**SECURITIES
        AND EXCHANGE COMMISSION**
 **Washington,
        D.C. 20549**
 
 **FORM
        10-KSB**
  **(Mark
        One)**
  **x**
              **ANNUAL
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934**
 
 For
        the
        Fiscal Year Ended July 31, 2005
 
 **o**
              **TRANSITION
                  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
                  OF
                  1934**
 
 For
        the
        transition period from _______________ to ________________
 
 Commission
        File Number 001-32584
  **NATIONAL
        LAMPOON, INC.******
 (Name
        of
        Small Business Issuer in its charter)
 
 Delaware
              
              95-4053296(State
                  or other jurisdiction
              
              (I.R.S.
                  Employer Identification No.)of
                  incorporation or organization)
 
 10850
        Wilshire Boulevard, Suite 1000
 Los
        Angeles, California 90024
 (Address
        of principal executive offices)(Zip code)
  Issuer's
        telephone number, including area code: (310) 474-5252
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 
 Title
                  of each class
              
              Name
                  of each exchange on which each is registeredNone
              
              None
 
 Securities
        registered pursuant to Section 12(g) of the Act:
  Common
        Stock, $0.0001 par value
 (Title
        of
        class)
 
 Check
        whether the issuer: (1) filed all reports required to be filed by Section
        13 or
        15(d) of the Exchange Act during the past 12 months (or for such shorter
        period
        that the registrant was required to file such reports); and (2) has been
        subject
        to such filing requirements for the past 90 days. Yes xNo o
 
 Check
        if
        disclosure of delinquent filers in response to Item 405 of Regulation S-B
        is not
        contained in this form, and will not be contained, to the best of registrant’s
        knowledge, in definitive proxy or information statements incorporated by
        reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.
        o
  Indicate
        by check mark whether the issuer is a shell company (as defined in Rule 12b-2
        of
        the Exchange Act). Yes
o No
x
 
 The
        issuer’s revenues for the fiscal year ended July 31, 2005 totaled
        $3,673,442.
 
 The
        number of shares of the issuer’s common stock, $0.0001 par value per share,
        outstanding as of October 19, 2005 was 6,769,451. The aggregate market value
        of
        the voting and non-voting common equity held by non-affiliates of the registrant
        on October 19, 2005, based on the selling price as reported by the American
        Stock Exchange as of such date, was approximately $12,716,688.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 
 None
 
 Transition
        Small Business Disclosure Format:  Yes
oNo
x
  
  **TABLE
        OF CONTENTS**
 PagePART
                  IITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              1ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              8ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              8ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OFSECURITY
                  HOLDERS
              9PART
                  IIITEM
                  5.
              MARKET
                  FOR COMMON EQUITY ANDRELATED
                  STOCKHOLDER MATTERS
              9ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSIONOF
                  FINANCIAL CONDITION OR PLAN OF OPERATION.
              14ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              30ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTSON
                  ACCOUNTING AND FINANCIAL DISCLOSURE
              31ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              31ITEM
                  8B.
              OTHER
                  INFORMATION
              32PART
                  IIIITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS ANDCONTROL
                  PERSONS; COMPLIANCE WITHSECTION
                  16(a) OF THE EXCHANGE ACT
              32ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              35ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIALOWNERS
                  AND MANAGEMENT
              41ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS
              43ITEM
                  13.
              EXHIBITS
              45ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              46
  SIGNATURES
  
 
 **Note
        Regarding Forward Looking Statements**
 
 This
        Annual Report on Form 10-KSB 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, those discussed in the section
        of
        this Annual Report titled “Management’s Discussion and Analysis of Financial
        Condition or Plan of Operation - Factors Affecting Business, Operating Results
        and Financial Condition”, as well as 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 we need
                  it,
 
 ·
              whether
                  the entertainment products we produce or to which we license our
                  brand
                  will generate significant sales,
 
 ·
              whether
                  our subsidiary, National Lampoon Networks, Inc., will be able to
                  continue
                  its relationships with its current advertisers and continue to
                  attract new
                  advertisers,
 
 ·
              our
                  overall ability to successfully compete in our market and our
                  industry,
 
 ·
              whether
                  we will continue to receive the services of our executive officers
                  and
                  directors, particularly our Chief Executive Officer, Daniel S.
                  Laikin and
                  our President, Douglas S. Bennett,
 
 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.
  
  **PART
        I**
 
 **ITEM
        1.**  **BUSINESS**
 
 **History**
 
 We
        were
        incorporated in California in 1986 under the name J2 Communications, Inc.
        We
        acquired National Lampoon, Inc., a Delaware corporation referred to in this
        report as “NLI”, in late 1990. NLI was incorporated in 1967. NLI was primarily
        engaged in publishing *National
        Lampoon Magazine* .
        Its
        other activities included radio, stage shows and the development and production
        of motion pictures. Prior to our acquisition of NLI, we had been engaged
        in the
        acquisition, production and distribution of videocassette programs for retail
        sale. With the acquisition of NLI, we shifted our focus from the videocassette
        business to the exploitation of the National LampoonTM trademark. In November
        2002, we merged J2 Communications, Inc. into NLI, with National Lampoon,
        Inc.
        being the surviving corporation of the merger.
 
 In
        May
        2002, a group led by our Chief Executive Officer, Daniel S. Laikin, acquired
        control of our company and our business focus expanded from passive income
        through trademark licenses to the creation and distribution of comedic
        content.
 
 **Our
        Business**
 
 We
        develop, produce, provide creative services (such as writing or assistance
        with
        the development of a project, as requested) and distribute National LampoonTM
        branded comedic content through a broad range of media platforms
        including:
 
 ·
              licensing
                  both our name and comedic content from our library for a wide variety
                  of
                  uses, including movies, television programming, radio broadcasts,
                  recordings, electronic games and live
                  events,
 
 ·
              reaching
                  nearly 4.8 million college students in their dormitories and other
                  places
                  of residence through National Lampoon Network, our network of 618
                  affiliated college and other television
                  stations,
 
 ·
              distributing
                  in the home entertainment market branded National LampoonTM comedic content
                  on DVD,
 
 ·
              providing
                  group travel and entertainment packages marketed under the National
                  LampoonTM brand,
 
 ·
              licensing
                  our brand and comedic content for the publication of National LampoonTM
                  books,
 
 ·
              hosting
                  an Internet website through which we not only sell our branded
                  products,
                  but through which writers can submit comedic content to us,
                  and
 
 ·
              developing,
                  producing (in conjunction with independent third parties) or providing
                  creative services for motion pictures and made for television movies
                  and
                  programs.
 
 *National
        Lampoon Networks, Inc.*
 
 In
        September 2002 we acquired substantially all of the assets of Burly Bear
        Network, Inc., a business engaged in producing and distributing entertainment
        through a network of affiliated college and other television stations. We
        renamed the business “National Lampoon Networks, Inc.” (referred to as “NLN” in
        this discussion) and expanded the affiliate network. The affiliate network
        is
        the collection of stations, primarily on college and university campuses,
        that
        air our programming and advertising. As of July 31, 2005, the end of our
        last
        fiscal year, NLN was available to 4.8 million students at 618 college campuses.
        When we acquired Burly Bear Network, Inc., we acquired 750 hours of original
        programming that we still use. In 2003 we commenced production of original
        television programs solely for distribution on NLN and in the fiscal year
        ended
        July 31, 2005 we delivered eight half-hour original television programs.
        We
        generally produce 10 episodes per show from July through October for the
        fall
        season.
  
  We
        believe that NLN provides an appealing platform to those advertisers who
        want
        their commercial messages to reach college students specifically. For those
        businesses targeting the college market, NLN provides an integrated marketing
        platform that includes on-air advertising, field marketing and Internet
        promotions.
 
 NLN
        obtains the commercial airtime it sells to advertisers from television
        affiliates in exchange for the programming it provides to them. In some cases
        it
        purchases time slots to air programming in certain geographic areas to expand
        its advertising reach.
 
 Our
        field
        marketing includes activities such as product sampling and live events (like
        a
        concert or a contest) that take place on college and university campuses
        throughout the United States and that reinforce and increase awareness of
        a
        brand among the students. Field marketing is the use of trained college students
        to conduct brand-building activities on behalf of our advertisers. Advertisers
        whose brands NLN promotes include Frank’s Red Hot Sauce, JBL, Liz Claiborne,
        NBC, Universal, Red Bull, TalentMatch.com, Sony Classic Films and Rohto V
        Eye
        Drops.
 
 During
        the 2005 fiscal year, we derived approximately 43% of our revenues from NLN’s
        operations.
 
 *Motion
        Picture and Feature Film*
 
 We
        generally 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 for allowing
        use
        of the National LampoonTM trademark and fees for creative services, if any are
        requested, are paid by the time production is completed.
 
 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.
 
 We
        currently are a party to 17 feature film agreements. Of those, five agreements
        are “first dollar gross” participation agreements, one agreement is a gross
        profit participation agreement, three agreements are adjusted gross revenue
        participation agreements and the remaining eight agreements are net profit
        participation 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.
 
 We
        are a
        party to two distribution agreements.
 
 We
        have a
        distribution agreement with Image Entertainment, Inc. that required us to
        provide four videos for distribution. Image Entertainment, Inc. paid us the
        production fees in stages. The initial fee for each program was paid upon
        execution of the agreement. Another partial payment was made when we notified
        Image Entertainment, Inc. that we had begun principal production of a program.
        A
        partial payment was made immediately after the delivery of each program and
        the
        final payment was made immediately after each program’s release date. The entire
        production fee was $50,000 per program, or $200,000. Under this agreement
        we
        also receive royalties based on net profits from domestic and international
        sales.
  2
  Our
        distribution agreement with Genius Products, Inc. requires us to provide
        a total
        of nine videos for the home entertainment market. Our only compensation under
        this agreement is royalties based on net sales made in any channel of
        distribution. In April 2005 we delivered the fifth and final program “Greek
        Games”.
 
 In
        December 2004, as part of our plan to expand the use of our brand and to
        expand
        our DVD library by increasing the number of products we produce and have
        distributed for home entertainment, we joined with Majestic Entertainment
        to
        form National Lampoon Clubhouse, Inc., a Nevada corporation. We are the holder
        of a 50% interest in National Lampoon Clubhouse, Inc. National Lampoon
        Clubhouse, Inc. was formed to develop and produce three live-action, full-length
        feature films per year for the “tween” market, children between the ages of nine
        and 13. We will finance one-half the cost of producing these films, which
        we
        anticipate will be between $1,250,000 to $1,800,000 per film. We expect National
        Lampoon Clubhouse, Inc. will release its first film, tentatively titled *Trick
        or Treat,* domestically
        in the first quarter of the 2007 fiscal year and in foreign territories in
        the
        second or third quarter of the 2006 fiscal year.
 
 With
        the
        exception of the films made by National Lampoon Clubhouse, Inc., we have
        not
        financed the production or distribution of any National LampoonTM motion
        pictures. Instead, we rely upon third parties, primarily independent motion
        picture studios, to provide the film’s financing and distribution. We intend to
        continue this model, since it allows us to derive revenues from the films
        without incurring the risks associated with their financing.
 
 In
        May
        2005 we agreed with Laughter Heals, LLC and Newco (an entity to be formed)
        to
        license our name to a feature film to be titled *National
        Lampoon’s Totally Baked* .
        We
        expect to release the film in the home entertainment market during the 2006
        fiscal year.
 
 We
        have
        agreements with independent third parties for the limited platform theatrical
        release and subsequent marketing of our films. During the 2005 fiscal year,
        these distributors released and marketed the films *National
        Lampoon’s Blackball* ,
        starring Vince Vaughn and James Cromwell, *National
        Lampoon’s Golddiggers,* and *National Lampoon’s Going the Distance.* During
        the 2006 fiscal year, we have released into a limited number of theaters *National
        Lampoon’s Barely Legal* and we
        expect to release *National
        Lampoon’s Pucked* ,
        starring Jon Bon Jovi and directed by Academy Award winner Arthur
        Hiller, *National Lampoon’s Jake’s Booty Call, National Lampoon’s Cattle Call* and *National Lampoon’s Adam & Eve* .
        A
“platform theatrical release” is the release of a motion picture in a small
        number of theaters in order to promote the rental and sale on DVD.
 
 We
        expect
        to give *National
        Lampoon’s Pledge This!* , ** starring
        Paris Hilton, a wide release during the 2006 fiscal year.
 
 The
        following is a list of the 29 motion pictures bearing our brand:
 
 **Year****Title**
              **Released**
              **Financier/Distributor***National
                  Lampoon’s Animal House*
              1979
              Universal
                  Studios*National
                  Lampoon Goes to the Movies*
              1981
              United
                  Artists*National
                  Lampoon’s Class Reunion*
              1982
              ABC/Disney*National
                  Lampoon’s Vacation*
              1983
              Warner
                  Bros.*National
                  Lampoon’s European Vacation*
              1985
              Warner
                  Bros.*National
                  Lampoon’s Class of ’86*
              1986
              Paramount*National
                  Lampoon’s Christmas Vacation*
              1989
              Warner
                  Bros.*National
                  Lampoon’s Loaded Weapon I*
              1993
              New
                  Line Cinema*National
                  Lampoon’s Last Resort*
              1994
              Trimark
                  Studios*National
                  Lampoon’s Attack of the 52 Women*
              1994
              Showtime*National
                  Lampoon’s Senior Trip*
              1995
              New
                  Line Cinema*National
                  Lampoon’s Favorite Deadly Sins*
              1995
              Showtime*National
                  Lampoon’s Dad’s Week Off*
              1997
              Paramount*National
                  Lampoon’s The Don’s Analyst*
              1997
              Paramount*National
                  Lampoon’s Men in White*
              1998
              Fox*National
                  Lampoon’s Golf Punks*
              1998
              Fox*National
                  Lampoon’s Van Wilder*
              2001
              Artisan*National
                  Lampoon Presents Dorm Daze*
              2003
              Independent*National
                  Lampoon’s Gold Diggers*
              2005
              Lady
                  P&A LLC*National
                  Lampoon’s Blackball*
              2005
              First
                  Look Entertainment*National
                  Lampoon’s Going the Distance*
              2005
              Think
                  Films*National
                  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 LLC*National
                  Lampoon’s RepliKate*
              2003
              Silver
                  Nitrate*National
                  Lampoon’s Pledge This*
              2006
              Street
                  Alien/Silver Nitrate*National
                  Lampoon’s Pucked (formerly Trouble with Frank)*
              2006
              To
                  be determined*National
                  Lampoon’s Trick or Treat*
              2006
              National
                  Lampoon Clubhouse*National
                  Lampoon’s Jake’s Booty Call*
              2006
              To
                  be determined
  3
  During
        the 2005 fiscal year, we derived approximately 37% of our revenues from license
        fees relating to the production of new motion pictures and from royalties
        earned
        from previously released motion pictures bearing our brand.
 
 *Television
        Production*
 
 The
        content included in our NLN television programming is generally provided
        to us
        by third parties at minimal or no charge. Members of the creative community
        are
        constantly seeking ways in which to have their works seen or published, and,
        due
        to the recognition of our brand on college campuses, they forward content
        to us
        without solicitation. If we want to acquire the work, we will enter into
        a
        license agreement with the author. Most of these agreements provide for the
        payment of a minimal license fee, such as $50 that, in turn, allows us to
        use
        the work in any manner for as long as we want. If we fail to use the work
        for a
        period of one year, we return it to the author. Other than the license
        agreements, we generally do not have contracts that obligate these writers
        to
        provide us with creative content in the future. Because the way we currently
        obtain creative content is inexpensive, we do not believe that such agreements
        are necessary at this time.
 
 We
        currently have four projects in development with CBS Paramount International
        Television, although we cannot guarantee that any of the projects will be
        developed. These projects include an untitled comedy-variety show, a show
        with
        the working title “Where’s Daddy,” a show with the working title “Spanish Maine”
        and a show with the working title “Lauren Holly/High School Project.”
        Additionally, we are actively engaged in developing three other television
        properties for cable, network and syndication, serving as the production
        company, executive producer or some combination of the two. In October 2004
        we
        concluded an agreement to enter the first-run syndication business as a
        production partner with Atlas Worldwide, an independent distributor of
        television programming. We provide creative consultation for this project.
        The
        series, called *An
        Eye for An Eye* ,
        began
        airing on local television stations on a daily basis beginning in September
        2005.
 
 During
        the 2005 fiscal year, we derived approximately 2% of our revenues from
        television production.
  4
  *Home
        Entertainment DVD*
 
 We
        have
        focused significant efforts and resources in the home entertainment market,
        including repackaging existing material and developing and producing original
        materials for DVD distribution. These efforts include the “Lost Reality” series
        with Studioworks, a division of Ventura Distribution, and “National LampoonTM
        Live”, a stand-up comedy series with Image Entertainment Inc. Additionally we
        have established a National LampoonTM brand imprint for DVDs with Genius
        Products, Inc. and its Branded Distribution Network, and may release as many
        as
        24 titles over the next 12 months. Studioworks has exercised its right to
        produce “Lost Reality II”.
 
 During
        the 2005 fiscal year we released *National
        Lampoon’s Blackball* ,
        starring Vince Vaughn and James Cromwell, *National
        Lampoon’s Gold Diggers,* and *National Lampoon’s Going the Distance* in the
        home entertainment market *.* During
        the 2006 fiscal year, we expect to release on DVD *National
        Lampoon’s Pledge This!* starring
        Paris Hilton, *National
        Lampoon’s Pucked* ,
        starring Jon Bon Jovi and directed by Academy Award winner Arthur
        Hiller, *National Lampoon’s Jake’s Booty Call, National Lampoon’s Barely Legal, National
        Lampoon’s Cattle Call* and *National Lampoon’s Adam & Eve.*
 
 During
        the 2005 fiscal year, we derived approximately 12% of our revenues from the
        home
        entertainment segment of our business.
 
 *Publishing*
 
 In
        October 2002 we entered into an agreement with Rugged Land LLC to publish
        six
        National Lampoon books over a three-year period based on new and established
        National Lampoon comedic content. We have released four books under this
        agreement, including *1964
        High School Reunion Year Book* , *National
        Lampoon’s Book of Love* , *National
        Lampoon’s Big Book of True Facts* and *National
        Lampoon’s Encyclopedia of Humor* .
 
 During
        the 2005 fiscal year, we derived approximately 1% of our revenues from our
        publishing activities.
 
 *Radio*
 
 In
        March
        2005 NL Radio, LLC was formed. We hold a 25% interest in this entity. NL
        Radio,
        LLC plans to launch an entertainment radio format under our brand. We have
        licensed the content of our radio library, as well as certain domain names,
        urls
        and websites, to NL Radio, LLC for this purpose. Throughout the summer and
        fall
        of 2005, NL Radio, LLC will use samples of the programming, called “pilot
        programming,” to introduce the format and content to radio networks and local
        stations. If the programming is sold to a network it may be syndicated, meaning
        that it would be distributed to stations affiliated with the network. Purchasers
        of the programming may broadcast segments of the programming at their
        discretion, such as during “drive time” or as late night programming. The
        programming is scheduled to be distributed in January 2006. Our radio library
        includes approximately 80 hours of National Lampoon radio programming consisting
        primarily of one to two minute short comedy routines and one hour comedy
        sketches and parodies. We are continuing to produce new contemporary comedy
        shows for radio. Revenues will be earned from ad sales, direct response
        advertising and product promotion arrangements. We will receive a licensing
        fee
        equal to 8% of the gross receipts received by NL Radio, LLC from all sources
        in
        connection with any use of our brand.
 
 During
        the 2005 fiscal year, we derived approximately 0.5% of our revenues from
        NL
        Radio, LLC.
 
 5
  *Other
        Licensing*
 
 We
        license the National Lampoon TM name to
        generate revenues. Aside from our film, television and book publishing, our
        current licensing projects include:
 
 ·
              the
                  development of National LampoonTM branded Class II and Class III games, as
                  defined in the Indian Gaming Regulatory Act (25 U.S.C.§ 2701, et seq.)
                  through a strategic partnership with Multimedia Games,
                  Inc.,
 
 ·
              the
                  development of video games with Activision, and selected merchandising
                  arrangements for various consumer products,
                  and
 
 ·
              the
                  wireless distribution of our content by Buena Vista Internet
                  Group.
 
 We
        also
        are currently in discussion with certain companies in the recording industry
        regarding the production of National Lampoon records. In September 2004,
        we
        released “It’s About Time,” a greatest-hits collection from the new National
        Lampoon Radio Hour, through a distribution agreement with Uproar Entertainment,
        a company that also has licensed rights to distribute parts of the original
        Radio Hour archive materials.
 
 During
        the 2005 fiscal year, we derived approximately 1.5% of our revenues from
        these
        licensing activities.
 
 *Internet*
 
 Our
        Internet operations do not generate significant revenue and we do not anticipate
        that will change soon. Aside from providing entertainment and information
        about
        us, our website allows writers who are unrelated to us to submit comedic
        content
        to us. We may use this content in the development of stories, characters
        and
        animation that will be the basis for films, television programming or other
        products we develop or brand. We also use the website to sell our branded
        merchandise. We earn revenues from our website from banner advertising and
        from
        the sale of our branded merchandise.
 
 During
        the 2005 fiscal year, we derived less than 1% of our revenues from our
        website.
 
 *National
        Lampoon Tours*
 
 In
        October 2004 we entered the travel and tourism business through our wholly-owned
        subsidiary, National Lampoon Tours, Inc., referred to in this discussion
        as NL
        Tours. NL Tours negotiates packages with vendors, such as hotels and airlines,
        and creates branded vacation tours that are marketed primarily to young adults
        between the ages of 18 and 30. Aside from transportation and lodging, the
        tours
        may include daily activities such as parties and “happy hours”, contests and
        other entertainment. We market to college students utilizing campus promotions,
        website marketing and keyword Internet search buys.
 
 The
        first
        tours took place in March 2005 during the four peak weeks of college spring
        break. Destinations included Las Vegas, Nevada and Cabo San Lucas,
        Mexico.
 
 The
        Las
        Vegas tours included an optional flight package, four nights all-inclusive
        hotel
        accommodations and an itinerary of daily and nightly events and theme parties.
        The Las Vegas tours are restricted to ages 21 and older.
 
 The
        Cabo
        San Lucas tours included roundtrip airfare, four to seven nights hotel
        accommodations, ground transportation, a discount booklet, trip wristband
        and
        itinerary of daily and nightly events and theme parties.
 
 During
        the 2005 fiscal year, we derived approximately 3% of our revenues from NL
        Tours.
 
 6
  **Competition**
 
 *Entertainment*
 
 The
        entertainment industry in general, and the motion picture and television
        industry specifically, are highly competitive. The most important competitive
        factors include quality, variety of product and marketing. Most of our
        competitors have significantly greater financial and other resources (such
        as
        personnel and contacts) than we have. All of our competitors in the
        entertainment industry compete for motion picture and television projects
        and
        talent and are producing products that compete with ours for exhibition time
        in
        theaters, on television, and on home video.
 
 Our
        success is highly dependent upon such unpredictable factors as the viewing
        public’s taste. Public taste changes, and a shift in demand could cause our
        products to lose their appeal. Therefore, acceptance of our products, no
        matter
        what the medium, cannot be assured.
 
 We
        do not
        represent a significant presence in the entertainment industry.
 
 *Travel*
 
 The
        travel services market is highly competitive and has relatively low barriers
        to
        entry. We compete primarily with other vacation providers, online travel
        reservation services, travel agencies and other distributors of travel products
        and services. Many of our competitors have competitive advantages due to
        various
        factors, which include greater brand recognition, longer operating histories,
        larger customer bases, significantly greater financial, marketing and other
        resources, and the ability to secure products and services from travel suppliers
        with greater discounts and on more favorable terms than we can. Furthermore,
        some travel providers have a strong presence in particular geographic areas,
        which may make it difficult for us to attract customers in those
        areas.
 
 We
        do not
        represent a significant presence in the travel services industry.
 
 *Advertising*
 
 NLN
        competes for advertisers with many other forms of advertising targeting the
        young adult market. These competing forms of advertising media include other
        television advertising, radio, print, direct mail and billboard. NLN currently
        has only a small number of advertisers and these advertisers are
        not
        contractually obligated to renew their advertising contracts or to purchase
        set
        amounts of advertising in the future. While it is our plan to increase NLN’s
        advertising and promotion activities, NLN does not represent a significant
        presence in the advertising industry at this time.
 
 **Intellectual
        Property**
 
 We
        own
        the common law trademark “National LampoonTM” as used to promote the sale of a
        variety of goods and services in the United States. Pursuant to an agreement
        we
        originally entered into with The Harvard Lampoon, Inc. on October 8, 1969
        and
        amended and restated on October 1, 1998, The Harvard Lampoon, Inc. has consented
        to our ownership and use of “National LampoonTM”, and variations of that mark, on
        all goods and services, including motion pictures, television programming,
        radio
        programming, sound recordings, live performances and merchandising, restaurant,
        travel and entertainment services, but expressly excluding any new magazine,
        periodical or pamphlet published under National LampoonTM without the consent of
        The Harvard Lampoon, Inc., as well as firearms, tobacco products, addictive
        substances of any kind, articles of personal hygiene, and any items depicting
        explicit sex acts. We may sublicense our rights to third parties so long
        as The
        Harvard Lampoon, Inc. has audit rights to our sublicense agreements with
        third
        parties and we enforce quality controls. We cannot grant perpetual terms
        during
        which a sublicensee can use the mark in a field (as opposed to a specific
        product or service). Our rights to National LampoonTM under the concurrent use
        agreement will terminate if, for a period of 12 consecutive months, we failed
        to
        be actively engaged in good faith efforts to produce or to market our products
        and services. We are required to pay The Harvard Lampoon, Inc. as
        follows:
  7
 
 ·
              as
                  to any print publication, 2% of the net sales
                  price;
 
 ·
              as
                  to any movie, stage show, television show or radio show, the greater
                  of
                  $2,000 or 2% of the first $2,000,000 of pre-tax profits, 1.75%
                  of any
                  pre-tax profits in excess of $2,000,000 but not to exceed $5,000,000
                  and
                  1.5% of any pre-tax profits in excess of $5,000,000;
                  and
 
 ·
              as
                  to all other products or services, the greater of 2% of our pre-tax
                  profits or $250.
 
 If
        we
        sublicense our rights to unaffiliated third parties, The Harvard Lampoon,
        Inc.
        is entitled to receive 10% of any pre-tax profits we receive that are derived
        from the sale of goods or services by the sublicensee.
 
 The
        concurrent use agreement also provides that The Harvard Lampoon, Inc. will
        not
        authorize any party to use the word “Lampoon” during the term of the agreement
        without our written consent. During the 2004 and 2005 fiscal years, we paid
        The
        Harvard Lampoon, Inc. $30,000 and $30,500, respectively, in accordance with
        the
        terms of this agreement.
 
 We
        believe that we take all appropriate and reasonable measures to obtain
        agreements from licensees requiring that they acknowledge our trademarks
        and
        copyrights. We own the trademark registration for National Lampoon on the
        Principal Register of the United States Patent and Trademark Office to promote
        the sale of magazines and we have registered various screenplays, comedy
        sketches and other written or sound materials with the United States Copyright
        Office. We otherwise have relied exclusively on our common law rights to
        protect
        unregistered trademark uses and copyrights. Failure to obtain or maintain
        appropriate protection for our intellectual property, either in the United
        States or in certain foreign countries, may have a material adverse effect
        on
        our business, operating results and financial condition.
 
 **Employees**
 
 As
        of
        October19, 2005 we had 18 full-time employees, NLN had 11 full-time and two
        part
        time employees and National Lampoon Tours had one full-time employee. We
        also
        hire independent contractors, as needed. We consider our employee relations
        to
        be satisfactory at the present time.
 
 **ITEM
        2.**  **DESCRIPTION
        OF PROPERTY**
 
 We
        lease
        approximately 3,912 square feet of office space in Los Angeles, California
        under
        a lease that expired in September 2005 at which time our lease terms converted
        to a month-to-month basis. During the 2005 fiscal year, our rent obligation
        totaled $139,306. The lease agreement provides for rent adjustments based
        upon
        the lessor’s operating costs and increases in the Consumer Price Index.
 
 National
        Lampoon Networks, Inc. leases, on a month-to-month basis, space in New York
        City. The monthly rent is $4,500 per month.
 
 **ITEM
        3.**  **LEGAL
        PROCEEDINGS**
 
 From
        time
        to time, claims are made against us in the ordinary course of our business,
        which could result in litigation. Claims and associated litigation are subject
        to inherent uncertainties and unfavorable outcomes could occur, such as monetary
        damages, fines, penalties or injunctions prohibiting us from selling one
        or more
        products or engaging in other activities. The occurrence of an unfavorable
        outcome in any specific period could have a material adverse effect on our
        results of operations for that period or future periods.
 
 8
  On
        October 27, 2004, Far Horizon Sales and Leasing LLC filed a complaint against
        our subsidiary, National Lampoon Networks, Inc., in the Superior Court for
        the
        County of Los Angeles. The plaintiff alleged that it suffered damages for
        breach
        of contract, negligence and trespass to chattel related to the rental of
        a coach
        bus and damage thereto. The plaintiff alleged damages in excess of $79,000.
        The
        action was settled in August 2005 for the sum of $22,000 and the legal action
        was dismissed with prejudice on August 31, 2005.
 
 On
        May
        12, 2005, All Comedy Networks, Inc. filed a complaint in the Superior Court
        for
        the State of California, County of Los Angeles against eight defendants,
        including National Lampoon Radio Networks and National Lampoon Networks.
        The
        complaint alleges that one of the defendants, Kent Emmons, was a founder,
        shareholder, promoter and fiduciary of All Comedy Networks, Inc. The complaint
        alleges that Mr. Emmons negotiated an agreement with National Lampoon Networks
        to use our trademark in competition with All Comedy Networks, Inc. All Comedy
        Networks, Inc. seeks actual damages in an amount to be proved at trial, punitive
        damages, and an injunction to prohibit any of the defendants from contacting
        its
        employees, investors and advertisers. We filed an answer to the complaint
        on
        August 24, 2005. Because this action was filed only recently, no discovery
        has
        been undertaken. We believe this was brought as a nuisance action against
        National Lampoon Radio Networks and National Lampoon Networks and we intend
        to
        vigorously defend any attempt by All Comedy Networks, Inc. to prosecute the
        action against those entities.
 
 **ITEM
        4.**  **SUBMISSION
        OF MATTERS TO A VOTE OF SECURITY HOLDERS**
 
 Not
        applicable.
  **PART
        II**
 
 **ITEM
        5.**  **MARKET
        FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER** **MATTERS**
 
 Until
        March 24, 2002, when we were delisted from the Nasdaq Small Cap Market for
        failing to meet certain listing requirements, our common stock traded on
        the
        Nasdaq Small Cap Market under the symbol JTWO. From March 25, 2002 until
        October
        25, 2002, our common stock traded on the Over The Counter Bulletin Board
        under
        the symbol JTWO. On October 25, 2002, our common stock symbol changed to
        NLPN.
        On March 11, 2005 we submitted an application to the American Stock Exchange
        to
        be traded under the ticker symbol NLN. On July 21, 2005 the American Stock
        Exchange notified us that the application was approved. On August 2, 2005
        our
        stock ceased trading on Over The Counter Bulletin Board and on August
        3,
        2005 it began trading the American Stock Exchange. The table below sets forth
        the range of high and low bids of our common stock for each quarter for the
        last
        two fiscal years as reported by the Over The Counter Bulletin Board.
        The
        Over The Counter Bulletin Board prices represent inter-dealer quotations,
        without adjustments for retail mark-ups, markdowns or commissions and may
        not
        necessarily represent actual transactions. The closing sales prices have
        been
        adjusted to reflect the two-for-one stock split that was effective on September
        15, 2004.
 
 **High**
              
              **Low****Fiscal
                  Year Ended July 31, 2005**First
                  Quarter Ended October 31, 2004
              
              $
              7.75
              
              $
              3.00Second
                  Quarter Ended January 31, 2005
              
              $
              4.20
              
              $
              1.75Third
                  Quarter Ended April 30, 2005
              
              $
              4.40
              
              $
              2.00Fourth
                  Quarter Ended July 31, 2005
              
              $
              4.85
              
              $
              2.10
  9
 **Fiscal
                    Year Ended July 31, 2004**First
                    Quarter Ended October 31, 2003
                
                $
                4.50
                
                $
                2.00Second
                    Quarter Ended January 31, 2004
                
                $
                3.50
                
                $
                1.50Third
                    Quarter Ended April 30, 2004
                
                $
                4.25
                
                $
                1.75Fourth
                    Quarter Ended July 31, 2004
                
                $
                7.00
                
                $
                1.90
 
 As
        of
        October 19, 2005, we had approximately 593 stockholders.
 
 **Dividend
        Policy**
 
 We
        have
        not declared or paid any dividends and do not intend to pay any dividends
        in the
        foreseeable future to the holders of our common stock. We intend to retain
        future earnings, if any, for use in the operation and expansion of our business.
        Any future decision to pay dividends on common stock will be at the discretion
        of our Board of Directors and will depend on our financial condition, results
        of
        operations, capital requirements and other factors our Board of Directors
        may
        deem relevant.
 
 Dividends
        accrue on our Series B and Series C Convertible Preferred Stock. Dividends
        accrue on a daily basis and continue until the date on which the Series B
        or
        Series C Convertible Preferred Stock is converted, until a liquidation event
        occurs, or, in the case of the Series C Convertible Preferred Stock, until
        the
        redemption date (although the redemption date is not defined and there is
        no
        right of redemption as to the Series C Convertible Preferred Stock). Dividends
        accrue at the rate of 9% per annum on the sum of the original purchase price
        of
        the Series B or Series C Convertible Preferred Stock plus all accumulated
        and
        unpaid dividends thereon (compounding annually). Dividends that accrue on
        our
        Series B and Series C Convertible Preferred Stock must be paid with our common
        stock.
 
 Dividends
        on the Series B and Series C Convertible Preferred Stock are computed using
        the
        closing price of the common stock, as reported by the exchange or regulated
        quotation service on which our common stock is traded, on the trading date
        immediately preceding the date that we become liable to pay the dividend.
        If no
        trades were made on that date, then the number of shares to be issued will
        be
        computed using the closing price of the last date on which trades were made
        and
        reported. As of October 19, 2005, dividends totaling $1,416,056 had accrued
        on
        our Series B and Series C Convertible Preferred Stock which, if payable as
        of
        that date, would have required us to issue 292,617 shares of common stock
        in
        payment of the Series B Convertible Preferred Stock dividends and 285,365
        shares
        of common stock in payment of the Series C Convertible Preferred Stock dividends
        based on a closing price of $2.45 per share on October 19, 2005 as reported
        by
        the American Stock Exchange.
 
 **Equity
        Compensation Plans**
 
 On
        January 30, 2002 our Board of Directors approved the J2 Communications Amended
        and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan
        (the
“Equity Incentive Plan”). The Equity Incentive Plan was approved by our
        stockholders on April 25, 2002. The discussion below is a brief summary,
        which
        is qualified in its entirety by the full text of the Equity Incentive
        Plan.
 
 The
        Equity Incentive Plan has a term of 10 years and is currently administered
        by
        our Board of Directors, which shall be referred to in this discussion as
        the
“Administrator”. Pursuant to the Equity Incentive Plan, the Administrator may
        grant to eligible persons, which include employees, officers, directors,
        consultants and advisors, awards of options (which may be qualified or
        non-qualified, depending upon whether or not the eligible person is an
        employee), stock appreciation rights (commonly known as “SARs”) or deferred
        common stock or restricted common stock. 1,500,000 shares of our common stock
        were originally set aside for grants made under the Equity Incentive Plan.
        The
        number of shares of common stock set aside for grants was increased to 2,500,000
        in the 2004 fiscal year. In September 2004 our Board of Directors authorized
        a
        two-for-one stock split, making 5,000,000 shares of common stock available
        for
        grants. As of July 31, 2005, we had 30 employees, three officers and seven
        directors (one of whom is also an officer) who would be eligible to receive
        awards from the Equity Incentive Plan. As of July 31, 2005, we had issued
        options to employees to purchase a total of 3,790,893 shares of our common
        stock.
 
 10
  Options
        granted from the Equity Incentive Plan may be incentive stock options or
        non-qualified stock options. The term of the options may not exceed 10 years
        from the date of grant. The price for each share of common stock purchased
        pursuant to the options varies, although if an option is designated as an
        incentive stock option, the exercise price must equal at least the fair market
        value of our common stock on the date of grant. A non-qualified option must
        have
        an exercise price that is at least 85% of the fair market value of our common
        stock on the date of grant.
 
 Options
        may be exercised by paying cash. The Administrator may also accept as payment
        for options shares of our unrestricted common stock held by the optionee
        for at
        least six months, cancellation of any indebtedness owed by us to the optionee,
        a
        full recourse promissory note executed by the optionee (so long as the
        acceptance of any such promissory note complies with federal and state law),
        shares of common stock issuable upon exercise of the option which have a
        fair
        market value equal to the exercise price of the option or any combination
        of the
        forgoing.
 
 SARs
        may
        be granted from the Equity Incentive Plan in tandem with option grants or
        without reference to option grants. A SAR granted in tandem with an option
        grant
        is valued at the exercise price of the option grant; a SAR granted without
        reference to an option grant is valued at fair market value.
 
 Deferred
        Stock and Restricted Stock awards may also be granted to eligible persons.
        Deferred Stock is the right to receive our common stock at the end of a
        specified period. Restricted Stock is the right to receive our common stock
        subject to restrictions such as the passage of time or the attainment of
        performance objectives.
 
 In
        the
        event of a Change of Control, as defined in the Equity Incentive Plan, all
        unvested stock options shall vest and the restrictions applicable to any
        Restricted Stock or Deferred Stock awards will lapse and the awards shall
        be
        deemed fully vested. The value of the outstanding stock option, Restricted
        Stock
        or Deferred Stock awards shall be cashed out by a payment of cash or other
        property, as determined by the Administrator.
 
 The
        Board
        of Directors may amend, alter or discontinue the Equity Incentive Plan, but
        no
        amendment, alteration or discontinuation may impair the rights of a participant.
        The Board of Directors must obtain stockholder approval if it seeks to increase
        the total number of shares of common stock reserved for the Equity Incentive
        Plan, change the employees or class of employees eligible to participate
        in the
        Equity Incentive Plan or extend the maximum option period under the Equity
        Incentive Plan.
 
 A
        recipient will recognize no income upon grant of an incentive option and
        incur
        no tax on its exercise (unless the recipient is subject to the alternative
        minimum tax). If the recipient holds the stock acquired upon exercise of
        an
        incentive option (the “ISO Shares”) for more than one year after the date the
        option was exercised and for more than two years after the date the option
        was
        granted, the recipient generally will realize capital gain or loss (rather
        than
        ordinary income or loss) upon disposition of the ISO Shares. This gain or
        loss
        will be equal to the difference between the amount realized upon such
        disposition and the amount paid for the ISO Shares.
 
 If
        the
        recipient disposes of ISO Shares prior to the expiration of either required
        holding period described above, the gain realized upon such disposition,
        up to
        the difference between the fair market value of the ISO Shares on the date
        of
        exercise (or, if less, the amount realized on a sale of such shares) and
        the
        option exercise price, will be treated as ordinary income. Any additional
        gain
        will be long-term capital gain, depending upon the amount of time the ISO
        Shares
        were held by the recipient.
  11
  A
        recipient will not recognize any taxable income at the time a non-qualified
        option is granted. However, upon exercise of a non-qualified option, the
        recipient will include in income as compensation an amount equal to the
        difference between the fair market value of the shares on the date of exercise
        and the recipient’s exercise price. The included amount will be treated as
        ordinary income by the recipient and may be subject to withholding. Upon
        resale
        of the shares by the recipient, any subsequent appreciation or depreciation
        in
        the value of the shares will be treated as capital gain or loss. There is
        no tax
        consequence to National Lampoon as a result of either the grant or the vesting
        of non-qualified stock options. There is also no tax consequence to National
        Lampoon as a result of either the grant or the vesting of incentive stock
        options. However, if an employee fails to meet the rules governing incentive
        stock options (for example, by selling the stock sooner than the rules allow),
        we would be allowed a tax deduction to the extent that the employee had ordinary
        taxable income from the disqualified incentive stock option. We are required
        to
        withhold FICA, Medicare and federal income taxes from both employees and
        former
        employees upon disqualified dispositions of incentive stock options. We are
        also
        subject to FICA, Medicare and FUTA on the amounts that are deemed to be
        wages.
 
 The
        following table sets forth the number of options received or to be received
        by
        each of our executive officers (our Chief Executive Officer, President and
        Chief
        Financial Officer), all current executive officers as a group, all current
        directors who are not executive officers as a group, each associate of any
        such
        director or executive officer and each person who received or will receive
        5% of
        the option awards made or to be made and all employees, including our current
        officers who are not executive officers, as a group:
 
 12
 Number
                    of Options Received or To Be Received
  Daniel
                    S. Laikin, Chief Executive Officer and Director
                619,666Douglas
                    S. Bennett, President
                680,000(1)Lorraine
                    M. Evanoff, Chief Accounting Officer
                50,000(2)All
                    current executive officers, as a group
                1,349,666All
                    current directors who are not executive officers, as a
                    group
                1,710,374Associates
                    of any director or executive officer
                N/AAny
                    person (other than those named above) who has received or will
                    receive 5%
                    of the option awards made or to be made to all employees, including
                    officers who are not named above
                N/A
 (1)
              Certain
                  options granted to Mr. Bennett are subject to vesting
                  conditions.
 (2)
              Certain
                  options granted to Ms. Evanoff are subject to vesting
                  conditions
 
 Set
        forth
        in the table below is information regarding awards made pursuant to the Equity
        Incentive Plan, as well as other outstanding warrants and rights granted
        through
        July 31, 2005, the most recently completed fiscal year.
 Plan
                    Category
                Number
                    of securities to be issued upon exercise of outstanding options,
                    warrants
                    and rights
                
                Weighted
                    average exercise price of outstanding options, warrants and
                    rights
                
                Number
                    of securities remaining available for future issuance under equity
                    compensation plans (excluding securities reflected in column
                    2)Equity
                    Compensation Plan Approved by Security Holders
                3,790,893(1)
                
                $2.67
                
                1,209,107(1)Equity
                    Compensation Plan Not Approved by Security Holders
                N/A
                
                N/A
                
                N/A
 
 (1)
        This
        number represents the remaining shares of common stock in the Equity Incentive
        Plan as of the end of our last fiscal year, July 31, 2005.
 
 **Sales
        of Unregistered Securities**
 
 On
        July
        1, 2005 the Registrant authorized for issuance to Porter, LeVay & Rose 2,399
        shares of restricted common stock and issued to Regal Growth Funding, Inc.
        626
        shares of restricted common stock. The common stock was issued in accordance
        with agreements for consulting services. The services were rendered to the
        Company during April and May 2005. The per share value of the common stock
        on
        the date of grant was $3.99 as to 1,879 shares and $4.36 as to 1,146 shares.
        The
        Registrant 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.
  13
 
 **ITEM
        6.**  **MANAGEMENT’S
        DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN** **OF
        OPERATION**
 
 Management’s
        Discussion and Analysis of Financial Condition and Results of Operations
        discusses our consolidated financial statements, which have been prepared
        in
        accordance with accounting principles generally accepted in the United States.
        The preparation of these financial statements requires management to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities and the disclosure of contingent assets and liabilities at the
        date
        of the financial statements and the reported amounts of revenues and expenses
        during the reporting period. On an on-going basis, management evaluates its
        estimates and judgments. Management bases its estimates and judgments on
        historical experience and on various other factors that are believed to be
        reasonable under the circumstances, the results of which form the basis for
        making judgments about the carrying value of assets and liabilities that
        are not
        readily apparent from other sources. Actual results may differ from these
        estimates under different assumptions or conditions.
 
 **Overview**
 
 We
        are a
        media and entertainment company that creates and distributes comedic content.
        The National LampoonTM brand was initially developed in 1970 through publication
        of *National
        Lampoon Magazine* and
        later
        through the production of motion pictures, including *National
        Lampoon’s Animal House* and *National
        Lampoon’s Vacation* .
 
 Our
        plan
        is to expand the use of our brand in order to increase the revenues we generate
        through license fees, advertising and other sources. We are pursuing this
        plan
        as follows:
 
 *Licensing*
 
 We
        derive
        a substantial portion of our revenues from license fees relating to the
        production of new motion pictures and from royalties from previously released
        motion pictures bearing our brand, including movies such as *National
        Lampoon’s Animal House* and *National
        Lampoon’s Vacation* .
        We
        license the National LampoonTM brand, as well as content from our library, for
        use in a wide variety of products including movies, television programming,
        live
        events, radio broadcasts, recordings, electronic games, and other consumer
        products.
 
 For
        the
        year ended July 31, 2005, revenues derived from our licensing and royalties
        (exclusive of revenues derived from our publishing activities) totaled
        $1,981,814, or approximately 54% of all the revenues we earned during the
        period.
  *National
        Lampoon Networks*
 
 Our
        subsidiary, National Lampoon Networks, Inc., through its network of 618
        affiliated college and other television stations, reaches nearly 4.8 million
        college students in their dormitories and other places of residence. For
        those
        retailers targeting the college market, National Lampoon Networks provides
        an
        integrated marketing approach that includes advertising during the airing
        of our
        television programming, field marketing such as product sampling, live events
        hosted on college and university campuses throughout the United States, and
        Internet promotions.
 
 Aside
        from providing an outlet for advertisers targeting the college market, National
        Lampoon Networks develops, produces and distributes comedic television
        programming to college audiences through its network. *Tooned
        Up, Greek Games, College Town* and *Master
        Debaters* are
        among
        the television programming that we developed and produced and that we are
        now
        distributing in the retail market.
 
 For
        the
        year ended July 31, 2005, revenues derived from National Lampoon Networks,
        exclusive of licensing revenues, totaled $1,321,771, or approximately 36%
        of all
        the revenues we earned during the period.
 
 14
  *Home
        Entertainment*
 
 We
        provide branded National LampoonTM comedic content, including television
        programming, motion pictures and live comedic events, for DVD. This segment
        of
        our business generates revenues primarily from royalty fees from the sale
        of
        these products and the use of our content. We also use NLN to promote the
        release of these products.
 
 For
        the
        year ended July 31, 2005, revenues derived from our home entertainment products
        totaled $223,333, or approximately 6% of all the revenues we earned during
        the
        period.
 
 *Travel
        Services*
 
 We
        are
        now offering group travel and entertainment packages through our subsidiary,
        National Lampoon Tours, Inc. The destinations of our first two travel packages,
        timed to coincide with most college and university spring breaks, were Las
        Vegas
        and Cabo San Lucas, Mexico. The packages included professional entertainment,
        theme parties and other attractions for young adults.
 
 For
        the
        year ended July 31, 2005, we earned $93,724 from National Lampoon Tours,
        or
        approximately 2.6% of all the revenues we earned during the period.
 
 *Publishing*
 
 We
        have
        been licensing our brand and content for the publication of books
        since 1972 and, to date, over 28 titles, including our four most recent
        publications, *1964
        High School Reunion Year Book, National Lampoon’s Book of Love,*  *National
        Lampoon’s Big Book of True Facts* and *National
        Lampoon’s Encyclopedia of Humor* ,
        have
        been published.
 
 For
        the
        year ended July 31, 2005, revenues derived from our publishing activities
        totaled $52,800, or approximately 1.4 % of all the revenues we earned during
        the
        period.
 
 *Radio*
 
 We
        hold a
        25% interest in NL Radio, LLC, which was formed in March 2005. NL Radio,
        LLC
        plans to launch an entertainment radio format under our brand. We have licensed
        the content of our radio library, as well as certain domain names, urls and
        websites, to NL Radio, LLC for this purpose and we are continuing to produce
        radio programming for use by NL Radio, LLC. Throughout the summer and fall
        of
        2005, NL Radio, LLC will use samples of the programming, called “pilot
        programming,” to introduce the format and content to radio networks and local
        stations. If the programming is sold to a network it may be syndicated, meaning
        that it will be distributed to stations affiliated with the network. Purchasers
        of the programming may broadcast segments of the programming at their
        discretion, such as during “drive time” or as late night programming. The
        programming is currently scheduled to be distributed in January 2006. We
        expect
        to earn revenues from commissions for advertisement sales and trademark
        licensing fees.
 
 For
        the
        year ended July 31, 2005, we earned $15,000, or approximately 0.4 % of all
        the
        revenues we earned during the period from NL Radio, LLC. These revenues were
        derived from the licensing of our radio library to NL Radio, LLC.
 
 *Internet*
 
 Our
        Internet operations do not generate significant revenue and we do not anticipate
        that will change soon. Aside from providing entertainment and information
        about
        us, our website allows writers who are unrelated to us to submit comedic
        content
        to us. We may use this content in the development of stories, characters
        and
        animation that may be the basis for films, television programming or other
        products we develop or brand. We also use the website to sell our branded
        merchandise. We earn revenues from our website from banner advertising and
        from
        the sale of our branded merchandise.
 
 15
  For
        the
        year ended July 31, 2005, revenues derived from sales of our products via
        the
        Internet totaled $8,529, or approximately 0.2 % of all the revenues we earned
        during the period.
 
 *Motion
        Picture and Television Programming*
 
 With
        the
        exception of films produced by National Lampoon Clubhouse, Inc., motion pictures
        that carry our brand have been produced and financed by third parties.
        Twenty-five motion pictures have been released using the National LampoonTM name
        and four additional motion pictures are planned for release during the 2006
        fiscal year. We provide creative services such as writing, as requested,
        to the
        producers of motion pictures that carry our brand. For the fiscal year ended
        July 31, 2003 we earned $140,000 as compensation for creative services. These
        services were provided to three projects. For the fiscal years ended July
        31,
        2004 and July 31, 2005, we earned no revenues from providing creative
        services.
 
 We
        are
        developing programming for television although, to date, none of our programming
        has been acquired by any distributor or broadcaster of television programming.
        We had a “first-look” agreement with CBS Paramount International Television, a
        division of Viacom Productions Inc. referred to in this discussion as Paramount
        Television, for television programming. A “first look” agreement allows a studio
        or production company, for a period of time, to look at and agree to develop
        and
        produce programming ideas in the form of treatments before the treatments
        may be
        offered to other studio or production companies. Pursuant to this agreement,
        we
        provided treatments for television shows to Paramount Television. Prior to
        the
        expiration of the first look agreement, Paramount Television exercised its
        right
        to develop and produce four of these treatments. To date, Paramount Television
        has not developed and produced the television programming and there is no
        assurance that the programs will be produced in the future. Any treatment
        not
        developed by March 8, 2006 will be returned to us. For the year ended July
        31,
        2005, we earned no revenues from our television programming. We intend to
        continue to develop programming for television broadcast.
 
 *Library*
 
 Our
        library includes 247 issues of National Lampoon Magazine, which we continue
        to
        use to generate new content for movies, television programming and other
        licensing opportunities. Our library also consists of television
        programming, including more than 300 hours of footage produced for National
        Lampoon Networks, radio programming, recordings and other
        materials.
 
 **Business
        Objective**
 
 We
        intend
        to provide National LampoonTM comedic content to as many consumers as possible by
        expanding the use of our brand. The following describes the ways in which
        we
        plan to achieve this goal.
 
 ·
              We
                  plan to continue to expand National Lampoon Networks by adding
                  new college
                  and university affiliate stations, increasing advertising and marketing
                  revenue and producing new television shows. We currently have eight
                  employees and two independent contractors who continually market
                  to
                  college and university affiliate stations to carry our programming
                  and we
                  intend to continue this practice for the foreseeable future. As
                  we add new
                  stations, we expect our advertising and marketing revenue to increase.
                  However, we do not have long-term agreements with college and university
                  affiliate stations, and these stations may terminate their relationships
                  with us at any time.
 
 ·
              We
                  intend to expand our DVD library by increasing the number of products
                  we
                  produce and have distributed for home entertainment. We currently
                  work
                  primarily with three distributors, Genius Products, Inc., Image
                  Entertainment and Studioworks/Ventura Distribution. Our distributors
                  pay
                  us to provide the creative content for designated projects. Once
                  the
                  project is completed, the distributor is not required to work with
                  us on
                  additional projects, therefore management is continually seeking
                  to build
                  relationships with additional
                  distributors.
  16
  ·
              We
                  plan to capitalize on our reputation and relationships with independent
                  studios and other multimedia companies to expand the use of the
                  National
                  LampoonTM brand.
 
 ·
              We
                  plan to create new licensing opportunities in markets outside of
                  publishing, film and television, such as games, records, radio
                  programming
                  and live events. We have hired a person to work on product placement
                  and
                  licensing.
 
 ·
              We
                  intend to attract an increased number of college students purchasing
                  travel packages created by National Lampoon Tours. Because it took
                  us more
                  time than we expected to organize National Lampoon Tours, we were
                  unable
                  to take full advantage of the 2004-2005 academic year college and
                  university spring break travel season. Our organizing activities
                  are now
                  complete, and we expect to be able to fully promote the travel
                  packages we
                  offer during the 2005-2006 academic year. We expect to do this
                  by
                  advertising on our website, developing a self-service travel website
                  and
                  through field marketing.
 
 ·
              We
                  plan to capitalize on opportunities provided by the Internet to
                  merchandise our home entertainment and other
                  products.
 
 ·
              NL
                  Radio, LLC plans to launch an entertainment radio format under
                  our brand.
                  We own a 25% interest in NL Radio,
                  LLC.
 
 **Critical
        Accounting Policies**
 
 Management
        believes the following critical accounting policies, among others, affect
        its
        more significant judgments and estimates used in the preparation of our
        consolidated financial statements.
 
 *Revenue
        Recognition*
 
 Our
        trademark licensing revenues are generally recognized when received or when
        earned under the terms of the associated agreement and when the collection
        of
        such revenue is reasonably assured. Revenues from the sale of DVDs, net of
        estimated provisions for returns (which are not material for any period
        presented) are recognized when the sales are reported to us by the distributor.
        Revenues from Internet operations are recognized when earned under the terms
        of
        the associated agreement and the collection of such revenue is reasonably
        assured. Revenues from advertising and promotion are recognized when earned
        under the terms of the associated agreement or when the advertisement has
        been
        broadcast and the collection of such revenues are reasonably
        assured.
 
 *Production
        Costs*
 
 As
        provided by SOP 00-2, Accounting by Producers or Distributor of Films, film
        and
        television production costs are capitalized based on ultimate estimates for
        productions with multiple episodes or if there are advertising agreements
        in
        place from which the production will generate revenues. As a result, feature
        film production costs are capitalized and amortized pro-rata upon revenue
        recognition proportionate to the ultimate estimates and the production costs
        incurred by our network operations are capitalized by an amount equal to
        remaining ultimate revenues or to the extent of the revenues generated by
        those
        agreements. The balance of the production costs is expensed during the period
        as
        the anticipated revenues are earned.
 
 17
  **Reorganization
        Transaction**
 
 In
        the
        discussion below, we sometimes refer to the “Reorganization Transaction”. The
        Reorganization Transaction occurred on May 17, 2002, when a group of investors
        that we refer to as “the NLAG Group” completed the acquisition of our Series B
        Convertible Preferred Stock and warrants to purchase our common stock, thereby
        gaining voting control of our company.
 
 **Results
        of Operations**
 
 We
        operate in four business segments, namely, licensing and exploitation of
        the
        National LampoonTM trademark and related properties including the sale of
        products to consumers; advertising and promotion through field marketing,
        live
        events and the distribution of television programming on college campuses;
        production of motion picture, television, and DVD products; and the sale
        of
        travel packages to young adults.
 
 Segment
        operating income/(loss) excludes the amortization of intangible assets, interest
        income, and income taxes. Selling, general and administrative expenses not
        specifically attributable to any segment have been allocated equally among
        the
        three segments.
 
 *Year
        ended July 31, 2005 as compared to the year ended July 31,
        2004*
 
 Summarized
        financial information for the years ended July 31, 2005 and 2004 for our
        segments is as follows:
 Licensing
                    
                    Advertising
                        &
                      Promotion
                    
                    Production
                    
                    Travel
                        Services
                    
                    Clubhouse
                    
                    TotalYear
                      Ended July 31, 2005Segment
                        revenue
                    
                    $
                    2,035,000
                    
                    $
                    1,322,000
                    
                    $
                    223,000
                    
                    $
                    94,000
                    
                    $
                    -
                    
                    $
                    3,674,000Segment
                        operating (loss)
                    
                    $
                    (2,649,000
                    )
                    $
                    (1,754,000
                    )
                    $
                    (3,741,000
                    )
                    $
                    (242,000
                    )
                    $
                    (100,000
                    )
                    $
                    (8,486,000
                    )Year
                        Ended July 31, 2004Segment
                        revenue
                    
                    $
                    1,363,000
                    
                    $
                    559,000
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    1,922,000Segment
                        operating (loss)
                    
                    $
                    (2,053,000
                    )
                    $
                    (2,840,000
                    )
                    $
                    -
                    
                    $
                    -
                    
                    $
                    -
                    
                    $
                    (4,893,000
                    )
  Since
        the
        Reorganization Transaction, our business has changed. As a result of our
        acquisition of National Lampoon Networks, we began creating programming for
        this
        division and undertaking advertising and promotion activities. We have also
        entered the home entertainment market and we have ceased publication of *National
        Lampoon Magazine* .
        Because
        of the evolving nature of our business, we changed the way in which we presented
        segment revenue for the year ended July 31, 2005 as compared to the way in
        which
        we presented it for the fiscal year ended July 31, 2004. In the table above,
        production revenues include films, television and home entertainment; licensing
        includes not only the licensing of our name, but publication, radio and Internet
        revenues; advertising and promotion revenues represent the revenues earned
        by
        National Lampoon Networks; and travel services represents the revenues earned
        by
        National Lampoon Tours, Inc.
 
 18
  For
        the
        year ended July 31, 2004, segment information was presented as trademark,
        consumer products and television. Trademark included revenues earned from
        our
        licensing activities, consumer products included revenues we earned from
        our
        website and the sale of certain videos and television included the advertising
        and promotion revenues we earned from National Lampoon Networks.
 
 In
        conjunction with the change in reporting our segment revenue, we have also
        expanded the classifications of the costs associated with our business
        activities and, in some instances, reallocated costs among the various segments.
        In the discussion below, we have noted where costs were
        reallocated.
 
 *Licensing
        Revenues.* Licensing
        revenues (which includes revenues earned from our publishing activities)
        of
        $2,034,614 for the year ended July 31, 2005 represents an increase of
        approximately $1,043,103 or 115% over licensing revenues of $991,511 for
        the
        year ended July 31, 2004. Increased licensing activity during this period
        included licensing our
        name
        for use in feature films, licensing our radio library to NL Radio, LLC and,
        as
        part of our agreement with Genius Products, Inc., licensing four
        television programs that were originally produced by National Lampoon Networks.
        These television programs are expected to be distributed in the home
        entertainment market. Our
        licensing revenues for the year ended July 31, 2005 included $365,000 from
        the
        film *National
        Lampoon’s Animal House,* an
        increase of approximately $185,000, or 103%, over revenues of $180,000 for
        the
        year ended July 31, 2004. This increase is attributable to the
        DVD
        release of the film by Universal Pictures, Inc .
        Since
        June 2000, these revenues have been paid directly to us. Prior to June 2000,
        the
        revenues were paid to Yearbook Movie Company, a partnership. Following a
        dispute
        between our predecessor, J2 Communications, and Heathdale Productions, Inc.,
        the
        successors in interest to the original partners of Yearbook Movie Company,
        and
        as part of a settlement agreement between them, J2 Communications and Heathdale
        Productions, Inc. agreed to allow Universal Pictures, Inc. to distribute
        the
        partnership’s share of the revenues earned from *National
        Lampoon’s Animal House* directly
        to each partner, rather than to the partnership. The partnership continues
        to
        exist and to hold the rights pursuant to which the partners are paid. Licensing
        revenues were also earned during the fiscal year ended July 31, 2005 for
        use of
        the National LampoonTM name on feature films. These revenues included $284,000
        from Genius Products, Inc. for *National
        Lampoon’s Blackball, National Lampoon’s Going the Distance* and *National
        Lampoon Presents Dorm Daze* ,
        $110,000 from MRG Entertainment for *National
        Lampoon’s Adam & Eve,* $100,000
        from Sony Picture Releasing for *National
        Lampoon’s Barely Legal* and
        $50,000 from Think Film for *Going
        the Distance* .
        Our
        licensing revenues also included $100,000 for licensing our content for
        distribution over wireless devices, $37,500 from Paramount Television as
        part of
        a television programming arrangement and $15,000 for the license of *National
        Lampoon Radio Hour* programming.
        During the year ended July 31, 2005, we recognized $100,000 in revenues
        previously classified as deferred revenues from Multimedia Games, Inc./Create
        Tours Corp., which paid this money to us for delivery of three concepts.
        Multimedia Games, Inc./Create Tours Corp. has accepted one of the concepts
        for
        development. During the year ended July 31, 2005, we also recognized $70,000
        in
        revenues from the completion and delivery of 70 episodes of television
        programming to An Eye for an Eye Productions LLC, $47,206 in royalties from
        Warner Brothers, $52,800 from publishing, and $35,000 from sales of consumer
        products. Licensing revenues from National Lampoon Networks, Inc. earned
        during
        the year ended July 31, 2005 included $132,250 from Genius Products, Inc.
        and
        $252,276 in participation revenues from the distribution of *National
        Lampoon Presents Dorm Daze.* We also
        received residuals from DVD and game sales of $21,985 for *National
        Lampoon’s Lost Reality* ,
        $24,098
        for *National
        Lampoon’s Scuba School* ,
        $35,000
        for *National
        Lampoon’s University Tycoon* and
        $16,917 for *National
        Lampoon’s Loaded Weapon* .
        $54,000
        in revenue was recognized due to the settlement of a legal action for less
        than
        the amount reserved. Remaining licensing revenues comprise residual payments
        from various projects. These payments were each less than $5,000.
 
 Costs
        related to licensing revenues of $517,744 increased by $95,943 or 23% in
        the
        year ended July 31, 2005 from $421,801 in the year ended July 31, 2004. In
        the
        financial statements for the year ended July 31, 2004 costs related to licensing
        revenues were reported as $467,241. Costs related to licensing revenues for
        the
        year ended July 31, 2004 decreased by $281,000 as a result of our reallocation
        of these costs to costs related to production revenue. This decrease was
        offset
        by an increase of $235,560 in web design fees previously included in general
        and
        administrative expense. The primary reason for the remaining increase relates
        to
        an increase of approximately $60,000 in commissions. Amortization of intangible
        assets, namely the costs of our acquisition of the “National LampoonTM”
        trademark, was $240,000 during the years ended, July 31, 2005 and
        2004.
 
 19
  *Advertising
        and Promotion Revenues.* Advertising
        and promotion revenues from National Lampoon Networks totaled $1,321,771
        during
        the year ended July 31, 2005 as compared to $558,640 for the year ended July
        31,
        2004, representing an increase of $763,132 or 137%. Advertising revenues
        increased to approximately $476,023 during the year ended July 31, 2005,
        from
        $289,156 during the year ended July 31, 2004, representing an increase of
        $186,867 or 65%. Promotion revenues of $845,748 for the year ended July 31,
        2005
        represents an increase of approximately $576,265 or 214% from the $269,483
        in
        promotion revenues we received during the year ended July 31, 2004. The increase
        in advertising and promotion revenues resulted from additional
        advertising opportunities that arose due to an increase in programming televised
        by National Lampoon Networks. During this period, we also began to sell
        advertising on our website for the promotion of feature films made by unrelated
        third parties and we increased presence marketing of feature films such as *National
        Lampoon’s Black Ball* and *National
        Lampoon’s Dorm Daze* .
        “Presence marketing” means that we use posters, product samples and similar
        marketing techniques to bring the marketing to the location of the targeted
        audience, such as college campuses.
 
 Overall
        costs related to advertising and promotion revenues of $1,076,346 for the
        year
        ending July 31, 2005 decreased by $104,000 or 9% from $1,181,039 in the year
        ended July 31, 2004. The costs related to advertising and promotions revenues
        for the year ended July 31, 2004 were previously categorized as “production
        expenses”. Also, many direct television production costs that were expensed
        immediately in the prior years are now being capitalized as they are incurred
        and amortized as revenue is recognized in accordance with the ultimate
        schedules. Amortization of capitalized television production costs for the
        year
        ended July 31, 2005 was $664,459. The primary reason for the decrease in
        overall
        costs related to advertising and promotion revenues is due to the amortization
        of capitalized television production costs.
 
 *Production
        Revenues.* **** For
        the
        year ended July 31, 2005, production revenues were $223,333 as compared to
        $371,413 for the same period in 2004. This decrease in production revenues
        of
        approximately $148,000 or 40% resulted primarily from a decrease in production
        projects as we reallocated resources to National Lampoon Networks to increase
        programming. During the year ended July 31, 2005, we recognized approximately
        $33,333 from sponsorship revenues from SJD Media, $30,000 for television
        production from Fox Sports, $68,000 for videos produced for Image Entertainment,
        $50,000 for videos produced for Genius Products, Inc. and $42,000 in production
        management fees from National Lampoon Clubhouse, which began accruing $6,000
        a
        month in management fees as of January 2005. Revenues recognized during the
        year
        ended July 31, 2004 include approximately $197,000 for the production of
        a
        television pilot for American Movie Classics, $150,000 for comedy videos
        produced for Image Entertainment and $24,000 for the production of a live
        event.
 
 Costs
        related to production revenues were $95,248 for the year ended July 31, 2005,
        a
        decrease of $185,000 from costs related to production revenues of $281,000
        for
        the year ended July 31, 2004. During the fiscal year ended July 31, 2004,
        we
        reported network television production costs of $1,181,039 that we classified
        as
“production costs”. For this discussion, these costs have been allocated to
        costs related to advertising and promotion revenues. During the year ended
        July
        31, 2005, production costs included approximately $46,000 associated with
        the
        videos produced for Image Entertainment, approximately $20,221 related to
        the
        television show, *National
        Lampoon’s Strip Poker* ,
        and
        $29,000 associated with the pilot for Fox Sports Network. The remaining
        production costs consisted of production personnel costs. During the year
        ended
        July 31, 2004, costs associated with the television pilot for American Movie
        Classics totaled approximately $160,000, costs associated with the video
        production for Image Entertainment totaled approximately $111,000 and
        approximately $10,000 in aggregate costs for Mother Goose and Lost
        Reality.
 
 *Travel
        Services Revenues.* During
        the year ended July 31, 2005, National Lampoon Tours recognized revenues
        of
        $93,724. National Lampoon Tours began business in December 2004.
 
 20
  Selling,
        general and administrative expenses during the year ended July 31, 2005 were
        $5,096,414 as compared to $4,285,858 for the year ended July 31, 2004, an
        increase of $810,556 or approximately 13%. For the year ended July 31, 2004,
        we
        had reported $4,521,418 in general and administrative expenses, however,
        for
        this discussion, that amount has been reduced by $235,000 in web design fees
        which have been allocated to costs related to licensing revenues. During
        the
        year ended July 31, 2005, approximately 56.9% of our selling, general and
        administrative expenses consisted of salary expense totaling $2,433,000,
        as
        compared to salary expense of approximately $2,155,000 for the year ended
        July
        31, 2004. The increase of $288,000 in salary expense for the year ended July
        31,
        2005 consisted primarily of bonuses totaling $220,000 that were paid to two
        employees with units of Series C Convertible Preferred Stock that we valued
        at
        $35.50 per unit and a bonus of $ 157,518 accrued
        to our President, Douglas S. Bennett, pursuant to an employment agreement
        that
        terminated on January 31, 2005. The increase in salary expense was offset
        by a
        decrease in vacation accrual of $41,000 due to a change in policy, a decrease
        in
        officer’s salary of $61,000 due to the separation from service of James P.
        Jimirro, our former Chief Executive Officer and President and a decrease
        in web
        design fees of $235,000. During the year ended July 31, 2005, selling, general
        and administrative expenses also included legal expenses of $532,000 as compared
        to $239,000 in legal expenses accrued during the year ended July 31, 2004,
        an
        increase of $293,000, and an increase of $311,000 in investor public relations
        costs, from $55,000 during the year ended July 31, 2004 to $366,000 during
        the
        year ended July 31, 2005. The increase in these expenses related primarily
        to
        the public offering that was completed August 8, 2005. During the year ended
        July 31, 2005 and July 31, 2004, selling, general and administrative expenses
        also included the following:
 
 **Expense**
              
              **Year
                  Ended****July
                  31, 2005**
              
              **Year
                  Ended****July
                  31, 2004**Employee
                  health benefits
              
              $
              150,000
              
              $
              114,000Accounting
                  expense
              
              
              83,000
              
              
              60,000Rent
                  expense
              
              
              220,000
              
              
              234,000Interest
                  expense
              
              
              148,000
              
              
              184,000Registration
                  fee to American Stock Exchange
              
              
              74,000
              
              
              0Advertising
                  and marketing
              
              
              50,000
              
              
              119,000Travel
                  and entertainment
              
              
              91,000
              
              
              116,000Corporate
                  insurance
              
              
              117,000
              
              
              144,000Computer
                  and communications
              
              
              96,000
              
              
              118,000Consulting
              
              
              499,000
              
              
              469,000Other
              
              
              247,000
              
              
              211,000Total
              
              $
              1,775,000
              
              $
              1,769,000
 
 Selling,
        general and administrative expenses not specifically attributable to any
        segment
        have been allocated equally 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.
 
 During
        the year ended July 31, 2005, we recorded expenses of $830,948 associated
        with
        the granting of stock, options and warrants to advisors and consultants as
        compared to expenses of $641,878 incurred for the year ended July 31, 2004.
        Expenses associated with the modification of warrants was approximately
        $1,082,695 for the year ended July 31, 2005 as compared to no expense for
        the
        year ended July 31, 2004. Warrants for the purchase of common stock issued
        in
        May 2002 in connection with the sale of units of our Series B Convertible
        Preferred Stock were modified to be identical in price and term with the
        warrants issued in conjunction with the offering of our Series C Convertible
        Preferred Stock. The excess of the value of the modified warrants as compared
        to
        the original warrants was calculated according to paragraph 188 of FAS 123.
        The
        excess amount, which included the right to purchase 3,583,491 shares of our
        common stock, totaled $904,897, which has been recognized as a charge to
        operations. Further, during the year ended July 31, 2005, we modified certain
        options for the purchase of common stock granted to James P. Jimirro. Pursuant
        to the terms of the J2 Communications Amended and Restated 1999 Stock Option,
        Deferred Stock and Restricted Stock Plan, the options would have expired,
        if not
        exercised, 90 days following Mr. Jimirro’s separation from service. The option
        agreements have been amended so that they are not subject to this section
        of the
        J2 Communications Amended and Restated 1999 Stock Option, Deferred Stock
        and
        Restricted Stock Plan and will instead expire in accordance with the terms
        of
        the original grant. The expense associated with this modification was $177,798.
        There was no corresponding expense during the year ended July 31, 2004. On
        January 28, 2005 we recorded an expense of $2,577,497 representing costs
        related
        to Mr. Jimirro’s separation from service, including a salary cost of $2,523,800
        and a payment of $53,697 to a leasing company in order to transfer ownership
        of
        an automobile to Mr. Jimirro. There were no corresponding expenses during
        the
        year ended July 31, 2004.
 
 21
  Interest
        income during the year ended July 31, 2005 increased to approximately $7,847
        from $5,762 in interest income earned during the year ended July 31, 2004.
        This
        increase of $2,085 or 36% resulted from an increase in cash and cash equivalents
        held during the year ended July 31, 2005 as compared to the year ended July
        31,
        2004. Other expense of $492,820 in the year ended July 31, 2005 resulted
        from
        forgiveness of a loan plus interest having an unpaid balance of approximately
        $165,820 that was due from James P. Jimirro to us. This loan forgiveness
        was
        part of the benefits paid or transferred to Mr. Jimirro upon his separation
        from
        service in accordance with the terms of his employment agreement. Other expense
        also includes the amortization of the capitalized debt issuance costs of
        $327,000
 
 For
        the
        year ended July 31, 2005, we had a net loss of $8,669,170 as compared to
        a net
        loss of $5,127,107 for the year ended July 31, 2004, representing an increase
        in
        net loss of $3,542,063 or 69%. The increase in net loss resulted primarily
        from
        costs of approximately $2,600,000 paid to Mr. Jimirro on his separation from
        service, and the expense of approximately $1,082,695 associated with modifying
        the terms of stock options and warrants. An increase in revenues of $1,752,000,
        to $3,673,000 earned during the year ended July 31, 2005 as compared to $1,922
        ,000 earned during the year ended July 31, 2004, offset the increase of net
        loss. During the years ended July 31, 2005 and 2004, we had no significant
        provision for income taxes due to the utilization of deferred tax valuation
        allowances. For the year ended July 31, 2005, we recognized the beneficial
        conversion feature attributable to the Series C Convertible Preferred Stock
        of
        $2,280,906, which is treated as preferred dividend, as well as accrued dividends
        of $1,113,519, as compared to no such expenses during the year ended July
        31,
        2004. The addition of the discount and dividend resulted in a net loss
        attributable to common shareholders of $12,063,595 or $3.69 per share versus
        a
        net loss attributable to common shareholders of $5,127,107 or $1.67 per share
        for the year ended July 31, 2004.
 
 **Liquidity
        And Capital Resources**
 
 We
        have
        not generated positive cash flow from operations over the past few years
        and we
        do not expect to do so for at least 12 months. Our principal source of working
        capital during the year ended July 31, 2005 consisted of proceeds from the
        issuance of units of our Series C Convertible Preferred Stock with warrants
        attached.
 
 For
        the
        year ended July 31, 2005, our net cash flow used in operating activities
        was
        $6,803,573 as compared to $4,003,455 of net cash flow used in operating
        activities during the year ended July 31, 2004. The decreased results are
        primarily attributable to the payout made to James P. Jimirro, our former
        Chief
        Executive Officer and President, upon his separation from service. During
        the
        year ended July 31, 2005, the decrease in the expense associated with the
        granting of stock, warrants, and options and the expense associated with
        the
        modification of stock options and warrants are not cash related expenses
        and so
        were eliminated from the calculation of cash flow used in operating activities.
        We had cash and cash equivalents of $110,695 at July 31, 2005 as compared
        to
        cash and cash equivalents of $484 at July 31, 2004. The increase in cash
        is
        primarily due to the offering of units of Series C Convertible Preferred
        Stock
        with warrants attached, which resulted in an infusion of approximately $3.6
        million in cash.
 
 As
        of
        October 19, 2005 we had cash on hand of approximately $3,554,897 and receivables
        totaling $694,145. We completed a public offering of our common stock on
        August
        8, 2005. We raised $9.6 million in gross proceeds from this offering of our
        securities. We believe that our cash on hand, along with the net proceeds
        raised
        by the public offering of our common stock, will provide us with adequate
        cash
        to fund our ongoing operations and capital requirements for at least 24
        months.
 
 22
  Our
        principal source of working capital since the Reorganization Transaction
        has
        been loans received from Daniel S. Laikin, our Chief Executive Officer and
        a
        director, and Timothy Durham, a director. The aggregate amount of the loans
        owed
        to Mr. Laikin and Mr. Durham was $4.6 million. These loans were paid with
        Series
        C Convertible Preferred units on December 9, 2004.
 
 During
        the year ended July 31, 2005, we received $3.6 million in cash proceeds from
        the
        offering of units composed of our Series C Convertible Preferred Stock and
        warrants to purchase our common stock and we issued additional units of these
        securities to pay the loans discussed above and expenses owed to Mr.
        Laikin
 
 On
        January 28, 2005 we received a loan in the amount of $2.7 million from N.
        Williams Family Investments, L.P. The proceeds of this loan were primarily
        used
        to pay certain benefits to James P. Jimirro, our former Chief Executive Officer
        and President, upon his separation from service. The loan accrued interest
        at
        the rate of 7% and was due to be repaid on the earlier of January 28, 2006
        or
        the date we closed an offering in which the gross cash proceeds to us equaled
        or
        exceeded $2,700,000. The loan was secured by a lien against all of our assets.
        On August 31, 2005 the loan and all accrued interest was paid in
        full.
 
 On
        May
        17, 2003, two notes payable totaling approximately $442,000 at April 30,
        2002
        were due to be paid in full. The notes represented money owed to legal firms
        relating to work done in connection with the Reorganization Transaction.
        We
        reached a settlement with one noteholder in December 2004 and paid that note,
        as
        it was re-negotiated, in full. Timothy Durham, a director, paid the amount
        due
        under the note to the second noteholder in full and the liability is now
        owed to
        him. As of July 31, 2005, approximately $115,000 in principal remained unpaid.
        The obligation to Mr. Dur ham
        is
        payable on demand. To date, no demand has been made. We plan to pay this
        obligation with revenues earned by our operations.
 
 In
        recent
        years, our operations have been characterized by ongoing capital shortages
        caused by expenditures related to the initiation of several new business
        activities. We have met these capital shortages by borrowing money from members
        of the NLAG Group, which includes three of our directors, and by selling
        our
        securities.
 
 Our
        financial statements for the fiscal year ended July 31, 2005 contain an
        explanatory paragraph as to our ability to continue as a “going concern.” This
        qualification may impact our ability to obtain future financing.
 
 **Off-Balance
        Sheet Arrangements**
 
 We
        do not
        have any off-balance sheet transactions such as guarantees, commitments,
        lease
        and debt agreements or other agreements that could trigger an adverse change
        in
        our credit rating, earnings, cash flows or stock price, including requirements
        to perform under standby agreements.
 
 **Contractual
        Obligations**
 
 The
        table
        below sets forth our contractual obligations as of July 31, 2005.
  23
 
 **Payments
                  Due by Period****Total**
              
              **Less
                  than**
                **1
                  year**
              
              **1
                  - 3 years**
              
              **3
                  - 5 years**
              
              **More
                  than**
                **5
                  years**Note
                  Payable
              
              $
              2,795,794
              
              $
              2,795,794
              
              $
              —
              
              $
              —
              
              $
              —Note
                  Payable on Demand
              
              
              848,202
              
              
              848,202
              
              
              —
              
              
              —
              
              
              —Long
                  Term Debt
              
              
              50,000
              
              
              —
              
              
              50,000
              
              
              —
              
              
              —Capital
                  Lease Obligations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Operating
                  Leases
              
              
              5,600
              
              
              2,800
              
              $
              2,800
              
              
              —
              
              
              —Purchasing
                  Obligations
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Other
                  Long-Term Liabilities
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —$
              3,699,596
              
              $
              3,646,796
              
              $
              52,800
              
              
              —
              
              
              —
 
 **New
        Accounting Pronouncements**
 
 In
        December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate
        Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67”
        (“SFAS 152). The amendments made by Statement 152 This Statement amends FASB
        Statement No. 66, Accounting for Sales of Real Estate, to reference the
        financial accounting and reporting guidance for real estate time-sharing
        transactions that is provided in AICPA Statement of Position (SOP) 04-2,
        Accounting for Real Estate Time-Sharing Transactions. This Statement also
        amends
        FASB Statement No. 67, Accounting for Costs and Initial Rental Operations
        of
        Real Estate Projects, to state that the guidance for incidental operations
        and
        costs incurred to sell real estate projects does not apply to real estate
        time-sharing transactions. The accounting for those operations and costs
        is
        subject to the guidance in SOP 04-2. This Statement is effective for financial
        statements for fiscal years beginning after June 15, 2005, with earlier
        application encouraged. We have evaluated the impact of the adoption of SFAS
        152, and we do not believe the impact will be significant to the overall
        results
        of our operations or financial position as the Company does not engage in
        these
        sorts of transactions.
 
 In
        December 2004, the FASB issued SFAS No.153, “Exchanges of Non-monetary Assets,
        an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
        The amendments made by Statement 153 are based on the principle that exchanges
        of non-monetary assets should be measured based on the fair value of the
        assets
        exchanged. Further, the amendments eliminate the narrow exception for
        non-monetary exchanges of similar productive assets and replace it with a
        broader exception for exchanges of non-monetary assets that do not have
        commercial substance. Previously, Opinion 29 required that the accounting
        for an
        exchange of a productive asset for a similar productive asset or an equivalent
        interest in the same or similar productive asset should be based on the recorded
        amount of the asset relinquished. Opinion 29 provided an exception to its
        basic
        measurement principle (fair value) for exchanges of similar productive assets.
        The Financial Accounting Standards Board believes that exception required
        that
        some non-monetary exchanges, although commercially substantive, be recorded
        on a
        carryover basis. By focusing the exception on exchanges that lack commercial
        substance, the Financial Accounting Standards Board believes this Statement
        produces financial reporting that more faithfully represents the economics
        of
        the transactions. The Statement is effective for non-monetary asset exchanges
        occurring in fiscal periods beginning after June 15, 2005. Earlier application
        is permitted for non-monetary asset exchanges occurring in fiscal periods
        beginning after the date of issuance. The provisions of this Statement shall
        be
        applied prospectively. We have evaluated the impact of the adoption of SFAS
        153,
        and we do not believe the impact will be significant to our overall results
        of
        operations or financial position.
 
 In
        December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
        Payment.” Statement 123(R) will provide investors and other users of financial
        statements with more complete and neutral financial information by requiring
        that the compensation cost relating to share-based payment transactions be
        recognized in financial statements. That cost will be measured based on the
        fair
        value of the equity or liability instruments issued. Statement 123(R) covers
        a
        wide range of share-based compensation arrangements including share options,
        restricted share plans, performance-based awards, share appreciation rights,
        and
        employee share purchase plans. Statement 123(R) replaces FASB Statement No.
        123,
        Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
        Accounting for Stock Issued to Employees. Statement 123, as originally issued
        in
        1995, established as preferable a fair-value-based method of accounting for
        share-based payment transactions with employees. However, that Statement
        permitted entities the option of continuing to apply the guidance in Opinion
        25,
        as long as the footnotes to financial statements disclosed what net income
        would
        have been had the preferable fair-value-based method been used. Public entities
        (other than those filing as small business issuers) will be required to apply
        Statement 123(R) as of the first interim or annual reporting period that
        begins
        after June 15, 2005. We have evaluated the impact of the adoption of SFAS
        123(R)
        and, although we have not yet finished our estimates to enable us to quantify
        the impact, based on contractual obligations, recurring customary grants
        such as
        those to the Board of Directors, and vested options in place, we believe
        the
        impact will be significant to our overall results of operations and financial
        position.
 
 24
  In
        March
        2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based
        Payment”(“SAB 107”), which provides interpretive guidance related to the
        interaction between SFAS 123(R) and certain SEC rules and regulations. It
        also
        provides the SEC staff's views regarding valuation of share-based payment
        arrangements. In April 2005, the SEC amended the compliance dates for SFAS
        123(R), to allow companies to implement the standard at the beginning of
        their
        next fiscal year, instead of the next reporting period beginning after June
        15,
        2005. Management is currently evaluating the impact SAB 107 will have on
        our
        consolidated financial statements.
 
 In
        May
        2005, the Financial Accounting Standards Board (FASB) issued Statement of
        Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
        Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
        3. SFAS
        No. 154 requires retrospective application to prior periods' financial
        statements of changes in accounting principle, unless it is impracticable
        to
        determine either the period-specific effects or the cumulative effect of
        the
        change. SFAS No. 154 also requires that retrospective application of a change
        in
        accounting principle be limited to the direct effects of the change. Indirect
        effects of a change in accounting principle, such as a change in
        nondiscretionary profit-sharing payments resulting from an accounting change,
        should be recognized in the period of the accounting change. SFAS No. 154
        also
        requires that a change in depreciation, amortization or depletion method
        for
        long-lived, non-financial assets be accounted for as a change in accounting
        estimate effected by a change in accounting principle. SFAS No. 154 is effective
        for accounting changes and corrections of errors made in fiscal years beginning
        after December 15, 2005. Early adoption is permitted for accounting changes
        and
        corrections of errors made in fiscal years beginning after the date this
        Statement is issued. Management does not expect the implementation of this
        new
        standard to have a material impact on their financial position, results of
        operations and cash flows.
 
 **Factors
        Affecting Business, Operating Results and Financial
        Condition**
 
 **Risks
        Related To Our Business Operations**
 
 ***We
        have incurred losses in the past and losses may
        continue.***
 
 We
        sustained a net loss of $8,669,170 and a net loss attributable to common
        stockholders of $12,063,595 for the fiscal year ended July 31, 2005. As of
        July
        31, 2005, we had an accumulated deficit of $31,894,027. Our last profitable
        quarter was the quarter ended January 31, 2002 and our last profitable fiscal
        year was the fiscal year ended July 31, 2000. We may not attain operating
        profits in the future.
 
 ***We
        may be unable to meet our future capital requirements*** **.** ***If
        we are unable to raise capital as we need it, we may have to curtail our
        operations.***
 
 We
        have
        not generated positive cash flow from operations over the past few years
        and we
        do not expect to generate positive cash flow until the fourth quarter of
        the
        2006 fiscal year. Our capital requirements have been and will continue to
        be
        significant. In order to fund shortages of capital during the past two fiscal
        years, we have borrowed money from our major stockholders and sold our
        securities. We anticipate that the proceeds from the public offering of our
        common stock, which closed on August 8, 2005, will be sufficient to meet
        our
        anticipated working capital and capital expenditure requirements for at least
        24
        months from the date the offering closed. However, if opportunities permit
        us to
        expand more rapidly than we have planned or if our working capital needs
        or our
        capital expenditures exceed our current expectations, we may be required
        to
        raise additional capital.
 
 25
  If
        we
        need additional capital in the future and we are unsuccessful in finding
        financing, we may be required to severely curtail our operations, which would
        have a material adverse affect on our business.
 
 ***Our
        revenues and results of operations vary from quarter to quarter. If we fail
        to
        project accurately and experience significant revenue shortfalls, we could
        be
        forced to discontinue a portion or all of our
        operations.***
 
 Our
        revenues and results of operations depend to a significant degree upon the
        timing and receipt of revenue from licensing, production fees and distribution
        of motion pictures and television programming. While most of our licensing
        fees
        are paid immediately upon entering into the license agreements, some are
        deferred until the licensor’s production costs are recouped. Production fees are
        not earned until the production is begun and expenses related to the production
        are incurred. Furthermore, motion pictures often have long production cycles,
        making it difficult to predict when they will be completed and released for
        distribution. All of these factors make it difficult to predict with certainty
        when revenues might be received. Results in any particular quarter may not
        be
        indicative of results in subsequent periods. If, because of the variance
        in our
        quarterly operating results, we fail to plan or project accurately, we could
        be
        subject to unexpected revenue shortfalls. If we were unable to find financing
        to
        cover the revenue shortfalls, we could have to discontinue a portion or all
        of
        our operations for some period of time or even indefinitely.
 
 ***We
        enter into agreements to develop ideas and properties, however, we may decide
        to
        abandon a project rather than to complete the development of
        it.***
 
 We
        pursue
        the acquisition of ideas and properties for original production from a number
        of
        sources. For example, we may internally develop a new property based on an
        existing public domain property or create or acquire an entirely new idea.
        Oftentimes, we enter into agreements with third parties to develop these
        ideas
        and properties. After we start development, we may determine that the project
        is
        too costly to develop or not suited to our purposes, in which case we may
        abandon the project. We cannot assure you that we will develop every project
        we
        acquire.
 
 ***Competition
        in the entertainment industry is intense for many reasons, including the
        fact
        that the industry is dominated by multinational, multi-media conglomerates.
        Because of our lack of money and other resources, we may not be able to compete
        successfully with other producers of entertainment.***
 
 The
        entertainment industry is intensely competitive and is evolving into an industry
        in which certain multi-national, multi-media entities, because of their control
        over key film, magazine, and/or television content, as well as key network
        and
        cable outlets, will be able to dominate certain communications industry
        activities in the United States and abroad. Virtually all of these competitors
        are substantially larger than we are, have been in business longer than we
        have
        and have more resources, including money, contacts and personnel, at their
        disposal. These competitors have numerous advantages over us, including the
        ability to acquire financing for their projects and attract superior properties,
        personnel, actors and/or celebrity hosts.
 
 In
        spite
        of the strength of our brand, we may not be able to compete successfully
        in the
        entertainment industry because of our lack of resources. If we cannot compete
        successfully, our business and operating results will be adversely
        affected.
 
 26
  ***We
        depend on the National LampoonTM trademark and related properties for a
        significant portion of our revenues. Any erosion of our brand could have
        a
        material adverse effect on our business.***
 
 Our
        revenues are primarily derived from exploitation of the National LampoonTM
        trademark. Any erosion of brand recognition of that trademark and its related
        properties or our failure to adequately protect our intellectual property
        could
        have a material adverse effect on our business, results of operations and
        financial position. Our business also depends upon the protection of the
        intellectual property rights that we have in our entertainment properties.
        Despite our efforts to protect our proprietary rights, unauthorized parties
        may
        attempt to copy or otherwise obtain and exploit our products. Monitoring
        unauthorized use of our products is difficult, and we cannot be certain that
        the
        steps we have taken will prevent unauthorized use of our film properties,
        particularly in foreign countries where the laws may not protect our proprietary
        rights as fully as in the United States.
 
 In
        recent
        years, there has been significant litigation in the United States involving
        intellectual property rights. We may become a party to litigation in the
        future
        to protect our intellectual property rights or as a result of the alleged
        infringement of someone else’s intellectual property. These claims and any
        resulting lawsuits could subject us to significant liability and invalidation
        of
        our property rights. Such litigation could also force us to take measures
        harmful to our operations, such as requiring us to stop selling certain products
        or to obtain a license from the owner of infringed intellectual property.
        Any
        such infringement claims, with or without merit, could be time-consuming
        to
        defend, result in costly litigation, divert management’s attention from our
        business and materially adversely affect our financial condition and results
        of
        operations
 
 ***We
        depend on the services of Daniel S. Laikin and Douglas S. Bennett. If we
        were to
        lose the services of either of these individuals, it could have a material,
        adverse effect on our business.***
 
 We
        are
        dependent upon the services of Daniel S. Laikin and Douglas S. Bennett. The
        loss
        of their services could have a material adverse effect on our business, results
        of operations and financial position. We do not carry key-person life insurance
        on these individuals.
 
 ***Termination
        of our agreement with The Harvard Lampoon, Inc. would adversely affect our
        business and results of operations.***
 
 We
        license the use of the word “LampoonTM” from The Harvard Lampoon, Inc. pursuant
        to an agreement we originally entered into on October 8, 1969. Pursuant to
        this
        agreement, as it was amended and restated on October 1, 1998, we would lose
        our
        right to use the word “Lampoon” in our mark if, for a period of 12 consecutive
        months, we failed to be actively engaged in good faith efforts to produce
        or to
        market our products and services. Loss of the use of the word “Lampoon” in our
        mark would have a material adverse effect on our business and results of
        operations.
 
 ***Our
        dependence on a limited number of projects means that the loss or failure
        of a
        major project could have a material adverse effect on our
        business.***
 
 A
        portion
        of our revenues is generated from a limited number of films, television
        programs, and other projects that change from period to period. Projects
        vary
        from period to period due to the opportunities available to us and to audience
        response, both of which are unpredictable and subject to change. The loss
        or
        failure of a major project, unless replaced by other projects, could have
        a
        material adverse effect on our results of operations and financial condition
        as
        well as on the market price of our securities. There is no assurance that
        any
        project we release will be successful.
 
 ***Failure
        to attract and retain qualified personnel may adversely affect our
        business.***
 
 We
        believe that our performance and future success will depend in large part
        upon
        our ability to attract and retain additional highly skilled creative, technical,
        sales, marketing and financial personnel, especially those with experience
        in
        the television industry. If we do not succeed in attracting skilled personnel
        or
        in retaining our current personnel, our business could be adversely affected.
        Competition for such individuals, especially creative and technical talent,
        is
        intense. We have in the past experienced, and expect to continue to experience,
        difficulty in hiring highly skilled employees with appropriate
        qualifications.
 
 27
  **Risks
        Related To National Lampoon Networks, Inc.**
 
 ***If
        National Lampoon Networks, Inc. is not successful in increasing its advertising
        revenues, it may not be able to operate profitably.***
 
 Our
        fiscal year ends on July 31st. During the 2005 fiscal year, advertising,
        promotion and licensing revenues earned by our subsidiary, National Lampoon
        Networks, Inc., accounted for approximately 43% of all the revenues we earned.
        National Lampoon Networks, Inc. earns advertising revenues through on-air
        advertising during its programming as well as through live promotional events
        and field marketing, such as product sampling. Our plan is to increase our
        revenues by increasing National Lampoon Networks’ programming and expanding its
        network. If National Lampoon Networks, Inc. is unable to increase its
        programming and expand its broadcasting network as planned, it may not be
        able
        to operate profitably.
 
 ***National
        Lampoon Networks, Inc. depends on a limited number of advertisers. The loss
        of a
        significant portion of these advertisers could adversely affect its advertising
        revenues.***
 
 We
        anticipate that National Lampoon Networks’ operating results will continue to
        depend to a significant extent upon revenues from a small number of advertisers.
        There may be little or no continuity in advertisers from period to period
        because few advertisers are contractually obligated to renew their advertising
        contracts or to purchase set amounts of advertising in the future. As a result,
        the failure of National Lampoon Networks, Inc. to renew advertising contracts,
        to replace advertisers who do not choose to continue advertising on the network
        or to sell its expected minimum number of advertisements could adversely
        affect
        our advertising revenues.
 
 ***Sales
        cycles vary for advertising and may cause our revenues for one or more quarterly
        periods to be adversely affected.***
 
 Advertisers
        have their own budgetary cycles that, very often, do not coincide with National
        Lampoon Networks’ schedule. The advertisers’ sales cycles for advertising may
        vary significantly. The time between the date of initial contact with a
        potential advertiser or sponsor and receipt of a purchase order may range
        from
        as little as six weeks to up to nine months. In addition, during these sales
        cycles, we may expend substantial funds and management resources but not
        generate advertising revenues. Therefore, if these sales are delayed or do
        not
        occur, our revenues for one or more quarterly periods may be adversely
        affected.
 
 Aside
        from budgetary cycles, our receipt of advertising revenues may be delayed
        due to
        things over which we have little or no control, including the
        following:
 
 ·
              advertisers’
                  budgetary constraints;
 
 ·
              the
                  timing of completion of advertisements by advertisers;
                  and
 
 ·
              the
                  possibility of cancellation or delay of projects by advertisers
                  or
                  sponsors.
 
 ***Tracking
        and measurement standards for advertising are evolving and create uncertainty
        with advertisers, which may lead to a decrease in advertising
        revenues.***
 
 The
        absence or insufficiency of advertising measurement standards could adversely
        impact our ability to attract and retain advertisers. There are currently
        few
        well-established advertising measurement standards, and the industry may
        need to
        standardize these measurements. We cannot assure you that standardization
        will
        occur.
 
 28
  It
        is
        important to our advertisers that we accurately measure the demographics
        of our
        user base and the delivery of advertisements on our network. We depend on
        third
        parties to provide certain of these measurement services. If they are unable
        to
        provide these services in the future, we would need to perform them ourselves
        or
        obtain them from another provider, if available. This could cause us to incur
        additional costs or cause interruptions in our business during the time we
        are
        replacing these services. Companies may choose to not advertise on our network
        or may pay less for advertising if they do not perceive our measurements
        or
        measurements made by third parties to be reliable.
 
 ***In
        order to be successful, National Lampoon Networks must manage its growth.
        If
        growth is not managed successfully, it could have a material adverse effect
        on
        our operations.***
 
 We
        are
        planning to expand National Lampoon Networks’ operations by expanding its
        broadcast network. If we are successful in expanding National Lampoon Networks’
        business, it will be exposed to greater overhead, marketing and support costs
        and other risks associated with expansion. To manage its growth effectively,
        National Lampoon Networks must improve and expand its general operations
        and
        hire and manage additional personnel. We cannot assure you that National
        Lampoon
        Networks, Inc. will be able to effectively do this. If growth is not effectively
        managed, our business and operations may be materially adversely
        affected.
 
 ***Failure
        to continue to develop content that attracts National Lampoon Networks’ targeted
        audience or a decline in the strength of the National LampoonTM brand could cause
        a decrease in the size of the audience or it could change the demographics
        of
        the audience, resulting in a loss of advertising
        revenues.***
 
 The
        future success of National Lampoon Networks depends on its ability to continue
        to develop or license content that is interesting and engaging to its targeted
        audience, which is primarily comprised of young adults. In addition, the
        success
        of its business will depend, to a large extent, upon the continued brand
        strength of the National LampoonTM trademark and associated logos. The strength
        of the brand will depend, among other things, upon continued promotion of
        the
        brand by National Lampoon Networks. If the young adult audience determines
        that
        National Lampoon Networks’ content does not reflect its tastes, or if the tastes
        of the young adult audience change and we do not react to those changes
        effectively or in a timely manner, or if our brand becomes less appealing
        to
        young adults, then audience size could decrease or the demographic
        characteristics of the audience could change. Any such occurrence would
        adversely affect the ability of National Lampoon Networks to attract advertisers
        and may also negatively impact our revenues.
 
 ***If
        significant comedic content developed by third parties is not available to
        us on
        favorable terms or at all, it could adversely affect our
        business.***
 
 Because
        much of National Lampoon Networks’ content is provided by third parties at
        minimal or no charge, we depend on our good relations with our content providers
        to offer content that we believe appeals to National Lampoon Networks’ audience.
        Some of our content providers are also competitors, and in the future may
        decide
        to limit our access to content or change prices or demand terms that are
        unfavorable or discriminatory. Neither we nor National Lampoon Networks have
        long-term contracts with our content providers, and we cannot assure you
        that
        they will continue to make their content available to us on reasonable terms
        or
        at all. If content providers charge significant fees for their content or
        otherwise alter or discontinue their relationships with us or with National
        Lampoon Networks, it would adversely affect our business and competitive
        position.
 
 29
  **Risks
        Related To National Lampoon Tours, Inc.**
 
 ***National
        Lampoon Tours faces considerable competition in the travel services market
        and
        may be unable to gain a competitive position in that
        market.***
 
 The
        travel services market is highly competitive and has relatively low barriers
        to
        entry. National Lampoon Tours competes primarily with other vacation providers,
        online travel reservation services, travel agencies and other distributors
        of
        travel products and services. Many of its competitors have competitive
        advantages such as greater brand recognition, longer operating histories,
        larger
        customer bases, greater financial, marketing and other resources and the
        ability
        to secure products and services from travel suppliers with greater discounts
        and
        on more favorable terms than we can.
 
 Some
        travel providers have a strong presence in particular geographic areas, which
        may make it difficult for us to attract customers in those areas. If National
        Lampoon Tours cannot compete successfully, its business and operating results
        will be adversely affected.
 
 ***National
        Lampoon Tours will be affected by a number of factors, any of which could
        have a
        material adverse effect on its business, financial condition and results
        of
        operations.***
 
 National
        Lampoon Tours’ results of operations will be dependent upon factors generally
        affecting the travel industry, such as political instability, armed hostilities,
        international terrorism, extreme weather conditions, a rise in fuel prices,
        labor disturbances, excessive inflation, a general weakening in economic
        activity and reduced employment in the United States. These types of events
        could have a material adverse effect on the business, financial condition
        and
        results of operations of National Lampoon Tours.
 
 ***National
        Lampoon Tours may not have enough insurance to cover all of the risks it
        faces.***
 
 In
        accordance with customary industry practices, National Lampoon Tours maintains
        insurance coverage against potential losses incurred by travel participants.
        However, National Lampoon Tours may not be adequately insured against such
        claims. The occurrence of an event not fully covered by insurance could have
        a
        material adverse effect on National Lampoon Tours’ financial condition and
        results of operations.
 
 **ITEM
        7.**  **FINANCIAL
        STATEMENTS**
 
 The
        financial statements, together with the independent auditors’ report thereon,
        appear beginning on page  F-1  of
        this
        report.
  30
  Report
                    Of Independent Registered Public Accounting Firm
                F-1Consolidated
                    Balance Sheet at July 31, 2005 (Audited)
                F-2Consolidated
                    Statements of Operations (Audited) for the YearsEnded
                    July 31, 2005 and 2004
                F-4Consolidated
                    Statements of Shareholders’ Equity (Deficit) forthe
                    Years Ended July 31, 2005 and 2004
                F-5Consolidated
                    Statements of Cash Flows (Audited) for the YearsEnded
                    July 31, 2005 and 2004
                F-6Notes
                    to Consolidated Financial Statements
                F-7
 
  
  
 REPORT
          OF
          INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board
          of
          Directors National Lampoon, Inc., Los Angeles, California
 
 We
          have
          audited the accompanying consolidated balance sheets of National Lampoon,
          Inc.
          and Subsidiaries (the Company) as of July 31, 2005, and the related consolidated
          statements of operations, shareholders (deficit) and cash flows for each
          of the
          two years in the period ended July 31, 2005. These consolidated financial
          statements are the responsibility of the Company’s management. Our
          responsibility is to express an opinion on these consolidated financial
          statements based on our audits.
 
 We
          conducted our audits in accordance with the standards of the Public Company
          Accounting Oversight Board (United States). Those standards require that
          we plan
          and perform the audit to obtain reasonable assurance about whether the
          consolidated financial statements are free of material misstatement. An
          audit
          includes examining, on a test basis, evidence supporting the amounts and
          disclosures in the consolidated financial statements. An audit also includes
          assessing the accounting principles used and significant estimates made
          by
          management, as well as evaluating the overall financial statement presentation.
          We believe that our audits provide a reasonable basis for our
          opinion.
 
 In
          our
          opinion, the consolidated financial statements referred to above present
          fairly,
          in all material respects, the consolidated financial position of National
          Lampoon, Inc. and subsidiaries as of July 31, 2005 and the results of their
          consolidated operations and their consolidated cash flows for each of the
          two
          years in the period ended July 31, 2005 in conformity with accounting principles
          generally accepted in the United States.
 
 
 /s/
                    Stonefield Josephson, Inc.CERTIFIED
                    PUBLIC ACCOUNTANTSSanta
                    Monica, CaliforniaOctober
                    15, 2005
 
  F-1
  
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
 CONSOLIDATED
          BALANCE SHEET
  
 Year
                    EndingASSETS
                
                31-Jul-05CURRENT
                    ASSETSCash
                
                $
                110,695Accounts
                    receivable
                
                
                322,324Capitalized
                    debt issuance costs, net of $327,000 amortization
                
                
                313,000Prepaid
                    expenses and other current assets
                
                
                192,718Total
                    current assets
                
                
                938,737NON-CURRENT
                    ASSETSCapitalized
                    production costs, net of $425,500 film financing and $664,459
                    amortization
                
                
                1,190,683Fixed
                    assets, net of accumulated depreciation
                
                
                15,474Intangible
                    assets
                
                
                5,964,732Accumulated
                    amortization of intangible assets
                
                
                (3,988,578
                )Total
                    non-current assets
                
                
                3,182,311TOTAL
                    ASSETS
                
                $
                4,121,048
 
  F-2
  
 LIABILITIES
          AND SHAREHOLDERS’ DEFICIT
 
 CURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                462,645Accrued
                    expenses
                
                
                90,421Accrued
                    legal fees
                
                
                473,329Payroll
                    accrual
                
                
                206,881Accrued
                    royalties
                
                
                396,250Accrued
                    dividends
                
                
                1,113,519Notes
                    payable - related party, including interest of $128,996 and $168,307
                    respectively
                
                
                3,693,996TOTAL
                    CURRENT LIABILITIES
                
                
                6,437,041MINORITY
                    INTEREST
                
                
                249,806SHAREHOLDERS’
                    DEFICITSeries
                    B Convertible Preferred Stock, par value $.0001 per share, 68,406
                    shares
                    authorized, 63,607 shares issued.
                
                
                6Series
                    C Convertible Preferred Stock, par value $.0001 per share, 250,000
                    shares
                    authorized, 229,761 shares issued.
                
                
                23Common
                    Stock, par value $.0001 per share, 60,000,000 shares authorized
                    and
                    3,527,124 shares issued.
                
                
                353Additional
                    paid-in capital
                
                
                29,436,213Less:
                    Deferred compensation
                
                
                (108,367
                )Accumulated
                    deficit
                
                
                (31,894,027
                )TOTAL
                    SHAREHOLDERS’ DEFICIT
                
                
                (2,565,799
                )TOTAL
                    LIABILITIES AND SHARESHOLDERS’ DEFICIT
                
                $
                4,121,048
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 
 
 
  F-3
  
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
 CONSOLIDATED
          STATEMENTS OF OPERATIONS
  
 
 Year
                    Ended July 31,2005
                
                2004REVENUESProduction
                
                $
                223,333
                
                $
                371,413Licensing
                
                
                1,981,814
                
                
                940,661Tours
                
                
                93,724
                
                
                —Advertising
                
                
                476,023
                
                
                289,156Promotion
                
                
                845,748
                
                
                269,484Publishing
                
                
                52,800
                
                
                50,850Total
                    revenues
                
                
                3,673,442
                
                
                1,921,564COSTS
                    AND EXPENSESCosts
                    related to production revenue
                
                
                95,247
                
                
                281,000Costs
                    related to licensing revenue
                
                
                517,745
                
                
                421,801Costs
                    related to tours revenues
                
                
                299,090
                
                
                —Costs
                    related to advertising and promotion revenues
                
                
                494,752
                
                
                1,181,039Amortization
                    of capitalized television production costs
                
                
                664,457
                
                
                —Amortization
                    of intangible assets
                
                
                240,000
                
                
                240,000Amortization
                    debt issuance costs
                
                
                327,000
                
                
                —Selling,
                    general and administrative expenses
                
                
                5,096,414
                
                
                4,285,858Stock,
                    warrants & options issued for services
                
                
                830,948
                
                
                641,878Severance
                    costs
                
                
                2,577,497
                
                
                —Forgiveness
                    of note receivable from officer
                
                
                165,822
                
                
                —Expense
                    associated with modification of warrants
                
                
                1,082,695
                
                
                —Total
                    costs and expenses
                
                
                12,391,667
                
                
                7,051,576OPERATING
                    LOSS
                
                
                (8,718,225
                )
                
                (5,130,012
                )OTHER
                    INCOMEInterest
                    income
                
                
                7,847
                
                
                5,762Other
                    income
                
                
                152
                
                
                —Total
                    other income
                
                
                7,999
                
                
                5,762NET
                    LOSS BEFORE MINORITY INTEREST
                
                $
                (8,710,226
                )
                $
                (5,124,250
                )MINORITY
                    INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARY
                
                $
                50,194
                
                $
                —LOSS
                    BEFORE INCOME TAXES
                
                $
                (8,660,032
                )
                $
                (5,124,250
                )Provision
                    for state income taxes
                
                
                9,138
                
                
                2,857NET
                    LOSS
                
                $
                (8,669,170
                )
                $
                (5,127,107
                )Accrued
                    dividends (Note C)
                
                
                (1,113,519
                )
                
                —Beneficial
                    conversion feature treated as preferred dividend (Note G)
                
                
                (2,280,906
                )
                
                —Net
                    loss attributable to common shareholders
                
                $
                (12,063,595
                )
                $
                (5,127,107
                )Net
                    loss per share attributable to common shareholder - basic and
                    diluted
                
                $
                (3.69
                )
                $
                (1.67
                )Weighted
                    average number of common shares - basic and diluted
                
                
                3,269,230
                
                
                3,063,674
 
 The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
 
 
  F-4
  
 **NATIONAL
                    LAMPOON, INC. AND SUBSIDIARIES**STATEMENTS
                    OF STOCKHOLDERS’ EQUITY (DEFICIT)
  
 
 Series
                      BShares
                
                Series
                      CShares
                
                Preferred
                    Stock
                    Amount
                
                Stock
                      SplitC/S
                    Shares
                
                Common
                    Stock
                    Amount
                
                APIC
                
                NoteReceivable
                
                DeferredComp
                
                AccumulatedDeficit
                
                Total**Balance
                    at July 31, 2003**
                
                
                63,607
                
                
                —
                
                $
                4,921,618
                
                
                3,053,590
                
                $
                12,188,942
                
                $
                —
                
                $
                (157,220
                )
                $
                (1,001,066
                )
                $
                (15,816,844
                )
                $
                135,430Interest
                    on note receivable
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (5,760
                )
                
                —
                
                
                —
                
                
                (5,760
                )Adjustment
                    for change in par value of preferred/ common stock
                
                
                —
                
                
                —
                
                
                (4,921,612
                )
                
                —
                
                
                (12,344,372
                )
                
                17,265,984
                
                
                —
                
                
                —
                
                
                —
                
                
                —Warrants/
                    options issued for services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                122,468
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                122,468Non
                    vested portion of stock issued for services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                486,296
                
                
                —
                
                
                486,296Common
                    stock issued
                
                
                —
                
                
                —
                
                
                —
                
                
                13,246
                
                
                33,115
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                33,115Net
                    Loss
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (5,127,107
                )
                
                (5,127,107
                )**Balance
                    at July 31, 2004**
                
                
                63,607
                
                
                —
                
                $
                6
                
                
                3,066,836
                
                $
                153
                
                $
                17,265,984
                
                $
                (162,980
                )
                $
                (514,770
                )
                $
                (20,943,951
                )
                $
                (4,355,558
                )Interest
                    on note receivable
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (2,842
                )
                
                —
                
                
                —
                
                
                (2,842
                )Forgiveness
                    of note receivable from officer
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                165,822
                
                
                —
                
                
                —
                
                
                165,822Issuance
                    of stock in connection with raising debt financing
                
                
                —
                
                
                —
                
                
                —
                
                
                200,000
                
                
                20
                
                
                639,980
                
                
                —
                
                
                —
                
                
                —
                
                
                640,000Adjustment
                    for stock split
                
                
                —
                
                
                —
                
                
                —
                
                
                (8
                )
                
                154
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                154Exercise
                    of stock options for cash
                
                
                —
                
                
                —
                
                
                —
                
                
                135,442
                
                
                14
                
                
                220,206
                
                
                —
                
                
                —
                
                
                —
                
                
                220,220Warrants
                    in exchange for services
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                414,393
                
                
                —
                
                
                (414,393
                )
                
                —
                
                
                —Deferred
                    compensation expense
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                820,796
                
                
                —
                
                
                820,796Common
                    stock issued for services
                
                
                —
                
                
                —
                
                
                —
                
                
                121,954
                
                
                12
                
                
                455,277
                
                
                —
                
                
                —
                
                
                —
                
                
                455,289Common
                    stock issued in lieu of bonuses
                
                
                —
                
                
                —
                
                
                —
                
                
                2,900
                
                
                —
                
                
                10,150
                
                
                —
                
                
                —
                
                
                —
                
                
                10,150Settlement
                    of legal note
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                95,000
                
                
                —
                
                
                —
                
                
                —
                
                
                95,000Conversion
                    of loans payable to Series C stock
                
                
                —
                
                
                126,971
                
                
                12
                
                
                —
                
                
                —
                
                
                4,507,638
                
                
                —
                
                
                —
                
                
                —
                
                
                4,507,650Proceeds
                    from Series C Investment
                
                
                —
                
                
                102,790
                
                
                11
                
                
                —
                
                
                —
                
                
                3,577,503
                
                
                —
                
                
                —
                
                
                —
                
                
                3,577,514Expense
                    associated with modification of Series B warrants and stock
                    options
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                1,082,695
                
                
                —
                
                
                —
                
                
                —
                
                
                1,082,695Series
                    B Dividend accrual (Note C)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (591,806
                )
                
                —
                
                
                —
                
                
                —
                
                
                (591,806
                )Series
                    C Dividend accrual (Note C)
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (521,713
                )
                
                —
                
                
                —
                
                
                —
                
                
                (521,713
                )Beneficial
                    conversion feature treated as preferred dividend
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                2,280,906
                
                
                —
                
                
                —
                
                
                (2,280,906
                )
                
                —Net
                    Loss for the period
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (8,669,170
                )
                
                (8,669,170
                )**Balance
                    at July 31, 2005**
                
                
                63,607
                
                
                229,761
                
                $
                29
                
                
                3,527,124
                
                $
                353
                
                $
                29,436,213
                
                $
                —
                
                $
                (108,367
                )
                $
                (31,894,027
                )
                $
                (2,565,799
                )
 
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
   F-5
  
 **NATIONAL
                    LAMPOON, INC. AND SUBSIDIARIES**CONSOLIDATED
                    STATEMENTS OF CASH FLOWS
  
 
 FOR
                    THE YEARENDED
                    JULY 31,2005
                
                2004CASH
                    FLOWS FROM OPERATING ACTIVITIESNet
                    (loss)
                
                $
                (8,669,170
                )
                $
                (5,127,107
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                
                
                34,203
                
                
                270,246Amortization
                    of intangible assets
                
                
                240,000
                
                
                —Amortization
                    of debt issuance costs
                
                
                327,000
                
                
                —Stock,
                    options and warrants issued for services
                
                
                1,286,236
                
                
                641,878Expense
                    associated with the modification of warrants
                
                
                1,082,695
                
                
                —Bad
                    debt write-off
                
                
                27,250
                
                
                —Forgiveness
                    of note receivable on common stock
                
                
                165,822
                
                
                —Minority
                    interest in income/(loss) of consolidated subsidiary
                
                
                (50,194
                )
                
                —Other
                
                
                4,410
                
                
                (5,760
                )Changes
                    in assets and liabilities:(Increase)
                    in accounts receivable
                
                
                (297,235
                )
                
                (33,950
                )(Increase)
                    in prepaid expenses and other assets
                
                
                (163,156
                )
                
                (9,426
                )(Increase)
                    in production costs
                
                
                (1,036,536
                )
                
                (127,148
                )Increase/(decrease)
                    in accounts payable
                
                
                59,507
                
                
                219,654Increase
                    in accrued expenses
                
                
                305,595
                
                
                209,258Increase/(decrease)
                    in deferred revenues
                
                
                (120,000
                )
                
                (41,000
                )NET
                    CASH USED IN OPERATING ACTIVITIES
                
                
                (6,803,573
                )
                
                (4,003,355
                )CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of fixed assets
                
                
                (1,075
                )
                
                (40,398
                )NET
                    CASH AND CASH EQUIVALENTS USED IN INVESTING ACTIVITIES
                
                
                (1,075
                )
                
                (40,398
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Minority
                    interest
                
                
                300,000
                
                
                —Proceeds
                    from Series C convertible preferred stock issuance
                
                
                3,432,735
                
                
                —Exercise
                    of stock options
                
                
                220,220
                
                
                —Proceeds
                    from notes payable
                
                
                2,961,904
                
                
                3,903,982NET
                    CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                6,914,859
                
                
                3,903,982NET
                    INCREASE/(DECREASE) IN CASH
                
                
                110,211
                
                
                (139,771
                )CASH
                    AT BEGINNING OF YEAR
                
                
                484
                
                
                140,255CASH
                    AT END OF YEAR
                
                $
                110,695
                
                $
                484Cash
                    paid for Taxes
                
                $
                —
                
                $
                2,857Interest
                    paid
                
                $
                —
                
                $
                —Supplemental
                    disclosures of cash flow information:Stock
                    and options issued for services and debt issuance costs
                
                $
                1,926,389
                
                $
                641,878Conversion
                    of loans to Series C Convertible Preferred stock with warrants
                    attached
                
                $
                4,507,650
                
                $
                —
 
 The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
 
 
 F-6
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
          A - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
          POLICIES**
 
 The
          Company was formed in California in 1986 and was primarily engaged in the
          acquisition, production and distribution of videocassette programs for
          retail
          sale. During the 1991 fiscal year, the Company acquired all of the outstanding
          shares of National Lampoon, Inc. (NLI). NLI was incorporated in 1967 and
          was
          primarily engaged in publishing *National
          Lampoon Magazine* and
          related activities. Subsequent to the Company’s acquisition of NLI, it
          de-emphasized its videocassette business and publishing operations and
          began to
          focus primarily on exploitation of the National LampoonTM trademark. The Company
          reincorporated in Delaware under the name National Lampoon, Inc. in November
          2002.
 
 On
          May
          17, 2002 a group of investors gained voting control of the Company through
          the
          acquisition of its Series B Convertible Preferred Stock and warrants to
          purchase
          its common stock (the “Reorganization Transaction”.) Since the Reorganization
          Transaction, the Company’s business has expanded to include operations other
          than licensing. On September 3, 2002, the Company’s subsidiary, National Lampoon
          Networks, Inc., acquired Burly Bear Network, Inc. to gain access to campus
          television stations. Aside from providing programming to these stations,
          National Lampoon Networks, Inc. provides an integrated marketing approach
          to
          retailers who wish to target the college market. The Company has also entered
          the home entertainment market, licensing its name to films and comedic
          entertainment that are distributed on DVD. In 2004, the Company began to
          offer
          travel services during spring break through its subsidiary, National Lampoon
          Tours, Inc. The Company has also expanded its licensing activities by licensing
          its name to books, content displayed over wireless communications devises
          and
          electronic games.
 
 The
          accompanying consolidated financial statements have been prepared assuming
          the
          Company will continue as a going concern. The Company’s net losses of
          $ 8,669,170,
          $5,127,107 and $5,924,836 in the prior three years, as well as negative
          working
          capital of $5,923,805 and accumulated deficit of $ 31,894,027 at
          July
          31, 2005, raise concerns about its ability to continue as a going concern,
          which
          are addressed by the equity transactions in the following
          paragraph.
 
 On
          December 9, 2004 the Company completed the sale of units consisting of
          Series C
          Convertible Preferred Stock with warrants attached. Through this offering,
          the
          Company received approximately $8.2 million consisting of approximately
          $3.6
          million in cash and approximately $4.6 million from the conversion of debt
          owed
          to Daniel S. Laikin and Timothy Durham, directors and major shareholders,
          and
          salary and accrued expenses owed to Mr. Laikin, who is also an
          officer.
 
 On
          January 28, 2005 the Company borrowed $2.7 million from N. Williams Family
          Investments, L.P. The loan was used to fund a payment in the amount of
          $2,532,800 due to James P. Jimirro, the Company’s former President and CEO and
          the current Chairman of the Board of Directors, on his separation from
          service.
          The balance of the funds was used for working capital. On August 31, 2005,
          the
          Company paid the note and accrued interest, totaling $2,811,846, in
          full.
 
 On
          March
          10, 2005 the Company filed a registration statement for a public offering
          of
          3,200,000 shares of its common stock. The registration statement was declared
          effective on July 28, 2005. The Company raised $9.6 million in gross proceeds
          in
          this offering. The Company received net proceeds of $8,654,063 on August
          8,
          2005, the closing date of the offering.  Based
          on
          internal projections for the upcoming year, management believes that cash
          on
          hand plus estimated revenues will be sufficient to support the Company’s
          operations for a reasonable period of time. Management believes this should
          alleviate the doubt about the Company’s ability to continue as a going concern.
          Net proceeds from the offering, after repayment of the loan from N. Williams
          Family Investments, LP in the amount of $2,811,846, were
          $5,842,217.
  **Principles
            of Consolidation.** The
            accompanying consolidated financial statements of the Company include
            the
            accounts of National Lampoon, Inc., its subsidiaries and National Lampoon
            Clubhouse, 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. All significant
            inter-company balances and transactions have been eliminated in
            consolidation.
  F-7
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 **Minority
          Interests.** National
          Lampoon, Inc. consolidates two subsidiary corporations and National Lampoon’s
          Clubhouse, Inc., one-half of which is owned by Majestic Entertainment.
          The
          category “minority interest” represents Majestic Entertainment’s 50% minority
          ownership interest in National Lampoon Clubhouse, Inc. The amount of minority
          interest is made up of the original investment of $300,000 less Majestic
          Entertainment’s share of the net losses to date.
 
 **Revenue
          Recognition.** The
          Company’s trademark licensing revenues are generally recognized when received or
          when earned under the terms of the associated agreement and when the collection
          of such revenue is reasonably assured. Revenues from the sale of videocassettes
          and DVDs, net of estimated provisions for returns (which are not material
          for
          any period presented) are recognized when the units are shipped. Revenues
          from
          Internet operations are recognized when earned under the terms of the associated
          agreement and the collection of such revenue is reasonably assured. Revenues
          from advertising and promotion are recognized when earned under the terms
          of the
          associated agreement or when the advertisement has been broadcast and the
          collection of such revenues are reasonably assured.
 
 The
          Company refers to SOP 00-2, Paragraphs 33, 38, 39 and 49, to recognize
          revenue
          for episodic television series. Ultimate revenue should include estimates
          of
          revenue over a period not to exceed ten years from the date of delivery
          of the
          first episode or, if still in production, five years from the date of delivery
          of the most recent episode, if later. For episodic television series, ultimate
          revenue should include estimates of secondary market revenue (that is,
          revenue
          from markets other than the initial market) for produced episodes only
          if an
          entity can demonstrate through its experience or industry norms that the
          number
          of episodes already produced, plus those for which a firm commitment exists
          and
          the entity expects to deliver, can be licensed successfully in the secondary
          market. Ultimate revenue should include estimates of revenue from a market
          or
          territory only if persuasive evidence exists that such revenue will occur,
          or if
          an entity can demonstrate a history of earning such revenue in that market
          or
          territory. Ultimate revenue should include estimates of revenue from newly
          developing territories only if an existing arrangement provides persuasive
          evidence that an entity will realize such amounts.
 
 **Advertising
          Expense.**  The
          Company expenses advertising costs as incurred. During the years ended
          July 31,
          2005 and 2004, the Company incurred approximately $50,000 and $119,000,
          respectively for advertising costs.
 
 **Use
          of Estimates.** The
          preparation of 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 consolidated
          financial statements and the reported amounts of revenues and expenses
          during
          the reporting period. Actual results could differ from those
          estimates.
 
 **Depreciation.** Depreciation of fixed assets is computed by the straight-line method over
          the
          estimated useful lives of the assets ranging from three to five
          years.
 
 **Cash
          Concentration and Cash Equivalents.** 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
          considers all highly liquid investments with a maturity of three months
          or less
          when purchased to be cash equivalents.
 
 **Intangible
          Assets.** Intangible Assets consists primarily of the National Lampoon trademark
          and is
          being amortized on a straight-line basis over twenty-five years. The Company
          continually evaluates whether events or circumstances have occurred that
          indicate the remaining estimated useful life of intangible assets should
          be
          revised or the remaining balance of intangible assets may not be recoverable.
          Factors that would indicate the occurrence of such events or circumstances
          include current period operating or cash flow losses, a projection or forecast
          of future operating or cash flow losses, or the inability of the Company
          to
          identify and pursue trademark licensing opportunities on terms favorable
          to the
          Company. Gross intangibles were $5,964,732 with accumulated amortization
          of
          $3,988,578 at July 31, 2005, which includes $240,000 of amortization being
          expensed during the year ended July 31, 2005. The estimated aggregate
          amortization expense for each of the five succeeding fiscal years is $240,000
          per year, which represents the original acquired intangible relating to
          the
          National Lampoon trademark, amortized over twenty five years.
  F-8
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 As
          of
          July 31, 2005, the Company has determined that expected future cash flows
          relating to its intangible assets will result in the recovery of the carrying
          value of such asset. The continued realization of these intangible assets,
          however, is dependent upon the continued exploitation of the National Lampoon
          trademark for use in motion pictures, television, the Internet, merchandising
          and other appropriate opportunities. If these and other ventures that the
          Company may enter into do not result in sufficient revenues to recover
          the
          associated intangible assets, the Company’s future results of operations may be
          adversely affected by adjustments to the carrying values of such
          intangible
 
 **Recent
          Accounting Pronouncements.** In
          December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate
          Time-Sharing Transactions—an amendment of FASB Statements No. 66 and 67” (SFAS
          152). This Statement amends FASB Statement No. 66, “Accounting for Sales of Real
          Estate,” to reference the financial accounting and reporting guidance for real
          estate time-sharing transactions that is provided in AICPA Statement of
          Position
          (SOP) 04-2, “Accounting for Real Estate Time-Sharing Transactions.” This
          Statement also amends FASB Statement No. 67, “Accounting for Costs and Initial
          Rental Operations of Real Estate Projects,” to state that the guidance for
          incidental operations and costs incurred to sell real estate projects does
          not
          apply to real estate time-sharing transactions. The accounting for those
          operations and costs is subject to the guidance in SOP 04-2. This Statement
          is
          effective for financial statements for fiscal years beginning after June
          15,
          2005, with earlier application encouraged. Management has evaluated the
          impact
          of the adoption of SFAS 152, and does not believe the impact will be significant
          to the overall results of the Company’s operations or financial position, as the
          Company does not engage in these types of transactions.
 
 In
          December 2004, the FASB issued SFAS No.153, “Exchanges of Non-monetary Assets,
          an amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions.”
          The amendments made by Statement 153 are based on the principle that exchanges
          of non-monetary assets should be measured based on the fair value of the
          assets
          exchanged. Further, the amendments eliminate the narrow exception for
          non-monetary exchanges of similar productive assets and replace it with
          a
          broader exception for exchanges of non-monetary assets that do not have
          commercial substance. Previously, Opinion 29 required that the accounting
          for an
          exchange of a productive asset for a similar productive asset or an equivalent
          interest in the same or similar productive asset should be based on the
          recorded
          amount of the asset relinquished. Opinion 29 provided an exception to its
          basic
          measurement principle (fair value) for exchanges of similar productive
          assets.
          The Financial Accounting Standards Board believes that exception required
          that
          some non-monetary exchanges, although commercially substantive, be recorded
          on a
          carryover basis. By focusing the exception on exchanges that lack commercial
          substance, the Financial Accounting Standards Board believes this Statement
          produces financial reporting that more faithfully represents the economics
          of
          the transactions. The Statement is effective for non-monetary asset exchanges
          occurring in fiscal periods beginning after June 15, 2005. Earlier application
          is permitted for non-monetary asset exchanges occurring in fiscal periods
          beginning after the date of issuance. The provisions of this Statement
          shall be
          applied prospectively. Management has evaluated the impact of the adoption
          of
          SFAS 152, and does not believe the impact will be significant to the Company’s
          overall results of operations or financial position as the Company does
          not
          engage in these types of transactions.
 
 In
          December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
          Payment.” Statement 123(R) will provide investors and other users of financial
          statements with more complete and neutral financial information by requiring
          that the compensation cost relating to share-based payment transactions
          be
          recognized in financial statements. That cost will be measured based on
          the fair
          value of the equity or liability instruments issued. Statement 123(R) covers
          a
          wide range of share-based compensation arrangements including share options,
          restricted share plans, performance-based awards, share appreciation rights,
          and
          employee share purchase plans. Statement 123(R) replaces FASB Statement
          No. 123,
“Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees.” Statement 123, as originally issued
          in 1995, established as preferable a fair-value-based method of accounting
          for
          share-based payment transactions with employees. However, that Statement
          permitted entities the option of continuing to apply the guidance in Opinion
          25,
          as long as the footnotes to financial statements disclosed what net income
          would
          have been had the preferable fair-value-based method been used. Public
          entities
          (other than those filing as small business issuers) will be required to
          apply
          Statement 123(R) as of the first interim or annual reporting period that
          begins
          after December 15, 2005. Management has evaluated the impact of the adoption
          of
          SFAS 123(R) and, although it has not yet finished its estimates to enable
          it to
          quantify the impact, based on contractual obligations, recurring customary
          grants such as those to the Board of Directors, and vested options in place,
          management believes the impact will be significant to the Company’s overall
          results of operations and financial position.
  F-9
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 In
          March
          2005, the SEC released Staff Accounting Bulletin No. 107, “Share-Based
          Payment”(SAB 107), which provides interpretive guidance related to the
          interaction between SFAS 123(R) and certain SEC rules and regulations.
          It also
          provides the SEC staff’s views regarding valuation of share-based payment
          arrangements. In April 2005, the SEC amended the compliance dates for SFAS
          123(R), to allow companies to implement the standard at the beginning of
          their
          next fiscal year, instead of the next reporting period beginning after
          June 15,
          2005. Management is currently evaluating the impact SAB 107 will have on
          our
          consolidated financial statements.
 
 In
          March 2005, the FASB issued FASB Interpretation No. 47, “Accounting
          for Conditional Asset Retirement Obligations” (FIN 47). FIN 47 provides guidance
          relating to the identification of and financial reporting for legal obligations
          to perform an asset retirement activity. The Interpretation requires recognition
          of a liability for the fair value of a conditional asset retirement obligation
          when incurred if the liability’s fair value can be reasonably estimated. FIN 47
          also defines when an entity would have sufficient information to reasonably
          estimate the fair value of an asset retirement obligation. The provision
          is
          effective no later than the end of fiscal years ending after December 15,
          2005. The Company will adopt FIN 47 beginning the first quarter of fiscal
          year
          2006 and does not believe the adoption will have a material impact on its
          consolidated financial position or results of operations or cash
          flows.
 
 In
          May
          2005, the Financial Accounting Standards Board (FASB) issued Statement
          of
          Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
          Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
          3. SFAS
          No. 154 requires retrospective application to prior periods’ financial
          statements of changes in accounting principle, unless it is impracticable
          to
          determine either the period-specific effects or the cumulative effect of
          the
          change. SFAS No. 154 also requires that retrospective application of a
          change in
          accounting principle be limited to the direct effects of the change. Indirect
          effects of a change in accounting principle, such as a change in
          nondiscretionary profit-sharing payments resulting from an accounting change,
          should be recognized in the period of the accounting change. SFAS No. 154
          also
          requires that a change in depreciation, amortization or depletion method
          for
          long-lived, non-financial assets be accounted for as a change in accounting
          estimate effected by a change in accounting principle. SFAS No. 154 is
          effective
          for accounting changes and corrections of errors made in fiscal years beginning
          after December 15, 2005. Early adoption is permitted for accounting changes
          and
          corrections of errors made in fiscal years beginning after the date this
          Statement is issued. Management does not expect the implementation of this
          new
          standard to have a material impact on their financial position, results
          of
          operations and cash flows.
 
 In
          June
          2005, the Emerging Issues Task Force, or EITF, reached a consensus on Issue
          05-6, *Determining
          the Amortization Period for Leasehold Improvements* ,
          which
          requires that leasehold improvements acquired in a business combination
          or
          purchased subsequent to the inception of a lease be amortized over the
          lesser of
          the useful life of the assets or a term that includes renewals that are
          reasonably assured at the date of the business combination or purchase.
          EITF
          05-6 is effective for periods beginning after July 1, 2005. We do not expect
          the
          provisions of this consensus to have a material impact on our financial
          position, results of operations or cash flows.
 
 **Income
          Taxes.** The
          Company accounts for income taxes in accordance with Statement of Financial
          Accounting Standards No. 109, *Accounting
          for Income Taxes* .
          Deferred tax assets and liabilities arise from temporary differences between
          the
          tax bases of assets and liabilities and their reported amounts in the financial
          statements that will result in taxable or deductible amounts in future
          years.
          Management evaluates the available evidence about future taxable income
          and
          other possible sources of realization of deferred tax assets. The valuation
          allowance reduces deferred tax assets to an amount that represents management’s
          best estimate of the amount of such deferred tax assets that more likely
          than
          not will be realized.
 
 **Net
          Income or Loss Per Share.** Diluted
          earnings per share amounts are calculated using the treasury method and
          are
          based upon the weighted average number of common and common equivalent
          shares
          outstanding during the period. Basic and diluted earnings per share are
          the
          same, as common equivalent shares have been excluded from the computation
          due to
          the fact they are anti-dilutive. Options and warrants to purchase 8,496,626
          common shares during the three months ended July 31, 2005, and 6,863,726
          and
          108,206 for the years ended July 31, 2005 and 2004, respectively, are not
          included in the calculation of diluted earnings per share because their
          inclusion would be anti-dilutive. 8,178,711 shares that would be issuable
          upon
          conversion of the convertible preferred stock are not included in the
          calculation of diluted earnings per share during the year ended July 31,
          2005
          and 2004, respectively because their inclusion would be
          anti-dilutive.
  F-10
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 **Comprehensive
          Income (Loss).** There
          are no differences between net income and comprehensive income and, accordingly,
          no amounts have been reflected in the accompanying financial
          statements.
 
 **Stock
          Based Compensation.** The
          Company has adopted SFAS No. 123, “Accounting for Stock Based Compensation”,
          issued in October 1995. In accordance with SFAS No. 123, the Company has
          elected
          to follow Accounting Principles Board (APB) Opinion No. 25, “Accounting for
          Stock issued to Employees”, and related interpretation in accounting for its
          employee stock options. Under APB Opinion No. 25, because the exercise
          price of
          the Company’s employee stock options equals the market price of the underlying
          stock on the date of grant, no compensation expense is recognized. There
          is no
          current-period compensation expense to disclose in relation to previously
          issued
          employee stock options, as required under SFAS 148. During the year ended
          July
          31, 2005, there were 281,500 granted to employees. If the Company elected
          to
          recognize compensation expense based on the fair value of the options granted
          on
          the grant date as prescribed by SFAS No. 123, the Company’s net income/(loss)
          and earnings/(loss) per share would have been reduced to the pro forma
          amounts
          as follows:
 
 For
                    the Fiscal Year Ended July 31,2005
                
                2004Net
                    loss attributable to common shareholders - as reported
                
                $
                (12,063,595
                )
                $
                (5,127,107
                )APB
                    25 expense recognized
                
                
                -
                
                
                -Stock
                    option compensation under-fair value method
                
                
                (427,098
                )
                
                (1,469,114
                )Net
                    loss -pro forma
                
                $
                (12,490,693
                )
                $
                (6,596,221
                )Basic
                    and diluted earnings/(loss) per share-as reported
                
                $
                (3.69
                )
                $
                (1.67
                )Basic
                    and diluted earnings/(loss) per share-pro forma
                
                $
                (3.82
                )
                $
                (2.15
                )
 
 The
          relative fair value of the options was estimated using the Black-Scholes
          option
          pricing model with the following assumptions: average risk-free interest
          of
          5.50%; dividend yield of 0%; average volatility factor of the expected
          market
          price of the Company’s common stock of 95.7% to 135.9%; and a term of six to 10
          years for the fiscal year ended July 31, 2005; and average risk-free interest
          of
          5.50%; dividend yield of 0%; average volatility factor of the expected
          market
          price of the Company’s common stock of 127.3% to 170.0%; and a term of seven to
          10 years for the fiscal year ended July 31, 2004.
 
 **NOTE
          B - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS**
 
 The
          Company periodically grants stock options to its employees and directors
          as
          financial incentives directly linked to increases in shareholder value.
          Such
          grants are subject to the Company’s Amended and Restated 1999 Stock Option,
          Deferred Stock and Restricted Stock Plan (the “1999 Plan”), as adopted by the
          Company’s shareholders at its annual meeting on January 13, 2000. All stock
          options granted under prior stock option plans were converted to stock
          option
          grants under the 1999 Plan. A summary of stock options outstanding is as
          follows:
  F-11
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  Option
                  
                  WeightedNumber
                      of
                  
                  Exercise
                  
                  AverageOptions
                  
                  Price
                      Range
                  
                  Exercise
                      PriceBalance,
                      July 31, 2003
                  
                  2,748,266
                  
                  $0.97
                  -
                  $8.06
                  
                  $2.89Options
                      granted
                  
                  1,245,040
                  
                  $1.60
                  -
                  $3.50
                  
                  $1.84Options
                      canceled
                  
                  (304,600
                  )
                  $1.04
                  -
                  $8.06
                  
                  $2.88Options
                      exercised
                  
                  —
                  
                  $
                      —
                  -
                  $
                      —
                  
                  $
                      —Balance,
                      July 31, 2004
                  
                  3,688,706
                  
                  $1.04
                  -
                  $8.06
                  
                  $2.52Options
                      granted
                  
                  377,687
                  
                  $3.00
                  -
                  $4.25
                  
                  $3.77Options
                      cancelled
                  
                  (140,068
                  )
                  $1.04
                  -
                  $6.81
                  
                  $2.43Options
                      exercised
                  
                  (135,432
                  )
                  $1.10
                  -
                  $4.00
                  
                  $1.87Balance,
                      July 31, 2005
                  
                  3,790,893
                  
                  $1.04
                  -
                  $8.06
                  
                  $2.67
 Of
          the
          options outstanding at July 31, 2005 and 2004, the number exercisable was
          3,790,893 and 3,688,706, respectively, and the weighted average exercise
          prices
          were $2.67 and $2.52. The weighted average remaining life of the options
          outstanding at July 31, 2005 was 5.67 years.
  A
          summary
          of the options by ranges at July 31, 2005 are as follows:
 
 Weighted
                
                
                
                WeightedRange
                    of
                
                Remaining
                
                Average
                
                
                
                AverageExercise
                
                Number
                
                Contractual
                
                Number
                
                ExercisePrices
                
                Outstanding
                
                Life
                    (Years)
                
                Exercisable
                
                Price$0
                    to $1
                
                33,334
                
                0.42
                
                33,334
                
                $
                    0.971
                    to 2
                
                1,966,872
                
                7.50
                
                1,766,397
                
                $
                    1.722
                    to 3
                
                739,000
                
                5.27
                
                677,441
                
                $
                    2.743
                    to 4
                
                613,687
                
                5.22
                
                473,856
                
                $
                    3.464
                    to 5
                
                194,000
                
                6.29
                
                39,105
                
                $
                    4.265
                    to 6
                
                —
                
                —
                
                —
                
                $   —6
                    to 7
                
                114,000
                
                3.39
                
                114,000
                
                $
                    6.477
                    to 8.50
                
                130,000
                
                2.84
                
                130,000
                
                $
                    7.54
 
 A
          summary
          of the options by ranges at July 31, 2004 are as follows:
 
 Weighted
                
                
                
                WeightedRange
                    of
                
                Remaining
                
                Average
                
                
                
                AverageExercise
                
                Number
                
                Contractual
                
                Number
                
                ExercisePrices
                
                Outstanding
                
                Life
                    (Years)
                
                Exercisable
                
                Price$0
                    to $1
                
                33,334
                
                0.42
                
                33,334
                
                $
                    0.971
                    to 2
                
                2,129,370
                
                6.18
                
                1,778,077
                
                $
                    1.712
                    to 3
                
                786,000
                
                4.99
                
                562,588
                
                $
                    2.713
                    to 4
                
                467,336
                
                4.44
                
                382,547
                
                $
                    3.454
                    to 5
                
                24,000
                
                2.37
                
                24,000
                
                $
                    4.815
                    to 6
                
                —
                
                —
                
                —
                
                $   —6
                    to 7
                
                118,666
                
                2.84
                
                118,666
                
                $
                    6.487
                    to 8.50
                
                130,000
                
                2.84
                
                130,000
                
                $
                    7.54
 
  F-12
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 **NOTE
          C - ACCRUED SERIES B AND C DIVIDENDS**
 
 **Dividends
          accrue on our Series B and Series C Convertible Preferred
          Stock.** The
          Company accrued dividends on a daily basis and will continue to do so until
          the
          date at which the Series B or Series C Convertible Preferred Stock is converted,
          until a liquidation event occurs, or, in the case of the Series C Convertible
          Preferred Stock, until the redemption date (although the redemption date
          is not
          defined and there is no right of redemption as to the Series C Convertible
          Preferred Stock). Dividends accrue at the rate of 9% per annum on the sum
          of the
          original purchase price of the Series B or Series C Convertible Preferred
          Stock
          plus all accumulated and unpaid dividends thereon (compounding annually).
          Dividends that accrue on our Series B and Series C Convertible Preferred
          Stock
          must be paid with our common stock. At July 31, 2005, the Company had $1,113,519
          accrued for Series B and C convertible Preferred Stock.
 
 Dividends
          on the Series B and Series C Convertible Preferred Stock are computed using
          the
          closing price of the common stock, as reported by the exchange or regulated
          quotation service on which our common stock is traded, on the trading date
          immediately preceding the date that we become liable to pay the dividend.
          If no
          trades were made on that date, then the number of shares to be issued will
          be
          computed using the closing price of the last date on which trades were
          made and
          reported.
 
 **NOTE
          D - NOTES PAYABLE**
 
 On
          May
          17, 2003, two notes payable totaling approximately $442,000 at April 30,
          2002
          were due to be paid in full. The notes represented money owed to legal
          firms
          relating to work done in connection with the reorganization transaction
          that
          took place in May 2002. Timothy Durham, a director, paid one of these notes
          in
          full and the liability is now owed to him. As of July 31, 2005, approximately
          $115,000 in principal and $33,848 in interest remained unpaid. The obligation
          to
          Mr. Durham is payable on demand. To date, no demand has been made. The
          Company
          plans to pay this obligation with revenues earned by its operations. The
          other
          note was renegotiated and paid in full in December 2004.
 
 On
          January 28, 2005 the Company borrowed the sum of $2,700,000 from N. Williams
          Family Investments, L.P. The loan accrued interest at the rate of 7% per
          year.
          The maturity date of the loan was the earlier of January 28, 2006 or the
          date
          the Company closed an offering in which the gross cash proceeds to the
          Company
          equal or exceed $2,700,000 of the proceeds collected, the first $2.7M must
          go
          towards the repayment of the loan. The lender could demand that the loan
          be
          immediately repaid if the Company defaulted in its obligations under the
          promissory note. The loan was secured by a lien against all of the Company’s
          assets. The amount of $2,523,800 from the loan proceeds was used to pay
          benefits
          to James P. Jimirro, the Chairman of the Company’s Board of Directors and the
          Company’s former Chief Executive Officer and President, upon his separation from
          service as required by his employment agreement dated May 17, 2002. The
          remaining proceeds were used for working capital. On August 31, 2005 the
          principal and interest due in the amount of $2,811,846 were paid in
          full.
 
 Between
          the months of June and July 2005 the Company borrowed the aggregate sum
          of
          $600,000 from Timothy Durham. No interest was accrued and on August 10,
          2005 the
          entire loan was paid in full.
 
 On
          May 6,
          2005, the Company signed a Deal Memorandum with Laughter Heals Productions,
          Inc.
          and Newco (an entity to be formed) with respect to the financing, development
          and production of a film tentatively titled “Totally Baked.” The total budget
          for the production, which is currently estimated to be $225,000, is to
          be funded
          by Newco. As of July 31, 2005, Newco funded $50,000, which was recorded
          to notes
          payable. As of September 29, 2005, Newco had funded $240,000 toward the
          production, which is expected to exceed the original budget. The terms
          of the
          Deal Memorandum provide that revenue from the project will be distributed
          to
          Newco in an amount that will allow it to recoup the production budget plus
          5%.
  F-13
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 **NOTE
          E - RELATED PARTY TRANSACTIONS**
 
 On
          December 9, 2004 the Company completed the sale of units consisting of
          Series C
          Convertible Preferred Stock with warrants attached. Through this offering,
          the
          Company received approximately $8.2 million consisting of approximately
          $3.6
          million in cash and approximately $4.6 million from the conversion of debt
          owed
          to Mr. Laikin and Mr. Durham and salary and accrued expenses owed to Mr.
          Laikin.
 
 On
          January 28, 2005 the Company borrowed $2.7 million from N. Williams Family
          Investments, L.P. The loan was used to fund a payment in the amount of
          $2,532,800 due to James P. Jimirro, the Company’s former President and CEO and
          the current Chairman of the Board of Directors, on his separation from
          service.
          The balance of the funds was used for working capital. On August 31, 2005,
          the
          Company paid the note and accrued interest, totaling $2,811,846, in
          full.
 
 **NOTE
          F - COMMITMENTS AND CONTINGENCIES**
 
 **Leases.** The
          Company is obligated under an operating lease expiring on September 30,
          2005 for
          approximately 3,912 square feet of office space in Los Angeles, California.
          The
          lease agreement includes certain provisions for rent adjustments based
          upon the
          lessor’s operating costs and increases in the Consumer Price Index.
 
 The
          Company is obligated under an equipment lease expiring in November of 2006
          for a
          photocopy machine
 
 The
          Company’s minimum future lease payments for the fiscal years indicated are as
          follows:
 
 Office
                
                Auto/Year
                
                Space
                
                Equipment
                
                Total2006
                
                $
                23,000
                
                $
                2,800
                
                $
                2,8002007
                
                
                —
                
                
                2,800
                
                
                2,800$
                23,000
                
                $
                5,600
                
                $
                5,600
 
 
 The
          Company’s aggregate lease payments were approximately $150,000 and $206,000, for
          the years ended July 31, 2005 and 2004, respectively.
 
 **Harvard
          Lampoon Agreement.** Pursuant
          to an agreement between the Company and The Harvard Lampoon, Inc. (“HLI”), as
          restated October 1, 1998, the Company is obligated to pay HLI a royalty
          of from
          1.5% to 2% on the Company’s net receipts from exploitation of the National
          Lampoon trademark. Royalty payments under this agreement were approximately
          $59,000 and $23,000, for the years ended July 31, 2005 and 2004,
          respectively.
 
 **Guber-Peters
          Agreement.** Pursuant
          to a July 24, 1987 Rights Agreement, NLI granted the right to produce National
          Lampoon television programming to Guber-Peters Entertainment Company (GPEC).
          NLI
          reacquired these rights from GPEC pursuant to an October 1, 1990 Termination
          Agreement (“Termination Agreement”) for the sum of $1,000,000, of which $500,000
          was paid upon execution. The remaining $500,000 is contingent on and payable
          through a 17.5% royalty on NLI’s cash receipts from each program produced by NLI
          or any licensee (subject to certain minimum royalties for each program
          produced). The Company guaranteed all of NLI’s obligations under the Termination
          Agreement and is the successor-in-interest to NLI as a result of its acquisition
          of NLI. As of July 31, 2005, the Company has accrued royalties of approximately
          $396,250 relating to the Termination Agreement. The increased royalty expense
          during fiscal 2003 was primarily due to the airing of 65 episodes of the
          Company’s “Funny Money” on one of the cable networks. According to the
          Guber-Peters agreements, there is a minimum fee of $5,000 for every television
          episode that airs. The 65 episodes would result in a royalty of $325,000,
          except
          that the Company has a maximum due Guber-Peters of $396,250 which the Company
          had already accrued. As of July 31, 2005, the Company has accrued the total
          balance due Guber-Peters.
  F-14
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 **Employment
          Agreements**
 
 Daniel
          S.
          Laikin
 
 On
          January 31, 2005 we entered into an Employment Agreement with Daniel S.
          Laikin.
          The employment agreement was adopted and approved by our Board of Directors
          on
          February 1, 2005. The employment agreement has a term of three years, but
          is
          automatically extended for successive three-year terms unless designated
          members
          of the Board of Directors notify Mr. Laikin that the Board does not intend
          to
          renew the employment agreement or unless the employment agreement has been
          terminated according to its terms.
 
 Pursuant
          to the employment agreement, Mr. Laikin receives an annual salary of $250,000.
          Mr. Laikin is also entitled to receive four weeks paid vacation. Mr. Laikin
          receives an automobile allowance and is entitled to participate in any
          other
          benefits offered generally to our employees and executives. He is also
          granted
          an option to purchase 100,000 shares of our common stock on each anniversary
          of
          the effective date of the employment agreement. The exercise price for
          the
          options will be equal to the average of the last reported sale price for
          one
          share of common stock during the five business days preceding the date
          of grant
          or, if this method of valuing the common stock is not available, the Board
          shall
          determine, in good faith, the value of one share of common stock. The term
          of
          each option shall be 10 years. The options shall be granted in accordance
          with
          the J2 Communications Amended and Restated 1999 Stock Option, Deferred
          Stock and
          Restricted Stock Plan. Mr. Laikin is to meet annually with the Board of
          Directors to set certain performance milestones that must be met bi-annually.
          If
          those milestones are met, Mr. Laikin will receive a bi-annual bonus of
          $50,000.
          If the milestones are exceeded, Mr. Laikin will receive additional compensation
          that will be paid one-half in cash and one-half in stock.
 
 Mr.
          Laikin’s employment agreement may be terminated voluntarily by us at any time
          during its term for Cause. Cause is defined as (i) the willful and continued
          failure by Mr. Laikin to substantially perform his duties to us in good
          faith
          (other than a failure resulting from his incapacity due to physical or
          mental
          illness), or (ii) the willful engaging in conduct which is demonstrably
          and
          materially injurious to us. In order to terminate Mr. Laikin for Cause,
          five
          members of the Board of Directors (not including Mr. Laikin) must determine
          at a
          meeting held for such purpose that Mr. Laikin is guilty of the conduct
          triggering the right to terminate him. If Mr. Laikin’s employment is terminated
          by us for Cause, in addition to any benefits mandated by law, we shall
          pay to
          Mr. Laikin his full annual salary in effect at the date of termination
          and other
          benefits to which he is entitled through the date of termination at the
          rate in
          effect at the time notice of termination is given.
 
 Mr.
          Laikin’s employment may be terminated by Mr. Laikin at any time, and will
          terminate automatically upon his death or disability. Upon such termination,
          in
          addition to any benefits mandated by law, we shall pay to Mr. Laikin his
          full
          annual salary in effect at the date of termination and other benefits to
          which
          he is entitled through the date of termination at the rate in effect at
          the time
          notice of termination is given.
 
 On
          signing the Employment Agreement, we also agreed to enter into a separate
          indemnity agreement with Mr. Laikin. A new indemnity agreement has not
          been
          entered into as of the date of this annual report, although we entered
          into an
          indemnity agreement with Mr. Laikin on May 17, 2002.
 
 Douglas
          S. Bennett
 
 On
          January 31, 2005 we entered into an agreement with Douglas S. Bennett to
          employ
          him as our President. The employment agreement was adopted and approved
          by our
          Board of Directors on February 1, 2005. The agreement will expire on January
          31,
          2008.
  F-15
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 Pursuant
          to the term of the agreement, we will pay Mr. Bennett a base salary of
          $250,000.
          Mr. Bennett is also entitled to receive four weeks paid vacation and we
          have
          agreed to pay 100% of the costs of his group health plan premiums, so long
          as we
          continue to offer a group health plan. Mr. Bennett receives an automobile
          allowance and is entitled to participate in any other benefits offered
          generally
          to our employees and executives.
 
 Mr.
          Bennett is to meet annually with the Chief Executive Officer and the Board
          of
          Directors to set certain performance milestones that must be met bi-annually.
          If
          those milestones are met, Mr. Bennett will receive a bi-annual bonus of
          $50,000.
          If the milestones are exceeded, Mr. Bennett will receive additional compensation
          that will be paid one-half in cash and one-half in stock.
 
 On
          January 31, 2006, January 31, 2007 and January 31, 2008, Mr. Bennett will
          receive an option to purchase 100,000 shares of our common stock through
          the J2
          Communications 1999 Amended and Restated Stock Option, Deferred Stock and
          Restricted Stock Plan. These options will be fully vested on the date of
          grant.
 
 Mr.
          Bennett is currently commuting from his home in Northern California and
          we pay
          his commuting expenses. If we require that he relocate to the Los Angeles
          area,
          and he agrees to do so, we will be required to pay him certain relocation
          expenses, including expenses (including costs of transportation, meals
          and
          lodging) of no more than three trips to Southern California for the purpose
          of
          locating a suitable place to live, the expenses incurred in moving his
          household
          furniture and furnishings to his home in Southern California and the payment
          of
          reasonable closing costs for the purchase of his home.
 
 We
          may
          terminate Mr. Bennett’s employment for cause at any time. “Cause” is defined as
          a good faith termination by a majority of the Board of Directors because
          he (i)
          engages in acts in violation of the law, (ii) breaches his fiduciary duty
          to us
          or his duties of loyalty or care to us, or (iii) intentionally and persistently
          disobeys the good faith, lawful, substantive policies or instructions of
          the
          Board of Directors after being given 30 days written notice and failing
          to cure
          such circumstances, or, if such circumstances are not susceptible of cure
          during
          such 30 day period, failing to initiate and diligently pursue actions reasonably
          calculated to achieve and cure such circumstances as soon as reasonably
          practicable thereafter.
 
 If
          we
          terminate Mr. Bennett’s employment without cause, or if he is constructively
          terminated, or if Mr. Bennett dies or is disabled, he will be entitled
          to
          receive the following severance benefits:
 
 ·
                his
                    base salary will be continued for a period of six months or for
                    the
                    remaining term, whichever is longer, following the date that
                    his
                    termination becomes effective;
 
 ·
                his
                    employee benefits will be continued as long as his base salary
                    is
                    continued; and
 
 ·
                any
                    unvested stock options will continue to vest for a period of
                    six months or
                    for the remaining term of his employment as set forth in the
                    agreement,
                    whichever is longer, following the date on which his termination
                    becomes
                    effective.
 
 After
          Mr.
          James Toll, our former Chief Financial Officer, separated from service,
          Mr.
          Bennett was appointed as our Chief Financial Officer on April 13, 2005.
          Mr.
          Bennett does not receive additional compensation for this position.
 
 **NOTE
          G - MINORITY INTEREST**
 
 Pursuant
          to an agreement entered into between the Company and Majestic Entertainment,
          Inc. in December 2004, National Lampoon Clubhouse, Inc. was formed on December
          16, 2004. The entity was incorporated in Nevada and is owned equally by
          National
          Lampoon, Inc. and Majestic Entertainment, Inc. Each party contributed $350,000
          to National Lampoon Clubhouse, Inc. Of that amount, $300,000 was an equity
          investment and $50,000 was used for start-up costs. The 50% ownership by
          Majestic Entertainment, Inc. was initially recognized on the Company’s
          consolidated financial statements as minority interest in the amount of
          $300,000
          less 50% of the losses to date of the subsidiary of $50,194. In connection
          with
          this agreement, between June and July 2005 the Company received funding
          toward
          the production of the feature film “Trick or Treat” in the aggregate amount of
          $425,500 from Majestic Entertainment. The total budget of $1,800,000 for
          the
          production is to be funded 50% by each party. The terms of the agreement
          state
          that (1) revenues received by National Lampoon Clubhouse, Inc. will be
          reinvested in future films and (2) when there are sufficient funds for
          National
          Lampoon Clubhouse, Inc. to function debt free, then profit distributions
          will be
          made in accordance with the ownership percentages. The transfer of the
          production costs to National Lampoon Clubhouse, Inc. has been recorded
          as a note
          payable to each party with no interest accrued. Profit distributions, if
          any,
          will be applied against the notes payable. The note payable is a related
          party
          note payable.
  F-16
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 **NOTE
          H - STOCKHOLDER EQUITY**
 
 On
          September 15, 2004 the Company’s Board of Directors and stockholders holding a
          majority of the Company’s voting stock approved a two-for-one split of the
          Company’s common stock. The effect of this stock split has been reflected in all
          reported periods.
 
 On
          July
          14, 1986, James P. Jimirro, the then Company Chairman, President and Chief
          Executive Officer purchased 192,000 shares of the Company's common stock
          for
          approximately $115,000. In payment for the shares, the Company received
          the sum
          of approximately $58,000 and a note for approximately $58,000. The note
          accrued
          interest at the rate of 10% per annum and, pursuant to a Pledge and Security
          Agreement dated July 14, 1986, was secured by the shares purchased. In
          January
          2005, as part of the severance package paid to Mr. Jimirro on his separation
          from service, the remaining unpaid principal and interest outstanding of
          $165,822 was forgiven.
 
 On
          January 28, 2005 the Company borrowed $2,700,000 from N. Williams Family
          Investments, L.P. As part of the loan transaction, N. Williams Family
          Investments, L.P. was issued 80,000 shares of the Company’s common stock, and
          Christopher Williams, a party related to N. Williams Family Investments,
          L.P.,
          was issued 20,000 shares. In addition Daniel S. Laikin and Timothy Durham
          personally guaranteed certain obligations of the Company relating to the
          security for the loan, and as part of this guarantee were each issued 50,000
          shares of the Company’s common stock. The expense associated with these stock
          grants for this loan transaction totaled $640,000, which was calculated
          at the
          fair market value of the stock on the date the 200,000 shares were issued.
          This
          was recognized as debt issuance costs, capitalized and amortized over the
          one-year term of the note.
 
 During
          the fiscal year ended July 31, 2005, 135,442 shares of common stock of
          the
          Company were purchased through the exercise of stock options that resulted
          in
          cash proceeds to the Company of $220,220.
 
 On
          October 14, 2004, the Company issued 15,230 shares of common stock to Erick
          Richardson and 5,115 shares of common stock to Richardson & Patel, LLC. The
          common stock was issued in exchange for legal services valued at the fair
          market
          value of the common stock on the date the grant was approved by the Board
          of
          Directors totaling $79,562.
 
 On
          February 17, 2005, the Company issued to Andy Gruenberg 1,413 shares of
          common
          stock in exchange for film distribution services valued at the fair market
          value
          of the common stock on the date the grant was approved by the Board of
          Directors
          totaling $4,000.
 
 On
          March
          1, 2005, the Company issued 39,421 shares of common stock to Erick Richardson
          and 8,400 shares of restricted common stock with 8,400 warrants for the
          purchase
          of common stock to Richardson & Patel, LLC at an exercise price ranging from
          $2.95 and $4.09 per share. The common stock was issued in exchange for
          legal
          services valued at the fair market value of the common stock on the date
          the
          grant was approved by the Board of Directors totaling $152,853 The relative
          fair
          value of the warrants of $16,649 was recorded to legal expense and was
          estimated
          using the Black-Scholes option pricing model with the following assumptions:
          average risk-free interest of 5.50%; dividend yield of 0%; average volatility
          factor of the expected market price of the Company’s common stock of 99.3%; and
          a term of 1.3 years.
 
 On
          March
          23, 2005, the Company issued to Porter LeVay & Rose 9,104 shares of common
          stock valued at $32,500 and issued to Regal Growth Fund 3,666 shares of
          common
          stock valued at the fair market value of the common stock on the date the
          grant
          was approved by the Board of Directors totaling $12,500. The common stock
          was
          issued in exchange for public relations services that were rendered to
          the
          Company.
 
 On
          May
          18, 2005, the Company issued to each of Allan Donnes and Frank Tanner Colby
          471
          shares of common stock and to Andy Toups 235 shares of common stock in
          exchange
          for services valued at the fair market value of the common stock on the
          date the
          grant was approved by the Board of Directors totaling $5,297.
  F-17
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 On
          June
          1, 2005, the Company issued 235 additional shares of common stock to Andy
          Toups
          in exchange for services valued at the fair market value of the common
          stock on
          the date the grant was approved by the Board of Directors totaling
          $1,058.
 
 On
          July
          1, 2005, the Company issued 2,668 shares of common stock to Andy Gruenberg,
          626
          shares of common stock to Regal Growth Funding and 2,399 shares of common
          stock
          to Porter LeVay & Rose, in exchange for film distribution and public
          relations services valued at the fair market value of the common stock
          on the
          date the grant was approved by the Board of Directors totaling $10,000,
          $2,500
          and $10,000, respectively.
 
 On
          July
          25, 2005, the Company issued to Erick Richardson 32,500 shares of common
          stock
          with an option to purchase 19,187 shares of common stock at an exercise
          price
          ranging from $3.12 and $3.61 per share. The common stock was issued in
          exchange
          for legal services valued at the fair market value of the common stock
          on the
          date the grant was approved by the Board of Directors totaling $145,019.
          The
          relative fair value of the option of $41,638 was recorded to legal expense
          and
          was estimated using the Black-Scholes option pricing model with the following
          assumptions: average risk-free interest of 5.50%; dividend yield of 0%;
          average
          volatility factor of the expected market price of the Company’s common stock of
          113%; and a term of 1.2 years.
 
 On
          February 18, 2005 employee bonuses were paid in the form of 2,900 shares
          of
          common stock valued at the fair market value of the common stock on the
          date the
          grant was approved by the Board of Directors totaling $10,150.
  On
            December 31, 2004, legal fees due to Latham & Watkins in the amount of
            $95,000 previously accrued and netted against capital raised and applied
            to
            additional paid-in capital were subsequently reversed due to a settlement
            releasing the Company from the obligation. As a result the Company credited
            additional paid-in capital to properly recognize the amount of capital
            raised.
 
 On
          December 9, 2004 the Company closed an offering of units consisting of
          Series C
          Convertible Preferred Stock and warrants to purchase the Company’s common stock.
          The Company received approximately $8.2 million for the units, consisting
          of
          102,790 units for approximately $3.6 million in cash, and 126,971 units
          for $4.5
          million from the conversion of debt, and approximately $492,000 for payment
          of
          salaries. At the commitment date, each unit was purchased for $35.50. Holders
          of
          Series C Convertible Preferred Stock earn a dividend of 9% per annum payable
          in
          the form of the Company’s common stock at the time the holder converts the
          Series C Convertible Preferred Stock to common stock. Attached to each
          share of
          Series C Convertible Preferred Stock is a warrant to purchase ten shares
          of the
          Company’s common stock.
 
 As
          part
          of the offering of units of Series C Convertible Preferred Stock with warrants
          attached, the terms of the warrants granted to the holders of Series B
          Convertible Preferred Stock were made identical to the terms of the Series
          C
          Convertible Preferred Stock warrants, the underlying shares of which are
          not
          required to be registered. Therefore, the term of the warrants attached
          to the
          Series B Convertible Preferred Stock was modified to extend four years
          from the
          issuance of the Series C Convertible Preferred Stock, and the exercise
          price was
          reduced to $1.775 from $2.50. The excess of the value of the modified warrants
          as compared to the original warrants was calculated according to paragraph
          188
          of FAS 123. The excess amount, which included the right to purchase 3,583,491
          shares of the Company’s common stock, totaled $904,897, which has been
          recognized as a charge to operations.
 
 In
          conjunction with his separation from service, the Company agreed to extend
          the
          stock options granted to James P. Jimirro that would otherwise have expired
          90
          days after the termination of his employment. The excess of the value of
          the
          modified options as compared to the original options was calculated according
          to
          paragraph 188 of FAS 123. The excess amount totaled $177,798, which has
          been
          recognized as a charge to operations during the year ended July 31,
          2005.
  F-18
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 Each
          share of Series C Convertible Preferred Stock is convertible at the option
          of
          the holder into 20 shares of the Company’s common stock. Attached to each share
          of Series C Convertible Preferred Stock is a warrant to purchase 10 shares
          of
          the Company’s common stock. The warrants have a term of four years and an
          exercise price of $1.775 on a post-split basis. The relative fair value
          of the
          warrants of $1,271,904 was estimated using the Black-Scholes option pricing
          model with the following assumptions: average risk-free interest of 5.50%;
          dividend yield of 0%; average volatility factor of the expected market
          price of
          the Company’s common stock of 95.7%; and a term of 4 years. The value of the
          warrants plus the value of the conversion feature total $3,552,810 and
          exceeded
          the proceeds of the offering. Pursuant to EITF 98-5, “Accounting for Convertible
          Securities with Beneficial Conversion Features or Contingently Adjustable
          Conversion Ratios,” as the terms of the Series C Convertible Preferred Stock are
          convertible upon issuance, the discount attributable to the beneficial
          conversion feature of $2,280,906 was expensed immediately during the nine
          months
          ended April 30, 2005 in a manner similar to a dividend at the date of issuance
          and is included in the Statement of Operations as a preferred
          dividend.
 
 **NOTE
          I - SEGMENT INFORMATION**
 
 Segment
          Reporting - SFAS No. 131, *Disclosures
          About Segments of an Enterprise and Related Information* ,
          results
          in the use of a management approach in identifying segments of an enterprise.
          Management has determined that t he
          Company operates in four business segments: the production of motion picture,
          television, and video/DVD products; the licensing and exploitation of the
          “National Lampoon®” trademark and related properties including the sale of
          products to consumers; television production and distribution to college
          campuses from which advertising and promotion revenues are derived and
          travel
          services. Segment operating income/(loss) excludes the amortization of
          intangible assets, interest income, and income taxes. Selling, general
          and
          administrative expenses not specifically attributable to any segment have
          been
          allocated equally among the four segments. Summarized consolidated financial
          information for the years ended July 31, 2005 and 2004 concerning the Company’s
          segments is as follows:
  F-19
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  Licensing
                  
                  Advertising
                      & Promotion
                  
                  Production
                  
                  Travel
                      Services
                  
                  Clubhouse
                  
                  TotalYear
                      Ended July 31, 2005Segment
                      revenue
                  
                  $
                  2,035,000
                  
                  $
                  1,322,000
                  
                  $
                  223,000
                  
                  $
                  94,000
                  
                  $
                  —
                  
                  $
                  3,674,000Segment
                      operating (loss)$
                  (2,649,000
                  )
                  $
                  (1,754,000
                  )
                  $
                  (3,741,000
                  )
                  $
                  (242,000
                  )
                  $
                  (100,000
                  )
                  $
                  (8,486,000
                  )Year
                      Ended July 31, 2004Segment
                      revenue
                  
                  $
                  1,363,000
                  
                  $
                  559,000
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  1,922,000Segment
                      operating (loss)$
                  (2,053,000
                  )
                  $
                  (2,840,000
                  )
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  (4,893,000
                  )
 
 A
          reconciliation of segment operating loss to net income before income taxes
          for
          year ended July 31, 2005 and 2004 is as follows:
 
 FOR
                    THE YEAR ENDEDJuly
                    31, 2005
                
                July
                    31, 2004Total
                    segment operating (loss)
                
                $
                (8,486,000
                )
                $
                (4,893,000
                )Amortization
                    of intangible assets
                
                $
                (240,000
                )
                $
                (240,000
                )Interest
                    income
                
                $
                8,000
                
                $
                6,000Net
                    loss before minority interest and income taxes
                
                $
                (8,718,000
                )
                $
                (5,127,000
                )
 
 **NOTE
          J - LITIGATION**
 
 On
          February 17, 2004, plaintiff Trustin Howard filed a lawsuit against defendants
          In-finn-ity Productions, Bud Friedman, National Lampoon Productions, and
          Game
          Show Network LLC in the United States District Court for the Central District
          of
          California. The plaintiff alleged that the Company, along with the other
          defendants, stole his idea for the show Funny Money and also alleged, among
          other things, copyright infringement. The complaint sought damages and
          injunctive relief. This action was settled as of February 28, 2005. The
          Company
          was not required to pay any consideration for the settlement.
  F-20
 **NATIONAL
                LAMPOON, INC. AND SUBSIDIARIES**
 
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 On
          October 27, 2004 Far Horizon Sales and Leasing LLC filed a complaint against
          the
          Company’s subsidiary, National Lampoon Networks, Inc., in the Superior Court for
          the County of Los Angeles. The plaintiff alleges that it suffered damages
          for
          breach of contract, negligence and trespass to chattel related to the rental
          of
          a coach bus and damage thereto. The plaintiff alleges damages in excess
          of
          $79,000. Noting the extent of the damages, the value of the vehicle, and
          the
          fact that there is insurance coverage, the Company in an effort to be
          conservative, has accrued $50,000 on its books. On August 8, 2005, a settlement
          was reached in the amount of $22,000, which was paid to Far Horizon on
          that
          date. The remaining reserve was written off to miscellaneous
          income.
 
 On
          May
          12, 2005, All Comedy Networks, Inc. filed a complaint in the Superior Court
          for
          the State of California, County of Los Angeles against eight defendants,
          including National Lampoon Radio Networks and National Lampoon Networks.
          The
          complaint alleges that one of the defendants, Kent Emmons, was a founder,
          shareholder, promoter and fiduciary of All Comedy Networks, Inc. The complaint
          alleges that Mr. Emmons negotiated an agreement with National Lampoon Networks
          to use the Company’s trademark in competition with All Comedy Networks, Inc. All
          Comedy Networks, Inc. seeks actual damages in an amount to be proved at
          trial,
          punitive damages, and an injunction to prohibit any of the defendants from
          contacting its employees, investors and advertisers. Because this action
          was
          filed only recently, no discovery has been undertaken. The Company believes
          this
          was brought as a nuisance action against National Lampoon Radio Networks
          and
          National Lampoon Networks and the Company intends to vigorously defend
          any
          attempt by All Comedy Networks, Inc. to prosecute the action against those
          entities.
 
 **NOTE
          K - SUBSEQUENT EVENTS**
 
 On
          July
          28, 2005 the Securities and Exchange Commission declared the Company’s
          registration statement effective and on August 8, 2005 the Company’s public
          offering was complete. The Company sold 3,200,000 shares of its common
          stock at
          $3.00 per share and raised gross proceeds of $9,600,000 and net proceeds
          of
          $8,654,063. On August 31, 2005, the Company used $2,811,846 of the net
          proceeds
          from the offering for the payment of the loan made to the Company by N.
          Williams
          Family Investments, L.P. The Company intends to use the remaining net proceeds
          for corporate purposes.
 
 On
          October 27, 2005, the board members were each granted options to purchase
          25,000
          shares of common stock with an exercise price of $2.19 that expire ten
          years
          from date of grant.
 F-21
  **ITEM
            8.**  **CHANGES
            IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
            DISCLOSURE**
 
 Not
        applicable.
 
 **ITEM
        8A.**  **CONTROLS
        AND PROCEDURES**
 
 We
        carried out an evaluation, under the supervision and with the participation
        of
        our management, including our Chief Executive Officer and our President (who
        is
        also our Chief Financial Officer) of the effectiveness of the design and
        operation of our disclosure controls and procedures as of the end of the
        period
        covered by this report. The evaluation was undertaken in consultation with
        our
        accounting personnel. Based on that evaluation, the President and Chief
        Executive Officer concluded that our disclosure controls and procedures are
        effective to ensure that information required to be disclosed by us in the
        reports that we file or submit under the Securities Exchange Act of 1934
        is
        recorded, processed, summarized and reported within the time periods specified
        in the Securities and Exchange Commission’s rules and forms. For
        the
        fiscal year ended July 31, 2005, we provided our auditor with significant
        detailed information in order to alleviate the going-concern qualification
        in
        the report on our financial statements. Preparing this information took longer
        than we anticipated and required that we file a notice pursuant to Rule 12b-25
        of the Securities Exchange Act of 1934.
  There
        were no significant changes in our internal controls or in other factors
        that
        could significantly affect internal controls subsequent to the date of their
        evaluation.
 
 31
  **ITEM
        8B.**  **OTHER
        INFORMATION**
 
 On
        June
        30, 2005 and again on July 18, 2005 Mr. Timothy Durham, a director, loaned
        us
        $100,000. These were short-term advances that bore no interest. The advances
        were repaid on July 15, 2005 and August 10, 2005, respectively. Mr. Durham
        also
        loaned us $230,000 on June 6, 2005, $270,000 on June 8, 2005 and $100,000
        on
        July 15, 2005. These loans were also short-term advances that bore no interest.
        The advances were repaid on August 10, 2005.
 
 **PART
        III**
 
 **ITEM
        9.**  **DIRECTORS,
        EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
        16(a)
        OF THE SECURITIES EXCHANGE ACT**
 
 The
        number of directors required by our bylaws is seven. There are no family
        relationships among our executive officers and directors.
 
 The
        following table sets forth certain information regarding our directors and
        executive officers.
 
 **Name**
              **Age**
              
              **Position**Daniel
                  S. Laikin
              43
              
              Chief
                  Executive Officer, DirectorDouglas
                  S. Bennett
              46
              
              President
                  and Chief Financial OfficerLorraine
                  M. Evanoff
              43
              
              Chief
                  Accounting OfficerJames
                  P. Jimirro
              67
              
              ChairmanTimothy
                  S. Durham
              43
              
              DirectorPaul
                  Skjodt
              47
              
              DirectorJoshua
                  A. Finkenberg
              31
              
              DirectorRichard
                  Irvine
              64
              
              DirectorRon
                  Berger
              57
              
              Director
 
 None
        of
        our directors or executive officers has, during the past five
        years,
 
 ·
              had
                  any bankruptcy petition filed by or against any business of which
                  such
                  person was a general partner or executive officer, either at the
                  time of
                  the bankruptcy or within two years prior to that
                  time,
 
 ·
              been
                  convicted in a criminal proceeding and none of our directors or
                  executive
                  officers is subject to a pending criminal
                  proceeding,
 
 ·
              been
                  subject to any order, judgment, or decree, not subsequently reversed,
                  suspended or vacated, of any court of competent jurisdiction, permanently
                  or temporarily enjoining, barring, suspending or otherwise limiting
                  his
                  involvement in any type of business, securities, futures, commodities
                  or
                  banking activities, or
 
 ·
              been
                  found by a court of competent jurisdiction (in a civil action),
                  the
                  Securities and Exchange Commission or the Commodity Futures Trading
                  Commission to have violated a federal or state securities or commodities
                  law, and the judgment has not been reversed, suspended, or
                  vacated.
 
 **Election
        of Directors**
 
 On
        May
        17, 2002, a Voting Agreement was entered into among James P. Jimirro and
        the
        members of the NLAG Group. The Voting Agreement will terminate 13 months
        following the date of Mr. Jimirro’s separation from service, which occurred on
        January 28, 2005. During the term of the Voting Agreement, Mr. Jimirro is
        entitled to nominate three directors to the Board of Directors and Daniel
        S.
        Laikin, our Chief Executive Officer, is entitled to nominate three directors.
        The seventh member of our Board of Directors must be mutually nominated by
        a
        majority of the directors nominated by Mr. Jimirro and Mr. Laikin. The parties
        to the Voting Agreement, who collectively have voting control, have agreed
        to
        vote for those persons nominated by Mr. Jimirro and Mr. Laikin.
 
 32
  Once
        the
        Voting Agreement terminates, directors will be elected annually and will
        serve
        until successors are elected and qualified or until a director’s earlier death,
        resignation or removal.
 
 **Committees
        of the Board of Directors**
 
 Our
        Board
        of Directors has two committees, an audit committee and a compensation
        committee. Timothy Durham and Joshua Finkenberg are the members of both
        committees and James Jimirro is a member of the compensation committee
        only.
 
 **Business
        Experience**
 
 DANIEL
        S.
        LAIKIN has been a director since 2000 and was employed as our Chief Operating
        Officer from May 17, 2002 until February 1, 2005 when he became our Chief
        Executive Officer. Mr. Laikin served as Co-Chairman of Biltmore Homes, Inc.,
        an
        Indiana-based home building and real estate development company until 2000.
        He
        also served as a managing partner of Four Leaf Partners, LLC, a closely held
        investment company, concentrating on the startup and financing of high tech
        and
        Internet-related companies. He is also on the Board of Directors of Obsidian
        Enterprises, Inc., a public company.
 
 DOUGLAS
        S. BENNETT provided services to us as a consultant beginning in June 2002,
        then
        joined us as our Executive Vice President in October 2002, became our President
        on February 1, 2005 and our Chief Financial Officer on April 13, 2005. Mr.
        Bennett has over 22 years of experience in managing businesses in publishing
        and
        software. Prior to joining us, Mr. Bennett was the President of iUniverse,
        Inc.,
        the largest independent publisher in the United States. iUniverse produced
        over
        5,000 titles a year through the Internet. Prior to that Mr. Bennett was the
        Chairman and Chief Executive Officer of EoExchange, Inc., an Internet search
        engine business. From 1992 until 1999 Mr. Bennett worked for Macmillan
        Publishing, the largest computer book and reference publisher in the world.
        Mr.
        Bennett started in the software and Internet division of Macmillan’s business
        and eventually became the President of the entire Macmillan Publishing business.
        Prior to his employment with Macmillan, Mr. Bennett worked for 11 years for
        CCH
        Computax, the largest tax software company in the United States. At CCH
        Computax, Mr. Bennett held numerous senior level positions.
 
 LORRAINE
        EVANOFF, Vice President of Finance and Chief Accounting Officer, joined us
        in
        April 2005. Between February 2004 and April 2005, Ms. Evanoff was Controller
        of
        TAG Entertainment Corp., a public company and was instrumental in consummating
        the merger with Powermarketing, Inc. as well as the pending acquisition of
        Myriad films. Prior to working at TAG Entertainment, Ms. Evanoff was Controller
        of ANTs Software Inc., a public company, a developer of high-performance
        SQL
        database management systems until February 2004. From 1999 to 2002, Ms. Evanoff
        also held senior treasury analyst and financial analyst posts with Electronic
        Arts Inc. and Landor Associates, Inc.
 
 JAMES
        P.
        JIMIRRO has been a director since 1986 and was employed as our President
        and
        Chief Executive Officer from 1990 until January 2005. From 1980 to 1985,
        he was
        the President of Walt Disney Telecommunications Company, which included serving
        as President of Walt Disney Home Video, a producer and distributor of family
        home video programming. While in this position, he also served as Corporate
        Executive Vice President of Walt Disney Productions. In addition, from 1983
        to
        1985, Mr. Jimirro served as the first President of the Disney Channel, a
        national cable pay-television channel, which Mr. Jimirro conceived and
        implemented. Mr. Jimirro continued in a consulting capacity for Walt Disney
        Company through July 1986. From 1973 to 1980, he served as Director of
        International Sales and then as Executive Vice President of Walt Disney
        Educational Media Company, a subsidiary of Walt Disney Company. Prior to
        1973,
        Mr. Jimirro directed international sales for CBS, Inc., and later for Viacom
        International. Mr. Jimirro also served as a member of the Board of Directors
        of
        Rentrak Corporation between January 1990 and September 2000.
 
 33
  TIMOTHY
        S. DURHAM has served as a director since 2002. He is the Chief Executive
        Officer
        and Chairman of the Board of Directors of Obsidian Enterprises, Inc. (formerly
        Danzer Corporation) and has held these positions since June 2001. Since April
        2000, he has served as a Managing Member and the Chief Executive Officer
        of
        Obsidian Capital Company LLC, which is the general partner of Obsidian Capital
        Partners LP. Mr. Durham founded in 1998, and since then has maintained a
        controlling interest in, several investment funds, including Durham Capital
        Corporation, Durham Hitchcock Whitesell and Company LLC, and Durham Whitesell
        Associates LLC. From 1991 to 1998, Mr. Durham served in various capacities
        at
        Carpenter Industries, Inc., including as Vice Chairman, President and Chief
        Executive Officer. Mr. Durham serves as a director of Obsidian Enterprises,
        Inc., a public company.
 
 PAUL
        SKJODT has been a director since 2002. He is actively involved in a variety
        of
        companies including managing member of Four Leaf & Associates. Four Leaf is
        a venture fund that provides seed money to a host of technology companies.
        Mr.
        Skjodt also is President of Oakfield Development a land development company
        based of Indianapolis and owner of the Indiana Ice, an ice hockey team in
        the
        United States Hockey League. Mr. Skjodt is also involved in numerous
        philanthropic endeavors in Indiana.
 
 JOSHUA
        A.
        FINKENBERG has been a director since 2002.  He is a Senior Vice President
        at Kelly Capital LLC, a specialized investment company that acquires and
        invests
        in undervalued assets and companies. Previously, Mr. Finkenberg was the Chairman
        and President of AF Investments LLC, a holding company focused on acquisitions
        of and investments in businesses located in the Southern California area.
        From
        August 2000 through January 2002, Mr. Finkenberg was a Senior Associate with
        Relational Advisors, a financial advisory firm based in San Diego, California.
        From July 1996 through July 2000, Mr. Finkenberg was in the Mergers and
        Acquisitions Group of SunTrust Equitable Securities Corporation, a full-service
        investment bank located in Nashville, Tennessee. Mr. Finkenberg graduated
        with
        highest honors from the Robert C. Goizueta Business School at Emory University
        with a dual concentration in Finance and Management Information
        Systems/Information Technology.
  RICHARD
        IRVINE joined our Board in 2004. Since April 2005, Mr. Irvine has been
        self-employed as a consultant to businesses in the gaming industry. From
        April
        2004 through April 2005, he was Senior Vice President of Sales for Bally
        Gaming
        and Systems, a public company. In this position, Mr. Irvine was responsible
        for
        guiding the North American sales operations of Bally Gaming, encompassing
        both
        the United States and Canada. Prior to joining Bally Gaming and Systems,
        from
        January 2002 to January 2004, Mr. Irvine served as Vice President of Sales
        for
        AC Coin & Slot, a gaming-device distributor based in Atlantic City, N.J.
        From January 1999 to December 2001, Mr. Irvine served as Chief Operating
        Officer
        of GameTech, a supplier of electronic bingo equipment, and from 1995 to 1998
        he
        served as President and Chief Operating Officer of Mikohn Gaming Corporation.
        Prior to 1995, Mr. Irvine held the positions of Senior Vice President, Marketing
        and Entertainment for Boomtown, Inc., a Reno, Nevada-based owner and operator
        of
        casino properties in Nevada, Mississippi and Louisiana, Vice President of
        Marketing for Walt Disney Attractions, and President and Chief Operating
        Officer
        of Straight Arrow Publishing, publishers of Rolling Stone Magazine. Mr. Irvine
        was co-founder of Aurora Productions, a producer of major motion pictures.
        He
        also served as Executive Vice President of Unicorn/Sovaminco, a U.S.-U.S.S.R.
        joint venture company. Mr. Irvine began his gaming-industry career as Executive
        Vice President, Worldwide Sales and Marketing, for International Game
        Technology.
 
 RON
        BERGER also joined us as a director in 2004. Mr. Berger is Chairman and Chief
        Executive Officer of Figaro’s Italian Pizza, Inc., a chain of retail pizza shops
        in 17 states. From 1989 through 2000, Mr. Berger served as Chairman and Chief
        Executive Officer of Rentrak Corporation, a publicly traded information and
        payment processor in the home video industry. Mr. Berger conceived of the
        Rentrak concept - a method of sharing revenues between video rental shops
        and
        motion picture studios and other program suppliers. Under his leadership,
        the
        business grew from $6 million in revenues in 1989 to $113 million in year
        2000.
        Prior to building Rentrak, Mr. Berger founded and took public National Video,
        the world’s largest specialty video retail chain prior to Blockbuster. He has
        also twice served as a member of the board of directors of the International
        Franchise Association and served as a member of the board of directors of
        the
        Video Software Dealers Association.
 
 34
  **ITEM
        10. EXECUTIVE COMPENSATION**
 
 The
        following tables and discussion set forth information with respect to all
        compensation awarded to, earned by or paid to our Chief Executive Officer
        and up
        to four of our executive officers whose annual salary and bonus exceeded
        $100,000 during our last three completed fiscal years (collectively referred
        to
        in this discussion as the “named executive officers”). The officer designation
        indicates positions held as of July 31, 2005, the end of our last fiscal
        year.
        During the 2005 fiscal year, James P. Jimirro separated from service, Daniel
        S.
        Laikin became our Chief Executive Officer and Douglas S. Bennett became our
        President and Chief Financial Officer. During the 2003 and 2004 fiscal years,
        James P. Jimirro was our President and Chief Executive Officer, Daniel S.
        Laikin
        was our Chief Operating Officer and Douglas S. Bennett was our Executive
        Vice
        President. James Toll, our former Chief Financial Officer, separated from
        service on May 17. 2005.
 
 **SUMMARY
                  COMPENSATION TABLE****Salary**
              
              **Bonus/Severence**
              
              **Securities
                  Underlying Options/**
              
              **All
                  Other Compensation****Position**
              
              **Year**
              
              **($)**
              
              **($)**
              
              **SARs**
              
              **($)(5)**Daniel
                  S. Laikin
              
              
              2005
              
              
              200,000
              
              
              200,000(3
              )
              
              -
              
              
              13,200Chief
                  Executive Officer
              
              
              2004
              
              
              200,000(1
              )
              
              -
              
              
              415,000
              
              
              13,2002003
              
              
              200,000(2
              )
              
              -
              
              
              -
              
              
              13,200Douglas
                  S. Bennett
              
              
              2005
              
              
              175,000
              
              
              157,518
              
              
              -
              
              
              33,800President
                  and Chief
              
              
              2004
              
              
              175,000
              
              
              -
              
              
              300,000
              
              
              31,000Financial
                  Officer
              
              
              2003
              
              
              131,667
              
              
              -
              
              
              380,000
              
              
              21,300James
                  P. Jimirro
              
              
              2005
              
              
              500,000
              
              
              2,523,800(4
              )
              
              60,000
              
              
              171,819Former
                  Chief Executive
              
              
              2004
              
              
              500,000
              
              
              -
              
              
              297,040
              
              
              11,994Officer
                  and President
              
              
              2003
              
              
              500,000
              
              
              -
              
              
              70,000
              
              
              11,994Lorraine
                  Evanoff
              
              
              2005
              
              
              110,000
              
              
              -
              
              
              50,000
              
              
              -Chief
                  Accounting OfficerJames
                  Toll
              
              
              2005
              
              
              139,800
              
              
              -
              
              
              -Former
                  Chief Financial
              
              
              2004
              
              
              149,550
              
              
              -
              
              
              30,000Officer
              
              
              2003
              
              
              132,737
              
              
              -
              
              
              30,000
 
 (1)
        Represents one year of salary paid to Mr. Laikin that was paid with 7,649
        units
        of Series C Preferred Stock, with each unit consisting of one share of Series
        C
        Convertible Preferred Stock and a warrant to purchase 10 shares of common
        stock
        at a price of $1.775 per share.
 (2)
        Represents one year of salary paid to Mr. Laikin that was paid with 2,000
        units
        of Series B Preferred Stock, with each unit consisting of one share of Series
        B
        Convertible Preferred Stock and a warrant to purchase 56.338 shares of common
        stock at a price of $1.775 per share.
 (3)
        On
        December 9, 2004, we granted a bonus to Daniel S. Laikin for exceptional
        services and issued to him 5,634 units of Series C Convertible Preferred
        Stock
        having a value of $35.50 per unit. In connection with this bonus an expense
        was
        recognized in the amount of $200,000 during the year ended July 31, 2005.
        Each
        unit included one share of Series C Convertible Preferred Stock and a warrant
        to
        purchase ten post-split shares of common stock at a price of $1.775 per
        share.
 (4)
        Severance payment upon termination of Mr. Jimirro as CEO.
 (5)
        Automobile and apartment allowance including payoff of $53,697 for
        Mr.
        Jimirro’s automobile as part of the severance package.
 
 35
  **Option/SAR
                  Grants for Last****Fiscal
                  Year-Individual Grants(1)**Name
              
              Number
                  of Securities Underlying Options/SARs Granted (#)
              
              %
                  of Total Options/SARs Granted to Employees in Fiscal Year
              
              Exercise
                  Price ($/sh)
              
              Expiration
                  DateDaniel
                  S. Laikin
              
              
              -
              
              
              -
              
              
              -Douglas
                  S. Bennett
              
              
              -
              
              
              -
              
              
              -James
                  Jimirro
              
              
              10,000(1
              )
              
              3
              %
              
              3.55
              
              
              8/31/14James
                  Jimirro
              
              
              10,000(1
              )
              
              3
              %
              
              4.00
              
              
              9/30/14James
                  Jimirro
              
              
              10,000(1
              )
              
              3
              %
              
              3.75
              
              
              10/31/14James
                  Jimirro
              
              
              10,000(1
              )
              
              3
              %
              
              3.00
              
              
              11/30/14James
                  Jimirro
              
              
              10,000(1
              )
              
              3
              %
              
              3.20
              
              
              12/31/14James
                  Jimirro
              
              
              10,000(1
              )
              
              3
              %
              
              4.20
              
              
              1/31/15
 
 (1)
        The
        options granted to Mr. Jimirro and Mr. Laikin were immediately
        exercisable.
 
 **Aggregated
                  Option/SAR Exercises in Last Fiscal Year****And
                  FY-End Option/SAR Values(1)**Value
                  ofNumber
                  of
              
              UnexercisedUnexercised
              
              In-the-MoneyOptions/SARs
              
              Options/SARsAt
                  FY-End (#)
              
              at
                  FY-End ($)(2)Shares
                  Acquired
              
              Value
                  Realized(1)
              
              Unexercisable/
              
              Unexercisable/Name
              
              on
                  Exercise (#)
              
              ($)
              
              Exercisable
              
              ExercisableDanel
                  Laikin
              
              
              -
              
              
              -
              
              
              0/619,666
              
              
              0/1,074,658Douglas
                  S. Bennett
              
              
              -
              
              
              -
              
              
              236,603/443,397
              
              
              536,730/681,570James
                  P. Jimirro
              
              
              -
              
              
              -
              
              
              0/1,560,374
              
              
              0/2,969,486Lorraine
                  Evanoff
              
              
              -
              
              
              -
              
              
              45,251/4,749
              
              
              0/0
  (1)
        Value
        realized is determined by calculating the difference between the aggregate
        exercise price of the options and the aggregate fair market value of the
        common
        stock on the date the options are exercised. The closing price of the common
        stock on July 31, 2005 was $4.06.
 (2)
        The
        value of unexercised options is determined by calculating the difference
        between
        the fair market value of the securities underlying the options at fiscal
        year
        end and the exercise price of the options.
 
 36
  **Information
        on Equity Incentive Plans**
 
 Information
        about our employee equity incentive plan is included in Item 5 of this Annual
        Report.
 
 **Employment
        Agreements**
 
 *Daniel
        S. Laikin, Chief Executive Officer*
 
 On
        January 31, 2005 we entered into an Employment Agreement with Daniel S. Laikin.
        The employment agreement was adopted and approved by our Board of Directors
        on
        February 1, 2005. The employment agreement has a term of three years, but
        is
        automatically extended for successive three-year terms unless designated
        members
        of the Board of Directors notify Mr. Laikin that the Board does not intend
        to
        renew the employment agreement or unless the employment agreement has been
        terminated according to its terms.
 
 Pursuant
        to the employment agreement, Mr. Laikin receives an annual salary of $250,000.
        Mr. Laikin is also entitled to receive four weeks paid vacation. Mr. Laikin
        receives an automobile allowance and is entitled to participate in any other
        benefits offered generally to our employees and executives. He is also granted
        an option to purchase 100,000 shares of our common stock on each anniversary
        of
        the effective date of the employment agreement. The exercise price for the
        options will be equal to the average of the last reported sale price for
        one
        share of common stock during the five business days preceding the date of
        grant
        or, if this method of valuing the common stock is not available, the Board
        shall
        determine, in good faith, the value of one share of common stock. The term
        of
        each option shall be 10 years. The options shall be granted in accordance
        with
        the J2 Communications Amended and Restated 1999 Stock Option, Deferred Stock
        and
        Restricted Stock Plan. Mr. Laikin is to meet annually with the Board of
        Directors to set certain performance milestones that must be met bi-annually.
        If
        those milestones are met, Mr. Laikin will receive a bi-annual bonus of $50,000.
        If the milestones are exceeded, Mr. Laikin will receive additional compensation
        that will be paid one-half in cash and one-half in stock.
 
 Mr.
        Laikin’s employment agreement may be terminated voluntarily by us at any time
        during its term for Cause. Cause is defined as (i) the willful and continued
        failure by Mr. Laikin to substantially perform his duties to us in good faith
        (other than a failure resulting from his incapacity due to physical or mental
        illness), or (ii) the willful engaging in conduct which is demonstrably and
        materially injurious to us. In order to terminate Mr. Laikin for Cause, five
        members of the Board of Directors (not including Mr. Laikin) must determine
        at a
        meeting held for such purpose that Mr. Laikin is guilty of the conduct
        triggering the right to terminate him. If Mr. Laikin’s employment is terminated
        by us for Cause, in addition to any benefits mandated by law, we shall pay
        to
        Mr. Laikin his full annual salary in effect at the date of termination and
        other
        benefits to which he is entitled through the date of termination at the rate
        in
        effect at the time notice of termination is given.
 
 Mr.
        Laikin’s employment may be terminated by Mr. Laikin at any time, and will
        terminate automatically upon his death or disability. Upon such termination,
        in
        addition to any benefits mandated by law, we shall pay to Mr. Laikin his
        full
        annual salary in effect at the date of termination and other benefits to
        which
        he is entitled through the date of termination at the rate in effect at the
        time
        notice of termination is given.
 
 On
        signing the Employment Agreement, we also agreed to enter into a separate
        indemnity agreement with Mr. Laikin. A new indemnity agreement has not been
        entered into as of the date of this annual report, although we entered into
        an
        indemnity agreement with Mr. Laikin on May 17, 2002.
 
 *Douglas
        S. Bennett, President and Chief Financial Officer*
 
 On
        January 31, 2005 we entered into an agreement with Douglas S. Bennett to
        employ
        him as our President. The employment agreement was adopted and approved by
        our
        Board of Directors on February 1, 2005. The agreement will expire on January
        31,
        2008.
 
 37
  Pursuant
        to the term of the agreement, we will pay Mr. Bennett a base salary of $250,000.
        Mr. Bennett is also entitled to receive four weeks paid vacation and we have
        agreed to pay 100% of the costs of his group health plan premiums, so long
        as we
        continue to offer a group health plan. Mr. Bennett receives an automobile
        allowance and is entitled to participate in any other benefits offered generally
        to our employees and executives.
 
 Mr.
        Bennett is to meet annually with the Chief Executive Officer and the Board
        of
        Directors to set certain performance milestones that must be met bi-annually.
        If
        those milestones are met, Mr. Bennett will receive a bi-annual bonus of $50,000.
        If the milestones are exceeded, Mr. Bennett will receive additional compensation
        that will be paid one-half in cash and one-half in stock.
 
 On
        January 31, 2006, January 31, 2007 and January 31, 2008, Mr. Bennett will
        receive an option to purchase 100,000 shares of our common stock through
        the J2
        Communications 1999 Amended and Restated Stock Option, Deferred Stock and
        Restricted Stock Plan. These options will be fully vested on the date of
        grant.
 
 Mr.
        Bennett is currently commuting from his home in Northern California and we
        pay
        his commuting expenses. If we require that he relocate to the Los Angeles
        area,
        and he agrees to do so, we will be required to pay him certain relocation
        expenses, including expenses (including costs of transportation, meals and
        lodging) of no more than three trips to Southern California for the purpose
        of
        locating a suitable place to live, the expenses incurred in moving his household
        furniture and furnishings to his home in Southern California and the payment
        of
        reasonable closing costs for the purchase of his home.
 
 We
        may
        terminate Mr. Bennett’s employment for cause at any time. “Cause” is defined as
        a good faith termination by a majority of the Board of Directors because
        he (i)
        engages in acts in violation of the law, (ii) breaches his fiduciary duty
        to us
        or his duties of loyalty or care to us, or (iii) intentionally and persistently
        disobeys the good faith, lawful, substantive policies or instructions of
        the
        Board of Directors after being given 30 days written notice and failing to
        cure
        such circumstances, or, if such circumstances are not susceptible of cure
        during
        such 30 day period, failing to initiate and diligently pursue actions reasonably
        calculated to achieve and cure such circumstances as soon as reasonably
        practicable thereafter.
 
 If
        we
        terminate Mr. Bennett’s employment without cause, or if he is constructively
        terminated, or if Mr. Bennett dies or is disabled, he will be entitled to
        receive the following severance benefits:
 
 ·
              his
                  base salary will be continued for a period of six months or for
                  the
                  remaining term, whichever is longer, following the date that his
                  termination becomes effective;
 
 ·
              his
                  employee benefits will be continued as long as his base salary
                  is
                  continued; and
 
 ·
              any
                  unvested stock options will continue to vest for a period of six
                  months or
                  for the remaining term of his employment as set forth in the agreement,
                  whichever is longer, following the date on which his termination
                  becomes
                  effective.
 
 After
        Mr.
        James Toll, our former Chief Financial Officer, separated from service, Mr.
        Bennett was appointed as our Chief Financial Officer on April 13, 2005. Mr.
        Bennett does not receive additional compensation for this position.
 
 **Key
        Employees**
 
 In
        addition to our executive officers and directors, we value and rely upon
        the
        services of certain key employees in the support of our business and operations,
        and the development and marketing of our brand and products, as
        follows:
 
 38
  BARRY
        LAYNE is the Executive Vice President responsible for our entertainment
        businesses. He joined us in May 2004. Immediately prior to joining National
        Lampoon, Mr. Layne spent a number of years as a senior executive consultant
        to
        companies in the media, entertainment and Internet industries, most recently
        as
        acting Chief Operating Officer of ASG Entertainment and as a member of the
        bankruptcy court approved turnaround team at the former Platinum Entertainment
        (subsequently renamed Compendia Media Group). Previous roles included senior
        management positions at About, Inc., FasTV, Inc., and Ketchum Communications
        Worldwide.
 
 MATTY
        SIMMONS rejoined National Lampoon in November 2002 as Director of Classics.
        Mr.
        Simmons was a co-founder or National Lampoon in the 1970s. Under Mr. Simmons’
        leadership, the company introduced *National
        Lampoon Magazine* ,
        one of
        the most popular humor magazines in publishing history. In 1978 he produced, *Animal
        House* ,
        one of
        the most popular comedy movies of all time. He has also produced, among other
        films, the *National
        Lampoon Vacation* series.
        In 1979, he was named *Producer
        of the Year* and
        in
        1980, *Publisher
        of the Year* by
        industry organizations. Mr. Simmons has written eight books including several
        best sellers.
 
 SARA
        RUTENBERG has been our Executive Vice President - Business Affairs since
        September 2002. Ms. Rutenberg has held various positions in the entertainment
        industry for the past twenty years. Prior to joining National Lampoon, she
        held
        the post of President, Business Development and Strategy for Pearson Television
        (now Fremantle Media, the owner and producer of ‘American Idol’) where she
        managed the divisions responsible for digital asset and intellectual property
        management and brand management. At Pearson, Ms. Rutenberg also served as
        Senior
        Vice President, Business and Legal Affairs and negotiated a variety of
        production and distribution agreements for all media. Ms. Rutenberg came
        to
        Pearson from Universal Television, where she held a variety of posts from
        1983-1998, the last being Senior Vice President of Business and Legal Affairs
        where she was responsible for all international and domestic television
        distribution and nonscripted television production.
 
 **Code
        of Ethics**
 
 The
        Board
        of Directors has adopted a Code of Ethics that applies to all employees,
        including executive officers, and members of the Board of
        Directors.
 
 **Compliance
        with Section 16(a) of the Securities Exchange Act**
 
 Section
        16(a) of the Securities Exchange Act requires our directors, executive officers
        and persons who own more than 10% of our common stock to file reports of
        ownership and changes in ownership of our common stock with the Securities
        and
        Exchange Commission. Directors, executive officers and persons who own more
        than
        10% of our common stock are required by Securities and Exchange Commission
        regulations to furnish to us copies of all Section 16(a) forms they
        file.
 
 To
        our
        knowledge, based solely upon review of the copies of such reports received
        or
        written representations from the reporting persons, we believe that during
        the
        2005 fiscal year our directors, executive officers and persons who own more
        than
        10% of our common stock complied with all Section 16(a) filing requirements
        with
        the exception of the following:
  39
  Name
                    of Filer
                Form
                DescriptionJames
                    P. Jimirro
                4
                Between
                    August 31, 2004 and September 21, 2004 Mr. Jimirro sold a total
                    of 23,419
                    shares of common stock for total gross proceeds of $166,275.
                    These sales
                    were not reported on a Form 4 until October 28, 2004.4
                On
                    June 17, 2004 Mr. Jimirro was granted options to purchase 162,040
                    shares
                    of common stock with an exercise price of $1.76 per share and
                    options to
                    purchase 15,000 shares of common stock with an exercise price
                    of $1.60 per
                    share. These grants were not reported on a Form 4 until November
                    17,
                    2004.4
                On
                    October 30, 2004 and November 30, 2004 Mr. Jimirro was granted
                    options to
                    purchase 10,000 shares of common stock with an exercise price
                    of $3.75 and
                    10,000 shares of common stock with an exercise price of $3.25,
                    respectively. These grants were not reported on a Form 4 until
                    December
                    16, 2004.Ron
                    Berger, Joshua Finkenberg, and Paul Skjodt
                4
                On
                    June 17, 2004 each of these directors was granted an option to
                    purchase
                    15,000 shares of our common stock at a price of $1.60. These
                    grants were
                    not reported on Form 4s until November 17, 2004.James
                    Toll
                4
                On
                    June 17, 2004 Mr. Toll, our former Chief Financial Officer, was
                    granted an
                    option to purchase 30,000 shares of our common stock at a price
                    of $1.60
                    per share. This grant was not reported on a Form 4 until November
                    17,
                    2004.Douglas
                    S. Bennett
                4
                On
                    June 17, 2004 Mr. Bennett was granted options to purchase 300,000
                    shares
                    of our common stock at a price of $1.60 per share. This grant
                    was not
                    reported on a Form 4 until November 17, 2004.Daniel
                    S. Laikin
                4
                On
                    June 17, 2004 Mr. Laikin was granted an option to purchase 15,000
                    shares
                    of our common stock at a price of $1.60 per share. This grant
                    was not
                    reported on a Form 4 until December 10, 2004. Also on June 17,
                    2004 Mr.
                    Laikin was granted an option to purchase 400,000 shares of our
                    common
                    stock at a price of $1.76. This grant was not reported on a Form
                    4 until
                    December 10, 2004.4
                On
                    October 25, 2004 Mr. Laikin received 28,165 shares of our Series
                    C
                    Convertible Preferred Stock with a warrant to purchase 281,650
                    shares of
                    our common stock by converting his loans outstanding to us. This
                    transaction was not reported on a Form 4 until December 10,
                    2004.4
                On
                    January 28, 2005 we issued 50,000 shares of our common stock,
                    having a
                    value of $2.90 per share, to Mr. Laikin in exchange for certain
                    guarantees
                    he made on our behalf in obtaining a loan. No Form 4 was filed
                    disclosing
                    this transaction.Richard
                    Irvine
                4
                On
                    June 17, 2004 Mr. Irvine was granted an option to purchase 15,000
                    shares
                    of our common stock at a price of $1.60. This grant was not reported
                    on a
                    Form 4 until November 17, 2004.4
                Between
                    November 15, 2004 and December 2, 2004 Mr. Irvine sold a total
                    of 15,000
                    shares of our common stock for total gross proceeds of $39,720.
                    These
                    transactions were not reported on a Form 4 until December 22,
                    2004.Timothy
                    S. Durham
                4
                On
                    June 17, 2004 Mr. Durham was granted an option to purchase 15,000
                    shares
                    of our common stock at a price of $1.60 per share. This grant
                    was not
                    reported on a Form 4 until December 23, 2004.4
                On
                    October 25, 2004 Mr. Durham received 28,169 shares of our Series
                    C
                    Convertible Preferred Stock with a warrant to purchase 281,690
                    shares of
                    our common stock by converting his loans outstanding to us. This
                    transaction was not reported on a Form 4 until December 23,
                    2004.4
                On
                    January 28, 2005 we issued 50,000 shares of our common stock,
                    having a
                    value of $2.90 per share, to Mr. Durham in exchange for certain
                    guarantees
                    he made on our behalf in obtaining a loan. No Form 4 was filed
                    disclosing
                    this transaction.
  
 40
  **ITEM
        11.**  **SECURITY
        OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND** **MANAGEMENT**
 
 The
        following table sets forth information as of October 19, 2005 as to each
        person
        or group who is known to us to be the beneficial owner of more than 5% of
        our
        outstanding voting securities and as to the security and percentage ownership
        of
        each of our executive officers and directors and of all of our officers and
        directors as a group.
 
 Beneficial
        ownership is determined under the rules of the Securities and Exchange
        Commission and generally includes voting or investment power over securities.
        The number of shares shown as beneficially owned in the tables below are
        calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of
        1934.
        Under Rule 13d-3(d)(1), shares not outstanding that are subject to options,
        warrants, rights or conversion privileges exercisable within 60 days are
        deemed
        outstanding for the purpose of calculating the number and percentage owned
        by
        such person, but not deemed outstanding for the purpose of calculating the
        percentage owned by each other person listed. Except in cases where community
        property laws apply or as indicated in the footnotes to this table, we believe
        that each stockholder identified in the table possesses sole voting and
        investment power over all of the shares of common stock, Series B Preferred
        Stock and Series C Preferred Stock shown as beneficially owned by the
        stockholder.
 
 The
        following table is based on a total of 14,948,162 shares of common stock
        consisting of the following:
 
 ·
              a
                  total of 6,769,451 shares of common stock outstanding on October
                  19,
                  2005;
 
 ·
              63,607
                  shares of Series B Convertible Preferred Stock that may be converted
                  into
                  3,583,491 shares of common stock;
                  and
 
 ·
              229,761
                  shares of Series C Convertible Preferred Stock that may be converted
                  into
                  4,595,220 shares of common stock.
  41
 Name
                    and Position
                
                Common
                    Stock
                
                Series
                    B Convertible Preferred Stock, on an as-converted basis(9)
                
                Series
                    C Convertible Preferred Stock, on an as-converted
                    basis(14)Number
                    of Shares
                
                Percentage
                    Ownership of Class
                
                Number
                    of Shares
                
                Percentage
                    Ownership of Class
                
                Number
                    of Shares
                
                Percentage
                    Ownership of ClassDaniel
                    S. Laikin, CEO
                
                
                3,624,875(1
                )
                
                24.25
                %
                
                1,787,379(10
                )
                
                49.88
                %
                
                1,663,060(15
                )
                
                36.19
                %Douglas
                    S. Bennett, President
                
                
                528,768
                    (2
                )
                
                3.54
                %
                
                24,000(11
                )
                
                0.66
                %
                
                21,800(16
                )
                
                0.48
                %Lorraine
                    Evanoff, CAO
                
                
                8,402(3
                )
                
                0.06
                %
                
                -
                
                
                -
                
                
                -
                
                
                -James
                    P. Jimirro, Chairman
                
                
                2,011,042(4
                )
                
                13.45
                %
                
                -
                
                
                -
                
                
                -
                
                
                -Timothy
                    Durham, Director
                
                
                1,858,301(5
                )
                
                12.43
                %
                
                994,253(12
                )
                
                27.75
                %
                
                1,206,300(17
                )
                
                26.25
                %Joshua
                    Finkenberg, Director
                
                
                45,000(6
                )
                
                0.30
                %
                
                -
                
                
                -
                
                
                -
                
                
                -Paul
                    Skjodt, Director
                
                
                733,297(7
                )
                
                4.91
                %
                
                366,197(13
                )
                
                10.22
                %
                
                -
                
                
                -Richard
                    Irvine, Director
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -Ron
                    Berger, Director
                
                
                16,000(8
                )
                
                0.11
                %
                
                -
                
                
                -
                
                
                -
                
                
                -Officers
                    and Directors as a Group (8 persons)
                
                
                8,825,685
                
                
                59.05
                %
                
                3,171,829
                
                
                88.51
                %
                
                2,891,160
                
                
                62.92
                %Remaining
                    Holders of Series B Convertible Preferred Stock as a Group
                
                
                -
                
                
                -
                
                
                411,662
                
                
                11.49
                %
                
                -
                
                
                -Remaining
                    Holders of Series C Convertible Preferred Stock as a Group
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                1,704,060
                
                
                37.08
                %
  (1)
        This
        number includes 386,300 shares of common stock, options to purchase 619,666
        shares of common stock, a warrant to purchase 1,787,379 shares of common
        stock
        issued in conjunction with the Series B Convertible Preferred Stock and a
        warrant to purchase 831,530 shares of common stock issued in conjunction
        with
        the Series C Convertible Preferred Stock.
 (2)
        This
        number includes 3,000 shares of common stock, options to purchase 490,868
        shares
        of common stock from a total of 680,000 options granted to Mr. Bennett, a
        warrant to purchase 24,000 shares of common stock issued in conjunction with
        the
        Series B Convertible Preferred Stock and a warrant to purchase 10,900 shares
        of
        common stock issued in conjunction with the Series C Convertible Preferred
        Stock.
 (3)
        This
        number represents options to purchase 8,402 shares of common stock from a
        total
        of 50,000 options granted to Ms. Evanoff.
 (4)
        This
        number includes 450,668 shares of common stock and options to purchase 1,560,374
        shares of common stock.
 (5)
        This
        number includes 415,898 shares of common stock owned by Mr. Durham or by
        an
        entity controlled by him, options to purchase 45,000 shares of common stock,
        a
        warrant to purchase 794,253 shares of common stock issued in conjunction
        with
        the Series B Convertible Preferred Stock and a warrant to purchase 603,150
        shares of common stock issued in conjunction with the Series C Convertible
        Preferred Stock.
 (6)
        This
        number represents stock that may be acquired by Mr. Finkenberg upon the exercise
        of options.
 (7)
        This
        number includes 322,100 shares of common stock, options to purchase 45,000
        shares of common stock, and a warrant to purchase 366,197 shares of common
        stock
        issued in conjunction with the Series B Convertible Preferred
        Stock.
  42
  (8)
        This
        number is made up of options to purchase 15,000 shares of common stock granted
        to Mr. Berger and 1,000 shares of common stock owned by the Ron A. Berger
        Irrevocable Trust.
 (9)
        Each
        share of Series B Convertible Preferred Stock may be converted into 56.338
        shares of common stock.
 (10)
        Mr.
        Laikin owns 31,726 shares of Series B Convertible Preferred Stock that may
        be
        converted into 1,787,379 shares of common stock.
 (11)
        Mr.
        Bennett owns 426 shares of Series B Convertible Preferred Stock that may
        be
        converted into 24,000 shares of common stock.
 (12)
        Mr.
        Durham owns 17,648 shares of Series B Convertible Preferred Stock that may
        be
        converted into 994,253 shares of common stock.
 (13)
        Mr.
        Skjodt owns 6,500 shares of Series B Convertible Preferred Stock that may
        be
        converted into 366,197 shares of common stock.
 (14)
        Each
        share of Series C Convertible Preferred Stock may be converted into 20 shares
        of
        common stock.
 (15)
        Mr.
        Laikin owns 83,153 shares of Series C Convertible Preferred Stock that may
        be
        converted into 1,663,060 shares of common stock.
 (16)
        Mr.
        Bennett owns 1,090 shares of Series C Convertible Preferred Stock that may
        be
        converted into 21,800 shares of common stock.
 (17)
        Mr.
        Durham owns 60,315 shares of Series C Convertible Preferred Stock that may
        be
        converted into 1,206,300 shares of common stock.
 
 The
        address for each of the persons named above is 10850 Wilshire Boulevard,
        Suite
        1000, Los Angeles, California 90024.
  **Information
        on Equity Incentive Plans**
 
 Information
        about our employee equity incentive plan is included in Item 5 of this Annual
        Report.
 
 **ITEM
        12.**  **CERTAIN
        RELATIONSHIPS AND RELATED TRANSACTIONS**
 
 Bruce
        P.
        Vann, was a director until February 2004. Mr. Vann was a partner at the law
        firm
        Kelly Lytton &Vann LLP. We retained the services of Kelly Lytton & Vann
        LLP for various legal matters. Legal expenses of approximately $32,000,
        $108,000, and $119,000 were incurred with respect to work performed for us
        by
        Kelly Lytton & Vann LLP during the fiscal years ended July 31, 2004, 2003
        and 2002.
 
 On
        July
        14, 1986, James P. Jimirro, our Chairman and former President and Chief
        Executive Officer, purchased 192,000 shares of our common stock for
        approximately $115,000. For such shares, we received the sum of approximately
        $58,000 and a note for approximately $58,000. The note bore interest at the
        rate
        of 10% per annum and, pursuant to a Pledge and Security Agreement dated July
        14,
        1986, was secured by the shares purchased. The unpaid principal and interest
        outstanding at July 31, 2004 was approximately $164,000. On May 17, 2002
        we
        entered into an employment agreement with Mr. Jimirro. Mr. Jimirro’s employment
        agreement included a “rolling term” provision so that at no time was the
        remaining term under the agreement less than five years. Mr. Jimirro’s
        employment agreement provided for an annual salary of $500,000 and, commencing
        as of January 31, 2003 and continuing on the last day of each month thereafter
        during the period that he was employed by us, provided for the monthly grant
        of
        fully vested options to purchase 10,000 shares of our common stock. Pursuant
        to
        the employment agreement, Mr. Jimirro also received fifty percent of our
        gross
        receipts from the movie *National
        Lampoon’s Van Wilder* .
        We were
        permitted to terminate Mr. Jimirro’s employment agreement without cause or for
        convenience after December 31, 2002. We exercised our right to do this on
        January 28, 2005 and, pursuant to the terms of Mr. Jimirro’s employment
        agreement, we cancelled the promissory note he owed to us. Aside from the
        cancellation of the promissory note, Mr. Jimirro’s severance benefits included a
        lump sum payment of $2,400,000, a payment of $123,800 to reimburse taxes
        to be
        paid by him as a result of the cancellation of the promissory note and the
        buy-out of the automobile we leased for him, totaling approximately $53,697.
        The
        payment of our obligations to Mr. Jimirro had been secured by all of our
        assets
        pursuant to the terms of a Security Agreement also dated May 17, 2002. Our
        obligations under the Security Agreement terminated upon payment of the
        severance benefits to Mr. Jimirro.
 
 On
        May
        17, 2002 we and National Lampoon Acquisition Group (the “NLAG Group”) entered
        into a Preferred Stock and Warrant Purchase Agreement pursuant to which we
        sold
        to members of the NLAG Group 35,244 units, each unit consisting of one share
        of
        Series B Convertible Preferred Stock and a warrant to purchase 56.338 shares
        of
        our common stock at a purchase price of $1.775 per share. The warrants have
        a
        term of five years. The per unit purchase price was $100. Our Chief Executive
        Officer and director, Daniel S. Laikin, and our directors, Timothy Durham
        and
        Paul Skjodt, purchased units in this offering.
 
 Effective
        August 17, 2002 we issued to Douglas S. Bennett 426 units of our Series B
        Convertible Preferred Stock as payment for services rendered to us as a
        consultant. Each unit had a value of $100. The units consisted of 426 shares
        of
        Series B Convertible Preferred Stock and warrants to purchase a total of
        24,000
        shares of our common stock. The warrant exercise price is $1.775 per share
        and
        the warrant term is five years.
 
 43
 Beginning
        in March 2003, after the closing of the Series B Convertible Preferred Stock
        offering, Daniel S. Laikin, our Chief Operating Officer and a director, and
        Timothy Durham, a director loaned us money in order to fund our operations.
        The
        total amount loaned to us by Mr. Laikin, including accrued interest, was
        approximately $2,509,000, and the total amount loaned to us by Mr. Durham,
        including accrued interest, was approximately $2,137,000. Mr. Laikin and
        Mr.
        Durham have converted their loans to units of our Series C Convertible Preferred
        Stock at a rate of $35.50 per unit. Mr. Laikin also converted $220,000 in
        compensation owed to him to our Series C Convertible Preferred Stock at the
        rate
        of $35.50 per unit.
 
 Leagre
        Chandler & Millard, our former attorneys, assigned to Mr. Timothy Durham a
        promissory note we had signed in favor of Leagre Chandler & Millard for
        legal services incurred in relation to the Reorganization Transaction. The
        original amount of the promissory note was $165,000. As of October19, 2005,
        the
        outstanding balance, with interest, totaled approximately $115,000. The loan
        bears interest at the rate of 6.75% per annum. We have made one payment of
        $50,000 toward this promissory note.
 
 In
        conjunction with our receipt of a loan from N. Williams Family Investments,
        L.P.
        on January 28, 2005, Mr. Daniel S. Laikin, our Chief Executive Officer and
        a
        director, and Mr. Timothy Durham, a director, agreed to guarantee certain
        obligations relating to the security provided for the loan. In exchange for
        these guarantees, we issued to each of Mr. Laikin and Mr. Durham 50,000 shares
        of our common stock. The loan was paid in full on August 31, 2005.
 
 On
        June
        30, 2005 and again on July 18, 2005 Mr. Timothy Durham, a director, loaned
        us
        $100,000. These were short-term advances that bore no interest. The advances
        were repaid on July 15, 2005 and August 10, 2005, respectively. Mr. Durham
        also
        loaned us $230,000 on June 6, 2005, $270,000 on June 8, 2005 and $100,000
        on
        July 15, 2005. These loans were also short-term advances that bore no interest.
        The advances were repaid on August 10, 2005.
 
 44
  **ITEM
        13.**  **EXHIBITS**
 
 Exhibit
                    No.
                Title3.1
                Certificate
                    of Incorporation of National Lampoon, Inc. (1)3.2
                Bylaws
                    of National Lampoon, Inc. adopted August 27, 2002 (1)3.3
                First
                    Amendment of Certificate of Incorporation of National Lampoon,
                    Inc. (2)4.1
                Certificate
                    of Designations, Preferences, Rights and Limitations of Series
                    C
                    Convertible Preferred Stock of National Lampoon, Inc. (2)4.2
                NLAG
                    Registration Rights Agreement dated May 17, 2002 among the Registrant
                    and
                    members of the NLAG Group and GTH Capital, Inc. (3)4.3
                Jimirro
                    Registration Rights Agreement dated May 17, 2002 (3)4.4
                Piggyback
                    Registration Rights Agreement dated September 3, 2002 between
                    the
                    Registrant and Constellation Venture Capital, L.P. as agent for
                    certain
                    individuals. (4)4.5
                Piggyback
                    Registration Rights Agreement entered into among the Registrant
                    and the
                    purchasers of Series C Convertible Preferred Stock (5)4.6
                J2
                    Communications Voting Agreement dated May 17, 2002 among members
                    of the
                    NLAG Group and James P. Jimirro (3)4.7
                First
                    Amendment to Voting Agreement dated June 7, 2002 *4.8
                Series
                    C Voting Agreement entered into among the Registrant and purchasers
                    of
                    Series C Convertible Preferred Stock (5)4.9
                Lock
                    Up Agreement executed by James P. Jimirro dated January 28, 2005
                    (7)4.10
                Form
                    of Lock Up Agreement executed by Officers and Directors dated
                    January 28,
                    2005 (7)4.11
                Lock
                    Up Agreement executed by James P. Jimirro dated June 21, 2005
                    (7)4.12
                Form
                    of Lock Up Agreement executed by Officers and Directors dated
                    June 21,
                    2005 (7)10.1
                2005
                    Employment Agreement between National Lampoon, Inc. and Daniel
                    Laikin
                    (7)10.2
                Employment
                    Agreement between National Lampoon, Inc. and Douglas S. Bennett
                    (7)10.3
                Secured
                    Promissory Note dated January 28, 2005 executed by National Lampoon,
                    Inc.
                    in favor of N. Williams Family Investments, L.P. (7)10.4
                Security
                    Agreement dated January 28, 2005 by and among National Lampoon,
                    Inc.,
                    National Lampoon Networks, Inc. and National Lampoon Tours, Inc.
                    and N.
                    Williams Family Investments, L.P. (7)10.5
                Repayment
                    Guaranty dated January 28, 2005 executed by National Lampoon
                    Networks,
                    Inc. and National Lampoon Tours, Inc. in favor of N. Williams
                    Family
                    Investments, L.P. (7)10.6
                Guaranty
                    dated January 28, 2005 executed by Daniel S. Laikin and Timothy
                    Durham in
                    favor of N. Williams Family Investments, L.P. (7)10.7
                Subordination
                    Agreement dated January 28, 2005 executed by National Lampoon,
                    Inc. and
                    National Lampoon Networks, Inc. in favor of N. Williams Family
                    Investments, L.P. (7)10.8
                Termination
                    of Security Agreement dated January 28, 2005 between National
                    Lampoon,
                    Inc. and James P. Jimirro (7)10.9
                Indemnification
                    Agreement dated May 17, 2002 between National Lampoon, Inc. and
                    Daniel S.
                    Laikin10.10
                Agreement
                    between J2 Communications and Harvard Lampoon, Inc. dated October
                    1, 1998
                    (7)10.11
                First
                    Amendment to Office Lease between National Lampoon, Inc. and
                    Avco Center
                    Corporation dated April 21, 200010.12
                J2
                    Communications Amended and Restated 1999 Stock Option, Restricted
                    Stock
                    and Deferred Stock Plan (7)10.13
                Non-Qualified
                    Stock Option Agreement dated May 17, 2002 between J2 Communications
                    and
                    Daniel S. Laikin (3)10.14
                Indemnification
                    Agreement dated May 17, 2002 between J2 Communications and Daniel
                    S.
                    Laikin (3)10.15
                Indemnification
                    Agreement dated May 17, 2002 between J2 Communications and James
                    P.
                    Jimirro (3)10.16
                Common
                    Stock Warrant for Series B Preferred Stockholders (3)10.17
                Series
                    C Preferred Stock and Warrant Purchase Agreement (5)10.18
                Piggyback
                    Registration Rights Agreement for Series C Preferred Stockholders
                    (5)10.19
                Common
                    Stock Purchase Warrant for Series C Preferred Stockholders (5)10.20
                Agreement
                    dated December 16, 1981 between Warner Bros. Inc. and Studio
                    21
                    Productions, Inc. (7)10.21
                Agreement
                    dated July 1, 1984 between Warner Bros. Inc. and Studio 21 Productions,
                    Inc. (7)10.22
                Letter
                    Agreement dated June 27, 2003 between National Lampoon, Inc.
                    and American
                    Movie Classic Company (7)
  45
  10.23
                Agreement
                    dated September 9, 2003 between National Lampoon, Inc. and TTWF,
                    LLC
                    (7)(8)10.24
                Agreement
                    dated June 30, 2004 between Buena Vista Internet Group and National
                    Lampoon, Inc. (7)(8)10.25
                Agreement
                    dated December 14, 2004 between Majestic Entertainment and National
                    Lampoon, Inc. (7)(8)10.26
                License
                    Agreement dated February 2, 2005 between National Lampoon, Inc.
                    and NL
                    Radio, LLC (6)10.27
                Operating
                    Agreement for NL Radio, LLC dated March 2, 2005 among K-Tahoe
                    Investments,
                    Ltd. and Front Row Films, Ind. And National Lampoon, Inc. (6)(8)10.28
                Underwriters’
                    Warrant (7)10.29
                Promissory
                    Note in favor of Richardson & Patel LLP (7)14
                Code
                    of Business Conduct and Ethics *21
                Subsidiaries
                    of National Lampoon, Inc. *23
                Consent
                    of Stonefield Josephson, Inc.
                    *
 
 *
        Filed
        herewith.
 (1)
        Incorporated by reference from the Registrant’s Form 10-K/A for the fiscal year
        ended July 31, 2003 filed with the Securities and Exchange Commission on
        December 19, 2003.
 (2)
        Incorporated by reference from the Registrant’s Form 10-K for the fiscal year
        ended July 31, 2004 filed with the Securities and Exchange Commission on
        October
        29, 2004.
 (3)
        Incorporated by reference from the Registrant’s Form 8-K filed with the
        Securities and Exchange Commission on May 31, 2002.
 (4)
        Incorporated by reference from the Registrant’s Form 8-K filed with the
        Securities and Exchange Commission on September 9, 2002.
 (5)
        Incorporated by reference from the Registrant’s Form 10-QSB filed with the
        Securities and Exchange Commission on December 22, 2004.
 (6)
        Incorporated by reference from the Registrant’s Form 10-QSB filed with the
        Securities and Exchange Commission on June 15, 2005.
 (7)
        Incorporated by reference from the Registrant’s SB-2 Registration Statement
        filed with the Securities and Exchange Commission on May 10, 2005.
 (8)
        The
        Registrant has omitted certain portions of this exhibit pursuant to a request
        for confidential treatment. The omitted material has been filed separately
        with
        the Securities and Exchange Commission.
 
 **ITEM
        14.**  **PRINCIPAL
        ACCOUNTANT FEES AND SERVICES**
 
 The
        following table sets forth fees billed to us by our auditors during the fiscal
        years ended July 31, 2005 and July 31, 2004 for: (i) services rendered for
        the
        audit of our annual financial statements and the review of our quarterly
        financial statements, (ii) services by our auditor that are reasonably related
        to the performance of the audit or review of our financial statements and
        that
        are not reported as Audit Fees, (iii) services rendered in connection with
        tax
        compliance, tax advice and tax planning, and (iv) all other fees for services
        rendered.
 
 July
                  31, 2005
              
              July
                  31, 2004(i)
                  Audit Fees
              
              $
              36,529
              
              $
              31,809(ii)
                  Audit Related Fees
              
              $
              95,114
              
              $
              12,990(iii)
                  Tax Fees
              
              $
              6,476
              
              $
              -(iv)
                  All Other Fees
              
              $
              -
              
              $
              -
  46
  **SIGNATURES**
 
 In
        accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
        this Form 10-KSB to be signed on its behalf by the undersigned, thereunto
        duly
        authorized on this 14th day of November 2005.
  **NATIONAL
                LAMPOON, INC.**By:
              /s/ Daniel
                S. LaikinDaniel
                  S. Laikin
                Chief Executive
                  Office
 
 In
        accordance with the Exchange Act, this report has been signed below by the
        following persons on behalf of the registrant and in the capacities and on
        the
        dates indicated.
 
 Signature
                
                Title
                Date/s/
                    Daniel S. Laikin
                
                Chief
                    Executive Officer, Director
                November
                    14, 2005Daniel
                    S. Laikin/s/
                    Douglas S. Bennett
                
                President
                    and Chief Financial Officer
                November
                    14, 2005Douglas
                    S. Bennett/s/
                    James P. Jimirro
                
                Chairman
                    of the Board of Directors
                November
                    14, 2005James
                    P. Jimirro/s/
                    Timothy Durham
                
                Director
                November
                    14, 2005Timothy
                    Durham/s/
                    Paul Skjodt
                
                Director
                November
                    14, 2005Paul
                    Skjodt/s/
                    Richard Irvine
                
                Director
                November
                    14, 2005Richard
                    Irvine/s/
                    Ron Berger
                
                Director
                November
                    14, 2005Ron
                    Berger/s/
                    Joshua Finkenberg
                
                Director
                November
                    14, 2005Joshua
                    Finkenberg
  47