<PAGE>

                    U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K


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

For the Fiscal Year Ended July 31, 2001              Commission File No. 0-15284


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

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


                        10850 Wilshire Blvd., Suite 1000
                          Los Angeles, California 90024
                     (Address of principal executive office)

Registrant's telephone number:  (310) 474-5252

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act: Common Stock, no
par value

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

                                  YES [X] NO [ ]

Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

As of October 23, 2001, the aggregate market value of the voting stock held by
non-affiliates of the Registrant (based on the closing sales price as reported
by NASDAQ) was $ 7,373,053 (assuming all officers and directors are deemed
affiliates for this purpose).

As of October 23, 2001 the registrant had 1,379,816 shares of its common stock,
no par value, outstanding.

Documents Incorporated by Reference: None


<PAGE>




                                     PART I.

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

     J2 Communications ("Company" or "Registrant") was founded in 1986 by its
Chairman of the Board and President, James P. Jimirro, the first President of
both The Disney Channel and Walt Disney Home Video. The Company was primarily
engaged in the acquisition, production and distribution of videocassette
programs for retail sale. In late 1990, the Company acquired National Lampoon,
Inc. ("NLI"). NLI was incorporated in 1967 and was primarily engaged in
publishing the "National Lampoon Magazine" and related activities including the
development and production of motion pictures. Subsequent to the Company's
acquisition of NLI, it de-emphasized the videocassette and publishing segments
of its business and has primarily focused its activities on exploitation of the
"National Lampoon" trademark including the October 1999 launch of its website,
"nationallampoon.com."

FORWARD-LOOKING STATEMENTS

     The foregoing discussion, as well as the other sections of this Annual
Report on Form 10-K, contains forward-looking statements that reflect the
Company's current views with respect to future events and financial results.
Forward-looking statements usually include the verbs "anticipates," believes,"
"estimates," "expects," "intends," "plans," "projects," "understands" and other
verbs suggesting uncertainty. The Company reminds shareholders that
forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors which could cause the actual results
to differ materially from the forward-looking statements. Potential factors that
could affect forward-looking statements include, among other things, the
Company's ability to identify, produce and complete projects that are successful
in the marketplace, to arrange financing, distribution and promotion for these
projects on favorable terms and to attract and retain qualified personnel and to
consummate the Laikin-Skjodt transactions (as defined below).

RECENT DEVELOPMENTS

     1.   THE LAIKIN-SKJODT TRANSACTIONS

     The Laikin-Skjodt Agreement (as defined below) was amended by the parties
thereto to provide that the termination date of the Laikin-Skjodt Agreement be
extended until November 15, 2001. For more information regarding the
Laikin-Skjodt Agreement and the transactions contemplated thereby, please see
"Management's Discussion and Analysis of Financial Position and Results of
Operations -- The Laikin-Skjodt Agreement." There can be no assurance that the
Laikin-Skjodt Group will be able to raise the necessary financing to consummate
the Laikin-Skjodt Transactions or that the Laikin-Skjodt Transactions will
otherwise close.

     In August 2000, the Company received a notice from Daniel Laikin, a
Director and member of a group purporting to own approximately 22.7% of the
Company's outstanding common stock seeking, among other things, a special
meeting of the Company's shareholders. At this meeting, Mr. Laikin intended to
nominate a slate of six directors with a view to replacing all of the Company's
existing directors.

     Subsequent to this request, the Company met on several occasions with Mr.
Laikin and his representatives. During the course of these meetings, the Company
and Mr. Laikin discussed a number of ways in which Mr. Laikin might increase his
involvement in, and/or



                                       2
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ownership of, the Company and assure that a costly proxy solicitation and
possible related litigation will be avoided. On March 5, 2001, the Company,
James P. Jimirro, the Company's Chairman and Chief Executive Officer and Mr.
Laikin and Paul Skjodt ("Laikin Skjodt Group") entered into an agreement (the
"Laikin Agreement") pursuant to which the Laikin Skjodt Group will purchase all
of the interests of Mr. Jimirro in the Company (including common shares, vested
options and common shares issuable upon exercise of Jimirro's SARs) for total
consideration of approximately $4.6 million, 227,273 common shares directly from
the Company for a purchase price of between approximately $5.21 and $9.90 per
share based on a formula, and, at the option of the Laikin Skjodt Group, up to
an additional 300,000 common shares directly from the Company at a purchase
price of $11 per share. The Laikin Skjodt Group agreed, in the event the Laikin
Agreement was not consummated by June 30, 2001, to a 10-year standstill, which,
among other things, precludes Messrs. Laikin and Skjodt (or their affiliates)
from continuing their proxy contest for control of the Company. The Agreement
also provides that the Laikin Skjodt Group will be obligated to make a tender
offer to other shareholders, under certain conditions, at $15.00 per share
during a period commencing 365 days from the closing of the transaction.

     Since the original anticipated closing date, the Laikin Agreement has been
extended by a series of amendments. To date, the Laikin group has paid to the
Company $450,000, in respect of these extensions. As of November, 2001, the
Laikin Skjodt Group has been unable to obtain the financing to consummate the
transaction. However, the standstill commitment is in full force and effect,
regardless.

     During the course of the negotiations leading up to the execution of the
Laikin Agreement, and subsequent thereto during the various extensions, the
Company questioned the accuracy of the SEC filings made by Mr. Laikin and
others. As of October 24, 2001, those questions have not been resolved to the
Company's satisfaction. Nothing in this report on Form 10-K should be read as an
acknowledgement of the accuracy of any of the statements made by the Laikin/
Skjodt group, among others, or a waiver of any rights of the Company or any
other person with respect to such statements or related matters. SEE NOTE K -
SUBSEQUENT EVENTS.

     2.   WORKING CAPITAL DEFICIENCIES

     As a result of the slowdown of the economy, the expenditure of considerable
resources in respect of the negotiation of the Laikin-Skjodt Agreement, the
failure of the Company to generate significant revenue from its internet
operations, and the diminution in the pursuit of other business opportunities as
a result of the Laikin-Skjodt Agreement, the Company has experienced a
significant decline of available working capital. If the Laikin-Skjodt Agreement
is not consummated, the Company may be forced to immediately obtain additional
working capital. No assurance can be given that such funds can be obtained or
that they can be obtained on terms acceptable to the Company. See "Risk
Factors-Adequacy of Capital Resources."

     Moreover, the Company has not been apprised of any financing activities,
which Mr. Laikin will undertake on behalf of the Company if the Laikin-Skjodt
Agreement is consummated. Please see "Management's Discussion and Analysis of
Financial Position and Results of Operations -- The Laikin-Skjodt Agreement" for
a discussion of certain transactions affecting the ownership of the Company's
Common Stock by certain of its executive officers and directors.




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<PAGE>




NOTE REGARDING OPERATING SEGMENTS

     The following discussion of the Company's business activities should be
read in conjunction with NOTE H - SEGMENT Information contained in the Company's
consolidated financial statements and related notes which summarizes the amounts
of revenue, operating profit or loss and identifiable assets attributable to
each of the Company's operating segments.

INTERNET

     In October 1999, the Company launched "nationallampoon.com" (the "Site"), a
website featuring a wide array of original comedy content as well as classic
articles from "National Lampoon Magazine." Some of the Site's features have
included:

     News on the March -- articles parody and satirize the news of the day.

     Word of the Week -- animated adventures parody the importance of a
     first-rate vocabulary. A dictionary in the "National Lampoon" style.

     NewsFlash -- authentic and topical newswire photos come to life in twisted
     stories.

     Online Confessional -- an interactive video features real people confessing
     their most bizarre sins: website viewers vote to absolve or condemn.

     Cybercops -- an animation/live action video hybrid explores the lives of
     two policemen on the prowl for Internet bad guys.

     Although as of October 16, 2001, the Company's Internet operations have not
yet generated significant revenue, the Company anticipates that its Internet
operations will become the core business of the Company in that they will be the
incubator for the development of stories, characters and animation that will be
spun off into other media. In the future, the Company may earn revenue from the
Site and other Internet activities, as follows:

     Banner and Sponsorship Advertising - The advertising model emerging on the
Internet is similar to that of more mature media in which revenue depends on the
quantity and quality of impressions delivered to advertisers. The Company has
engaged an advertising sales agent to handle the sale of advertising on its
Site. The sales agent receives a percentage of the advertising revenue. From its
inception through July 31, 2001, the website has generated approximately $10,000
in gross advertising revenue.

     E-Commerce - The Site's online store has a variety of "National Lampoon"
branded merchandise including apparel, ceramics, audio entertainment and VHS and
DVD copies of "National Lampoon" movies. Visitors to the website are encouraged
to visit the online store and portions of the Site highlight special products or
special offers currently available in the store. The Site's online store is
hosted by a third party that processes and fulfills all orders and pays a
percentage to the Company from all sales. During the year ended July 31, 2001,
e-commerce revenues were approximately $5,000.

     Syndication of Content -- The Company has expanded its Internet operations
to include the syndication to other websites of content created for the Site.
Currently, the Company provides several of its features to other websites
including neurotrash.com, isyndicate.com, streamingmedia.com and rioport.com.
The Company generally receives a license fee or, in some cases, a portion of the
advertising revenues generated by the content licensed. While the Company
currently syndicates only programming that has appeared on the Site, the Company




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also expects that in the future it may produce Internet programming for the
exclusive use of other websites. During the year ended July 31, 2001,
syndication revenues were approximately $8,000.

     Development of Motion Pictures and Television -- Using the properties and
characters created for the Site, the Company plans to package this material for
use in motion picture and television properties. This is similar to NLI's past
use of magazine properties as the basis for "National Lampoon" motion pictures.

     The Company has and will continue to pursue both online and offline
marketing strategies to attract visitors to the Site. Offline consumer marketing
comprises a number of activities including publicity campaigns directed to print
and electronic media. Marketing has and will be directed toward "National
Lampoon's" historical core audience of men ages 18-34, with specific emphasis on
the college age group.

     The number of content-based websites is substantial and the competition
between websites for viewers is intense. Because there are few barriers to entry
into this marketplace, the number of websites competing for consumers' attention
has proliferated and it is expected that competition will continue to intensify.
Many of these competitors are larger, more established and have greater capital
resources than the Company.

MOTION PICTURES AND TELEVISION

     In recent years, the Company has derived the bulk of its revenues from
license fees relating to the production of new motion pictures and from
contingent compensation for motion pictures previously produced by the Company
and NLI. The Company generally licenses its "National Lampoon" trademark for use
in the title of the film. For producing services and providing the "National
Lampoon" trademark, the Company generally receives a fee at the time of
production of the motion picture plus contingent compensation that is dependent
on the motion picture's financial performance.

     To date, the Company has not financed the production or distribution of any
"National Lampoon" motion pictures and does not maintain a dedicated film
development or production staff. Instead, the Company relies upon third parties,
primarily major motion picture studios, to provide a picture's financing and
distribution. However, the Company may participate in such activities in the
future if, subject to sufficient capital resources being made available, it
believes circumstances warrant such investment.




                                       5
<PAGE>



     As of July 31, 2001, the Company and/or NLI has been involved in the
production of seventeen motion pictures, as follows:
<TABLE>
<CAPTION>

                                                    Year of               Financier/
              Title                                 Release               Distributor
              -----                                 -------               -----------
<S>                                                  <C>                <C>
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
National Lampoon's Last Resort                       1994               Trimark

National Lampoon's Attack of the 5'2" Women          1994               Showtime

National Lampoon's Senior Trip                       1995               New Line

National Lampoon's Favorite Deadly Sins              1995               Showtime

Vegas Vacation                                       1996               Warner Bros.

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
</TABLE>


     As discussed above, the Company does not directly distribute the motion
pictures it produces. Typically, the financier is also a distributor and
subsequent to production of the picture handles distribution of the picture.

     The Company has also been involved in the production of television programs
and currently has one television project in development. The project, a National
Lampoon awards spoof program, is being developed by Oliver Wilson Productions
under license from National Lampoon.

     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 for the sum of $1,000,000, of which $500,000 was
paid upon execution. The remaining $500,000 is contingent 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). As of
July 31, 2001, the Company has recorded a liability of approximately $166,000
relating to the Termination Agreement.




                                       6
<PAGE>



     The motion picture and television industry is highly competitive. The
Company faces intense competition from motion picture studios and numerous
independent production companies, many of which have significantly greater
financial resources than the Company. All of these companies compete for motion
picture and television projects and talent and are producing products that
compete for exhibition time at theaters, on television, and on home video with
products produced by the Company.

OTHER ACTIVITIES

     The Company has been and continues to be involved in various other
activities to exploit the "National Lampoon" trademark including books, audio
entertainment and other merchandise as well as the distribution of videocassette
programming. In addition, the Company, and previously NLI, published "National
Lampoon Magazine" from March 1970 until October 1998 when the magazine was
discontinued. Although in recent years, these activities have not generated
significant amounts of revenue, the Company believes that such activities
reinforce the "National Lampoon" trademark and provide cross-promotional
opportunities for its motion picture, television and Internet operations. It is
also anticipated that these activities might be enhanced by the new creative
content created by the Company's Internet operations.

REGULATION

     The Company's trademarks and other intellectual properties are granted
legal protection under the trademark or copyright laws of the United States and
most foreign countries, which provide substantial civil and criminal sanctions
for infringement. The Company takes all appropriate and reasonable measures to
obtain agreements from licensees to secure, protect and maintain trademark and
copyright protection for the Company's properties under the laws of all
applicable jurisdictions.

EMPLOYEES

     As of October 30, 2001, the Company employed four (4) full-time employees
and six (6) part-time employees. The Company considers its employee relations to
be satisfactory at the present time.

IN ADDITION TO OTHER INFORMATION IN THIS FORM 10-K, THE FOLLOWING RISK FACTORS
SHOULD BE CAREFULLY CONSIDERED IN EVALUATING OUR BUSINESS BECAUSE SUCH FACTORS
MAY HAVE A SIGNIFICANT IMPACT ON OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
POSITION.

ADEQUACY OF CAPITAL RESOURCES

     The Company is not certain its existing capital resources are sufficient to
fund its activities for the next six to twelve months. Unless the Company's
Internet revenues or revenues from other business activities significantly
increase during that period, the Company will need to raise additional capital
to continue to fund its current Internet operations or, in the alternative,
significantly reduce or even eliminate its Internet operations. There can be no
assurance that the Company will be able to raise such capital on reasonable
terms, or at all.

     The Company, Mr. James P. Jimirro, the Company's Chairman and Chief
Executive Officer, and Mr. Daniel Laikin, a Director of the Company have entered
into the Laikin-Skjodt Agreement. Please see "Management's Discussion and
Analysis of Financial Position and Results of Operations -- The Laikin-Skjodt
Agreement." As a result of the closing of the Laikin-Skjodt Transaction, the
Company may need to raise additional capital to continue to fund its



                                       7
<PAGE>


current Internet operations or, in the alternative, significantly reduce or even
eliminate its Internet operations. There can be no assurance that the Company
will be able to raise such capital on reasonable terms, or at all.

DEPENDENCE ON THE INTERNET

     Since the Internet and other wide area networks are new and evolving, it is
difficult to predict with any certainty whether the Internet will prove to be a
viable commercial enterprise. Growth in the Company's Internet revenues will be
dependent on the Internet's continued growth and integration into daily
commerce, among other factors. The Company's business will be adversely affected
if Internet usage does not continue to grow. A number of factors may inhibit
Internet usage, including: inadequate network infrastructure; security concerns;
inconsistent quality of service; and lack of availability of cost-effective,
high-speed service. If Internet usage grows, the Internet infrastructure may not
be able to support the demands placed on it by this growth and its performance
and reliability may decline. In addition, websites have experienced
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. To date, the Company has not
encountered any significant outages or delays; however, if these outages or
delays occur in the future, Internet usage, including usage of the Company's
website could be adversely affected.

INTERNET ADVERTISING

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

THIRD PARTY CLAIMS

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

INTERNET SECURITY

     Internet security concerns could hinder e-commerce. The need to securely
transmit confidential information over the Internet has been a significant
barrier to electronic commerce and communications over the Internet. Any
well-publicized compromise of security could deter people from using the
Internet or using it to conduct transactions that involve transmitting




                                       8
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confidential information. The Company may incur significant costs to protect
against the threat of security breaches or to alleviate problems caused by such
breaches.

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

NATIONALLAMPOON.COM IS A NEW VENTURE

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

STOCK PRICE VOLATILITY

     The trading price of the Company's stock has been and continues to be
subject to fluctuations. The stock price may fluctuate in response to a number
of events and factors, such as quarterly variations in operating results,
changes in recommendations by security analysts, the operating and stock
performance of other companies that investors may deem as comparable and news
reports relating to trends in the marketplace, among other factors. In addition,
the stock prices for Internet related companies in particular have recently
experienced extreme volatility that may be unrelated to the operating
performance of such companies. These broad market and industry fluctuations may
adversely affect the price of the Company's common stock, regardless of the
company's operating performance.

DEPENDENCE ON "NATIONAL LAMPOON" TRADEMARK AND RELATED PROPERTIES

     The Company's revenues are primarily derived from exploitation of the
"National Lampoon" trademark. Any erosion of brand recognition of that trademark
and its related properties or the failure of the Company to adequately protect
its intellectual property could have a materially adverse effect on the
Company's business, results of operations and financial position.

DEPENDENCE ON KEY PERSONNEL

     The Company is dependent upon the services of James P. Jimirro. The loss of
his services could have a materially adverse effect on the Company's business,
results of operations and financial position.




                                       9
<PAGE>


ITEM 2.  PROPERTIES

     The Company leases approximately 3,912 square feet of office space in Los
Angeles, California under a lease expiring in September 2005. Management
considers the Company's office space generally suitable and adequate for its
current needs.

ITEM 3.  LEGAL PROCEEDINGS

     None.

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

     No matters were submitted to a vote of the Company's shareholders during
the fourth quarter of the fiscal year covered by this report.

                                    PART II.

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

     The Company's common stock trades on the Nasdaq SmallCap Market tier of the
Nasdaq Stock Market under the symbol: "JTWO". The following table sets forth the
high and low bid prices of the Company's common stock during the years ended
July 31, 2000 and 2001:

<TABLE>
<CAPTION>

   FISCAL YEAR 2000                                 HIGH         LOW
   ----------------                                 ----         ---
<S>                                                <C>         <C>
        First Quarter                              26 5/16     14 1/16
        Second Quarter                             19 1/2       9 13/16
        Third Quarter                              17 3/8       5 7/16
        Fourth Quarter                             14 7/16      5 1/2

<CAPTION>

   FISCAL YEAR 2001                                 HIGH         LOW
   ----------------                                 ----         ---
<S>                                                <C>         <C>
        First Quarter                              13 1/2        9
        Second Quarter                             12 7/8        8 1/8
        Third Quarter                              14 15/16     11 1/2
        Fourth Quarter                             13 1/2       10 1/2
</TABLE>

     As of October 30, 2001, the Company had approximately 471 stockholders of
record.

     The Company may not meet certain minimum NASDAQ continued listing
requirements. As a result, Nasdaq may seek to delist the Company's common stock
from The Nasdaq Small Cap Market. If the Company's common stock were to be
delisted it may trade only on the OTC Bulletin Board (or through other vehicles
offering limited trading options), and the liquidity of the Company's common
stock may, accordingly, be materially diminished. In addition, the ability of
the Company to take action with respect to any deficiencies may be impacted by
the Letter Agreement described in ITEM 2 - RECENT DEVELOPMENTS which, among
other things, restricts the ability of the Company to undertake transactions
that would materially change its current capital structure.


                                       10
<PAGE>




ITEM 6.  SELECTED FINANCIAL DATA

     The following table shows selected consolidated financial data for the
Company for each of the last five fiscal years. This financial data should be
read in conjunction with the Company's consolidated financial statements and
related footnotes contained herein for the fiscal year ended July 31, 2001 and
for the other periods presented.

                             SELECTED FINANCIAL DATA

                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>

                                                       For the fiscal years ended July 31,
                                             2001         2000         1999         1998         1997
                                             ----         ----         ----         ----         ----
<S>                                        <C>           <C>          <C>           <C>           <C>
Revenues                                   $   306       $ 1,480      $ 1,246       $   783       $ 1,356

Operating income/(loss)                    ($3,130)      $   854      ($1,765)      ($  267)      $    62

Net income/(loss)                          ($3,076)      $   826      ($1,299)      $   121       $    30

Net income/(loss) per share - basic        $ (2.26)      $  0.64      ($ 1.07)      $  0.10       $  0.03

Net income/(loss) per share - diluted      $ (2.26)      $  0.62      ($ 1.07)      $  0.10       $  0.02

Total assets                               $ 3,302       $ 5,119      $ 5,350       $ 5,962       $ 5,473

Long term obligations                      $     0       $     0      $ 1,717       $    17       $     0

</TABLE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION
         AND RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

     In August 2000, the Company received a notice from Daniel Laikin, a
Director and member of a group of shareholders of the Company purporting to own
approximately 22.7% of the Company's outstanding common stock. Mr. Laikin
sought, among other things, a special meeting of the Company's shareholders at
which Mr. Laikin intended to nominate a slate of six directors to replace in its
entirety the Company's existing Board of Directors (other than Mr. Laikin
himself).

     Subsequent to this request, representatives of the Company met on several
occasions with Mr. Laikin and his representatives. On March 5, 2001, the
Company, James P. Jimirro, the Company's Chairman and Chief Executive Officer,
Daniel Laikin and Paul Skjodt, another shareholder of the Company acting in
concert with Mr. Laikin, entered into an agreement (the "Laikin-Skjodt
Agreement"; the transactions contemplated by the Laikin-Skjodt Agreement are
referred to herein as the "Laikin-Skjodt Transactions") pursuant to which the
parties agreed, among other things and subject to various conditions, that Mr.
Laikin and Mr. Skjodt and/or their associates and affiliates (collectively
referred to herein as the "Laikin-Skjodt Group") would purchase all of the
interests of Mr. Jimirro in the Company (including common stock, vested stock
options and common stock issuable upon exercise of Mr. Jimirro's stock
appreciation rights) for aggregate consideration of approximately $4.6 million
and, in accordance with Mr. Jimirro's employment agreement, the Company would
pay Mr. Jimirro $2.5 million of deferred


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<PAGE>


compensation due upon a change in control of the Company ("Deferred
Compensation"). The Laikin-Skjodt Agreement further provided, subject to various
conditions, that the Laikin-Skjodt Group would purchase 227,273 shares of the
Company's common stock from the Company for a purchase price of between
approximately $5.21 and $9.90 per share, based on a formula, to partially fund
the Company's Deferred Compensation obligation to Mr. Jimirro and may also
acquire, at the Laikin-Skjodt Group's option, up to an additional 300,000 shares
of the Company's common stock directly from the Company at a purchase price of
$11.00 per share. The Laikin-Skjodt Group's obligations set forth above are
subject to the satisfaction of certain conditions including due diligence and
financing.

     The Laikin-Skjodt Agreement further provided that at the closing of the
Laikin-Skjodt Transactions, Mr. Jimirro would resign as an officer and Director
of the Company and enter into a long-term consulting and non-compete agreement
with the Company providing for aggregate payments to Mr. Jimirro over time of
approximately $3.8 million plus fringe benefits expected to cost the Company
approximately $360,000 and would receive options, vesting over four years, to
purchase up to 250,000 shares of the Company's common stock at a price equal to
the average market price of such common stock during the five days immediately
preceding the closing date of Laikin-Skjodt Transactions. The Company's
obligations under the consulting and non-compete agreement would be secured by a
lien on the Company's assets.

     Pursuant to the Laikin-Skjodt Agreement, Messrs. Laikin and Skjodt agreed
to a standstill agreement effective during the period prior to the closing of
the Laikin-Skjodt Transactions, which standstill agreement generally precludes
Messrs. Laikin and Skjodt from purchasing or selling the Company's securities or
exerting influence over the Company's governance, by solicitation of proxies or
otherwise, and agreed to the same standstill agreement in the event that the
closing of the Laikin-Skjodt Transactions does not occur prior to the
termination date of the Laikin-Skjodt Agreement. The Company subsequently
consented to a waiver of the initial standstill commitment in order to allow
Messrs. Laikin and Skjodt to purchase up to 67,700 shares of the Company's
common stock on the open market.

     The Laikin-Skjodt Agreement also provides for a tender offer by Messrs.
Laikin and Skjodt for all the remaining outstanding shares of the Company's
common stock at a price of $15.00 per share no later than the first anniversary
of the closing of the Laikin-Skjodt Transactions if the Company's common stock
does not trade at or above $15.00 per share for any twenty (20) days during any
period of thirty (30) consecutive trading days during the 365 days following the
consummation of the Laikin-Skjodt Transactions.

     Completion of the Laikin-Skjodt Transactions, which have been approved by
the Company's board of directors, are subject to due diligence and financing
contingencies, shareholder approval (if reasonably deemed necessary by the
Company based upon the advice of counsel) and customary closing conditions and
regulatory approvals. Messrs. Jimirro, Laikin and Skjodt, collectively holders
of over 39% of the Company's outstanding common stock, have agreed to vote in
favor of the Laikin-Skjodt Transactions if they are submitted to the Company's
shareholders.

     The Laikin-Skjodt Transactions were originally scheduled to close on or
before June 30, 2001 and the Laikin-Skjodt Agreement originally terminated in
accordance with its terms on August 31, 2001. However, the termination date has
been extended on four occasions by the agreement of the parties, most recently
until November 15, 2001. There can be no assurance that the Laikin-Skjodt Group
will be able to raise the necessary financing to consummate the Laikin-Skjodt
Transactions or that the Laikin-Skjodt Transactions will otherwise close.




                                       12
<PAGE>


RESULTS OF OPERATIONS

THE YEAR ENDED JULY 31, 2001 VS. THE YEAR ENDED JULY 31, 2000

     For the year ended July 31, 2001, total revenues decreased by approximately
79% to $306,244 from $1,480,215 for the year ended July 31, 2000. This decrease
resulted primarily from reduced trademark revenues from motion pictures
including; "Animal House", "National Lampoon's Vacation," "National Lampoon's
Dad's Week Off" and "National Lampoon's The Don's Analyst." Internet revenue of
$13,685 while not material in the aggregate, was represented a 37% increase over
July 2000 Internet revenues of $9,956. Internet revenue consists primarily of
banner and sponsorship advertising. Video revenues of $22,151 in fiscal 2001
increased 38% from year 2000 video revenues of $16,020. This increase was due to
additional sales of library video product in 2001 versus 2000.

     Costs related to trademark revenue, primarily royalties and commissions
payable to third parties based on the Company's trademark revenues, decreased by
approximately 85% to $22,221 for the year ended July 31, 2001 versus $144,578
during the same period last year. The decline in costs resulted primarily from
decreased royalties due to reduced trademark revenues during the fiscal year
ended July 31, 2001. Costs related to Internet revenues were approximately
$36,040 for the year ended July 31, 2001 versus $283,929 for fiscal 2000, which
represents a decline of 87%. Internet costs are direct expenses incurred by the
Company to develop, maintain, and promote the Company's website excluding
salaries and other general and administrative expenses incurred in connection
with the Company's Internet operations. The Company developed its website during
fiscal 2000, therefore expenditures to develop and promote the website were far
more extensive for the year ended July 31, 2000 than they were for fiscal 2001.

     During the year ended July 31, 2001, and through November 15, 2001, the
Company made significant expenditures to its lawyers, independent accountants,
and investment bankers for advice and preparation of documentation related to
the change of control pursued by Mr. Laikin. Proxy solicitation expenses for the
year ended July 31, 2001 totaled $1,532,837. There were no equivalent proxy
solicitation expenditures made by the Company during fiscal 2000.

     Selling, general and administrative expenses for the fiscal year ended July
31, 2001 increased to $1,221,338 versus $1,101,784 for the fiscal year ended
July 31, 2000. This increase of approximately 11% resulted primarily from
additional full-time staff in fiscal year 2001, and increases in rent, and
insurance costs.

     During the year ended July 31, 2001, the Company recorded an expense of
$379,695 related to stock appreciation rights ("SARs") granted to the Company's
Chief Executive Officer. This expense resulted from an increase in the Company's
stock price from July 31, 2000 to July 31, 2001 that increased the amount
payable by the Company to the Chief Executive Officer upon exercise of the
outstanding SARs, and the granting of additional shares during fiscal 2001.
During the year ended July 31, 2000 the Company recorded a benefit of
approximately $1,148,000 related to the SARs that resulted from a significant
decrease in the Company's stock price from July 31, 1999 to July 31, 2000. The
decrease in stock price decreased the amount payable by the Company to the Chief
Executive Officer upon exercise of the outstanding SARs.

     Interest income during the year ended July 31, 2001 decreased to $55,551
versus approximately $87,365 for the same period last year. This decrease
results from lower cash balances held during the year ended July 31, 2001 versus
the year ended July 31, 2000.




                                       13
<PAGE>



     There was no minority interest income or expense during fiscal 2001 because
during the year ended July 31, 2000 there was a settlement of various claims
made by the subsidiary's minority interest and a new structure was established
that permanently separated the subsidiary from National Lampoon, and therefore
from the Company.

     For the year ended July 31, 2001, the Company recorded a net loss of
$3,076,516 versus a net income of $826,416 for the year ended July 31, 2000.
This substantial decrease resulted primarily from; reduced trademark revenues of
nearly $1.2 million, costs of attorneys and others pursuant to the Laikin groups
desire to change control of the Company of over $1.5 million, and a change from
an SAR benefit of over $1.1 million during the year ended July 31, 2000 to an
SAR expense of $379.695 for fiscal 2001 which represents an increase in SAR
expenses of over $1.5 million from fiscal 2000 to fiscal 2001. For additional
explanation of the items just mentioned see above. Some of these increases in
costs/decreases in revenues were offset by somewhat lower royalty costs due to
lower revenues, and lower development costs for the Company's website during
fiscal 2001.

THE YEAR ENDED JULY 31, 2000 VS. THE YEAR ENDED JULY 31, 1999

     For the year ended July 31, 2000, total revenues increased by approximately
19% to approximately $1,480,000 versus approximately $1,246,000 for the year
ended July 31, 1999. This increase results primarily from increased trademark
revenues from the motion pictures "National Lampoon's Vacation," "National
Lampoon's Loaded Weapon I," "National Lampoon's Dad's Week Off" and "National
Lampoon's The Don's Analyst." Internet revenue was approximately $10,000
resulting from banner and sponsorship advertising sales on the Company's
website. During the year ended July 31, 1999, there was no Internet revenue as
the Company's website was not launched until October 1999.

     Costs related to trademark revenue, primarily royalties and commissions
payable to third parties based on the Company's trademark revenues, increased by
approximately 30% to approximately $145,000 for the year ended July 31, 2000
versus approximately $112,000 during the same period last year. This increase
results primarily from increased trademark revenues during the fiscal year ended
July 31, 2000 for motion pictures that have significant third party obligations.
Costs related to Internet revenues were approximately $284,000 for the year
ended July 31, 2000. These costs are direct expenses incurred by the Company to
develop, maintain and promote the Company's website excluding salaries and other
general and administrative expenses incurred in connection with the Company's
Internet operations. No similar costs were incurred during the year ended July
31, 1999 as the Company's website was not launched until October 1999.

     Selling, general and administrative expenses for the fiscal year ended July
31, 2000 increased to approximately $1,102,000 versus approximately $948,000 for
the fiscal year ended July 31, 1999. This increase of approximately 16% results
primarily from the addition of six full-time employees for its internet
operations resulting in increased salaries and related payroll taxes and public
company expenses that were partially offset by reductions in storage and legal
expenditures.

     During the year ended July 31, 2000, the Company recorded a benefit of
approximately $1,148,000 related to stock appreciation rights ("SARs") granted
to the Company's Chief Executive Officer. This benefit resulted from a
significant decrease in the Company's stock price from July 31, 1999 to July 31,
2000 that lowered the amount payable by the Company to the Chief Executive
Officer upon exercise of the outstanding SARs. During the year ended July 31,
1999 the Company recorded an expense of approximately $1,700,000 related to the
SARs that resulted from a significant increase in the Company's stock price from
July 31, 1998 to July




                                       14
<PAGE>



31, 1999 that increased the amount payable by the Company to the Chief Executive
Officer upon exercise of the outstanding SARs.

     Interest income during the year ended July 31, 2000 decreased to
approximately $87,000 versus approximately $99,000 for the same period last
year. This decrease results from lower cash balances held during the year ended
July 31, 2000 versus the year ended July 31, 1999.

     The minority interest in the income of a consolidated subsidiary increased
to approximately $114,000 during the year ended July 31, 2000 versus
approximately $68,000 during the year ended July 31, 1999. This increase results
primarily from increased interest income earned by the subsidiary during the
year ended July 31, 2000 versus the year ended July 31, 1999 and a one-time
charge of approximately $23,000 recorded during the year ended July 31, 2000 to
reflect the settlement of various claims made by the subsidiary's minority
interest.

     During the year ended July 31, 1999, the Company recorded other income of
approximately $436,000 related to the reduction of certain royalties and other
expenses (including a contingent payment on the sale of stock issued to settle
certain liabilities) accrued in previous years that were settled or otherwise
satisfied at reduced levels. There were no such items recorded during the year
ended July 31, 2000.

     For the year ended July 31, 2000, the Company recorded net income of
approximately $826,000 versus a net loss of approximately $1,299,000 for the
year ended July 31, 1999. This substantial increase in net income results
primarily from the benefit recorded during the year ended July 31, 2000 of
approximately $1,148,000 relating to SARs and increased trademark revenues from
motion pictures partially offset by Internet operations expenditures and
increased general and administrative expenses.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal sources of working capital during the fiscal year
ended July 31, 2001 included; trademark and other income of approximately
$306,000 and $200,000 from the Laikin group in order to extend the deadline
reflected in the Letter Agreement dated March 5, 2001, to complete the purchase
of the Company. The Company's management is not certain that its existing cash
resources will be sufficient to fund its ongoing operations for the next six to
twelve months, assuming that the transaction contemplated by the Laikin-Skjodt
Agreement is not consummated. Unless the Company's Internet revenues or revenues
from other business activities significantly increase during that period, the
Company may need to raise additional capital to continue to fund its current
operations or, in the alternative, significantly reduce or even eliminate some
of its operations. There can be no assurance that the Company will be able to
raise such capital on reasonable terms, or at all.

     If a change of control results as part of the Letter Agreement dated March
5, 2001, the significant contingent amounts due an officer discussed below and
in ITEM 11. - EXECUTIVE COMPENSATION could be triggered which would result in a
net capital deficiency and the need for the Company to obtain additional
capital. In the event the transactions discussed in Recent Developments are
consummated, the Company's new management will need to evaluate the Company's
liquidity and capital resources in relation to their intended plans for the
Company. Substantially all of the proceeds from the sale of the 227,273 common
shares which the Laikin-Skjodt Group are obligated to purchase if the
transactions discussed in Recent Developments are consummated will be used to
satisfy a portion of the Deferred Compensation due to Mr. Jimirro. However, the
Letter Agreement does allow the Laikin-Skjodt Group, at the closing, to




                                       15
<PAGE>



purchase up to an additional 300,000 common shares directly from the Company at
a purchase price of $11.00 per share. If the Laikin-Skjodt Group does not
purchase these shares, the Company may need to obtain third party financing to
continue its operations. There can be no assurance that the Company will be able
to obtain such financing on reasonable terms or at all.

     As indicated above, if the Laikin-Skjodt Agreement is consummated, the
Company has been advised by its independent auditors that it will be required to
record an expense related to the difference between the purchase price and the
fair market value of the shares or stock options sold by the Company and Mr.
Jimirro. The exact amount of these charges cannot be determined until
consummation of the transactions and are dependent upon the market price of the
Company's common stock on the closing date and dependent on the number of
additional shares purchased by the Laikin-Skjodt Group. However, if the
Laikin-Skjodt Group purchases all 300,000 additional shares and if the market
price for the Company's common stock on the closing date of the transactions is
between $10.00 and $15.00, these charges are estimated to be between $2.5
million and $2.8 million.

     In addition, pursuant to the transactions, Mr. Jimirro will resign his
officer and director positions with the Company, receive deferred compensation
owed to him of approximately $2.5 million and enter into a long-term consulting
and non-compete agreement with the Company with aggregate payments to Mr.
Jimirro over time of approximately $3.8 million plus fringe benefits expected to
cost approximately $360,000 over the life of the consulting and non-compete
agreement. At the closing of the transactions, Mr. Jimirro will also receive
options that vest over four years to purchase up to 250,000 shares of the
Company's common stock at a price equal to the average market price of such
common stock during the five trading days immediately preceding the closing date
of the transactions. The Company's obligations under the consulting and
non-compete agreement will be secured by a lien on its assets.

     If the transactions are consummated, the Company estimates that it will
record expenses upon closing relating to Mr. Jimirro's deferred compensation and
consulting and non-compete agreement in the aggregate amount of approximately
$6.7 million. In addition, the Company will be required to record an expense1
relating to the grant of options to Mr. Jimirro that is dependent upon the
market price of the Company's common stock on the closing date. If the price for
the Company's common stock on that date is between $10.00 and $15.00, this
charge is estimated to be between $2.0 million and $2.5 million.

     For the twelve months ended July 31, 2001, the Company's net cash flows
used in its operating activities was $1,486,834, a decrease of $1,253,535 versus
$233,299 of net cash flow used in operating activities during the twelve months
ended July 31, 2000. This decrease resulted primarily from a decrease in
trademark licensing income during the year ended July 31, 2001, and expenditures
related to the Company's activities concerning the Laikin group. At October 15,
2001, the Company had cash and cash equivalents of approximately $471,880 as
compared to $1,883,941 at July 31, 2000.

FUTURE COMMITMENTS

     The Company does not have any material future commitments for capital
expenditures, subject however, to the consummation of the Laikin-Skjodt
Agreement, which will entail the incurrence of significant future payments to
Mr. Jimirro as indicated above. However, the Company has and will continue to
use its working capital to fund its Internet operations that, during the twelve
months ended July 31, 2001, generated approximately $14,000 of revenue




                                       16
<PAGE>




and have resulted in segment operating losses of approximately $787,000 (SEE
NOTE H - SEGMENT INFORMATION). Due to substantial competition among companies
with internet-based business strategies and the developing economics of the
internet in general, it is uncertain when, and if, the Company will be able to
generate revenues from its Internet operations sufficient to offset the
significant costs incurred to date and the ongoing costs that the Company
expects to incur in the future to support its Internet operations.

     In connection with Mr. Laikin's notice and the subsequent discussions with
Mr. Laikin as discussed in LIQUIDITY AND CAPITAL RESOURCES, the Company has, as
of October 24, 2001, received a total of $450,000 from the Laikin group. Please
See "Management's Discussion and Analysis of Financial Position and Results of
Operations -- The Laikin-Skjodt Agreement."

New Accounting Pronouncements:

     In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS
No. 141 supersedes Accounting Principles Board ("APB") No. 16 and requires that
any business combinations initiated after June 30, 2001 be accounted for as a
purchase; therefore, eliminating the pooling-of-interest method defined in APB
16. The statement is effective for any business combination initiated after June
30, 2001 and shall apply to all business combinations accounted for by the
purchase method for which the date of acquisition is July 1, 2001 or later. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations since the Company has not
participated in such activities covered under this pronouncement.

     In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangibles." SFAS No. 142 addresses the initial recognition, measurement and
amortization of intangible assets acquired individually or with a group of other
assets (but not those acquired in a business combination) and addresses the
amortization provisions for excess cost over fair value of net assets acquired
or intangibles acquired in a business combination. The statement is effective
for fiscal years beginning after December 15, 2001, and is effective July 1,
2001 for any intangibles acquired in a business combination initiated after June
30, 2001. The Company is evaluating any accounting effect, if any, arising from
the recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the
Company's financial position or results of operations.

     In October 2001, the FASB recently issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," which requires companies to record the fair value
of a liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is depreciated over the life of the respective
asset while the liability is accreted to its present value. Upon settlement of
the liability, the obligation is settled at its recorded amount or the company
incurs a gain or loss. The statement is effective for fiscal years beginning
after June 30, 2002. The Company does not expect the adoption to have a material
impact to the Company's financial position or results of operations.

     In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the
accounting and reporting for the impairment or disposal of long-lived assets.
The statement provides a single accounting model




                                       17
<PAGE>





for long-lived assets to be disposed of. New criteria must be met to classify
the asset as an asset held-for-sale. This statement also focuses on reporting
the effects of a disposal of a segment of a business. This statement is
effective for fiscal years beginning after December 15, 2001. The Company does
not expect the adoption to have a material impact to the Company's financial
position or results of operations.

ITEM 8.  FINANCIAL STATEMENTS

     The consolidated financial statements of J2 Communications are listed on
the Index to Financial Statements set forth on page F-1.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Please refer to Form 8-K filed with the SEC on July 30, 2001 reflecting the
selection of Stonefield Josephson as the Company's independent auditors for the
fiscal year ending July 31, 2001 and replacing the firm of Arthur Andersen LLP
who has served as the Company's independent auditors since the fiscal year ended
July 31, 1995

                                    PART III.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth information with respect to the directors
and executive officers of the Company. Directors are elected at the annual
meeting of stockholders to serve a one-year term and until their successors are
elected and qualified. Officers serve at the request of the Board of Directors
of the Company. There are no family relationships among any of the directors or
executive officers.

<TABLE>
<CAPTION>

                                                                               Director
              Name                 Age             Position                     Since
              ----                 ---             --------                     -----
          <S>                     <C>      <C>                                <C>
          James Jimirro            64      Chairman, President and Chief        1986
                                           Executive Officer

          James Fellows            65      Director                             1986

          Bruce Vann               45      Director                             1987

          John De Simio            49      Director                             1998

          Gary Cowan               66      Director                             2000

          Daniel Laikin            39      Director                             2000

</TABLE>







                                       18
<PAGE>



EXECUTIVE OFFICERS AND DIRECTORS

     JAMES P. JIMIRRO has been employed by the Company as President and Chief
Executive Officer since its inception. From 1980 to 1985 he was the President of
Walt Disney Telecommunications Company, which included serving as President of
Walt Disney Home Video, a producer and distributor of family home video
programming. While in this position, he also served as Corporate Executive Vice
President of Walt Disney Productions. In addition, from 1983 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 the Walt Disney Company through July of
1986. From 1973 to 1980 he served as Director of International Sales and then as
Executive Vice President of the Walt Disney Educational Media Company, a
subsidiary of the 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 FELLOWS has been a member of the Board of Directors and the President
of the Central Education Network, Inc., a Chicago, Illinois association of
public television and educational associations, since 1983. From 1962 through
1982, Mr. Fellows worked in a variety of positions for the National Association
of Educational Broadcasters in Washington, D.C., and became its President and
Chief Executive Officer in 1978. Mr. Fellows is a director of numerous nonprofit
corporations including the Hartford Gunn Institute, a research and planning
service for public telecommunications; the Maryland Public Broadcasting
Foundation, a corporate fund-raiser for public television; and the American
Center for Children and Media, a coalition of organizations committed to
improving media services for children and youth.

     BRUCE P. VANN has been a principal of the law firm of Kelly, Lytton, Mintz
& Vann LLP since December 1995. From 1989 through December 1995 he was a partner
in the law firms of Keck, Mahin & Cate and Meyer & Vann. Mr. Vann specializes in
corporate and securities matters. From January 1994 through December 1998, Mr.
Vann served, on a non-exclusive basis, as Senior Vice President, Business and
Legal Affairs, of Largo Entertainment, Inc., a subsidiary of the Victor Company
of Japan.

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

     GARY COWAN, a certified public accountant, has served as Chief Financial
Officer for a broad range of companies, including U.S. Vacation Resorts, Inc.,
the Coastland Corporation, and Superscope Inc. In addition, he was Vice
President, Financial Analysis and Review, for Dart Industries. From 1993 through
1997, Mr. Cowan served as Chief Financial Officer of the Company and was a
member of the Board of Directors. He is currently an independent consultant in
strategic financial planning and accounting. Mr. Cowan holds a B.S. in
accounting and a M.B.A. from U.C.L.A.




                                       19
<PAGE>



     DANIEL LAIKIN currently serves as co-Chairman of Biltmore Homes, Inc., an
Indiana based home building and real estate development company. He is also
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 currently an advisor to the board of directors of Focus
Affiliates, Inc. and is on the advisory board of iNetNow.

ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

     The following table sets forth the compensation for each of the last three
fiscal years of the Company's Chief Executive Officer and up to four other
executive officers of the Company ("Named Officers") whose annual salary and
bonus exceeded $100,000 during the fiscal year ended July 31, 2001.

<TABLE>
<CAPTION>

                                                                             Long Term
                                             Annual Compensation            Compensation
                                           ------------------------     ---------------------
                                                        Other Annual                  Stock        All Other
                                                        Compensation      SARs       Options     Compensation
       Name and Position        Year      Salary ($)        ($)          (Shares)     (Shares)       ($)
       -----------------        ----      ----------     -----------    --------     --------     -----------
<S>                             <C>       <C>             <C>              <C>        <C>         <C>
James Jimirro                   2001      190,750(1)            0          25,000       25,000
   Chairman, President and      2000      190,750(1)      913,724          25,000       25,000      287,812(3)
   Chief Executive Officer      1999      190,750(1)            0          16,667       16,667      441,000(3)

Christopher Trunkey (4)         2001      117,500               0               0       21,000            0
    Vice President, Chief
    Financial Officer
</TABLE>

 ---------------
(1)  Mr. Jimirro has voluntarily deferred all "Base Salary," as defined by the
     applicable employment agreement, in excess of $190,750. Such deferred
     amounts are payable only upon a "Change of Control" of the Company as
     defined by the applicable employment agreement and are included in "All
     Other Compensation" hereunder.
(2)  Represents the difference between the exercise price and the market price
     on the date of exercise for 66,668 stock options exercised by Mr. Jimirro
     on November 30, 1999.
(3)  Represents salary voluntarily deferred by Mr. Jimirro that is payable only
     upon a "Change of Control" as defined by the applicable employment
     agreement. Does not include interest at the rate of 5% per annum on amounts
     deferred also payable upon a "Change in Control."
(4)  Mr. Trunkey joined the Company on January 31, 2000 and is included
     hereunder pursuant to Item 402(a)(3)(iii) of Regulation S-K. Mr. Trunkey
     resigned from the Company on August 24, 2001.

STOCK OPTION AND STOCK APPRECIATION RIGHTS GRANTS

     The following table sets forth the individual grants of stock options and
stock appreciation rights made during the fiscal year ended July 31, 2001 to the
Named Officers:

<TABLE>
<CAPTION>
                                                                                       Potential Realized Valu
                                                                                          at Assumed Annual
                                           % of Total                                    Rates of Stock Price
                                          Options/SARs                                       Appreciation
                            Options/       Granted to      Exercise                        for Option Term
                              SARs         Employees       Or Base      Expiration      ----------------------
          Name              Granted     in Fiscal Year   Price($/Sh)       Date           5%($)       10%($)
          ----              -------     --------------   -----------    ------------    ---------    ---------
<S>                        <C>          <C>              <C>            <C>             <C>          <C>
James Jimirro              25,000(1)            17%          14.76       12/28/2009      203,750      501,750
                           25,000(1)           100%          14.76       12/28/2009      203,750      501,750

Christopher Trunkey        21,000(2)            14%          12.75       01/31/2007       91,140      206,640

</TABLE>


                                       20
<PAGE>


------------
(1)  The options and SARs granted to Mr. Jimirro were immediately exercisable
     upon grant. The exercise and base prices of the options and SARs granted to
     Mr. Jimirro are equal to the average of the high and low bid and asked
     price during the five (5) business days preceding the date of grant. The
     market price on the date of grant was $14.50.
(2)  The options granted to Mr. Trunkey are exercisable one-third one year from
     the date of grant, one-third two years from the date of grant and one-third
     three years from the date of grant.

STOCK OPTION AND STOCK APPRECIATION RIGHTS EXERCISES AND YEAR-END VALUES

     Shown below is information for the Named Officers with respect to the
exercise of stock options and the ownership of stock options and stock
appreciation rights and their values as of July 31, 2001.

<TABLE>
<CAPTION>

                                                                                     Value of Unexercised
                                                         Number of Unexercised       In-the-Money Options/
                                                   Options/SARs at July 31, 2001   SARs at July 31, 2001 (1)
                         Shares                     ---------------------------   ---------------------------
                        Acquired        Value       Exercisable   Unexercisable   Exercisable    Unexercisable
    Name              On Exercise    Realized ($)     (Shares)       (Shares)         ($)             ($)
    ----              -----------    ------------     --------     ------------    ---------       ---------
<S>                   <C>            <C>             <C>           <C>            <C>              <C>
James Jimirro              0              0            158,335              0        847,771               0

Christopher Trunkey        0              0                  0         21,000              0               0
</TABLE>

---------------
(1)  Based upon the difference between the closing price on July 31, 2000 and
     the option exercise price or stock appreciation rights base price.

DIRECTOR COMPENSATION

     On the date of each annual meeting held by the Company, all directors,
excluding Mr. Jimirro, completing a year of service receive options to purchase
up to 1,333 shares at the market price on the date of grant that are immediately
exercisable. Mr. Jimirro's compensation as a director is pursuant to the
employment agreement described under "Employment Agreements."

EMPLOYMENT AGREEMENTS

     The Company has entered into a Restated Employment Agreement dated July 1,
1999 ("1999 Agreement") with James P. Jimirro, its Chairman, President and Chief
Executive Officer. The 1999 Agreement has a term of seven years ("Term") and
provides for a base salary of $475,000 with annual increases equal to the
greater of 9% or 5% plus the percentage increase in the Consumer Price Index.
The 1999 Agreement also provides for (i) an annual bonus of 5% to 9% of the
Company's pre-tax earnings in excess of $500,000, (ii) an annual grant of
immediately exercisable stock options covering 25,000 shares of the Company's
common stock, (iii) an annual grant of immediately exercisable stock
appreciation rights relating to 25,000 shares of the Company's common stock, and
(iv) such other benefits including medical insurance, an automobile and the
reimbursement of business expenses as have previously been provided to Mr.
Jimirro.

     Also, pursuant to the 1999 Agreement, Mr. Jimirro received a contingent
note ("Contingent Note") in the principal sum of approximately $2,151,000
representing salary payable to Mr. Jimirro pursuant to previous employment
agreements that was voluntarily deferred by Mr. Jimirro between January 1, 1993
and June 30, 1999. The Contingent Note bears interest at the rate of 7% per
year. Mr. Jimirro has continued to voluntarily defer all salary in excess of
approximately $191,000 payable under the 1999 Agreement and has the right to
request the issuance of additional contingent notes to reflect such additional
deferrals. The



                                       21
<PAGE>


deferred compensation due to Mr. Jimirro as part of the March 5, 2001 "Letter
Agreement" with the "Laikin-Skjodt Group" is $2.5 million (see Item 7. Recent
Developments above). The Contingent Note and any subsequent salary deferrals are
payable only upon a "Change of Control" as defined in the 1999 Agreement.

     In addition, upon any "Change of Control" of the Company or any one of the
"Executive Termination Events," all as defined in the 1999 Agreement, Mr.
Jimirro is generally entitled to receive a lump sum payment of all salary due
for the remaining Term (excluding subsequent annual increases) and to continue
to receive all benefits, bonuses, stock options and stock appreciation rights
for the remaining Term. Further, to the extent the aforesaid payments result in
any excise tax liability under the Internal Revenue Code of 1986, the Company is
obligated to make an additional payment to Mr. Jimirro equal to the amount of
such excise taxes plus any income or other payroll taxes resulting from such
excise tax payment. In addition, Mr. Jimirro, at his request, shall be engaged
as a consultant to the Company for a term of five years at the annual rate of
50% of his salary at the time of termination.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

     The Company's Board of Directors does not have a compensation or similar
committee. Mr. Jimirro's employment agreement was negotiated on behalf of the
Company by Mr. Vann and approved by all of the Company's directors, other than
Mr. Jimirro who abstained, at a special meeting of the Board of Directors held
on October 14, 1999.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT

PRINCIPAL STOCKHOLDERS

     The following table sets forth certain information, as of October 16, 2001,
concerning ownership of shares of Common Stock by each person who is known by
the Company to beneficially own more than 5% of the issued and outstanding
Common Stock of the Company:

<TABLE>
<CAPTION>

                                                     Number of            Percent of
     Name of Beneficial Owner                          Shares               Class
     ------------------------                        -----------          ---------
<S>                                                  <C>                  <C>
    James Jimirro (1)                                308,668(2)              22.4%

    Daniel Laikin (1)                                166,900(3)              12.1%

    Paul Skjodt (1)                                  159,300(3)              11.1%

    Christopher Williams (1)                         129,900(4)               9.1%

    Carroll Edwards (1)                               95,000(5)               6.6%

    Timothy S.Durham (6)                               87,699(7)               6.3%
</TABLE>



---------------
(1)  The address for Mr. Jimirro is 10850 Wilshire Blvd., Suite 1000, Los
     Angeles, California 90024. The address for Mr. Laikin and Mr. Skjodt is 25
     West 9th Street, Indianapolis, Indiana 46204. The address for Mr. Williams
     is PO Box 21207, Santa Barbara, California 93121. The address for Mr.
     Edwards is PO Box 219, Marshville, North Carolina 28103.
(2)  Includes options to purchase up to 75,001 shares that are presently
     exercisable.
(3)  Based upon a joint Schedule 13D filed by Mr. Laikin and Mr. Skjodt as
     amended August 11, 2001. Mr. Laikin and Mr. Skjodt ---- disclaim voting
     power or any voting agreement or arrangements over the shares beneficially
     owned by the other.




                                       22
<PAGE>




(4)  Mr. Williams filed a Schedule 13G on January 20, 2000 claiming beneficial
     ownership of 89,000 shares. The Company has information that as of August
     22, 2000 Mr. Williams is the beneficial owner of the shares indicated.

(5)  To the Company's knowledge, Mr. Edwards has not filed any Schedule 13D or
     13G with the Securities and Exchange Commission. The Company has
     information that as of August 22, 2000 Mr. Edwards is the beneficial owner
     of the shares indicated.

(6)  The address for Mr. Durham is 111 Monument Circle, Suite 3680,
     Indianapolis, Indiana 46204.

(7)  Based on a Schedule 13d filed by Mr. Durham on August 10, 2001.

     The information contained in this table is derived, in part, from a listing
of Non-objecting Beneficial Owners of the Company's common stock dated as of
August 22, 2000 and information filed by various holders on Schedules 13D and
13G. By presenting the foregoing information, the Company does not necessarily
accept the accuracy of the information disclosed herein including, but not
limited to, the number of shareholders in the Laikin/Skjodt group, the number of
shares owned or controlled by the Laikin/Skjodt group and/or the relationship of
Christopher Williams or Carroll Edwards, among others, to such group.

SECURITY OWNERSHIP OF MANAGEMENT

     The following table sets forth, as of October 23, 2001, certain information
concerning ownership of shares of Common Stock by each executive officer and
director of the Company and by all executive officers and directors of the
Company as a group:

<TABLE>
<CAPTION>

          Name of Director                         Number of               Percent of
        or Executive Officer                         Shares                  Class
        --------------------                         ------                  -----
<S>                                               <C>                       <C>
    James Jimirro (1)                              308,668(2)                22.4%

    Daniel Laikin (1)                              166,900(3)                12.1%

    James Fellows (1)                               15,833(4)                 1.1%

    Bruce Vann (1)                                  14,998(4)                 1.1%

    John De Simio (1)                                3,666(5)                 ***

    Gary Cowan (1)                                   2,333(4)                 ***

    Christopher Trunkey (1)                             --                     --

    All directors and executive officers as
      A group (7 persons)                          512,398(6)                37.1%

</TABLE>

---------------
***  Less than one percent
(1)  The address for each director or officer except for Mr. Laikin is 10850
     Wilshire Blvd., Suite 1000, Los Angeles, California 90024. The address for
     Mr. Laikin is 25 West 9th Street, Indianapolis, Indiana 46204.
(2)  Includes options to purchase up to 75,001 shares that are presently
     exercisable.
(3)  Based upon a joint Schedule 13D filed by Mr. Laikin and Mr. Skjodt as
     amended August 11, 2000. Mr. Laikin and Mr. Skjodt disclaim voting power or
     any voting agreement or arrangements over the shares beneficially owned by
     the other.
(4)  Represents options to purchase up to the number of shares indicated that
     are presently exercisable.
(5)  Includes options to purchase up to 1,333 shares that are presently
     exercisable.
(6)  Includes options to purchase up to 95,498 shares that are presently
     exercisable.

     Please see "Management's Discussion and Analysis of Financial Position and
Results of Operations - The Laikin-Skjodt Agreement" for a discussion of certain
transactions affecting the ownership of the Company's Common Stock by certain of
its executive officers and directors.

     Except for the Laikin-Skjodt Agreement, the Company does not know of any
arrangements, including any pledge of the Company's securities, the operation of
which at a subsequent date may result in a change of control of the Company.




                                       23
<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     Bruce Vann, one of the Company's directors, is a partner of the law firm
Kelly, Lytton and Vann retained by the Company for various legal matters. Legal
expenses of approximately $46,000 were incurred with respect to work performed
by Mr. Vann's firm for the Company during the fiscal year ended July 31, 2001.

     On July 14, 1986, James P. Jimirro, the Company's Chairman, President and
Chief Executive Officer purchased 192,000 shares of the Company's common stock
for approximately $115,000. For such shares, the Company received the sum of
approximately $58,000 and a note ("Note") for approximately $58,000. The Note
bears interest at the rate of 10% per annum and, pursuant to a July 14, 1986
Pledge and Security Agreement, is secured by the shares purchased. The unpaid
principal and interest outstanding at July 31, 2001 was approximately $146,000.

     The Company, Mr. James P. Jimirro, the Company's Chairman and Chief
Executive Officer, and Mr. Daniel Laikin, a Director of the Company have entered
into the Laikin-Skjodt Agreement. Please see "Management's Discussion and
Analysis of Financial Position and Results of Operations - The Laikin-Skjodt
Agreement."


                                    PART IV.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(A)  EXHIBITS (NUMBERED IN ACCORDANCE WITH ITEM 601 OF REGULATION S-K)

       2.1    Acquisition Agreement dated as of July 31, 1990 between
              Registrant, J2 Acquisition Corp., National Lampoon, Inc., Daniel
              L. Grodnick and Tim Matheson and related Agreement and Plan of
              Merger. (1)

       3.1    Restated Articles of Incorporation of Registrant filed July 17,
              1986. (2)

       3.2    Certificate of Amendment of Restated Articles of Incorporation
              filed April 27, 1989. (9)

       3.3    Certificate of Amendment of Restated Articles of Incorporation
              filed July 14, 1993. (9)

       3.4    Certificate of Amendment of Restated Articles of Incorporation
              filed October 29, 1998. (3)

       3.5    Bylaws of Registrant. (2)

       3.6    Amendment to Bylaws of Registrant dated July 15, 1999. (4)

       3.7    Amendment to Bylaws of Registrant dated August 18, 2000. (5)

       4.1    Rights Agreement between Registrant and U.S. Stock Transfer
              Corporation dated July 15, 1999. (4)

       4.2    Amendment to Rights Agreement between Registrant and U.S. Stock
              Transfer Corporation dated March 5, 2001. (9)

       10.1   Employee Stock Purchase Plan adopted June 30, 1986. (2)

       10.2   Agreement between Registrant and Harvard Lampoon, Inc. dated
              October 1, 1998. (6)

                                       24
<PAGE>






       10.3   Restated Employment Agreement between Registrant and James Jimirro
              dated as of July 1, 1999. (7)

       10.4   Contingent Note issued by Registrant to James Jimirro dated as of
              July 1, 1999. (7)

       10.5   Registrant's Amended and Restated 1999 Stock Option, Deferred
              Stock and Restricted Stock Plan dated October 14, 1999. (8)

       10.6   Employment Agreement between Registrant and Christopher Trunkey
              dated January 21, 2000. (9)

       10.7   First Amendment to Office Lease between Registrant and Avco Center
              Corporation dated April 21, 2000. (9)

       10.8   Letter Agreement between Registrant and Batchelder & Partners,
              Inc. dated August 16, 2000. (9)

       10.9   Amendment to Letter Agreement between Registrant and Batchelder &
              Partners, Inc. dated August 30, 2000. (9)

       10.10  Warrant issued by Registrant to George Vandemann dated August 18,
              2000. (9)

       10.11  Form of Restated Indemnification Agreement. (6)

       10.12  Laikin-Skjodt Agreement, dated March 5, 2001 (10)

       21     Subsidiaries of Registrant. (11)

       27     Financial Data Schedule. (11)

------------
(1)  Incorporated by reference to Form S-4 filed on August 2, 1990, as amended
     September 18, 1990.
(2)  Incorporated by reference to Form S-1 filed on July 28, 1986, as amended
     September 22, 1986 and October 2, 1986.
(3)  Incorporated by reference to Form 10-K for the fiscal year ended July 31,
     1998.
(4)  Incorporated by reference to Form 8-K filed July 16, 1999.
(5)  Incorporated by reference to Form 8-K filed August 22, 2000.
(6)  Incorporated by reference to Form 10-Q for the period ended October 31,
     1998.
(7)  Incorporated by reference to Form 10-K for the fiscal year ended July 31,
     1999.
(8)  Incorporated by reference to Schedule 14A filed December 13, 1999.
(9)  File herewith.
(10) Incorporated by reference to the Form 10-Q filed by the Company on March
     14, 2001.
(11) Filed electronically herewith with the Securities and Exchange Commission,
     omitted in copies distributed to shareholders or other persons.

(b)  FORMS 8-K

     On August 11, 2000, the Company filed a Current Report on Form 8-K
     reporting under Item 5. thereof that on August 11, 2000, the Company
     received a request from Daniel Laikin, a member of the Company's Board of
     Directors, requesting a special meeting of the Company shareholders be
     called for September 18, 2000 for the purpose of removing the Company's
     incumbent directors and electing a new Board of Directors, among other
     things.

     On August 21, 2000, the Company filed a current Report on Form 8-K
     reporting under Item 5. thereof the adoption of an amendment to the
     Company's Bylaws.

(c)  SEE (a) ABOVE


                                       25
<PAGE>


                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

Date: November 13, 2001


                                           By: /s/ James Jimirro
                                               ----------------------
                                               James Jimirro,
                                               Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

        SIGNATURE                           TITLE                                      DATE
        ---------                           -----                                      ----
<S>                                 <C>                                         <C>
/s/ James Jimirro                   Chairman of the Board of                    November 12, 2001
----------------------------        Directors and Chief Executive
James Jimirro                       Officer (Principal Executive
                                    Officer)

/s/ James Toll                      Chief Financial Officer                     November 12, 2001
----------------------------
James Toll

/s/ James Fellows                   Director                                    November 12, 2001
----------------------------
James Fellows

/s/ Bruce Vann                      Director                                    November 12, 2001
----------------------------
Bruce Vann

/s/ John De Simio                   Director                                    November 12, 2001
----------------------------
John De Simio

/s/ Gary Cowan                      Director                                    November 12, 2001
----------------------------
Gary Cowan

                                    Director                                    November 12, 2001
----------------------------
Daniel Laikin

</TABLE>


                                       26
<PAGE>



                       J2 COMMUNICATIONS AND SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                        FOR THE YEAR ENDED JULY 31, 2000


<TABLE>

<S>                                                                                    <C>
Reports of Independent Public Accountants                                               F-2/F3

Consolidated Balance Sheets as of July 31, 2001 and 2000                                  F-4

Consolidated Statements of Operations for the Years

Ended July 31, 2001, 2000 and 1999                                                        F-5

Consolidated Statements of Shareholders' Equity

for the Years Ended July 31, 2001, 2000 and 1999                                          F-6

Consolidated Statements of Cash Flows for the Years

Ended July 31, 2001, 2000 and 1999                                                        F-7

Notes to Consolidated Financial Statements                                                F-8


</TABLE>


                                      F-1
<PAGE>



INDEPENDENT AUDITORS' REPORT

Board of Directors
J2 Communications
Los Angeles, California

We have audited the accompanying consolidated balance sheets of J2
Communications and Subsidiaries (the "Company") as of July 31, 2001, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year ended July 31, 2001. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of J2
Communications as of July 31, 2001 and the results of their operations and their
cash flows for the year ended July 31, 2001 in conformity with accounting
principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note C to the
consolidated financial statements, the Company has significant contingent
payments due an officer upon a change of control event. The Company and its
Chairman are currently in negotiations with certain shareholders to acquire all
interests in the Company held by the Chairman (Note K), after which the Chairman
will resign. Consummation of this transaction would trigger the obligations due
discussed in Note C, which as the Company may not be able to meet raises
substantial doubt about its ability to continue as a going concern. The
Company's new management will need to evaluate the Company's liquidity and
capital measures. Management's plans in regard to these matters are also
described in Note K. The financial statements do not include any adjustments to
asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.

CERTIFIED PUBLIC ACCOUNTANTS

Santa Monica, California
October 8, 2001


                                      F-2
<PAGE>



                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To J2 Communications:

We have audited the accompanying consolidated balance sheet of J2 Communications
and Subsidiaries (the "Company") as of July 31, 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended July 31, 2000 and 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of J2
Communications as of July 31, 2000 and the results of their operations and their
cash flows for the two years ended July 31, 2000 and 1999 in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note K to the
consolidated financial statements, in August 2000, the Company received notice
from a member of the Board of Directors requesting that a special meeting of the
Company's shareholders be called for the purported purpose of nominating a slate
of six new directors and replacing all of the Company's incumbent directors. As
of October 24, 2000, the Company is currently engaged in discussions with this
Director regarding the notice and related matters. Management cannot predict the
outcome of these discussions at this time. As discussed in Note C to the
consolidated financial statements, the Company has significant contingent
payments due an officer upon a change of control event. If a change of control
event results as part of these discussions, the amounts due discussed in Note C
would be triggered and result in a net capital deficiency that raises
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note K. The consolidated
financial statements do not include any adjustments to asset carrying amounts or
the amount and classification of liabilities that might result from the outcome
of this uncertainty.

Arthur Andersen LLP
Los Angeles, California

October 24, 2000



                                      F-3
<PAGE>




                       J2 COMMUNICATIONS AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>


                                                                   AS OF JULY 31,
                                                               2001             2000
                                                          ------------      ------------
<S>                                                        <C>               <C>
CURRENT ASSETS

   Cash and cash equivalents                               $   324,472       $ 1,883,750
   Accounts receivable                                               0             6,580
   Inventory                                                         0                 0
   Prepaid expenses and other current assets                    32,685            22,214
                                                           -----------       -----------
          Total current assets                                 357,157         1,912,544

NON-CURRENT ASSETS
   Fixed assets, net of accumulated depreciation                 8,451            19,816
   Intangible assets, net of accumulated amortization        2,936,154         3,176,154
   Other assets                                                      0            10,758
                                                           -----------       -----------
          Total non-current assets                           2,944,605         3,206,728
                                                           -----------       -----------
TOTAL ASSETS                                               $ 3,301,762       $ 5,119,272
                                                           ===========       ===========

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
   Accounts payable                                        $   242,451       $   291,567
   Accrued expenses                                            620,705           374,692
   Settlement payable                                          203,117           203,117
   Stock appreciation rights payable                           843,096           568,820
   Extension payments (Note K)                                 200,000                 0
                                                           -----------       -----------
          Total current liabilities                          2,109,369         1,438,196

                                                           -----------       -----------
     TOTAL LIABILITIES                                       2,109,369         1,438,196
                                                           -----------       -----------

SHAREHOLDERS' EQUITY
   Preferred Stock, no par value, 2,000,000 shares
      authorized, no shares issued and outstanding                   0                 0
   Common Stock, no par value, 15,000,000 shares
      authorized, 1,371,116 and 1,337,046 shares
      issued, respectively                                   9,616,767         9,024,778
   Less: Note receivable on common stock                      (145,700)         (139,940)
   Less: Treasury stock, at cost, 1,166 shares                       0            (1,603)
   Deficit                                                  (8,278,674)       (5,202,159)
                                                           -----------       -----------
     TOTAL SHAREHOLDERS' EQUITY                              1,192,393         3,681,076
                                                           -----------       -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                 $ 3,301,762       $ 5,119,272
                                                           ===========       ===========
</TABLE>



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




                                      F-4
<PAGE>




                       J2 COMMUNICATIONS AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                             FOR THE YEARS ENDED JULY 31,
                                                       2001              2000               1999
                                                   -----------       -----------         ----------
<S>                                                <C>               <C>                 <C>
REVENUES
  Trademark                                        $   270,408       $ 1,454,239         1,230,284
  Video                                                 22,151            16,020            16,188
  Internet                                              13,685             9,956                 0
                                                   -----------       -----------       -----------
     Total revenue                                     306,244         1,480,215         1,246,472

COSTS AND EXPENSES
  Costs related to trademark revenue                    22,221           144,578           111,598
  Costs related to video revenue                         4,580             3,583            12,793
  Costs related to internet revenue                     36,040           283,929                 0
  Amortization of intangible assets                    240,000           240,000           240,000
  Proxy solicitation                                 1,532,837                 0                 0
  Selling, general & administrative expenses         1,221,338         1,101,784           947,632
  Stock appreciation rights (benefit)/expense          379,695        (1,148,056)        1,699,745
                                                   -----------       -----------       -----------
     Total costs and expenses                        3,436,711           625,818         3,011,768
                                                   -----------       -----------       -----------
  OPERATING INCOME/(LOSS)                           (3,130,467)          854,397        (1,765,296)

OTHER INCOME/(EXPENSE)
  Interest income                                       55,551            87,365            98,845
  Minority interest in income of
     consolidated subsidiary                                 0          (113,846)          (68,102)
  Reduction of accrued liabilities                           0                 0           435,665
                                                   -----------       -----------       -----------
     Total other (expense)/income                       55,551           (26,481)          466,408
                                                   -----------       -----------       -----------
  INCOME/(LOSS) BEFORE INCOME TAXES                 (3,074,916)          827,916        (1,298,888)

Provision for income taxes                               1,600             1,500                 0
                                                   -----------       -----------       -----------
NET INCOME/(LOSS)                                  ($3,076,516)      $   826,416       ($1,298,888)
                                                   ===========       ===========       ===========

Earnings/(loss) per share - basic                  ($     2.26)      $      0.64       ($     1.07)
                                                   ===========       ===========       ===========

Weighted average number of common
  shares -basic                                      1,358,342         1,289,930         1,211,728
                                                   ===========       ===========       ===========

Earnings/(loss) per share - diluted                ($     2.26)      $      0.62       ($     1.07)
                                                   ===========       ===========       ===========

Weighted average number of common
  and common equivalent shares - diluted             1,358,342         1,341,661         1,211,728
                                                   ===========       ===========       ===========

</TABLE>

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




                                      F-5
<PAGE>



                       J2 COMMUNICATIONS AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>

                                       Common          Common             Note                                           Total
                                       Stock           Stock         Receivable on      Treasury                     Shareholders'
                                       Shares          Amount        Common Stock         Stock         Deficit          Equity
                                     ---------         ------        ------------       --------        -------      -------------
<S>                                  <C>              <C>            <C>                <C>             <C>          <C>
Balance at July 31, 1998             1,200,000        8,662,995         (128,420)         (1,603)      (4,729,687)       3,803,285
  Interest on note receivable             --              5,760           (5,760)           --               --               --
  Exercise of stock options             17,045           47,836             --              --               --             47,836
  Stock issued in settlement
    of liabilities                      16,667           37,501             --              --               --             37,501
  Net loss                                --               --               --              --         (1,298,888)      (1,298,888)
                                    ----------        ---------       ----------        --------      -----------      -----------
Balance at July 31, 1999             1,233,712        8,754,092         (134,180)         (1,603)      (6,028,575)       2,589,734

  Interest on note receivable             --               --             (5,760)           --               --             (5,760)
  Exercise of stock options            103,334          270,686             --              --               --            270,686
  Net income                              --               --               --              --            826,416          826,416
                                    ----------        ---------       ----------        --------      -----------      -----------
Balance at July 31, 2000             1,337,046      $ 9,024,778      ($  139,940)    ($    1,603)     ($5,202,159)     $ 3,681,076


  Interest on note receivable             --                              (5,760)                            --             (5,760)
  Cancel Treasury Stock                 (1,166)          (1,603)                           1,603             --
  Stock issued for services             23,214          271,263                                                            271,263
  Options granted for services                          287,000                                                            287,000
  Exercise of stock options             12,022           35,329             --              --               --             35,329
  Net loss                                --               --               --              --         (3,076,516)      (3,076,516)
                                    ----------        ---------       ----------        --------      -----------      -----------
Balance at July 31, 2001             1,371,116      $ 9,616,767      ($  145,700)              0      ($8,278,674)     $ 1,192,393
                                   ===========      ===========      ===========     ===========      ===========      ===========
</TABLE>


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




                                      F-6
<PAGE>




                       J2 COMMUNICATIONS AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


                                                                             FOR THE YEARS ENDED JULY 31,
                                                                       2001               2000              1999
                                                                   -----------      -----------      -----------
<S>                                                                <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income/(loss)                                               ($3,076,516)     $   826,416      ($1,298,888)
   Adjustments to reconcile net income/(loss) to net
     cash (used in)/provided by operating activities:
        Depreciation and amortization                                  253,720          250,661          248,327
        Stock appreciation rights (benefit)/expense                    379,695       (1,148,056)       1,699,745
        Minority interest in income of consolidated subsidiary               0          113,846           68,102
        Other                                                           (5,760)          (5,760)               0
        Stock issued in settlement of liabilities                                             0           37,501
        Stock issued for services                                      271,263
        Options granted for services                                   287,000

   Changes in assets and liabilities:
        Decrease/(increase) in accounts receivable                       6,580            2,063           (1,339)
        Decrease/(increase) in inventory                                     0            9,642            4,650
        Decrease/(increase) in prepaid expenses and
            other current assets                                       (10,472)             415           16,327
        Decrease/(increase) in other assets                             10,758            4,895             (912)
        (Decrease)/Increase in accounts payable                        (49,115)          94,922           42,389
       (Decrease) /increase in accrued expenses                        246,013          (56,885)        (396,373)
        Decrease in income taxes payable                               (25,378)         (12,801)
        (Decrease)/increase in minority interest payable                     0         (300,080)               0
        (Decrease)/increase in deferred revenue                        200,000                0         (800,000)
                                                                    ----------      -----------      -----------
  NET CASH AND CASH EQUIVALENTS (USED IN)/
     PROVIDED BY OPERATING ACTIVITIES                               (1,486,834)        (233,299)        (393,272)
                                                                    ----------      -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchase of fixed assets                                             (2,356)         (11,578)         (27,227)
   Sale/(purchase) of marketable securities                                  0                0        1,351,805
                                                                    ----------      -----------      -----------
   NET CASH AND CASH EQUIVALENTS (USED IN)/
     PROVIDED BY INVESTING ACTIVITIES                                   (2,356)         (11,578)       1,324,578
                                                                    ----------      -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Exercise of stock options                                            35,329          270,686           47,836
   Exercise of Stock Appreciation Rights shares                       (105,419)               0                0
                                                                    ----------      -----------      -----------
   NET CASH AND CASH EQUIVALENTS
     PROVIDED BY FINANCING ACTIVITIES                                  (70,090)         270,686           47,836
                                                                    ----------      -----------      -----------
NET INCREASE/(DECREASE) IN CASH
  AND CASH EQUIVALENTS                                              (1,559,278)          25,809          979,142

CASH AND CASH EQUIVALENTS
  AT BEGINNING OF YEAR                                               1,883,750        1,857,941          878,799
                                                                    ----------      -----------      -----------
CASH AND CASH EQUIVALENTS
  AT END OF YEAR                                                   $   324,472      $ 1,883,750      $ 1,857,941
                                                                   ===========      ===========      ===========
Cash paid for:
     Taxes                                                         $     5,401      $     3,230      $    23,289
                                                                   ===========      ===========      ===========

Supplemental disclosure of non-cash financing Activities:

Stock and options issued for services                                  558,263                0                0
                                                                   ===========      ===========      ===========

</TABLE>

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


                                      F-7
<PAGE>


                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES

Organization and Principles of Consolidation - The consolidated financial
statements include the accounts of J2 Communications and its subsidiaries
("Company") after elimination of all inter-company items and transactions. The
Company, a California corporation, was formed in 1986 and was primarily engaged
in the acquisition, production and distribution of videocassette programs for
retail sale. During fiscal year 1991, the Company acquired all of the
outstanding shares of National Lampoon, Inc. ("NLI"). NLI was incorporated in
1967 and was primarily engaged in publishing the "National Lampoon Magazine" and
related activities. Subsequent to the Company's acquisition of NLI, it has
de-emphasized its videocassette business and publishing operations and has
focused primarily on exploitation of the "National Lampoon" trademark including
the October 1999 launch of the Company's website, "nationallampoon.com."

Revenue Recognition - The Company's trademark licensing revenues are generally
recognized when received or when earned under the terms of the associated
agreement and when the collection of such revenue is reasonably assured.
Revenues from the sale of videocassettes, net of estimated provisions for
returns (which are not material for any period presented) are recognized when
the units are shipped. Revenues from Internet operations are recognized when
earned under the terms of the associated agreement and the collection of such
revenue is reasonably assured.

Use of Estimates - The preparation of 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 financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Depreciation - Depreciation of fixed assets is computed by the straight-line
method over the estimated useful lives of the assets ranging from three to five
years.

Cash Concentration and Cash Equivalents - The Company maintains its cash
balances at financial institutions that are federally insured, however, at times
such balances may exceed federally insured limits. The Company considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.

Intangible Assets - Intangible Assets consists primarily of the "National
Lampoon" trademark and related assets acquired through the Company's acquisition
of NLI and are 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.




                                      F-8
<PAGE>


                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

The Company has adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of." This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying value of an asset may not be recoverable. When factors indicate that
intangible assets should be evaluated for possible impairment, the
recoverability of such assets is measured by a comparison of the carrying value
of an asset to the estimated future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying value of the asset
exceeds the fair value of the asset.

As of July 31, 2001, the Company has determined that expected future cash flows
relating to its intangible assets will result in the recovery of the carrying
value of such asset. The continued realization of these intangible assets,
however, is dependent upon the continued exploitation of the "National Lampoon"
trademark for use in motion pictures, television, the Internet, merchandising
and other appropriate opportunities. If these and other ventures that the
Company may enter into do not result in sufficient revenues to recover the
associated intangible assets, the Company's future results of operations may be
adversely affected by adjustments to the carrying values of such intangible
assets.

New Accounting Pronouncements:

In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS No. 141
supersedes Accounting Principles Board ("APB") No. 16 and requires that any
business combinations initiated after June 30, 2001 be accounted for as a
purchase; therefore, eliminating the pooling-of-interest method defined in APB
16. The statement is effective for any business combination initiated after June
30, 2001 and shall apply to all business combinations accounted for by the
purchase method for which the date of acquisition is July 1, 2001 or later. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations since the Company has not
participated in such activities covered under this pronouncement.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangibles."
SFAS No. 142 addresses the initial recognition, measurement and amortization of
intangible assets acquired individually or with a group of other assets (but not
those acquired in a business combination) and addresses the amortization
provisions for excess cost over fair value of net assets acquired or intangibles
acquired in a business combination. The statement is effective for fiscal years
beginning after December 15, 2001, and is effective July 1, 2001 for any
intangibles acquired in a business combination initiated after June 30, 2001.
The Company is evaluating any accounting effect, if any, arising from the
recently issued SFAS No. 142, "Goodwill and Other Intangibles" on the Company's
financial position or results of operations.

In October 2001, the FASB recently issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires companies to record the fair value of a
liability for asset retirement obligations in the period in which they are
incurred. The statement applies to a company's legal obligations associated with
the retirement of a tangible long-lived asset that results from the acquisition,
construction, and development or through the normal operation of a long-lived
asset. When a liability is initially recorded, the company would capitalize the
cost, thereby increasing the carrying amount of the related asset. The
capitalized asset retirement cost is




                                      F-9
<PAGE>



depreciated over the life of the respective asset while the liability is
accreted to its present value. Upon settlement of the liability, the obligation
is settled at its recorded amount or the company incurs a gain or loss. The
statement is effective for fiscal years beginning after June 30, 2002. The
Company does not expect the adoption to have a material impact to the Company's
financial position or results of operations.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.




                                      F-10
<PAGE>



                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Basic and Fully Diluted Loss Per Share - The Company computes earnings per share
in accordance with the provisions of SFAS No. 128, "Earnings Per Share." Basic
earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity that were
outstanding for the period, similar to fully diluted earnings per share.

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

<TABLE>
<CAPTION>

                                                             For the Fiscal Year Ended
                                                  July 31, 2001  July 31, 2000  July 31, 1999
                                                  -------------  -------------  -------------

<S>                                                 <C>           <C>           <C>
Weighted average number of common
  shares used to compute basic EPS                  1,358,342     1,289,930     1,211,728

Weighted average number of common
  share equivalents                                         0        51,731             0
                                                    ---------     ---------     ---------
Weighted average number of common
  shares used to compute diluted EPS                1,358,342     1,341,661     1,211,728
                                                    =========     =========     =========
</TABLE>

Options to purchase 182,167 common shares are not included in the calculation of
diluted EPS in the fiscal year ended July 31, 1999 because they are
anti-dilutive.

Reclassification - Certain amounts for the fiscal year ended July 31, 1999 have
been reclassified to conform with the presentation of the July 31, 2000 amounts.
These reclassifications have no effect on reported net income.

NOTE B - ACCRUED EXPENSES

Accrued expenses consist of:

<TABLE>
<CAPTION>

                                                     As of           As of
                                                  July 31, 2001  July 31, 2000
                                                  -------------  -------------
<S>                                                <C>              <C>
Accrued legal fees                                  $15,000          $10,000
Accrued accounting fees                             $20,000           40,000
Accrued payroll and related items                    85,889           79,922
Accrued video royalties                              49,017           49,971
Accrued television and other royalties              168,914                0
Deferred payroll- officers/shareholders             188,845          188,845
Other                                                93,040            5,954
                                                  ---------        ---------
                                                   $620,705         $374,692
                                                  =========        =========

</TABLE>


                                      F-11
<PAGE>




                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B - ACCRUED EXPENSES (CONTINUED)

Accounting for Stock-Based Compensation:

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, which
applies the fair-value method of accounting for stock-based compensation plans.
In accordance with this standard, the Company accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.

In March 2000, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), "Accounting for Certain Transactions
Involving Stock Compensation." Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under APB Opinion No. 25, Accounting for
Stock-Based Compensation. Interpretation 44 became effective July 1, 2000, with
certain provisions that were effective retroactively to December 15, 1998 and
January 12, 2000. Interpretation 44 did not have any material impact on the
Company's financial statements.

Certain royalties and other expenses (including a contingent payment on the sale
of stock issued to settle certain liabilities) accrued in previous years were
settled or otherwise satisfied at reduced levels during fiscal year 1999. The
reduction in these accruals is reflected as other income in the accompanying
consolidated statement of operations.

NOTE C - COMMITMENTS AND CONTINGENCIES

Leases - The Company is obligated under an operating lease expiring on September
30, 2005 for approximately 3,912 square fee of office space in Los Angeles,
California. The lease agreement includes certain provisions for rent adjustments
based upon the lessor's operating costs and increases in the Consumer Price
Index.

The Company is obligated under an operating lease expiring September 2002 for
office equipment located at its Los Angeles offices.

The Company is obligated under an operating lease expiring in December 2001 for
an automobile provided by the Company to it chairman, President and Chief
Executive Officer.

The Company's minimum future lease payments for the fiscal years indicated are
as follows:
<TABLE>
<CAPTION>
                       Office        Auto/
     Year              Space       Equipment       Total
     ----              -----       ---------       -----
<S>                   <C>             <C>         <C>
     2002             126,748         1,754       128,502
     2003             129,878           292       130,170
     2004             136,138             0       136,138
     2005             136,138             0       136,138
     2006              22,690             0        22,690
                     --------      --------      --------
                     $551,592        $2,046      $553,638

</TABLE>



                                      F-12
<PAGE>




The Company's aggregate lease payments were approximately $142,433, $99,000 and
$81,000 for the years ended July 31, 2001, 2000 and 1999, respectively.

Harvard Lampoon Agreement - Pursuant to an agreement between the Company and The
Harvard Lampoon, Inc. ("HLI"), as restated October 1, 1998, the Company is
obligated to pay HLI a royalty of from 1.5% to 2% on the Company's net receipts
from exploitation of the "National Lampoon" trademark. Royalty payments under
this agreement were approximately $3,000, $9,000 and $19,000 for the years ended
July 31, 2001, 2000 and 1999, respectively. In addition, pursuant to a
Settlement Agreement dated November 24, 1998, the Company issued 16,667 shares
of its common stock to HLI (which at the time of issue had a value of
approximately $38,000), in settlement of various claims made by HLI against the
Company.

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 and payable through a 17.5%
royalty on NLI's cash receipts from each program produced by NLI or any licensee
(subject to certain minimum royalties for each program produced). The Company
guaranteed all of NLI's obligations under the Termination Agreement and is the
successor-in-interest to NLI as a result of its acquisition of NLI. As of July
31, 2001, the Company has recorded royalty expense of approximately $274,000
relating to the Termination Agreement including approximately $9,000, $83,000
and $53,000 during the years ended July 31, 2001, 2000 and 1999, respectively.




                                      F-13
<PAGE>


                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - COMMITMENTS AND CONTINGENCIES (CONTINUED)

Employment Agreement -- The Company has entered into a Restated Employment
Agreement dated July 1, 1999 ("1999 Agreement") with James P. Jimirro, its
Chairman, President and Chief Executive Officer. The 1999 Agreement has a term
of seven years ("Term") and provides for a base salary of $475,000 with annual
increases equal to the greater of 9% or 5% plus the percentage increase in the
Consumer Price Index. The 1999 Agreement also provides for (i) an annual bonus
of 5% to 9% of the Company's pre-tax earnings in excess of $500,000, (ii) an
annual grant of immediately exercisable stock options covering 25,000 shares of
the Company's common stock, (iii) an annual grant of immediately exercisable
stock appreciation rights relating to 25,000 shares of the Company's common
stock, and (iv) such other benefits including medical insurance, an automobile
and the reimbursement of business expenses as have previously been provided to
Mr. Jimirro.

Also, pursuant to the 1999 Agreement, Mr. Jimirro received a contingent note
("Contingent Note") in the principal sum of approximately $2,151,000
representing salary payable to Mr. Jimirro pursuant to previous employment
agreements that was voluntarily deferred by Mr. Jimirro between January 1, 1993
and June 30, 1999. The Contingent Note bears interest at the rate of 7% per
year. Mr. Jimirro has continued to voluntarily defer all salary in excess of
approximately $191,000 payable under the 1999 Agreement and has the right to
request the issuance of additional contingent notes to reflect such additional
deferrals. The Contingent Note and any subsequent salary deferrals are payable
only upon a "Change of Control" as defined in the 1999 Agreement.

In addition, upon any "Change of Control" of the Company or any one of the
"Executive Termination Events," all as defined in the 1999 Agreement, Mr.
Jimirro is generally entitled to receive a lump sum payment of all salary due
for the remaining Term (excluding subsequent annual increases) and to continue
to receive all benefits, bonuses, stock options and stock appreciation rights
for the remaining Term. Further, to the extent the aforesaid payments result in
any excise tax liability under the Internal Revenue Code of 1986, the Company is
obligated to make an additional payment to Mr. Jimirro equal to the amount of
such excise taxes plus any income or other payroll taxes resulting from such
excise tax payment. In addition, Mr. Jimirro, at his request, shall be engaged
as a consultant to the Company for a term of five years at the annual rate of
50% of his salary at the time of termination.

Litigation -- The Company, NLI and certain of their officers and directors
became defendants in a lawsuit filed in March 1990 in the Supreme Court of the
State of New York, County of Kings, alleging that the then proposed merger
between the Company and NLI was financially unfair to the shareholders, among
other things. In August 1991, a settlement was reached between the parties
("Settlement Agreement") whereby the Company would issue an additional 25,000
shares of its common stock to NLI shareholders plus issue up to 16,667 shares of
its common stock to plaintiff's attorneys' for their fees and expenses.
Subsequent to August 1991, to the Company's knowledge, the plaintiffs have not
executed the Settlement Agreement or otherwise pursued their causes of action.
The Company established a reserve of approximately $203,000 during the fiscal
year ended July 31, 1992 for its obligations under the Settlement Agreement.




                                      F-14
<PAGE>



                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE C - COMMITMENTS AND CONTINGENCIES (CONTINUED)

On August 13, 1999, Heathdale Productions, Inc. ("Heathdale") filed an action
against the Company in the Superior Court of the State of California for the
County of Los Angeles alleging, among other things, breach of contract relating
to a joint venture ("Joint Venture") formed to produce the film "National
Lampoon's Animal House." The Company and Heathdale entered into a Mutual Release
and Settlement Agreement ("Heathdale Agreement") as of June 30, 2000 pursuant to
which approximately $1,027,000, representing all monies then held by the Joint
Venture, was disbursed approximately $727,000 to the Company and $300,000 to
Heathdale. The Company recorded an expense of approximately $23,000 during the
fiscal year ended July 31, 2000 for its obligations under the Heathdale
Agreement in excess of normally recurring expenses previously recorded relating
to the Joint Venture. (SEE NOTE I - JOINT VENTURE).

Shareholder Rights Plan -- On July 15, 1999, the Company's Board of Directors
adopted a Shareholder Rights Plan ("Rights Plan"). The Rights Plan is designed
to assure that all of the Company's shareholders receive fair and equal
treatment in the event of any proposed takeover of the Company and to guard
against partial tender offers, open market accumulations and other abusive
tactics to gain control of the Company without paying all shareholders a
premium. In connection with such adoption, a dividend was declared of one
preferred share purchase right ("Purchase Right") for each outstanding share of
common stock outstanding on August 5, 1999. Subject to certain exceptions, each
share of common stock issued by the Company subsequent to such date also carries
a Purchase Right.

After the Purchase Rights become exercisable, each Purchase Right will initially
entitle the holder to purchase 1/100th of a share of Series A Junior
Participating Preferred Stock ("Preferred Shares") at a price of $65.00 per
1/100th of a share until the close of business on July 15, 2009 or such earlier
date as defined in the Plan. In the event any person or any of such person's
affiliates or associates ("Acquiring Person") becomes the beneficial owner of
15% or more of the Company's outstanding common stock (with certain exceptions
as set forth in the Plan), each shareholder, other than the Acquiring Person,
shall thereafter, upon the terms and subject to the conditions set forth in the
Rights Plan, have the right to receive upon exercise that number of shares of
the Company's common stock having a market value of two times the then current
exercise price of one Purchase Right. Subject to certain exceptions, the
Purchase Rights are redeemable at a price of $0.001 per right at the approval of
the Board of Directors.

The foregoing description is qualified in its entirety by reference to the terms
of the Rights Plan that has been filed by the Company as an exhibit to its Form
8-K filed on July 16, 1999.

NOTE D - NOTE RECEIVABLE ON COMMON STOCK

On July 14, 1986, James P. Jimirro, the Company's Chairman, President and Chief
Executive Officer purchased 192,000 shares of the Company's common stock for
approximately $115,000. For such shares, the Company received the sum of
approximately $58,000 and a note ("Note") for approximately $58,000. The Note
bears interest at the rate of 10% per annum and, pursuant to a July 14, 1986
Pledge and Security Agreement, is secured by the shares purchased. The unpaid
principal and interest outstanding at July 31, 2001 and 2000 was approximately
$146,000 and $140,000, respectively.




                                      F-15
<PAGE>



                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE E - MAJOR CUSTOMERS

During the year ended July 31, 2001, the Company earned revenue from three
significant customer of approximately $245,000 representing 41%, 23%, and 16% of
revenues respectively. During the year ended July 31, 2000, the Company earned
revenue from three significant customers of approximately $1,056,000
representing 27%, 24% and 20% of revenues, respectively. During the year ended
July 31, 1999, the Company earned revenue from one significant customer of
approximately $800,000 representing 59% of revenues.

NOTE F - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS

The Company periodically grants stock options to its employees and directors as
financial incentives directly linked to increases in shareholder value. Such
grants are subject to the Company's Amended and Restated 1999 Stock Option,
Deferred Stock and Restricted Stock Plan ("1999 Plan"), as adopted by the
Company's shareholders at its annual meeting on January 13, 2000. All stock
options granted under prior stock option plans were converted to stock option
grants under the 1999 Plan. A summary of stock options outstanding is as
follows:

<TABLE>
<CAPTION>

                                                               Option        Weighted
                                              Number of       Exercise        Average
                                               Options       Price Range   Exercise Price
                                               -------       -----------   --------------
<S>                                            <C>         <C>             <C>
     Balance, July 31, 1998                    249,167     $ 1.68 - $ 4.43      $ 3.03

       Options granted                          42,000     $ 1.53 - $ 2.08      $ 2.02
       Options canceled                        (92,000)    $ 1.69 - $ 3.57      $ 3.04
       Options exercised                       (17,000)    $ 1.69 - $ 3.56      $ 2.91
                                             ---------     ---------------    --------
     Balance, July 31, 1999                    182,167     $ 1.53 - $ 4.43      $ 2.82

       Options granted                         145,832     $ 7.50 - $17.50      $13.10
       Options canceled                        (27,000)    $ 8.00 - $16.13      $14.07
       Options exercised                      (103,334)    $ 1.53 - $11.63      $ 2.62
                                             ---------     ---------------    --------
     Balance, July 31, 2000                    197,665     $ 1.53 - $17.50      $ 9.09

       Options granted                         128,000     $ 9.63 - $14.00      $11.29
       Options canceled                        (16,667)    $ 4.43 - $ 4.43      $ 4.43
       Options exercised                       (12,022)    $ 1.69 - $ 8.25      $ 2.94
                                             ---------     ---------------    --------
     Balance, July 31, 2001                    296,996     $ 1.69 - $14.00      $10.55
                                             =========     ===============    ========
</TABLE>

Of the options outstanding at July 31, 2001, 2000 and 1999, 128,000, 107,333 and
149,833, respectively, were exercisable with weighted average exercise prices of
$11.29, $4.53 and $2.99. The weighted average remaining life of the options
outstanding at July 31, 2001 was 5.18 years.




                                      F-16
<PAGE>



                       J2 COMMUNICATIONS AND SUBSIDIARIES

                    NOTES TO CONSOLIDATE FINANCIAL STATEMENTS

NOTE F - STOCK OPTIONS AND STOCK APPRECIATION RIGHTS (CONTINUED)

The Company has adopted SFAS No. 123, "Accounting for Stock Based Compensation,"
issued in October 1995. In accordance with SFAS No. 123, the Company has elected
to follow Accounting Principles Board ("APB") Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations in accounting for its
employee stock options. Under APB Opinion No. 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. If the
Company had elected to recognize compensation expense based on the fair value of
the options granted on their grant date as prescribed by SFAS No. 123, the
Company's net income/(loss) and earnings/(loss) per share would have been
reduced to the pro forma amounts as follows:

<TABLE>
<CAPTION>

                                                                 For the Fiscal Year Ended
                                                           July 31, 2001   July 31, 2000  July 31, 1999
                                                           -------------   ------------  -------------
<S>                                                         <C>              <C>          <C>
      Net income/(loss) - as reported                       ($3,076,516)     $  826,416   ($1,298,888)
      Net income/(loss) - pro forma                         ($3,426,802)     $  341,421   ($1,333,059)

      Basic earnings/(loss) per share - as reported         ($     2.26)     $     0.64   ($     1.07)
      Basic earnings/(loss) per share - pro forma           ($     2.52)     $     0.27   ($     1.10)

      Diluted Earnings/(Loss) Per Share - as reported       ($     2.26)     $     0.62   ($     1.07)
      Diluted Earnings/(Loss) Per Share - pro forma         ($     2.52)     $     0.25   ($     1.10)
</TABLE>

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

<TABLE>
<CAPTION>

                                                                         For the Fiscal Year Ended
                                                            July 31, 2001     July 31, 2000     July 31, 1999
                                                            -------------     -------------     -------------
<S>                                                         <C>               <C>              <C>
      Expected dividend yield                                     00%             0.00%            0.00%
      Expected stock price volatility                          89.48%            89.14%           85.77%
      Risk free interest rate                                    5.5%             6.27%            4.95%
      Expected life of option (in years)
                                                                4.00              4.00              3.34
</TABLE>

The weighted average fair value of the options granted during the fiscal years
ended July 31, 2001, 2000 and 1999 was $11.29, $8.75 and $1.53, respectively.

The Company's Chairman, President and Chief Executive Officer has stock
appreciation rights that entitle him to receive, upon demand, a cash payment
equal to the difference between the fair market value and the appreciation base
of the rights when they are exercised. As of July 31, 2001, 2000, and 1999, the
appreciation in these rights was approximately $843,000, $569,000, and
$1,717,000, respectively, and is reflected under stock appreciation rights
payable in the accompanying consolidated balance sheets.




                                      F-17
<PAGE>


                       J2 COMMUNICATIONS AND SUBSIDIARIES

                    NOTES TO CONSOLIDATE FINANCIAL STATEMENTS

NOTE G - INCOME TAXES

The Company's provision for income taxes is as follows:

<TABLE>
<CAPTION>

                                                           For the Fiscal Year Ended
                                                July 31, 2001     July 31, 2000     July 31, 1999
                                                -------------     -------------     -------------
<S>                                                <C>               <C>                <C>
Federal income taxes                               $    0            $    0             $   0
State income taxes                                  1,600             1,500                 0
                                                   ------            ------             ------
Provision for income taxes                         $1,600            $1,500                 0
                                                   ======            ======            ======
</TABLE>

A reconciliation between the statutory federal tax rate and the Company's
effective tax rate is as follows:

<TABLE>
<CAPTION>

                                                          For the Fiscal Year Ended
                                                July 31, 2001    July 31, 2000     July 31, 1999
                                                -------------    -------------     -------------
<S>                                             <C>              <C>               <C>
Statutory federal income tax rate                   (34%)            34%              (34%)
State income taxes                                   --              --                --
Amortization of intangible assets                     7%             10%                6%
Other, primarily utilization of
  valuation allowances                               27%            (44%)              28%
                                                    ---             ---               ---
Effective tax rate                                    0%              0%                0%
                                                    ===             ===               ===
</TABLE>


The Company's effective tax rate is lower than the statutory rate due to the
utilization of prior years operating losses not previously benefited.

For federal and state income tax purposes, as of 7/31/01 the Company has
available net operating loss carryforwards of approximately $4,225,000 and
$1,695,000 respectively (expiring between 2008 and 2016) to potentially offset
future income tax liabilities.

Deferred tax assets result from temporary differences between financial and tax
accounting in the recognition of revenue and expenses. Temporary differences and
carryforwards which give rise to deferred tax assets are as follows:

<TABLE>
<CAPTION>

                                            As of               As of
                                        July 31, 2001      July 31, 2000
                                        -------------      -------------
<S>                                     <C>                 <C>
Net operating loss carryforwards          1,925,000             581,000
Accrued liabilities                         413,000             258,000
Royalty reserves                             87,000              17,000
                                        -----------         -----------
                                          2,425,000             856,000
Valuation allowance                      (2,425,000)           (856,000)
                                        -----------         -----------
Net deferred tax assets                 $         0         $         0
                                        ===========         ===========
</TABLE>


                                      F-18
<PAGE>



Valuation allowances of $2,425,000 and $856,000 were recorded at July 31, 2001
and 2000, respectively, to offset the net deferred tax assets due to the
uncertainty of realizing the benefits of the tax assets in the future.

                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H - SEGMENT INFORMATION

The Company has adopted SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information," during the fiscal year ended July 31, 1999
which changed the way the Company reports information about its operating
segments. The Company operates in three business segments: licensing and
exploitation of the "National Lampoon" trademark and related properties,
operation of the "nationallampoon.com" website and video distribution. Segment
operating income/(loss) excludes the amortization of intangible assets, stock
appreciation rights costs, interest income and income taxes. Selling, general
and administrative expenses not specifically attributable to any segment have
been allocated equally between the trademark and Internet segments. Summarized
financial information for the fiscal years ended July 31, 2001, 2000 and 1999
concerning the Company's segments is as follows:

<TABLE>
<CAPTION>

                                             Trademark            Internet             Video              Total
                                             ---------            --------             -----              -----

<S>                                         <C>                 <C>                 <C>                <C>
Year Ended July 31, 2001
     Segment revenue                        $   270,000         $    14,000         $    22,000        $   306,000
     Segment operating income/(loss)           (210,000)           (787,000)             18,000           (979,000)
     Identifiable assets                              0              20,000                   0             20,000
     Capital expenditures                             0                   0                   0                  0
     Depreciation expense                             0               7,000                   0              7,000

Year Ended July 31, 2000
     Segment revenue                        $ 1,454,000         $    10,000         $    16,000        $ 1,480,000
     Segment operating income/(loss)            776,000            (955,000)             12,000           (167,000)
     Identifiable assets                              0              20,000                   0             20,000
     Capital expenditures                             0              12,000                   0             12,000
     Depreciation expense                             0              11,000                   0             11,000

Year Ended July 31, 1999
     Segment revenue                        $ 1,228,000         $         0         $    18,000        $ 1,246,000
     Segment operating income/(loss)            425,000            (324,000)              5,000            106,000
     Identifiable assets                              0              19,000              10,000             29,000
     Capital expenditures                             0              27,000                   0             27,000
     Depreciation expense                             0               8,000                   0              8,000

</TABLE>

A reconciliation of segment operating income/(loss) to net income/(loss) before
income taxes for the fiscal years ended July 31, 2001, 2000 and 1999 is as
follows:

<TABLE>
<CAPTION>

                                                                    For the Fiscal Year Ended
                                                        July 31, 2001     July 31, 2000    July 31, 1999
                                                        -------------     -------------    -------------
<S>                                                 <C>                 <C>                 <C>
 Segment operating (loss)/income                       (979,000)           (167,000)        $   106,000
 Amortization of intangible assets                     (240,000)           (240,000)           (240,000)
 Stock appreciation rights benefit/(expense)           (380,000)          1,148,000          (1,700,000)
 Other income                                           436,000
                                                                                                      0

 Interest income                                         56,000              99,000
                                                                                                 87,000

Corporate expenses incurred related to
the change in control of the Company                 (1,533,000)
                                                    -----------         -----------         -----------
 Net income/(loss) before income taxes              ($3,076,000)        $   828,000         ($1,299,000)
                                                    ===========         ===========         ===========
</TABLE>




                                      F-19
<PAGE>




                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H - SEGMENT INFORMATION (CONTINUED)

A reconciliation of reportable segment assets to consolidated total assets as of
July 31, 2001, 2000 and 1999 is as follows:

<TABLE>
<CAPTION>

                                                      For the Fiscal Year Ended
                                          July 31, 2001     July 31, 2000     July 31, 1999
                                          -------------     -------------     -------------
<S>                                         <C>               <C>               <C>
Total assets for reportable segments        $   20,000        $   20,000        $   29,000
Goodwill not allocated to segments           2,936,000         3,176,000         3,416,000
Cash and cash equivalents                      324,000         1,884,000         1,858,000
Short-term investments                               0                 0                 0
Other unallocated amounts                       22,000            39,000            47,000
                                            ----------        ----------        ----------
Total assets                                $3,302,000        $5,119,000        $5,350,000
                                            ==========        ==========        ==========
</TABLE>

NOTE I - JOINT VENTURE

The Company is the successor to a 75% interest in a joint venture ("Joint
Venture") established in 1975 for the development and production of the film
"National Lampoon's Animal House" ("Film"). The current operations of the Joint
Venture consist solely of collecting certain proceeds from the distribution and
exploitation of the Film by the copyright owner. For financial statement
purposes, the Joint Venture has been consolidated and an expense recorded
corresponding to the minority partner's interest in the proceeds from the Joint
Venture. The revenue received by the joint venture relating to the Film was
approximately $71,000, $322,000 and $251,000 for the fiscal years ended July 31,
2001, 2000 and 1999, respectively.

NOTE J - RELATED PARTY TRANSACTIONS

Bruce Vann, one of the Company's directors, is a partner of the law firm Kelly,
Lytton, Mintz and Vann retained by the Company for various legal matters. Legal
expenses of approximately $46,000, $25,000 and $13,000 were incurred with
respect to work performed by Mr. Vann's firm for the Company during the fiscal
years ended July 31, 2001, 2000 and 1999.

See Notes C, D and F to these consolidated financial statements for information
concerning certain transactions between the Company and the Company's Chairman,
President and Chief Executive Officer.




                                      F-20
<PAGE>



                       J2 COMMUNICATIONS AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE K - PENDING TRANSACTIONS

On March 5, 2001, the Company, James P. Jimirro, the Company's Chairman and
Chief Executive Officer, Daniel Laikin and Paul Skjodt, another shareholder of
the Company acting in concert with Mr. Laikin, entered into an agreement (the
"Laikin-Skjodt Agreement"; the transactions contemplated by the Laikin-Skjodt
Agreement are referred to herein as the "Laikin-Skjodt Transactions") pursuant
to which the parties agreed, among other things and subject to various
conditions, that Mr. Laikin and Mr. Skjodt and/or their associates and
affiliates (collectively referred to herein as the "Laikin-Skjodt Group") would
purchase all of the interests of Mr. Jimirro in the Company (including common
stock, vested stock options and common stock issuable upon exercise of Mr.
Jimirro's stock appreciation rights) for aggregate consideration of
approximately $4.6 million and, in accordance with Mr. Jimirro's employment
agreement, the Company would pay Mr. Jimirro $2.5 million of deferred
compensation due upon a change in control of the Company ("Deferred
Compensation"). The Laikin-Skjodt Agreement further provided, subject to various
conditions, that the Laikin-Skjodt Group would purchase 227,273 shares of the
Company's common stock from the Company for a purchase price of between
approximately $5.21 and $9.90 per share, based on a formula, to partially fund
the Company's Deferred Compensation obligation to Mr. Jimirro and may also
acquire, at the Laikin-Skjodt Group's option, up to an additional 300,000 shares
of the Company's common stock directly from the Company at a purchase price of
$11.00 per share. The Laikin-Skjodt Group's obligations set forth above are
subject to the satisfaction of certain conditions including due diligence and
financing.

The Laikin-Skjodt Agreement further provided that at the closing of the
Laikin-Skjodt Transactions, Mr. Jimirro would resign as an officer and Director
of the Company and enter into a long-term consulting and non-compete agreement
with the Company providing for aggregate payments to Mr. Jimirro over time of
approximately $3.8 million plus fringe benefits expected to cost the Company
approximately $360,000 and would receive options, vesting over four years, to
purchase up to 250,000 shares of the Company's common stock at a price equal to
the average market price of such common stock during the five days immediately
preceding the closing date of Laikin-Skjodt Transactions. The Company's
obligations under the consulting and non-compete agreement would be secured by a
lien on the Company's assets.

If the transactions are consummated, the Company will be required to record an
expense related to the transfer of options from Mr. Jimirro to the Laikin Skjodt
Group and the difference between the purchase price and the fair market value of
the common stock and stock options sold by Mr. Jimirro. The exact amount of this
charge cannot be determined until consummation of the transactions and is
dependent upon the market price of the Company's common stock on the closing
date. If the market price for the Company's common stock on the closing date of
the transactions is between $10.00 and $15.00, this charge is estimated to be
between $2.0 million and $2.5 million, respectively. The Company also estimates
that it will record expenses on closing of the transactions related to Mr.
Jimirro's Deferred Compensation and the consulting and non-compete agreement in
the aggregate amount of approximately $6.2 million.

Pursuant to the Laikin-Skjodt Agreement, Messrs. Laikin and Skjodt agreed to a
standstill agreement effective during the period prior to the closing of the
Laikin-Skjodt Transactions, which standstill agreement generally precludes
Messrs. Laikin and Skjodt from purchasing or selling the Company's securities or
exerting influence over the Company's governance, by solicitation of proxies or
otherwise, and agreed to the same standstill agreement




                                      F-21
<PAGE>




in the event that the closing of the Laikin-Skjodt Transactions does not occur
prior to the termination date of the Laikin-Skjodt Agreement. The Company
subsequently consented to a waiver of the initial standstill commitment in order
to allow Messrs. Laikin and Skjodt to purchase up to 67,700 shares of the
Company's common stock on the open market.

     The Laikin-Skjodt Agreement also provides for a tender offer by Messrs.
Laikin and Skjodt for all the remaining outstanding shares of the Company's
common stock at a price of $15.00 per share no later than the first anniversary
of the closing of the Laikin-Skjodt Transactions if the Company's common stock
does not trade at or above $15.00 per share for any twenty (20) days during any
period of thirty (30) consecutive trading days during the 365 days following the
consummation of the Laikin-Skjodt Transactions.

     Completion of the Laikin-Skjodt Transactions, which have been approved by
the Company's board of directors, are subject to due diligence and financing
contingencies, shareholder approval (if reasonably deemed necessary by the
Company based upon the advice of counsel) and customary closing conditions and
regulatory approvals. Messrs. Jimirro, Laikin and Skjodt, collectively holders
of over 39% of the Company's outstanding common stock, have agreed to vote in
favor of the Laikin-Skjodt Transactions if they are submitted to the Company's
shareholders.

     The transactions were scheduled to close on or before June 30, 2001,
however, the transactions have not been consummated as of that date. From June
30, 2001 the Company agreed to extend the closing date of the transaction for a
non-refundable extension fee of $25,000 per week or $100,000 per month to be
applied against stock purchase if the transaction is consummated. As of July 31,
2001, the Company received $200,000 from the Laikin group to extend the closing
date to August 31, 2001, classified as Extension payments in the financial
statements.

     The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. As discussed herein, as of November 4,
2001, the Company is still waiting for the completion of the transactions.
Management at this time cannot predict the outcome of as to whether the
transactions will be completed. However, if a change of control results from
these transactions, the significant contingent amounts due an officer discussed
in NOTE C - COMMITMENTS AND CONTINGENCIES could be triggered which would result
in a net capital deficiency that raises substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

NOTE L -- SUBSEQUENT EVENTS

     On October 26, 2001 the Company signed an extension to the Letter of
Agreement until November 15, 2001. Through November 15, 2001 the Company will
have received $450,000 from the Laikin group for extending the closing date of
the letter agreement from June 30, 2001 to November 15, 2001.



                                      F-22