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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                  Annual Report Pursuant to Section 13 or 15(d)
                     of the Securities Exchange Act of 1934

                     For the Fiscal Year Ended July 31, 1999

                         Commission File Number 0-15284

                                J2 COMMUNICATIONS
               (Exact name of registrant as specified in charter)

               California                              95-4053296
     (State or Other Jurisdiction of                (I.R.S. Employer
     Incorporation or Organization)                Identification No.)

                      10850 Wilshire Boulevard, Suite 1000
                             Los Angeles, California
                     (Address of principal executive office)

               Registrant's telephone number, including area code
                                 (310) 474-5252

           Securities registered pursuant to Section 12(g) of the Act:

                                                 (Name of each exchange
         (Title of each class)                    on which registered)
       --------------------------                ----------------------
       Common Stock, no par value                        NASDAQ

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

YES [X]  NO [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, 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-K or any amendment to this
Form 10-K. [ ]

As of October 27, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $13,178,034.

As of October 27, 1999, the Registrant had 1,233,712 of its common stock
("Common Stock"), no par value, issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

No documents are incorporated by reference into Parts I, II or III
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                                     PART I

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

Certain statements in the Annual Report on Form 10-K, particularly under Items 1
through 8, constitute "forward-looking statements" within the meaning of Private
Securities Litigation Reform Act of 1995 (the "Reform Act"). Such
forward-looking statements involve known and unknown risks, uncertainties, and
other factors which may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements, expressed or implied by such forward-looking statements.

ITEM 1: THE BUSINESS

The Company was founded in March, 1986 by its Chairman of the Board and
President, James P. Jimirro, the first President of both The Disney Channel and
Walt Disney Home Video. The Company was originally formed primarily to engage in
the acquisition, development and production of entertainment feature film and
special-interest videocassette programs, and the marketing of these programs in
the home video rental and sell-through markets. Due to increasing competition in
the videocassette market, resulting in declining profitability, the Company
de-emphasized this segment of its business and presently it is an insignificant
part of the Company's overall business. In late 1990, the Company acquired
National Lampoon, Inc. ("NL"), publisher of a national satire and humor magazine
and licensor of its name for feature films. In an effort to preserve capital the
Company at that time significantly scaled back its operations, and retained a
modest staff to administer the licensing of the National Lampoon name. The
Company did not actually engage in any production or development activity and
instead contracted with various licensees to exploit this trademark.

Altering its strategy to reflect current opportunities, in April, 1999 the
Company announced its intent to develop nationallampoon.com, a humor network
(the "Site") featuring a wide array of new comedic content including animation
and live action, as well as classic articles and features from the magazine.
Management expects to earn revenue on the Site through the sales of advertising
and National Lampoon-themed merchandise from a virtual store which is a part of
the Site. A further part of this Internet strategy is to spin off characters,
animation, and stories from the website into feature films, television, video,
audio and merchandise.

The Site, which launched on October 25, 1999, is a content provider, and will
deliver original programming, both developed by the Company and produced and
acquired from third parties, for exhibition and exploitation over the Internet.
The Site features a wide variety of original programming delivered via audio,
video and text as well as classic National Lampoon audio from "The National
Lampoon Radio Hour" and reprints of classic National Lampoon magazine articles
and features. During the first week of the site's launch, there had been over
1,100,000 hits on nationallampoon.com, providing an early indication that the
Site may be attractive to advertisers and that the quantity of visitors may
attain the level necessary to sell significant quantities of merchandise. The
Company believes that, despite the plethora of existing Internet sites, its
strong consumer positioning will allow it to establish its Site as a leader in
the delivery of comedic entertainment.

The Company believes that the Site will derive a substantial portion of its
revenue from "banner" and "sponsorship" advertising. The advertising model
emerging on the Internet is similar to that which has developed in more mature
media, in which revenue will depend upon the quantity and quality of impressions
delivered to advertisers. The Company anticipates that the Site will appeal to
the same demographic segments as did the magazine: males age 18-34, with a
strong overlay of college-age males and a contingent of under-18 year olds. In
addition, the Company believes that there is a significant segment of post-34
year olds who grew up with National Lampoon and, it is anticipated, will
regularly visit the Site.


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Nationallampoon.com demographics, especially 18-34 year old males, are extremely
attractive to advertisers. Thus, should the Site succeed in delivering large
quantities of this demographic segment, we believe that advertisers will be
attracted to the Site. In addition, Management believes that the highly
interactive nature of the Site and the frequent addition of new material will
encourage visitors to remain at the Site longer than they would otherwise stay
and to revisit it often, thus adding to its attractiveness to advertisers.

The site also log on E-commerce component. The Site's retail store, "Smash &
Grab," features a broad array of NL videos, books and CD's, as well as new
National Lampoon apparel and other themed merchandise. Management anticipates
that this selection of merchandise, as well as a schedule of promotions in the
store, may result in retail revenue.

Management anticipates that the Site will become the principal business of the
Company over the near term.

WEB RELATED BUSINESS ARRANGEMENTS

In the process of creating and launching nationallampoon.com, the Company has
been fortunate in attracting high caliber, experienced personnel, and in forming
alliances, on a cost effective basis, which afford the Site the opportunity of
achieving success.

During 1999 the Company hired an Editor-in-Chief of the site who has extensive
experience in comedy writing, editing and performing. In addition, the Company
added a nationallampoon.com Marketing Manager who brought with her experience in
creating, launching, and conducting online marketing for a website.

Management believes that a primary source of revenue from the Site will be from
advertising. The Company has entered into an agreement with Phase2Media to sell
banner ads, interstitial ads (i.e., ads which use video as opposed to static
images) and sponsorships (wherein an advertiser sponsors an entire section of
the Site). Phase2Media represents a number of other prestigious, "branded"
sites. As of November 1, 1999, no significant advertising space had been sold.

To maximize the revenue potential of the Site, the Company has contracted with
The eMarket Group to design and maintain a virtual retail outlet, "Smash &
Grab." Under the terms of this agreement, the Company has completely eliminated
inventory risk. Since all order fulfillment and customer service has, per the
contract, been outsourced, the Company has avoided the fixed costs normally
associated with managing a retail site.

In a further effort to minimize fixed costs, the Company has chosen to outsource
the hosting and maintaining of the Site to Concentric Network, which was chosen
because of its reputation for reliability and high technical quality. The
Company has a one year contract with Concentric, under what it considers to be
favorable terms.

The Company also has agreements with Reel Networks and inet regarding the
republishing (re broadcast) of "Classic" National Lampoon ceudro metered, and
the link of such sites to the National Lampoon site.

Management believes that these personnel decisions, as well as the alliances
described above, allow the Company to concentrate its resources, both human and
financial, on the tasks of creating high quality, new comedic material for the
Site and marketing it effectively.

INDUSTRY BACKGROUND

Due to its strong consumer appeal, the Internet is emerging as a medium that is
complimentary and, in several respects, superior to traditional electronic and
print media. Specifically, the Internet offers content providers and advertisers
the ability to quickly and efficiently reach highly-targeted audiences without
having to surmount the barriers to entry presented by traditional media. The
Company believes that the Internet offers it a significant opportunity to reach
its own target audience and deliver it to advertisers.


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PROPRIETARY RIGHTS

The Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success. The Company has obtained
copyrights and registration for its major properties and is in the process of
obtaining them for its new properties. Due to worldwide availability of the
Internet, copyright and trademark protection may not be available in every
country where nationallampoon.com is available.

MARKETING

The Company will pursue both online and offline marketing in an effort to
leverage National Lampoon's strong consumer positioning against
nationallampoon.com

Offline consumer marketing will, over the coming period, comprise a number of
activities, beginning with a publicity campaign directed to print and electronic
media. This will be supplemented by consumer promotions and paid advertising.
Marketing will be directed toward the site's core audience of men 18-34, with
specific emphasis on college age males and supplemented by targeting "baby
boomer" males who grew up with the National Lampoon.

In addition to consumer advertising and promotion, there will be an additional
emphasis on online marketing, including syndication of nationallampoon.com
material to other portals and websites. This "sampling" of National Lampoon
material with accompanying links to nationallampoon.com is designed to generate
interest among potential viewers and entice them to visit our site.

COMPETITION

The market for Internet access is relatively new, intensely competitive and
rapidly changing. Because there are no substantial barriers to entry, the number
of web sites competing for consumers' attention has proliferated and it is
expected that competition will continue to intensify.

Many proprietors of traditional offline media such as television, radio and
print have already established, or may establish Web sites, and may compete
directly with the Company. Many of these competitors are larger, more
established and have access to more capital than the Company. The Company may
need to raise additional capital to be able to be competitive in this market. It
is anticipated that the amount of competition will increase in the future. This
could result in price reductions for advertising revenue, reduced margins, loss
of market share and greater operating losses, any of which would materially and
adversely effect the business of the company, the results of its operations and
financial condition.


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CERTAIN CONSIDERATIONS

Dependence on the Internet

Since the Internet and other wide area networks are new and evolving, it is
difficult to predict with any certainty whether the Internet will prove to be a
viable commercial marketplace. The Internet has experienced and is expected to
continue to experience significant growth in users and traffic. There can be no
assurance that the Internet infrastructure will continue to be able to support
the demands on it by this continued growth. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle an increased level of activity. Further, if the necessary
infrastructure or complimentary services or facilities are not developed,
results of the Company's operations and financial conditions will be materially
affected.

The Company expects to derive a substantial amount of its revenues from
sponsorships and advertising for the foreseeable future, and demand and market
acceptance for Internet advertising is uncertain.

There are currently no standards for the measurement of the effectiveness of
Internet advertising, and the industry may need to develop standard measurements
to support and promote Internet advertising as a significant advertising medium.
If such standards do not develop, existing advertisers may not continue their
levels of Internet advertising. Furthermore, advertisers that have traditionally
relied upon other advertising media may be reluctant to advertise on the
Internet. The Company's business would be adversely affected if the market for
Internet advertising fails to develop or develops more slowly than expected.

The Company expects to be dependent on third parties for (i) establishment of
agreements to acquire or license products, and (ii) operation of the Site. In
particular, during its startup phase, the Company will be dependent on various
third parties for software, systems and related services. Many of these third
parties have a limited operating history, have relatively immature technology
and are themselves dependent on reliable delivery of services from others. As a
result, the Company's ability to deliver various services to its potential users
may be adversely affected by the failure of these third parties to provide
reliable software, systems and related services to us. In addition, there can be
no assurance that the Company will be successful in establishing and maintaining
such relationships with distributors and licensed entities on terms favorable to
the Company.

Risks Associated With Internet-Based Business

Although the Company has just commenced active operations of its Internet site,
shareholders should note the following:

(i)     The Company may be sued for information disseminated on the Internet,
        including claims for defamation, negligence, copyright or trademark
        infringement, personal injury or other legal theories relating to the
        information it publishes on the Site. These types of claims have been
        brought, sometimes successfully, against online services as well as
        print publications in the past. The Company could also be subjected to
        claims based upon the content that is accessible from the Site or
        through content and materials that may be posted by members in chat
        rooms or bulletin boards. The Company may also offer e-mail services,
        which may subject the Company to potential risks, such as liabilities or
        claims resulting from unsolicited e-mail, lost or misdirected messages,
        illegal or fraudulent use of e-mail or interruptions or delays in e-mail
        service. The Company, which intends to maintain general liability, may
        not adequately protect itself against these types of claims.


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(ii)    The Company may incur potential liability for products sold over the
        Internet. Consumers may sue it if any of the products that it sells
        (either online or otherwise) are defective, fail to perform properly or
        injure the user. The Company may foster relationships with manufacturers
        or companies to offer such products directly on other websites. Such a
        strategy involves numerous risks and uncertainties. Although the
        Company's agreements with manufacturers typically contain provisions
        intended to limit its exposure to liability claims, these limitations
        may not prevent all potential claims. Liability claims could require the
        Company to spend significant time and money in litigation or to pay
        significant damages. As a result, any such claims, whether or not
        successful, could seriously damage the Company's reputation and
        business.

(iii)   To the extent that the Company's growth is based on the Internet, the
        Company will be dependent on its continued growth and integration into
        daily commerce. The Company's intended business would be adversely
        affected if Internet usage does not continue to grow. A number of
        factors may inhibit Internet usage, including: inadequate network
        infrastructure; security concerns; inconsistent quality of service; and
        lack of availability of cost-effective, high speed service. If Internet
        usage grows, the Internet infrastructure may not be able to support the
        demands placed on it by this growth and its performance and reliability
        may decline. In addition, websites have experienced interruptions in
        their service as a result of outages and other delays occurring
        throughout the Internet network infrastructure. If these outages or
        delays frequently occur in the future, Internet usage, as well as the
        usage of the Company's website, could grow more slowly or decline.

(iv)    Internet security concerns could hinder e-commerce. The need to securely
        transmit confidential information over the Internet has been a
        significant barrier to electronic commerce and communications over the
        Internet. Any well-publicized compromise of security could deter people
        from using the Internet or using it to conduct transactions that involve
        transmitting confidential information. The Company may incur significant
        costs to protect against the threat of security breaches or to alleviate
        problems caused by such breaches.

(v)     Third parties may misappropriate personal information about the
        Company's potential users. If third parties were able to penetrate the
        Company's network security or otherwise misappropriate our users'
        personal information or credit card information, the Company could be
        subject to liability. This could include claims for unauthorized
        purchases with credit card information, impersonation or other similar
        fraud claims. They could also include claims for other misuses of
        personal information, such as for unauthorized marketing purposes. These
        claims could result in litigation. In addition, the Federal Trade
        Commission and state agencies have been investigating certain Internet
        companies regarding their use of personal information. The Company would
        incur additional expenses if new regulations regarding the use of
        personal information are introduced or if the Company's privacy
        practices are investigated.

The Company Will Need To Expend Significant Resources On Internet Resources

The Site will need to accommodate a high volume of traffic and deliver
frequently updated information. If the Site has slow response times or decreased
traffic, for a variety of reasons these types of occurrences could cause users
to perceive the Site as not functioning properly and therefore cause them to use
another website or other methods to obtain information.


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In addition, the Company's potential users will depend on Internet service
providers, online service providers and other website operators for access to
the Site. Many of them have experienced significant outages in the past, and
could experience outages, delays and other difficulties due to system failures
unrelated to our systems. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems. Computer viruses, electronic break-ins or other similar disruptive
problems could also adversely affect the Site. The Company's business could be
adversely affected if its systems were impacted by any of these occurrences. The
Company's insurance policies may not adequately compensate it for any losses
that may occur due to any failures or interruptions in our systems. The Company
does not presently have any secondary "off-site" systems or a formal disaster
recovery plan.

nationallampoon.com is a new venture

The Site is a new venture and its prospects are subject to risks, expenses and
uncertainties frequently encountered by young companies that operate exclusively
in the new and rapidly evolving markets for Internet products and services.
Successfully achieving its growth plan depends on, among other things: the
Company's ability to continue to develop new and original comedic material which
is equal or superior to that of its competitors; its ability to attract,
increase and maintain traffic on the Site; its ability to effectively integrate
the technology and operations of business; its ability to continually identify,
attract, retain and motivate qualified personnel and its ability to successfully
attract Internet based advertising.

J2 Common Stock Volatility

The trading price of the Company's stock has been and continues to be subject to
fluctuations. Since the Company began the full-scale development of the Site the
stock price of the Company has risen substantially. The closing price of the
Company's stock on March 25, 1999 was $1.875. The closing price of the Company's
stock on October 22, 1999 was $24.50. The stock price may fluctuate in response
to a number of events and factors, such as quarterly variations in operating
results, changes in financial estimates and recommendations by security
analysts, the operating and stock performance of other companies that investors
may deem as comparable, and news reports relating to trends in the marketplace.
In addition, the stock market in general and the market prices for Internet
related companies in particular have experienced extreme volatility that often
has been unrelated to the operating performance of such companies. These broad
market and industry fluctuations may adversely affect the price of the company's
common stock, regardless of the company's operating performance.

NASDAQ Listing Requirement

The NASDAQ listing requirements specify that a corporation meet certain minimum
requirements for continued listing. One of the requirements is that a company
maintain either 1) $2 million in net assets, or 2) $35 million in market
capitalization, or 3) $500,000 in net income in the latest fiscal year or 2 of
the last 3 fiscal years. The Company has an ongoing need to produce income or
capital or an increase in its stock price to continue to meet these
requirements. Management believes that it will be able to maintain compliance
with these requirements. However, it cannot offer any guarantee that it can do
so. The Company's inability to maintain compliance may affect its stock price.

Dependence on National Lampoon name

The Company's revenue is based primarily on the proceeds realized from
exploitation of the National Lampoon name. Lack of any continued demand for the
tradename could have an adverse effect on its business, the results of
operations, and its financial condition.


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Dependence on Key Personnel

The Company is substantially dependent on the services of James P. Jimirro, who
serves as the Company's Chairman of the Board and President. Although Mr.
Jimirro is party to an employment agreement with the Company, the loss of his
services could have a material adverse effect on the Company.

RESTATED AGREEMENT WITH HARVARD LAMPOON

On October 1, 1998, the Company entered into two agreements with Harvard
Lampoon, Inc. ("HLI") to settle all outstanding past disputes and to confirm the
Company's exclusive ownership of the National Lampoon trademark in a wide
variety of areas, including all media currently being used as well as restaurant
services and new electronic media not contemplated in earlier agreements. Under
the agreement the Company will give up the right and obligation to publish new
issues in print of National Lampoon magazine, which in recent years detracted
from the Company's financial results. The Company has retained full rights to
its extensive library of past issues of the magazine. The Company agreed to
deliver 16,667 shares (as adjusted per the reverse split) of common stock to HLI
(which were delivered in December, 1998) and increase the royalty level for
certain expanded rights of exploitation, but the financial terms between the
Company and HLI for the Company's ongoing and existing operations remain the
same.

The Company believes the new agreement represents a significant improvement for
the Company, as the agreement clarifies the relationship with HLI, expands
opportunities for business activities, and reduces the possibility of future
disputes with HLI (which have occurred periodically over three decades).
Moreover, the Company is now relieved of the financial obligation of publishing
the magazine.

The impact of the settlement resulted in no material impact on the financial
results or operations of the Company.

STOCKHOLDER RIGHTS AGREEMENT

In July 1999, the Board of Directors of the Company adopted a Stockholder Rights
Plan, and in connection therewith declared a dividend of one preferred share
purchase right (the "Rights") for each outstanding share of common stock, no par
value per share, of the Company (the "Common Shares") outstanding at the close
of business on August 5, 1999. Since such time the Company has issued the Rights
with each Common Share that has been subsequently issued. When exercisable, each
new Right will entitle its holder to buy one one-hundredth of a share of Series
A Junior Participating Preferred Stock (the "Preferred Shares") at a price of
$65.00 per one-one-hundredth of a share (the "Purchase Price") until July 15,
2009.

The Rights will become exercisable upon the earlier of (i) ten (10) business
days following public announcement that a person or a group of affiliated or
associated persons has acquired, or obtained the right to acquire, beneficial
ownership of 15% or, in the case of Messrs. Daniel Laikin and Paul Skjodt (or
any of their related persons, if any) as a group, 25%, or, in the case of Mr.
James Jimirro (or any of his related persons, if any) 39% or more of the
outstanding Common Shares (an "Acquiring Person"), or (ii) ten (10) business
days following the commencement or announcement of an intention to make a tender
offer or exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding Common Shares.


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In the event of any merger, consolidation or other transaction in which Common
Shares are exchanged, each Preferred Shareholder will be entitled to receive 100
times the amount received per Common Share. In the event that a person becomes
an Acquiring Person or if the Company were the surviving corporation in a merger
with an Acquiring Person or any affiliate or associate of an Acquiring Person
and the Common Shares were not changed or exchanged, each holder of a Right,
other than the Rights that are or were acquired or beneficially owned by the
Acquiring Person (which Rights will thereafter be void), will thereafter have
the right to receive upon exercise that number of Common Shares having a market
value of two times the then current Purchase Price of one Right. In the event
that, after a person has become an Acquiring Person, the Company were acquired
in a merger or other business combination transaction or more than 50% of its
assets or earning power were sold, proper provision shall be made so that each
holder of a Right shall thereafter have the right to receive, upon the exercise
thereof at the then current Purchase Price of the Right, that number of shares
of common stock of the acquiring company which at the time of such transaction
would have a market value of two times the then current Purchase Price of one
Right.

The Rights may be redeemed in whole, but not in part, by the Board of Directors
of the Company at a price of $.001 per Right at any time prior to the time that
an Acquiring Person has become such. The redemption of the Rights may be made
effective at such time, on such basis and with such conditions as the Board of
Directors of the Company in its sole discretion may establish.

OTHER ACTIVITIES

The Company will continue its focus on using the National Lampoon name in
virtually every segment of the entertainment business. In the past, The first
significant result of this effort was realized with the release in February,
1993 of the feature film "National Lampoon's Loaded Weapon I". This film
achieved in excess of $28 million of theatrical revenue in its United States
theatrical release. The Company is participating in the film's revenue as
provided by the Company's licensing agreement with New Line Cinema, the producer
and distributor of the film. The second picture under this licensed agreement,
"National Lampoon's Senior Trip," was released in September of 1995. The
theatrical revenue from this film was disappointing. However, as the Company
only licensed the National Lampoon name with respect to the project, it had no
risk of loss if theatrical boxoffice and ancillary revenues were disappointing.
The Company intends to continue its efforts to license the National Lampoon name
to other producers of full-length motion pictures. In fiscal 1994, a licensing
agreement was entered into with Showtime Networks, Inc. which provided for the
production of seven (7) movies made for initial viewing on the Showtime
television channel over three (3) years. The Showtime Agreement expired during
the fiscal year ending July 31, 1997 with only four made-for-cable pictures
being produced and as such, the fifth through seventh movies were not produced.
In accordance with the contract, Showtime has paid the producer fees due for the
fifth (5) through seventh (7) movies as of July 31, 1998.

On April 15, 1998 the Company entered into an agreement with International
Family Entertainment, Inc. ("IFE"), a wholly-owned subsidiary of Fox Kids
Worldwide, Inc., whereby IFE acquired an exclusive option to acquire certain
exclusive rights in and to the National Lampoon brand (including name, logos,
and related elements).

On June 10, 1998 IFE elected to exercise that option. The rights acquired by IFE
consisted of the right to use the National Lampoon name in connection with a
Monday through Friday half-hour comedy strip, a once-weekly movie and/or comedy
night as well as original made-for-television movies and series. The first two
projects resulting from this alliance are two made-for-television motion
pictures entitled "National Lampoon's Men in White" and "National Lampoon's Golf
Punks". These two movies were broadcast on Fox Family Channel during the months
of August and September of 1998 to favorable ratings. In addition, IFE's
exercise of the option entitled them to four (4) additional, consecutive,
conditional annual options to renew and extend this agreement through August,
2003. IFE has let this agreement lapse by not exercising its option during the
second consecutive year's option period.


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Motion Pictures, Television and Other Entertainment Activities

MOTION PICTURES: NL's motion picture activities have consisted principally of
developing ideas for feature films, suggesting script writers, providing
supervision of the scripting, and providing producer services in connection with
the production of such films. NL has not financed the development, production or
distribution of movies, and does not maintain a development department. Instead,
NL is typically presented with film ideas by major movie studios for
consideration with regard to financing of development, production, and
distribution by such studios and obtaining the right to use the National Lampoon
name. For these services, NL receives production and other fees and a
participation in the profits, if any, of the movie which bears its name. After
NL's first movie, "Animal House," NL's compensation arrangements for its comedy
film projects financed and distributed by studios traditionally fell into a
general pattern of cash fees for NL's producer services and for the use of the
name National Lampoon in the film title, and a small percentage of the studio's
"net profits" (after a certain level of revenues has been achieved) from the
film.

To date, NL has been involved in the production of eight feature films,
including the highly profitable 1978 film "Animal House," co-produced by NL and
Ivan Reitman. This movie starred John Belushi and was financed and distributed
by Universal Studios. For the last five years, revenues from this picture have
consisted mainly of NL's share of fees derived from the licensing of the picture
by Universal for showing by various independent television stations, and from
the sale of videocassettes.

NL's other films have included "National Lampoon's Vacation" (released in 1983)
and its sequels, "National Lampoon's European Vacation" (released in 1985), and
"National Lampoon's Christmas Vacation" (released in 1989), all starring Chevy
Chase and Beverly D'Angelo.

NL and New Line Cinema Corporation ("New Line") entered into an agreement, dated
September 11, 1991, regarding the development and production, financing, and
distribution of up to three (3) National Lampoon motion pictures, each at
budgets not greater than $10 million, within four and one-half years of
execution of the agreement (the "New Line Agreement"). The New Line Agreement
provided NL with an advance fee for the use of the National Lampoon name in
connection with each of the theatrical motion pictures to be produced and
additional contingent compensation based on the gross revenues produced by the
picture.

New Line released the first film under this agreement, "National Lampoon's
Loaded Weapon I," in February, 1993. The film grossed in excess of $28 million
at the domestic boxoffice. The second film, "National Lampoon's Senior Trip,"
was released in September, 1995 and was not a boxoffice success. The New Line
agreement expired on May 10, 1996, and as such, the third motion picture was
never produced.

In March, 1994, the Company signed an agreement with Showtime Networks, Inc.
("Showtime") to produce seven (7) movies over a three (3) year period to be
aired initially on the Showtime Network or The Movie Channel. The agreement
provided for the payment of a license fee to National Lampoon upon the
commencement of principal photography of each film and contingent compensation
based on revenues the films may generate from all sources. The Showtime
agreement has now expired, with only four (4) made-for-cable movies produced,
and as such, the fifth through seventh movies will not be produced. In
accordance with the contract, Showtime has paid the producer fees due for the
fifth (5th) through seventh (7th) movies as of July 31, 1998. Unless the Company
licenses the rights and obtains a significant advance, revenue from theatrical
feature film rights for fiscal year ended July 31, 2000 will be dependent on
contingent compensation from previously licensed rights. The results will be
lower feature film rights revenue for the fiscal year ended July 31, 2000, than
in prior years.


                                       9
<PAGE>   11
TELEVISION: In July, 1987 NL entered into an exclusive television agreement with
Barris Industries, Inc. ("Barris"), a Los Angeles-based television production
company. Barris is a predecessor of Guber-Peter Entertainment Company ("GPEC"),
which was acquired by Sony Pictures (formerly Columbia Studios). Pursuant to the
Barris Agreement, NL granted Barris the exclusive right to produce television
programming of any kind utilizing the name National Lampoon for a term of five
years. NL had not previously been significantly active in creating television
programming, and this agreement did not produce any significant television
activity.

Concurrent with the acquisition of NL by J2 Communications, the exclusive right
to produce television programming under the name National Lampoon was
re-acquired by NL on October 1, 1990 from GPEC ("GPEC Agreement"). The purpose
of this acquisition of rights was to ensure that NL had the ability to control
the use of its name in the valuable medium of television and to develop comedy
motion pictures and other programs for broadcast in all areas of television
distribution, including network, syndication and cable.

The GPEC Agreement required the re-payment of $1,000,000 to GPEC, which was the
consideration paid by GPEC to NL for the rights in 1987. This sum was payable by
NL, fifty-percent ($500,000) on execution of the contract (and so paid), and
fifty-percent ($500,000) payable out of seventeen and one-half percent (17 1/2%)
of the gross receipts received by NL as a result of the exploitation of any new
television programs bearing the National Lampoon name, with certain minimums due
on commencement of principal photography or taping of the applicable programs.
After this amount has been repaid, NL shall have no further obligations to GPEC.
To date, $182,500 has been paid under the gross receipt provision of the
agreement.

MADE-FOR-VIDEO MOVIES: "National Lampoon's Last Resort", a made-for-video movie
produced by Rose & Ruby Productions, completed filming in July, 1993. The
picture starred Corey Feldman & Corey Haim, and was distributed internationally
by Moonstone Entertainment and in the U. S. by Vidmark in early 1994.

MOTION PICTURE AND TELEVISION COMPETITION: Motion pictures and television
development activities are highly competitive. NL is in competition with the
major film studios as well as numerous independent motion picture and television
production companies for the acquisition of literary properties, the services of
creative and technical personnel, and available production financing. NL
believes it has been, and will continue to be, aided in these endeavors by the
recognition achieved by the National Lampoon name and by the success achieved by
its films, "National Lampoon's Animal House," "National Lampoon's Vacation," and
"National Lampoon Loaded Weapon I;" however, NL cannot guarantee that any
project will actually be produced or, if produced, will yield the success of
past projects.

BOOKS: NL has published various books, including "National Lampoon's Treasury of
Humor" with Simon and Schuster, and four "True Facts" books with Contemporary
Books. Other NL published books include the third edition of "National Lampoon's
Cartoon Book," and "National Lampoon's White Bread Snaps".

MERCHANDISE: NL has a number of merchandising arrangements, including a line of
trading and post cards based upon National Lampoon magazine art. In addition, At
A Glance Landmark, which published the Company's previous calendars is
distributing the 1999 NL Life Sucks! PAGE-A-DAY CALENDAR AND HORRORSCOPE.

RECORDINGS: Rhino Records continues to distribute a commemorative boxed set
titled "The Best of The National Lampoon Radio Hour," a compilation of classic
comedy from the early 1970's radio series.


                                       10
<PAGE>   12
Publishing Operations

NATIONAL LAMPOON MAGAZINE: First published in March, 1970, National Lampoon was
distributed at newsstands, bookstores, and other retail outlets. Its audience
was largely young, college educated, and affluent. Each issue of the magazine
contained original articles, artwork, and photographs treating various matters
in a satirical manner.

National Lampoon became a bi-monthly magazine in late 1986 with a $3.95 cover
price and approximately 112 pages per issue. Commencing with the March, 1991
issue, National Lampoon increased to a ten (10) times per year frequency and
reduced its cover price to $2.95 and lowered the page count to 84 pages.
However, the continued economic recession and the advent of the Gulf War
depressed all magazine circulation and related advertising revenues.
Consequently, beginning with the December, 1991 issue, the Company reverted to
bi-monthly issues. In an effort to reverse the trend of NL losses over many
years, in March, 1992, the Company relocated the principal offices of National
Lampoon, Inc. to Los Angeles, California, and closed the New York offices. After
the April, 1992 issue, NL suspended publication of National Lampoon for several
months. NL recommenced publication of National Lampoon with the spring, 1993
issue.

In August, 1993 the Company entered into an agreement with CR Cooper
Publications, Inc., a magazine publisher, to print and distribute the magazine.
Editorial control of the magazine content remained with the Company. The
agreement called for the publication of a minimum of 4 issues during the first
year of the agreement, 6 issues the second year and 10 issues for the third and
subsequent years. The agreement was for a period of 3 years; however, in
February, 1996, the agreement was terminated by the Company because certain
minimum performance targets were not met by the Publisher. Beginning with the
25th anniversary issue published in May 1996, the Company again began publishing
the magazine. The Company published 55,000 copies of the 25th Anniversary 1996
issue and 62,000 copies of the 1997 issue. The Company's agreement with Harvard
Lampoon at the time obligated the Company to publish at least one issue of the
magazine a year with a minimum of 50,000 copies. The Company complied with this
obligation until the Company received a waiver from Harvard Lampoon from its
obligation to publish the magazine during the 1999 fiscal year, yet published an
issue of the magazine in October of 1998. The Company published 53,000 copies of
the magazine with a cover price of $4.95.

It became clear to the Company that continuing to publish the magazine was no
longer profitable. Therefore, in connection with the new agreement signed with
Harvard Lampoon, Inc. on October 1, 1998, the Company prevailed in its desire to
discontinue publishing the magazine.

Video Operations

The Company, which through 1993 was engaged in significant operations in the
sell-through video market, has drastically diminished its video operations. The
Company does not expect that its video operations will generate any significant
revenue in the near future.

EMPLOYEES

As of October 23, 1998, the Company employed six (6) employees of whom four (4)
are full time and two (2) are part-time.


                                       11
<PAGE>   13
ITEM 2: PROPERTIES

The Company leases office space of approximately 3,912 square feet at 10850
Wilshire Boulevard, Suite 1000, Los Angeles, California 90024 for a five (5)
year period commencing on October 1, 1995. The Company's rental obligation is
$7,237 per month. The space is utilized for office space, as well as storage of
video masters, cassettes and back issues of the National Lampoon Magazine and
other NL archival materials. In addition, it provides storage for legal,
accounting and contract files related to past years for National Lampoon and J2
Communications. Management considers the Company's corporate offices generally
suitable and adequate for their intended purposes.

ITEM 3: LEGAL PROCEEDINGS

On August 13,1999, Heathdale Productions, Inc., a 25% partner with J2
Communications in the Yearbook Movie company--the participant in the royalties
from Universal Studios on the movie "Animal House"-- sued the Company for breach
of contract and other alleged violations they claim the Company committed in
distributing their share of "Animal House" revenue. The Company believes this
suit is without merit and plans to defend it vigorously. Management believes
that this suit will not result in any material impact on its financial condition
or results of operations.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None


                                       12
<PAGE>   14
                                     PART II

ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

a. Stock: The Company's Common Stock has been traded in the NASDAQ
over-the-counter market since October 2, 1986 under the symbol JTWO. On October
21, 1998, the Company held a special shareholders meeting where a 3:1 reverse
stock split was voted on and approved. In consideration of this subsequent
event, all periods presented have been restated to retroactively reflect the
decreased number of shares and share prices outstanding. The reverse split
resulted in a decrease in the common shares from 3,600,000 to 1,200,000 for all
periods presented. The following table sets forth, for the periods shown, the
high and low sales prices of the common stock during each quarterly period
within the three most recent fiscal years, as reported by NASDAQ.

Common Stock

<TABLE>
<CAPTION>
                                                       High            Low
                                                      ------          ------
<S>                                                   <C>             <C>
Fiscal 2000:

         First Quarter (through October 31, 1999).... 26.31           14.50

Fiscal 1999:

         First Quarter...............................  1.875           1.7814
         Second Quarter..............................  2.25            1.7814
         Third Quarter...............................  2.25            1.875
         Fourth Quarter.............................. 18.25            1.6875

Fiscal 1998:

         First Quarter...............................  4.0314          2.8125
         Second Quarter..............................  3.2814          1.875
         Third Quarter...............................  2.8125          1.50
         Fourth Quarter..............................  2.9064          2.3436

Fiscal 1997:

         First Quarter...............................  3.6564          3.1875
         Second Quarter..............................  3.375           2.625
         Third Quarter...............................  2.9064          2.3436
         Fourth Quarter..............................  3.00            2.4375
</TABLE>


                                       13
<PAGE>   15
On October 25, 1999 the closing sales price for the Common Stock was $20.50 per
share. The approximate number of holders of record of Common Stock on that date
was 1,300. The Company has never paid a dividend on its Common Stock and
presently intends to retain all earnings for use in its business.

ITEM 6: SELECTED FINANCIAL DATA

The selected consolidated statements of operations data for each of the three
years in the period ended July 31, 1999 and the consolidated balance sheet data
at July 31, 1998 and 1997 are derived from the Company's consolidated financial
statements included elsewhere in this Annual Report that have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report, which is also included elsewhere in this Annual Report. Such selected
consolidated financial data should be read in conjunction with those
consolidated financial statements and the notes thereto. The selected
consolidated income statement data for the years ended July 31, 1996 and 1995
are derived from audited consolidated financial statements of the Company which
are not included herein.


                                       14
<PAGE>   16
                      SELECTED CONSOLIDATED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                                        Years-ended July 31,
                                            ------------------------------------------------------------------------------
                                                1999            1998            1997             1996             1995
                                            ------------     ----------     ------------     ------------     ------------
<S>                                         <C>              <C>            <C>              <C>              <C>
STATEMENT OF OPERATIONS DATA:
Total revenues                              $  1,345,000     $  868,000     $  1,415,000     $  1,041,000     $  1,333,000
Costs and expenses:
Costs of revenue                                 124,000         45,000          262,000          259,000          193,000
Selling, general
  and administrative                           2,648,000        765,000          792,000          725,000          818,000

Amortization of  intangible assets               240,000        240,000          240,000          240,000          240,000
                                            ------------     ----------     ------------     ------------     ------------
(Loss) income from operations                 (1,667,000)      (182,000)         121,000         (183,000)          82,000

Other income and expense:
 Settlement of royalty and other claims          436,000        343,000               --               --               --
 Minority Interest in income
   of consolidated subsidiary                    (68,000)       (34,000)         (82,000)         (46,000)         (30,000)
                                            ------------     ----------     ------------     ------------     ------------
(Loss) income before provision (benefit)
  for income taxes                            (1,299,000)       127,000           39,000         (229,000)          52,000

Provision (benefit) for income taxes                  --          6,000            9,000            7,000          (14,000)
                                            ------------     ----------     ------------     ------------     ------------
NET (LOSS) INCOME                           $ (1,299,000)    $  121,000     $     30,000     $   (236,000)    $     66,000
                                            ============     ==========     ============     ============     ============
(LOSS) INCOME PER COMMON SHARE

     Basic                                  $      (1.07)    $     0.10     $       0.03     $      (0.20)           $0,06
                                            ============     ==========     ============     ============     ============
     Diluted                                $      (1.07)    $     0.10     $       0.02     $      (0.20)    $       0.06
                                            ============     ==========     ============     ============     ============
</TABLE>


                                       15
<PAGE>   17

<TABLE>
<CAPTION>
                                               Years-ended July 31,
                        ------------------------------------------------------------------
                           1999          1998          1997          1996          1995
                        ----------    ----------    ----------    ----------    ----------
<S>                     <C>           <C>           <C>           <C>           <C>
BALANCE SHEET DATA:

Intangible assets       $3,416,000    $3,656,000    $3,896,000    $4,136,000    $4,376,000
Total assets            $5,350,000    $5,962,000    $5,473,000    $5,367,000    $5,667,000
                        ==========    ==========    ==========    ==========    ==========
Shareholders' equity    $2,590,000    $3,803,000    $3,682,000    $3,652,000    $3,888,000
                        ==========    ==========    ==========    ==========    ==========
</TABLE>


                                       16
<PAGE>   18
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

RESULTS OF OPERATIONS

YEAR ENDED JULY 31, 1999 VERSUS JULY 31, 1998

Total revenues for 1999 increased $477,000 to $1,345,000 compared to $868,000
for 1998. Movies, television and theatrical revenues increased $516,000
primarily due to the receipt of $800,000 from International Family Entertainment
Inc. ("IFE") for the rights to exploit the National Lampoon brand in connection
with certain U.S. television rights. These revenues were partially offset by
reductions in amounts received from Showtime of approximately $306,000.
Videocassette sales increased $17,000 to $18,000 from $1,000 in the prior year
mainly due to increased sales of "Mother Goose" video titles. Royalty income
decreased $82,000 from $160,000 to $78,000 from the prior year due to decreased
video royalties. Publishing revenue increased $12,000 from last fiscal year to
$12,000 compared to $0 in 1998 due to the current fiscal year sales of the 1998
edition. Interest income for the year increased $14,000 to $99,000 from $85,000
in the prior fiscal year primarily due to increased interest income recognized
on short-term investment, as well as higher cash balances invested in interest
bearing accounts during the current fiscal year.

Cost of movies, television and video increased $27,000 to $58,000 from $31,000
in the prior fiscal year, primarily due to required payments on the "GPEC"
rights agreement.

Royalty expense increased $52,000 to $66,000, compared to $14,000 in 1998,
primarily due to increases in royalty income, video income and movie income.

Selling, general and administrative expenses increased $163,000 to $948,000 in
the current year as compared to $785,000 in the prior year. The increase was
primarily due to increase in personnel and support staff required in launching
the Site.

Compensation (benefit) related to SAR's increased by $1,719,000 to $1,700,000
from a benefit of $19,000, in 1998 due to a dramatic increase in the Company's
stock price resulting in a corresponding increase in the value of the SAR's.
This is described more fully under "Employment Agreement and Stock Options."

Other income of $436,000 in 1999 and $343,000 in 1998 primarily represents the
reversal of previous accruals related to royalty and other liabilities which
were extinguished at reduced amounts.

A Net Loss of $1,299,000 equal to $1.07 per diluted share was recorded in the
current year compared to $121,000 of Net Income equal to $.10 in 1998. The
dramatic decrease was due primarily to the increase in SAR expenses and expenses
associated with the launch of nationallampoon.com.

YEAR ENDED JULY 31, 1998 VERSUS JULY 31, 1997

Total revenues for 1998 decreased $547,000 to $868,000 compared to $1,415,000
for 1997. Movies, television and theatrical revenues decreased $348,000,
primarily due to decreased movie licensing revenue of previously licensed
movies. Videocassette sales decreased $218,000 to $1,000 from $219,000 from the
prior year due to the Company's continuing de-emphasis of the video segment of
its business because of declining profitability. Royalty income increased
$49,000 from $111,000 to $160,000 from the prior year, primarily due to the
recognition of income on the balance of advance license fees upon expiration of
the license agreements. Publishing revenue decreased $56,000 from last fiscal
year to zero this year due to the Company receiving a waiver from publishing the
National Lampoon magazine during the current fiscal year. Interest income for
the year increased $26,000 to $85,000 from $59,000 in the prior fiscal year
primarily due to increased interest income recognized on short-term investment,
as well as higher cash balances invested in interest bearing accounts during the
current fiscal year.


                                       17
<PAGE>   19
Cost of movies and television decreased $27,000 to $26,000 from $53,000 in the
prior fiscal year, primarily due to no payments being required on the "GPEC"
rights agreement.

There was no cost of magazine due to the company obtaining a waiver from
publishing a magazine this fiscal year.

Royalty expenses decreased $49,000 to $14,000 compared to $63,000 in 1997,
primarily due to no royalty expense being due on the balance of advance license
fees upon expiration of the license agreements as mentioned above.

Selling, general and administrative expenses decreased $27,000 to $765,000 in
the current year as compared to $792,000 in the prior year. The decrease was
primarily due to a reduction in salary expense and insurance expense, partially
offset by an increase in accounting and corporate expenses.

Other income of $343,000 primarily represents the reversal of previous accruals
related to potential royalties, which were extinguished at a reduced amount, the
current year recognition of certain unearned revenues, and the settlement of
certain accrued expenses at reduced levels.

Net income for the current year was $121,000, equal to $.10 per diluted share
compared to $30,000, equal to $.02 per diluted share in the prior fiscal year.
The increase in net income was due primarily to an increase in royalty, interest
and other income, lower general and administrative expenses and cost of movies
and television. This was partially offset by lower movies, television and
theatrical revenue and reduced videocassette sales.

LIQUIDITY AND CAPITAL RESOURCES

Cash and short term investments at July 31,1999 totaled $1,858,000, a decrease
of $373,000 from the prior year-end.

The Company incurred significant expenditures in fiscal 1999, with approximately
$116,000 (without taking into consideration the share of the Company's overhead
allocated to developing the Site) due to the cost of developing and launching
the Site. There will be additional significant expenditures in the current line
of business and management believes that its present level of cash, augmented by
internally generated funds, will provide sufficient cash resources through
fiscal 2000. The Company is exploring ways of raising additional capital. No
assurance can be given that the Company will be successful in raising additional
capital, or if successful, that it will be on terms which are acceptable to the
Company. To the extent that the Web operations are not cash flow positive, or
that additional capital is not available, the Company may be forced to curtail
some of its new activities.

The Company has made a significant investment in the National Lampoon name and
other intangible assets through its acquisition of NLI. Realization of these
acquired assets $(3,416,000 as of July 31, 1999) is dependent on the success and
viability of nationallampoon.com as well as the continued licensing of the
National Lampoon name for use in feature films, video, television and audio
distribution and merchandising of other appropriate opportunities. The Company
has received approximately $7,407,000 in licensing revenues since the
acquisition of the National Lampoon name in 1990. The Company is in the process
of negotiating other licensing agreements and the development of other concepts,
programs, etc. that could generate additional licensing fees in the future. If
these and other licensing agreements that the Company may enter into in the
future do not result in sufficient revenues to recover these acquired intangible
assets over a reasonable period of time or if nationallampoon.com does not meet
with advertising and merchandising sales success, the Company's future results
of operations may be adversely affected by a write-off of or an adjustment to
these acquired intangible assets.

In evaluating if there has been an impairment in the value of its long-lived
assets, the Company follows the guidelines of SFAS No. 121. This statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. Management has determined that through the realization of future
licensing agreements and revenues from nationallampoon.com, expected future cash
flows relating to the intangible assets will result in the recovery of the
carrying amount of such assets.


                                       18
<PAGE>   20
IMPACT OF YEAR 2000 ISSUE

Introduction: The term "Year 2000 issue" is a general term used to describe the
various problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the Year 2000 is
approached and reached. These problems generally arise from the fact that most
of the world's computer hardware and software has historically used only two
digits to identify the year in a date, often meaning that the computer will fail
to distinguish dates in the "2000's" from dates in the "1900's." These problems
may also arise from other sources as well, such as the use of special codes and
conventions in software that make use of the date field.

State of Readiness: To date, we have completed the Year 2000 conversion with
respect to all of our computer systems and applications. We have completed
remediation and testing of our computer systems and applications. While we have
completed all required system remediation and testing for the Year 2000, we will
continue our testing efforts and make appropriate remediations as necessary
through January 1, 2000.

Because of the substantial progress made by us towards our Year 2000 conversion,
we do not anticipate that any additional significant changes will be required or
that the Year 2000 issue will pose significant operational problems for us.
However, if the Company, its customers and vendors are unable to make necessary
changes in a timely fashion and if unanticipated problems arise, the Year 2000
issue may take longer for us to address and may have a material impact on our
financial condition and results of operations.

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Index to Financial Statements of the Company is included in Item 14.

ITEM 9: NONE


                                       19
<PAGE>   21
                                    PART III

ITEM 10:  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth below, as of the date of this filing, lists each
director and executive officer of the Company, the year in which he first became
a director or executive officer, and his principal occupation during the past
five years. Each Director is expected to hold office until the next annual
meeting of stockholders and until his successor has been elected and qualified.

<TABLE>
<CAPTION>
                                                                         First
Name and Office to which Elected                           Age          Elected
--------------------------------                           ---          -------
<S>                                                        <C>          <C>
James P. Jimirro                                           62            1986
 Chairman of the Board of Directors,
 President and Chief Executive Officer

James Fellows                                              64            1986
 Director

Bruce P. Vann                                              43            1986
 Director

John De Simio                                              47            1998
 Director

Andrew Weeraratne                                          49            1999
 Chief Financial Officer

Duncan Murray                                              53            1986
 Vice President-Marketing
</TABLE>

JAMES P. JIMIRRO has been employed by the Company since its inception. 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 until 1985, Mr. Jimirro served as the first President of The
Disney Channel, a national pay cable television channel, which Mr. Jimirro
conceived and implemented. Mr. Jimirro continued in a consulting capacity for
the Walt Disney Company through July, 1986. From 1973 to 1980 he served as
Director of International Sales and then as Executive Vice President of the Walt
Disney Educational Media Company, a subsidiary of Walt Disney Productions.
Before his move to Disney, Mr. Jimirro directed international sales for CBS,
Inc. and later, for Viacom International.


                                       20
<PAGE>   22
JAMES FELLOWS has been a member of the Board of Directors and the President of
the Central Education Network, Inc., a Chicago, Illinois association of public
television and educational associations, since 1983. From 1962 through 1982, Mr.
Fellows worked in a variety of positions for the National Association of
Educational Broadcasters (NAEB) in Washington, D.C., and became its President
and Chief Executive Officer in 1978. Mr. Fellows is a director of numerous
non-profit corporations, including the Hartford Gunn Institute, a research and
planning service for public telecommunications; the Maryland Public Broadcasting
Foundation, a corporate fund-raiser for public television; and the American
Center for Children and Media, a coalition of organizations committed to
improving media services for children and youth.

BRUCE P. VANN has been a partner in the law firm of Kelly Lytton Mintz & Vann,
LLP since December, 1995, and from 1989 through December 1995 was a partner with
the law firm of Keck, Mahin & Cate and Meyer & Vann. In all firms (located in
Los Angeles, California), Mr. Vann has specialized in corporate and securities
matters. From 1994 through 1998 Mr. Vann served, on a non-exclusive basis, as
Senior Vice President of Largo Entertainment, a subsidiary of The Victor Company
of Japan.

JOHN DE SIMIO has been in the entertainment side of the public relations
business since 1976. From 1988 to 1996, Mr. De Simio was a Senior Vice
President, Publicity/Promotion for Castle Rock Entertainment, where he oversaw
publicity and national promotional campaigns for their theatrical and television
productions. Before moving to Castle Rock, Mr. De Simio was National Publicity
Director of Twentieth Century Fox Film Corporation from 1985-1988. Mr. De Simio
is presently on a disability leave due to a visual impairment. Mr. De Simio
currently serves on the boards of Theatre LA and The Broadcast Film Critics
Association.

ANDREW WEERARATNE joined the company in February,1999 as Chief Financial
Officer. He is a Certified Public Accountant, licensed in the State of Florida
(presently inactive), and has worked as Chief Financial Officer and Controller
for various companies over the last 10 years. Prior to that he owned and
operated his own Certified Public Accounting firm in Washington, D.C. for 6
years.

DUNCAN MURRAY has been with the Company since August, 1986. Before that, he
worked with The Walt Disney Company for fourteen years in a variety of
capacities including Vice President, Sales Administration for The Disney Channel
and Director of Sales for Walt Disney Telecommunications Company. Mr. Murray
also serves, on a non-exclusive basis, as Vice President and Treasurer of
Transactional Media Incorporated.


                                       21
<PAGE>   23
ITEM 11: EXECUTIVE COMPENSATION

The Summary Compensation Table below includes, for each of the fiscal years
ended July 31, 1999, 1998 and 1996, individual compensation for services to the
Company and its subsidiaries of the Chief Executive Officer (the "Named
Officer").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                   Long Term Compensation
                                                                   ---------------------------------------------------
                                Annual Compensation                          Awards                      Payouts
                      ---------------------------------------      ----------------------------    -------------------
(a)           (b)          (c)           (d)           (e)            (f)             (g)             (h)       (i)
                                                      Other
Name                                                  Annual       Restricted                                 All Other
and                                                   Compen-        Stock                           LTIP      Compen-
Principal                                             sation        Award(s)        Options/        Payouts    sation
Position      Year    Salary($)(4)    Bonus($)(4)     ($)(1)          ($)            SARs(#)          ($)        ($)
--------      ----    ------------    -----------     -------      -----------   --------------     -------   --------
<S>           <C>     <C>             <C>             <C>          <C>           <C>                <C>       <C>
              1999      190,750            --           (2)            (3)       16,667/16,667         --        3
James P.      1998      190,750            --           (2)            (3)       16,667/16,667         --        3
Jimirro(2)    1997      190,750            --           (2)            (3)       16,667/16,667         --        3
</TABLE>

------------

(1)     Does not include amounts of $18,887 in 1999, $12,000 in 1998, and
        $12,500 in 1997 paid to Jim Jimirro, who is entitled to be reimbursed
        for expenses relating to entertainment, travel and living expenses when
        away from home.

(2)     Does not include $6000 in 1999, $6,000 in 1998, and $7,000 in 1997,
        which the Company paid for Mr. Jimirro's health plan. The Company also
        provides Mr. Jimirro with a Company-leased vehicle for his use.

(3)     Does not include SAR's granted to Mr. Jimirro pursuant to his employment
        agreement. See the description of Mr. Jimirro's employment agreement
        under "Employment Agreements and Stock Option Plans" below.

(4)     Effective June 1, 1992, Mr. Jimirro reduced the amount of salary he
        receives to $190,750. Mr. Jimirro does not expect to receive the unpaid
        portion unless there is a change in the control of the Company as
        defined by his employment agreement. The Company has not accrued any
        salary or bonus for Mr. Jimirro in regards to the above for the fiscal
        years ended July 31, 1999, 1998 and 1997.


                                       22
<PAGE>   24
Option Grants in Last Fiscal Year

Shown below is information on grants of stock options pursuant to the 1994 Stock
Option Plan during the fiscal year ended July 31, 1999 to the Named Officer
which are reflected in the Summary Compensation Table on page 17.

<TABLE>
<CAPTION>
                                                                                       Potential Realized Value at
                                Individual Grants in 1999                             Assigned Annual Rates of Stock
                  --------------------------------------------------------                  Price Appreciation
                                 Percentage                                              for 7 year Option Term
                                  of Total                                      -----------------------------------------
                                Options/SARs      Exercise                              5%                   10%
                   Options/      granted to        or Base                      -------------------   -------------------
                    SARS        Employees in      Price Per     Expiration      Stock      Dollar      Stock     Dollar
Name              Granted(#)     Fiscal Year       Share($)        Date         Price($)   Gains($)   Price($)   Gains($)
----              ----------    ------------      ---------     ----------      --------   -------    --------   --------
<S>               <C>           <C>               <C>           <C>             <C>        <C>        <C>        <C>
James Jimirro      16,667(1)        40.0           $1.94(2)     12-28-2005       $2.73      $13,167     $3.78    $30,667
                   16,667          100.0           $1.94        12-28-2005       $2.73      $13,167     $3.78    $30,667
</TABLE>

----------

(1)     Options/SARS granted are immediately exercisable.

(2)     Options/SARS granted with an exercise price (or initial valuation in the
        case of SARs) equal to the average of the high and low bid and asked
        price for one share of Common Stock during the five (5) business days
        preceding the date of grant Stock as quoted on the National Association
        of Securities Dealers Automated Quotation System ("NASDAQ") on December
        28, 1999, the date of grant for Mr. Jimirro.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values

Shown below is information with respect to (i) options exercised by the Named
Officer pursuant to the 1994 Plan during fiscal 1999 (of which there were none);
and (ii) unexercised options granted in fiscal 1999 and prior years under the
1994 Plan to the Named Officer and held by them at July 31, 1999.

<TABLE>
<CAPTION>
                                                                              Value of
                                                                             Unexercised
                                                         Unexercised         In-the-Money
                                                       Options/SARs at     Options/SARS at
                                                           7/31/99            7/31/99(1)
                   Shares Acquired         Value         Exercisable/        Exercisable/
Name                on Exercise(#)      Realized($)    Unexercisable(#)    Unexercisable($)
----               ---------------      -----------    ----------------    ----------------
<S>                <C>                  <C>            <C>                 <C>
James Jimirro            -0-                -0-            233,338/0         $3,433,752/0
</TABLE>

----------

(1)     Based on the closing sale price as quoted on NASDAQ on that date.

Director Compensation

Directors, with the exception of Mr. Jimirro, receive 1,333 stock options per
year exercisable at the then market price as compensation for their services as
a director.


                                       23
<PAGE>   25
Compensation Committee Interlocks and Insider Participation

The Company does not have a Compensation Committee or similar Board committee.
The compensation of Mr. Jimirro as Chief Executive Officer ("CEO") is determined
under the provisions of Mr. Jimirro's employment agreement with the Company,
which was approved by the Board of Directors in 1994 and then in 1999. James
Jimirro, James Fellows, Bruce Vann and John De Simio were each directors of the
Company during fiscal 1999.

EMPLOYMENT AGREEMENTS AND STOCK OPTIONS

In 1999, the Company entered into a new employment agreement with James P.
Jimirro, effective July 1, 1999 (the "1999 Agreement"). Under the 1999
Agreement, which has a term of seven years, Mr. Jimirro will receive a base
salary plus an incentive bonus following the end of each fiscal year during
which Mr. Jimirro is employed by the Company. Mr. Jimirro's base salary for the
first year will be $475,000 and will be adjusted annually by the greater of (i)
9% or (ii) 5% plus the percentage increase in the CPI Index. Effective July 1,
1999, the President reduced the amount of salary he receives to $191,000. The
President does not expect to receive the unpaid portion unless there is a change
in the control of the Company as defined by the agreement. The decision by Mr.
Jimirro to forego compensation is similar to the actions by Mr. Jimirro under
the terms of his prior employment agreement. Accordingly, and as specifically
provided by the terms of the 1999 Agreement, the company has entered into a
contingent note (the "Contingent Note") in the amount of $2,150,625, which
amount represents the principal of all amounts previously waived by Mr. Jimirro.
The Contingent Note is due only upon a change of control by the Company (as
discussed below), and is considered a contingent obligation of the Company. To
the extent that amounts are waived by Mr. Jimirro in the future, the 1999
Agreement provides that the Company is obligated to issue additional Contingent
Notes, due on the same basis, for the amounts so waived.

Mr. Jimirro's bonus is to be an amount equal to 5% of the Company's earnings in
excess of $500,000 and up to $1 million; plus 6% of the next $1 million of
earnings; plus 7% of the next $1 million of earnings; plus 8% of the next $2
million of earnings; and plus 9% of the next $2 million of earnings. If earnings
exceed $7 million, then Executive shall, in addition to foregoing compensation,
be entitled to such additional incentive compensation as may be determined by
the Board based upon Executive's services and performance on behalf of the
Company and the profitability of the Company.

The 1999 Agreement also provides that, on the date of each annual meeting of
shareholders during its term, Mr. Jimirro will be granted stock options with
respect to 25,000 shares of Common Stock and stock appreciation rights (SARs)
with respect to 25,000 shares of Common Stock. The exercise price of each option
and the initial valuation of each SAR will be equal to the average of the high
and low bid and asked price for a share of common stock during the five (5)
business days preceding the date of grant as reported by NASDAQ automated
quotation system. The options and SARs will be immediately exercisable
non-statutory stock options, will have a term of seven years, and will be
subject to all other terms identical to those contained in the Company's 1999
Employee Stock Option Incentive Plan (the "1999 Plan"). The 1999 Plan
specifically provides for the grant of stock options and SARs to Mr. Jimirro in
accordance with his employment agreement. The 1999 Agreement provides that if
Mr. Jimirro's employment is terminated without cause, or is terminated by Mr.
Jimirro for cause or under certain other circumstances, including a change in
control of the Company (as defined below), then Mr. Jimirro generally is
entitled to receive all payments and other benefits which would be due under the
1999 Agreement during its entire term; provided, that such payments are to be
"grossed up" to the extent that such payments would constitute an "excess
parachute payment" under the Internal Revenue Code of 1986, or any successor law
applicable to payments of severance compensation to Mr. Jimirro. A "change in
control" would be deemed to occur if (a) any person or group becomes the direct
or indirect owner of securities with 25% or more of the combined voting power of
the Company's then outstanding securities, (b) if there is a significant change
in the composition of the Board of


                                       24
<PAGE>   26
Directors of the Company, (c) upon the sale of all or substantially all of the
assets of the Company, (d) upon the merger of the Company with any other
corporations if the shareholders of the Company prior to the merger owned less
than 75% of the voting stock of the corporation surviving the merger or (e) in
certain other events. In addition to the foregoing benefits, Mr. Jimirro has the
right, if he terminates his employment under certain circumstances (including
following a change in control or a breach of the 1999 Agreement by the Company)
to serve as a consultant to the Company for a period of five years (the
"Consulting Period"). During the Consulting Period, Mr. Jimirro would be
required to devote no more than 600 hours per year to the affairs of the
Company, and would receive 50% of his salary as in effect on the date of
termination of his employment. As a result of the foregoing, the Company would
incur substantial expenses if Mr. Jimirro terminates his employment with the
Company following a change in control of the Company, which may make the Company
a less attractive acquisition candidate. The 1999 Agreement also provides Mr.
Jimirro with certain registration rights pursuant to which, beginning in 2000,
the Company will be required upon the request of Mr. Jimirro to register the
sale of shares of the Company's Common Stock owned by Mr. Jimirro under the
Securities Act of 1933. The 1999 Agreement is terminable by the Company only
"for cause" as defined therein.

Any employee may participate in any bonus plan, which may be established, as
well as all Employee Stock Option Plans.

STOCK OPTION PLANS

In 1994 the Board of Directors approved an Employee Stock Option Plan and a
Stock Option Plan for Non-Employee Directors. Both Plans were approved by
Shareholders at the Shareholders' Meeting held March 2, 1995.

The Employee Stock Option Plan is to be administered by a committee consisting
of at least two members of the Board of Directors. All prior options granted
under previous stock option plans are to be replaced by options granted under
the 1994 Plan.

The 1994 Plan provides for the maximum number of options to be granted to be the
greater of 358,333 or 30% of the Company's outstanding shares less 41,667 shares
reserved for issuance under the Non-Employee Director Plan.

The term of the options granted shall not exceed 10 years and the exercise price
shall be equal to 100% of the fair market value of the common stock on the date
of grant.

The Non-Employee Directors Stock Option Plan is to be administered by a
committee consisting of at least two members of the Board of Directors. All
prior options granted under previous stock option plans are to be replaced by
options granted under the 1994 Plan.

The 1994 Plan provided for a maximum number of 41,667 options to be granted and
further provides for the granting of 1,333 option shares per year to each
Non-Employee Director as compensation for his services.

A maximum of 41,667 shares may be issued under the Plan at an exercise price
equal to the fair market value of the stock on the date of grant. All options
are to be immediately exercisable.

The Board of Directors has approved, and the Company will be submitting to
shareholders, a 1999 Stock Option Plan which will provide for the issuance of
shares equal to 20% of the aggregate number of shares of the Company's Common
Stock then outstanding. The options outstanding under the 1994 Plan will be
transferred to the 1999 Plan. The provisions of the proposed 1999 Plan are
substantially similar to the 1994 Non-Employee Director Plan and Employee Plan,
on a combined basis.


                                       25
<PAGE>   27
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the expected beneficial ownership of Common Stock
as of October 27, 1999. The table shows the beneficial ownership to each person
known to J2 who beneficially owns more than 5% of the shares of J2 Common Stock,
each current director, and all directors and officers as a group. Except as
otherwise indicated, J2 believes that the beneficial owners of the Common Stock
listed below, based on information furnished by such owners, have sole
investment and voting power with respect to such shares, subject to community
property laws where applicable.

<TABLE>
<CAPTION>
                                                      Shares           Percent
                                                   Beneficially           of
                                                      Owned             Class
                                                   ------------        --------
                                                      Number           Percent
<S>                                                <C>                 <C>
James P. Jimirro(2)(3)                               325,336            26.4%
Daniel S. Laikin(7)                                  151,200            12.42%
Paul Skjodt(7)                                       127,000            10.44%
James Fellows(2)(4)                                   13,500              (1)
Bruce P. Vann(2)(5)                                    1,665              (1)
John De Simio(2)(6)                                    1,333              (1)
All directors and executive officers
 as a group (4 persons)                              620,034            50.26%
</TABLE>

----------

(1)     Less than 1 percent.

(2)     The address for each shareholder listed is 10850 Wilshire Boulevard,
        Suite 1000, Los Angeles, California 90024.

(3)     Includes 116,669 stock options granted under the Company's Stock Option
        Plan pursuant to Mr. Jimirro's Executive Employment Agreement.

(4)     Includes 13,500 shares of Common Stock purchasable under the Company's
        Stock Option Plan.

(5)     Includes 1,665 shares of Common Stock purchasable under the Company's
        Stock Option Plan.

(6)     Includes 1,333 shares of Common Stock purchasable under the Company's
        Stock Option Plan

(7)     The address for each shareholder listed is c/o Biltmore Homes, Inc.,
        25 West 9th Street, Indianapolis, IN 46204

ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        Bruce P. Vann and the law firms of Kelly Lytton Mintz & Vann LLP, of
which he is a partner, performed services as attorneys for the Company. For the
fiscal year ended July 31, 1999, Kelly & Lytton Mintz & Vann LLP earned
approximately $13,185. Mr. Vann is a director of the Company and, as such, he
(or his law firm) may receive additional compensation for services rendered to
the Company.


                                       26
<PAGE>   28
ITEM 14:  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)     The following documents are filed as a part of this annual report:

        1.      Financial Statements:

                The financial statements listed in the accompanying Index to
                Financial Statements are filed as part of this annual report.

        2.      Exhibits:

                The Exhibits listed below are filed as a part of this annual
                report.

                3.1   Restated Articles of Incorporation.(1)

                3.2   By-laws of the Company.(1)

                3.3   Certificate of amendment to Articles of Incorporation.(10)

                4.1   Right Agreement between J2 Communications and U.S. Stock
                      Transfer Corporation, dated July 15, 1999.(3)

                10.1  Restated Employment Agreement between the Company and
                      James P. Jimirro, dated as of July 1, 1999.(9)

                10.3  Lease between the Company and Pacific Properties.(4)

                10.4  Amended lease between the Company and Pacific
                      Properties.(5)

                10.5  Second amended lease between the Company and Pacific
                      Properties(6)

                10.7  1994 Stock Option Plan for Employees.(7)

                10.8  1994 Stock Option Plan for Non-Employee Directors.(7)

                10.9  1998 Agreement between The Harvard Lampoon, Inc. and J2
                      Communications and settlement agreement and mutual
                      general release agreement.(8)

                10.10 Form of Contingent Note.

                10.11 Form of Restated Indemnity Agreement.(9)

                21.1  List of subsidiaries of Registrant.(8)

----------

(1)     Filed as an Exhibit to that certain Form S-1 Registration Statement of
        the Company as filed with the Securities and Exchange Commission on July
        28, 1986, September 22, 1986 and October 2, 1986 (the "S-1 Registration
        Statement").

(2)     Filed as Exhibit to the Company's Annual Report on Form 10-K for the
        Fiscal Year ended July 31, 1991.

(3)     Filed as an Exhibit to that certain current report on Form 8-K, dated
        July 16, 1999.


                                       27
<PAGE>   29
(4)     Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
        Fiscal Year Ended July 31, 1988.

(5)     Filed as an Exhibit to the Company's Annual Report of Form 10-K for the
        Fiscal Year Ended as of July 31, 1989.

(6)     Filed as an Exhibit to that certain Registration Statement of the
        Company filed with the Securities and Exchange Commission on May 28,
        1993.

(7)     Filed as an Exhibit to that certain Registration Statement of the
        Company on Form S-8 filed with the Securities and Exchange Commission on
        May 8, 1995.

(8)     Filed as an Exhibit to that certain quarterly report on Form 10-Q, dated
        December 15, 1998.

(9)     Filed herewith.

(10)    Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
        Fiscal Year Ended July 31, 1998.


                                       28
<PAGE>   30
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California, on the 26th day of October, 1998.

                                       J2 COMMUNICATIONS

NOVEMBER 4, 1999                       BY: /s/ JAMES P. JIMIRRO
                                       -----------------------------------------
                                       JAMES P. JIMIRRO
                                       CHAIRMAN OF THE BOARD,
                                       PRESIDENT, AND CHIEF EXECUTIVE OFFICER
                                       (PRINCIPAL EXECUTIVE OFFICER)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Los Angeles,
State of California, on the 26th day of October, 1998.

<TABLE>
<CAPTION>
Signatures                          Title                                      Date
----------                          -----                                      ----
<S>                                 <C>                                        <C>
/s/ James P. Jimirro                Chairman of the Board,                     November 4, 1999
-----------------------------       President, Chief Executive Officer
JAMES P. JIMIRRO                    (Principal Executive Officer)
                                    and Director

/s/ Andrew Weeraratne               Chief Financial Officer                    November 4, 1999
-----------------------------       (Principal Financial Officer)
ANDREW WEERARATNE

/s/ James Fellows                   Director                                   November 4, 1999
-----------------------------
JAMES FELLOWS

/s/ Bruce P. Vann                   Director                                   November 4, 1999
-----------------------------
BRUCE P. VANN

/s/ John De Simio                   Director                                   November 4, 1999
-----------------------------
JOHN DE SIMIO
</TABLE>


                                       29
<PAGE>   31
                        J2 COMMUNICATIONS AND SUBSIDIARIES

                        FINANCIAL STATEMENTS
                        AS OF JULY 31, 1999 AND 1998
                        TOGETHER WITH AUDITOR'S REPORT


                                       30
<PAGE>   32
                       J2 COMMUNICATIONS AND SUBSIDIARIES

                          INDEX TO FINANCIAL STATEMENTS

                                  JULY 31, 1999


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

FINANCIAL STATEMENTS:

  Consolidated Balance Sheets as of
    July 31, 1999 and 1998

  Consolidated Statements of Operations
    for each of the three years in the period ended July 31, 1999

  Consolidated Statements of Shareholders' Equity for each of the
    three years in the period ended July 31, 1999

  Consolidated Statements of Cash Flows
    for each of the three years in the period ended July 31, 1999

  Notes to Consolidated Financial Statements


                                       31
<PAGE>   33
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To J2 Communications:

We have audited the accompanying consolidated balance sheets of J2
Communications and subsidiaries (a California corporation) as of July 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended July 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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 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.

As discussed in Note 1 to the consolidated financial statements, a significant
portion of the Company's assets is composed of certain intangible assets.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of J2 Communications and
subsidiaries as of July 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1999 in conformity with generally accepted accounting principles.

                                        ARTHUR ANDERSEN LLP

Los Angeles, California
October 19, 1999


                                       32
<PAGE>   34
                       J2 COMMUNICATIONS AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

AS OF JULY 31, 1999 AND 1998

                                     ASSETS

<TABLE>
<CAPTION>
                                                          1999           1998
                                                       ----------     ----------
<S>                                                    <C>            <C>
CURRENT ASSETS:
  Cash and cash equivalents                            $1,858,000     $  879,000
  Short-term investments, at cost                              --      1,352,000
  Other current assets                                     41,000         55,000
                                                       ----------     ----------
          Total current assets                          1,899,000      2,286,000
                                                       ----------     ----------
NONCURRENT ASSETS:
  Equipment, less accumulated
    depreciation of $8,000 and
    $0 in 1999 and 1998, respectively                      19,000             --
  Intangible assets, less accumulated
    amortization of $2,549,000 and
    $2,309,000 in 1999 and 1998, respectively           3,416,000      3,656,000
               Other                                       16,000         20,000
                                                       ----------     ----------
          Total noncurrent assets                       3,451,000      3,676,000
                                                       ----------     ----------
TOTAL ASSETS                                           $5,350,000     $5,962,000
                                                       ==========     ==========
</TABLE>

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


                                       33
<PAGE>   35
                       J2 COMMUNICATIONS AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

AS OF JULY 31, 1999 AND 1998

                      LIABILITIES AND SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                        1999             1998
                                                     ----------       ----------
<S>                                                  <C>              <C>
CURRENT LIABILITIES:
  Accounts payable                                   $  197,000       $  154,000
  Accrued expenses                                      432,000          829,000
  Deferred revenues                                          --          800,000
  Income taxes payable                                   25,000           38,000
  Common stock payable                                  203,000          203,000
  Minority interest                                     186,000          118,000
                                                     ----------       ----------
          Total current liabilities                   1,043,000        2,142,000
                                                     ----------       ----------
Deferred Compensation                                 1,717,000           17,000
                                                     ----------       ----------
       Total liabilities                              2,760,000        2,159,000
                                                     ----------       ----------
</TABLE>


                                       34
<PAGE>   36
COMMITMENTS AND CONTINGENCIES (Note 5)

<TABLE>
<S>                                                 <C>             <C>
SHAREHOLDERS' EQUITY:
   Preferred stock, no par value:
     Authorized -- 2,000,000 shares,
      issued and outstanding --
        0 shares in 1999 and 1998                            --              --
   Common stock, no par value:
     Authorized--15,000,000 shares,
      issued
        1,233,712 and 1,200,000 shares in
        1999 and 1998, respectively                   8,754,600       8,662,600
   Note receivable on common stock                     (134,000)       (128,000)
   Deficit                                           (6,029,000)     (4,730,000)
   Less: treasury stock at cost, 1,166 shares            (1,600)         (1,600)
                                                    -----------     -----------
          Total shareholders' equity                  2,590,000       3,803,000
                                                    -----------     -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY          $ 5,350,000     $ 5,962,000
                                                    ===========     ===========
</TABLE>

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


                                       35
<PAGE>   37
                       J2 COMMUNICATIONS AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS

          FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999

<TABLE>
<CAPTION>
                                                  1999             1998             1997
                                              ------------     ------------     ------------
<S>                                           <C>              <C>              <C>
REVENUES:
  Movies, television and theatrical           $  1,138,000     $    622,000     $    970,000
  Videocassette sales                               18,000            1,000          219,000
  Royalty income                                    78,000          160,000          111,000
  Publishing                                        12,000               --           56,000
  Interest                                          99,000           85,000           59,000
                                              ------------     ------------     ------------
          Total revenues                         1,345,000          868,000        1,415,000
                                              ------------     ------------     ------------
EXPENSES:
  Costs of movies and television                    45,000           26,000           53,000
  Cost of videocassettes sold                       13,000            5,000          105,000
  Royalty expense                                   66,000           14,000           63,000
  Magazine editorial, production and
    distribution                                        --               --           41,000
  Selling, general and administrative              948,000          784,600          755,000
  Compensation (benefit) related to SAR          1,700,000          (19,600)          37,000
  Amortization of intangible assets                240,000          240,000          240,000
                                              ------------     ------------     ------------
          Total expenses                         3,012,000        1,050,000        1,294,000
                                              ------------     ------------     ------------
</TABLE>


                                       36
<PAGE>   38

<TABLE>
<S>                                           <C>              <C>              <C>
OTHER INCOME                                       436,000          343,000               --
                                              ------------     ------------     ------------
          (Loss) income from
            consolidated operations             (1,231,000)         161,000          121,000

MINORITY INTEREST IN INCOME OF
  CONSOLIDATED SUBSIDIARY                          (68,000)         (34,000)         (82,000)
                                              ------------     ------------     ------------
          (Loss) income before provision
            for income taxes                    (1,299,000)         127,000           39,000

PROVISION FOR INCOME TAXES                              --            6,000            9,000
                                              ------------     ------------     ------------
NET (LOSS) INCOME                             $ (1,299,000)    $    121,000     $     30,000
                                              ============     ============     ============
(LOSS) INCOME PER COMMON SHARE:

  Basic                                       $      (1.07)    $       0.10     $       0.03
                                              ============     ============     ============
  Diluted                                     $      (1.07)    $       0.10     $       0.02
                                              ============     ============     ============
WEIGHTED AVERAGE NUMBER OF COMMON
  AND COMMON EQUIVALENT SHARES OUTSTANDING

  Basic                                          1,211,728        1,200,000        1,200,000
                                              ============     ============     ============
  Diluted                                        1,211,728        1,212,347        1,214,937
                                              ============     ============     ============
</TABLE>

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

                                       36
<PAGE>   39
                       J2 COMMUNICATIONS AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

          FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999

<TABLE>
<CAPTION>
                                                                               Notes
                                                     Common Stock            Receivable                       Less:
                                                ------------------------     on Common                      Treasury
                                                 Shares         Amount         Stock          Deficit         Stock         Total
                                                ---------     ----------     ---------      -----------     ---------     ----------
<S>                                             <C>           <C>            <C>            <C>              <C>          <C>
BALANCES, July 31, 1996                         1,200,000     $8,649,600     $(115,000)     $(4,881,000)     $(1,600)     $3,652,000
 Accrued interest on notes receivable                  --          6,000        (6,000)              --           --              --
 Net income                                            --             --            --           30,000           --          30,000
                                                ---------     ----------     ---------      -----------      -------      ----------
BALANCES, July 31, 1997                         1,200,000      8,655,600      (121,000)      (4,851,000)      (1,600)      3,682,000
 Accrued interest on notes receivable                  --          7,000        (7,000)              --           --              --
 Net income                                            --             --            --          121,000           --         121,000
                                                ---------     ----------     ---------      -----------      -------      ----------
BALANCES, July 31, 1998                         1,200,000      8,662,600      (128,000)      (4,730,000)      (1,600)      3,803,000
 Accrued interest on notes receivable                  --          6,000        (6,000)              --           --              --
 Stock options exercised                           17,045         49,000            --               --           --          49,000
 Shares issued in settlement of liabilities        16,667         37,000            --               --           --          37,000
 Net loss                                              --             --            --        1,299,000           --       1,299,000
                                                ---------     ----------     ---------      -----------      -------      ----------
BALANCES, July 31, 1999                         1,233,712     $8,754,600     $(134,000)     $(6,029,000)     $(1,600)     $2,590,000
                                                =========     ==========     =========      ===========      =======      ==========
</TABLE>


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


                                       37
<PAGE>   40
                       J2 COMMUNICATIONS AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

          FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1999

<TABLE>
<CAPTION>
                                                        1999              1998              1997
                                                    ------------      ------------      ------------
<S>                                                 <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (loss) income                                 $ (1,299,000)     $    121,000      $     30,000
  Adjustments to reconcile net (loss)
     income to net cash (used in)
     provided by operating activities:
      Amortization of intangible assets                  240,000           240,000           240,000
      Depreciation                                         8,000                --                --
      Deferred compensation                            1,700,000           (19,600)           37,000
     Shares issued in settlement of liabilities           37,000                --                --
      Minority interest in income of
        consolidated subsidiary                           68,000            34,000            82,000
      Changes in assets and liabilities:
        Accounts payable                                  43,000            24,000            18,000
        Accrued expenses                                (397,000)         (262,400)          (56,000)
        Income taxes payable                             (13,000)               --                --
        Deferred revenues                               (800,000)          592,000            (5,000)
        Other                                             14,000            20,000            22,000
                                                    ------------      ------------      ------------
          Net cash (used in) provided by
            operating activities                        (399,000)          749,000           368,000
                                                    ------------      ------------      ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of short-term investments                          --        (1,641,000)       (1,053,000)
  Sale of short-term investments                       1,352,000         1,150,000         1,206,000
  Purchase of equipment                                  (27,000)          (20,000)               --
  Acquisition of other long-term assets                    4,000                --                --
                                                    ------------      ------------      ------------
          Net cash provided by (used in)
            investing activities                       1,329,000          (511,000)          153,000
                                                    ------------      ------------      ------------
</TABLE>


                                       38
<PAGE>   41
<TABLE>
<S>                                                 <C>               <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from exercise of stock options                 49,000                --                --
                                                    ------------      ------------      ------------
          Net cash provided by financing
            activities                                    49,000                --                --
                                                    ------------      ------------      ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS                979,000           238,000           521,000

CASH AND CASH EQUIVALENTS,
  beginning of year                                      879,000           641,000           120,000
                                                    ------------      ------------      ------------
CASH AND CASH EQUIVALENTS,
  end of year                                       $  1,858,000      $    879,000      $    641,000
                                                    ============      ============      ============
SUPPLEMENTAL DISCLOSURE OF CASH
  FLOW INFORMATION--
    Cash paid during the year for
      income taxes                                  $     23,000      $      6,000      $      9,000
                                                    ============      ============      ============
</TABLE>

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


                                       39
<PAGE>   42
                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                  JULY 31, 1999

1.       Summary of Significant Accounting Policies

         Organization and Principles of Consolidation

         J2 Communications (the "Company"), a California Corporation, was formed
         in March 1986, and was primarily engaged in the acquisition,
         development and production of entertainment and special-interest
         videocassette programs and the marketing, distribution and licensing of
         these programs for retail sale in the home video market. In fiscal year
         1991, the Company acquired all of the outstanding shares of National
         Lampoon, Inc. ("NLI"). NLI was incorporated in 1967 and was primarily
         engaged in various aspects of the publishing and entertainment
         industries. In December 1992, in consideration for the default of
         certain intercompany notes from NLI to the Company, NLI assigned the
         rights to the majority of its assets in full satisfaction of the notes.
         Included in these assets was NLI's 100 percent ownership interest in NL
         Communications, Inc. and Heavy Metal, Inc., which, upon this
         assignment, became subsidiaries of the Company.

         During April 1999, the Company refocused its business strategy by
         positioning itself as an internet based comedic content provider by
         developing "nationallampoon.com" ("the Website"). The Company believes
         that the world wide web is emerging as a form complimentary to, and in
         many respects superior to, traditional television and print media in
         terms of its ability to deliver content to its target audience. The
         Website was launched during October 1999.

         The Company's primary source of revenues currently are derived through
         exploitation of the "National Lampoon" trademark in a variety of areas
         including motion pictures, home video, television, publishing and other
         entertainment media. Although continued licensing revenues are expected
         from these forms of media, the Company anticipates that the new Website
         will become the primary source of income through advertising revenue,
         electronic commerce and the spinning off of original characters and
         stories introduced on the Website to feature films and television.
         Until the time where a normalized revenue stream can be generated from
         the Website, the Company's revenues and income will continue to
         fluctuate based on the size, nature and timing of transactions whereby
         its names and trademarks are licensed.


                                       40
<PAGE>   43
         The consolidated financial statements include the accounts of the
         Company and its majority owned subsidiaries. All significant
         intercompany accounts and transactions have been eliminated.

         Cash Equivalents

         Cash equivalents include certificates of deposit with original maturity
         dates of three months or less.

         Short-Term Investments

         In accordance with the provisions of Statement of Financial Accounting
         Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt
         and Equity Securities," the Company determines the appropriate
         classification of marketable securities at the time of purchase and
         reevaluates such designation at each balance sheet date. Marketable
         securities have been classified as held-to-maturity and are carried at
         cost.

         Revenue Recognition

         The Company recognizes licensing revenues based upon information
         provided by the licensee, with the exception of non-refundable advances
         from the licensing of the "National Lampoon" name, which are recognized
         when received. Revenues from the sale of videocassettes, net of
         estimated provisions for sales returns (which are not material for any
         period presented), are recognized when the units are shipped. Advances
         for future sales of videocassettes are deferred until the units are
         shipped. Publishing revenues include magazine sales and revenue from
         advertising included in the magazines. Single copy magazine sales are
         recognized as income in the month the issue becomes available for sale
         at the newsstand. Advertising revenue is recognized concurrently with
         the recognition of magazine sales.

         Intangible Assets

         Intangible assets consist primarily of the right to license the
         "National Lampoon" name and are being amortized straight-line over a
         twenty-five year period. Management continually evaluates whether
         events and circumstances have occurred that indicate the remaining
         estimated useful life of intangible assets may warrant revision or that
         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
         combined with a history of operating or cash flow losses, a projection
         or forecast that demonstrates continuing losses, or the inability of
         the Company to renew,


                                       41
<PAGE>   44
         extend or replace existing contracts as they expire, including
         licensing of the "National Lampoon" name. When factors indicate that
         intangible assets should be evaluated for possible impairment, the
         Company uses an estimate of the related business's undiscounted net
         income over the remaining life of the intangible assets in measuring
         whether the intangible assets are recoverable.

         The Company has made a significant investment in the "National Lampoon"
         name and other intangible assets through its acquisition of NLI.
         Realization of these acquired assets is dependent on the continued
         exploitation of the "National Lampoon" name through licensing for use
         in feature films, video, television and audio distribution and
         merchandising or other appropriate opportunities, as well as the
         ability to generate revenue through other business ventures, such as
         the Website. The Company has received approximately $7,407,000 in
         licensing revenues since the acquisition of the "National Lampoon" name
         in 1990. The Company is in the process of identifying other licensing
         opportunities and developing concepts, programs and other opportunities
         that could generate future revenue. If these and other ventures that
         the Company may enter into in the future do not result in sufficient
         revenues to recover these acquired intangible assets over a reasonable
         period of time, the Company's future results of operations may be
         adversely affected by a write-off of or an adjustment to these acquired
         intangible assets.

         In evaluating if there has been an impairment in the value of its
         long-lived assets, the Company follows the guidelines of SFAS No. 121.
         This statement establishes accounting standards for the impairment of
         long-lived assets, certain identifiable intangibles and goodwill
         related to those assets to be held and used and for long-lived assets
         and certain identifiable intangibles to be disposed of. Management has
         determined that through the realization of future licensing agreements,
         expected future cash flows relating to the intangible asset will result
         in the recovery of the carrying amount of such asset.

PER SHARE INFORMATION

         The Company has adopted SFAS No. 128, "Earnings Per Share" ("EPS"),
         effective for the quarter-ended January 31, 1998. All prior period EPS
         data presented has been restated to conform with the provisions of this
         statement. Under SFAS No. 128, primary EPS is replaced by "Basic" EPS,
         which excludes dilution and is computed by dividing income available to
         common shareholders by the weighted average number of common shares
         outstanding for the period. "Diluted" EPS, which is computed similarly
         to fully diluted EPS, reflects the potential dilution that could occur
         if securities or options are included as share equivalents in computing
         diluted earnings per share using the treasury stock method.


                                       42
<PAGE>   45
         On October 21, 1998, the Company held a special shareholders meeting
         where a 3:1 reverse stock split was voted on and approved. In
         consideration of this event, all periods presented have been restated
         to retroactively reflect the decreased number of shares outstanding.

         A summary of the shares used to compute earnings per share is as
         follows:

<TABLE>
<CAPTION>
                                                    Year Ended     Year Ended      Year Ended
                                                     July 31,       July 31,        July 31,
                                                       1999           1998           1997
                                                    ----------     ----------      ----------
<S>                                                 <C>            <C>             <C>
         Weighted average common shares used
           to compute basic EPS                      1,211,728      1,200,000      1,200,000

         Stock options                                      --         12,347         14,937
                                                     ---------      ---------      ---------
         Weighted average common shares used
           to compute diluted EPS                    1,211,728      1,212,347      1,214,937
                                                     =========      =========      =========
</TABLE>

         Dilutive stock options of 182,167 are not included in the calculation
         of diluted EPS in the year ending July 31, 1999 because they are
         antidilutive.

         Income Taxes

         Deferred income tax assets and liabilities are computed annually for
         differences between the financial statement and tax basis of assets and
         liabilities that will result in taxable or deductible amounts in the
         future. Such deferred income tax asset and liability computations are
         based on enacted tax laws and rates applicable to periods in which the
         differences are expected to effect taxable income. Valuation allowances
         are established when necessary to reduce deferred tax assets to the
         amount expected to be realized. Income tax expense is the tax payable
         or refundable for the period plus or minus the change during the period
         in deferred tax assets and liabilities.

         Use of Estimates

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that effect the reported amounts of assets and
         liabilities and 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. Actual results could differ
         from those estimates.


                                       43
<PAGE>   46
         Reclassifications

         Certain items in the 1998 and 1997 financial statements have been
         reclassified to conform with the 1999 presentation.

2.       Short-Term Investments

         Short-term investments consist of United States Treasury bills and
         notes with original maturities of between three and twelve months. The
         following is an analysis of short-term investments:

<TABLE>
<CAPTION>
                                                            1999         1998
                                                            ----      ----------
<S>                                                         <C>       <C>
         US Government obligations, cost                    $ --      $1,352,000
         Gross unrealized holding gains                       --          12,000
                                                            ----      ----------
         US Government obligations, fair value              $ --      $1,364,000
                                                            ====      ==========
</TABLE>

No provision has been made for the change in market value for these investments,
as the Company intends to hold them until maturity. In determining realized net
gains, the cost of the securities sold is based on specific identification.

3.       Deferred Revenues

         Deferred revenues consist of the following:

<TABLE>
<CAPTION>
                                                              1999       1998
                                                              ----     --------
<S>                                                           <C>      <C>
         Deferred television revenues                         $ --     $800,000
                                                              ----     --------
                                                              $ --     $800,000
                                                              ====     ========
</TABLE>


                                       44
<PAGE>   47
4.       Accrued Expenses

         Accrued expenses consist of the following:

<TABLE>
<CAPTION>
                                                            1999          1998
                                                          --------      --------
<S>                                                       <C>           <C>
         Accrued royalties                                $ 50,000      $312,000
         Reserve for contract payment on
           sale of stock (Note 5)                               --       158,000
         Deferred salary                                   189,000       189,000
         Legal expenses and other                          193,000       170,000
                                                          --------      --------
                                                          $432,000      $829,000
                                                          ========      ========
</TABLE>

         Certain royalties and other expenses (including the contingent payment
         on sale of stock) accrued in previous years were settled in fiscal year
         1999 and 1998 at reduced levels. The reduction in these accruals is
         reflected in other income in the accompanying consolidated statement of
         operations.

5.       Commitments and Contingencies

         Made-For-Cable Agreement

         In March 1994, the Company signed an agreement with Showtime Networks,
         Inc. ("Showtime") to produce seven movies over a three year period to
         be aired initially on the Showtime Network or The Movie Channel. The
         agreement provides for the payment of a license fee to NLI upon the
         commencement of principal photography of each film and contingent
         compensation based on revenues the films may generate from all sources.
         The Showtime agreement has now expired, with only four made-for-cable
         movies produced, and as such, the fifth through seventh movies will not
         be produced. Showtime has paid the producer fees due for all movies as
         of July 31, 1999.

         Revenue recognized under this agreement totaled $0, $300,000 and
         $300,000 for the years ended July 31, 1999, 1998 and 1997,
         respectively.


                                       45
<PAGE>   48
         In April 1998, the Company entered into an $800,000 agreement with
         International Family Entertainment, Inc. ("IFE"), whereby IFE had
         certain exclusive rights to the "National Lampoon" brand (including
         name, logos and related elements) in connection with US television
         series and made-for-TV movies during the 1998-99 telecast season. As
         the $800,000 annual fee was received by the Company in June 1998 for
         the television season beginning in August 1998, the Company deferred
         this income until fiscal year 1999. This income was reflected as
         movies, television and theatrical in the accompanying consolidated
         statements of operations. IFE did not exercise an option to extend this
         agreement through the 1999-2000 telecast season.

         Motion Picture Agreement

         NLI and New Line Cinema Corporation ("New Line") entered into an
         agreement, effective September 11, 1991, regarding the development,
         production, financing and distribution of up to three "National
         Lampoon" motion pictures. The agreement provided NLI with a
         non-refundable advance of $375,000 upon the execution of the agreement.
         The agreement was subsequently amended to extend its term through April
         1, 1996.

         The compensation to be received by NLI as a result of the use of its
         name is $250,000 for each motion picture produced (payable on
         commencement of principal photography of the applicable film) plus
         2-1/2 percent of distributors' gross receipts, as defined from all
         media in connection with the motion pictures. Revenues recognized under
         this agreement totaled $0, $84,000 and $118,000 for the years ended
         July 31, 1999, 1998 and 1997, respectively.

         Reserve for Contract Payment on Sale of Stock

         The Company has its videocassettes for the domestic market duplicated
         primarily by an independent duplication company, Technicolor
         Videocassette, Inc. ("Technicolor"), which warehouses the
         videocassettes and fulfills and ships orders for the Company. In April
         1993, pursuant to a settlement agreement regarding an outstanding
         balance, the Company issued to Technicolor 52,333 shares of its common
         stock valued at $176,000, and a note in the amount of $87,000 to
         satisfy obligations owed to Technicolor. The Company paid the balance
         of the note in full during fiscal year 1995. The agreement provides for
         an additional cash payment in the event that such common stock is sold,


                                       46
<PAGE>   49
         within a specified time period, for less than $6 per share. A reserve
         for this contingent payment of $158,000 was included in accrued
         expenses at July 31, 1998 and 1997. The current year appreciation of
         the Company's share price in excess of $6 per share allowed Technicolor
         to recoup its monies due without additional payment from the Company
         which eliminated the need for the liability previously recorded (see
         Note 4). Accordingly, reversal of the reserve has been reflected as
         other income in the accompanying consolidated statement of operations
         for the year ended July 31, 1999.

         Joint Venture

         As part of the acquisition of NLI, the Company acquired a 75 percent
         interest in a joint venture, which only operations consist of revenues
         received from the licensing of a certain "National Lampoon" motion
         picture. The minority interest's share in the joint venture's revenue
         is deducted from movies, television and theatrical revenue. Total
         revenues received by the joint venture related to this motion picture
         were $251,000, $124,000 and $328,000 for each of the three years in the
         period ended July 31, 1999. Of this revenue, the minority interest's
         share totaled $68,000, $34,000 and $82,000, respectively.

         Leases

         The Company is obligated under an operating lease expiring on September
         30, 2000 for its office facility in Los Angeles, California. The
         facility lease includes certain provisions for rent adjustments based
         upon changes in the lessor's operating costs and increases in the
         Consumer Price Index.

         The Company is obligated under an operating lease expiring in September
         2002 for equipment located at its office facility.

         The Company is also obligated under an operating lease expiring in
         November 1999 for an automobile leased on behalf of an employee of the
         Company.


                                       47
<PAGE>   50
         The Company is committed to future minimum lease payments for the
         following years:

<TABLE>
<CAPTION>
                                    Building    Equipment      Total
                                    --------    ---------    --------
<S>                                 <C>         <C>          <C>
                  2000                89,000       6,000       95,000
                  2001                15,000       2,000       17,000
                  2002                    --       2,000        2,000
                                    --------     -------     --------
                  Total             $104,000     $10,000     $114,000
                                    ========     =======     ========
</TABLE>

         Rent expense totaled $79,000, $89,000 and $79,000 for the years ended
         July 31, 1999, 1998 and 1997, respectively.

         Equipment lease expense totaled $2,000, $2,000 and $8,000 for the years
         ended July 31, 1999, 1998 and 1997, respectively.

         Royalty Agreements

         Pursuant to a royalty agreement between NLI and The Harvard Lampoon,
         Inc. ("HLI"), as amended on October 1, 1998, NLI is required to pay HLI
         a royalty equal to 2 percent on the aggregate "net sales price", as
         defined by the agreement, from sales of any permitted publication using
         the name "Lampoon" as part of its title and a royalty of up to 2
         percent of "pretax profits", as defined in the agreement, on any movie,
         stage show, television show or radio show using the name. Royalties
         payable under this agreement totaled $5,000, $13,000 and $19,000 for
         the years ended July 31, 1999, 1998 and 1997, respectively.

         The Company has entered into various royalty agreements with the
         producers of videocassettes distributed by the Company. The Company is
         required to pay a royalty, according to each individual agreement, of a
         percentage of gross receipts, less certain expenses. Royalty expense
         under these agreements totaled $2,000, $2,000 and $45,000 for the years
         ended July 31, 1999, 1998 and 1997, respectively.


                                       48
<PAGE>   51
         GPEC Agreement

         In 1987, NLI sold the exclusive rights to produce television
         programming utilizing the name "National Lampoon" to Guber-Peter
         Entertainment Company ("GPEC"). In 1991, under agreement with GPEC, NLI
         reacquired this right for $1,000,000, of which $500,000 was paid on
         execution of the agreement. The remaining $500,000 was payable out of
         the gross receipts of television programming, if any. To date, $182,500
         has been paid under the gross receipts provision of the agreement.

         Employment Agreement

         The Company has entered into a restated employment agreement, dated
         July 1, 1999 ("1999 Agreement"), with its President and Chief Executive
         Officer. The agreement is for seven years and provides annual base
         compensation of $475,000, with annual increases of the greater of 9
         percent or 5 percent, plus the percentage increase in the Consumer
         Price Index. Previously, the President had reduced the amount of salary
         he receives to $191,000. The President does not expect to receive the
         difference between the amount received and the amount provided for
         under the 1999 Agreement unless there is a change in control of the
         Company, as defined by the agreement. The decision by the President to
         forego compensation is similar to the actions by the President under
         the terms of his prior employment agreement. Accordingly, and as
         specifically provided by the terms of the 1999 Agreement, the Company
         has entered into ("the Contingent Note") in the amount of $2,150,625,
         which amount represents the principal and interest (computed at 10% per
         annum) of all amounts previously waived by the President. The
         Contingent Note is due only upon change of control by the Company (as
         defined in the 1999 Agreement), and is a contingent obligation of the
         Company. To the extent that amounts are waived by the President in the
         future, the 1999 Agreement provides that the Company is obligated to
         issue additional contingent notes, due on the same basis, for the
         amounts so waived.

         In addition, an annual bonus is payable to the President if the
         Company's pretax income exceeds specified levels. The amount is based
         on pretax earnings of the Company ranging from 5 percent to 9 percent
         over certain minimums. If earnings exceed $7,000,000, the President
         shall be entitled to such incentive compensation, as may be determined
         by the Board of Directors based upon the President's service and
         performance on behalf of the Company and the profitability of the
         Company. No bonus was earned in 1999, 1998 or 1997. Deferred bonuses
         for the President, included in accrued expenses, totaled $100,000 at
         July 31, 1999 and 1998. In addition, certain officers have deferred
         salary totaling $89,000 at July 31, 1999 and 1998, also included in
         accrued expenses.


                                       49
<PAGE>   52
         The Company has also granted the President options to purchase 25,000
         shares of its common stock and 25,000 stock appreciation rights (see
         Note 7) for each year of his employment contract. The price for each
         will be based on the average of the high and low bid and asked price
         for one share of common stock during the five (5) business days
         preceding the date of grant as reported by NASDAQ automated quotation
         system.

         The 1999 Agreement provides that if the President's employment is
         terminated without cause, or is terminated by the President for cause
         or under certain other circumstances, including a change in control of
         the Company (as defined in the 1999 Agreement), then the President
         generally is entitled to receive all payments and other benefits which
         would be due under the 1999 Agreement during its entire term; provided,
         that such payments are to be "grossed up" to the extent that such
         payments wold constitute an "excess parachute payment" under the
         Internal Revenue Code of 1986, or any successor law applicable to
         payments of severance compensation to the President. In addition to the
         foregoing benefits, the President has the right, if he terminates his
         employment under certain circumstances to serve as a consultant to the
         Company for a period of five years. During this consulting period the
         President would earn 50% of his salary as in effect on the date of
         termination of his employment.

LITIGATION

         The Company, NLI and the officers and directors of NLI became the
         defendants in a lawsuit related to the acquisition of NLI by the
         Company. The shareholders of NLI (the "Plaintiffs") filed the claim in
         respect to the tax treatment of the transaction to the individual
         shareholders of NLI. The Company entered into a settlement agreement in
         August 1991, which must still be approved by the courts, under which
         the Company will pay in cash or stock the Plaintiffs for the payment of
         attorneys' fees. The value of the consideration to be paid of
         approximately $203,000 has been reflected as a liability at July 31,
         1999, 1998 and 1997 as the shares have not been issued and the
         settlement has not been approved.

         On August 20, 1996, counsel for HLI filed a demand for arbitration with
         the American Arbitration Association, asserting that the Company
         underpaid royalties payable under the HLI royalty agreement by
         approximately $226,000, plus unspecified late charges, for the period
         July 1, 1992 through June 30, 1995, based upon HLI's interpretation of
         the agreement. After considerable arbitration, HLI and the Company
         entered into a new, perpetual license agreement which clarified certain
         new rights for the Company. As part of the arbitration, the Company
         agreed to issue HLI 16,667 shares of its common stock. The Company
         delivered the stock to HLI during the current year.


                                       50
<PAGE>   53
         The Company is party to other legal matters arising in connection with
         its business. While the final resolution of any matter may have an
         impact on the Company's results of operations for a particular
         reporting period, management believes, based in part on discussions
         with legal counsel, that the final outcomes of these matters will not
         have a material adverse effect upon the Company's financial position or
         results of operations.

6.       Notes Receivable on Common Stock

         In 1986, the Company issued 266,667 shares of common stock to certain
         of its officers and directors pursuant to its Restated Stock Purchase
         Plan. The shares were issued with 50 percent of the purchase price
         payable at the time of issuance and the remainder due in five years.
         The unpaid balance is due from the Company's President and Chief
         Executive Officer and bears interest at the rate of 10 percent, under
         promissory notes secured by the stock in favor of the Company.

7.       Stock Options and Stock Appreciation Rights

         Stock Option Plans

         In March, 1995, shareholders approved the 1994 Employee Stock Option
         Plan and the 1994 Option Plan for Non-Employee Directors. These plans
         replaced the 1991 Stock Option Plan. All stock options subject to these
         plans are granted with an exercise price equivalent to the fair market
         value of the common stock at the time of the grant, except that in the
         case of the incentive stock options granted to a holder of 10 percent
         or more of the outstanding shares of common stock, such exercise price
         may not be less than 110 percent of the fair market value and may not
         be exercisable after the expiration of five years, versus ten years for
         regular stock options.


                                       51
<PAGE>   54
         A summary of the stock options outstanding is below:

<TABLE>
<CAPTION>
                                     Number of             Option           Weighted Average
                                      Options               Price            Exercise Price
                                    Outstanding             Range               Per Share
                                    -----------         -------------       ----------------
<S>                                 <C>                 <C>                 <C>
Balance, July 31, 1996                198,000           $1.68 - $4.44             $3.30
    Granted                            38,000           $2.64 - $3.39             $3.00
    Canceled                          (23,000)          $3.18 - $3.57             $3.39
                                      -------           -------------             -----
Balance, July 31, 1997                213,000           $1.68 - $4.44             $3.24
    Granted                            44,000           $1.68 - $3.00             $2.10
    Canceled                           (8,000)          $2.63 - $3.19             $3.09
                                      -------           -------------             -----
Balance, July 31, 1998                249,000           $1.68 - $4.44             $3.03
    Granted                            42,000           $1.94 - $2.08             $2.02
    Exercised                         (17,000)          $1.69 - $3.56             $2.91
    Canceled                          (92,000)          $1.69 - $3.57             $3.04
                                      =======           =============             =====
Balance, July 31, 1999                182,000           $1.68 - $4.44             $2.82
</TABLE>

Of the options outstanding as of July 31, 1999, 1998 and 1997, 149,833, 214,000
and 192,000, respectively, were exercisable with a weighted average exercise
price of $2.99, $3.18 and $3.27, respectively. The weighted average remaining
contractual life of the options outstanding as of July 31, 1999 was 3.95 years.

The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", issued in October 1995. In accordance
with provisions of SFAS No.123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost for employee options granted at of above market
value. If the Company had elected to recognize compensation cost based on the
fair value of the options granted at grant date as prescribed by SFAS No. 123,
net income (loss) and earnings (loss) per share would have been reduced to the
pro forma amounts indicated in the table below:


                                       52
<PAGE>   55
<TABLE>
<CAPTION>
                                                           Years Ended July 31,
                                               ------------------------------------------
                                                   1999            1998          1997
                                               -----------       --------      --------
<S>                                            <C>               <C>           <C>
Net (loss) income-as reported                  $(1,299,000)      $121,000      $ 30,000
Net (loss) income-pro-forma                    $(1,343,000)      $ 76,000      $(11,000)
Basic (loss) earnings per share-
  as reported                                  $     (1.07)      $   0.10      $   0.03
Diluted (loss) earnings per share-
  as reported                                  $     (1.07)      $   0.10      $   0.02
Basic (loss) earnings per share-pro-forma      $     (1.11)      $   0.06      $   0.00
Diluted (loss) earnings per share-pro-forma    $     (1.11)      $   0.06      $   0.00
</TABLE>

Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to August 1, 1995, the resulting pro-forma compensation cost may
not be representative of the cost to be expected in future years.

         The fair value of each option grant is estimated on the date of grant
         using the Black-Scholes option pricing model with the following
         assumptions:

<TABLE>
<S>                                                                <C>
                  Expected dividend yield                                0.00%
                  Expected stock price volatility                       85.77%
                  Risk free interest rate                                4.95%
                  Expected life of options                               3.34 years
</TABLE>

         The weighted average fair value of options granted during fiscal 1999
         and 1998 was $1.53 and $1.50, respectively.


                                       53
<PAGE>   56
         Stock Appreciation Rights

         The President and Chief Executive Officer of the Company has stock
         appreciation rights which entitle the officer to receive cash equal to
         the difference between the fair market value and the appreciation base
         of the rights when they are exercised. The rights are payable to the
         President on demand. However, the President has represented that unless
         there is a change in control in the Company's ownership, he does not
         intend to call in these rights during fiscal year 2000. As of July 31,
         1999 and 1998, appreciation in these rights amounted to approximately
         $1,717,000 and $17,000, respectively. This amount has been classified
         as non-current and is reflected in deferred compensation in the
         accompanying consolidated balance sheets.

         At July 31, 1999, a total of 116,669 rights were outstanding with
         exercise prices of between $1.94 and $4.42 per share.

8.       Related Party Transactions

         Legal fees of $13,200, $7,000 and $3,000, included in selling, general
         and administrative expenses, were incurred during fiscal 1999, 1998 and
         1997, respectively, for services from legal firms, one of whose
         partners is a director of the Company.

         See Note 6 for discussion of a note receivable from the Company's
         President and Chief Executive Officer.

9.       Income Taxes

         The provision for income taxes is comprised as follows:

<TABLE>
<CAPTION>
                                                         1999     1998      1997
                                                         ----    ------    ------
<S>                                                      <C>     <C>       <C>
         Current:
           State                                         $ --    $6,000    $9,000
           Federal                                         --        --        --
         Adjustment to valuation allowance:
           State                                           --        --        --
                                                         ----    ------    ------
                                                         $ --    $6,000    $9,000
                                                         ====    ======    ======
</TABLE>


                                       54
<PAGE>   57
         A reconciliation between the statutory federal rate and the Company's
         effective rate follows:

<TABLE>
<CAPTION>
                                                         1999      1998      1997
                                                         ----      ----      ----
<S>                                                      <C>       <C>       <C>
         Statutory federal
           income tax rate                                (34)%      34%       34%
         State income taxes                                --         7        19
         Benefit of unrecognized prior
           year losses                                     --      (190)     (185)
         Amortization of intangible
           assets                                           6        64       173
         Other                                             28        92       (22)
                                                         ----      ----      ----
         Effective rate                                    --%        7%       19%
                                                         ====      ====      ====
</TABLE>

         At July 31, 1999 and 1998, the tax effect of deductible timing
         differences and carryforwards is comprised of the following:

<TABLE>
<CAPTION>
                                                      1999             1998
                                                  ------------     ------------
<S>                                               <C>              <C>
         Net operating loss carryforwards         $    550,000     $    507,000
         Accrued liabilities and contingencies         705,000          136,000
         Royalty reserves                              108,000          131,000
         Deferred income                                    --          320,000
                                                  ------------     ------------
                                                     1,363,000        1,094,000
         Valuation allowance                        (1,363,000)      (1,094,000)
                                                  ------------     ------------
         Net deferred tax asset                   $         --     $         --
                                                  ============     ============
</TABLE>

         At July 31, 1998, the Company had available for federal income tax
         purposes net operating loss carryforwards of approximately $1,572,000,
         expiring at various dates through 2019.


                                       55
<PAGE>   58
10.      Major Customers

         During the year ended July 31, 1999, the Company received $800,000 in
         revenues from one motion picture/television license agreement
         representing 59% of total revenues. During the year ended July 31,
         1998, the Company received $300,000 in revenues from two motion picture
         licensees representing 25% of total revenues. During the year ended
         July 31, 1997, the Company received $300,000 in revenues from a motion
         picture licensee representing 24% of total revenues.

11.      Stockholder Rights Plan

         In July of 1999, the Board of Directors of the Company adopted a
         Stockholder Rights Plan ("the Plan"). In connection therewith a
         dividend of one preferred share purchase right ("the Rights") for each
         outstanding share of common stock outstanding at the close of business
         on August 5, 1999. Since that time the Company has issued the Rights
         with each Common Share that has been subsequently issued. When
         exercisable, each new right will entitle its holder to buy
         one-hundredth of a share of Series A Junior Participating Preferred
         Stock ("the Preferred Shares") at a price of $65 per one-one-hundredth
         of a share until July 15, 1999.

         The Rights will become exercisable upon the earlier of (i) ten business
         days following public announcement that a person or a group of
         affiliated or associated persons has acquired, or obtained the right to
         acquire, beneficial ownership of 15% (with certain exceptions as
         defined in the Plan) or more of the outstanding Common Shares or (ii)
         ten business days following the commencement or announcement of an
         intention to make a tender offer or exchange offer the consummation of
         which would result in the beneficial ownership by a person or group of
         15% or more of the outstanding Common Shares.

         In the event of any merger, consolidation or other transaction in which
         Common Shares are exchanged, each Preferred Shareholder will be
         entitled to receive 100 times the amount received per Common Share. In
         the event that a person becomes an Acquiring Person or if the Company
         were the surviving corporation on a merger with an Acquiring Person or
         any affiliate or associate of an Acquiring Person and the Common Shares
         were not changed or exchanged, each holder of a Right, other than the
         Rights that are or were acquired or beneficially owned by the Acquiring
         Person (which Rights will thereafter be


                                       56
<PAGE>   59
         void), will thereafter have the right to receive upon exercise that
         number of Common Shares having a market value of two times the then
         current Purchase Price of one Right. In business combination
         transaction or more than 50% of its assets or earning power was sold,
         proper provision shall be made so that each holder of a Right shall
         thereafter have the right to receive, upon the exercise thereof at the
         then current Purchase Price of the Right, that number of shares of
         common stock of the acquiring company which at the time of such
         transaction would have a market value of two times the then current
         Purchase of one Right.

         The Rights may be redeemed in whole, but not in part, by the Board of
         Directors of the Company at a price of $0.001 per Right at any time
         prior to the time that an Acquiring Person has become such. The
         redemption of the Rights may be made effective at such time, on such
         basis and with such conditions as the Board of Directors of the Company
         in its sole discretion may establish.

12.      Segment Information

         The Company adopted SFAS No. 131, "Disclosures About Segments of an
         Enterprise and Related Information", for its fiscal year ended July 31,
         1999, which changed the way the Company reports information about its
         operating segments. The Company business units have been aggregated
         into three reportable operating segments: exploitation of the "National
         Lampoon" trademark, internet operations and video distribution. The
         factors for determining the reportable segments were based on the
         distinct nature of their operations. They are managed as separate
         business units because each requires and is responsible for executing a
         unique business strategy. Earnings of industry segments exclude
         interest income, goodwill amortization, compensation related to SAR's
         and other unallocated corporate expenses. With the development of
         internet operations beginning in January 1999, the Company began
         allocating unidentifiable selling, general and administrative expenses
         evenly between the trademark and internet segments. Identifiable assets
         are those assets used in the operations of the segments. Corporate
         assets consist of cash, certain corporate receivables and intangibles.
         Summarized financial information concerning the Company's reportable
         segments is shown in the following tables:


                                       57
<PAGE>   60
<TABLE>
<CAPTION>
                                        Trademark      Internet        Video         Total
                                       -----------     ---------     ---------     -----------
<S>                                    <C>             <C>           <C>           <C>
         Year Ended July 31, 1999:
              Revenues                 $ 1,228,000     $      --     $  18,000     $ 1,246,000
              Segment income (loss)        425,000      (324,000)        5,000         106,000
              Identifiable assets               --        19,000        10,000          29,000
              Capital expenditures              --        27,000            --          27,000
              Depreciation expense              --         8,000            --           8,000

         Year Ended July 31, 1998:
              Revenues                 $   782,000     $      --     $   1,000     $   783,000
              Segment income (loss)        (76,600)           --        (4,000)        (80,600)
              Identifiable assets               --            --        14,000          14,000
              Capital expenditures              --            --            --              --
              Depreciation expense              --            --            --              --

         Year Ended July 31, 1997:
              Revenues                 $ 1,137,000     $      --     $ 219,000     $ 1,356,000
              Segment income (loss)        143,000            --       114,000         257,000
              Identifiable assets               --            --        12,000          12,000
              Capital expenditures              --            --            --              --
              Depreciation expense              --            --            --              --
</TABLE>


                                       58
<PAGE>   61
         The following is a reconciliation of reportable segment income to
         consolidated income (loss) before taxes:

<TABLE>
<CAPTION>
                                                                  Year Ended     Year Ended     Year Ended
                                                                   July 31,       July 31,       July 31,
                                                                     1999           1998           1997
                                                                  -----------    ----------     ---------
<S>                                                               <C>             <C>           <C>
         Segment income (loss)                                    $   106,000     $ (80,600)    $ 257,000
         (Compensation) benefit related to SAR                     (1,700,000)       19,600       (37,000)
         Goodwill amortization                                       (240,000)     (240,000)     (240,000)
         Other income                                                 436,000       343,000            --
                                                                  -----------     ---------     ---------
                 Operating (loss) income                           (1,398,000)       42,000       (20,000)
         Interest income                                               99,000        85,000        59,000
                                                                  -----------     ---------     ---------
                 Consolidated (loss) income before taxes          $(1,299,000)    $ 127,000     $  39,000
                                                                  ===========     =========     =========
</TABLE>

         The following is a reconciliation of reportable segment assets to
         consolidated total assets:

<TABLE>
<CAPTION>
                                                       Year Ended    Year Ended    Year Ended
                                                         July 31,     July 31,      July 31,
                                                          1999          1998          1997
                                                       ----------    ----------    ----------
<S>                                                    <C>           <C>           <C>
         Total assets for reportable segments          $   29,000    $   14,000    $   12,000
         Goodwill not allocated to segments             3,416,000     3,656,000     3,896,000
         Cash and cash equivalents                      1,858,000       879,000       641,000
         Short-term investments                                --     1,352,000       861,000
         Other unallocated amounts                         47,000        61,000        63,000
                                                       ----------    ----------    ----------
                 Consolidated total assets             $5,350,000    $5,962,000    $5,473,000
                                                       ==========    ==========    ==========
</TABLE>


                                       59