**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-KSB**


**(Mark
      One)**





**x**
            **ANNUAL
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934**





For
      the
      Fiscal Year Ended July 31, 2007





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





For
      the
      transition period from _______________ to ________________





Commission
      File Number 001-32584





**NATIONAL
      LAMPOON, INC.**


(Name
      of
      Small Business Issuer in its charter)





Delaware
            
            95-4053296(State
                or other jurisdiction
            
            (I.R.S.
                Employer Identification No.)of
                incorporation or organization)





8228
      Sunset Boulevard


West
      Hollywood, California 90046


(Address
      of principal executive offices)(Zip code)





Issuer’s
      telephone number, including area code: (310) 474-5252





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





Title
                of each class
            
            Name
                of each exchange on which each is registeredCommon
                Stock, $0.0001 par value
            
            American
                Stock Exchange





Securities
      registered pursuant to Section 12(g) of the Act: None





Check
      whether the issuer is not required to file reports pursuant to Section 13 or
      15(d) of the Exchange Act. o





Check
      whether the issuer: (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports); and (2) has been subject
      to such filing requirements for the past 90 days. Yes x No o





Check
      if
      disclosure of delinquent filers in response to Item 405 of Regulation S-B is
      not
      contained in this form, and will not be contained, to the best of registrant’s
      knowledge, in definitive proxy or information statements incorporated by
      reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o





Indicate
      by check mark whether the issuer is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act).


Yes o No x





The
      issuer’s revenues for the fiscal year ended July 31, 2007 totaled
      $6,099,065.





The
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates of the registrant on November 6, 2007, computed by reference
      to
      the price at which the common equity was sold on that date, was approximately
      $14,983,826.





The
      number of shares of the issuer’s common stock, $0.0001 par value per share,
      outstanding as of November 6, 2007 was 8,283,186.





DOCUMENTS
      INCORPORATED BY REFERENCE





None





Transition
      Small Business Disclosure Format: Yes o No x








**TABLE
      OF CONTENTS**


PagePART
                  IITEM
                  1.
              DESCRIPTION
                  OF BUSINESS
              
              4ITEM
                  2.
              DESCRIPTION
                  OF PROPERTY
              
              10ITEM
                  3.
              LEGAL
                  PROCEEDINGS
              
              11ITEM
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY HOLDERS
              
              12PART
                  IIITEM
                  5.
              MARKET
                  FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
              
              12ITEM
                  6.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
              
              17ITEM
                  7.
              FINANCIAL
                  STATEMENTS
              
              F-1ITEM
                  8.
              CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURE
              
              30ITEM
                  8A.
              CONTROLS
                  AND PROCEDURES
              
              30ITEM
                  8B.
              OTHER
                  INFORMATION
              
              30PART
                  IIIITEM
                  9.
              DIRECTORS,
                  EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS AND CORPORATE
                  GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                  ACT
              
              30ITEM
                  10.
              EXECUTIVE
                  COMPENSATION
              
              34ITEM
                  11.
              SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS
              
              37ITEM
                  12.
              CERTAIN
                  RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
                  INDEPENDENCE
              
              39ITEM
                  13.
              EXHIBITS
              
              40ITEM
                  14.
              PRINCIPAL
                  ACCOUNTANT FEES AND SERVICES
              
              42




2


**Note
      Regarding Forward Looking Statements**





This
      Annual Report on Form 10-KSB contains “forward-looking statements” within
      the meaning of the Private Securities Litigation Reform Act of 1995 as codified
      in Section 27A of the Securities Act of 1933 and Section 21E of the Securities
      Exchange Act of 1934 .
      These
      forward-looking statements are based on our current expectations, assumptions,
      estimates and projections about our business and our industry. Words such as
      “believe,” “anticipate,” “expect,” “intend,” “plan,” “may,” and other similar
      expressions identify forward-looking statements. In addition, any statements
      that refer to expectations, projections or other characterizations of future
      events or circumstances are forward-looking statements. These forward-looking
      statements are subject to certain risks and uncertainties that could cause
      actual results to differ materially from those reflected in the forward-looking
      statements. Factors that might cause such a difference include, but are not
      limited to, those discussed in the section of this Annual Report titled
“Management’s Discussion and Analysis of Financial Condition or Plan of
      Operation - Factors Affecting Business, Operating Results and Financial
      Condition”, as well as the following:


·
              a
                  decline in the general state of the economy, which impacts the
                  amount of
                  money spent by consumers for entertainment products,
 
 ·
              whether
                  we will be able to raise capital for film financing as we need
                  it,
 
 ·
              whether
                  the entertainment products we produce or to which we license our
                  brand
                  will generate significant sales,
 
 ·
              whether
                  our subsidiary, National Lampoon Networks, Inc., will be able to
                  continue
                  its relationships with its current advertisers and continue to
                  attract new
                  advertisers,
 
 ·
              our
                  overall ability to successfully compete in our market and our industry,
 
 ·
              whether
                  we will continue to receive the services of our executive officers
                  and
                  directors, particularly our Chief Executive Officer, Daniel S.
                  Laikin,·
              unanticipated
                  increases in development, production or marketing expenses related
                  to our
                  various business activities,





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


3


**PART
      I**





**ITEM
      1.**  **BUSINESS**





**History**





We
      were
      incorporated in California in 1986 under the name J2 Communications, Inc. We
      acquired National Lampoon, Inc., a Delaware corporation referred to in this
      report as “NLI”, in late 1990. NLI was incorporated in 1967. NLI was primarily
      engaged in publishing *National
      Lampoon Magazine* .
      Its
      other activities included radio, stage shows and the development and production
      of motion pictures. Prior to our acquisition of NLI, we had been engaged in
      the
      acquisition, production and distribution of videocassette programs for retail
      sale. With the acquisition of NLI, we shifted our focus from the videocassette
      business to the exploitation of the National LampoonTM trademark. In November
      2002, we merged J2 Communications, Inc. into NLI, with National Lampoon, Inc.
      being the surviving corporation of the merger.





In
      May
      2002, a group led by our Chief Executive Officer, Daniel S. Laikin, acquired
      control of our company and our business focus expanded from passive income
      through trademark licenses to the creation and distribution of comedic
      content.





**Our
      Business**





We
      develop, produce, and distribute National LampoonTM branded comedic content
      through a broad range of media platforms including:





·
            hosting
                three Internet websites through which we sell advertising space and
                branded products,





·
            licensing
                both our name and comedic content from our library for a wide variety
                of
                uses, including movies, television programming, radio broadcasts,
                recordings, electronic games and live events,





·
            reaching
                nearly 2 million college students in their dormitories and other
                places of
                residence through National Lampoon Network, our network of approximately
                200 affiliated college and other television stations,





·
            distributing
                branded National LampoonTM comedic content on DVD in the home entertainment
                market,·
            publishing
                and licensing our brand and comedic content for the publication of
                National LampoonTM books,·
            developing,
                producing or providing creative services for our own original or
                third-party motion pictures and made for television movies and programs.





Because
      of our experience in the college and young adult market, we maintain a network
      of affiliated college campuses for holding live events, screenings and
      distribution of promotional goods. Our customers, which are derived from various
      industries including the beverage, motion picture, mobile phone and
      pharmaceutical industry, contract with us to provide these
      services.





*Internet*





NLN’s
      internet properties comprise several internet destination sites including:
      NationalLampoon.com, DrunkUniversity.com, TOGATV.com, and KnuckleheadVideo.com.
      These destination sites are also part of the National Lampoon Humor Network,
      an
      aggregated network of some of the most popular humor destinations on the
      Internet. We sell advertising space on these sites in the form of video streamed
      advertisements, full page takeover advertisements and banner advertisements.


4


Our
      National Lampoon Humor Network now has over 40 affiliate websites. We believe
      that we provide an appealing platform to those advertisers who want their
      commercial messages to reach the college age market. For those businesses
      targeting the college market, we provide an integrated marketing platform that
      includes internet advertisers, on-air advertising, and field
      marketing.





We
      recently announced the launch of the National Lampoon Video Network where we
      entered into content distribution agreements with several Internet Video Portals
      including: AOL, Joost, Veoh, Yahoo!, YouTube and others. Our Video Network
      Partners will sell advertising space, including video streaming and we will
      receive a portion of the revenues earned.





*College
      Network*





In
      September 2002 we acquired substantially all of the assets of Burly Bear
      Network, Inc., a business engaged in producing and distributing entertainment
      through a network of affiliated college and other television stations. We
      renamed the business “National Lampoon Networks, Inc.” (referred to as “NLN” in
      this discussion) and expanded the affiliate network.





Since
      the
      acquisition of Burly Bear Network, we have expanded NLN’s operations to
      include our internet, television and field marketing activities. Field
      marketing is the use of trained college students to conduct brand-building
      activities on behalf of our advertisers. Our field marketing includes activities
      such as product sampling and live events (such as a concert or a contest) that
      take place on college and university campuses throughout the United States
      and
      reinforce and increase awareness of a brand among the students. Using
      these mediums, we provide an integrated marketing platform to advertisers who
      want their commercial messages to reach the college age market. Some of
      the advertisers whose brands NLN promotes include E! Entertainment, Red Bull,
      and MadCroc.





Aside
      from providing an outlet for advertisers targeting the college market, NLN
      develops, produces and distributes, through its affiliate network, comedic
      internet and television programming. NLN’s television activities include
      delivering programming during the standard academic year to more than 200
      affiliated college and other television stations, reaching nearly 2 million
      college students in their dormitories and other places of residence. When
      we
      acquired Burly Bear Network, Inc., we acquired 750 hours of original
      programming. In 2003 we commenced production of original television programs
      solely for distribution on NLN’s NL College Network. NLN currently produces four
      half-hour segments per week hosted by Kato Kaelin and other guest celebrities.
      These segments are produced in NLN’s in-house facility. During the first quarter
      of the 2007 fiscal year NLN entered into an agreement with Capazoo, a social
      and
      entertainment website, to film 50 episodes of comedic entertainment that it
      intends to air on NL College Network.





During
      the fiscal year ended July 31, 2007, NLN discontinued the purchase of commercial
      airtime and currently uses only the free airtime provided by universities to
      broadcast its original programming and commercials.





*Motion
      Picture and Feature Film*





We
      previously licensed our National Lampoon trademark for use in the titles of
      films. We received a license fee at the time we entered into an agreement for
      allowing use of the National LampoonTM trademark. We began financing our own
      productions during the 2007 fiscal year and therefore have discontinued
      licensing our name to any new third party productions. We have begun the
      acquisition and branding of third-party films for distribution in the U.S.
      and
      internationally. We pay finishing and print and advertising costs that are
      recouped through U.S. theatrical, video, PPV and free TV and international
      sales.


5


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





We
      currently are a party to approximately 23 feature film agreements. Pursuant
      to
      these agreements, once the film is released and begins earning revenues, the
      studio or distributor is entitled to recoup any licensing fee, minimum guarantee
      or advance it paid to us under the agreement and, if included in the agreement,
      interest. Once this amount is recouped, our participation in the revenues earned
      by the film may begin.





In
      December 2004, as part of our plan to expand the use of our brand and to expand
      our DVD library by increasing the number of products we produce and have
      distributed for home entertainment, we joined with Majestic Entertainment to
      form National Lampoon Clubhouse, Inc., a Nevada corporation. We are the holder
      of a 50% interest in National Lampoon Clubhouse, Inc. National Lampoon
      Clubhouse, Inc. was formed to develop and produce live-action, full-length
      feature films for the “tween” market, children between the ages of nine and
      thirteen. We financed one-half the cost of producing *Monster
      Night* (formerly
      titled *Trick
      or Treat* ),
      the
      first film produced through National Lampoon Clubhouse which had a production
      budget of approximately $1,800,000. *Monster
      Night* was
      released domestically on video in the fall of 2006. We
      are
      now in post production on a feature film currently titled “ *Bag
      Boy* ”
which
      was financed by National Lampoon and Red Rock Picture Holdings, Inc. and is
      expected to be released in January 2008. We are also in post production on
      the
      film “ *Ratko,
      The Dictator’s Son* ”
which
      commenced production in May 2007 and which we expect to release in spring 2008.





We
      also
      earn revenues from providing producer/manager services for films that do not
      carry our brand.





We
      own
      19% of Red Rock Picture Holdings, Inc. (sometimes referred to in this report
      as
“Red Rock”), a development stage company formed in August 2006. Red Rock was
      formed for the purpose of providing financing and consulting services related
      to
      the production and exploitation of motion pictures.





During
      the quarter ended April 30, 2007, we hired 2 new consultants to perform the
      services required to distribute motion pictures produced by both National
      Lampoon and unrelated third parties. We expect the first films to be distributed
      in the first and second quarter of our next fiscal year.





We
      are
      currently developing four projects per year which will carry the National
      Lampoon name and we are in the process of negotiating motion picture output
      deals with a domestic home video distributor and cable television broadcast
      company. An output deal basically guarantees a previously negotiated payment
      or
      advance for the applicable rights for our current slate of films in development.
      The minimum guarantee or advance may be paid over various points of production
      of the film or upon full delivery of the finished product.





In
      May
      2005 we agreed with Laughter Heals, LLC and an entity that was to be formed
      to
      co-produce a feature film to be titled *Totally
      Baked* .
      As a
      result of creative differences, the parties agreed to terminate this venture.
      During the fourth quarter of our 2007 fiscal year, we entered into an agreement
      with Laughter Heals, LLC whereby we transferred any ownership interest we had
      in
      the film to Laughter Heals, LLC in exchange for a release of our obligations
      in
      connection with the production and marketing of the film.


6


We
      have
      agreements with independent third parties for the limited platform theatrical
      release and subsequent marketing of our films. ** During
      the 2007 fiscal year, we have released into a limited number of theaters *National
      Lampoon’s Barely Legal,*  *National
      Lampoon’s Pucked* ,
      starring Jon Bon Jovi and directed by Academy Award winner Arthur Hiller, *National
      Lampoon’s Jake’s Booty Call* and *National Lampoon’s Adam & Eve* .
      A
“platform theatrical release” is the release of a motion picture in a small
      number of theaters in order to promote the rental and sale on DVD.





*National
      Lampoon’s Pledge This!* ,
      starring Paris Hilton, and *National
      Lampoon’s Beach Party on the Threshold of Hell* were
      released in October 2007.





The
      following is a list of the 34 motion pictures bearing our brand:





**Year****Title**
            
            **Released**
            
            **Financier/Distributor***National
                Lampoon’s Animal House*
            
            1979
            
            Universal
                Studios*National
                Lampoon Goes to the Movies*
            
            1981
            
            United
                Artists*National
                Lampoon’s Class Reunion*
            
            1982
            
            ABC/Disney*National
                Lampoon’s Vacation*
            
            1983
            
            Warner
                Bros.*National
                Lampoon’s European Vacation*
            
            1985
            
            Warner
                Bros.*National
                Lampoon’s Class of ‘86*
            
            1986
            
            Paramount*National
                Lampoon’s Christmas Vacation*
            
            1989
            
            Warner
                Bros.*National
                Lampoon’s Loaded Weapon I*
            
            1993
            
            New
                Line Cinema*National
                Lampoon’s Last Resort*
            
            1994
            
            Trimark
                Studios*National
                Lampoon’s Attack of the 52 Women*
            
            1994
            
            Showtime*National
                Lampoon’s Senior Trip*
            
            1995
            
            New
                Line Cinema*National
                Lampoon’s Favorite Deadly Sins*
            
            1995
            
            Showtime*National
                Lampoon’s Dad’s Week Off*
            
            1997
            
            Paramount*National
                Lampoon’s The Don’s Analyst*
            
            1997
            
            Paramount*National
                Lampoon’s Men in White*
            
            1998
            
            Fox*National
                Lampoon’s Golf Punks*
            
            1998
            
            Fox*National
                Lampoon’s Van Wilder*
            
            2001
            
            Artisan*National
                Lampoon Presents Dorm Daze*
            
            2003
            
            Independent*National
                Lampoon’s Gold Diggers*
            
            2005
            
            Lady
                P&A LLC*National
                Lampoon’s Blackball*
            
            2005
            
            First
                Look Entertainment*National
                Lampoon’s Going the Distance*
            
            2005
            
            Think
                Films*National
                Lampoon’s Adam & Eve*
            
            2006
            
            MRG
                Ent.*National
                Lampoon’s Barely Legal*
            
            2006
            
            Motion
                Picture Corp./Sony Pic. Rel.*National
                Lampoon’s Cattle Call*
            
            2006
            
            Cattle
                Call LLC*National
                Lampoon’s RepliKate*
            
            2003
            
            Silver
                Nitrate*National
                Lampoon’s Pledge This!*
            
            2006
            
            Street
                Alien/Silver Nitrate*National
                Lampoon’s Pucked (formerly Trouble with Frank)*
            
            2006
            
            National
                Lampoon, Inc,*National
                Lampoon’s Jake’s Booty Call*
            
            2006
            
            National
                Lampoon, Inc.*National
                Lampoon’s Dorm Daze II*
            
            2006
            
            Independent*National
                Lampoon’s Van Wilder II*
            
            2006
            
            Lion’s
                Gate*National
                Lampoon’s Electric Apricot: The Quest for Festaroo*
            
            2007
            
            Bait
                Productions*National
                Lampoon’s Beach Party at the Treshold of Hell*
            
            2007
            
            Threshold
                Productions, LLC*National
                Lampoon’s Homo Erectus*
            
            2007
            
            Caveman
                Comedy, LLC*National
                Lampoon’s One, Two, Many*
            
            2007
            
            Breaking
                the Rules, LLC


7


*Television
      Production*





The
      content included in our NLN television programming is generally provided to
      us
      by third parties at minimal or no charge. Members of the creative community
      are
      constantly seeking ways in which to have their works seen or published, and,
      due
      to the recognition of our brand on college campuses, they forward content to
      us
      without solicitation. If we want to acquire the work, we will enter into a
      license agreement with the author. Most of these agreements provide for the
      payment of a minimal license fee, such as $50 that, in turn, allows us to use
      the work in any manner for as long as we want. If we fail to use the work for
      a
      period of one year, we return it to the author. Other than the license
      agreements, we generally do not have contracts that obligate these writers
      to
      provide us with creative content in the future. Because the way we currently
      obtain creative content is inexpensive, we do not believe that such agreements
      are necessary at this time. Most of our programming is utilized on the college
      cable network and also digitized for streaming on our TOGA TV website. We sell
      advertising around this programming on both our cable network and internet
      websites.





*Publishing*





In
      October 2002 we entered into an agreement with Rugged Land LLC to publish six
      National Lampoon books over a three-year period based on new and established
      National Lampoon comedic content. We have released four books under this
      agreement, including *1964
      High School Reunion Year Book* , *National
      Lampoon’s Book of Love* , *National
      Lampoon’s Big Book of True Facts* and *National
      Lampoon’s Encyclopedia of Humor* .
      During
      the 2007 fiscal year the agreement with Rugged Land was terminated and no
      additional books are expected to be released under that agreement.





In
      the
      2006 fiscal year, we began publishing our books. The first book released during
      the 2006 fiscal year was titled *National
      Lampoon’s Saddam Dump[Saddam Hussein’s Trial Blog].* Eight
      other books, *National
      Lampoon’s Magazine Rack* , *National Lampoon’s*  *Jokes
      Jokes Jokes* , *National Lampoon’s Favorite Cartoons of the 21* *st* *Century, National Lampoon’s Not Fit for Print* , *National
      Lampoon’s Road Trip* , *National
      Lampoon’s Van Wilder Guide to Graduating College in Eight Years or
      More* , *National Lampoon’s Animal House* and *National Lampoon’s Help!* were
      released during the 2007 fiscal year *.* Three
      more books, *National
      Lampoon’s Jokes Jokes Jokes 2, National Lampoon’s Balls!* and *National
      Lampoon’s Pimp it Yourself!* were
      released subsequent to the 2007 fiscal year end. **





*Radio*





In
      March
      2005 NL Radio, LLC was formed. We hold a 25% interest in this entity. NL Radio,
      LLC launched an entertainment radio format under our brand. We have licensed
      the
      content of our radio library, as well as certain domain names, urls and
      websites, to NL Radio, LLC for this purpose. NL Radio, LLC used samples of
      the
      programming, called “pilot programming,” to introduce the format and content to
      radio networks and local stations. If the programming is sold to a network
      it
      may be syndicated, meaning that it would be distributed to stations affiliated
      with the network. Purchasers of the programming may broadcast segments of the
      programming at their discretion, such as during “drive time” or as late night
      programming. The programming was launched on XM radio in fiscal 2007. Our radio
      library includes approximately 80 hours of National Lampoon radio programming
      consisting primarily of one to two minute short comedy routines and one hour
      comedy sketches and parodies. We earn revenues from royalties when our
      programming is aired, ad sales, direct response advertising and product
      promotion arrangements. We also receive a licensing fee equal to 8% of the
      gross
      receipts received by NL Radio, LLC from all sources in connection with any
      use
      of our brand.





*Other
      Licensing*





We
      licensed the National Lampoon TM name to generate revenue. We no longer license
      our name to third party projects. Rather we produce our own original branded
      films or acquire third-party produced films for branding and distribution.
      Aside
      from our film, television and book publishing, our previously licensed projects
      included:





·
            the
                development of National LampoonTM branded Class II and Class III games, as
                defined in the Indian Gaming Regulatory Act (25 U.S.C.§ 2701, et seq.)
                through a strategic partnership with Multimedia Games, Inc.,


8


·
            the
                development of video games with Activision, and selected merchandising
                arrangements for various consumer products, and





·
            the
                wireless distribution of our content by Buena Vista Internet Group.





*National
      Lampoon Tours*





In
      October 2004 we entered the travel and tourism business through our wholly-owned
      subsidiary, National Lampoon Tours, Inc., referred to in this discussion as
      "NL
      Tours". NL Tours created branded vacation tours that were marketed primarily
      to
      young adults between the ages of 18 and 30. These operations were not profitable
      and in the 2007 fiscal year we stopped offering tour packages.





**Competition**





*Entertainment*





The
      entertainment industry in general, and the motion picture and television
      industry specifically, are highly competitive. The most important competitive
      factors include quality, variety of product and marketing. Most of our
      competitors have significantly greater financial and other resources (such
      as
      personnel and contacts) than we have. All of our competitors in the
      entertainment industry compete for motion picture and television projects and
      talent and are producing products that compete with ours for exhibition time
      in
      theaters, on television, and on home video.





Our
      success is highly dependent upon such unpredictable factors as the viewing
      public’s taste. Public taste changes and a shift in demand could cause our
      products to lose their appeal. Therefore, acceptance of our products, no matter
      what the medium, cannot be assured.





We
      do not
      represent a significant presence in the entertainment industry.





*Advertising*





NLN
      competes for advertisers with many other forms of advertising targeting the
      young adult market. These competing forms of advertising media include other
      television and internet advertising, radio, print, direct mail and billboard.
      NLN’s current list of advertisers continues to grow but these advertisers are
      not contractually obligated to renew their advertising contracts or to purchase
      set amounts of advertising in the future. Although NLN’s advertising and
      promotion activities on the internet have increased significantly during the
      2007 fiscal year, NLN does not yet represent a significant presence in the
      advertising industry at this time.





**Intellectual
      Property**





We
      own
      the common law trademark “National LampoonTM” as used to promote the sale of a
      variety of goods and services in the United States. Pursuant to an agreement
      we
      originally entered into with The Harvard Lampoon, Inc. on October 8, 1969 and
      amended and restated on October 1, 1998, The Harvard Lampoon, Inc. has consented
      to our ownership and use of “National LampoonTM”, and variations of that mark, on
      all goods and services, including motion pictures, television programming,
      radio
      programming, sound recordings, live performances and merchandising, restaurant,
      and travel and entertainment services, but expressly excluding any new magazine,
      periodical or pamphlet published under National LampoonTM without the consent of
      The Harvard Lampoon, Inc., as well as firearms, tobacco products, addictive
      substances of any kind, articles of personal hygiene, and any items depicting
      explicit sex acts. We may sublicense our rights to third parties so long as
      The
      Harvard Lampoon, Inc. has audit rights to our sublicense agreements with third
      parties and we enforce quality controls. We cannot grant perpetual terms during
      which a sublicensee can use the mark in a field (as opposed to a specific
      product or service). Our rights to National LampoonTM under the concurrent use
      agreement will terminate if, for a period of 12 consecutive months, we failed
      to
      be actively engaged in good faith efforts to produce or to market our products
      and services. We are required to pay The Harvard Lampoon, Inc. as follows:





·
            as
                to any print publication, 2% of the net sales price;


9




·
            as
                to any movie, stage show, television show or radio show, the greater
                of
                $2,000 or 2% of the first $2,000,000 of pre-tax profits, 1.75% of
                any
                pre-tax profits in excess of $2,000,000 but not to exceed $5,000,000
                and
                1.5% of any pre-tax profits in excess of $5,000,000; and·
            as
                to all other products or services, the greater of 2% of our pre-tax
                profits or $250.




If
      we
      sublicense our rights to unaffiliated third parties, The Harvard Lampoon, Inc.
      is entitled to receive 10% of any pre-tax profits we receive that are derived
      from the sale of goods or services by the sub-licensee.





The
      concurrent use agreement also provides that The Harvard Lampoon, Inc. will
      not
      authorize any party to use the word “Lampoon” during the term of the agreement
      without our written consent. During the 2006 and 2007 fiscal years, we paid
      The
      Harvard Lampoon, Inc. $0 and $66,070, respectively, in accordance with the
      terms
      of this agreement. We have accrued approximately $4,600 in royalties as of
      July
      31, 2007 due to The Harvard Lampoon, Inc.





We
      believe that we take all appropriate and reasonable measures to obtain
      agreements from licensees requiring that they acknowledge our trademarks and
      copyrights. We own the trademark registration for National Lampoon on the
      Principal Register of the United States Patent and Trademark Office to promote
      the sale of magazines and we have registered various screenplays, comedy
      sketches and other written or sound materials with the United States Copyright
      Office. We otherwise have relied exclusively on our common law rights to protect
      unregistered trademark uses and copyrights. Failure to obtain or maintain
      appropriate protection for our intellectual property, either in the United
      States or in certain foreign countries, may have a material adverse effect
      on
      our business, operating results and financial condition.





**Employees**





As
      of
      November 6, 2007 we had 26 full-time employees. We also hire independent
      contractors, as needed. We consider our employee relations to be satisfactory
      at
      the present time.





**ITEM
      2.**  **DESCRIPTION
      OF PROPERTY**





Our
      corporate offices are located in West Hollywood, California under a sublease
      agreement that expired in April 2007 at which time our lease term converted
      to a
      month-to-month basis. We also occupied office space in New York City that was
      leased on a month to month basis. We closed this office on September 30, 2007
      and no longer maintain an office in New York City. During
      the 2007 fiscal year, our lease obligations totaled $141,820, of which $129,820
      was for the Los Angeles office and $12,000 was for the New York office. During
      the 2008 fiscal year we expect our lease obligation to be approximately $208,000
      for the Los Angeles office.


10


**ITEM
      3.**  **LEGAL
      PROCEEDINGS**





*National
      Lampoon, Inc. v. Alma Investments* (d/b/a
      Bahia Mar Hotel) (Los Angeles Superior Court Case No. BC 356118). We filed
      this
      complaint on July 27, 2006. The action arises from an agreement we had with
      Bahia Mar Hotel pursuant to which we were to provide to Bahia Mar Hotel an
      entertainment package for the 2006 spring break. Bahia Mar Hotel failed to
      support the program, and we alleged that Bahia Mar Hotel diverted some of the
      business to our competitors. In our complaint, we have alleged causes of action
      for fraud, breach of contract, promissory estoppel, quantum meruit and breach
      of
      the covenant of good faith and fair dealing. We believe that our damages are
      in
      excess of $500,000. On September 22, 2006 Bahia Mar Hotel filed a motion to
      quash service of summons, which the Court denied on October 25, 2006. On
      November 8, 2007 we served the plaintiff with an Offer to Compromise under
      Code
      of Civil Procedure Section 998. The Offer to Compromise provides for a
      settlement of the action for $150,000. The plaintiff has 30 days to accept
      or
      reject the Offer to Compromise. Both parties are continuing to engage in
      discovery and prepare for trial.





*Cinergy
      Creative, Inc. and Leslie Allen v. National Lampoon Clubhouse, Inc., National
      Lampoon, Inc., Majestic Entertainment, Inc. and Lorenzo Doumani* (Los
      Angeles Superior Court Case No. SC091496). This complaint was filed on October
      20, 2006. The plaintiffs allege causes of action for breach of written contract,
      breach of oral contract, breach of the implied covenant of good faith and fair
      dealing, quantum meruit, fraud and deceit based on promises made without
      intention to perform, intentional misrepresentation, slander per se, libel
      per
      se, breach of confidence, declaratory relief, conversion, untrue or misleading
      advertising, unfair competition and negligence. Specifically, the plaintiffs
      allege that we and our co-defendants induced them to set aside other projects
      so
      that they would spend their time working on projects for the benefit of us
      and
      our co-defendants. The plaintiffs also allege that they were promised a share
      of
      profits from the projects and/or a "partnership" interest in them. The
      plaintiffs allege that their damages are in excess of $2,000,000. The Company
      entered into a settlement agreement with the plaintiffs dated November 5, 2007.
      The plaintiffs agreed to dismiss the complaint against the Company in exchange
      for a payment of $50,000 to be made within 90 days from the execution of the
      settlement agreement. The action is continuing against the remaining
      defendants.




*Screen
      Actor’s Guild v. National Lampoon Clubhouse, Inc.* During
      late 2006, the Screen Actor’s Guild (“SAG”) filed claims against National
      Lampoon Clubhouse, Inc. (“Clubhouse”) for unpaid wages and pension, health and
      welfare benefits incurred for the filming of “Monster House” aka “Trick or
      Treat”. SAG alleges that certain actors were not paid in full and are owed more
      compensation, expenses and benefits in the amount of approximately $30,000
      under
      the SAG agreement. Clubhouse disputes these claims and intends to vigorously
      defend this action. An arbitration with SAG is scheduled for February of
      2008.




*American
      Cinema Distribution Corporation v. National Lampoon, Inc.*In
      August 2007, the American Cinema Distribution Corporation (“ACDC”) filed claims
      against National Lampoon, Inc. for costs incurred on the release of “National
      Lampoon’s Pucked”. ACDC alleges that the Company did not perform distribution
      services as agreed and that ACDC should be reimbursed for distribution costs
      it
      incurred estimated at $65,000. ACDC also alleges that it does not owe
      distribution fees to the Company for marketing, publicity, promotional and
      advertising services the Company provided which services the Company alleges
      have a value in excess of $290,000. National Lampoon disputes these claims
      and
      intends to vigorously defend this action.


11


**ITEM
      4.**  **SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS**





Our
      annual meeting of stockholders was held on June 19, 2007. The
      matters voted upon at the meeting included the election of directors and the
      ratification of the appointment of Stonefield Josephson, Inc. as our independent
      auditors for the fiscal year ended July 31, 2007. The results of the voting
      were
      as follows:





Election
      of Directors





Name
                of Nominee
            
            Votes
                For
            
            Votes
                WithheldDaniel
                S. Laikin
            
            
            7,278,858
            
            
            26,646Timothy
                S. Durham
            
            
            7,273,751
            
            
            26,753Paul
                Skjodt
            
            
            7,283,209
            
            
            22,295Robert
                Levy
            
            
            7,283,163
            
            
            22,341James
                P. Jimirro
            
            
            7,188,891
            
            
            116,613Duncan
                Murray
            
            
            7,232,163
            
            
            23,341James
                Toll
            
            
            7,283,029
            
            
            22,475





Ratification
      of Stonefield Josephson, Inc. as our independent auditors for the fiscal year
      ended July 31, 2007.





For
            
            Against
            
            Abstain7,302,898
            
            450
            
            2,156





Shares
      which abstained from voting as to these matters, and shares held in “street
      name” by brokers or nominees who indicated on their proxies that they did not
      have discretionary authority to vote such shares as to these matters (“broker
      non-votes”), were not counted as votes in favor of such matters. For purposes of
      determining whether the affirmative vote of a majority of the shares present
      at
      the meeting and entitled to vote on a proposal had been obtained, abstentions
      were included in, and broker non-votes were excluded from, the number of shares
      present and entitled to vote.





**PART
      II**





**ITEM
      5.**  **MARKET
      FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**





Until
      March 24, 2002, when we were delisted from the Nasdaq Small Cap Market (now
      the
      Nasdaq Capital Market) for failing to meet certain listing requirements, our
      common stock traded on the Nasdaq Small Cap Market under the symbol JTWO. From
      March 25, 2002 until October 25, 2002, our common stock traded on the Over
      the
      Counter Bulletin Board under the symbol JTWO. On October 25, 2002, our common
      stock symbol changed to NLPN. On March 11, 2005 we submitted an application
      to
      the American Stock Exchange to be traded under the ticker symbol NLN. On July
      21, 2005 the American Stock Exchange notified us that the application was
      approved. On August 2, 2005 our stock ceased trading on Over the
      Counter Bulletin Board and on August 3, 2005 it began trading on the
      American Stock Exchange. The table below sets forth the range of the high and
      low sales prices of our common stock for each quarter for the last two fiscal
      years as reported by American Stock Exchange.





High
            
            Low**Fiscal
                Year Ended July 31, 2007**First
                Quarter Ended October 31, 2006
            
            $
            2.00
            
            $
            1.10Second
                Quarter Ended January 31, 2007
            
            $
            2.61
            
            $
            1.85Third
                Quarter Ended April 30, 2007
            
            $
            2.15
            
            $
            1.71Fourth
                Quarter Ended July 31, 2007
            
            $
            2.41
            
            $
            1.85


12


**High**
            
            **Low****Fiscal
                Year Ended July 31, 2006**First
                Quarter Ended October 31, 2005
            
            $
            3.85
            
            $
            2.05Second
                Quarter Ended January 31, 2006
            
            $
            2.98
            
            $
            2.00Third
                Quarter Ended April 30, 2006
            
            $
            3.06
            
            $
            2.30Fourth
                Quarter Ended July 31, 2006
            
            $
            2.67
            
            $
            1.05





As
      of
      November 6, 2007, we had approximately 246 stockholders of record. This
      number does not include an indeterminate number of shareholders whose shares
      are
      held by brokers in street name.





**Dividend
      Policy**





We
      have
      not declared or paid any dividends and do not intend to pay any dividends in
      the
      foreseeable future to the holders of our common stock. We intend to retain
      future earnings, if any, for use in the operation and expansion of our business.
      Any future decision to pay dividends on common stock will be at the discretion
      of our Board of Directors and will depend on our financial condition, results
      of
      operations, capital requirements and other factors our Board of Directors may
      deem relevant.





Dividends
      accrue on our Series B and Series C Convertible Preferred Stock. Dividends
      accrue on a daily basis and continue until the date on which the Series B or
      Series C Convertible Preferred Stock is converted, until a liquidation event
      occurs, or, in the case of the Series C Convertible Preferred Stock, until
      the
      redemption date (although the redemption date is not defined and there is no
      right of redemption as to the Series C Convertible Preferred Stock). Dividends
      accrue at the rate of 9% per annum on the sum of the original purchase price
      of
      the Series B or Series C Convertible Preferred Stock plus all accumulated and
      unpaid dividends thereon (compounding annually). Dividends that accrue on our
      Series B and Series C Convertible Preferred Stock must be paid with our common
      stock.





Dividends
      on the Series B and Series C Convertible Preferred Stock are computed using
      the
      closing price of the common stock, as reported by the exchange or regulated
      quotation service on which our common stock is traded, on the trading date
      immediately preceding the date that we become liable to pay the dividend. If
      no
      trades were made on that date, then the number of shares to be issued will
      be
      computed using the closing price of the last date on which trades were made
      and
      reported. As of July 31, 2007, dividends totaling $3,432,663 of our Series
      B and
      Series C Convertible Preferred Stock which, if payable as of that date, would
      have required us to issue 811,557 shares of common stock in payment of the
      Series B Convertible Preferred Stock dividends and 792,491 shares of common
      stock in payment of the Series C Convertible Preferred Stock dividends based
      on
      a closing price of $2.14 per share on July 31, 2007 as reported by the American
      Stock Exchange.





**Equity
      Compensation Plans**





On
      January 30, 2002 our Board of Directors approved the National Lampoon, Inc.
      Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock
      Plan
      (the “Equity Incentive Plan”). The Equity Incentive Plan was approved by our
      stockholders on April 25, 2002. The discussion below is a brief summary, which
      is qualified in its entirety by the full text of the Equity Incentive Plan.





The
      Equity Incentive Plan has a term of 10 years and is currently administered
      by
      our Board of Directors, which shall be referred to in this discussion as the
      “Administrator”. Pursuant to the Equity Incentive Plan, the Administrator may
      grant to eligible persons, which include employees, officers, directors,
      consultants and advisors, awards of options (which may be qualified or
      non-qualified, depending upon whether or not the eligible person is an
      employee), stock appreciation rights (commonly known as “SARs”) or deferred
      common stock or restricted common stock. 1,500,000 shares of our common stock
      were originally set aside for grants made under the Equity Incentive Plan.
      The
      number of shares of common stock set aside for grants was increased to 2,500,000
      in the 2004 fiscal year. In September 2004 our Board of Directors authorized
      a
      two-for-one stock split, making 5,000,000 shares of common stock available
      for
      grants. Thereafter, on November 15, 2005 our Board of Directors approved, and
      on
      January 18, 2006 our shareholders ratified, another increase of 1,500,000 shares
      to the number of shares included in the Equity Incentive Plan.


13


As
      of
      July 31, 2007, we had 26 employees, two officers and seven directors (one of
      whom is also an officer) who would be eligible to receive awards from the Equity
      Incentive Plan. As of July 31, 2007, we had issued options to employees to
      purchase a total of 5,369,606 shares of our common stock.





Options
      granted from the Equity Incentive Plan may be incentive stock options or
      non-qualified stock options. The term of the options may not exceed 10 years
      from the date of grant. The price for each share of common stock purchased
      pursuant to the options varies, although if an option is designated as an
      incentive stock option, the exercise price must equal at least the fair market
      value of our common stock on the date of grant. A non-qualified option must
      have
      an exercise price that is at least 85% of the fair market value of our common
      stock on the date of grant.





Options
      may be exercised by paying cash. The Administrator may also accept as payment
      for options shares of our unrestricted common stock held by the optionee for
      at
      least six months, cancellation of any indebtedness owed by us to the optionee,
      a
      full recourse promissory note executed by the optionee (so long as the
      acceptance of any such promissory note complies with federal and state law),
      shares of common stock issuable upon exercise of the option which have a fair
      market value equal to the exercise price of the option or any combination of
      the
      forgoing.





SARs
      may
      be granted from the Equity Incentive Plan in tandem with option grants or
      without reference to option grants. A SAR granted in tandem with an option
      grant
      is valued at the exercise price of the option grant; a SAR granted without
      reference to an option grant is valued at fair market value.





Deferred
      Stock and Restricted Stock awards may also be granted to eligible persons.
      Deferred Stock is the right to receive our common stock at the end of a
      specified period. Restricted Stock is the right to receive our common stock
      subject to restrictions such as the passage of time or the attainment of
      performance objectives.





In
      the
      event of a Change of Control, as defined in the Equity Incentive Plan, all
      unvested stock options shall vest and the restrictions applicable to any
      Restricted Stock or Deferred Stock awards will lapse and the awards shall be
      deemed fully vested. The value of the outstanding stock option, Restricted
      Stock
      or Deferred Stock awards shall be cashed out by a payment of cash or other
      property, as determined by the Administrator.





The
      Board
      of Directors may amend, alter or discontinue the Equity Incentive Plan, but
      no
      amendment, alteration or discontinuation may impair the rights of a participant.
      The Board of Directors must obtain stockholder approval if it seeks to increase
      the total number of shares of common stock reserved for the Equity Incentive
      Plan, change the employees or class of employees eligible to participate in
      the
      Equity Incentive Plan or extend the maximum option period under the Equity
      Incentive Plan.





A
      recipient will recognize no income upon grant of an incentive option and incur
      no tax on its exercise (unless the recipient is subject to the alternative
      minimum tax). If the recipient holds the stock acquired upon exercise of an
      incentive option (the “ISO Shares”) for more than one year after the date the
      option was exercised and for more than two years after the date the option
      was
      granted, the recipient generally will realize capital gain or loss (rather
      than
      ordinary income or loss) upon disposition of the ISO Shares. This gain or loss
      will be equal to the difference between the amount realized upon such
      disposition and the amount paid for the ISO Shares.


14


If
      the
      recipient disposes of ISO Shares prior to the expiration of either required
      holding period described above, the gain realized upon such disposition, up
      to
      the difference between the fair market value of the ISO Shares on the date
      of
      exercise (or, if less, the amount realized on a sale of such shares) and the
      option exercise price, will be treated as ordinary income. Any additional gain
      will be long-term capital gain, depending upon the amount of time the ISO Shares
      were held by the recipient.





A
      recipient will not recognize any taxable income at the time a non-qualified
      option is granted. However, upon exercise of a non-qualified option, the
      recipient will include in income as compensation in an amount equal to the
      difference between the fair market value of the shares on the date of exercise
      and the recipient’s exercise price. The included amount will be treated as
      ordinary income by the recipient and may be subject to withholding. Upon resale
      of the shares by the recipient, any subsequent appreciation or depreciation
      in
      the value of the shares will be treated as capital gain or loss. There is no
      tax
      consequence to National Lampoon as a result of either the grant or the vesting
      of non-qualified stock options. There is also no tax consequence to National
      Lampoon as a result of either the grant or the vesting of incentive stock
      options. However, if an employee fails to meet the rules governing incentive
      stock options (for example, by selling the stock sooner than the rules allow),
      we would be allowed a tax deduction to the extent that the employee had ordinary
      taxable income from the disqualified incentive stock option. We are required
      to
      withhold FICA, Medicare and federal income taxes from both employees and former
      employees upon disqualified dispositions of incentive stock options. We are
      also
      subject to FICA, Medicare and FUTA on the amounts that are deemed to be wages.





The
      following table sets forth the number of options received or to be received
      from
      the Equity Incentive Plan by each of our executive officers (our Chief Executive
      Officer, former President and former Chief Financial Officer), all current
      executive officers as a group, all current directors who are not executive
      officers as a group, each associate of any such director or executive officer
      and each person who received or will receive 5% of the option awards made or
      to
      be made and all employees, including our current officers who are not executive
      officers, as a group:





Number
                of Options Received or To Be ReceivedDaniel
                S. Laikin, Chief Executive Officer and Director
            
            
            1,244,666Bruce
                K. Long, former President
            
            
            100,000David
                Kane, former Chief Financial Officer
            
            
            100,000All
                current executive officers, as a group
            
            
            1,444,666All
                current directors who are not executive officers, as a group
            
            
            1,957,040Associates
                of any director or executive officer
            
            
            N/AAny
                person (other than those named above) who has received or will receive
                5%
                of the option awards made or to be made to all employees, including
                officers who are not named above
            
            
            N/A




Set
      forth
      in the table below is information regarding awards made pursuant to the Equity
      Incentive Plan, as well as other outstanding warrants and rights granted through
      July 31, 2007, the most recently completed fiscal year.





Plan
                Category
            
            Number
                of securities to be issued upon exercise of outstanding options,
                warrants
                and rights
            
            Weighted
                average exercise price of outstanding options, warrants and rights
            
            Number
                of securities remaining available for future issuance under equity
                compensation plans (excluding securities reflected incolumn
                2)Equity
                Compensation Plan Approved by Security Holders
            
            
            6,656,337
            (1)
            
            2.75
            
            
            (156,337
            )(1)Equity
                Compensation Plan Not Approved by Security Holders
            
            
            N/A
            
            
            N/A
            
            
            N/A





(1)
      This
      number represents the shares of common stock in excess of number of shares
      available in the Equity Incentive Plan and the 2005 Plan as of the end of our
      last fiscal year, July 31, 2007. As of August 27, 2007, 579,000 warrants expired
      and the number of shares granted no longer exceeded the shares available for
      grant and the number of shares remaining available was 422,663.


15


**Sales
      of Unregistered Securities**





On
      May
      24, 2007, 1,400 shares of our Series C Convertible Preferred Stock and the
      related accrued dividends of $11,801 were converted to 34,146 shares of our
      common stock. Each Series C Convertible Preferred Share is convertible into
      20
      common shares. The accrued dividends were converted into our common stock at
      the
      rate of $1.92 per share. The stock transfer agent has not yet issued these
      shares. We relied on section 3(9) of the Securities Act of 1933 to issue the
      securities inasmuch as the securities were exchanged with our existing security
      holder and no commission or other remuneration was paid or given directly or
      indirectly for soliciting the exchange.





In
      November 2006 we entered into an agreement with Douglas S. Bennett to provide
      consulting services to us. In exchange for his services, we issued the
      equivalent of $10,000 in shares of restricted common stock to him on the first
      of each month during the service period. During the fiscal year ended July
      31,
      2007 we issued a total of 45,955 shares of restricted common stock having a
      total value of $90,000.





In
      November 2006 we entered into an agreement with Sanctuary Management to provide
      consulting services to us. In exchange for these services, we issued the
      equivalent of $2,000 in shares of restricted common stock to it on the first
      of
      each month during the service period. During the fiscal year ended July 31,
      2007
      we issued a total of 7,887 shares of restricted common stock having a total
      value of $16,000.





In
      October 2006 we entered into an agreement with Dominic Ianno and Kelly Rodrigues
      to provide consulting services to us. In exchange for their services, during
      the
      fiscal year ended July 31, 2007 we issued a total of 1,058 shares each of
      restricted common stock having a total value of $2,000,
      respectively.





In
      October 2006 we entered into an agreement with Mark Love to provide consulting
      services to us. In exchange for his services, during the fiscal year ended
      July
      31, 2007 we issued a total of 27,547 shares of restricted common stock having
      a
      total value of $41,321.





In
      August
      2006 we entered into an agreement with Dennis Barsky to provide consulting
      services to us. In exchange for his services, we issued 5,000 shares of
      restricted common stock to him on the first of August, September, October and
      November 2006, and thereafter we issued 3,000 shares of restricted common stock
      to him on the first of each month during the service period. During the fiscal
      year ended July 31, 2007 we issued a total of 44,000 shares of restricted common
      stock having a total value of $79,230.





In
      May
      2006 we entered into an agreement with Michael Kassan to provide consulting
      services to us. In exchange for his services, we issued 3,500 shares of
      restricted common stock to him on the first of each month during the service
      period. During the fiscal year ended July 31, 2007 we issued a total of 42,000
      shares of restricted common stock having a total value of $77,595.


16


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





**ITEM
      6. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
      OPERATION**





Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
      discusses our consolidated financial statements, which have been prepared in
      accordance with accounting principles generally accepted in the United States.
      The preparation of these financial statements requires management to make
      estimates and assumptions that affect the reported amounts of assets and
      liabilities and the disclosure of contingent assets and liabilities at the
      date
      of the financial statements and the reported amounts of revenues and expenses
      during the reporting period. On an on-going basis, management evaluates its
      estimates and judgments. Management bases its estimates and judgments on
      historical experience and on various other factors that are believed to be
      reasonable under the circumstances, the results of which form the basis for
      making judgments about the carrying value of assets and liabilities that are
      not
      readily apparent from other sources. Actual results may differ from these
      estimates under different assumptions or conditions.





**Overview**




We
      are a
      media and entertainment company that creates and distributes comedic content
      through multiple distribution platforms. The National LampoonTM brand was
      initially developed in 1970 through publication of *National
      Lampoon Magazine* and
      later through the use of our name on motion pictures, including *National
      Lampoon’s Animal House* and *National
      Lampoon’s Vacation* .
      Our
      plan is to continue to expand the use of our brand in order to increase the
      revenues we generate through license fees, advertising revenue, film production
      revenue, and other sources. We are pursuing this plan as follows:





*Licensing*





We
      derive
      a substantial portion of our revenues from license fees relating to the use
      of
      our name on new motion pictures and from royalties from previously released
      motion pictures bearing our brand, including movies such as *National
      Lampoon’s Animal House* and *National
      Lampoon’s Vacation* .
      Releasing a film with our brand enhances its ability to find distribution
      outlets. Once a film is released with our brand, we earn revenues from foreign
      sales, theatrical release, home video DVD sales and rentals and pay-per-view.
      With the exception of two films in production as of July 31, 2007 and a film
      produced by National Lampoon Clubhouse, Inc., motion pictures that carry our
      brand have been produced and financed by third parties. We have licensed the
      National LampoonTM brand, as well as content from our library, for use in a wide
      variety of products including movies, television programming, live events,
      radio
      broadcasts, recordings, electronic games, and other consumer products. We
      anticipate granting fewer new licenses as we begin increasing the number of
      our
      own productions in the future.





For
      the
      year ended July 31, 2007, revenues derived from our licensing and royalties
      (exclusive of revenues derived from our publishing activities) totaled
      $3,952,847, or 64% of all the revenues we earned during the 2007 fiscal year.
      A
      significant portion of this revenue was realized from a settlement relating
      to
      royalties earned during periods prior to September 30, 2004 for a National
      Lampoon licensed film.




*National
      Lampoon Networks*





National
      Lampoon Networks, Inc. (sometimes referred to in this report as “NLN”) includes
      our Internet activities, college television network and field marketing
      activities. We believe that we provide an appealing platform to advertisers
      who
      want their commercial messages to reach the college age market.


17


For
      those
      businesses targeting the college market, NLN provides an integrated marketing
      platform that includes Internet advertising, on-air advertising, and field
      marketing.





NLN’s
      Internet properties are comprised of several Internet destination sites
      including: NationalLampoon.com, DrunkUniversity.com, TOGATV.com, and
      KnuckleheadVideo.com. These destination sites are also part of the National
      Lampoon Humor Network, an aggregated network of some of the most popular humor
      destinations on the Internet. We sell advertising space on these sites in the
      form of video streamed advertisements, full page takeover advertisements and
      banner advertisements.





We
      recently announced the National Lampoon Video Network where we entered into
      content distribution agreements with several Internet video portals including:
      AOL, Joost, Veoh, Yahoo!, YouTube and others. We have launched National Lampoon
      branded channels on these partners’ sites, in which our video network partners
      sell advertising space, including video streaming and we will receive a portion
      of the revenues generated.





NLN’s
      television activities include delivering programming during the standard
      academic school year to more than 200 affiliated college and other television
      stations, reaching nearly 2 million college students in their dormitories and
      other places of residence.





Aside
      from providing an outlet for advertisers targeting the college market, NLN
      develops, produces and distributes comedic Internet and television programming
      to audiences through its network.





For
      the
      year ended July 31, 2007, revenues derived from National Lampoon Networks,
      exclusive of licensing revenues, totaled $1,688,606, or 27% of all the revenues
      we earned during the 2007 fiscal year.




*Travel
      Services*





We
      have
      decided not to continue offering travel services and no revenue was earned
      from
      this segment of our business during the year ended July 31, 2007.




*Publishing*





In
      October 2002, we entered into an agreement with Rugged Land LLC to publish
      six
      National Lampoon books over a three-year period based on new and established
      National Lampoon comedic content. We have released four books under this
      agreement, including *1964
      High School Reunion Year Book* , *National
      Lampoon’s Book of Love* , *National
      Lampoon’s Big Book of True Facts* and *National
      Lampoon’s Encyclopedia of Humor.* The
      Company and Rugged Land LLC mutually agreed to terminate the agreement and
      no
      additional books were published.





In
      the
      2006 fiscal year, we began publishing our books. The first book released during
      the 2006 fiscal year was titled *National
      Lampoon’s Saddam Dump[Saddam Hussein’s Trial Blog].* Eight
      other books, *National
      Lampoon’s Magazine Rack* , *National Lampoon’s*  *Jokes
      Jokes Jokes* , *National Lampoon’s Favorite Cartoons of the 21* *st* *Century, National Lampoon’s Not Fit for Print* , *National
      Lampoon’s Road Trip* , *National
      Lampoon’s Van Wilder’s Guide to Graduating College in Eight Years or
      More* , *National Lampoon’s Animal House* and *National Lampoon’s Help!* were
      released during the 2007 fiscal year *.* Three
      more books, *National
      Lampoon’s Jokes Jokes Jokes 2, National Lampoon’s Balls!* and *National
      Lampoon’s Pimp it Yourself!* were
      released subsequent to the 2007 fiscal year end. **




For
      the
      year ended July 31, 2007, revenues derived from our publishing activities
      totaled $125,891, or approximately 2.1% of all the revenues we earned during
      the
      2007 fiscal year.




*Motion
      Picture and Television Programming*





Historically,
      with the exception of the film produced by National Lampoon Clubhouse, Inc.,
      motion pictures that carry our brand have been produced and financed by third
      parties. Thirty motion pictures have been released using the National LampoonTM
name and approximately seven additional motion pictures are planned for release
      during the 2008 fiscal year, of which three will be distributed by the Company.
      Additionally, three of the films will be financed and produced directly by
      us.
      We decided to produce and finance motion pictures under the National Lampoon
      name in order to take control, both creatively and with regard to distribution,
      to build a film library, and to expand our brand awareness. During the 2006
      fiscal year, we provided creative and production services on the development
      of
      projects for which we received a fee. For the fiscal year ended July 31, 2007,
      we earned $44,500, or approximately 0.7% of all the revenues we earned during
      the 2007 fiscal year, providing production and creative services.


18


*Library*




Our
      library includes 247 issues of *National
      Lampoon Magazine* ,
      which
      we continue to use to generate new content for movies, television programming
      and other licensing opportunities. Our library also consists of television
      programming, including more than 300 hours of footage produced for National
      Lampoon Networks, radio programming, recordings and other
      materials.




**Business
      Objective**




We
      intend
      to provide National LampoonTM comedic content to as many consumers as possible by
      expanding the use of our brand. The following describes the ways in which we
      plan to achieve this goal.




·
            We
                plan to continue to expand National Lampoon Networks by adding new
                internet sites and driving traffic to these sites. We will concentrate
                our
                efforts on measured media and sell available advertising and marketing
                space on our expanding network. We will continue to create, produce
                and
                acquire programming for all of our web sites as well as our college
                television network and capitalize on our expertise in the college
                and
                young adult market to continue to grow revenue in these
                areas.




·
            We
                intend to expand our film library by increasing the number of film
                projects we produce internally.We
                currently have two films in post-production, one in pre-production
                and we
                are actively developing several new projects. We have also built
                both
                domestic and international distribution arrangements for our
                films.****The
                domestic distribution arrangement includes a number of home video
                distributors and retailers and a domestic cable provider. In some
                cases we
                are guaranteed a minimum payment upon delivery of the film to the
                respective broadcaster or distributor.




·
            We
                plan to capitalize on our reputation and relationships with independent
                studios and other multimedia companies to expand the use of the National
                LampoonTM brand.




·
            We
                plan to create new licensing opportunities in markets outside of
                publishing, film and television, such as games, records, radio programming
                and live events. National Lampoon Networks continues to maintain
                a
                presence at third-party events and provide field marketing campaigns
                for
                various advertisers. However we no longer produce our own
                events.




·
            We
                started publishing and distributing books we created to continue
                capitalizing on the National Lampoon brand. During the 2007 fiscal
                year we
                published eight books, however going forward we plan to release only
                four
                books per year.




·
            During
                the 2007 fiscal year, NL Radio, LLC launched an entertainment radio
                format
                using our brand with a 24 hour/7 day-a-week channel on XM Satellite
                Radio.
                We own a 25% interest in NL Radio,
                LLC.




**Critical
      Accounting Policies**




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


19


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




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




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




**Reorganization
      Transaction**




In
      the
      discussion below, we sometimes refer to the “Reorganization Transaction”. The
      Reorganization Transaction occurred on May 17, 2002, when a group of investors
      that we refer to as “the NLAG Group” completed the acquisition of our Series B
      Convertible Preferred Stock and warrants to purchase our common stock, thereby
      gaining voting control of our company.




**Results
      of Operations**




We
      operate in five business segments, namely, licensing and exploitation of the
      National LampoonTM trademark and related properties including the sale of
      products to consumers; advertising and promotion on our internet websites,
      field
      marketing, live events and the distribution of television programming on college
      campuses; production television and DVD products; the sale of travel packages
      to
      young adults; and production of motion pictures through National Lampoon
      Clubhouse, Inc.




Segment
      operating income (loss) excludes the amortization of intangible assets, interest
      income, interest expense, other income and expenses, minority interest, equity
      in investee loss and income taxes. Selling, general and administrative
      expenses not specifically attributable to any segment have been prorated among
      the five segments.


20


**Year
      ended July 31, 2007 as compared to the year ended July 31,
      2006**




Summarized
      financial information for the years ended July 31, 2007 and 2006 for our
      segments is as follows:





Publishing
                and Licensing
            
            Advertising
                and Promotion
            
            Production
            
            Travel
                Services
            
            Clubhouse
            
            Total**Fiscal
                Year Ended July 31, 2007**Segment
                revenue
            
            $
            4,078,738
            
            $
            1,975,827
            
            $
            44,500
            
            $
            —
            
            $
            —
            
            $
            6,099,065Segment
                operating (loss)
            
            $
            1,421,273
            
            $
            (2,944,690
            )
            $
            (724,111
            )
            $
            —
            
            $
            —
            
            $
            (2,247,528
            )**Fiscal
                Year Ended July 31, 2006**Segment
                revenue
            
            $
            1,027,572
            
            $
            2,283,610
            
            $
            178,583
            
            $
            197,929
            
            $
            —
            
            $
            3,687,693Segment
                operating (loss)
            
            $
            (2,752,024
            )
            $
            (1,978,017
            )
            $
            (866,037
            )
            $
            (653,712
            )
            $
            (714,510
            )
            $
            (6,964,300
            )




Since
      the
      Reorganization Transaction, our business has changed. As a result of our
      acquisition of National Lampoon Networks, we began creating programming for
      this
      division and undertaking advertising and promotion activities. We also began
      publishing National Lampoon Books. In the table above, production revenue
      includes films, television and home entertainment; licensing and publishing
      include the licensing of our name and sale of our books; advertising and
      promotion revenue represents the revenue earned by National Lampoon Networks
      which includes online and cable advertising and street promotions; and travel
      services represents the revenues earned by National Lampoon Tours,
      Inc.




**Licensing
      Revenue and Publishing Revenue**




Licensing
      and publishing revenues were $4,078,738 for the year ended July 31, 2007, as
      compared to $1,027,572 for the year ended July 31, 2006, representing an
      increase of $3,051,166 or 296%. The increase for the twelve month period was
      primarily attributable to a settlement of prior royalties in the amount of
      $2.9
      million. Television license revenues were $117,796 for the year ended July
      31,
      2007, as compared to $181,848 for the year ended July 31, 2006, representing
      a
      decrease of $64,052 or 35%. The decrease for the twelve month period was due
      to
      reduced royalties from Dorm Daze and decreased pay per view receipts from Strip
      Poker. Internet license revenues were $123,403 for the year ended July 31,
      2007,
      as compared to none for the year ended July 31, 2006. Video royalty revenues
      were $802,737 for the year ended July 31, 2007, as compared to $24,402 for
      the
      year ended July 31, 2006, representing an increase of $778,335 or 3,190%. The
      increase for the twelve month period was primarily attributable to a settlement
      of outstanding video royalties in the amount of $370,600. Publishing revenues
      net of reserve for returns were $125,891 for the year ended July 31, 2007,
      as
      compared to $89,912 for the year ended July 31, 2006, representing an increase
      of $35,979 or 40%. The increase for the twelve month period was due to the
      increased number of books published.





Costs
      related to licensing revenues were $155,842 for the year ended July 31, 2007,
      as
      compared to $231,386 for the year ended July 31, 2006, representing a decrease
      of $75,544 or 32%. The decrease for the twelve month period was primarily
      attributable to a decrease in commissions of $22,498 arising from a change
      in
      the commission structure for one of our executives, as well as a reduction
      in
      the estimate of license fees due on a title released in a prior period.




**Advertising
      and Promotion Revenues**




Advertising
      and promotion revenues totaled $1,975,827 during the year ended July 31, 2007,
      as compared to $2,283,610 for the year ended July 31, 2006, representing a
      decrease of $307,783 or 13%. Of the $1,975,827 in advertising and promotion
      revenues we earned, $1,688,606 was earned by National Lampoon Networks during
      the 2007 fiscal year, as compared to $2,249,673 earned by National Lampoon
      Networks during the 2006 fiscal year. The decrease in revenue was the result
      of
      a $714,361 decrease in promotion revenues mainly due to a reduced number of
      field promotion events. This was partially offset by an increase in Internet
      advertising on our new websites of $457,306 and product placement revenues
      of
      $85,000. We continue to expand and improve our digital distribution and
      entertainment capabilities resulting in increased revenue from our network
      and
      affiliate network of internet websites. Going forward, we expect to focus our
      resources on increasing revenues generated from our internet websites and from
      product placement. While we intend to continue providing field promotion
      services at events held by third parties, we intend to decrease the number
      of
      field promotion events we produce.


21


Costs
      related to advertising revenues include bandwidth usage fees, website
      development costs, and content conversion costs along with some amortization
      of
      capitalized television production costs. We incur costs related to promotion
      revenues based on direct costs of live events and promotion of third-party
      feature films, which are expensed as they are incurred. Cost of advertising
      and
      promotion revenue was $1,608,195 during the year ended July 31, 2007, as
      compared to $2,398,021 for the year ended July 31, 2006, representing a decrease
      of $789,826 or 33%. Costs related to our cable network and internet websites
      decreased by $324,484. The decrease was primarily due to our use of free airtime
      from the colleges, instead of paying for cable airtime from various carriers.
      We
      also realized costs associated with the launch of the new websites which offset
      all profit margins associated with advertising sales on the internet. Many
      of
      these costs are nonrecurring and we have reduced our internet servicing costs
      by
      up to 50% beginning in the 2007 fiscal year. Costs related to live events
      decreased by $60,623 due to a reduced number of live events. Costs of marketing
      and promotion for our movies and other events decreased by $636,292 due to
      fewer
      movies being released in the current year. We expect costs related to marketing
      and promoting movies to increase in the future as we release the films we
      produce and as we distribute films produced by third parties. **** Furthermore,
      promotions in 2006 were sold at or near cost as an incentive for our customers
      to purchase licensing or media advertising from us.





**Production
      Revenues**





For
      the
      year ended July 31, 2007, production revenue was $44,500 as compared to $178,583
      for the same period in 2006. Production revenues decreased by $134,083, or
      75%
      due to fewer films being produced internally. We traditionally do not produce
      product unless we have a presale, minimum guarantee or co-production agreement
      in place. This reduces our financial risk as productions tend to be capital
      intensive. However, we are planning to expand our productions and we are
      negotiating with domestic pay television broadcasters and home video
      distributors for output arrangements which will guarantee us a minimum return
      on
      each new motion picture release. The output arrangement guarantees a
      pre-negotiated minimum guarantee or sales price for the licensing of a specific
      media and territory. As these output arrangements are signed, we will allocate
      additional internal resources to this segment of our business.





Costs
      related to production revenues in the amount of $146,578 are primarily the
      write
      down of the remaining capitalized costs of *National
      Lampoon’s Pledge This!* Amortization of capitalized film production costs was $598,273 for the twelve
      months ending July 31, 2007 consisting of $206,590 in amortization, and a net
      write off of $391,683. During the year ended July 31, 2007, a write-down of
      $408,897 was recorded for *Trick
      or Treat* aka *Monster
      Night* ,
      a film
      produced in the prior year. The write-down reflects our estimate of lower
      ultimate revenues. These lower revised ultimates are based on the results
      realized to date from the film’s domestic release and the unsuccessful
      international marketing efforts. The net book value and revised ultimates for *Trick
      or Treat* aka *Monster
      Night* is
      approximately $97,000. During
      the year ended July 31, 2007, the company and other members of Totally Baked,
      LLC, which produced the film titled “Totally Baked” agreed to dissolve their
      business relationship whereby the company relinquished its rights in the film
      in
      exchange for a release of obligations. The dissolution did not require any
      exchange of cash and the film will also not have any rights to use our brand.
      The remaining unamortized production costs and accrued interest at July 31,
      2007
      were amortized resulting in net gain of $17,214 during the year ended July
      31,
      2007. In addition, during the year ended July 31, 2007 another previously
      released film was written down for $125,000.




**Travel
      Services Revenues**





We
      earned
      no revenue from this segment of our business during the year ended July 31,
      2007. During the year, we did not organize any tours or travel related products.
      Instead, we generated revenue from sponsors by providing advertising and
      promotion services to spring break events promoted by third
      parties.


22


**Other
      Costs and Expenses**




Selling,
      General and Administrative Expenses. Selling, general and administrative
      expenses during the year ended July 31, 2007 were $4,586,633 as compared to
      $5,303,877 for the year ended July 31, 2006, a decrease of $717,244 or
      approximately 14%. During the year ended July 31, 2007, approximately 52% of
      our
      selling, general and administrative expenses consisted of salary expense
      totaling $2,400,375, as compared to salary expense of approximately $2,580,594,
      which has been adjusted down from $2,851,937 to exclude stock option expense
      in
      the amount of $271,343 that is disclosed separately in the paragraph below
      and
      which represented 48% of selling, general and administrative expenses for the
      year ended July 31, 2006. The decrease of $180,219 in salary expense for the
      year ended July 31, 2007 was primarily due to the separation from service of
      our
      former President and Chief Financial Officer, Douglas S. Bennett, as well as
      the
      closure of our New York office. During the year ended July 31, 2007, selling,
      general and administrative expenses also included consulting fees of $394,277
      as
      compared to $589,437 during the same period in the prior year as we reduced
      our
      reliance on consultants. Legal fees increased by $224, from $287,666 during
      the
      year ended July 31, 2006 to $287,890 for the same period in 2007. Investor
      and
      public relations costs increased by $84,814 from $204,416 for the period ended
      July 31, 2006 to $289,230 during the same period in 2007  .




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





Amortization
      of intangible assets, which consists of the costs of our acquisition and
      protection of the “National Lampoon” trademark, was approximately $242,502
      during the twelve months ended July 31, 2007.




During
      the year ended July 31, 2007, we recorded expenses of $1,051,653 associated
      with
      the granting of stock, options and warrants to employees, advisors and
      consultants as compared to expenses of $271,343 incurred for the year ended
      July
      31, 2006, for an increase of $780,310. The increase is primarily due to the
      implementation of SFAS No. 123R and grants of options to our chief executive
      officer pursuant to his employment contract, our former president pursuant
      to
      his severance and consulting agreement, new employees including an interim
      chief
      financial officer and directors.





Interest
      income earned during the year ended July 31, 2007 totaled $5,832, compared
      to
      $75,962 for the year ended July 31, 2006. Additional interest income of $70,130
      was realized in the prior period due to our increased cash position during
      the
      year ended July 31, 2006 as a result of the public offering completed on August
      8, 2005. No similar capital infusion occurred during the period ended July
      31,
      2007.





For
      the
      year ended July 31, 2007, we had a net loss of $2,504,170 as compared to a
      net
      loss of $6,859,085 for the year ended July 31, 2006, representing a decrease
      in
      net loss of $4,354,915 or 63%. The decrease in net loss for the year resulted
      primarily from the significant increase in revenue associated with license
      fees
      from a settlement along with increases in internet related advertising revenue
      and publishing. The decrease in expenses for the year was a result of decreases
      in advertising and promotion costs, tour revenue costs and selling, general
      and
      administrative costs, partially offset by an increase in the issuance of stock,
      warrants and options.





During
      the years ended July 31, 2007 and 2006, we had no provision for income taxes
      due
      to the significant net operating losses incurred in prior periods and related
      carry forward to the current period. We also accrued dividends of $1,230,896
      during the fiscal period ended July 31, 2007 and $1,327,524, during the same
      period in 2006 for a total of $3,432,663 at July 31, 2007. The addition of
      the
      accrued dividend resulted in a net loss attributable to common shareholders
      of
      $(3,735,066) or $(0.49) per basic and fully diluted share for the year ended
      July 31, 2007, as compared to a net loss attributable to common shareholders
      of
      $(8,186,609) or $(1.20) per basic and fully diluted share for the year ended
      July 31, 2006.


23


**Liquidity
      and Capital Resources**





With
      the
      exception of the first quarter of the fiscal year ending July 31, 2007, we
      have
      not generated positive cash flow from operations over the past few years. Our
      principal sources of working capital during the year ended July 31, 2007
      consisted of loans from our officers and directors and a settlement of $2.9
      million related to unpaid royalties.





For
      the
      year ended July 31, 2007, our net cash flow used in operating activities was
      $4,144,414 as compared to $5,712,436 of net cash flow used in operating
      activities during the year ended July 31, 2006. The
      decrease in cash flow usage from operations was primarily attributable to an
      increase in revenue partially offset by an increase in cash used for production
      costs. Cash
      provided by financing activities was $4,263,500 for the fiscal year ended July
      31, 2007, as compared to $5,736,314 for the fiscal year ended July 31,
      2006. The
      funds for the current period were obtained from officers and directors and
      a
      related party and were partially offset by the repayment of loans from officers
      and directors. Financing activities for the fiscal year ended July 31, 2006
      included funds obtained from the offering of our common stock that we undertook
      in August 2005 offset by the partial payment of notes payable to officers and
      directors and offering costs.




As
      of
      July 31, 2007, we had cash on hand of $85,706, which
      includes the payment of the settlement for unpaid royalties. We believe these
      funds, along with additional loans from our Chief Executive Officer and one
      member of our board of directors, will be adequate to fund our ongoing
      operations and capital requirements for the next twelve months. However, we
      have
      no commitment for these loans and our Chief Executive Officer and director
      are
      not required to make additional loans to us. If we do not receive these loans
      and if alternate sources of financing cannot be found, then we may not be able
      to continue to operate as a going concern.





Historically,
      our principal source of funds used for operations and working capital has been
      loans received from Daniel S. Laikin, our Chief Executive Officer, and Timothy
      Durham, a director, and a shareholder. The aggregate amount of the loans and
      accrued interest owed to these individuals at July 31, 2007 is $1,329,998. These
      obligations are payable on demand. We plan to pay these obligations from future
      revenues. In addition, Red Rock Picture Holdings, Inc. has provided the company
      with funds for movie production. The aggregate amount of the loans and accrued
      interest owed to Red Rock at July 31, 2007 is $3,657,408.





Our
      financial statements for the fiscal year ended July 31, 2007, contain an
      explanatory paragraph as to our ability to continue as a “going concern.” This
      qualification may impact our ability to obtain future financing.


On
        November 15, 2007 we received a letter from the American Stock Exchange which
        indicated that we are not in compliance with Sections 134 and 1101 of the
        Amex
        Company Guide because we did not file our annual report on Form 10-KSB for
        the
        fiscal year ended July 31, 2007 on or before October 29, 2007. We have until
        November 29, 2007 to provide the American Stock Exchange with a specific
        plan to
        achieve and sustain compliance with Sections 134 and 1101 of the Amex Company
        Guide. Compliance must be achieved no later than February 15, 2008. If we
        either
        fail to submit a plan or if we submit a plan and the staff of the American
        Stock
        Exchange determines that it does not adequately address these issues, the
        American Stock Exchange will provide written notification that our securities
        will be delisted. We may appeal this decision. By filing this annual report
        on
        Form 10-KSB, we expect to regain compliance with Sections 134 and 1101 of
        the
        Amex Company Guide.




**Off-Balance
      Sheet Arrangements**




We
      do not
      have any off-balance sheet transactions such as guarantees, commitments, lease
      and debt agreements or other agreements that could trigger an adverse change
      in
      our credit rating, earnings, cash flows or stock price, including requirements
      to perform under standby agreements.


**Contractual
        Obligations**




The
      table
      below sets forth our contractual obligations as of July 31, 2007.





Payments
                Due by PeriodTotal
            
            Less
                than 1 year
            
            1
                -
                3 years
            
            3
                -
                5 years
            
            More
                than 5 yearsProduction
                loan, related party
            
            $
            3,728,545
            
            $
            3,728,545
            
            $
            —
            
            $
            —
            
            $
            —Notes
                Payable, related party
            
            $
            1,258,862
            
            $
            1,258,862
            
            $
            —
            
            $
            —
            
            $
            —


24


**Recent
      Accounting Pronouncements**





In
      June
      2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48,
      "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109," which seeks to reduce the diversity in practice associated with the
      accounting and reporting for uncertainty in income tax positions. This
      Interpretation prescribes a comprehensive model for the financial statement
      recognition, measurement, presentation and disclosure of uncertain tax positions
      taken or expected to be taken in an income tax return. FIN 48 presents a
      two-step process for evaluating a tax position. The first step is to determine
      whether it is more-likely-than-not that a tax position will be sustained upon
      examination, based on the technical merits of the position. The second step
      is
      to measure the benefit to be recorded from tax positions that meet the
      more-likely-than-not recognition threshold, by determining the largest amount
      of
      tax benefit that is greater than 50 percent likely of being realized upon
      ultimate settlement, and recognizing that amount in the financial statements.
      FIN 48 is effective for fiscal years beginning after December 15, 2006.
      Management believes the adoption of FIN 48 will not have a material impact
      on
      the Company’s results of operations, financial position or cash
      flow.




In
      February 2007, the Financial
      Accounting Standards Board (FASB) issued
      FASB Statement No. 159, “The Fair Value Option for Financial Assets and
      Financial Liabilities — including an amendment of FASB Statement
      No. 115” (FAS 159). ** FAS 159,
      which becomes effective for the company on January 1, 2008, permits
      companies to choose to measure many financial instruments and certain other
      items at fair value and report unrealized gains and losses in earnings. Such
      accounting is optional and is generally to be applied instrument by instrument.
      The company does not anticipate that election, if any, of this fair-value option
      will have a material effect on its consolidated ** financial
      condition, results of operations, cash flows or disclosures.





In
      September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
      Value Measurements,” which establishes a framework for measuring fair value in
      accordance with GAAP and expands disclosures about fair value measurements.
      FAS
      157 does not require any new fair value measurements but rather eliminates
      inconsistencies in guidance found in various prior accounting pronouncements.
      FAS 157 is effective for fiscal years beginning after November 15, 2007.
      The Company is currently evaluating the impact this standard will have on its
      consolidated ** financial
      condition, results of operations, cash flows or disclosures.





**Factors
      Affecting Business, Operating Results and Financial Condition**





**Risks
      Related To Our Business Operations**





***We
      have incurred losses in the past and losses may continue.***





We
      sustained a net loss of $2,504,170 and a net loss attributable to common
      stockholders of $3,735,066 for the fiscal year ended July 31, 2007. As of July
      31, 2007, we had an accumulated deficit of $41,257,284. Our last profitable
      quarter was the quarter ended October 31, 2006 and our last profitable fiscal
      year was the fiscal year ended July 31, 2000. We may not attain operating
      profits in the future.





***We
      may be unable to meet our future capital requirements*** **.** ***If
      we are unable to raise capital as we need it, we may have to curtail our
      operations.***




We
      have
      not generated positive cash flow from operations over the past few years. Our
      capital requirements have been and will continue to be significant. In order
      to
      fund shortages of capital during the past two fiscal years, we have borrowed
      money from our major stockholders and sold our securities.


25


If
      we
      need to raise additional capital in the future and we are unsuccessful in
      finding financing, we may be required to severely curtail our operations, which
      would have a material adverse affect on our business.





***Our
      revenues and results of operations vary from quarter to quarter. If we fail
      to
      project accurately and experience significant revenue shortfalls, we could
      be
      forced to discontinue a portion or all of our operations.***





Our
      revenues and results of operations depend to a significant degree upon the
      timing and receipt of revenue from licensing, production fees and distribution
      of motion pictures and television programming. While most of our licensing
      fees
      are paid immediately upon entering into the license agreements, some are
      deferred until the licensor’s production costs are recouped. Production fees are
      not earned until the production is begun and expenses related to the production
      are incurred. Third-party motion pictures often have long production cycles,
      making it difficult to predict when they will be completed and released for
      distribution. All of these factors make it difficult to predict with certainty
      when revenues might be received. Results in any particular quarter may not
      be
      indicative of results in subsequent periods.





If,
      because of the variance in our quarterly operating results, we fail to plan
      or
      project accurately, we could be subject to unexpected revenue shortfalls. If
      we
      were unable to find financing to cover the revenue shortfalls, we could have
      to
      discontinue a portion or all of our operations for some period of time or even
      indefinitely.





***We
      enter into agreements to develop ideas and properties, however; we may decide
      to
      abandon a project rather than to complete the development of it.***





We
      pursue
      the acquisition of ideas and properties for original production from a number
      of
      sources. For example, we may internally develop a new property based on an
      existing public domain property or create or acquire an entirely new idea.
      Oftentimes, we enter into agreements with third parties to develop these ideas
      and properties. After we start development, we may determine that the project
      is
      too costly to develop or not suited to our purposes, in which case we may
      abandon the project. We cannot assure you that we will develop every project
      we
      acquire.





***Competition
      in the entertainment industry is intense for many reasons, including the fact
      that the industry is dominated by multinational, multi-media conglomerates.
      Because of our lack of money and other resources, we may not be able to compete
      successfully with other producers of entertainment.***





The
      entertainment industry is intensely competitive and is evolving into an industry
      in which certain multi-national, multi-media entities, because of their control
      over key film, magazine, and/or television content, as well as key network
      and
      cable outlets, will be able to dominate certain communications industry
      activities in the United States and abroad. Virtually all of these competitors
      are substantially larger than we are, have been in business longer than we
      have
      and have more resources, including money, contacts and personnel, at their
      disposal. These competitors have numerous advantages over us, including the
      ability to acquire financing for their projects and attract superior properties,
      personnel, actors and/or celebrity hosts.





In
      spite
      of the strength of our brand, we may not be able to compete successfully in
      the
      entertainment industry because of our lack of resources. If we cannot compete
      successfully, our business and operating results will be adversely affected.


26


***We
      depend on the National LampoonTM trademark and related properties for a
      significant portion of our revenue. Any erosion of our brand could have a
      material adverse effect on our business.***





Our
      revenue is primarily derived from exploitation of the National LampoonTM
trademark. Any erosion of brand recognition of that trademark and its related
      properties or our failure to adequately protect our intellectual property could
      have a material adverse effect on our business, results of operations and
      financial position. Our business also depends upon the protection of the
      intellectual property rights that we have in our entertainment properties.
      Despite our efforts to protect our proprietary rights, unauthorized parties
      may
      attempt to copy or otherwise obtain and exploit our products. Monitoring
      unauthorized use of our products is difficult, and we cannot be certain that
      the
      steps we have taken will prevent unauthorized use of our film properties,
      particularly in foreign countries where the laws may not protect our proprietary
      rights as fully as in the United States.





In
      recent
      years, there has been significant litigation in the United States involving
      intellectual property rights. We may become a party to litigation in the future
      to protect our intellectual property rights or as a result of the alleged
      infringement of someone else’s intellectual property. These claims and any
      resulting lawsuits could subject us to significant liability and invalidation
      of
      our property rights. Such litigation could also force us to take measures
      harmful to our operations, such as requiring us to stop selling certain products
      or to obtain a license from the owner of infringed intellectual property. Any
      such infringement claims, with or without merit, could be time-consuming to
      defend, result in costly litigation, divert management’s attention from our
      business and materially adversely affect our financial condition and results
      of
      operations





***We
      depend on the services of Daniel S. Laikin. If we were to lose Mr. Laikin’s
      services, it could have a material, adverse effect on our business.***





We
      are
      dependent upon the services of Daniel S. Laikin, our Chief Executive Officer
      and
      one of our directors. The loss of his services could have a material adverse
      effect on our business, results of operations and financial position. We do
      not
      carry key-person life insurance on Mr. Laikin.





***Termination
      of our agreement with The Harvard Lampoon, Inc. would adversely affect our
      business and results of operations.***





We
      license the use of the word “LampoonTM” from The Harvard Lampoon, Inc. pursuant
      to an agreement we originally entered into on October 8, 1969. Pursuant to
      this
      agreement, as it was amended and restated on October 1, 1998, we would lose
      our
      right to use the word “Lampoon” in our mark if, for a period of 12 consecutive
      months, we failed to be actively engaged in good faith efforts to produce or
      to
      market our products and services. Loss of the use of the word “Lampoon” in our
      mark would have a material adverse effect on our business and results of
      operations.





***Our
      dependence on a limited number of projects means that the loss or failure of
      a
      major project could have a material adverse effect on our business.***





A
      portion
      of our revenue is generated from a limited number of films, television programs,
      and other projects that change from period to period. Projects vary from period
      to period due to the opportunities available to us and to audience response,
      both of which are unpredictable and subject to change. The loss or failure
      of a
      major project, unless replaced by other projects, could have a material adverse
      effect on our results of operations and financial condition as well as on the
      market price of our securities. There is no assurance that any project we
      release will be successful.





***Failure
      to attract and retain qualified personnel may adversely affect our
      business.***





We
      believe that our performance and future success will depend in large part upon
      our ability to attract and retain highly skilled creative, technical, sales,
      marketing and financial personnel, especially those with experience in the
      television industry, as and when we need them. If we do not succeed in
      attracting skilled personnel when we need them or in retaining our current
      personnel, our business could be adversely affected. Competition for such
      individuals, especially creative and technical talent, is intense. We have
      in
      the past experienced, and expect to continue to experience, difficulty in hiring
      highly skilled employees with appropriate qualifications.


27


**Risks
      Related To National Lampoon Networks, Inc.**





***If
      National Lampoon Networks, Inc. is not successful in increasing its advertising
      revenues, it may not be able to operate profitably.***





During
      the 2007 fiscal year, advertising, promotion and licensing revenue earned by
      our
      subsidiary, National Lampoon Networks, Inc., accounted for approximately 28%
      of
      all the revenue we earned. National Lampoon Networks, Inc. earns advertising
      revenue through its various internet websites, on-air advertising during its
      programming as well as through live promotional events and field marketing,
      such
      as product sampling. Our plan is to increase our revenue by increasing National
      Lampoon Networks’ online programming and expanding its network. If National
      Lampoon Networks, Inc. is unable to continue to increase its programming and
      expand its internet network as planned, it may not be able to operate
      profitably.





***National
      Lampoon Networks, Inc. depends on a limited number of advertisers. The loss
      of a
      significant portion of these advertisers could adversely affect its advertising
      revenues.***





We
      anticipate that National Lampoon Networks’ operating results will continue to
      depend to a significant extent upon revenues from a small number of advertisers.
      There may be little or no continuity in advertisers from period to period
      because few advertisers are contractually obligated to renew their advertising
      contracts or to purchase set amounts of advertising in the future. As a result,
      the failure of National Lampoon Networks, Inc. to renew advertising contracts,
      to replace advertisers who do not choose to continue advertising on the network
      or to sell its expected minimum number of advertisements could adversely affect
      our advertising revenues.





***Sales
      cycles vary for advertising and may cause our revenues for one or more quarterly
      periods to be adversely affected.***





The
      advertisers’ sales cycles for advertising may vary significantly. The time
      between the date of initial contact with a potential advertiser or sponsor
      and
      receipt of a purchase order may range from as little as six weeks to up to
      nine
      months. In addition, during these sales cycles, we may expend substantial funds
      and management resources but not generate advertising revenues. Therefore,
      if
      these sales are delayed or do not occur, our revenues for one or more quarterly
      periods may be adversely affected.





Aside
      from budgetary cycles, our receipt of advertising revenues may be delayed due
      to
      things over which we have little or no control, including the following:





·
            advertisers’
                budgetary constraints;





·
            the
                timing of completion of advertisements by advertisers; and





·
            the
                possibility of cancellation or delay of projects by advertisers or
                sponsors.




***Tracking
      and measurement standards for advertising are evolving and create uncertainty
      with advertisers, which may lead to a decrease in advertising
      revenue.***





The
      absence or insufficiency of advertising measurement standards could adversely
      impact our ability to attract and retain advertisers. There are currently few
      well-established advertising measurement standards, and the industry may need
      to
      standardize these measurements. We cannot assure you that standardization will
      occur.


28


It
      is
      important to our advertisers that we accurately measure the demographics of
      our
      user base and the delivery of advertisements on our network. We depend on third
      parties to provide certain of these measurement services. If they are unable
      to
      provide these services in the future, we would need to perform them ourselves
      or
      obtain them from another provider, if available. This could cause us to incur
      additional costs or cause interruptions in our business during the time we
      are
      replacing these services. Companies may choose to not advertise on our network
      or may pay less for advertising if they do not perceive our measurements or
      measurements made by third parties to be reliable.





***In
      order to be successful, National Lampoon Networks must manage its growth. If
      growth is not managed successfully, it could have a material adverse effect
      on
      our operations.***





We
      are
      planning to expand National Lampoon Networks’ operations by continuing to expand
      its internet network. If we are successful in expanding National Lampoon
      Networks’ business, it will be exposed to greater overhead, marketing and
      support costs and other risks associated with expansion. To manage its growth
      effectively, National Lampoon Networks must improve and expand its general
      operations and hire and manage additional personnel. We cannot assure you that
      National Lampoon Networks, Inc. will be able to effectively do this. If growth
      is not effectively managed, our business and operations may be materially
      adversely affected.





***Failure
      to continue to develop content that attracts National Lampoon Networks’ targeted
      audience or a decline in the strength of the National LampoonTM brand could cause
      a decrease in the size of the audience or it could change the demographics
      of
      the audience, resulting in a loss of advertising
      revenue.***





The
      future success of National Lampoon Networks depends on its ability to continue
      to develop or license content that is interesting and engaging to its targeted
      audience, which is primarily comprised of young adults. In addition, the success
      of its business will depend, to a large extent, upon the continued brand
      strength of the National LampoonTM trademark and associated logos. The strength
      of the brand will depend, among other things, upon continued promotion of the
      brand by National Lampoon Networks. If the young adult audience determines
      that
      National Lampoon Networks’ content does not reflect its tastes, or if the tastes
      of the young adult audience change and we do not react to those changes
      effectively or in a timely manner, or if our brand becomes less appealing to
      young adults, then audience size could decrease or the demographic
      characteristics of the audience could change. Any such occurrence would
      adversely affect the ability of National Lampoon Networks to attract advertisers
      and may also negatively impact our revenues.





***If
      significant comedic content developed by third parties is not available to
      us on
      favorable terms or at all, it could adversely affect our business.***





Because
      much of National Lampoon Networks’ content is provided by third parties at
      minimal or no charge, we depend on our good relations with our content providers
      to offer content that we believe appeals to National Lampoon Networks’ audience.
      Some of our content providers are also competitors, and in the future may decide
      to limit our access to content or change prices or demand terms that are
      unfavorable or discriminatory. Neither we nor National Lampoon Networks have
      long-term contracts with our content providers, and we cannot assure you that
      they will continue to make their content available to us on reasonable terms
      or
      at all. If content providers charge significant fees for their content or
      otherwise alter or discontinue their relationships with us or with National
      Lampoon Networks, it would adversely affect our business and competitive
      position.


29


**ITEM
        7. FINANCIAL STATEMENTS**
 The
                    financial statements, together with the independent auditors'
                    report thereon,
                    appear beginning on page F-1 of this
                    report.
  Reports
                    Of Independent Registered Public Accounting Firms
                F-1,
                    F-2Consolidated
                    Balance Sheet at July 31, 2007
                F-3Consolidated
                    Statements of Operations for the Years Ended July 31, 2007 and
                    2006
                F-4Consolidated
                    Statements of Shareholders' Deficit for the Years Ended July
                    31, 2007 and
                    2006
                F-5Consolidated
                    Statements of Cash Flows for the Years Ended July 31, 2007 and
                    2006
                F-6Notes
                    to Consolidated Financial Statements
                F-7
  REPORT
        OF
        INDEPENDENT REGISTERED ACCOUNTING FIRM
  To
        the
        Board of Directors of National Lampoon, Inc.:
 
 We
        have
        audited the accompanying consolidated balance sheet of National Lampoon,
        Inc.
        and Subsidiaries (the "Company"), as of July 31, 2007 and the related
        consolidated statements of operations, shareholders' deficit and cash flows
        for
        the year then ended. 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 audit.
 
 We
        conducted our audit in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the 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 audit provides a
        reasonable basis for our opinion.
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly
        in all material respects, the consolidated financial position of National
        Lampoon, Inc and Subsidiaries as of July 31, 2007, and the results of their
        operations and their consolidated cash flows for the year then ended, in
        conformity with accounting principles generally accepted in the United States
        of
        America.
  The
        accompanying financial statements have been prepared assuming that the Company
        will continue as a going concern. As discussed in Note A to the financial
        statements, the Company had a working capital deficiency of $7,196,255 and
        accumulated deficit of $41,257,284 as of July 31, 2007 and a net loss of
        $2,504,170 for the year ended July 31, 2007. These factors raise substantial
        doubt about its ability to continue as a going concern. Management’s plan in
        regards to these matters is also described in Note A. These financial statements
        do not include any adjustments that might result from the outcome of this
        uncertainty.
  /s/
        WEINBERG & COMPANY, P.A.
  WEINBERG
        & COMPANY, P.A.
 
 Los
        Angeles, California
 November
        9, 2007
 F-1
 REPORT
        OF
        INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  **Board
        of Directors National Lampoon, Inc.,**
  **West
        Hollywood, California**
  We
        have
        audited the accompanying consolidated statements of operations, shareholders
        (deficit) and cash flows of National Lampoon, Inc. and Subsidiaries (the
        Company) for the year ended July 31, 2006. These consolidated financial
        statements are the responsibility of the Company's management. Our
        responsibility is to express an opinion on these consolidated financial
        statements based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the
        consolidated financial statements are free of material misstatement. An audit
        includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the consolidated financial statements. We
        were
        not engaged to perform an audit of the Company’s internal control over financial
        reporting. Our audit included consideration of internal control over financial
        reporting as a basis for designing audit procedures that are appropriate
        in the
        circumstances, but not for the purpose of expressing an opinion on the
        effectiveness of the Company’s internal control over financial reporting.
        Accordingly, we express no such opinion. An audit also 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.
  In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the results of consolidated operations and their
        consolidated cash flows for year ended July 31, 2006 in conformity with
        accounting principles generally accepted in the United States.
  The
        accompanying consolidated financial statements have been prepared assuming
        that
        the Company will continue as a going concern. As discussed in Note A to the
        consolidated financial statements, the Company's net loss and negative working
        capital raise substantial doubt about its ability to continue as a going
        concern. Management's plans concerning these matters are also discussed in
        Note
        A. The consolidated financial statements do not include any adjustments that
        might result from the outcome of this uncertainty.
 
 
 /s/
        Stonefield Josephson, Inc.
 
 Los
        Angeles, California
 November
        1, 2006
 F-2
 **NATIONAL
                    LAMPOON, INC. AND SUBSIDIARIES**CONSOLIDATED
                    BALANCE SHEET____________
 As
                    ofASSETS
                
                July
                    31, 2007CURRENT
                    ASSETSCash
                
                $
                85,706Accounts
                    receivable, net of reserves of $461,810
                
                
                358,342Prepaid
                    expenses and other current assets
                
                
                65,182Total
                    current assets
                
                
                509,230NON-CURRENT
                    ASSETSFixed
                    assets, net of accumulated depreciation of $177,510
                
                
                37,431Capitalized
                    production costs, net of $4,355,191 of amortization
                
                
                5,483,508Capitalized
                    publishing costs, net of $381,284 of amortization
                
                
                62,179Intangible
                    assets, net of accumulated amortization of $4,471,786
                
                
                1,608,499Total
                    non-current assets
                
                
                7,191,617TOTAL
                    ASSETS
                
                $
                7,700,847LIABILITIES
                    AND SHAREHOLDERS' DEFICITCURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                929,606Accrued
                    expenses
                
                
                552,699Notes
                    payable - related party, including interest of $42,734
                
                
                1,258,862Production
                    loans - related party, including interest of $89,729
                
                
                3,728,545Deferred
                    income
                
                
                1,235,773TOTAL
                    CURRENT LIABILITIES
                
                
                7,705,485COMMITMENTS
                    AND CONTINGENCIESAccrued
                    dividends payable in common stock
                
                
                3,432,663SHAREHOLDERS'
                    DEFICITSeries
                    B Convertible Preferred Stock, par value $.0001 per share, 68,406
                    shares
                    authorized, 63,607 shares issued and outstanding
                
                
                6Series
                    C Convertible Preferred Stock, par value $.0001 per share, 250,000
                    shares
                    authorized, 190,947 shares issued and outstanding
                
                
                18Common
                    Stock, par value $.0001 per share, 60,000,000 shares authorized,
                    8,207,189
                    shares issued and outstanding
                
                
                821Additional
                    paid-in capital
                
                
                37,819,138Accumulated
                    deficit
                
                
                (41,257,284
                )TOTAL
                    SHAREHOLDERS' DEFICIT
                
                
                (3,437,301
                )TOTAL
                    LIABILITIES AND SHAREHOLDERS' DEFICIT
                
                $
                7,700,847
 The
          accompanying notes are an integral part of these consolidated financial
          statements.
 F-3
 **NATIONAL
                  LAMPOON, INC. AND SUBSIDIARIES**CONSOLIDATED
                  STATEMENTS OF OPERATIONS
  Year
                  EndedJuly
                  31,2007
              
              2006REVENUESProduction
              
              $
              44,500
              
              $
              178,583Licensing
              
              
              3,952,847
              
              
              931,738Tours
              
              
              -
              
              
              197,929Advertising
                  & Promotion
              
              
              1,975,827
              
              
              2,283,610Publishing
              
              
              125,891
              
              
              95,834Total
                  revenues
              
              
              6,099,065
              
              
              3,687,694COSTS
                  AND EXPENSESCosts
                  related to production revenue
              
              
              146,578
              
              
              38,560Costs
                  related to licensing revenue
              
              
              155,842
              
              
              231,386Costs
                  related to tours revenues
              
              
              -
              
              
              710,754Costs
                  related to advertising and promotion revenues
              
              
              1,608,195
              
              
              2,398,021Amortization
                  of capitalized television production costs
              
              
              206,590
              
              
              274,257Impairment
                  of capitalized television costs
              
              
              -
              
              
              266,038Amortization
                  of intangible assets
              
              
              242,502
              
              
              240,706Impairment
                  of capitalized film costs
              
              
              391,683
              
              
              670,134Amortization
                  debt issuance costs
              
              
              -
              
              
              313,000Provision
                  for doubtful accounts
              
              
              199,419
              
              
              174,625Selling,
                  general and administrative expenses
              
              
              4,586,633
              
              
              5,303,877Stock
                  options and warrants issued for services
              
              
              1,051,653
              
              
              271,343Total
                  costs and expenses
              
              
              8,589,095
              
              
              10,892,701OPERATING
                  LOSS
              
              
              (2,490,030
              )
              
              (7,205,007
              )OTHER
                  INCOME (EXPENSE)Interest
                  income
              
              
              5,832
              
              
              75,962Interest
                  expense
              
              
              (51,299
              )
              
              (37,232
              )Equity
                  in investee loss
              
              
              (800
              )
              
              -Other
                  income
              
              
              32,127
              
              
              57,386Total
                  other income (expense)
              
              
              (14,140
              )
              
              96,116NET
                  LOSS BEFORE MINORITY INTEREST
              
              
              (2,504,170
              )
              
              (7,108,891
              )Minority
                  Interest In Income of Consolidated Subsidiary
              
              
              -
              
              
              249,806NET
                  LOSS
              
              
              (2,504,170
              )
              
              (6,859,085
              )Preferred
                  stock dividends
              
              
              (1,
                  230,896
              )
              
              (1,327,524
              )Net
                  loss attributable to common shareholders
              
              $
              (3,735,066
              )
              $
              (8,186,609
              )Net
                  loss per share attributable to common shareholder - basic and
                  diluted
              
              $
              (0.49
              )
              $
              (1.20
              )Weighted
                  average number of common shares - basic and diluted
              
              
              7,691,520
              
              
              6,803,080
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
 F-4
 **NATIONAL
                    LAMPOON, INC. AND
                    SUBSIDIARIES**CONSOLIDATED
                    STATEMENTS OF SHAREHOLDERS' DEFICITFor
                    the Years Ended July 31, 2007 and
                    2006
  Preferred
                    Stock
                
                Common
                    Stock
                
                AdditionalSeries
                    B
                
                Series
                    C
                
                Stock
                
                
                
                
                
                Paid-in
                
                AccumulatedShares
                
                Shares
                
                Amount
                
                Stock
                
                Amount
                
                Capital
                
                Deficit
                
                Total**Balance
                    at August 1, 2005**
                
                
                63,607
                
                
                229,761
                
                $
                29
                
                
                3,527,124
                
                $
                353
                
                $
                29,327,846
                
                $
                (31,894,029
                )
                $
                (2,565,801
                )Exercise
                    of stock options for cash
                
                
                -
                
                
                -
                
                
                -
                
                
                13,333
                
                
                1
                
                
                20,982
                
                
                -
                
                
                20,983Exercise
                    of stock options (cashless)
                
                
                -
                
                
                -
                
                
                -
                
                
                20,911
                
                
                2
                
                
                (2
                )
                
                -
                
                
                -Exercise
                    of warrants for common stock
                
                
                -
                
                
                -
                
                
                -
                
                
                188,996
                
                
                19
                
                
                334,981
                
                
                -
                
                
                335,000Conversion
                    of Series C shares into Common Shares
                
                
                -
                
                
                (5,000
                )
                
                (1
                )
                
                100,000
                
                
                10
                
                
                (9
                )
                
                -
                
                
                -Deferred
                    compensation expense
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                271,343
                
                
                -
                
                
                271,343Common
                    stock issued for services
                
                
                -
                
                
                -
                
                
                -
                
                
                83,850
                
                
                8
                
                
                282,172
                
                
                -
                
                
                282,180Stock
                    options issued for services
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                -
                
                
                
                
                
                -Series
                    B Dividend accrual
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (572,463
                )
                
                -
                
                
                (572,463
                )Series
                    C Dividend accrual
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (738,530
                )
                
                -
                
                
                (738,530
                )Common
                    Stock Offering closed August 8, 2005
                
                
                -
                
                
                -
                
                
                -
                
                
                3,200,000
                
                
                320
                
                
                8,320,295
                
                
                -
                
                
                8,320,615Net
                    Loss for the period
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (6,859,085
                )
                
                (6,859,085
                )**Balance
                    at July 31, 2006**
                
                
                63,607
                
                
                224,761
                
                
                28
                
                
                7,134,214
                
                
                713
                
                
                37,246,615
                
                
                (38,753,114
                )
                
                (1,505,758
                )Exercise
                    of stock options for cash
                
                
                -
                
                
                -
                
                
                -
                
                
                82,100
                
                
                8
                
                
                131,802
                
                
                -
                
                
                131,810Stock
                    issued for services
                
                
                -
                
                
                -
                
                
                -
                
                
                192,232
                
                
                19
                
                
                358,125
                
                
                -
                
                
                358,144Exercise
                    of warrants for common stock
                
                
                -
                
                
                -
                
                
                -
                
                
                5,055
                
                
                1
                
                
                8,999
                
                
                -
                
                
                9,000Conversion
                    of Series C shares into Common Shares
                
                
                -
                
                
                (33,814
                )
                
                (4
                )
                
                676,280
                
                
                68
                
                
                (64
                )
                
                -
                
                
                -Conversion
                    of accrued dividends into Common Shares
                
                
                -
                
                
                -
                
                
                -
                
                
                111,108
                
                
                11
                
                
                239,265
                
                
                -
                
                
                239,276Fair
                    value of options & warrants issued to consultants
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                646,333
                
                
                -
                
                
                646,333Fair
                    value of vesting of employee stock options
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                405,320
                
                
                -
                
                
                405,320Employee
                    bonuses paid in common stock
                
                
                
                
                
                
                
                
                
                
                
                6,200
                
                
                1
                
                
                13,639
                
                
                
                
                
                13,640Series
                    B Dividend accrual
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (572,463
                )
                
                -
                
                
                (572,463
                )Seriec
                    C Dividend accrual
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (658,433
                )
                
                -
                
                
                (658,433
                )Net
                    Loss for the period
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                -
                
                
                (2,504,170
                )
                
                (2,504,170
                )**Balance
                    at July 31, 2007**
                
                
                63,607
                
                
                190,947
                
                $
                24
                
                
                8,207,189
                
                $
                821
                
                $
                37,819,138
                
                $
                (41,257,284
                )
                $
                (3,437,301
                )
  The
          accompanying notes are an integral part of these consolidated financial
          statements.
 F-5
 **NATIONAL
                    LAMPOON, INC. AND SUBSIDIARIES**CONSOLIDATED
                    STATEMENTS OF CASH FLOWS
  Year
                    Ended July 31,2007
                
                2006CASH
                    FLOWS FROM OPERATING ACTIVITIESNet
                    Loss
                
                $
                (2,504,170
                )
                $
                (6,859,085
                )Adjustments
                    to reconcile net loss to net cash used in operating
                    activities:Depreciation
                
                
                13,669
                
                
                15,973Amortization
                    of intangible assets
                
                
                242,502
                
                
                240,706Amortization
                    of debt issuance costs
                
                
                -
                
                
                313,000Amortization
                    of capitalized production costs
                
                
                206,590
                
                
                274,257Impairment
                    of capitalized television costs
                
                
                -
                
                
                266,038Impairment
                    of capitalized film costs
                
                
                391,683
                
                
                670,134Stock,
                    options and warrants issued for services
                
                
                1,423,437
                
                
                553,523Provision
                    for losses on accounts receivable
                
                
                199,419
                
                
                174,625Minority
                    interest in loss of consolidated subsidiary
                
                
                -
                
                
                (249,806
                )Undistributed
                    loss of equity investment
                
                
                800
                
                
                -Changes
                    in assets and liabilities:Decrease/(increase)
                    in accounts receivable
                
                
                192,649
                
                
                (602,711
                )(Increase)/decrease
                    in prepaid expenses and other assets
                
                
                (6,360
                )
                
                133,893Decrease/(increase)
                    in publishing costs
                
                
                23,673
                
                
                (85,852
                )Increase
                    in production costs
                
                
                (5,147,941
                )
                
                (713,588
                )(Decrease)/increase
                    in accounts payable
                
                
                (21,353
                )
                
                488,314(Decrease)
                    in accrued expenses
                
                
                (138,517
                )
                
                (409,625
                )Increase
                    in deferred revenues
                
                
                979,505
                
                
                256,268Decrease
                    in common stock owed
                
                
                -
                
                
                (178,500
                )NET
                    CASH USED IN OPERATING ACTIVITIES
                
                
                (4,144,414
                )
                
                (5,712,436
                )CASH
                    FLOWS FROM INVESTING ACTIVITIES:Purchase
                    of fixed assets
                
                
                (33,528
                )
                
                (18,071
                )Purchase
                    of intangible assets
                
                
                (73,653
                )
                
                (41,901
                )Investment
                    in equity securities
                
                
                (800
                )
                
                -NET
                    CASH USED IN INVESTING ACTIVITIES
                
                
                (107,981
                )
                
                (59,972
                )CASH
                    FLOWS FROM FINANCING ACTIVITIES:Proceeds
                    from issuance of common stock
                
                
                -
                
                
                9,600,000Payments
                    related to the issuance of common stock
                
                
                -
                
                
                (1,279,386
                )Payments
                    of notes payable
                
                
                (675,834
                )
                
                (3,661,851
                )Payments
                    of production loans
                
                
                (765,121
                )
                
                -Borrowings
                    of productions loans
                
                
                4,199,753
                
                
                -Proceeds
                    from the exercise of stock options
                
                
                131,810
                
                
                20,983Proceeds
                    from the exercise of warrants
                
                
                9,000
                
                
                335,000Proceeds
                    from notes payable
                
                
                1,363,892
                
                
                721,568NET
                    CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                4,263,500
                
                
                5,736,314NET
                    INCREASE/(DECREASE) IN CASH
                
                
                11,105
                
                
                (36,094
                )CASH
                    AT BEGINNING OF YEAR
                
                
                74,601
                
                
                110,695CASH
                    AT END OF PERIOD
                
                $
                85,706
                
                $
                74,601Supplemental
                    disclosures of cash flow information:Cash
                    paid forTaxes
                
                $
                10,290
                
                $
                26,132Interest
                
                $
                83,140
                
                $
                111,847Non-cash
                    investing and financing activities:Stock
                    options issued for services and debt issuance costs
                
                $
                -
                
                $
                553,523Accrued
                    dividends converted to common stock
                
                $
                239,276
                
                
                -Accrued
                    dividends on preferred stock payable in common
                    shares
                
                $
                1,230,896
  The
                    accompanying notes are an integral part of these consolidated
                    financial
                    statements.
 F-6
 **NATIONAL
        LAMPOON, INC. AND SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
          A - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
          POLICIES**
  The
          Company was formed in California in 1986 and was primarily engaged in the
          acquisition, production and distribution of videocassette programs for
          retail
          sale. During the 1991 fiscal year, the Company acquired all of the outstanding
          shares of National Lampoon, Inc. (NLI). NLI was incorporated in 1967 and
          was
          primarily engaged in publishing National Lampoon Magazine and related
          activities. Subsequent to the Company's acquisition of NLI, it de-emphasized
          its
          videocassette business and publishing operations and began to focus primarily
          on
          exploitation of the National LampoonTM trademark. The Company reincorporated in
          Delaware under the name National Lampoon, Inc. in November 2002.
  On
          May
          17, 2002 a group of investors gained voting control of the Company through
          the
          acquisition of its Series B Convertible Preferred Stock and warrants to
          purchase
          its common stock (the "Reorganization Transaction"). Since the Reorganization
          Transaction, the Company's business has expanded to include operations
          other
          than licensing. On September 3, 2002, the Company's subsidiary, National
          Lampoon
          Networks, Inc., acquired Burly Bear Network, Inc. to gain access to campus
          television stations. The division has since expanded to the internet and
          now
          sells advertising space on four distinct National Lampoon websites. The
          vast
          majority of our programming is developed for both the college network and
          the
          internet. Aside from providing programming to the college stations and
          the
          internet, National Lampoon Networks, Inc. provides an integrated marketing
          approach to retailers who wish to target the college market. The Company
          has
          also entered the home entertainment market, producing original motion pictures.
          In 2004, the Company began to offer travel services during spring break
          through
          its subsidiary, National Lampoon Tours, Inc. The Company has discontinued
          these
          services, however, National Lampoon Tours will continue to maintain a
          significant presence at Spring Break events so that we may offer advertising,
          distribute promotional material and hold live events for our advertisers
          and
          other customers. In 2006 the Company began publishing its own books and
          has also
          expanded its licensing activities by licensing its name to other books,
          content
          displayed over wireless communications devices and electronic
          games.
  The
          accompanying consolidated financial statements have been prepared assuming
          the
          Company will continue as a going concern. The Company's current fiscal
          year net
          loss of $2,504,170 along with the prior two years net losses of $6,859,085
          and
          $8,669,170 as well as negative working capital of $7,196,255 and accumulated
          deficit of $41,257,284 at July 31, 2007, raises substantial doubt about
          its
          ability to continue as a going concern. We are currently devoting efforts
          to
          raising additional capital and achieving profitable o perations.
          Our ability to continue as a going concern is dependent upon our ability
          to
          develop additional sources of capital and revenue. The accompanying financial
          statements do not include any adjustments that might result from the outcome
          of
          this uncertainty. As of November 6, 2007, we had cash on hand of approximately
          $63,799 and receivables totaling $497,878. We also have $1,020,000 in minimum
          guarantee payments due from domestic and foreign distributors including
          Comedy
          Central, Beta (Germany) and Equinoxe (Canada). We are currently delivering
          two
          films for which the minimum guarantee payments are due upon notice of delivery
          and we expect payments to be received by the second quarter of fiscal 2008.
  Our
          principal source of funds used for operations and working capital has been
          loans
          received from Daniel S. Laikin, our Chief Executive Officer, and Timothy
          Durham,
          a director. The aggregate amount of the loans and accrued interest owed
          to Mr.
          Laikin and Mr. Durham at July 31, 2007 is $1,241,937 up from $650,000 at
          July
          31, 2006. These two individuals have expressed their continued support
          to
          provide loans to us to meet any immediate working capital requirements.
  ***Principles
          of Consolidation.*** The
          accompanying consolidated financial statements of the Company include the
          accounts of National Lampoon, Inc., its wholly owned subsidiaries, National
          Lampoon Network, Inc and National Lampoon Tours, Inc. along with its 50%
          ownership in National Lampoon Clubhouse, Inc., and its 100% ownership in
          Bagboy,
          LLC and Ratko, LLC. During the 2007 fiscal year, the Company disposed of
          its
          interest in Totally Baked, LLC pursuant to a settlement agreement with
          Laughter
          Heals, Inc. The Company has the full and exclusive control of the management
          and
          operation of the business of each subsidiary and participates in 100% of
          the
          revenues and losses of its subsidiaries. The Company participates in 50%
          of the
          revenues and net losses of National Lampoon Clubhouse, Inc. Inter-company
          balances and transactions have been eliminated in consolidation.
 F-7
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 ***Revenue
          Recognition.***  Royalty
          income from film contracts is derived from the sale of DVDs or from the
          licensing of film rights to third parties. A significant portion of royalty
          income is paid to the Company based on the timetable associated with royalty
          statements generated by third party processors, and is not typically known
          by
          the Company on a timely basis. This revenue is consequently not recognized
          until
          the amount is either known or reasonably estimable or until receipt of
          the
          statements from the third parties .
          The
          Company contracts with various agencies to facilitate collection of royalty
          income. When the Company is entitled to royalties based on gross receipts,
          revenue is recognized before deduction of agency fees, which are included
          as a
          component of cost of revenue.
  The
          Company recognizes revenue from television and film productions pursuant
          to
          American Institute of Certified Public Accountants Statement of Position
          00-2,
“Accounting by Producers or Distributors of Films” (“SOP 00-2”). The following
          conditions must be met in order to recognize revenue under SOP 00-2:
          (i) persuasive evidence of a sale or licensing arrangement exists;
          (ii) the program is complete and has been delivered or is available for
          immediate and unconditional delivery; (iii) the license period of the
          arrangement has begun and the customer can begin its exploitation, exhibition
          or
          sale; (iv) the arrangement fee is fixed or determinable; and
          (v) collection of the arrangement fee is reasonably assured. Advance
          payments received from buyers or licensees are included in the financial
          statements as a component of deferred revenue.
  ***Film
          Costs*** *.* Investment in film costs includes the capitalization of costs incurred
          to
          produce the film content including direct negative costs, production overhead,
          interest and development. These costs are recognized as operating expenses
          on an
          individual film basis in the ratio that the current year’s gross revenues bear
          to management’s estimate of total ultimate gross revenues from all sources to be
          earned over a seven year period. Capitalized production costs are stated
          at the
          lower of unamortized cost or estimated fair value on an individual film
          basis.
          Revenue forecasts, based primarily on historical sales statistics, are
          continually reviewed by management and revised when warranted by changing
          conditions. When estimates of total revenues and other events or changes
          in
          circumstances indicate that a film has a fair value that is less than its
          unamortized cost, an impairment loss is recognized in the current period
          for the
          amount by which the unamortized cost exceeds the film’s fair value.
  ***Advertising
          Expense.***The
          Company expenses advertising costs as incurred. During the years ended
          July 31,
          2007 and 2006, the Company incurred approximately $1,000 and $30,000,
          respectively for advertising costs.
  ***Use
          of Estimates.*** The
          preparation of consolidated financial statements in conformity with generally
          accepted accounting principles requires management to make estimates and
          assumptions that affect the reported amounts of assets and liabilities
          and
          disclosure of contingent assets and liabilities at the date of the consolidated
          financial statements and the reported amounts of revenues and expenses
          during
          the reporting period. Actual results could differ from those estimates.
          Management makes estimates that effect reserves for allowance for doubtful
          accounts, estimated useful life of property and equipment, accrued expenses,
          fair value of equity instruments, reserves for any commitments or contingencies,
          debt issue costs, capitalized film costs, calculation of impairment,
          amortization expense and deferred income taxes.
  ***Depreciation.*** Depreciation of fixed assets is computed by the straight-line method over
          the
          estimated useful lives of the assets ranging from three to five
          years.
  ***Concentration.*** The
          Company maintains its cash balances at financial institutions that are
          federally
          insured; however, at times such balances may exceed federally insured limits.
          The Company has not experienced any losses in such accounts. The
          Company’s cash balances on deposit with banks are guaranteed by the Federal
          Deposit Insurance Corporation up to $100,000. The Company may be exposed
          to risk
          for the amounts of funds held in bank accounts in excess of the insurance
          limit.
          In assessing the risk, the Company’s policy is to maintain cash balances with
          high quality financial institutions. The Company had cash balances in excess
          of
          the $100,000 guarantee during the year ended July 31, 2007.
 
 During
          the year ended July 31, 2007 one customer accounted for 52% of total revenue,
          while no customer accounted for more than 10% of total revenue in the year
          ending July 31, 2006. As of July 31, 2007, the Company had $128,383 (16%),
          $85,571 (10%) and $121,681 (15%), of accounts receivable due from its largest
          customers.
 
 The
          Company currently does not rely on a single vendor for a majority of its
          productions. The Company has different vendors that can be replaced if
          the need
          arises. A change in vendors would not cause a significant delay in the
          production process that would ultimately affect operating results.
 F-8
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 ***Cash
            and Cash Equivalents.*** Cash
            and
            cash equivalents include short-term investments with an original maturity
            of
            three months or less.
 
 ***Fair
            Value of Financial Instruments.*** The
            carrying amount of the Company’s financial instruments including cash, accounts
            receivable, accounts payable, and accrued expenses approximate their
            fair value
            as of July 31, 2007 due to their short maturities. The carrying amounts of
            production loans and notes payable approximate fair value because the
            related
            effective interest rates on these instruments approximate the rates currently
            available to the Company.
 
 ***Accounts
            Receivable.*** The
            Company evaluates the collectibility of its trade accounts receivable
            based on a
            number of factors. In circumstances where the Company becomes aware of
            a
            specific customer’s inability to meet its financial obligations to the Company,
            a specific reserve for bad debts is estimated and recorded, which reduces
            the
            recognized receivable to the estimated amount the Company believes will
            ultimately be collected. In addition to specific customer identification
            of
            potential bad debts, bad debt charges are recorded based on the Company’s
            historical losses and an overall assessment of past due trade accounts
            receivable outstanding.
 
 The
            allowance for doubtful accounts and returns is established through a
            provision
            for returns and discounts charged against sales. Receivables are charged
            off
            against the allowance when payments are received or products returned.
            The
            allowance for doubtful accounts and returns and discounts as of July
            31, 2007
            was $461,810.
  ***Intangible
            Assets.*** Intangible Assets consists primarily of the National Lampoon trademark
            and is
            being amortized on a straight-line basis over twenty-five years. The
            Company
            continually evaluates whether events or circumstances have occurred that
            indicate the remaining estimated useful life of intangible assets should
            be
            revised or the remaining balance of intangible assets may not be recoverable.
            Factors that would indicate the occurrence of such events or circumstances
            include current period operating or cash flow losses, a projection or
            forecast
            of future operating or cash flow losses, or the inability of the Company
            to
            identify and pursue trademark licensing opportunities on terms favorable
            to the
            Company. Gross intangibles were approximately $6,080,000 with accumulated
            amortization of approximately $4,471,000 at July 31, 2007, which includes
            approximately $243,000 of amortization being expensed during the year
            ended July
            31, 2007. The estimated aggregate amortization expense for each of the
            six
            succeeding fiscal years is $243,000 per year, which primarily represents
            the
            original acquired intangible relating to the National Lampoon trademark,
            amortized over twenty-five years.
  As
            of
            July 31, 2007, the Company has determined and tested for impairment in
            accordance with SFAS 141, paragraphs 16-21, and concluded that the expected
            future cash flows relating to its intangible assets will result in the
            recovery
            of the carrying value of such asset. The continued realization of these
            intangible assets, however, is dependent upon the continued exploitation
            of the
            National Lampoon trademark for use in motion pictures, television, the
            Internet,
            merchandising and other appropriate opportunities. If these and other
            ventures
            that the Company may enter into do not result in sufficient revenues
            to recover
            the associated intangible assets, the Company's future results of operations
            may
            be adversely affected by adjustments to the carrying values of such
            intangible.
 
 ***Recent
            Accounting Pronouncements.***  In
            June
            2006, the Financial Accounting Standards Board (“FASB”) issued FIN 48,
            "Accounting for Uncertainty in Income Taxes--an interpretation of FASB
            Statement
            No. 109," which seeks to reduce the diversity in practice associated
            with the
            accounting and reporting for uncertainty in income tax positions. This
            Interpretation prescribes a comprehensive model for the financial statement
            recognition, measurement, presentation and disclosure of uncertain tax
            positions
            taken or expected to be taken in an income tax return. FIN 48 presents
            a
            two-step process for evaluating a tax position. The first step is to
            determine
            whether it is more-likely-than-not that a tax position will be sustained
            upon
            examination, based on the technical merits of the position. The second
            step is
            to measure the benefit to be recorded from tax positions that meet the
            more-likely-than-not recognition threshold, by determining the largest
            amount of
            tax benefit that is greater than 50 percent likely of being realized
            upon
            ultimate settlement, and recognizing that amount in the financial statements.
            FIN 48 is effective for fiscal years beginning after December 15, 2006.
            Management believes the adoption of FIN 48 will not have a material impact
            on
            the Company’s results of operations, financial position or cash
            flow.
  In
            February 2007, the Financial
            Accounting Standards Board (FASB) issued
            FASB Statement No. 159, “The Fair Value Option for Financial Assets and
            Financial Liabilities — including an amendment of FASB Statement
            No. 115” (FAS 159). ** FAS 159,
            which becomes effective for the Company on January 1, 2008, permits
            companies to choose to measure many financial instruments and certain
            other
            items at fair value and report unrealized gains and losses in earnings.
            Such
            accounting is optional and is generally to be applied instrument by instrument.
            The Company does not anticipate that election, if any, of this fair-value
            option
            will have a material effect on its consolidated ** financial
            condition, results of operations, cash flows or disclosures.
 F-9
 **NATIONAL
              LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  In
              September 2006, the FASB issued FAS No. 157 (“FAS 157”), “Fair
              Value Measurements,” which establishes a framework for measuring fair value in
              accordance with GAAP and expands disclosures about fair value measurements.
              FAS
              157 does not require any new fair value measurements but rather eliminates
              inconsistencies in guidance found in various prior accounting pronouncements.
              FAS 157 is effective for fiscal years beginning after November 15, 2007.
              The Company is currently evaluating the impact this standard will have
              on its
              consolidated ** financial
              condition, results of operations, cash flows or disclosures.
 
 ***Net
            Income or Loss Per Share.***  Diluted
            earnings per share amounts are calculated using the treasury method and
            are
            based upon the weighted average number of common and common equivalent
            shares
            outstanding during the period. Basic and diluted loss per share is $(0.49)
            and
            $(1.20) for the twelve months ended July 31, 2007 and 2006, respectively.
            Basic
            and diluted loss per share are the same at July 31, 2007 and 2006, as
            common
            equivalent shares have been excluded from the computation due to the
            fact that
            they are anti-dilutive. Options and warrants to purchase 8,627,647 and
            5,209,795
            common shares during the twelve months ended July 31, 2007 and 2006
            respectively, are not included in the calculation of diluted earnings
            per share
            because their inclusion would be anti-dilutive. 7,402,431 and 8,078,711
            shares
            that would be issuable upon conversion of the convertible preferred stock
            are
            not included in the calculation of diluted earnings per share during
            the twelve
            months ended July 31, 2007 and 2006, respectively, because their inclusion
            would
            also be anti-dilutive.
  ***Stock
            Based Compensation.*** The
            Company periodically issues stock options and warrants to employees and
            non-employees.
 
 Statement
            of Financial Accounting Standards No. 123, "Accounting for Stock-Based
            Compensation" ("SFAS No 123"), established a fair value method of accounting
            for
            stock-based compensation plans and for transactions in which an
            entity acquires goods or services for non-employees in exchange
            for equity instruments. SFAS No. 123 was amended by Statement of Financial
            Accounting Standards No. 148, "Accounting for
            Stock-Based Compensation-Transition and Disclosure", which required
            companies to disclose in interim financial statements the pro forma effect
            on
            net income (loss) and net income (loss) per common share of the estimated
            fair market value of stock options or warrants issued to employees. Through
            July
            31, 2006, the Company accounted for stock-based compensation utilizing
            the
            intrinsic value method prescribed in Accounting Principles Board Opinion
            No. 25,
            "Accounting for Stock Issued to Employees" ("APB No. 25"), with pro forma
            disclosures of net income (loss) as if the fair value method had been
            applied.
            Accordingly, compensation cost for stock options was measured as the
            excess, if
            any, of the fair market price of the Company's stock at the date of grant
            over
            the amount an employee must pay to acquire the
            stock.
 
 In
            December 2004, the Financial Accounting Standards Board ("FASB") issued
            SFAS No.
            123 (revised 2004), "Share Based Payment" ("SFAS No. 123R"), a revision
            to SFAS
            No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123R superseded
            APB
            No. 25 and amended SFAS No. 95, "Statement of Cash Flows". Effective
            January 1,
            2006, SFAS No. 123R requires that the Company measure the cost of employee
            services received in exchange for equity awards based on the grant date
            fair
            value of the awards, with the cost to be recognized as compensation expense
            in
            the Company's financial statements over the vesting period of the awards.
            The
            Company adopted SFAS No. 123R effective January 1, 2006, and is using
            the
            modified prospective method in which compensation cost is recognized
            beginning
            with the effective date (a) based on the requirements of SFAS No. 123R
            for all
            share-based payments granted after the effective date and (b) based on
            the
            requirements of SFAS No. 123R for all awards granted to employees prior to the
            effective date of SFAS No. 123R that remain unvested on the effective
            date.
 
 The
            Company accounts for stock option and warrant grants issued and vesting
            to non
            employees in accordance with EITF No. 96-18: "Accounting for Equity Instruments
            that are Issued to Other Than Employees for Acquiring, or in Conjunction
            with
            Selling, Goods or Services” and EITF 00-18 “Accounting Recognition for Certain
            Transactions involving Equity Instruments Granted to Other Than Employees”
whereas the value of the stock compensation is based upon the measurement
            date
            as determined at either a) the date at which a performance commitment
            is
            reached, or b) at the date at which the necessary performance to earn
            the equity
            instruments is complete.
 F-10
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 Prior
            to
            the adoption of SFAS 123R, all stock options and warrants issued to employees
            and others had an exercise price not less than the fair market value
            of the
            Company’s common stock on the date of the grant, and in accordance with
            accounting for such options utilizing the intrinsic value method there
            was no
            related compensation expense recorded in the Company’s financial statements. Had
            compensation cost for the stock-based compensation been determined based
            on the
            fair value of the grant dates consistent with the method of SFAS 123,
            the
            Company’s net loss and loss per share for the year ended July 31, 2006 would
            have been increased to the pro forma amount presented.
 
 Year
                      EndedJuly
                      31, 2006Net
                      loss attributable to common shareholders, as reported
                  
                  $
                  (8,186,609
                  )Add:
                      Stock-based employee Compensation expense includedin
                      reported net loss
                  
                  
                  -Deduct:
                      Total stock-based employee compensation expense determinedunder
                      fair value based method for all awards
                  
                  
                  (345,195
                  )Net
                      loss, pro forma
                  
                  $
                  (8,531,804
                  )Basic
                      and diluted net loss per Common share, as reported
                  
                  $
                  (1.20
                  )Pro
                      forma
                  
                  $
                  (1.25
                  )
 
 
 The
            relative fair value of the options was estimated using the Black-Scholes
            option
            pricing model with the following assumptions: average risk-free interest
            of
            5.50%; dividend yield of 0%; average volatility factor of the expected
            market
            price of our common stock of 55.6% to 105.6%; and a term of six to ten
            years for
            the fiscal year ended July 31, 2006.
  ***Reclassification.*** In the
            current year we have reclassified certain components of our shareholders’
deficit section to reflect the elimination of deferred compensation arising
            from
            unvested share-based compensation pursuant to the requirements of Staff
            Accounting Bulletin No. 107, regarding Statement of Financial Accounting
            Standards No. 123(R), “Share-Based Payment.” This deferred compensation was
            previously recorded as an increase to additional paid-in capital with
            a
            corresponding reduction to shareholders’ deficit for such deferred compensation.
            This reclassification has no effect on net loss or total shareholders’ deficit
            as previously reported. The Company will record an increase to additional
            paid-in capital as the share-based payments vest. The Company also determined
            that its previous classification of preferred stock dividend as a current
            liability should be changed to a non-current liability, as the dividends
            are
            only payable in common shares.
  **NOTE
            B - CAPITALIZED PRODUCTION COSTS**
  The
            following table summarizes the net capitalized film and television costs
            in
            various stages of production at July 31, 2007:
 Development-television
                    
                    $
                    7,110Development-theatrical
                    
                    
                    5,379,398Completed-theatrical
                    
                    
                    97,000Total
                        film and television costs
                    
                    $
                    5,483,508
 The
          Company expects to amortize within three years 90% of capitalized film
          costs
          based on the estimated costs and ultimate revenue projected. The portion
          of the
          costs of the Company's films that are expected to be amortized during the
          upcoming 12 months is approximately $2,908,000.
 F-11
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  **NOTE
          C - FIXED ASSETS**
 
 Fixed
          assets comprise the following as of July 31, 2007:
 
 Computer
                    equipment
                
                $
                172,291Camera
                    and lighting equipment
                
                
                38,433Furniture
                    and office equipment
                
                
                4,217214,941Accumulated
                    depreciation
                
                
                (177,510
                )$
                37,431
 
 Depreciation
          expense for the years ended July 31, 2007 and 2006 was $13,669 and $15,973,
          respectively.
 
 **NOTE
          D - NOTES PAYABLE TO RELATED PARTIES AND ACCRUED INTEREST**
  Notes
          payable to related parties and accrued interest consist of the following
          at July
          31, 2007:
 (A)
                      Payable to Daniel Laikin
                  
                  $
                  1,004,016(B)
                      Payable to Timothy Durham
                  
                  
                  166,784(C)
                      Payable to Christopher Williams
                  
                  
                  88,062$
                  1,258,862
 
 (A)
          As of
          July 31, 2007, the Company owed Daniel Laikin, the Company's Chief Executive
          Officer, approximately $970,000 in principal and $34,016 in interest. The
          loans
          bear interest at the rate of 6% per annum. The obligation to Mr. Laikin
          is
          unsecured and payable on demand. During the twelve months ending July 31,
          2007,
          $188,834 of principal and no interest had been paid to Mr. Laikin.
 
 (B)
          As of
          July 31, 2007, the Company owed Timothy Durham, a director, approximately
          $162,794 in principal and $3,990 in interest. The loans bear interest at
          the
          rate of 6% to 6.75% per annum. The obligation to Mr. Durham is unsecured
          and
          payable on demand. During the twelve months ending July 31, 2007, $441,706
          of
          principal and $45,294 interest had been paid to Mr. Durham.
 
 (C)
          As of
          July 31, 2007, the Company owed Christopher R. Williams, a shareholder,
          approximately $83,333 in principal and $4,729 in interest. The loans bear
          interest at the rate of 6% per annum. The obligation to Mr. Williams is
          payable
          on demand. During the twelve months ending July 31, 2007, no principal
          and no
          interest had been paid to Mr. Williams.
  **NOTE
          E - PRODUCTION LOANS FROM RELATED PARTIES AND ACCRUED
          INTEREST**
  Outstanding
          production loans from related parties and accrued interest consist of the
          following as of July 31, 2007:
 (A)  Red
                        Rock Productions, Inc. - Bag Boy Productions, Inc.
                  
                  $
                  1,695,792(B)Red Rock Productions, Inc. - Ratko Productions,
                      Inc.
                  
                  
                  1,961,616(C)
                        Dan Laikin
                  
                  
                  71,137$
                  3,728,545
 
 (A)
                On
                    October 26, 2006, the Company entered into a financing agreement
                    with Red
                    Rock Productions Inc. (Red Rock) regarding the financing of the
                    theatrical
                    motion picture Bag Boy. Red Rock Pictures Holdings, Inc. is a
                    publicly
                    traded company and related party (See Note J). In accordance
                    with the
                    agreement, Red Rock agreed to loan the Company up to $2,000,000
                    (unless
                    otherwise agreed to by both parties) to fund this film, with
                    payments to
                    be made on an approved cash flow as provided by the Company.
                    Red Rock will
                    be entitled to recoup its investment plus interest at 10% accruing
                    on the
                    average daily balance from the date the loan is provided to the
                    Company.
                    Red Rock will also be entitled to contingent participation of
                    twenty five
                    percent (25%) of all net contingent proceeds from the picture.
                    Red Rock
                    has a security interest in the film to the extent of the actual
                    amount of
                    the funding as long as there is an unpaid balance on the loan.
                    As of July
                    31, 2007, the Company was advanced $1,695,792 under this financing
                    agreement.
 F-12
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 (B)
                On
                    October 26, 2007, the Company entered into a financing agreement
                    with Red
                    Rock Productions Inc. (Red Rock) regarding the financing of the
                    theatrical
                    motion picture Ratko. Red Rock Pictures Holdings, Inc. is a publicly
                    traded company and related party (See Note J). In accordance
                    with the
                    agreement, Red Rock agreed to loan the Company up to $2,000,000
                    to fund
                    this film, with payments to be made on an approved cash flow
                    as provided
                    by the Company. Red Rock will be entitled to recoup its investment
                    plus
                    interest at 10% accruing on the average daily balance from the
                    date the
                    loan is provided to the Company. Red Rock will also be entitled
                    to
                    contingent participation of twenty five (25%) of all net contingent
                    proceeds from the picture. Red Rock has a security interest in
                    the film to
                    the extent of the actual amount of the funding as long as there
                    is an
                    unpaid balance on the loan. As of July 31, 2007, the Company
                    was advanced
                    $1,961,616 under this financing agreement.
 
 (C)
                Mr.
                    Laikin, the Company's Chief Executive Officer, has made various
                    loans to
                    us for film financing. As of July 31, 2007, he was owed $67,000
                    in
                    principal and $4,137 in interest for production loans. The loans
                    bear
                    interest at the rate of 6% per annum.
 
 **NOTE
          F - ACCRUED SERIES B AND C DIVIDENDS**
 
 Dividends
          accrue on the Company's Series B and Series C Convertible Preferred Stock.
          The
          Company accrued dividends on a daily basis and will continue to do so until
          the
          date at which the Series B or Series C Convertible Preferred Stock is converted,
          until a liquidation event occurs, or, in the case of the Series C Convertible
          Preferred Stock, until the redemption date (although the redemption date
          is not
          defined and there is no right of redemption as to the Series C Convertible
          Preferred Stock). Dividends accrue at the rate of 9% per annum on the sum
          of the
          original purchase price of the Series B or Series C Convertible Preferred
          Stock
          plus all accumulated and unpaid dividends thereon (compounding annually).
          Dividends that accrue on the Company's Series B and Series C Convertible
          Preferred Stock must be paid with our common stock. During the twelve-month
          periods ended July 31, 2007 and 2006, the Company accrued $1,230,896 and
          $1,327,524, respectively of Series B and Series C dividends.
 
 During
          the year ended July 31, 2007, 33,814 shares of the Company's Series C
          Convertible Preferred Stock and related accrued dividends of $239,276 were
          converted to 787,388 shares of the Company’s common stock. Each Series C
          Convertible Preferred Share is convertible into 20 common shares. The accrued
          dividends were converted into the Company’s common stock based on the trading
          value of the Company’s common stock on the conversion date.
 
 At
          July
          31, 2007, the Company had accrued $3,432,663 representing the total value
          of the
          dividends for Series B and Series C dividends.
  On
          conversion of the Series B and Series C Convertible Preferred Stock, the
          company
          becomes liable to pay dividends. Conversion of dividends on the Series
          B and
          Series C Convertible Preferred Stock are computed using the closing price
          of the
          common stock, as reported by the exchange or regulated quotation service
          on
          which the Company's common stock is traded, on the trading date immediately
          preceding the date that the Company becomes liable to pay the dividend.
          If no
          trades were made on that date, then the number of shares to be issued is
          computed using the closing price of the last date on which trades were
          made and
          reported.
  **NOTE
          G - ISSUANCE OF COMMON STOCK**
  Year
          ended July 31, 2006
 
 During
          the fiscal year ended July 31, 2006, 13,333 shares of the Company’s common stock
          were purchased through the exercise of stock options that resulted in cash
          proceeds to the Company of approximately $20,983. During the fiscal year
          ended
          July 31, 2006, 20,911 shares of the Company’s common stock were purchased
          through the cashless exercise of stock options. Also during this period
          188,996
          shares of the Company’s common stock were purchased through the exercise of
          stock warrants by various board members of the Company that resulted in
          cash
          proceeds to the Company of approximately $335,000. In addition, approximately
          83,850 shares of restricted stock were issued at a market at a market price
          of
          $282,180 to various consultants of the Company for services rendered.
          Furthermore, 5,000 shares of Series C Convertible Preferred Stock were
          converted
          to 100,000 shares of the Company’s common stock.
 F-13
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 On
          June
          9, 2006 the Company issued 5,554 shares to Porter Levay & Rose, Inc. for
          investor relations services. The Company expensed $15,000, which was equivalent
          to the market price of the stock on the date of issue.
  On
          May
          12, 2006 the board of directors granted 3,500 shares of restricted stock
          per
          month to an employee for the length of his employment for services performed
          during the month. The Company issued a total of 10,500 shares which were
          valued
          and expensed $16,659 during the fourth quarter of fiscal year ending 2006
          which
          was equivalent to the market price of the stock during the first of each
          month
          when the restricted shares are issued.
  On
          March
          31, 2006 27,596 shares were issued to various consultants for services
          rendered
          during the third quarter of fiscal year 2006. We expensed $72,500, which
          was
          equivalent to the market price of the stock on the date of issue.
 
 On
          January 31, 2006, in accordance with the terms of their employment agreements,
          Mr. Daniel S. Laikin, the Company’s Chief Executive Officer, and Mr. Douglas S.
          Bennett, the Company’s President and Chief Financial Officer, each received an
          option to purchase 100,000 shares of the Company’s common stock at an exercise
          price of $2.98 which was the market value of the common stock on the date
          of
          grant and accordingly no expense was recognized under the intrinsic value
          method.
 
 On
          August
          26, 2005, the Company issued 40,000 shares of restricted common stock in
          exchange for services rendered during the year ended July 31, 2005. The
          Company
          had previously accrued the value of the service during 2005. The service
          was
          valued at the fair market value on the date of issuance in August 2005.
          On
          August 31, 2005, the Company issued 200 shares of common stock from the
          1999
          Plan in exchange for services valued at $520. The stock was valued at the
          fair
          market value on the date of issuance.
 
 On
          March
          10, 2005 the Company filed a registration statement for a public offering
          of
          3,200,000 shares of common stock. The registration statement was declared
          effective on August 1, 2005. The Company raised $9.6 million in gross proceeds
          in this offering. Net proceeds from the offering, after payment of expenses
          totaling $1,288,505 were $8,311,495.
 
 Year
          ended July 31, 2007
 
 On
          May 1,
          2006, the Company commenced issuing 3,500 common shares to a consultant
          for each
          month of service during the engagement period. During the twelve month
          period
          ended July 31, 2007, the Company issued 42,000 common shares and expensed
          $77,595, which was equivalent to the trading value of the shares on the
          date of
          issuance.
 
 On
          August
          1, 2006, the Company entered into a monthly consulting arrangement whereby
          a
          consultant would receive 5,000 common shares per month through November
          2006 and
          then 3,000 common shares per month. During the twelve month period ended
          July
          31, 2007 the Company issued 44,000 common shares and expensed $79,230,
          which was
          equivalent to the trading value of the shares on the date of issuance.
 
 On
          October 3, 2006 the Company issued 27,547 common shares to a consultant
          for
          production services on one of our films. The Company expensed $41,321,
          which was
          equivalent to the fair market value on the date of issuance.
 
 On
          November 1, 2006, the Company commenced compensating a consultant $10,000
          in
          common shares for each month of service during the engagement period. During
          the
          twelve month period ended July 31, 2007, the Company issued 45,955 common
          shares
          and expensed $90,000, which was equivalent to the trading value of the
          shares on
          the date of issuance.
 F-14
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  On
            November 9, 2006, the Company compensated two consultants $2,000 each
            in common
            shares for consulting services rendered. The Company issued 2,116 common
            shares
            in total and expensed $4,000, which was at the agreed upon price of $1.89
            per
            share.
 
 On
            November 29, 2006, the Company commenced issuing $2,000 in common shares
            to a
            consultant for each month of service during the engagement period. During
            the
            twelve month period ended July 31, 2007, the Company issued 7,887 common
            shares
            and expensed $16,000, which was equivalent to the trading value of the
            shares on
            the date of issuance.
 
 On
            December 20, 2006 the Company issued 6,200 shares of its common stock
            valued at
            $13,640 (the
            market price on the date of grant) to
            employees as a bonus.
 
 During
            the twelve months ended July 31, 2007, 82,100 shares of the Company’s common
            stock were purchased through the exercise of stock options that resulted
            in cash
            proceeds to the Company of approximately $131,810.
 
 During
            the twelve months ended July 31, 2007, 5,055 shares of the Company’s common
            stock were issued upon exercise of warrants attached to the Company's
            Series B
            Convertible Preferred Stock that resulted in cash proceeds to the Company
            of
            approximately $9,000.
 
 During
            the year ended July 31, 2007, 33,814 shares of the Company's Series C
            Convertible Preferred Stock and related accrued dividends of $239,276
            were
            converted to 787,388 shares of the Company’s common stock. Each Series C
            Convertible Preferred Share is convertible into 20 common shares. The
            accrued
            dividends were converted into the Company’s common stock based on the trading
            value of the Company’s common stock on the conversion date.
 
 On
            April
            24, 2007, the Company compensated a professional services firm for their
            services in common shares. The Company issued 22,727 common shares and
            expenses
            $49,999, which was equivalent to the value of the services
            provided.
  **NOTE
            H - COMMITMENTS AND CONTINGENCIES**
  *Leases*
  The
            Company's principal offices are located in West Hollywood, California
            where it
            is subleasing approximately 6,000 square feet of property for approximately
            $17,248 per month. The sublease expired on April 30, 2007 and became
            a month-to
            month lease thereafter. The sublease agreement includes certain provisions
            for
            rent adjustments based upon the lessor's operating costs and increases
            in the
            Consumer Price Index.
  The
            Company is obligated under an equipment lease for a photocopy machine
            of
            approximately $1,600 per month.
  The
            Company's rent expense was approximately $141,820 and $263,859, for the
            years
            ended July 31, 2007 and 2006, respectively.
  *Royalty
            Agreements*
  Harvard
            Lampoon Agreement. Pursuant to an agreement between the Company and The
            Harvard
            Lampoon, Inc. ("HLI"), as restated October 1, 1998, the Company is obligated
            to
            pay HLI a royalty of 1.5% to 2% on the Company's net receipts from exploitation
            of the National Lampoon trademark. Royalty payments under this agreement
            were
            approximately $66,070 and $0, for the years ended July 31, 2007 and 2006,
            respectively. At July 31, 2007, we have accrued approximately $4,632
            in
            royalties due to HLI.
  Guber-Peters
            Agreement. Pursuant to a July 24, 1987 Rights Agreement, NLI granted
            the right
            to produce National Lampoon television programming to Guber-Peters Entertainment
            Company (GPEC). NLI reacquired these rights from GPEC pursuant to an
            October 1,
            1990 Termination Agreement ("Termination Agreement") for the sum of $1,000,000,
            of which $500,000 was paid upon execution. The remaining $500,000 is
            contingent
            on and payable through a 17.5% royalty on NLI's cash receipts from each
            program
            produced by NLI or any licensee (subject to certain minimum royalties
            for each
            program produced). The Company guaranteed all of NLI's obligations under
            the
            Termination Agreement and is the successor-in-interest to NLI as a result
            of its
            acquisition of NLI. The full $500,000 was recognized as an expense in
            prior
            years, with approximately $396,000 remaining on the books as a
            liability.
 F-15
 **NATIONAL
              LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 In
            2005
            the Screen Actors Guild filed a UCC 1 against the assets of the film
            Monster
            Night AKA Trick or Treat as security against talent salaries and benefits.
            The
            Company will file to terminate the UCC 1 as the film has been completed.
 
 *Film
            Financing commitments*
  During
            the year ended July 31, 2007, the Company obtained $3,657,408 of funding
            under
            finance agreements with Red Rock for its motion picture projects, Bag
            Boy and
            Ratko. The terms of the financing provide for the investors to recoup
            their
            contribution plus interest from the first proceeds of these films. After
            all costs are recouped by the Company, the investors are entitled to
            25% of the
            net profits paid to the Company, but the investors do not have any ownership
            rights in the film (See Note E).
  The
            Company has also entered into various distribution agreements for the
            marketing
            and distribution of certain films listed below. The Company will receive
            varying
            distribution fees ranging from 20% to 25% relating to the exploitation
            and
            distribution of these films. These films will require the Company to
            contribute
            certain production and print and advertising costs for the completion
            and
            distribution of these films as follows:
  Funding
                      CommitmentsPrints
                      & Advertising
                  
                  TotalFilm
                  
                  Production
                  
                  Lower
                  
                  Upper
                  
                  Lower
                  
                  Upper**Homo
                      Erectus**
                  
                  $
                  90,000
                  
                  $
                  200,000
                  
                  $
                  400,000
                  
                  $
                  290,000
                  
                  $
                  490,000**Beach
                      Party at the Threshold of Hell**
                  
                  
                  50,000
                  
                  
                  300,000
                  
                  
                  500,000
                  
                  
                  350,000
                  
                  
                  550,000**Electric
                      Apricot - The Quest for Festaroo**
                  
                  
                  -
                  
                  
                  300,000
                  
                  
                  300,000
                  
                  
                  300,000
                  
                  
                  300,000**One,
                      Two, Many**
                  
                  
                  105,000
                  
                  
                  300,000
                  
                  
                  300,000
                  
                  
                  405,000
                  
                  
                  405,000$
                  245,000
                  
                  $
                  1,100,000
                  
                  $
                  1,500,000
                  
                  $
                  1,345,000
                  
                  $
                  1,745,000
  *Employment
            Agreements*
  On
            January 31, 2007, in accordance with the terms of their employment agreements,
            Mr. Daniel S. Laikin, the Company's Chief Executive Officer, and Mr.
            Douglas S.
            Bennett, the Company's former President and Chief Financial Officer,
            each
            received an option to purchase 100,000 shares of the Company's common
            stock at
            an exercise price of $2.04 which was the market value of the common stock
            on the
            date of grant.
  On
            January 31, 2005 we entered into an Employment Agreement with Daniel
            S. Laikin.
            The employment agreement was adopted and approved by our Board of Directors
            on
            February 1, 2005. The employment agreement has a term of three years,
            but is
            automatically extended for successive three-year terms unless designated
            members
            of the Board of Directors notify Mr. Laikin that the Board does not intend
            to
            renew the employment agreement or unless the employment agreement has
            been
            terminated according to its terms.
  Pursuant
            to the employment agreement, Mr. Laikin receives an annual salary of
            $250,000.
            Mr. Laikin is also entitled to receive four weeks paid vacation. Mr.
            Laikin
            receives an automobile allowance and is entitled to participate in any
            other
            benefits offered generally to our employees and executives. He is also
            granted
            an option to purchase 100,000 shares of our common stock on each anniversary
            of
            the effective date of the employment agreement. The exercise price for
            the
            options will be equal to the average of the last reported sale price
            for one
            share of common stock during the five business days preceding the date
            of grant
            or, if this method of valuing the common stock is not available, the
            Board shall
            determine, in good faith, the value of one share of common stock. The
            term of
            each option shall be 10 years. The options shall be granted in accordance
            with
            the J2 Communications Amended and Restated 1999 Stock Option, Deferred
            Stock and
            Restricted Stock Plan. Mr. Laikin is to meet annually with the Board
            of
            Directors to set certain performance milestones that must be met bi-annually.
            If
            those milestones are met, Mr. Laikin will receive a bi-annual bonus of
            $50,000.
            If the milestones are exceeded, Mr. Laikin will receive additional compensation
            that will be paid one-half in cash and one-half in stock.
 F-16
 **NATIONAL
              LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 Mr.
            Laikin's employment agreement may be terminated voluntarily by us at
            any time
            during its term for Cause. Cause is defined as (i) the willful and continued
            failure by Mr. Laikin to substantially perform his duties to us in good
            faith
            (other than a failure resulting from his incapacity due to physical or
            mental
            illness), or (ii) the willful engaging in conduct which is demonstrably
            and
            materially injurious to us. In order to terminate Mr. Laikin for Cause,
            five
            members of the Board of Directors (not including Mr. Laikin) must determine
            at a
            meeting held for such purpose that Mr. Laikin is guilty of the conduct
            triggering the right to terminate him. If Mr. Laikin's employment is
            terminated
            by us for Cause, in addition to any benefits mandated by law, we shall
            pay to
            Mr. Laikin his full annual salary in effect at the date of termination
            and other
            benefits to which he is entitled through the date of termination at the
            rate in
            effect at the time notice of termination is given.
  Mr.
            Laikin's employment may be terminated by Mr. Laikin at any time, and
            will
            terminate automatically upon his death or disability. Upon such termination,
            in
            addition to any benefits mandated by law, we shall pay to Mr. Laikin
            his full
            annual salary in effect at the date of termination and other benefits
            to which
            he is entitled through the date of termination at the rate in effect
            at the time
            notice of termination is given.
  On
            signing the Employment Agreement, we also agreed to enter into a separate
            indemnity agreement with Mr. Laikin. A new indemnity agreement has not
            been
            entered into as of the date of this annual report, although we entered
            into an
            indemnity agreement with Mr. Laikin on May 17, 2002.
  *Litigation*
 
 National
            Lampoon, Inc. v. Alma Investments (d/b/a Bahia Mar Hotel) (Los Angeles
            Superior
            Court Case No. BC 356118). We filed this complaint on July 27, 2006.
            The action
            arises from an agreement we had with Bahia Mar Hotel pursuant to which
            we were
            to provide to Bahia Mar Hotel an entertainment package for the 2006 spring
            break. Bahia Mar Hotel failed to support the program, and, in fact, diverted
            some of the business to our competitors. In our complaint, we have alleged
            causes of action for fraud, breach of contract, promissory estoppel,
            quantum
            meruit and breach of the covenant of good faith and fair dealing. We
            believe
            that our damages are in excess of $500,000. On September 22, 2006 Bahia
            Mar
            Hotel filed a motion to quash service of summons, which the Court denied
            on
            October 25, 2006. On November 8, 2007 we served the plaintiff with an
            Offer to
            Compromise under Civil Code Procedure Section 998. The Offer to Compromise
            provides for a settlement of the action for $150,000. The plaintiff has
            30 days
            to accept or reject the Offer to Compromise. Both parties are continuing
            to
            engage in discovery and prepare for trial.
  Cinergy
            Creative, Inc. and Leslie Allen v. National Lampoon Clubhouse, Inc.,
            National
            Lampoon, Inc., Majestic Entertainment, Inc. and Lorenzo Doumani (Los
            Angeles
            Superior Court Case No. SC091496). This complaint was filed on October
            20, 2006.
            The plaintiffs allege causes of action for alter ego, breach of written
            contract, breach of oral contract, breach of the implied covenant of
            good faith
            and fair dealing, quantum meruit, fraud and deceit based on promises
            made
            without intention to perform, intentional misrepresentation, slander
            per se,
            libel per se, breach of confidence, declaratory relief, conversion, untrue
            or
            misleading advertising, unfair competition and negligence. Specifically,
            the
            plaintiffs allege that we and our co-defendants induced them to set aside
            other
            projects so that they would spend their time working on projects for
            the benefit
            of us and our co-defendants. The plaintiffs also allege that they were
            promised
            a share of profits from the projects and/or a "partnership" interest
            in them.
            The plaintiffs allege that their damages are in excess of $2,000,000.
            The
            Company entered into a settlement agreement with the plaintiffs dated
            November
            5, 2007. The plaintiffs agreed to dismiss the complaint against the Company
            in
            exchange for a payment of $50,000 to be made within 90 days from the
            execution
            of the settlement agreement. The action is continuing against the remaining
            defendants.
 F-17
 **NATIONAL
              LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 Screen
            Actor’s Guild v. National Lampoon Clubhouse, Inc. During late 2006, the Screen
            Actor’s Guild (“SAG”) filed claims against National Lampoon Clubhouse, Inc.
            (“Clubhouse”) for unpaid wages and pension, health and welfare benefits incurred
            for the filming of “Monster House” aka “Trick or Treat”. SAG alleges that
            certain actors were not paid in full and are owed more compensation,
            expenses
            and benefits under the SAG agreement. Clubhouse disputes these claims
            and
            intends to vigorously defend this action. An arbitration with SAG is
            scheduled
            for February of 2008.
  American
            Cinema Distribution Corporation v. National Lampoon, Inc. In August 2007,
            the
            American Cinema Distribution Corporation (“ACDC”) filed claims against National
            Lampoon, Inc. for costs incurred on the release of “National Lampoon’s Pucked”.
            ACDC alleges that the Company did not perform distribution services as
            agreed
            and that ACDC should be reimbursed for distribution costs it incurred
            estimated
            at $65,000. ACDC also alleges that it does not owe distribution fees
            to the
            Company for marketing, publicity, promotional and advertising services
            the
            Company provided which services the Company alleges have a value in excess
            of
            $290,000. National Lampoon disputes these claims and intends to vigorously
            defend this action.
  **NOTE
            I - MINORITY INTEREST**
  Pursuant
            to an agreement entered into between the Company and Majestic Entertainment,
            Inc. ("Majestic") in December 2004, the parties formed National Lampoon
            Clubhouse, Inc. ("Clubhouse"). The entity is owned equally by the Company
            and
            Majestic. Clubhouse is an attempt to create another brand using the National
            LampoonTM name. Because of the importance of the National LampoonTM name to the
            Company, the Company exercises day-to-day operational control over Clubhouse.
            Clubhouse operates out of the Company's premises, and utilizes both the
            staff
            and property of the Company. The Company integrated Clubhouse's operations
            with
            its operations, making all the decisions necessary to carry out the current
            business activities. The Company provides all the accounting functions
            for
            Clubhouse, including making all accounting policy decisions, determining
            any
            estimates affecting the carrying amounts of assets and liabilities, and
            maintaining all accounting records. The Company also established credit
            with
            vendors for use by Clubhouse or used its vendors to provide services
            to
            Clubhouse. Additionally, Clubhouse uses the post-production equipment
            and other
            post-production facilities on the Company's premises. Based on the foregoing,
            the Company has determined that although it does not exercise control
            by a
            majority of the voting rights in Clubhouse, it has more than a significant
            influence on Clubhouse and accordingly the Company consolidates Clubhouse's
            financial results with the Company's.
  The
            total
            budget for the first film made by Clubhouse was $1,800,000, which was
            funded
            equally by the Company and Majestic **.** As of
            July 31, 2007, Clubhouse received $911,784 in funding from Majestic toward
            the
            production of the film. Of this amount, $181,250 was received during
            the fiscal
            year ended July 31, 2006 and $5,034 was received during the fiscal year
            ended
            July 31, 2007. Each party was to invest $300,000 into Clubhouse. Majestic’s
            contribution was recorded to minority interest. Based on EITF 88-18,
            because
            there is no implicit rate of return to Majestic and Majestic has contributing
            participation in the production of the film, and because there is no
            other
            factor that would require the classification of this payment as debt,
            the
            Company has recorded the remainder of the funding, totaling $611,784,
            against
            capitalized production costs. The 50% of production costs funded by the
            Company
            in the amount of $632,932 to National Lampoon Clubhouse, Inc. has been
            recorded
            as an inter-company note payable with no interest accrued and has been
            eliminated in consolidation.
  The
            50%
            ownership by Majestic Entertainment, Inc. was initially recognized on
            the
            Company's consolidated financial statements as minority interest in the
            amount
            of $300,000 which has been reduced to zero because the Company offset
            its
            portion of losses by the subsidiary which exceeded $300,000. The total
            budget of
            $1,800,000 for the production was funded 50% by each party. The terms
            of the
            agreement state that (1) revenue received by National Lampoon Clubhouse,
            Inc.
            will be reinvested in future films and (2) when there are sufficient
            funds for
            National Lampoon Clubhouse, Inc. to function debt free, then profit
            distributions will be made in accordance with the ownership percentages.
            During
            the years ended July 31, 2007 and 2006 most of the capitalized production
            costs
            were expensed to “permanent impairment of assets” and the remaining amount of
            $97,000 will be expensed during fiscal year 2008. There are no future
            profit
            distributions expected.
 F-18
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  **NOTE
            J - INVESTMENT IN RED ROCK**
 
 In
            October 2006, the Company invested $800 in Red Rock Pictures Holdings,
            Inc.,
            (“Red Rock”) which was then merged into a publicly traded entity classified as a
            development stage company. The investment represents approximately 11,769,236
            shares or 19.5% of the total outstanding shares of Red Rock Pictures
            Holdings,
            Inc. Three members of National Lampoon’s board of directors, Robert Levy,
            Tim Durham and Daniel Laikin, also own stock in Red Rock Pictures Holdings,
            Inc.
            The Company recorded the transaction under the equity method due to the
            determination they had significant influence, and recognized its proportionate
            share of the investee’s losses not to exceed the $800 investment. In addition,
            the Company’s investment had been determined to not be a variable interest
            entity in accordance with FIN46(R) since Red Rock Pictures Holdings,
            Inc. was
            not formed for the primary benefit of the Company, and the Company does
            not have
            an obligation to absorb the losses, nor receive any return. The fair
            market
            value of each share of Red Rock Pictures Holdings, Inc. is $0.60 as of
            July 31,
            2007. Included in the accompanying balance sheet as of July 31, 2007
            are notes
            payable to Red Rock Pictures Holdings, Inc of $3,657,408. In September
            2006, Red
            Rock entered into a sub lease agreement with National Lampoon, Inc. for
            office
            space at $2,000 per month.
 
 **NOTE
            K - INCOME TAXES**
  The
            Company accounts for income taxes in accordance with SFAS 109, Accounting
            for
            Income Taxes. There was no income tax provision recorded for fiscal years
            ending
            2007 and 2006 due to the significant net losses in both years.
  A
            valuation allowance has been recorded for the total deferred tax assets
            as a
            result of uncertainties regarding realization of the asset based upon
            the lack
            of profitability and the uncertainty of future profitability. The income
            tax
            benefit reconciled to the tax computed at the statutory rate was approximately
            as follows for the year ended December 31, 2007.
  The
            tax
            effects of significant temporary differences representing deferred tax
            assets as
            of July 31, 2007 are as follows:
 2007Deferred
                        tax assets:Accrued
                        Royalties
                    
                    $
                    160,000Accrued
                        Interest
                    
                    
                    53,000Accrued
                        Expenses
                    
                    
                    46,000Net
                        Operating losses
                    
                    
                    7,895,000Total
                        Deferred Tax Asset
                    
                    
                    8,154,000Valuation
                        Allowance
                    
                    
                    (8,154,000
                    )Net
                        deferred tax asset
                    
                    $
                    -
  A
          valuation allowance of $8,154,000 was recorded at July 31, 2007 an increase
          of
          $464,000 from the prior year balance of $7,690,000. The balances at July
          31 2007
          and 2006 were recorded to offset the net deferred tax assets due to the
          uncertainty of realizing the net benefits of the tax assets in the
          future.
  A
          reconciliation between the statutory federal tax rate and the Company's
          effective tax rate is as follows:
 2007Statutory
                      Federal Income Tax Rate
                  
                  
                  (34.0
                  %)State
                      Income Taxes Amortization of Intangible Assets
                  
                  
                  9.3
                  %Other,
                      Increase in Valuation Analysis
                  
                  
                  24.7
                  %Effective
                      Tax Rate
                  
                  
                  0.0
                  %The
                      Company has unused net operating loss (NOL) carry forwards
                      totaling $19,737,000
                      which expire at various dates from 2007 to
                      2027.
 F-19
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  **NOTE
          L - STOCK OPTIONS AND WARRANTS**
 
 ***A)***
                ***Stock
                    Options***
 
 On
          January 30, 2002, the Company adopted the Amended
          and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan
          (the
          "1999 Plan"), as adopted by the Company's shareholders at its annual meeting
          on
          April 25, 2002 .
          The
          options shall be granted from time to time by the Compensation Committee.
          Individuals eligible to receive options include employees of the Company,
          consultants to the Company and directors of the Company. The options shall
          have
          a fixed price, which will not be less than 100% of the fair market value
          per
          share on the grant date. The total number of options authorized is
          6,500,000.
 
 During
          the year ended July 31, 2007, the Company issued 1,065,000 options to purchase
          the Company's common stock at $1.85 - $2.50 per share to employees under
          the "1999
          Plan" .
          The
          aggregate value of the options vesting from August 1, 2006 to July 31,
          2007 was
          $872,542 and has been reflected as compensation cost. As of July 31, 2007,
          the
          aggregate value of unvested options was $1,008,507, which will be amortized
          as
          compensation cost as the options vest, over 3 years.
 
 The
          fair
          value of each option is estimated on the date of grant using the Black-Scholes
          option pricing model that uses the assumptions noted in the following table.
          Expected volatility is based on the volatility of the Company’s share price
          during the year preceding the issuance date of the warrant. For purposes
          of
          determining the expected life of the option, the full contract life of
          the
          option is used; average
          risk-free interest of 5.50% and; dividend yield of 0%.
 
 The
          weighted-average grant-date fair value of options granted during 2007 and
          2006
          was $1.44 and $1.44, respectively.
 
 Year
                    ended
                  July
                    31, 2007
                
                Year
                    ended
                  July
                    31, 2006Expected
                    volatility
                
                
                68.4%
                    - 72.9
                %
                
                80.60
                %Weighted
                    average volatility
                
                
                69.9
                %
                
                80.60
                %Expected
                    dividends
                
                
                0
                %
                
                0
                %Expected
                    term (in years)
                
                
                7-10
                
                
                6-10Risk
                    free rate
                
                
                5.5
                %
                
                5.5
                %
 
 A
          summary
          of option activity as of July 31, 2007 and changes during the year then
          ended is
          presented below:
 
 Shares
                
                Weighted-Average
                  Exercise
                    Price
                
                Weighted-Average
                  Remaining
                  Contractual
                  Terms
                    (Years)
                
                Aggregate
                  Intrinsic
                  Value
                    (1)Outstanding
                    at July 31, 2006
                
                
                4,663,393
                
                $
                2.66Granted
                
                
                1,065,000
                
                $
                2.11Exercised
                
                
                (82,100
                )
                $
                1.61Forfeited
                    or expired
                
                
                (276,687
                )
                $
                2.89Outstanding
                    at July 31, 2007
                
                
                5,369,606
                
                $
                2.55
                
                
                4.47
                
                $
                890,791Exercisable
                    at July 31, 2007
                
                
                4,448,940
                
                $
                2.55
                
                
                4.03
                
                $
                830,391
 
 (1)
          The
          aggregate intrinsic value was calculated, as of July 31, 2007, as the difference
          between the market price and the exercise price of the Company’s stock for the
          2,626,606 and 2,166,606 options outstanding and exercisable, respectively,
          which
          were in the money.
 F-20
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 A
          summary
          of the status of the Company’s non-vested shares granted under the Company’s
          stock option plan as of July 31, 2007 and changes during the year ended
          July 31,
          2007 is presented below:
 Non-vested
                    Shares
                
                Shares
                
                Weighted-Average
                    Grant
                  Date
                    Fair ValueNon-vested
                    at August 1, 2006
                
                
                342,667
                
                $
                2.16Granted
                
                
                1,065,000
                
                
                1.44Vested
                
                
                (472,834
                )
                
                1.70Forfeited
                
                
                (14,167
                )
                
                1.08Non-vested
                    at July 31, 2007
                
                
                920,666
                
                $
                1.58
 
 
 ***B)***
                ***Warrants***
 
 During
          the year ended July 31, 2007, the Company granted 222,727 warrants valued
          at
          $210,609.
 
 The
          fair
          value of each warrant is estimated on the date of grant using the Black-Scholes
          option pricing model that uses the assumptions noted in the following table.
          Expected volatility is based on the volatility of the Company’s share price
          during the year preceding the issuance date of the warrant. For purposes
          of
          determining the expected life of the option, the full contract life of
          the
          option is used; average
          risk-free interest of 5.50% and; dividend yield of 0%.
 
 Year
                    ended
                  July
                    31, 2007Expected
                    volatility
                
                
                68.7%
                    to 72.7
                %Weighted
                    average volatility
                
                
                70.59
                %Expected
                    dividends
                
                
                -Expected
                    term (in years)
                
                
                2
                    - 10Risk
                    free rate
                
                
                5.50
                %
 
 The
          weighted-average grant date fair value of warrants granted during fiscal
          year
          2007 was $0.95.
 
 A
          summary
          of warrant activity as of July 31, 2007 and changes during the year then
          ended
          is presented below:
 
 Shares
                
                Weighted-Average
                  Exercise
                    Price
                
                Weighted-Average
                  Remaining
                  Contractual
                  Terms
                    (Years)
                
                Aggregate
                  Intrinsic
                  Value
                    (1)Outstanding
                    at July 31, 2006
                
                
                1,084,004
                
                $
                3.74Granted
                
                
                222,727
                
                $
                2.78Exercised
                
                
                -
                
                
                -Forfeited
                    or expired
                
                
                (20,000
                )
                $
                2.75Outstanding
                    at July 31, 2007
                
                
                1,286,731
                
                $
                3.59
                
                
                2.18
                
                $
                -Exercisable
                    at July 31, 2007
                
                
                1,220,064
                
                $
                3.62
                
                
                2.21
                
                $
                -
 F-21
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
 The
          aggregate intrinsic value was calculated, as of July 31, 2007, as the difference
          between the market price and the exercise price of the Company’s stock for the
          warrants which were in-the-money.
 
 A
          summary
          of the status of the Company’s non-vested shares granted as warrants as of July
          31, 2007 and changes during the year ended July 31, 2007 is presented
          below:
 
 Non-vested
                    Shares
                
                Shares
                
                Weighted-Average
                    Grant
                  Date
                    Fair ValueNon-vested
                    at July 31, 2006
                
                
                -
                
                $
                -Granted
                
                
                222,727
                
                
                0.95Vested
                
                
                (156,060
                )
                
                1.15Forfeited
                
                
                -
                
                
                -Non-vested
                    at July 31, 2007
                
                
                66,667
                
                $
                0.47
  **NOTE
          M - SEGMENT INFORMATION**
  Segment
          Reporting - SFAS No. 131, “Disclosures About Segments of an Enterprise and
          Related Information” results in the use of a management approach in identifying
          segments of an enterprise. The Company operates in five business segments:
          licensing and exploitation of the National Lampoon(TM) trademark and related
          properties including the sale of products to consumers; advertising and
          promotion through field marketing, live events and the distribution of
          television programming on college campuses; production of television, and
          DVD
          products; and production of motion pictures through National Lampoon Clubhouse,
          Inc. Segment operating income/(loss) excludes the amortization of intangible
          assets, interest income, and income taxes. Selling, general and administrative
          expenses not specifically attributable to any segment have been prorated
          based
          on revenue among the five segments. Summarized financial information for
          the
          years ended July 31, 2007 and July 31, 2006 concerning the Company's segments
          is
          as follows:
 Publishing
                      &
                  
                  Advertising
                      &
                  
                  
                  
                  TravelLicensing
                  
                  Promotion
                  
                  Production
                  
                  Services
                  
                  Clubhouse
                  
                  TotalFiscal
                      Year Ended July 31, 2007Segment
                      revenue
                  
                  $
                  4,078,738
                  
                  $
                  1,975,827
                  
                  $
                  44,500
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  6,099,065Segment
                      operating income (loss)
                  
                  $
                  1,421,273
                  
                  $
                  (2,944,690
                  )
                  $
                  (724,111
                  )
                  $
                  —
                  
                  $
                  —
                  
                  $
                  (2,247,528
                  )Depreciation
                      expense
                  
                  $
                  8,415
                  
                  $
                  5,254
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  13,669Fiscal
                      Year Ended July 31, 2006Segment
                      revenue
                  
                  $
                  1,027,572
                  
                  $
                  2,283,610
                  
                  $
                  178,583
                  
                  $
                  197,929
                  
                  $
                  —
                  
                  $
                  3,687,693Segment
                      operating (loss)
                  
                  $
                  (2,752,024
                  )
                  $
                  (1,978,017
                  )
                  $
                  (866,037
                  )
                  $
                  (653,712
                  )
                  $
                  (714,510
                  )
                  $
                  (6,964,300
                  )Depreciation
                      expense
                  
                  $
                  —
                  
                  $
                  (9,000
                  )
                  $
                  —
                  
                  $
                  —
                  
                  $
                  —
                  
                  $
                  (9,000
                  )
 F-22
 **NATIONAL
          LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  **FOR
          THE YEAR**
 A
          reconciliation of segment operating loss to net income before income taxes
          for
          year ended July 31, 2007 and 2006 is as follows:
 7/31/07
                
                7/31/06Total
                  segment operating (loss)
                
                $
                (2,247,528
                )
                $
                (6,964,300
                )Amortization
                    of intangible assets
                
                
                (242,502
                )
                $
                (240,706
                )Interest
                    expense
                
                
                (51,299
                )
                $
                (37,232
                )Interest
                    Income
                
                
                5,832
                
                $
                75,962Equity
                    in investee loss
                
                
                (800
                )
                $
                —Other
                    income/expense
                
                
                32,127
                
                $
                57,386Net
                  loss before minority interest and income taxes
                
                $
                (2,504,170
                )
                $
                (7,108,890
                )
  **NOTE
          N - CONTROLLED COMPANY STATUS**
  The
          Company is a "controlled company" as that term is defined in Section 801(a)
          of
          the Rules of the American Stock Exchange. Three of its directors, Daniel
          S.
          Laikin, Timothy S. Durham and Paul Skjodt, control over 50% of the voting
          power
          of National Lampoon, Inc. As a controlled company, the Company is not subject
          to
          Section 804 of the Rules of the American Stock Exchange. Section 804 requires
          that nominees to the Board of Directors be made by either a nominating
          committee
          comprised solely of independent directors or by a majority of the independent
          directors. Instead, nominees to the Board of Directors are nominated in
          accordance with the terms of that certain Voting Agreement entered into
          on May
          17, 2002 among Daniel S. Laikin, Paul Skjodt, Timothy S. Durham, Ronald
          Holzer,
          DC Investment, LLC, NL Acquisition Group LLC, Samerian LLP, Diamond Investments,
          LLC, Christopher R. Williams, Helen C. Williams, DW Leasing Company, LLC,
          Judy
          B. Laikin (all of whom are collectively referred to in this discussion
          as the
          "NLAG Stockholders") and James P. Jimirro. The Voting Agreement was entered
          into
          in conjunction with the reorganization transaction that took place on May
          17,
          2002. According to the terms of the Voting Agreement, the NLAG Stockholders
          agree to vote for Mr. Jimirro and two directors nominated by Mr. Jimirro
          and,
          conversely, Mr. Jimirro agrees to vote for three directors nominated by
          the NLAG
          Stockholders. Since the termination of Mr. Jimirro's employment agreement
          and
          payment of all amounts due to him, the NLAG Stockholders can now nominate
          and
          vote for a seventh director. The Voting Agreement will terminate on the
          date as
          of which Mr. Jimirro personally ceases to own beneficially (whether by
          reason of
          his death or otherwise) at least 100,000 shares of common stock. Mr. Jimirro
          owned 111,245 shares of the Company's common stock as of July 31, 2007.
          The
          Voting Agreement prevents the Company from having a policy with regard
          to the
          consideration of any director candidates recommended by security holders
          (other
          than the NLAG Stockholders and Mr. Jimirro) or an independent committee
          whose
          purpose is to nominate director candidates.
  **NOTE
          O - SUBSEQUENT EVENTS**
  On
          September 21, 2007, 620,000 options were issued to the directors and various
          employees. These options have an exercise price of $2.15 and will expire
          seven
          years from the grant date. The options vest over three years with a third
          of the
          options vesting at each anniversary date of the grant.
  On
          October 25, 2007, the Company issued 4,171 shares of its common stock to
          the
          Board of Directors as director fees in lieu of the monthly fee of $1,000.
          The
          Company expensed $10,511, which was equivalent to the fair market value
          of the
          shares on the date of issuance.
  On
          September 1, 2007, the Company signed an agreement with a consultant for
          consulting and investor relations services. The consultant is to receive
          60,000
          restricted shares of common stock of the Company. The shares will be delivered
          over the twelve month term of the agreement. On October 25, 2007, the Company
          issued 20,000 shares of its restricted common stock to the consultant.
          The
          Company expensed $50,400, which was equivalent to the fair market value
          of the
          shares on the date of issuance. The remaining 40,000 shares will be earned
          and
          issued monthly at the rate of 3,636 shares each month. The consultant will
          also
          receive a cash fee payable on the first of every month in the amount of
          $3,500.
          The consultant will also be issued 40,000 warrants, whereby 10,000 shares
          will
          vest upon each of the following dates: September 1, 2007, December 1, 2007,
          March 1, 2008 and June 1, 2008. The shares will be priced at the current
          market
          price upon those dates.
 F-23
 **NATIONAL
            LAMPOON, INC. AND SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)**
  On
          October 25, 2007, the Company issued 10,000 shares of its restricted common
          stock to a consultant for internet services. The Company expensed $25,200,
          which
          was equivalent to the fair market value of the shares on the date of issuance.
  On
          October 25, 2007, the Company issued 9,000 shares of its restricted common
          stock
          to a consultant for product placement services. The Company expensed $22,680,
          which was equivalent to the fair market value of the shares on the date
          of
          issuance.
  During
          the months of August, September, October and November 2007 we issued
          approximately 32,826 shares to various consultants for services rendered
          during
          these months.
  On
          November 21, 2007, the Company filed a Form 8K announcing the Notice of
          Delisting or Failure to Satisfy a Continued Listing Rule or Standard from
          The
          American Stock Exchange. The
          Company believes that the filing of the 10KSB will be sufficient to cease
          the
          delisting process.
 F-24


**ITEM
      8.**  **CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**





Not
      Applicable




**ITEM
      8A.**  **CONTROLS
      AND PROCEDURES**




We
      carried out an evaluation, under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and our interim Chief
      Financial Officer of the effectiveness of the design and operation of our
      disclosure controls and procedures as of the end of the period covered by this
      report. The evaluation was undertaken in consultation with our accounting
      personnel. Based on the evaluation, the interim Chief Financial Officer and
      the
      Chief Executive Officer concluded that our disclosure controls and procedures
      are not effective to ensure that information required to be disclosed by us
      in
      the reports that we file or submit under the Securities Exchange Act of 1934
      is
      recorded, processed, summarized and reported within the time periods specified
      in the Securities and Exchange Commission’s rules and forms.





Specifically,
      due in part to the departure of our former Chief Financial Officer and due
      to
      our limited accounting staff, we were unable to complete the preparation of
      our
      financial statements for the year ending July 31, 2007 and this report on a
      timely basis. We have attempted to address this weakness by hiring an interim
      Chief Financial Officer and continuing to search for a permanent
      replacement.





Other
      than as described above, there were no changes in our internal controls or
      in
      other factors that could significantly affect internal controls subsequent
      to
      the date of their evaluation.





**ITEM
      8B.**  **OTHER
      INFORMATION**





Not
      Applicable





**PART
      III**





**ITEM
      9.**  **DIRECTORS,
      EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
      16(a)
      OF THE SECURITIES EXCHANGE ACT**





The
      number of directors required by our bylaws is seven. There are no family
      relationships among our executive officers and directors.





The
      following table sets forth certain information regarding our directors and
      executive officers.





**Name**
            
            **Age**
            
            **Position**Daniel
                S. Laikin
            
            45
            
            Chief
                Executive Officer, and DirectorLorraine
                Evanoff
            
            45
            
            Interim
                Chief Financial OfficerTimothy
                S. Durham
            
            45
            
            DirectorPaul
                Skjodt
            
            49
            
            DirectorRobert
                Levy
            
            53
            
            DirectorJames
                P. Jimirro
            
            66
            
            ChairmanDuncan
                Murray
            
            61
            
            DirectorJames
                Toll
            
            54
            
            Director





None
      of
      our directors or executive officers has, during the past five years,


30


·
            had
                any bankruptcy petition filed by or against any business of which
                such
                person was a general partner or executive officer, either at the
                time of
                the bankruptcy or within two years prior to that time,





·
            been
                convicted in a criminal proceeding and none of our directors or executive
                officers is subject to a pending criminal proceeding,





·
            been
                subject to any order, judgment, or decree, not subsequently reversed,
                suspended or vacated, of any court of competent jurisdiction, permanently
                or temporarily enjoining, barring, suspending or otherwise limiting
                his
                involvement in any type of business, securities, futures, commodities
                or
                banking activities, or





·
            been
                found by a court of competent jurisdiction (in a civil action), the
                Securities and Exchange Commission or the Commodity Futures Trading
                Commission to have violated a federal or state securities or commodities
                law, and the judgment has not been reversed, suspended, or vacated.





**Election
      of Directors**





On
      May
      17, 2002, a Voting Agreement was entered into among James P. Jimirro and the
      members of the NLAG Group. The Voting Agreement will terminate 13 months
      following the date of Mr. Jimirro’s separation from service, which occurred on
      January 28, 2005. During the term of the Voting Agreement, Mr. Jimirro is
      entitled to nominate three directors to the Board of Directors and Daniel S.
      Laikin, our Chief Executive Officer, is entitled to nominate three directors.
      The seventh member of our Board of Directors must be mutually nominated by
      a
      majority of the directors nominated by Mr. Jimirro and Mr. Laikin. The parties
      to the Voting Agreement, who collectively have voting control, have agreed
      to
      vote for those persons nominated by Mr. Jimirro and Mr. Laikin.





Once
      the
      Voting Agreement terminates, directors will be elected annually and will serve
      until successors are elected and qualified or until a director’s earlier death,
      resignation or removal.





**Committees
      of the Board of Directors**





Our
      Board
      of Directors has two committees, an audit committee and a compensation
      committee. Currently Timothy Durham and Robert Levy make up our audit committee. The
      members of the Audit Committee are independent as that term is defined in
      Section 121 of the Rules of the American Stock Exchange. Neither of our audit
      committee members qualifies as an “audit committee financial expert”, as defined
      by Item 407 of Regulation S-B promulgated under the Securities Act of 1933
      and
      the Securities Exchange Act of 1934. However, members of our audit committee
      and
      members of our Board of Directors each have some of the attributes of an audit
      committee financial expert, and we believe that the collective experience and
      education of the members of our Board of Directors, including the members of
      our
      audit committee, provide us with the expertise that an audit committee financial
      expert could provide. Timothy
      Durham and James P. Jimirro serve as members of the compensation
      committee **.**





**Business
      Experience**





DANIEL
      S.
      LAIKIN has been a director since 2000 and was employed as our Chief Operating
      Officer from May 17, 2002 until February 1, 2005 when he became our Chief
      Executive Officer. Mr. Laikin served as Co-Chairman of Biltmore Homes, Inc.,
      an
      Indiana-based home building and real estate development company until 2000.
      He
      also served as a managing partner of Four Leaf Partners, LLC, a closely held
      investment company, concentrating on the startup and financing of high tech
      and
      Internet-related companies. He is also on the Board of Directors of Obsidian
      Enterprises, Inc., a public company.


31


LORRAINE
      EVANOFF, Interim Chief Financial Officer, rejoined us in September 2007. Ms.
      Evanoff had been our Vice
      President of Finance and Chief Accounting Officer from April 2005 until March
      2006. From March 2006 until July 2007, Ms. Evanoff was Director of Finance
      of
      Element Films, LLC. Prior to joining us in April 2005, Ms. Evanoff was
      Controller of TAG Entertainment Corp., a public company, a position she held
      from February 2004 until April 2005. Prior to working at TAG Entertainment,
      Ms.
      Evanoff was Controller of ANTs Software Inc., a public company, a developer
      of
      high-performance SQL database management systems until February 2004. From
      1999
      to 2002, Ms. Evanoff also held senior treasury analyst and financial analyst
      posts with Electronic Arts Inc. and Landor Associates, Inc.





TIMOTHY
      S. DURHAM has served as a director since 2002. He is the Chief Executive Officer
      and Chairman of the Board of Directors of Obsidian Enterprises, Inc. (formerly
      Danzer Corporation) and has held these positions since June 2001. Since April
      2000, he has served as a Managing Member and the Chief Executive Officer of
      Obsidian Capital Company LLC, which is the general partner of Obsidian Capital
      Partners LP. Mr. Durham founded in 1998, and since then has maintained a
      controlling interest in, several investment funds, including Durham Capital
      Corporation, Durham Hitchcock Whitesell and Company LLC, and Durham Whitesell
      Associates LLC. From 1991 to 1998, Mr. Durham served in various capacities
      at
      Carpenter Industries, Inc., including as Vice Chairman, President and Chief
      Executive Officer. Mr. Durham serves as a director of Obsidian Enterprises,
      Inc., a public company.





PAUL
      SKJODT has been a director since 2002. He is actively involved in a variety
      of
      companies including managing member of Four Leaf & Associates. Four Leaf is
      a venture fund that provides seed money to a host of technology companies.
      Mr.
      Skjodt also is President of Oakfield Development a land development company
      based in Indianapolis and owner of the Indiana Ice, an ice hockey team in the
      United States Hockey League. Mr. Skjodt is also involved in numerous
      philanthropic endeavors in Indiana.





ROBERT
      LEVY  was
      appointed to our Board of Directors on September 13, 2006. Mr. Levy has written
      and/or produced motion pictures for over 20 years and is a principal partner
      in
      Tapestry Films. His recent production credits include The Wedding Crashers,
      starring Vince Vaughn, Owen Wilson, Rachel McAdams and Christopher Walken;
      Underclassman, starring Nick Cannon; Serendipity starring John Cusack and Kate
      Beckinsale; The Wedding Planner starring Jennifer Lopez and Matthew McConaughey;
      National Lampoon’s Van Wilder starring Ryan Reynolds; Van Wilder 2: The Rise of
      Taj, starring Kal Penn; She’s All That starring Freddie Prinze Jr. and Rachael
      Leigh Cook; and Employee of the Month, starring Dane Cook, Jessica Simpson
      and
      Dax Shepard. Mr. Levy has also been the executive producer on the films Swing,
      Black & White, Payback, The Chain, The Granny, and Dark Tide. He was not
      only the executive producer, but he also wrote the story for the classic film
      Smokey and the Bandit, starring Burt Reynolds. Mr. Levy has also directed and
      produced A Kid in Aladdin’s Court, the sequel to A Kid in King Arthur’s Court,
      which was produced by Tapestry Films. Mr. Levy graduated from the University
      of
      California, Los Angeles and received a producing fellowship from the American
      Film Institute.





JAMES
      P.
      JIMIRRO has been a director since 1986 and was employed as our President and
      Chief Executive Officer from 1990 until January 2005. From 1980 to 1985, he
      was
      the President of Walt Disney Telecommunications Company, which included serving
      as President of Walt Disney Home Video, a producer and distributor of family
      home video programming. While in this position, he also served as Corporate
      Executive Vice President of Walt Disney Productions. In addition, from 1983
      to
      1985, Mr. Jimirro served as the first President of the Disney Channel, a
      national cable pay-television channel, which Mr. Jimirro conceived and
      implemented. Mr. Jimirro continued in a consulting capacity for Walt Disney
      Company through July 1986. From 1973 to 1980, he served as Director of
      International Sales and then as Executive Vice President of Walt Disney
      Educational Media Company, a subsidiary of Walt Disney Company. Prior to 1973,
      Mr. Jimirro directed international sales for CBS, Inc., and later for Viacom
      International. Mr. Jimirro also served as a member of the Board of Directors
      of
      Rentrak Corporation between January 1990 and September 2000.





JAMES
      TOLL  was
      appointed to our Board of Directors on September 18, 2006. Mr. Toll has worked
      in the financial area for 26 years, including CBS Television Network in Los
      Angeles and Warner/Electra/Atlantic International (WEA International) Records
      in
      Burbank as a Senior Financial Analyst for three years. While at WEA, Mr. Toll
      worked for six months at the Mexico City division as their Director Financiero.
      Mr. Toll spent three years as head of the accounting department for the
      non-profit company WQED-West, and was involved with the production of the Emmy
      award winning seven part series, “The Planet Earth”, and the production of
      National Geographic Specials. Mr. Toll spent three years as CFO/Treasurer in
      the
      Direct Response Industry where he was involved with the hit products “Komputer
      Tutor” and the “Mighty Pro Grill”, and the mega hit, “Abslide”. Mr. Toll joined
      Keller Entertainment Group as the CFO in l996 and was responsible for the
      corporate financial functions of the Company and management of $40 million
      for
      the production and distribution of domestic and international television series
      such as “Tarzan the Epic Adventure”, “Conan the Adventurer”, and “Acapulco
      Heat”. Mr. Toll initially joined J2 Communications/National Lampoon in 1987 as
      Chief Financial Officer and continued in that position until 1993. He then
      re-joined the Company in August of 2001 as Chief Financial Officer and remained
      in the position until June 16, 2005. Mr. Toll developed all computerized
      financial systems for J2 Communications, was responsible for the preparation
      of
      all budgets, forecasts, and financial statements including all SEC financial
      reporting. He was head of operations of J2 Communications video distribution,
      and was involved in all M&A activity, including J2 Communication’s
      acquisition of National Lampoon. After leaving National Lampoon in 2005, Mr.
      Toll joined Resources Global Professionals, an international consulting firm
      that was spun off from Deloitte & Touche one of the big 5 accounting firms.
      Resources Global Professionals has over 70 offices worldwide and in 2005 earned
      over $525 million in revenues.


32


DUNCAN
      MURRAY was appointed to our Board of Directors on October 19, 2006. From
      1998
      to his retirement in 2004, Mr. Murray served as Vice President, Business and
      Legal Affairs, of Santa Monica based Transactional Marketing Partners, Inc.
      (“TMP”), a direct response television consulting firm. Before joining TMP, from
      August 1986 through January of 2003, Mr. Murray served as the registrant’s
      Vice-President of Marketing and, prior to that, worked with The Walt Disney
      Company for 14 years in a variety of capacities including Vice President-Sales
      Administration for The Disney Channel and Director of Sales for Walt Disney
      Telecommunications Company. While at The Walt Disney Company, Mr. Murray was
      an
      integral part of the small team that created and launched The Disney Channel.
      During his tenure as Vice President of Marketing for the registrant, he oversaw
      shareholder relations, published the final three issues of National Lampoon
      Magazine, and managed negotiations with Artisan Entertainment for attachment
      of
      the registrant’s name to the feature film National Lampoon’s Van Wilder. Mr.
      Murray currently serves as a Director, Secretary and Treasurer of The Greenburg
      Family Foundation, a health issues-related philanthropic organization
      headquartered in Santa Monica and Palm Springs, California.





Our
      Board
      of Directors does not have a standing nominating committee or a charter
      governing the manner in which individuals are nominated to the Board. With
      the
      exception of Daniel S. Laikin, our current Chief Executive Officer, James P.
      Jimirro, our former President and Chief Executive Officer, and James Toll,
      our
      former Chief Financial Officer, all of the members of our Board of Directors
      are
“independent”, as that term is defined in Section 121A of
      the
      Rules of the American Stock Exchange.





We
      are a
“controlled company” as that term is defined in Section 801(a) of the Rules of
      the American Stock Exchange. Three of our directors, Daniel S. Laikin, Timothy
      S. Durham and Paul Skjodt, control over 50% of the voting power of National
      Lampoon, Inc. As a controlled company, we are not subject to Section 804 of
      the
      Rules of the American Stock Exchange. Section 804 requires that nominees to
      the
      Board of Directors be made by either a nominating committee comprised solely
      of
      independent directors or by a majority of the independent directors. Instead,
      nominees to the Board of Directors have been nominated in accordance with the
      terms of that certain Voting Agreement entered into on May 17, 2002 among Daniel
      S. Laikin, Paul Skjodt, Timothy S. Durham, Ronald Holzer, DC Investment, LLC,
      NL
      Acquisition Group LLC, Samerian LLP, Diamond Investments, LLC, Christopher
      R.
      Williams, Helen C. Williams, DW Leasing Company, LLC, Judy B. Laikin (all of
      whom are collectively referred to in this discussion as the “NLAG Stockholders”)
      and James P. Jimirro. The Voting Agreement was entered into in conjunction
      with
      the reorganization transaction, referred to in this Proxy Statement as the
      “Reorganization Transaction,” that took place on May 17, 2002. According to the
      terms of the Voting Agreement, the NLAG Stockholders agree to vote for Mr.
      Jimirro and two directors nominated by Mr. Jimirro and, conversely, Mr. Jimirro
      agrees to vote for four directors nominated by the NLAG Stockholders. The Voting
      Agreement will not terminate until the later of the termination of Mr. Jimirro’s
      employment agreement and the payment of all amounts due to him thereunder (which
      occurred on January 28, 2005) or the date as of which Mr. Jimirro personally
      ceases to own beneficially (whether by reason of his death or otherwise) at
      least 100,000 shares of common stock. The Voting Agreement prevents us from
      having a policy with regard to the consideration of any director candidates
      recommended by security holders (other than the NLAG Stockholders and Mr.
      Jimirro) or an independent committee whose purpose is to nominate director
      candidates.


33


**ITEM
      10. EXECUTIVE COMPENSATION**





The
      following tables and discussion set forth information with respect to all
      compensation awarded to, earned by or paid to our Chief Executive Officer and
      up
      to four of our executive officers whose annual salary and bonus exceeded
      $100,000 during our last completed fiscal year (collectively referred to in
      this
      discussion as the “named executive officers”). The officer designation indicates
      positions held as of July 31, 2007, the end of our last fiscal year. During
      the
      2007 fiscal year, Bruce Long separated from service as President and David
      Kane
      separated from service as Chief Financial Officer.





**Summary
                Compensation Table**




Name
                and principal position
            
            Year
            
            Salary
                ($)
            
            Bonus
                ($)
            
            Stock
                Awards ($)
            
            Option
                Awards ($) (1)
            
            Non-Equity
                Incentive Plan Compen-sation ($)
            
            Nonquali-fied
                Deferred Compen-sation Earnings
              ($)
            
            All
                Other Compen-sation ($)
            
            Total
                ($)Daniel
                S. Laikin,
            
            
            2007
            
            
            250,000
            
            
            -
            
            
            -
            
            
            26,874
            
            
            -
            
            
            -
            
            
            3,000
            
            
            279,874Chief
                Executive Officer and PresidentBruce
                Long,
            
            
            2007
            
            
            296,000
            
            
            -
            
            
            -
            
            
            37,072
            
            
            -
            
            
            -
            
            
            -
            
            
            333,072former
                PresidentDavid
                Kane,
            
            
            2007
            
            
            45,000
            (2)
            
            -
            
            
            -
            
            
            17,962
            
            
            -
            
            
            -
            
            
            -
            
            
            62,962former
                Chief Financial Officer




(1)
            The
                relative fair value of the options was estimated using the Black-Scholes
                option pricing model with the following assumptions: average risk-free
                interest of 5.50%; dividend yield of 0%; average volatility factor
                of the
                expected market price of our common stock of 68.4% to 70.1%; and
                a term of
                seven to ten years for the fiscal year ended July 31, 2007;





(2)
            Mr.
                Kane’s annual salary was $90,000. Mr. Kane separated from service after
                six months of employment. The table above includes only the salary
                paid to
                him during his period of
                employment.





**Discussion
      of Compensation**





Our
      compensation program consists of the following three components:





·
            base
                salary;





·
            bonuses;
                and





·
            awards
                of restricted stock or stock options from our Amended and Restated
                1999
                Stock Option, Deferred Stock and Restricted Stock
                Plan.





We
      believe that a combination of cash and common stock or options will allow us
      to
      attract and retain the services of the individuals who will help us achieve
      our
      business objectives, thereby increasing value for our shareholders.





In
      setting the compensation for our officers or members of our Board of Directors,
      our compensation committee looks primarily at the person’s responsibilities, at
      salaries paid to others in businesses comparable to ours, at the person’s
      experience and at our ability to replace the individual. We expect the salaries
      of our executive officers to remain relatively constant unless the person’s
      responsibilities are materially changed.


34


Bonuses
      are used to reward exceptional performance, either by the individual or by
      the
      company. Bonuses are discretionary. There is no single method of computing
      bonuses. The Board of Directors or the compensation committee may establish
      any
      criteria to determine the amount of a bonus. No bonuses were paid to our
      executive officers during the 2007 fiscal year.





In
      2007
      we granted restricted stock or options to purchase our common stock to Dan
      Laikin, Bruce Long and David Kane. We grant options or restricted stock because
      we believe that share ownership by our employees is an effective method to
      deliver superior shareholder returns by increasing the alignment between the
      interests of our employees and our shareholders. No employee is required to
      own
      common stock in our company.





**Director
      Compensation**





As
      compensation to the members of our Board of Directors for the services rendered
      by them, during the fiscal year ended July 31, 2007 we paid fees of $3,000
      to
      each of our directors and we awarded to each director an option to purchase
      25,000 shares of our common stock at an exercise price of $2.00 per share.
      These
      options vest over three years and have a term of seven years.





The
      following table sets forth certain information concerning stock option awards
      granted to our executive officers. No options were exercised by our executive
      officers during the last fiscal year





**OUTSTANDING
                EQUITY AWARDS AT FISCAL YEAR-END****OPTION
                AWARDS**
            
            **STOCK
                AWARDS**Name
            
            Number
                of securities underlying unexercised options (#)
                Exercisable
            
            Number
                of securities underlying unexercised options (#)
              Unexercis-able
            
            Equity
                Incentive Plan Awards: Number of Securities underlying unexercised
                unearned options (#)
            
            Option
                exercise price ($)
            
            Option
                expiration date
            
            Number
                of shares or units of stock that have not vested (#)
            
            Market
                value of shares or units of stock that have not vested ($)
            
            Equity
                incentive plan awards: number of unearned shares, units or other
                rights
                that have not vested (#)
            
            Equity
                incentive plan awards: Market or payout value of unearned shares,
                units or
                other rights that have not vested (#)Daniel
                S. Laikin
            
            
            2,000
            
            
            -
            
            
            -
            
            
            6.50
            
            
            2/22/08
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            2,666
            
            
            -
            
            
            -
            
            
            1.75
            
            
            2/29/09
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            200,000
            
            
            -
            
            
            -
            
            
            3.50
            
            
            5/17/09
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            400,000
            
            
            -
            
            
            -
            
            
            1.76
            
            
            6/16/09
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            15,000
            
            
            -
            
            
            -
            
            
            1.60
            
            
            6/16/14
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            100,000
            
            
            -
            
            
            -
            
            
            2.98
            
            
            1/31/16
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            400,000
            
            
            -
            
            
            -
            
            
            3.13
            
            
            9/17/10
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            25,000
            
            
            -
            
            
            -
            
            
            2.19
            
            
            10/27/15
            
            
            -
            
            
            -
            
            
            -
            
            
            -Daniel
                S. Laikin
            
            
            -
            
            
            100,000
            
            
            -
            
            
            2.04
            
            
            1/31/17
            
            
            -
            
            
            -
            
            
            -
            
            
            -Bruce
                Long
            
            
            -
            
            
            50,000
            
            
            -
            
            
            2.50
            
            
            5/11/13
            
            
            -
            
            
            -
            
            
            -
            
            
            -Bruce
                Long
            
            
            -
            
            
            50,000
            
            
            -
            
            
            2.50
            
            
            11/29/13
            
            
            -
            
            
            -
            
            
            -
            
            
            -David
                Kane
            
            
            -
            
            
            100,000
            
            
            -
            
            
            2.00
            
            
            2/27/14
            
            
            -
            
            
            -
            
            
            -
            
            
            -


35


The
        following table sets forth certain information concerning compensation granted
        to our directors during the 2007 fiscal year. No options were exercised by
        our
        directors during the last fiscal year.


**DIRECTOR
                COMPENSATION**




Name
            
            Fees
                earned or paid in cash ($)
            
            Stock
                Awards ($)
            
            Option
                Awards ($)
            
            Non-Equity
                Incentive Plan Compensation ($)
            
            Non-Qualified
                Deferred Compensation Earnings ($)
            
            All
                Other Compensation ($)
            
            Total
                ($)Daniel
                S. Laikin
            
            
            
            
            
            -
            
            
            —
            
            
            -
            
            
            -
            
            
            3,000
            
            
            3,000Timothy
                S. Durham
            
            
            -
            
            
            -
            
            
            32,331
            
            
            -
            
            
            -
            
            
            3,000
            
            
            35,331Paul
                Skjodt
            
            
            -
            
            
            -
            
            
            32,331
            
            
            -
            
            
            -
            
            
            3,000
            
            
            35,331Robert
                Levy
            
            
            -
            
            
            -
            
            
            189,303
            
            
            -
            
            
            -
            
            
            -
            
            
            189,303James
                P. Jimirro
            
            
            -
            
            
            -
            
            
            32,331
            
            
            -
            
            
            -
            
            
            3,000
            
            
            35,331Duncan
                Murray
            
            
            -
            
            
            -
            
            
            32,331
            
            
            -
            
            
            -
            
            
            -
            
            
            32,331James
                Toll
            
            
            -
            
            
            -
            
            
            32,331
            
            
            -
            
            
            -
            
            
            3,000
            
            
            35,331




(1)
            The
                relative fair value of the options was estimated using the Black-Scholes
                option pricing model with the following assumptions: average risk-free
                interest of 5.50%; dividend yield of 0%; average volatility factor
                of the
                expected market price of the Company’s common stock of 68.7% to 72.9%; and
                a term of seven to ten years for the fiscal year ended July 31,
                2007.





**Information
      on Equity Incentive Plans**





Information
      about our employee equity incentive plan is included in Item 5 of this Annual
      Report.





**Employment
      Agreements**





*Daniel
      S. Laikin, Chief Executive Officer*





On
      January 31, 2005 we entered into an Employment Agreement with Daniel S. Laikin.
      The employment agreement was adopted and approved by our Board of Directors
      on
      February 1, 2005. The employment agreement has a term of three years, but is
      automatically extended for successive three-year terms unless designated members
      of the Board of Directors notify Mr. Laikin that the Board does not intend
      to
      renew the employment agreement or unless the employment agreement has been
      terminated according to its terms.





Pursuant
      to the employment agreement, Mr. Laikin receives an annual salary of $250,000.
      Mr. Laikin is also entitled to receive four weeks paid vacation. Mr. Laikin
      receives an automobile allowance and is entitled to participate in any other
      benefits offered generally to our employees and executives. He is also granted
      an option to purchase 100,000 shares of our common stock on each anniversary
      of
      the effective date of the employment agreement. The exercise price for the
      options will be equal to the average of the last reported sale price for one
      share of common stock during the five business days preceding the date of grant
      or, if this method of valuing the common stock is not available, the Board
      shall
      determine, in good faith, the value of one share of common stock. The term
      of
      each option shall be 10 years. The options shall be granted in accordance with
      the J2 Communications Amended and Restated 1999 Stock Option, Deferred Stock
      and
      Restricted Stock Plan. Mr. Laikin is to meet annually with the Board of
      Directors to set certain performance milestones that must be met bi-annually.
      If
      those milestones are met, Mr. Laikin will receive a bi-annual bonus of $50,000.
      If the milestones are exceeded, Mr. Laikin will receive additional compensation
      that will be paid one-half in cash and one-half in stock.





Mr.
      Laikin’s employment agreement may be terminated voluntarily by us at any time
      during its term for Cause. Cause is defined as (i) the willful and continued
      failure by Mr. Laikin to substantially perform his duties to us in good faith
      (other than a failure resulting from his incapacity due to physical or mental
      illness), or (ii) the willful engaging in conduct which is demonstrably and
      materially injurious to us. In order to terminate Mr. Laikin for Cause, five
      members of the Board of Directors (not including Mr. Laikin) must determine
      at a
      meeting held for such purpose that Mr. Laikin is guilty of the conduct
      triggering the right to terminate him. If Mr. Laikin’s employment is terminated
      by us for Cause, in addition to any benefits mandated by law, we shall pay
      to
      Mr. Laikin his full annual salary in effect at the date of termination and
      other
      benefits to which he is entitled through the date of termination at the rate
      in
      effect at the time notice of termination is given.


36


Mr.
      Laikin’s employment may be terminated by Mr. Laikin at any time, and will
      terminate automatically upon his death or disability. Upon such termination,
      in
      addition to any benefits mandated by law, we shall pay to Mr. Laikin his full
      annual salary in effect at the date of termination and other benefits to which
      he is entitled through the date of termination at the rate in effect at the
      time
      notice of termination is given.





On
      signing the Employment Agreement, we also agreed to enter into a separate
      indemnity agreement with Mr. Laikin. A new indemnity agreement has not been
      entered into as of the date of this annual report, although we entered into
      an
      indemnity agreement with Mr. Laikin on May 17, 2002.





**Code
      of Ethics**





The
      Board
      of Directors has adopted a Code of Ethics that applies to all employees,
      including executive officers, and members of the Board of Directors.





**Compliance
      with Section 16(a) of the Securities Exchange Act**





Section
      16(a) of the Securities Exchange Act requires our directors, executive officers
      and persons who own more than 10% of our common stock to file reports of
      ownership and changes in ownership of our common stock with the Securities
      and
      Exchange Commission. Directors, executive officers and persons who own more
      than
      10% of our common stock are required by Securities and Exchange Commission
      regulations to furnish to us copies of all Section 16(a) forms they file.





To
      our
      knowledge, based solely upon review of the copies of such reports received
      or
      written representations from the reporting persons, we believe that during
      the
      2007 fiscal year our directors, executive officers and persons who own more
      than
      10% of our common stock complied with all Section 16(a) filing requirements
      with
      the exception of the following:





Messrs.
      Robert Levy, Duncan Murray and James Toll filed their initial statement of
      beneficial ownership of securities (form 3) late.





Messrs.
      Paul Skjodt and Timothy Durham each filed one form 4, statement of changes
      in
      beneficial ownership of securities, late. Each form reported one
      transaction.





Mr.
      Daniel S. Laikin filed two form 4s late. Each form reported one
      transaction.





Mr.
      James
      P. Jimirro reported 303 transactions late.





**ITEM
      11.**  **SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**





The
      following table sets forth information as of November 6, 2007 as to each person
      or group who is known to us to be the beneficial owner of more than 5% of our
      outstanding voting securities and as to the security and percentage ownership
      of
      each of our executive officers and directors and of all of our officers and
      directors as a group.





Beneficial
      ownership is determined under the rules of the Securities and Exchange
      Commission and generally includes voting or investment power over securities.
      The number of shares shown as beneficially owned in the tables below are
      calculated pursuant to Rule 13d-3(d)(1) of the Securities Exchange Act of 1934.
      Under Rule 13d-3(d)(1), shares not outstanding that are subject to options,
      warrants, rights or conversion privileges exercisable within 60 days are deemed
      outstanding for the purpose of calculating the number and percentage owned
      by
      such person, but not deemed outstanding for the purpose of calculating the
      percentage owned by each other person listed. Except in cases where community
      property laws apply or as indicated in the footnotes to this table, we believe
      that each stockholder identified in the table possesses sole voting and
      investment power over all of the shares of common stock, Series B Preferred
      Stock and Series C Preferred Stock shown as beneficially owned by the
      stockholder.


37


The
      following table is based on a total of 15,685,617 shares of common stock
      consisting of the following:





·
            a
                total of 8,283,186 shares of common stock outstanding on November
                6,
                2007;





·
            63,607
                shares of Series B Convertible Preferred Stock that may be converted
                into
                3,583,491 shares of common stock;
                and





·
            190,947
                shares of Series C Convertible Preferred Stock that may be converted
                into
                3,818,940 shares of common stock.




Common
                Stock
            
            Series
                B Convertible Preferred Stock, on an as-converted basis(7)
            
            Series
                C Convertible Preferred Stock, on an as-converted basis(11)Name
                and Position *
            
            Number
                of Shares
            
            Percentage
                Ownership of Class
            
            Number
                of Shares
            
            Percentage
                Ownership of Class
            
            Number
                of Shares
            
            Percentage
                Ownership of ClassDaniel
                S. Laikin, CEO
            
            
            4,975,130
            (1)
            
            40.43
            %
            
            1,787,379
            (8)
            
            49.88
            %
            
            1,894,040
            (12)
            
            49.60
            %James
                P. Jimirro, Chairman
            
            
            1,728,750
            (2)
            
            17.46
            %
            
            -
            
            
            -
            
            
            -
            
            
            -Timothy
                Durham, Director
            
            
            1,963,766
            (3)
            
            20.36
            %
            
            994,253
            (9)
            
            27.75
            %
            
            1,206,300
            (13)
            
            31.59
            %Paul
                Skjodt, Director
            
            
            833,762
            (4)
            
            9.49
            %
            
            366,197
            (10)
            
            10.22
            %
            
            -
            
            
            -Robert
                Levy
            
            
            357,265
            (5)
            
            4.16
            %
            
            -
            
            
            -
            
            
            224,600
            (14)
            
            5.88
            %Officers
                and Directors as a Group (7 persons)
            
            
            10,011,352
            (6)
            
            61.60
            %
            
            -
            
            
            -
            
            
            -
            
            
            -Remaining
                Holders of Series B Convertible Preferred Stock as a Group
            
            
            -
            
            
            -
            
            
            435,662
            
            
            12.15
            %
            
            -
            
            
            -Remaining
                Holders of Series C Convertible Preferred Stock as a Group
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            494,000
            
            
            12.94
            %





*
      The
      address for each of the persons named in the table above (with the exception
      of
      the holders of the Series B and Series C Convertible Preferred Stock) is 8228
      Sunset Boulevard, West Hollywood, California 90046.




(1)
      This
      number includes 953,368 shares of common stock owned by Mr. Laikin or by an
      entity controlled by him, options to purchase 1,294,666 shares of common stock,
      a warrant to purchase 1,780,076 shares of common stock issued in conjunction
      with the Series B Convertible Preferred Stock and a warrant to purchase 947,020
      shares of common stock issued in conjunction with the Series C Convertible
      Preferred Stock.




(2)
      This
      number includes 111,710 shares of common stock owned by Mr. Jimirro or by an
      entity controlled by him and options to purchase 1,617,040 shares of common
      stock.


38


(3)
      This
      number includes 600,014 shares of common stock owned by Mr. Durham or by an
      entity controlled by him, options to purchase 145,000 shares of common stock,
      a
      warrant to purchase 615,602 shares of common stock issued in conjunction with
      the Series B Convertible Preferred Stock and a warrant to purchase 603,150
      shares of common stock issued in conjunction with the Series C Convertible
      Preferred Stock.




(4)
      This
      number includes 329,868 shares of common stock owned by Mr. Skjodt or by an
      entity controlled by him, options to purchase 145,000 shares of common stock,
      and a warrant to purchase 358,894 shares of common stock issued in conjunction
      with the Series B Convertible Preferred Stock.




(5)
      This
      number includes 44,965 shares of common stock owned by Mr. Levy or by an entity
      controlled by him, options to purchase 200,000 shares of common stock, and
      a
      warrant to purchase 112,300 shares of common stock issued in conjunction with
      the Series C Convertible Preferred Stock.




(6)
      This
      number includes 1,935 and 744 shares of common stock owned by Mr. Toll and
      Mr.
      Murray, respectively and options to purchase 75,000 shares each of common
      stock.




(7)
      Each
      share of Series B Convertible Preferred Stock may be converted into 56.338
      shares of common stock.




(8)
      Mr.
      Laikin owns 31,726 shares of Series B Convertible Preferred Stock that may
      be
      converted into 1,787,379 shares of common stock.




(9)
      Mr.
      Durham owns 17,648 shares of Series B Convertible Preferred Stock that may
      be
      converted into 994,253 shares of common stock.




(10)
      Mr.
      Skjodt owns 6,500 shares of Series B Convertible Preferred Stock that may be
      converted into 366,197 shares of common stock.




(11)
      Each
      share of Series C Convertible Preferred Stock may be converted into 20 shares
      of
      common stock.




(12)
      Mr.
      Laikin owns 94,702 shares of Series C Convertible Preferred Stock that may
      be
      converted into 1,894,040 shares of common stock.




(13)
      Mr.
      Durham owns 60,315 shares of Series C Convertible Preferred Stock that may
      be
      converted into 1,206,300 shares of common stock.




(14)
      Mr.
      Levy owns 11,230 shares of Series C Convertible Preferred Stock that may be
      converted into 224,600 shares of common stock.





**Information
      on Equity Incentive Plans**





Information
      about our employee equity incentive plan is included in Item 5 of this Annual
      Report.





**ITEM
      12.**  **CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS**





With
      the
      exception of Daniel S. Laikin, our current Chief Executive Officer, James P.
      Jimirro, our former President and Chief Executive Officer, and James Toll,
      our
      former Chief Financial Officer, all of the members of our Board of Directors
      are
“independent”, as that term is defined in Section 121A of
      the
      Rules of the American Stock Exchange. We have an audit committee composed of
      two
      members of our board of directors, both of whom are independent and a
      compensation committee composed of three directors, two of whom are independent.
      We do not have a nominating committee.





During
      the fiscal year ended July 31, 2007, we borrowed additional funds from Daniel
      Laikin, Chief Executive Officer, director and a significant stockholder and
      Timothy Durham, a member of the board of directors and a significant stockholder
      for working capital which was used for the publication of National Lampoon
      books. A total of $250,000 was borrowed from Mr. Laikin, Mr. Durham and a third
      party and $12,327 in interest was accrued. The loans bear interest at the rate
      of 6% per annum. No principal and no interest was repaid during the year. The
      largest aggregate amount of principal outstanding of the publishing loans during
      the year ended July 31, 2007 was $250,000. As of November 6, 2007, the Company
      owed these individuals $250,000 in principal and $16,108 in
      interest.





As
      of
      July 31, 2007, we owed Daniel Laikin, our Chief Executive Officer, approximately
      $947,333 in principal and $34,488 in interest. The loans bear interest at the
      rate of 6% per annum. The obligation to Mr. Laikin is payable on demand. During
      the twelve months ended July 31, 2007, $188,834 of principal and no interest
      had
      been paid to Mr. Laikin. The largest aggregate amount of principal outstanding
      of the loans to Mr. Laikin during the year ended July 31, 2007 was $947,496.
      As
      of November 6, 2007, we owed Mr. Laikin $885,031 in principal and $48,754 in
      interest.




As
      of
      July 31, 2007, we owed Timothy Durham, a director, approximately $85,794 in
      principal and $56 in interest. The loans bear interest at the rate of 6% per
      annum. The obligation to Mr. Durham is payable on demand. During the twelve
      months ended July 31, 2007, $441,706 of principal and $45,294 of interest had
      been paid to Mr. Durham. The largest aggregate amount of principal outstanding
      of the loans to Mr. Durham during the year ended July 31, 2007 was $427,500.
      As
      of November 6, 2007, we owed Mr. Durham $388,794 in principal and $2,514
      interest.


39


The
      loans
      from Mr. Laikin and Mr. Durham are unsecured.





Red
      Rock
      Pictures Holdings, Inc. (“Red Rock”), a publicly traded company and related
      party, has made various loans to us. The outstanding amount includes loans
      made
      to us for film financing as discussed in Note F to our audited financial
      statements. As of July 31, 2007 we owed Red Rock $3,571,816 in principal and
      $85,592 in interest. The loans bear interest at the rate of 10% per annum.
      During the twelve months ended July 31, 2007, $20,112 of principal and $22,193
      of interest had been paid to Red Rock. The largest aggregate amount of principal
      outstanding of the loans to Red Rock during the year ended July 31, 2007 was
      $3,571,816. As of November 6, 2007, we owed Red Rock $3,643,091 in principal
      and
      $175,619 in interest.





During
      August 2006 a company controlled by Timothy Durham, a director, provided debt
      financing to the producers of the films *National
      Lampoon’s Jakes Booty Call* and *National
      Lampoon’s Pucked* in order
      to finance the prints and advertising costs associated with the theatrical
      release of these pictures. National Lampoon, Inc. was the theatrical distributor
      and incurred various prints and advertising costs associated with the
      distribution of these two films. Mr. Durham’s Company paid the majority of these
      costs directly to National Lampoon. We have no obligation or plan to repay
      Mr.
      Durham or any of his companies for the funds received.





From
      June
      29 to July 31, 2006, the Company borrowed approximately $288,000 from Mr. Laikin
      to cover some of its working capital requirements. We also owed $943 of accrued
      interest to Mr. Laikin at July 31, 2006.





In
      conjunction with our receipt of a loan from N. Williams Family Investments,
      L.P.
      on January 28, 2005, Mr. Laikin and Mr. Durham agreed to guarantee certain
      obligations relating to the security provided for the loan. In exchange for
      these guarantees, we issued to each of Mr. Laikin and Mr. Durham 50,000 shares
      of our common stock. The loan was paid in full on August 31, 2005.





On
      June
      30, 2005 and again on July 18, 2005 Mr. Durham loaned us $100,000. These were
      short-term advances that bore no interest. The advances were repaid on July
      15,
      2005 and August 10, 2005, respectively. Mr. Durham also loaned us $230,000
      on
      June 6, 2005, $270,000 on June 8, 2005 and $100,000 on July 15, 2005. These
      loans were also short-term advances that bore no interest. The advances were
      repaid on August 10, 2005.





**ITEM
      13.**  **EXHIBITS**





Exhibit
                No.
            
            Title3.1
            
            Certificate
                of Incorporation of National Lampoon, Inc. (1)3.2
            
            Bylaws
                of National Lampoon, Inc. adopted August 27, 2002 (1)3.3
            
            First
                Amendment of Certificate of Incorporation of National Lampoon, Inc.
                (2)4.1
            
            Certificate
                of Designations, Preferences, Rights and Limitations of Series C
                Convertible Preferred Stock of National Lampoon, Inc. (2)4.2
            
            NLAG
                Registration Rights Agreement dated May 17, 2002 among the Registrant
                and
                members of the NLAG Group and GTH Capital, Inc. (3)4.3
            
            Jimirro
                Registration Rights Agreement dated May 17, 2002 (3)4.4
            
            Piggyback
                Registration Rights Agreement dated September 3, 2002 between the
                Registrant and Constellation Venture Capital, L.P. as agent for certain
                individuals. (4)4.5
            
            Piggyback
                Registration Rights Agreement entered into among the Registrant and
                the
                purchasers of Series C Convertible Preferred Stock (5)


40


4.6
            
            J2
                Communications Voting Agreement dated May 17, 2002 among members
                of the
                NLAG Group and James P. Jimirro (3)4.7
            
            First
                Amendment to Voting Agreement dated June 7, 2002 *4.8
            
            Series
                C Voting Agreement entered into among the Registrant and purchasers
                of
                Series C Convertible Preferred Stock (5)4.9
            
            Lock
                Up Agreement executed by James P. Jimirro dated January 28, 2005
                (7)4.10
            
            Form
                of Lock Up Agreement executed by Officers and Directors dated January
                28,
                2005 (7)4.11
            
            Lock
                Up Agreement executed by James P. Jimirro dated June 21, 2005 (7)4.12
            
            Form
                of Lock Up Agreement executed by Officers and Directors dated June
                21,
                2005 (7)10.1
            
            2005
                Employment Agreement between National Lampoon, Inc. and Daniel Laikin
                (7)10.3
            
            Secured
                Promissory Note dated January 28, 2005 executed by National Lampoon,
                Inc.
                in favor of N. Williams Family Investments, L.P. (7)10.4
            
            Security
                Agreement dated January 28, 2005 by and among National Lampoon, Inc.,
                National Lampoon Networks, Inc. and National Lampoon Tours, Inc.
                and N.
                Williams Family Investments, L.P. (7)10.5
            
            Repayment
                Guaranty dated January 28, 2005 executed by National Lampoon Networks,
                Inc. and National Lampoon Tours, Inc. in favor of N. Williams Family
                Investments, L.P. (7)10.6
            
            Guaranty
                dated January 28, 2005 executed by Daniel S. Laikin and Timothy Durham
                in
                favor of N. Williams Family Investments, L.P. (7)10.7
            
            Subordination
                Agreement dated January 28, 2005 executed by National Lampoon, Inc.
                and
                National Lampoon Networks, Inc. in favor of N. Williams Family
                Investments, L.P. (7)10.8
            
            Termination
                of Security Agreement dated January 28, 2005 between National Lampoon,
                Inc. and James P. Jimirro (7)10.9
            
            Indemnification
                Agreement dated May 17, 2002 between National Lampoon, Inc. and Daniel
                S.
                Laikin10.10
            
            Agreement
                between J2 Communications and Harvard Lampoon, Inc. dated October
                1, 1998
                (7)10.12
            
            J2
                Communications Amended and Restated 1999 Stock Option, Restricted
                Stock
                and Deferred Stock Plan (7)10.14
            
            Indemnification
                Agreement dated May 17, 2002 between J2 Communications and Daniel
                S.
                Laikin (3)10.15
            
            Indemnification
                Agreement dated May 17, 2002 between J2 Communications and James
                P.
                Jimirro (3)10.16
            
            Common
                Stock Warrant for Series B Preferred Stockholders (3)10.17
            
            Series
                C Preferred Stock and Warrant Purchase Agreement (5)10.18
            
            Piggyback
                Registration Rights Agreement for Series C Preferred Stockholders
                (5)10.19
            
            Common
                Stock Purchase Warrant for Series C Preferred Stockholders (5)10.20
            
            Agreement
                dated December 16, 1981 between Warner Bros. Inc. and Studio 21
                Productions, Inc. (7)10.21
            
            Secured
                Promissory Note dated May 16, 2006 and Amendment dated June 6, 2006
                executed by National Lampoon, Inc. in favor of Daniel Laikin, Timothy
                Durham and Christopher Williams.10.22
            
            Financing
                Agreement dated October 31, 2006, by and between Ratko Productions,
                Inc.,
                a wholly owned subsidiary of National Lampoon, Inc. and Red Rock
                Productions, Inc.10.23
            
            Financing
                Agreement dated October 31, 2006, by and between Bagboy Productions,
                Inc.,
                a wholly owned subsidiary of National Lampoon, Inc. and Red Rock
                Productions, Inc.


41


14
            
            Code
                of Business Conduct and Ethics (8)21
            
            Subsidiaries
                of National Lampoon, Inc. *23.1
            
            Consent
                of Weinberg & Company, P.A.*23.2
            
            Consent
                of Stonefield Josephson, Inc. *





*
      Filed
      herewith.




(1)
      Incorporated by reference from the Registrant’s Form 10-K/A for the fiscal year
      ended July 31, 2003 filed with the Securities and Exchange Commission on
      December 19, 2003.




(2)
      Incorporated by reference from the Registrant’s Form 10-K for the fiscal year
      ended July 31, 2004 filed with the Securities and Exchange Commission on October
      29, 2004.




(3)
      Incorporated by reference from the Registrant’s Form 8-K filed with the
      Securities and Exchange Commission on May 31, 2002.




(4)
      Incorporated by reference from the Registrant’s Form 8-K filed with the
      Securities and Exchange Commission on September 9, 2002.




(5)
      Incorporated by reference from the Registrant’s Form 10-QSB filed with the
      Securities and Exchange Commission on December 22, 2004.




(6)
      Incorporated by reference from the Registrant’s Form 10-QSB filed with the
      Securities and Exchange Commission on June 15, 2005.




(7)
      Incorporated by reference from the Registrant’s SB-2 Registration Statement
      filed with the Securities and Exchange Commission on May 10, 2005.




(8)
      Incorporated by reference from the Registrant’s Form
      10-K for the fiscal year ended July 31, 2005 filed with the Securities and
      Exchange Commission on November 14, 2005.




**ITEM
      14.**  **PRINCIPAL
      ACCOUNTANT FEES AND SERVICES**





The
      following table sets forth fees billed to us by our auditors during the fiscal
      years ended July 31, 2007 and July 31, 2006 for: (i) services rendered for
      the
      audit of our annual financial statements and the review of our quarterly
      financial statements, (ii) services by our auditor that are reasonably related
      to the performance of the audit or review of our financial statements and that
      are not reported as Audit Fees, (iii) services rendered in connection with
      tax
      compliance, tax advice and tax planning, and (iv) all other fees for services
      rendered.





July
                31, 2007
            
            July
                31, 2006(i)
                Audit Fees
            
            $
            123,459
            
            $
            55,786(ii)
                Audit Related Fees
            
            $
            16,489
            
            $
            67,083(iii)
                Tax Fees
            
            $
            -
            
            $
            -(iv)
                All Other Fees
            
            $
            -
            
            $
            -


42


**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly
      authorized on this 28th day of November 2007.





**NATIONAL
                LAMPOON, INC.**By:
            /s/ Daniel
                S. Laikin
              Daniel
                S. Laikin
              Chief
                Executive Office





In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities and on
      the
      dates indicated.





Signature
            
            Title
            
            Date/s/
                Daniel S. Laikin
              Daniel
                S. Laikin
            
            Chief
                Executive Officer, Director
            
            November
                28, 2007/s/Lorraine
                Evanoff
              Lorraine
                Evanoff
            
            Principal
                Accounting Officer
            
            November
                  28, 2007/s/
                James P. Jimirro
              James
                P. Jimirro
            
            Chairman
                of the Board of Directors
            
            November
                  28, 2007/s/
                Timothy Durham
              Timothy
                Durham
            
            Director
            
            November
                  28, 2007/s/
                Paul Skjodt
              Paul
                Skjodt
            
            Director
            
            November
                  28, 2007/s/
                Robert S. Levy
              Robert
                S. Levy
            
            Director
            
            November
                  28, 2007/s/
                Duncan Murray
              Duncan
                Murray
            
            Director
            
            November
                  28, 2007/s/
                James Toll
              James
                Toll
            
            Director
            
            November
                  28, 2007