expenses were also due to an increase in the
amortization of capitalized production costs of $42,497 and an impairment of
capitalized film production costs in the amount of $2,351,575 due to a write
down of domestic and international licensing ultimate revenues from the release
of National Lampoon’s BagboyandRatko.





During
the quarters ended October 31, 2008 and 2007, 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 October 31, 2008 and $297,771, during the
same period in 2007 for a decrease of $5,436 or 2%. The decrease was primarily
due to the conversion of our Series B or Series C Preferred Stock to common
stock. The addition of the accrued dividend resulted in a net loss attributable
to common shareholders of $3,554,585 or $(0.35) per basic and fully diluted
share for the three months ended October 31, 2008, as compared to a net loss
attributable to common shareholders of $1,463,103 or $(0.18) per basic and fully
diluted share for the three months ended October 31, 2007.




Liquidity
and Capital Resources




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




Net cash
used in operating activities was $1,357,809 for the three months ended October
31, 2008, as compared to $497,534 for the three months ended October 31, 2007.
The increase in cash flow used in operations was primarily attributable to an
increase in production costs, offset by a decrease in accounts receivable, and
increases in accounts payable and deferred revenues. Cash provided by financing
activities was $1,364,621 for the three months ended October 31, 2008, as
compared to $438,945 for the three months ended October 31, 2007. 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 $3,262,250 for the three months ended October 31, 2008, as well as
negative working capital of $5,383,587 and a stockholder’s deficiency of
$970,204 as of October 31, 2008, 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 Subsequent Events). 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.






21






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
October 31, 2008 was $1,569,329 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
October 31, 2008, we had cash of $2,287 and receivables totaling $793,021. 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
first quarter ended October 31, 2008, we received $155,998 in license fees and
we expect additional payments to be received by the end of the 2009 fiscal
year.




We have
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.  We are currently reviewing those
results to determine how we will proceed. The Company has not recorded an
estimate of any amount that may be owed.




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.”






22





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.





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





Our
management is responsible for establishing and maintaining an adequate system of
internal control over financial reporting. Our system of internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting, and the preparation of financial statements
for external purposes in accordance with accounting
principles  generally accepted in the United States of
America.





Our
internal controls over financial reporting include those policies and procedures
that:





Pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets;





Provide
reasonable assurance that our transactions are recorded as necessary to permit
preparation of our financial statements in accordance with accounting principles
generally accepted in the United States of America, and that our receipts and
expenditures are being made only in accordance with authorizations of our
management and our directors; and





Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect
on the financial statements.






23







Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal control over financial reporting may vary over time. Our system
contains self monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.





Our Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of the system of internal control over financial reporting based
on the framework in Internal Control. Based on the evaluation, our management
concluded that our system of internal control over financial reporting was
ineffective as of October 31, 2008.





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), has been
identified. A material weakness 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,





Lack of
documented and reviewed system of internal controls, and





Management
is continuing to work with our internal controls consultant to remediate these
material weaknesses in our system of internal controls.





Changes
in Internal Control





No change
in internal control over financial reporting was made during the first 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




American Cinema Distribution
Corporation v. National Lampoon, Inc.In August 2007, the American Cinema
Distribution Corporation (“ACDC”) filed claims against us for costs incurred on
the release of “National
Lampoon’s Pucked”. ACDC alleged that we did not perform distribution
services as agreed and that ACDC should be reimbursed for distribution costs it
incurred estimated at $65,000.  ACDC also alleged that it does not owe
distribution fees to us for marketing, publicity, promotional and advertising
services that we provided.  We alleged that we provided these services
and that they have a value in excess of $290,000.  On September 23,
2008 we entered into a settlement agreement with the plaintiffs dated July 16,
2008.  We agreed to dismiss the complaint against the plaintiffs in
exchange for a payment of $20,000, which was made to us upon the execution of
the settlement agreement, and the right to retain 75% of the receipts after
payments to unions and guilds until we have been paid an additional sum of
$180,000.




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




On September 17, 2008, 10,000 shares of common stock
at a price of $1.70 per share with a value of $17,000 were issued to Bruce Long,
a former executive, for services provided.





On
September 17, 2008, 5,000 shares of common stock at a price of $0.92 per share
with a value of $4,600 were issued to Dennis Haskins, a consultant, for a
one-time consulting fee.




In
September 2007 we entered into an agreement with American Capital Ventures to
provide consulting services to us. On September 17, 2008, we issued a total of
7,272 shares of restricted common stock to American Capital Ventures having a
total value of $6,690. The consultant was also paid a fee of $3,500 per month
during the service period.




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




Item
3 - Defaults Upon Senior Securities




None.






24




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
            Employment
      Agreement dated October 28, 2008 between the registrant and Lorraine
      Evanoff (7)10.2
            Amendment
      to Financing Agreement dated October 30, 2008 between Ratko Productions,
      Inc. and Red Rock Productions, Inc. *10.3
            Amendment
      to Financing Agreement dated October 30, 2008 between Bag Boy Productions,
      Inc. and Red Rock Productions, Inc. *10.4
            Notice
      of Assignment and Direction to Pay dated October 1, 2008 among Flim Flam
      Films, LLC, NLDM One, LLC, National Lampoon, Inc. and VooDoo Productions
      Services, LLC*10.5
            Promissory
      Note in the amount of $150,000 dated October 3, 2008 and executed by
      National Lampoon, Inc. in favor of Gerald J. Daigle,
  Jr.*10.6
            Promissory
      Note in the amount of $100,000 dated August 18, 2008 and executed by
      National Lampoon, Inc. in favor of Robert Levy*10.7
            Promissory
      Note in the amount of $150,000 dated August 21, 2008 and executed by
      National Lampoon, Inc. in favor of Robert Levy*10.8
            Promissory
      Note in the amount of $100,000 dated September 23, 2008 and executed by
      National Lampoon, Inc. in favor of Robert Levy*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.




25




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













26