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U.S. SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-K

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

For the Fiscal Year Ended July 31, 2002
Commission File No. 0-15284

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

|                                                          |  |                                                
|--------------------------------------------------------- |  | -----------------------------------------------
|California
(State or other jurisdiction
of incorporation) |  | 95-4053296
(I.R.S. Employer
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.    YES [X]    NO [   ]

As of October 23, 2002, the aggregate market value of the voting and non-voting
common stock held by non-affiliates of the Registrant (based on the closing
sales price as reported by the OTC Bulletin Board) was $6,079,624 assuming all
officers and directors are deemed affiliates for this
purpose).

As of October 28, 2002 the Registrant had
1,465,471 shares of its common stock,
no par value, outstanding.

Documents Incorporated by Reference: None

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|              |                                                                                              |  |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I.      
|              | ITEM 1. DESCRIPTION OF BUSINESS                                                             
|              | ITEM 2. PROPERTIES                                                                          
|              | ITEM 3. LEGAL PROCEEDINGS                                                                   
|              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                 
|PART II.     
|              | ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS               
|              | ITEM 6. SELECTED FINANCIAL DATA                                                             
|              | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
|              | ITEM 8. FINANCIAL STATEMENTS                                                                
|              | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|PART III.    
|              | ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                 
|              | ITEM 11. EXECUTIVE COMPENSATION                                                             
|              | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                     
|              | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS                               
|PART IV.     
|              | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.                   
|SIGNATURES   
|EXHIBIT 10.23
|EXHIBIT 10.24



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FORWARD-LOOKING STATEMENTS

The foregoing discussion, as well as the other sections of this Annual Report
on Form 10-K, contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, that reflect our current view
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. We remind 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, our 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 in various markets, and to attract and retain qualified
personnel.




PART I.




ITEM 1. DESCRIPTION OF BUSINESS

GENERAL

J2 Communications (the Company, we, us 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. We were
primarily engaged in the acquisition, production and distribution of
videocassette programs for retail sale. In late 1990, we 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 our
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.

On May 17, 2002, we completed the reorganization transactions previously
reported in our Form 8-K filed on April 29, 2002, (the Reorganization
Transactions), involving a group headed by Daniel S. Laikin, Paul Skjodt and
Timothy S. Durham. Concurrently with the consummation of the Reorganization
Transactions, the Board of Directors was reorganized. Messrs. Laikin, Skjodt,
Durham and Joshua A. Finkenberg were added to the Board and Mr. Laikin became
Chief Operating Officer. We are currently exploring a number of new ventures,
with a view toward increasing both our operations and the visibility of the
National Lampoonbrand.

RECENT DEVELOPMENTS

1. REORGANIZATION TRANSACTIONS

On May 17, 2002, we completed the Reorganization Transactions, involving a
group headed by Daniel S. Laikin, Paul Skjodt and Timothy S. Durham and also
including National Lampoon Acquisition Group LLC, a California limited
liability company; Samerian, LLP, an Indiana limited liability partnership;
Diamond Investments, LLC, an Indiana limited liability company; DW Leasing
Company, LLC, an Indiana limited liability company; Christopher R. Williams;
Helen C. Williams; Judy B. Laikin; and DC Investments, LLC, an Indiana limited
liability company (DCI) (collectively, the NLAG Group), and James P.
Jimirro, our Chairman of the Board, President and Chief Executive Officer.
Certain of the Reorganization Transactions were undertaken pursuant to a
Preferred Stock and Warrant Purchase Agreement, dated April 25, 2002, as
amended by the First Amendment to Preferred Stock and Warrant Purchase
Agreement, dated May 17, 2002 (the Purchase Agreement). The amendment added
Ronald Holzer and DCI as parties to the Purchase Agreement.

As part of the Reorganization Transactions, our Articles of Incorporation were
amended on May 17, 2002 to designate 68,406 of the previously authorized
2,000,000 shares of Preferred Stock as Series B Convertible Preferred Stock
(Series B Preferred), with each share of Series B Preferred being convertible
into 28.169 shares of Common Stock. The shares of Series B Preferred vote on a
converted basis as a class with the shares of Common Stock. Pursuant to the
Purchase Agreement, we agreed to sell to designees of NLAG up to 68,406 units
(the Series B Units), with each unit consisting of one share of Series B
Preferred and a warrant to purchase 28.169 shares of Common Stock, At the
initial closing we issued 35,244 Series B Units to five members of the NLAG
Group for an aggregate purchase price of $3,524,400.

The members of the NLAG Group and Mr. Jimirro entered into a Voting Agreement,
dated May 17, 2002, regarding, in addition to certain other matters, the voting
of their shares of Common Stock and Series B Preferred for the election of
three Jimirro nominees, three NLAG nominees, and one nominee acceptable to both
parties. To give effect to the Voting Agreement, Joe De Simio and Gary Cowan
resigned as directors of the Company on May 17, 2002, and Messrs. Durham and
Skjodt were elected to fill the vacancies created by those resignations. In
addition, Joshua A. Finkenberg was elected to fill the vacancy created by an
amendment to the Bylaws to increase the size of the Board of Directors from six
to seven members.

The Board also has voted unanimously to terminate the Rights Agreement, dated
July 15, 1999, as amended March 5, 2001, between

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us and U.S. Stock Transfer Corporation, and to redeem all of the outstanding
rights issued thereunder for a cash payment of $.001 per right. In voting to
terminate the Rights Agreement and redeem the rights, the Board of Directors
made no finding regarding the validity of the Rights Agreement or the rights.

The consummation of the Reorganization Transactions effectively concluded all
of the litigation between us, the members of the NLAG Group and Mr. Jimirro.
As part of or in connection with the Reorganization Transactions, Mr. Jimirros
employment arrangement with us was restructured, a prior debt obligation from
us to Mr. Jimirro was cancelled, and Mr. Jimirro was granted certain
registration rights relative to securities granted to him in connection with
the restructuring. To secure future obligations to him, Mr. Jimirro was also
granted a security interest in substantially all of our assets, including a
pledge of all the outstanding securities of all of our wholly owned
subsidiaries. Finally, as part of the Reorganization Transactions, Daniel
Laikin became our Chief Operating Officer, and entered into an employment
agreement with us with respect thereto.

2. BURLY BEAR NETWORK

Effective on September 3, 2002, National Lampoon Networks, Inc., a Delaware
corporation (NLNI) a newly formed subsidiary of ours, acquired substantially
all of the assets of Burly Bear Network, Inc., a Delaware corporation (Burly
Bear). Burly Bear, organized by a group including the executive producer of
Saturday Night Live, was in the business of producing and distributing
entertainment through a network of affiliated college television outlets. The
Asset Purchase Agreement provided that Burly Bear was to receive as
consideration for the purchase of the assets the following: $200,000 in cash,
less certain transaction expenses; shares of our Common Stock having an
aggregate value of $400,000 (resulting in the issuance of 73,801 shares of
Common Stock); and 150 shares of NLNI Common Stock, representing fifteen
percent of NLNIs issued and outstanding shares of Common Stock. The cash
consideration paid in the acquisition was received by the Company on August 29,
2002, from two existing shareholders upon their exercise of an option to
acquire 2,000 units, with each unit consisting of one share of our Series B
Convertible Preferred Stock and one warrant to purchase 28.169 shares of our
Common Stock, for a purchase price of $100 per unit.

Burly Bear incurred substantial losses since the inception of the company in
1994, and had an accumulated deficit of <$24,657,746> as of May 31, 2002.
The Company hopes to rationalize the assets which were acquired and effectuate
a reorganization of the business with a goal of achieving significant revenue
growth during the last two quarters of fiscal 2003 and all of fiscal 2004.

3. WORKING CAPITAL DEFICIENCIES

Since the consummation of the Reorganization Transactions, we have initiated a
number of new business activities, including our acquisition of substantially
all the assets of Burly Bear, and significantly increased our overhead by the
hiring of new employees and consultants. To date, these operations have
provided de minimisoperating revenue and we have been relying on capital
received from NLAG Group in connection with the Series B Units purchased in
connections with the Reorganization Transactions and in subsequent purchases
pursuant to the Purchase Agreement to fund operations. Since the consummation
of the Reorganization Transactions, in which we received $2,085,718, subsequent
purchases of Series B Units have provided us with $830,000 through October 15,
2002, of which $200,000 was used for the Burly Bear transaction. Unless our
revenues from new business activities significantly increase in the near term,
we will need to raise additional capital to continue to fund our planned
operations or, in the alternative, significantly reduce or even eliminate
certain operations. There can be no assurance that we will be able to raise
such capital on reasonable terms, or at all. As of October 18, 2002, we had
cash on hand of $ 86,000, an amount which reflects an infusion of $80,000 upon
the exercise of certain Series B Warrants owned by NLAF immediately prior to
such date, and no significant receivables. This amount is not sufficient to
fund current operations, which we estimate to be approximately $475,000 per
month. We anticipate that any shortfall will be covered by the additional
exercise of the Series B Warrants held by the NLAG Group or other investments
by NLAG. If NLAG declines to make additional investments, or should we be
unable to secure additional financing, we could be forced to immediately
curtail much, if not all, of our current plans. Our financial statements for
the fiscal year ended July 31, 2002 contain an explanatory paragraph as to our
ability to continue as a going concern. This explanatory paragraph may
impact our ability to obtain future financing. See Business- Certain
Considerations and Managements Discussion and Final Analysis  Liquidity and
Capital Resources.

4. DELAWARE REDOMESTICATION.

We are in the process, and its shareholders have consented to a corporate
reorganization pursuant to which we will be redomesticated as a Delaware
corporation. Our new name will be National Lampoon Inc. This transaction is
scheduled to be consummated in early November 2002.

BUSINESS

The following discussion of our business activities should be read in
conjunction with Note I  Segment Information contained in our consolidated
financial statements and related notes which summarizes the amounts of revenue,
operating profit or loss and identifiable assets attributable to each of our
operating segments.

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Since the completion of the Reorganization Transactions, we have sought to
initiate new business activities on several related fronts. Although there are
no assurances that any of the following ventures can be completed, or the
business activities described below profitably implemented, we are hopeful that
certain of these activities will commence operation during the fiscal year
which will end July 31, 2003. The consummation of any of these activities is
subject to adequate financing being available for us.

Motion Picture
and Feature Film Licensing. In recent years, we have
derived the bulk of our revenue from license fees relating to the production of
new motion pictures and from contingent compensation for motion pictures
previously produced by us and NLI. We generally licensed our National
Lampoon trademark for use in the titles of the films. , We generally received
a fee at the time of production of the motion picture plus contingent
compensation that is dependent on the motion pictures financial performance
for producing services and providing the National Lampoon trademark.

To date, we have not financed the production or distribution of any National
Lampoon motion pictures. Instead, we have relied upon third parties,
primarily major motion picture studios, to provide a pictures financing and
distribution. Since the Reorganization Transactions, we have increased our
emphasis on developing product across all media and, in particular, are
devoting management resources to the development of film projects.

We are in discussions with several studios and other film financing entities
regarding the development of new National Lampoonfeature film projects. We
have entered into a one year employment arrangement with Matty Simmons, the
founder and former CEO/President of National Lampoon from National Lampoons
inception through the late 1980s, to help further the implementation of this
process.

As of July 31, 2002, we and/or NLI have been involved in the production of
eighteen motion pictures, as follows:

|                                            |  |         |      |             |  |                   |  | 
|------------------------------------------- |  | ------- | ---- | ----------- |  | ----------------- |  | 
|                                            |  | Year of |      | Financier/ 
|Title                                       |  | Release |      | Distributor
|                                            |  |         |      |            
|National Lampoons Animal House             |  |         | 1979 |             |  | Universal Studios
|National Lampoon Goes to the Movies         |  |         | 1981 |             |  | United Artists   
|National Lampoons Class Reunion            |  |         | 1982 |             |  | ABC/Disney       
|National Lampoons Vacation                 |  |         | 1983 |             |  | Warner Bros.     
|National Lampoons European Vacation        |  |         | 1985 |             |  | Warner Bros.     
|National Lampoons Class of  86             |  |         | 1986 |             |  | Paramount        
|National Lampoons Christmas Vacation       |  |         | 1989 |             |  | Warner Bros.     
|National Lampoons Loaded Weapon I          |  |         | 1993 |             |  | New Line         
|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              
|National Lampoons Van Wilder               |  |         | 2001 |             |  | Artisan          

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Television Development;
Acquisition of The Burly Bear Network.

We are exploring a number of television production opportunities, primarily in
the reality television genre. We are currently actively developing a reality
show based on fraternity life tentatively called The House, as well as
programming which can be derived from the College Bus tour (described below).
We have also been involved in the production of television programs and
currently have several television projects in development. Other shows may be derived from the
programming acquired from the September 2002 acquisition of certain of the
assets of the Burly Bear. See Recent Developments-Acquisition of the Burly
Bear Network. It is anticipated that Burly Bear, which will be renamed the
National Lampoon Network, will be an integral part of future television
activities. The Company is currently developing and producing
projects for Burly Bear.

Burly Bear had been engaged in the business of producing and distributing
entertainment through a network of affiliated colleges and other educational
television stations. Through the 2001-2002 academic year it experienced
significant financing problems as well as generating an operating loss of over
$20 million. We procured the assets of the Burly Bear on a liquidation basis
with a view towards keeping as much of the network intact as possible, and
reusing previous produced programming until such time as revenue can be
generated to produce original content on a more economic basis. We have
retained Errol Gerson, pursuant to the terms of an oral one year consulting
agreement, to manage the operations of the network. Through this agreement,
Mr. Gerson is serving as COO of National Lampoon Networks, the operating
subsidiary. Mr. Gerson is compensated by both us and NLNI, at the rate of
$5,000 and $7,500 per month, respectively. Three advertising sales employees,
working on a commission basis, have been retained to provide sales support.
Sales will be largely dependent on our ability to retain as much as possible of
the network, and the ratings which may be generated when, and if, we initiate
ratings tests.

Of the 400 campuses comprising the Burly Bear Network, approximately 50% are
services by broadcast studios, and have their materials physically delivered to
them, and the other 50% are reached through local cable affiliates. Because of
the financial difficulties associated with prior ownership, many of the leased
carriage arrangements were allowed to expire by Burly Bear. We are currently
negotiating to reinstate those that we have determined maintain economic
viability. The cost of these leased carriage arrangements is anticipated to be
$180,000 during the first year of operation. Burly Bear is currently
broadcasting to approximately 181 campuses, with approximately 40 broadcasts
and 15 cable deals anticipated to be effective by the end of the calendar year
on, bringing on line and additional 220 campuses.

In the event that we are not able to operate the network on a more economic
basis than prior ownership, we will scale back its operation. In such event,
we believe that we may have other uses for the programs that were acquired in
the acquisition.

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 television program produced by
NLI or any licensee (subject to certain minimum royalties for each program
produced). As of July 31, 2002, we have recorded a liability of approximately
$201,000 relating to the Termination Agreement.

College Bus
Tour. We are attempting to organize a national comedy bus
tour for the fall of 2003 which would include over 51 colleges and provide 6
weeks of bus related television programming. The tour which would actually be
comprised of 2 separate bus trips (one east of the Mississippi and one west of
the Mississippi), would provide for weekly contests as comedians perform on
college campuses all over the country and would attempt to obtain the
designation as that weeks funniest comic. We have entered into a relationship
with LMNO Productions, Inc., a privately held television production company to
work with us regarding a possible television show and other ancillary rights
(including video) in connection with the production of the tour. Currently we
are seeking to develop sponsorship arrangements to defray 100% of the costs of
the tour which are estimated to be between $1.6 and $2 million. Inquiries
among national sponsors have recently been disseminated. However, we have not
commenced formal negotiations with any sponsor, and accordingly, no assurances
can be given that an acceptable sponsorship arrangements will be effectuated.

Gaming. On August 21, 2002 we formed National Lampoon Games, Inc. (NL
Games) to handle all our gaming activities. NL Games is currently in
negotiations with Multi Media Games (Nasdaq  MGAM, a publicly held company
which designs and develops Class II Bingo and Class III video games), to
develop and manufacture up to 3 casino type slot machine games. MGAM is one of
the leading development and manufacturing companies in its industry. It is
currently anticipated that these games will be located in Class II type casinos
(public casinos, such as Indian gaming casinos). MGAM will also have the right
to place the games in Class III casinos (i.e., private gaming casinos) under
certain circumstances. Our gaming activities are being supervised by
Daniel
Sarnoff, COO of NL Games. Mr. Sarnoff is also assisting with sales of the
Burly Bear Network. No assurances can be given that we

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will be successful in completing an agreement with MGAM.

Publishing.We have entered into a consulting arrangement with Douglas
Bennett pursuant to which Mr. Bennett is seeking to re-establish our publishing
operations. We have entered into an agreement with Rugged Land LLC to publish
6 National Lampoon books. The first book contemplated is a 1964 high school
year book parody.

Internet.In October 1999, we 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 the date hereof, our Internet operations have not yet generated
significant revenue, we anticipate that our Internet operations will be the
incubator for the development of stories, characters and animation that will be
spun off into other media. In the future, we may earn revenue from the Site and
other Internet activities from either banner and sponsorship advertising ,
E-Commerce and the syndication of content originally developed and exploited on
the Site.

OTHER ACTIVITIES

We have been and continue 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, we, 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, we believe that such activities reinforce the National Lampoon
trademark and provide cross-promotional opportunities for our motion picture,
television and Internet operations. It is also anticipated that these
activities might be enhanced by the new creative content created by our
Internet operations.

COMPETITION

The entertainment industry in general, and the motion picture and television
industry specifically, are highly competitive. We face intense competition
from motion picture studios and numerous independent production companies, most
of whom have significantly greater financial resources than we do. 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 us. Moreover, the
growth of ever larger, vertically integrated media conglomerates such as AOL
Time Warner (owning AOL), Viacom (owing both Paramount, Nickelodeon, and CBS),
News Corporation (owning or controlling Twentieth Century Fox, Fox Searchlight
and Fox 2000, Fox Sports, and the Fox network) and The Walt Disney Company
(owning Disney, ABC, and ESPN) presents significantly more challenges.

REGULATION

Our 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. We take all appropriate and reasonable measures to obtain
agreements from licensees to secure, protect and maintain trademark and
copyright protection for our properties under the laws of all applicable
jurisdictions.

EMPLOYEES

As of October 15, 2002, we employed 13 full-time employees and 6 part-time
employees. We consider our employee relations to be satisfactory at the
present time. Since the consummation of the Reorganization Transactions, we
have also employed a number of consultants as we have increased our business
activities. See Part III- Item 10- Directors And Executive Officers Of The
Registrant for a description of certain of these arrangements.

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CERTAIN CONSIDERATIONS

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

Since the completion of the Reorganization Transactions, our operations have
been characterized by ongoing capital shortages caused by expenditures in
initiating several new business ventures. We are also actively seeking private
sources of financing, establishing bank lines and obtaining additional equity
from third party sources. There is no assurance that such financing will be
available on commercially acceptable terms, if at all. We are not certain if
our existing capital resources are sufficient to fund our activities for the
next six to twelve months. Unless our revenues from new business activities
significantly increase during that period, we will need to raise additional
capital to continue to fund our planned operations or, in the alternative,
significantly reduce or even eliminate certain operations. There can be no
assurance that we will be able to raise such capital on reasonable terms, or at
all. As of October 18, 2002, we had cash on hand of $ 86,000, which reflects
an infusion of $80,000 upon the purchase of Series B Units by members of NLAG,
and no significant receivables . This amount is not sufficient to fund current
operations, which we estimate to be approximately $475,000 per month. We
anticipate that any shortfall will be covered by the additional purchase of
additional Series B Units by designees of NLAG or other investments by members
of NLAG. If they decline to make additional investments, or should we be
unable to secure additional financing, we could be forced to immediately
curtail much, if not all, of our current plans. Our financial statements for
the fiscal year ended July 31, 2002 contain an explanatory paragraph as to our
ability to continue as a going concern. This qualification may impact our
ability to obtain future financing.

SPECULATIVE NATURE OF ACTIVITIES

Historically, substantially all of our revenues are derived from the licensing
of the name National Lampoon in connection with production and distribution
of feature films, television series and made-for-television movies. The
entertainment industry in general, and the development, production and
distribution of feature films and television programs, in particular, is highly
speculative and involves a substantial degree of risk. Since each project is an
individual artistic work and its commercial success is primarily determined by
audience reaction, which is volatile and unpredictable, there can be no
assurance that any entertainment property will make money. Even if a
production is a critical or artistic success, there is no assurance that it
will be profitable. In particular, to the extent that our product caters to the
tastes of television audiences in the United States, our results may be
affected by the inability to attract audiences in our newly addressed markets,
especially Europe. If we are unable to attract productions which compete
effectively in the global marketplace, our financial condition and results of
operations could be materially adversely affected

COMPETITION: GENERAL ECONOMIC CONDITIONS

We are also subject to certain factors affecting the entertainment industry
generally, such as (a) sensitivity to general economic conditions; (b) critical
acceptance of our products; and (c) intense competition. Virtually all of our
competitors are substantially larger than we are, have been in business longer
than we have and have more resources at their disposal. The television
industry is currently evolving into an industry in which certain
multi-national, multi-media entities, because of their control over key film,
magazine, and/or television content, as well as key network and cable outlets,
will be able to dominate certain communications industry activities in the
United States and abroad. These competitors have numerous competitive
advantages, including the ability to acquire financing for their projects and
attract superior properties, personnel, actors and/or celebrity hosts.

PRODUCTION ACTIVITIES

To the extent that we produce new programming for the Burly Bear Network, we
will be required to be cognizant of the risk of production activities and the
related costs. To the extent that we seek to recoup some of those costs from
the exploitation of product outside the network, there can be no assurance that
we can produce enough episodes so that we can syndicate the series in the
United States. Typically, there needs to be at least 65 episodes of a series
produced in order to strip or syndicate the series in the daily re-run
market. Networks can generally cancel a series at stated intervals and,
accordingly, do not commit in advance to exhibit a series for more than a
limited period. If we cancel a series before the minimum number of shows
necessary to syndicate or strip have been produced, there is the risk that
the production costs of the project will not be fully recovered. Similar risks
apply for a series produced for a non-network medium.

VARIANCE IN REVENUE

Our revenues and results of operations are significantly dependent upon the
timing and success of implementing the business activities describe above, and
the timing and receipt of revenue from licensing and production activities,
which cannot be predicted

7



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with certainty. Revenues for any particular program may not be recognized
until the program is produced and available for delivery to the licensee.
Production delays may impact the timing of when revenues may be recognized
under generally accepted accounting principles. Significant sales of our
product take place at the industrys major selling markets, the most important
of which are the Cannes Film Festival, the American Film Market, MIFED, MIP-TV
and MIPCOM-TV (the International Film and Program Market for TV, Video, Cable &
Satellite) which take place in France in the second, third and fourth quarters,
respectively, and NATPE and the American Film Market, which takes place in the
United States in January. Finally, production commitments are typically
obtained from networks in the spring (second quarter), although production
activity and delivery may not occur until later periods. We may experience
significant quarterly variations in our operations, and results in any
particular quarter may not be indicative of results in subsequent periods. Such
variations may lead to significant volatility of our share price.

INTERNET ACTIVITIES

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 our Internet revenues will be
dependent on the Internets continued growth and integration into daily
commerce, among other factors. However, the demand for Internet advertising in
general has declined, and we have not achieved any significant advertising
revenue, 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. Our business would be
adversely affected if the market for Internet advertising fails to develop or
develops more slowly than expected.

STOCK PRICE VOLATILITY

The trading price of our common 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. Significant volatility in
the market price of our common stock may arise due to factors such as:



| |  |  | our developing business;                                                        
| | - |  | --------------------------------------------------------------------------------
|
| |  |  | a continued negative cash flow;                                                 
|
| |  |  | relatively low price per share;                                                 
|
| |  |  | relatively low public float;                                                    
|
| |  |  | variations in quarterly operating results;                                      
|
| |  |  | general trends in the television industry;                                      
|
| |  |  | the number of holders of our common stock; and                                  
|
| |  |  | the interest of securities dealers in maintaining a market for our
common stock.

As long as there is only a limited public market for our common stock, the
sale of a significant number of shares of our common stock at any particular
time could be difficult to achieve at the market prices prevailing immediately
before such shares are offered, and could cause a severe decline in the price
of our common stock.

Sale of substantial amounts of our common stock, the issuance of
substantial amounts of warrants and options granting the right to receive
shares of our common stock or the prospect of such sales or issuances,
respectively, could materially adversely affect the market price of our common
stock. We have the equivalent of approximately 3.8 million shares of common
stock outstanding, consisting of approximately 1.4 million shares of common
stock, approximately 1.2 million shares issueable upon conversion of
outstanding shares of Series B Preferred and approximately 1.1 million shares
of common stock are issuable upon exercise of outstanding warrants
and options (exclusive of options which would be issued upon issuance
of the Series B Preferred.).
Of these shares, approximately 1,680,000 shares are restricted shares under
the Securities Act of 1933, as Amended (the Act). We have filed a
registration statement on Form S-8 under the Act to register the sale of
approximately 2,500,000 shares of our common stock reserved for issuance under
our Restated 2001 Stock Option, Deferred Stock and Restricted Stock Plan.
Shares of our common stock issued upon exercise of options are available for
sale in the public market, subject in some cases to volume and other
limitations.

On December 21, 2001 we received notification from Nasdaq that we failed to
comply with the requirements for continued listing on the Nasdaq SmallCap
Market. The notification was made pursuant to Nasdaq Marketplace Rule
4310(c)(2)(B) for failure to meet the quantitative listing requirements
contained in such rule and Rules 4350(e) and 4350(g) for failure by us to hold
our annual meeting for the year 2000 within the time limits required for such
rules and that our securities were subject to delisting. On March 22, 2002 the
Nasdaq Listing Qualifications Panel notified us of its delisting determination.
We requested the Nasdaq Listing and Hearing Review Council to review the
Panels delisting determination. On March 25, 2002 our common stock began to
trade on the Over The Counter Bulletin Board. On July 2, 2002, the Council
notified us that it had affirmed the Panels decision and on July 26, 2002
Nasdaq notified us that the NASD Board had declined to call the Councils
decision for review.

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##### Table of Contents



DEPENDENCE ON NATIONAL LAMPOON TRADEMARK AND RELATED PROPERTIES

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

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

DEPENDENCE ON KEY PERSONNEL

We are dependent upon the services of James P. Jimirro and Daniel S. Laikin.
The loss of their services could have a materially adverse effect on our
business, results of operations and financial position. We are also subject to
a number of consulting arrangements with individuals and entities are not
exclusive to us, or who are working without cash compensation. No assurance
can be given that we will receive the same level of service and attention than
had these services been handled by full time employees receiving traditional
cash compensation.




ITEM 2. PROPERTIES

We lease approximately 3,912 square feet of office space in Los Angeles,
California under a lease expiring in September 2005. Management considers our
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

1. The following proposals were submitted to shareholders at our Annual
Meeting of Shareholders held June 14, 2002. Each of the proposals was approved
by a majority of the shares present at the meeting.



| | 1. |  | To re-elect four directors and elect three new
directors to serve for the ensuing year or until their
successors are duly elected and qualified.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------

|                     |  |            |           |                 |  |  |     | 
|-------------------- |  | ---------- | --------- | --------------- |  |  | --- | 
|                     |  | SHARES FOR |           | SHARES
WITHHELD
|                     |  |            |           |                
|James P. Jimirro     |  |            | 2,217,793 |                 |  |  | 794 | 
|James Fellows        |  |            | 2,217,793 |                 |  |  | 794 | 
|Bruce P. Vann        |  |            | 2,217,793 |                 |  |  | 794 | 
|Daniel S. Laikin     |  |            | 2,217,793 |                 |  |  | 794 | 
|Timothy S. Durham    |  |            | 2,217,793 |                 |  |  | 794 | 
|Paul Skjodt          |  |            | 2,217,793 |                 |  |  | 794 | 
|Joshua A. Finkenberg |  |            | 2,217,793 |                 |  |  | 794 | 



| | 2. |  | To ratify the appointment of Stonefield Josephson,
Inc., as our independent auditors for the fiscal year 2002.
Results of the voting included 2,218,062 shares for, 525 shares
against and no shares abstained.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2. On September 27, 2002, 1,890,465 of our outstanding Common Stock consented
to reincorporate our company as a Delaware corporation with the name National
Lampoon, Inc. This transaction is expected to become effective in early
November, 2002.

9



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PART II.




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

Until March 24, 2002, our Common Stock traded on the Nasdaq Small Cap Market
under the symbol JTWO. Beginning on March 25, 2002, our Common Stock began
trading on the Over The Counter Bulletin Board under the symbol JTWO.OB. The
following table sets forth the high and low closing sales prices per share of
our Common Stock for the periods indicated.

|                 |  |      |    |       |  |  |    |    
|---------------- |  | ---- | -- | ----- |  |  | -- | ---
|FISCAL YEAR 2001 |  | HIGH |    | LOW  
|                 |  |      |    |      
|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

|                 |  |      |    |       |  |  |   |     
|---------------- |  | ---- | -- | ----- |  |  | - | ----
|FISCAL YEAR 2002 |  | HIGH |    | LOW  
|                 |  |      |    |      
|First Quarter    |  |      | 13 | 47/50 |  |  | 7 | 1/5 
|Second Quarter   |  |      | 10 | 1/2   |  |  | 3 | 3/20
|Third Quarter    |  |      | 9  | 2/5   |  |  | 4 | 1/2 
|Fourth Quarter   |  |      | 7  | 1/4   |  |  | 5 |     

As of October 25, 2002, we had approximately
[212] stockholders of record.

On December 21, 2001 we received notification from Nasdaq that we failed to
comply with the requirements for continued listing on the Nasdaq SmallCap
Market. The notification was made pursuant to Nasdaq Marketplace Rule
4310(c)(2)(B) for failure to meet the quantitative listing requirements
contained in such rule and Rules 4350(e) and 4350(g) for our failure to hold
our annual meeting for the year 2000 within the time limits required for such
rules and that our securities were subject to delisting. On March 22, 2002 the
Nasdaq Listing Qualifications Panel notified us of its delisting determination.
We requested the Nasdaq Listing and Hearing Review Council to review the
Panels delisting determination. On March 25, 2002 our common stock began to
trade on the Over The Counter Bulletin Board. On July 2, 2002, the Council
notified us that it had affirmed the Panels decision and on July 26, 2002
Nasdaq notified us that the NASD Board had declined to call the Councils
decision for review.

The delisting of our Common Stock has decreased its liquidity.

DIVIDEND POLICY

We have not paid any dividends on our outstanding Common Stock since our
inception and do not anticipate doing so in the foreseeable future.

SALES OF UNREGISTERED SECURITIES.



| | 1. |  | As part of the Reorganization Transactions, our Articles of
Incorporation were amended on May 17, 2002 to designate 68,406 of the
previously authorized 2,000,000 shares of Preferred Stock as Series B
Convertible Preferred Stock (Series B Preferred), with each share of
Series B Preferred being convertible into 28.169 shares of Common Stock.
The shares of Series B Preferred vote on a converted basis as a class
with the shares of Common Stock. Pursuant to the Purchase Agreement, we
agreed to sell to designees of NLAG up to 68,406 units (the Series B
Units), with each unit consisting of one share of Series B Preferred
and a warrant to purchase 28.169 shares of Common Stock. At the initial
closing we issued 35,244 Series B Units to five members of the NLAG
Group for an aggregate purchase price of $3,524,400. See Item 1
Business and Recent Developments. Since that time, and through October
15, 2002 we have issued and additional 830 Series B Units in connection
with the purchases by designees of NLAG under the Purchase Agreement.
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | We have agreed to issue, and Batchelder Partners Inc. has agreed to
accept, 50,000 shares of Common Stock to satisfy the balance of our
obligation to it pursuant to various investment banking agreements
signed with such firm. The shares, which have not yet been issued, will
be subject to various demand registration rights.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | 3. |  | Since the consummation of the Reorganization Transactions we have
issued warrants to the following consultants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

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| | a. |  | We are party to a consulting
agreement, approved by our Board of Directors on August 7, 2002, with
Zelnick Media Group (ZM), headed by Stauss Zelnick, the former head
of 20th Century Fox and Bertlesman, the European media conglomerates.
Mr. Zelnick and his affiliates are providing marketing, development,
production and branding assistance to us. In particular, Scott
Ziegler, a partner of ZM, is assisting directly in certain television
activities. ZM is being compensated solely by the issuance to it of
300,000 warrants (the ZM Warrants) which have been issued directly to
ZM and an affiliate. Two of the ZM Warrants will entitle ZM and an
affiliate to purchase up to 150,500 of the shares of our Common Stock
at an exercise price of $6.50 per share the other two ZM Warrants will
entitle ZM and an affiliate to purchase up to 150,500 of the ZM Warrant
Shares at an exercise price of $10.00 per share. The number and
exercise price of the ZM Warrants are subject to adjustments
customarily contained in warrants of a similar nature. One-third of
the ZM Warrant Shares become exercisable upon issuance of the ZM
Warrants and the remainder of the ZM Warrants will first become
exercisable in monthly installments during the 13th through 36th months
following the issuance of the ZM Warrants, provided that no ZM Warrant
Shares become exercisable after the termination of the consulting
agreement
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b. |  | Effective as of September 11, 2002, we have entered into a
consulting agreement with SBI USA, an affiliate of Softbank (SBI),
pursuant to which SBI has to introduce us to market makers,
institutional investors, and other broker/dealers who will increase the
visibility of the Corporation in capital markets. The sole compensation
paid to SBI was a warrant to purchase 50,000 shares of our Common
Stock at an exercise price of $7.00 per share. The warrant expires nine
months from the date of issuance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



| | 4. |  | We have issued stock options under our Amended and Restated
1999 Stock Option, Deferred Stock and Restricted Stock Plan to our
employees and members of our Corporate Advisory Board and Creative
Advisory Board. See Part III- Item 10. Directors and Executive
Officers of the Registrant  Advisory Boards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 5. |  | Effective as of August 17, 2002, we issued to Douglas Bennett,
an advisor of the Company (Bennett) and now our Vice President, the
right to acquire 213 shares of Series B Convertible Preferred Stock
of the Company (Series B Preferred) and a Warrant to purchase up to
6,000 shares of the Companys common stock (Common Stock), which
warrant is exercisable for a period of five years at an exercise
price of $3.55 per share of Common Stock during the first two years
of the term thereof and at a price of $5.00 per share of Common Stock
during the last three years of such term. In connection with such
grant, NLAG delivered to us a written waiver (the NLAG Waiver) of
its right to purchase 213 Series B Units purchasable by NLAG pursuant
to the Purchase Agreement, thereby making available for issuance 213
shares of authorized but unissued shares of Series B Preferred that
had been reserved for possible future issuance to NLAG upon the
exercise of its option to purchase Series B Units under the Purchase
Agreement.

EQUITY COMPENSATION PLAN INFORMATION

|                                                           |  |                                                                                        |  |                                                                         |  |                                                                                                                                          
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------
|Plan category                                              |  | Number of SecuritiesTo be issuedUpon exercise ofoutstanding optionswarrants and rights |  | Weighted-averageexercise price ofoutstanding optionswarrants and rights |  | Number of securities
remaining available for futureissuance under equity compensation
plans(excluding securities reflected in column (a))
|                                                           |  |                                                                                        |  |                                                                         |  |                                                                                                                                          
|Equity Compensation
plans approved by
security holders     |  | 5,351,988(1)                                                                           |  | 4.303                                                                   |  | 574,202(2)                                                                                                                               
|                                                           |  |                                                                                        |  |                                                                         |  |                                                                                                                                          
|Equity compensation
plans not approved
by security holders |  |                                                                                       |  |                                                                        |  |                                                                                                                                         
|                                                           |  |                                                                                        |  |                                                                         |  |                                                                                                                                          
|Total:                                                     |  | 5,351,988                                                                              |  | 4.303                                                                   |  | 574,202                                                                                                                                  
|                                                           |  |                                                                                        |  |                                                                         |  |                                                                                                                                          

|1) |  | Includes all 68,406 Series B
units authorized. The units include one share of Series B
preferred shares and one warrant. Both the Series B shares and
the warrant can be converted into 28.119 shares of common stock.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2) |  | The Amended and Restated 1999 Stock
Option Plan reserved and made available for issuance 1,500,000 shares
of the Companys common stock, 925,798 options have been granted as of
10/28/02.                            




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 our consolidated financial statements and related footnotes
contained herein for the fiscal year ended July 31, 2002 and for the other
periods presented.

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SELECTED FINANCIAL DATA

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

|                                      |  |                                     |        |      |  |      |        |      |  |      |       |  |  |   |        |   |  |   |       |  
|------------------------------------- |  | ----------------------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ----- |  |  | - | ------ | - |  | - | ----- | -
|                                      |  | For the fiscal years ended July 31,
|                                      |  |                                    
|                                      |  | 2002                                |        | 2001 |  | 2000 |        | 1999 |  | 1998
|                                      |  |                                     |        |      |  |      |        |      |  |     
|Revenues                              |  | $                                   | 943    |      |  | $    | 306    |      |  | $    | 1,480 |  |  | $ | 1,246  |   |  | $ | 783   |  
|Operating income/(loss)               |  | $                                   | (1,800 | )    |  | $    | (3,130 | )    |  | $    | 854   |  |  | $ | (1,765 | ) |  | $ | (267  | )
|Net income/(loss)                     |  | $                                   | (1,613 | )    |  | $    | (3,076 | )    |  | $    | 826   |  |  | $ | (1,299 | ) |  | $ | 121   |  
|Net income/(loss) per share  basic   |  | $                                   | (1.17  | )    |  | $    | (2.26  | )    |  | $    | 0.64  |  |  | $ | (1.07  | ) |  | $ | 0.10  |  
|Net income/(loss) per share  diluted |  | $                                   | (1.17  | )    |  | $    | (2.26  | )    |  | $    | 0.62  |  |  | $ | (1.07  | ) |  | $ | 0.10  |  
|Total assets                          |  | $                                   | 3,745  |      |  | $    | 3,302  |      |  | $    | 5,119 |  |  | $ | 5,350  |   |  | $ | 5,962 |  
|Long term obligations                 |  | $                                   | 0      |      |  | $    | 0      |      |  | $    | 0     |  |  | $ | 1,717  |   |  | $ | 17    |  




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

GENERAL

On May 17, 2002, we completed the Reorganization Transactions, involving a
group headed by Daniel S. Laikin, Paul Skjodt and Timothy S. Durham and also
including National Lampoon Acquisition Group LLC, a California limited
liability company; Samerian, LLP, an Indiana limited liability partnership;
Diamond Investments, LLC, an Indiana limited liability company; DW Leasing
Company, LLC, an Indiana limited liability company; Christopher R. Williams;
Helen C. Williams; Judy B. Laikin; and DC Investments, LLC, an Indiana limited
liability company (DCI) ((collectively, the NLAG Group), and James P.
Jimirro, our Chairman of the Board, President and Chief Executive Officer.
Certain of the Reorganization Transactions were undertaken pursuant to a
Preferred Stock and Warrant Purchase Agreement, dated April 25, 2002, as
amended by the First Amendment to Preferred Stock and Warrant Purchase
Agreement, dated May 17, 2002.

Future results will also be affected by our September 2002 acquisition of all
of the assets of Burly Bear, Inc., a Delaware corporation (Burly Bear).
Burly Bear, organized by a group including the executive producer of Saturday
Night Live, was in the business of producing and distributing entertainment
through a network of affiliated college television outlets. The Asset Purchase
Agreement, provided that Burly Bear was to receive as consideration for the
purchase of the assets the following: $200,000 in cash, less certain
transaction expenses; shares of our Common Stock having an aggregate value of
$400,000 (resulting in the issuance of 73,801 shares of Common Stock); and 150
shares of NLNI Common Stock, representing fifteen percent of NLNIs issued and
outstanding shares of Common Stock. The cash consideration paid in the
acquisition was received by the Company on August 29, 2002, from two existing
shareholders upon their exercise of an option to acquire 2,000 units, with each
unit consisting of one share of our Series B Convertible Preferred Stock and
one warrant to purchase 28.169 shares of our Common Stock, for a purchase price
of $100 per unit.

Burly Bear incurred substantial losses since the inception of the company in
1994, and had an accumulated deficit of <$24,657,746> as of May 31, 2002.
We hope to rationalize the assets which were acquired and effectuate a
reorganization of the business with a goal of achieving significant revenue
growth during the last two quarters of fiscal 2003 and all of fiscal 2004. We
are currently exploring a number of new ventures, with a view toward increasing
both our operations and the visibility of the National Lampoonbrand.

CRITICAL ACCOUNTING POLICIES

Based upon our operating activities there are no significant alternative
accounting policies which would have a material affect on our operating
results. See Footnote A to the financial statements for a discussion of our
significant accounting policies.

RESULTS OF OPERATIONS

THE YEAR ENDED JULY 31, 2002 VS. THE YEAR ENDED JULY 31, 2001

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For the year ended July 31, 2002, total revenues increased by approximately
208% to $943,487 from $306,244 for the year ended July 31, 2001. This increase
resulted primarily from trademark revenues from motion pictures, which rose to
$913,491 in fiscal 2002 versus $270,408 for the prior year. Revenues from
Animal House increased to $200,448 from $70,715 in the prior year. The three
National Lampoons Vacation features together recorded revenues of $358,996
in fiscal 2002 compared to $124,431 in fiscal 2001. We also received $135,000
for the feature National Lampoons Van Wilder which was released this year.
Revenues from television increased in fiscal 2002 to approximately $202,000
from $7,500 in the prior fiscal year. Video revenues of $19,208 in fiscal 2002
decreased 13% from year 2001 video revenues of $22,151. This decrease was due
to fewer sales of library video product in 2002 versus 2001. Internet revenue
of $10,788 represented a 21% decrease over year ended July 2001 Internet
revenues of $13,685. Internet revenue consisted primarily of sale of
merchandise.

Costs related to trademark revenue, primarily royalties and commissions payable
to third parties based on our trademark revenues, increased by approximately
297% to $88,155 for the year ended July 31, 2002 versus $22,221 during the same
period last year. The increase in costs resulted primarily from increased
royalties due to greater trademark motion picture and television revenues
during the fiscal year ended July 31, 2002. Costs related to Internet revenues
were $32,256 for the year ended July 31, 2002 versus $36,040 for fiscal 2001,
which represents a decline of 10%. Internet costs are direct expenses we
incurred to develop, maintain, and promote our website excluding salaries and
other general and administrative expenses incurred in connection with our
Internet operations. Cost declines were related to the decline in Internet
revenues in fiscal 2002 versus fiscal 2001

Amortization of intangible assets, the costs of our acquisition of the
National Lampoon trademark, was $240,000 during each of the years ended July
31, 2002 and 2001.

During the year ended July 31, 2002 and 2001 we made significant expenditures
to our lawyers, and investment bankers for advice and preparation of
documentation related to the activities which culminated in the Reorganization
Transactions. These expenses for the year ended July 31, 2002 totaled $545,887
and for July 31, 2001, $1,532,837. Costs totaling approximately $865,000,
incurred by us from our lawyers, and investment bankers after the January 30,
2002 letter of intent with respect to the Purchase Agreement between us and
NLAG, were classified as part of the cost of issuing the Series B Preferred
shares and accordingly decreased the capital raised.

Selling, general and administrative expenses for the fiscal year ended July 31,
2002 increased to $2,538,282 versus $1,221,338 for the fiscal year ended July
31, 2001. This increase of $1,316,944 or 108% resulted primarily from
increases in officer salary costs of approximately $1.1 million granted to the
Chief Executive Officer in consideration of his forgiveness of all contingent
notes and deferred salary due to him, increases in public filing and printing
costs of $38,000 and an increase in corporate expenses of approximately $80,000
related to the Reorganization Transaction and Purchase Agreement with the NLAG.

During the year ended July 31, 2002, we recorded a benefit to stock
appreciation rights (SARs) of $843,096 versus an expense of $379,695 during the
prior year from SARs granted to our Chief Executive Officer. This credit
resulted from a conversion of all SARs granted to the Chief Executive Officer
to common stock options. This conversion eliminated the liability or the
amount payable by us to the Chief Executive upon exercising the outstanding
SARs.

The conversion of the SARs to common stock options resulted in an expense of
$140,894 for the fiscal year ended July 31, 2002. This cost reflects the
difference between the exercise price of the SARs when converted to a stock
option and the market price of the stock on the date of conversion. Other
income of $175,484 in fiscal 2002 represents the elimination of liability
associated with deferred salaries owed to the Chief Executive Officer as part
of the Preferred Stock and Warrant Purchase Agreement.

Interest income during the year ended July 31, 2002 decreased to $12,849 versus
$55,551 for the same period last year. This decrease results from lower cash
balances held during the year ended July 31, 2002 versus the year ended July
31, 2001.

For the year ended July 31, 2002, we recorded a net loss of $1,613,334 versus a
net loss of $3,076,516 for the year ended July 31, 2001. The substantial
decrease in net loss of $1,463,182 resulted primarily from the conversion of
SARs to common stock options, which had an overall benefit of $843,096, along
with the reduction in the expensing of proxy solicitation expenses for the year
ended July 31, 2002. The amounts incurred after the execution of the
definitive letter of credit were capitalized and offset against the offering
proceeds in accordance with generally accepted accounting principles. In
addition, revenues increased by $637,243 in fiscal 2002 over fiscal 2001
levels.

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%

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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 our 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 us to develop,
maintain, and promote our website excluding salaries and other general and
administrative expenses incurred in connection with our Internet operations.
We 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, we 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 us 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, we recorded an expense of $379,695 related
to stock appreciation rights (SARs) granted to our Chief Executive Officer.
This expense resulted from an increase in our stock price from July 31, 2000 to
July 31, 2001 that increased the amount payable by us 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 we recorded a
benefit of approximately $1,148,000 related to the SARs that resulted from a
significant decrease in our stock price from July 31, 1999 to July 31, 2000.
The decrease in stock price decreased the amount payable by us 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. 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 us.

For the year ended July 31, 2001, we 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 Groups 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 our website during fiscal 2001.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of working capital during the fiscal year ended July 31,
2002 included; trademark and other income of approximately $943,487 and
$2,585,317 from the Laikin group pursuant to the Reorganization Transactions.

For the twelve months ended July 31, 2002, our net cash flows used in our
operating activities was $1,961,561, versus $1,486,834 of net cash flow used in
operating activities during the twelve months ended July 31, 2001. This
decrease resulted primarily from a decrease in accrued expenses and other
liabilities.

Since the completion of the Reorganization Transactions, our operations have
been characterized by ongoing capital shortages caused by expenditures in
initiating several new business ventures. We are also actively seeking private
sources of financing, establishing bank lines and obtaining additional equity
from third party sources. There is no assurance that such financing will be
available on commercially acceptable terms, if at all. We are not certain if
our existing capital resources are sufficient to fund our activities for the
next six to twelve months. Unless our revenues from new business activities
significantly increase during that period, we will need to raise additional
capital to continue to fund our planned operations or, in the alternative,
significantly reduce or even eliminate certain operations. There can be no
assurance that we will be able to raise such capital on reasonable terms, or at
all. As of October 18, 2002, we had cash on hand of $ 86,000, an amount
which reflects an infusion of $80,000 upon the purchase of Series B Units by
designees of NLAG immediately prior to such date, and no significant
receivables. This amount is not sufficient to fund current operations, which
we estimate to be approximately $475,000 per month. We anticipate that any
shortfall will be covered by the additional exercise of the Series B Warrants
held by the NLAG Group or other investments by NLAG. If NLAG declines to make

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additional investments, or should we be unable to secure additional financing,
we could be forced to immediately curtail much, if not all, of our current
plans. Our financial statements for the fiscal year ended July 31, 2002
contain an explanatory paragraph as to our ability to continue as a going
concern. This qualification may impact our ability to obtain future financing

FUTURE COMMITMENTS

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.

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. We are evaluating any accounting effect, if any, arising from the
recently issued SFAS No. 142, Goodwill and Other Intangibles on our 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. We do not expect the adoption to
have a material impact to our 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. We do not expect the adoption to have a material impact to
our financial position or results of operations.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt, and an amendment of that Statement,
FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements and FASB Statement No. 44, Accounting for Intangible Assets of
Motor Carriers. This Statement amends FASB Statement No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. We do not expect the adoption to have a material impact on our
financial position or results of operations.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. We do not expect the adoption to have a material
impact on our 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

As reported in a Form 8-K filed on August 12, 2001, and amended on August 24,
2001, the Audit Committee of our Board of

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Directors dismissed Arthur Andersen LLP as our independent auditors on July 30,
2001, and on that same date engaged Stonefield Josephson, Inc. as our
independent auditors for the fiscal year ending July 31, 2001. During the two
most recent fiscal years prior to the change, there had been no reportable
events (as defined in Item 304 of Regulation S-K) with Arthur Andersen LLP. We
had not consulted with Stonefield Josephson, Inc. regarding the application of
accounting principles to a specified transaction or the type of audit opinion
that might be rendered on our financial statements during the two most recent
fiscal years. We did not believe that there were any disagreements with Arthur
Andersen LLP within the meaning of Instruction 4 of Item 304 of Regulation S-K
as to any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure in connection with the audits of our
financial statements for the fiscal years ended July 31, 2000 and 1999 or for
any subsequent interim period, which disagreements if not resolved to its
satisfaction would have caused Arthur Andersen LLP to issue an adverse opinion
or a disclaimer of opinion, and neither report contained an adverse opinion or
disclaimer of opinion or was qualified or modified as to uncertainty, audit
scope or accounting principles except uncertainty as to our ability to continue
as a going concern in the event certain contingent payments became due to any
of our officers contained in Arthur Andersen LLPs opinion on our financial
statements for the fiscal year ended July 31, 2000. A letter of Arthur
Andersen LLP addressed to the Securities and Exchange Commission was included
as Exhibit 16 to the amendment to the Form 8-K. Such letter stated that such
firm agreed with the statements made by us.




PART III.




ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth information with respect to our directors and
executive officers. 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. There
are no family relationships among any of the directors or executive officers.

|                     |  |     |    |          |  |                                      |  |  |      |          |  | 
|-------------------- |  | --- | -- | -------- |  | ------------------------------------ |  |  | ---- | -------- |  | 
|                     |  |     |    |          |  |                                      |  |  |      | Director
|Name                 |  | Age |    | Position |  | Since                               
|                     |  |     |    |          |  |                                     
|James Jimirro        |  |     | 65 |          |  | Director, Chairman, President and    |  |  | 1986 |         
|                     |  |     |    |          |  | Chief Executive Officer              |  |  |      |         
|James Fellows        |  |     | 65 |          |  | Director                             |  |  | 1986 |         
|Bruce Vann           |  |     | 46 |          |  | Director                             |  |  | 1985 |         
|Daniel S. Laikin     |  |     | 40 |          |  | Director and Chief Operating Officer |  |  | 2000 |         
|Timothy S. Durham    |  |     | 40 |          |  | Director                             |  |  | 2002 |         
|Paul Skjodt          |  |     | 43 |          |  | Director                             |  |  | 2002 |         
|Joshua A. Finkenberg |  |     | 28 |          |  | Director                             |  |  | 2002 |         

EXECUTIVE OFFICERS AND DIRECTORS

In connection with the consummation of the Reorganization Transactions, Messrs.
Durham, Skjodt and Finkenberg were elected to the Board on May 17, 2002.
Messrs. Durham and Skjodt filled the vacancies created by the resignations on
that date of Messrs. De Simio and Cowan and Mr. Finkenberg was elected to fill
the vacancy created by the expansion of the Board from six to seven members.

James P. Jimirrohas been employed as our 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 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.

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James Fellowshas 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. Vannhas been a principal of the law firm of Kelly Lytton & Vann
LLP since December 1995. 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.

Daniel S. Laikinhas been employed as our Chief Operating Officer since
May 17, 2002. Mr. Laikin served as Co-Chairman of Biltmore Homes, Inc., an
Indiana-based home building and real estate development company until 2000. He
also served as a managing partner of Four Leaf Partners, LLC, a closely held
investment company, concentrating on the startup and financing of high tech and
Internet-related companies. He is also on the Board of Directors of Obsidian
Enterprises, Inc.

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

Paul Skjodtis the Chairman and Chief Executive Officer of Biltmore Homes,
Inc., an Indiana-based home building and real estate development company.

Joshua A. Finkenbergis the Co-Founder, Chairman and President of AF
Investments LLC, a holding company focused on acquisitions of and investments
in businesses located in the Southern California area. From August 2000
through January 2002, Mr. Finkenberg was a Senior Associate at Batchelder &
Partners, a financial advisory firm based in San Diego, California. From July
1996 through July 2000, Mr. Finkenberg was an Associate in the Investment
Banking Department of SunTrust Equitable Securities Corporation, a full-service
investment bank located in Nashville, Tennessee. Mr. Finkenberg graduated with
highest honors from the Robert C. Goizueta Business School at Emory University
with a dual concentration in Finance and Management Information
Systems/Information Technology.

CONSULTANTS

We are party to a consulting agreement, approved by
our Board of Directors on August 7, 2002, with Zelnick Media
Group (ZM), headed by Stauss Zelnick, the former head of 20th Century Fox and
Bertslman. Mr. Zelnick and his affiliates are providing marketing,
development, production and branding assistance to us. In particular, Scott
Ziegler, a partner of ZM, is assisting directly in certain television
activities. ZM is being compensated solely by the issuance to it of 300,000
warrants (the ZM Warrants) which have been issued directly to ZM and an
affiliate. Two of the ZM Warrants will entitle ZM and an affiliate to purchase
up to 150,500 of the shares of our Common Stock at an exercise price of $6.50
per share the other two ZM Warrants will entitle ZM and an affiliate to
purchase up to 150,500 of the ZM Warrant Shares at an exercise price of $10.00
per share. The number and exercise price of the ZM Warrants are subject to
adjustments customarily contained in warrants of a similar nature. One-third of
the ZM Warrant Shares become exercisable upon issuance of the ZM Warrants and
the remainder of the ZM Warrants will first become exercisable in monthly
installments during the 13th through 36th months following the issuance of the
ZM Warrants, provided that no ZM Warrant Shares become exercisable after the
termination of the consulting agreement

Douglas Bennett has been retained as a consultant to implement a publishing
business plan for National Lampoon. As compensation, the NLAG group assigned
to Mr. Bennett, with our consent, an option to acquire 213 shares of Series B
Preferred Stock which NLAG had retained in connection with the Reorganization
Transactions, and a warrant to purchase up to 6,000 shares of our Common Stock
during the five year term thereof at an exercise price of $3.55 per share
during the first two years of the term thereof at an exercise price of $5.00
per share during the last three years of such term. In October 2002, Mr.
Bennett was named our Executive Vice President. Mr. Bennett is currently
negotiating the terms of his employment relationship.

Steve Mendelson has been retained as a consultant pursuant to a three month
consulting agreement, dated August 5, 2002, which pays him $10,000 per month to
assist in television development activities. An extension with Mr. Mendelson
is currently being negotiated. He is being assisted in his efforts by Scott
Ziegler of Zelnick Media Group, Randi Siegel, who is an employee of ours, and
Debbie Goldfarb, who is a member of our Creative Advisory Board. See
Directors and Executive Officers of the Registrant  Advisory Board.

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We are also party to a one year consulting agreement with Mr. Daniel Sarnoff,
dated as of September 1, 2002 pursuant to which Mr. Sarnoff serves in a
non-exclusive capacity. Mr. Sarnoff serves as the CEO of our newly formed
subsidiary NL Games, Inc. (NLG), as well as assisting us in sales of the
Burly Bear Network. Pursuant to the terms of his agreement with us, Mr.
Sarnoff is to receive an annual compensation of $60,000 per year, and a
percentage of revenue from NLG games. Mr. Sarnoff is also to receive stock
options and other bonus, subject to approval of the Board of Directors.

Pursuant to the terms of an oral agreement, Errol Gerson has been retained as a
consultant responsible for implementing our operations regarding the Burly Bear
acquisition. We are paying Mr. Gerson $5,000 per month, and Mr. Gerson began
receiving an additional $7,500 per month per month form National Lampoon
Networks, Inc. in October.

Our basic licensing agreements are being supervised by Bob Koff, who is party
to an oral consulting agreement with us which pays him 10% of funds received by
us from these activities. Mr. Koff is being assisted by Mark Roessler, who is a
member of our Corporate Advisory Board. See Directors and Officers of the
Registrant  Advisory Board below.

ADVISORY BOARD.

We have established a creative advisory board and a corporate advisory
board. The members of these committees have agreed to assist us in identifying
business opportunities, as well as opportunities to leverage our brand and
increase our exposure in the creative community. The composition of these two
boards is as follows:

Corporate Advisory Board:

Douglas Bennett- Mr. Bennett, who is currently serving as our Executive Vice
President, has more than 20 years of experience in management, sales and
marketing in the publishing industry. Mr. Bennett was formerly president of
Macmillan Digital and Macmillan USA.

Steve Lehman- Mr. Lehman was one of the founders of Premier Radio. He is
currently a partner in Broadstream Capital Partners,

Mark Roessler- Mr. Roessler is currently head of CMG Worldwide, an agency
representing over 200 diverse personalities and entities, as well as the
estates of celebrities, in various enterprises.

Charles Segars- Mr. Segars was formerly an executive at DreamWorks
Television, and is currently an E.W. Scripps cable and television executive.

Brian Wood- Mr. Wood is president of Columbia House, the leading book, record
and DVD club.

Each of the members of the Creative Advisory Boards is entitled to receive
options to acquire 5,000 shares of our Common Stock at an exercise price
determined on the date of grant

Creative Advisory Board:

Charles Fink- Mr. Fink, formerly a senior executive of AOL Time Warner, is
currently the president of American Greetings.com.

Errol Gerson- Mr. Gerson is currently a consultant to the Company, and has a
twenty year background in the entertainment. industry. Mr. Gerson, in addition
to acting as design consultant to various internet ventures, formerly was the
Director of New Media for the Creative Artists Agency. For the past two and
half years, Mr. Gerson was the CEO of iNetnow.

Debbie Goldfarb- Ms. Goldfarb is a television agent at Abrams, Rubeloff in Los
Angeles, and was formerly an agent of the Creative Artist Agency.

Richard Lewis- The founder of Ovation Entertainment, Mr. Lewis was one of the
founders of Trilogy Entertainment, the producers of such hits as Robin Hood:
Prince of Thievesand Backdraft.

Scott McCain- Mr. McCain is chairman of McCain Performance Group, an
association of companies specializing in trade shows and professional business
speaking.

Chris Miller- Mr. Miller was formerly a writer for National Lampoonand one of
the original writers of National Lampoons Animal House.

Dan Pasternack- Mr. Pasternack was formerly an executive for Granada
Entertainment, USA, and was a senior vice president of

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drama at studios USA, an affiliate of Universal Pictures.

Brad Yonover- Formerly a principal of Greenstreet Productions, he is currently
a consultant focusing of development and production of feature films.

Each of the members of the Creative Advisory Boards is entitled to receive
options to acquire 2,000 shares of our Common Stock at an exercise price
determined on the date of grant.




ITEM 11. EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

The following table sets forth the compensation for each of the last three
fiscal years of our Chief Executive Officer and up to four of our executive
officers (Named Officers) whose annual salary and bonus exceeded $100,000
during the fiscal year ended July 31, 2002.

|                  |                         |      |      |           |  |     |                     |          |                       |          |              |         |      |  |         |        |              |  |           |        |  |  |   |         |    
|----------------- | ----------------------- | ---- | ---- | --------- |  | --- | ------------------- | -------- | --------------------- | -------- | ------------ | ------- | ---- |  | ------- | ------ | ------------ |  | --------- | ------ |  |  | - | ------- | ---
|                  |                         |      |      |           |  |     | Annual Compensation |          | Long TermCompensation |          |             
|                  |                         |      |      |           |  |     |                     |          |                       |          |              |         |     
|                  |                         |      |      |           |  |     |                     |          |                       |          | Other Annual |         |      |  |         |        | Stock        |  | All Other
|                  |                         |      |      |           |  |     |                     |          |                       |          | Compensation |         | SARs |  | Options |        | Compensation
|Name and Position |                         | Year |      | Salary($) |  | ($) |                     | (Shares) |                       | (Shares) |              | ($)    
|                  |                         |      |      |           |  |     |                     |          |                       |          |              |        
|James P. Jimirro  |                         |      | 2002 |           |  |     | 1,471,146           | (1)      |                       |          | 0            |         |      |  | 0       |        |              |  | 608,335   | (2)    |  |  | 0 |        
|                  | Chairman, President and |      |      | 2001      |  |     |                     | 190,750  | (3)                   |          |              | 0       |      |  |         | 25,000 |              |  |           | 25,000 |  |  |   | 0       |    
|                  | Chief Executive Officer |      |      | 2000      |  |     |                     | 190,750  | (2)                   |          |              | 913,724 |      |  |         | 25,000 |              |  |           | 25,000 |  |  |   | 287,812 | (4)



---

|(1) |  | Includes 1.215,069 recieved as apart of the Reorganization Transaction.                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Stock options include options to acquire 450,000 shares of Common Stock
granted during the fiscal year ended December 31, 2002, plus 158,335 stock
options that were converted from SARs as part of the Reorganization Transaction                                                                                                                                                                                                      
|   
|   
|   
|   
|(3) |  | 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. Under the terms of Mr. Jimirros Restated Employment Agreement
these amounts due to him have been forgiven.
|   
|   
|   
|   
|(4) |  | 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.                                                                                                                                                             

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, 2002 to the
Named Officers:

|              |  |          |         |                |  |              |    |            |  |       |      |                 |  |  |            |                      |  |                          |           |  |  |  |           | 
|------------- |  | -------- | ------- | -------------- |  | ------------ | -- | ---------- |  | ----- | ---- | --------------- |  |  | ---------- | -------------------- |  | ------------------------ | --------- |  |  |  | --------- | 
|              |  |          |         |                |  |              |    |            |  |       |      |                 |  |  |            |                      |  | Potential Realized Value
|              |  |          |         |                |  |              |    |            |  |       |      |                 |  |  |            |                      |  | 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%($)         
|              |  |          |         |                |  |              |    |            |  |       |      |                
|James Jimirro |  |          | 608,335 | (1)            |  |              | 68 | %          |  | $     | 3.50 |                 |  |  | 01/29/2012 |                      |  |                          | 3,543,875 |  |  |  | 5,412,553 | 



---

|(1) |  | The options granted to Mr. Jimirro were immediately exercisable. The
exercise price of the options is equal to the closing price on the date
of grant. The options granted to Mr. Jimirro included 158,335 options
that were converted from SARs to stock options during the fiscal year.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



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, 2002.

|              |  |             |   |             |  |             |   |               |  |                               |         |                          |  |  |   |  |  |                      |           |  |  |  |   | 
|------------- |  | ----------- | - | ----------- |  | ----------- | - | ------------- |  | ----------------------------- | ------- | ------------------------ |  |  | - |  |  | -------------------- | --------- |  |  |  | - | 
|              |  |             |   |             |  |             |   |               |  |                               |         |                          |  |  |   |  |  | Value of Unexercised
|              |  |             |   |             |  |             |   |               |  | Number of Unexercised         |         | In-the-Money Options/   
|              |  |             |   |             |  |             |   |               |  | Options/SARs at July 31, 2002 |         | SARs at July 31, 2002(1)
|              |  | Shares      |   |             |  |             |   |               |  |                              
|              |  | Acquired    |   | Value       |  | Exercisable |   | Unexercisable |  | Exercisable                   |         | Unexercisable           
|Name          |  | On Exercise |   | Realized($) |  | (Shares)    |   | (Shares)      |  | ($)                           |         | ($)                     
|              |  |             |   |             |  |             |   |               |  |                               |         |                         
|James Jimirro |  |             | 0 |             |  |             | 0 |               |  |                               | 666,669 |                          |  |  | 0 |  |  |                      | 1,599,082 |  |  |  | 0 | 



---

|(1) |  | Based upon the difference
between the closing price on July 31, 2002 and
the option exercise price or stock appreciation rights base price.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------

DIRECTOR COMPENSATION

At the organization meeting of the Board of
Directors following our annual meeting of shareholders in June 2002,
all directors, excluding Mr. Jimirro and Mr. Laikin, were
granted options to receive options to
purchase up to 7,500 shares at the market price on the date of grant that are
immediately exercisable. Mr. Jimirros and Mr. Laikins compensation as
directors is pursuant to their employment agreements described under
Employment Agreements.

EMPLOYMENT AGREEMENTS

On May 17, 2002, we entered into a new employment agreement with James P.
Jimirro (the Jimirro Employment Agreement). The Jimirro Employment Agreement
will terminate on December 31, 2007; provided, however, that if Mr. Jimirro
remains employed by us on December 31, 2003, the Jimirro Employment Agreement
will automatically be extended for an additional year. As of December 31, 2004
and December 31 of each year thereafter, so long as Mr. Jimirro remains
employed by us on such date, the Jimirro Employment Agreement will again be
automatically extended for an additional year so that at no time will the
remaining term under the Jimirro Employment Agreement be less than five years.

The Jimirro Employment Agreement will provide Mr. Jimirro with an annual
salary of $500,000 and, commencing on January 31, 2003 and continuing on the
last day of each month thereafter during the period that Jimirro is employed by
us, will provide for the monthly grant by the Company to Mr. Jimirro of fully
vested options to purchase 5,000 shares of our Common Stock. Pursuant to the
Jimirro Employment Agreement, Mr. Jimirro will receive fifty percent of our
gross receipts from the movie National Lampoons Van Wilder. The Jimirro
Employment Agreement also provides Mr. Jimirro with other benefits, including
medical and life insurance, an automobile and the reimbursement of business
expenses.

The Jimirro Employment Agreement is terminable by us without Cause or
for convenience after December 31, 2002 upon written notice to Mr. Jimirro,
payment to Mr. Jimirro of a cash severance payment in the amount of $1,400,000,
and delivery of a promissory note providing for our payment to Mr. Jimirro of
$1,000,000 in twelve equal monthly installments. Prior to December 31, 2002,
the Jimirro Employment Agreement will only be terminable by us for Cause.
For us to terminate Mr. Jimirro for Cause under the Jimirro Employment
Agreement, six of the members of the Board of Directors (excluding Mr. Jimirro)
must determine at a meeting called for such purpose, that Mr. Jimirro is guilty
of the conduct triggering the right to terminate him for Cause. Under the
Jimirro Employment Agreement, Cause is defined as (i) the willful and
continued failure by Mr. Jimirro to substantially perform his duties with us in
good faith (other than any such failure resulting from his incapacity due to
physical or mental illness or any such actual or anticipated failure resulting
from his termination by us for convenience (or without Cause)), after a
demand for substantial performance is delivered to him by the Board of
Directors that specifically identifies the manner in which the Board of
Directors believes that Mr. Jimirro has not substantially performed his duties
in good faith; or (ii) the willful engaging by Mr. Jimirro in conduct which is
demonstrably and materially injurious to us, monetarily or otherwise. For
purposes of the definition of Cause under the Jimirro Employment Agreement,
no act, or failure to act, on Mr. Jimirros part shall be considered willful
unless done, or omitted to be done, by him in bad faith and without reasonable
belief that his action or omission was in our best interest.

The Jimirro Employment Agreement is terminable by Mr. Jimirro upon the
occurrence of certain events, with Mr. Jimirro being entitled to receive the
same severance benefits, including the $1,400,000 cash severance payment and
$1,000,000 promissory note (detailed above), as if Mr. Jimirro had been
terminated by us without Cause or for convenience.

In addition, under the Jimirro Employment Agreement, in the event that Mr.
Jimirro incurs an excise tax under the Internal Revenue

20



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Code of 1986, as amended (the Code), because he receives any compensation or
payments from us that constitute excess parachute payments under Section 280G
of the Code, we will reimburse Mr. Jimirro for that excise tax, and for the
income and excise taxes on such reimbursement on a fully grossed up basis if
either (i) Mr. Jimirros employment with us is terminated by us at any time
before the first anniversary of the date on which the Reorganization
Transactions are consummated, or (ii) after the effectiveness of the Jimirro
Employment Agreement a transaction (excluding the Reorganization Transactions,
if applicable) involving us occurs that results in Mr. Jimirro incurring such
an excise tax.

All of our obligations to Mr. Jimirro under the Jimirro Employment
Agreement, as well as under an indemnification agreement and a registration
rights agreement, are secured by a first priority lien on all of our assets,
pursuant to a security agreement between Mr. Jimirro and us, executed in
connection with the Reorganization Transactions.

Daniel S. Laikin Employment Agreement

On May 17, 2002, we and Daniel S. Laikin entered into an Employment
Agreement (the Laikin Employment Agreement) effective for a period of one
year and subject to automatic extension for successive one-year terms
thereafter unless and until the Board of Directors elects not to renew the
Laikin Employment Agreement and notifies Mr. Laikin within sixty days prior to
the end of the then-current one-year term of the Employment Agreement or unless
the Laikin Employment Agreement has been terminated according to its terms and
conditions.

Pursuant to the Laikin Employment Agreement, Mr. Laikin receives an annual
salary of $200,000. He also was granted options to purchase 100,000 shares of
our Common Stock as of the effective date of the Employment Agreement, which
options were immediately exercisable and will expire, to the extent not
exercised, prior to the close of business on the day ten years from the date of
grant. The Laikin Employment Agreement also provides Mr. Laikin with other
benefits, including vacation, pension, retirement, medical and life insurance
and reimbursement of business expenses. Mr. Laikin has agreed to
receive his entire salary in Series B Units.

The Laikin Employment Agreement may be terminated voluntarily by us at any
time during its term for Cause (which is defined as in the Jimirro Employment
Agreement described above). For us to terminate Mr. Laikin for Cause, five
of the members of the Board of Directors (not including Mr. Laikin) must
determine at a meeting held for such purpose that Mr. Laikin is guilty of the
conduct triggering the right to terminate him for Cause. If Mr. Laikins
employment is terminated by us for Cause, or by Mr. Laikin, in addition to
any benefits mandated by law, we shall pay Mr. Laikin his full annual salary in
effect at the date of termination and other benefits to which he is entitled
through the date of termination at the rate in effect at the time notice of
termination is given.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Employment Agreements with Messrs. Jimirro and Laikin were negotiated
as part of the Reorganization Transactions involving Mr. Jimirro and the NLAG
Group and were approved by our entire Board of Directors (other than Messrs.
Jimirro and Laikin who excused themselves from the meetings during the Boards
consideration of the Employment Agreements) at special meetings of the Board of
Directors held on April 25, 2002 and May 17, 2002.

21



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##### Table of Contents






ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership Of Certain Beneficial Owners And Management

The following table sets forth the beneficial ownership of the Common
Stock and Series B Preferred for (i) each person known by the Company to be the
beneficial owner of more than five percent of the outstanding shares of Common
Stock or Series B Preferred; (ii) each director; and (iii) the directors and
executive officers as a group. Beneficial ownership information in the table is
as of September 26, 2002. In calculating beneficial ownership, shares of Series
B Preferred are included as if converted into Common Stock. Unless otherwise
indicated, beneficial ownership represents both sole voting and sole investment
power.

|                                                                             |                                                              |        |           |     |  |  |      |   | 
|---------------------------------------------------------------------------- | ------------------------------------------------------------ | ------ | --------- | --- |  |  | ---- | - | 
|                                                                             |                                                              |        | Number of |     |  |  |     
|Name of Beneficial Owner                                                     |                                                              | Shares | Percent**
|Directors and Executive Officers(1)                                          |                                                              |        |           |     |  |  |      |  
|James P. Jimirro,                                                            |                                                              |        | 900,336   | (2) |  |  | 27.2 | %
|                                                                             | Chairman of the Board,
President and
Chief Executive Officer |        |           |     |  |  |      |   | 
|James
A. Fellows,                                                            |                                                              |        | 24,666    | (3) |  |  | *    |  
|                                                                             | Director                                                     |        |           |     |  |  |      |   | 
|Bruce P. Vann,
Director                                                      |                                                              |        | 23,831    | (4) |  |  | *    |  
|Daniel S. Laikin,
Chief Operating Officer and
Director                       |                                                              |        | 2,717,977 | (5) |  |  | 59.8 | %
|Timothy S. Durham, Director                                                  |                                                              |        | 2,076,363 | (5) |  |  | 49.8 | %
|Paul Skjodt, Director                                                        |                                                              |        | 1,469,676 | (5) |  |  | 37.9 | %
|Joshua A. Finkenberg, Director                                               |                                                              |        | 7,500     | (6) |  |  | *    |  
|All Executive Officers and Directors as
a group, consisting of eight members |                                                              |        | 4,956,125 |     |  |  | 86.5 | %
|NLAG Group(1),(5)                                                            |                                                              |        | 4,147,512 |     |  |  | 82.7 | %
|Ronald Holzer                                                                |                                                              |        | 180,945   | (7) |  |  | 6.8  | %



---

|*   |  | Less than one percent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|**  |  | Percentage of combined votes of outstanding shares of Common Stock and Series B Preferred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   
|   
|   
|   
|(1) |  | The address for
Messrs. Jimirro, Laikin, Fellows and Vann is 10850 Wilshire Blvd., Suite 1000, Los Angeles, California
90024. The address for the NLAG Group
is 111 Monument Circle, Suite 4800, Indianapolis, Indiana 46204. The address for Mr. Skjodt is 9910 Towne Road,
Carmel, Indiana 46032. The address for Mr. Finkenberg is 4080 Front Street, Suite 105, San Diego, California 92123.
The address for Mr. Holzer is 600 Central Avenue, Suite 240, Highland Park, Illinois 60035.                                                                                                                                                                                                                                                                 
|   
|   
|   
|   
|(2) |  | Includes options to purchase 666,669 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   
|   
|   
|   
|(3) |  | Consists of options to purchase shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|   
|   
|   
|(4) |  | Includes options to purchase 12,831 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|   
|   
|   
|(5) |  | The following individuals and entities are referred to collectively as the NLAG Group: Daniel Laikin; Paul Skjodt;
Christopher R. Williams; Diamond Investments, LLC; DC Investments, LLC; Timothy S. Durham; Judy B. Laikin; Samerian
LLP; DW Leasing Company, LLC; and National Lampoon Acquisition Group, LLC. Each member of the NLAG Group may be
deemed to beneficially own all of the shares of Common Stock that are deemed to be beneficially owned collectively
by the NLAG Group, which includes shares of Common Stock that the members could acquire upon the conversion of
shares of Series B Preferred and pursuant to warrants and options. As of September 26, 2002, the individual members
of the NLAG Group have the following holdings:



| | (a) |  | Mr. Durham directly owns 73,200 shares of Common Stock, 8,380 shares
of Series B Preferred and warrants to acquire 236,056 shares of
Common Stock (he has granted an option to Mr. Williams to acquire
2,307 shares of Series B
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |     |  | Preferred and warrants for 64,987 shares of
Common Stock). He also has the right to acquire 7,500 shares of
Common Stock pursuant to stock options. Mr. Durham may be deemed to
share voting and dispositive power with respect to the securities
listed below for Diamond Investments, LLC and DC Investments, LLC,
for both of
which Mr. Durham serves as Managing Member, and DW Leasing Company,
LLC, in which Mr. Durham has an ownership interest. (The total
beneficial ownership for Mr. Durham shown in the table also includes
the maximum number of securities that Mr. Durham could acquire if he
were named the designee of, and exercised, the option held by
National Lampoon Acquisition Group, LLC, described in (j) below.)
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Mr. Laikin directly owns 167,250 shares of Common Stock, 23,364
shares of Series B Preferred and warrants to acquire 658,141 shares
of Common Stock. He also has the right to acquire 102,333 shares of
Common Stock pursuant to stock options. He may be deemed to share
voting and dispositive power with respect to securities listed below
for Judy B. Laikin. (The total beneficial ownership for Mr. Laikin
shown in the table also includes the maximum number of securities
that Mr. Laikin could acquire if he were named the designee of, and
exercised, the option held by National Lampoon Acquisition Group,
LLC, described in (j) below.)                                                                                      
|
| | (c) |  | Mr. Skjodt directly owns 141,050 shares of Common Stock, 3,000
shares of Series B Preferred and warrants to acquire 84,507 shares
of Common Stock. He also has the right to acquire 7,500 shares of
Common Stock pursuant to stock options. He may be deemed to share
voting and dispositive power with respect to the securities listed
below for Samerian LLP, in which Mr. Skjodt is a Partner. (The total
beneficial ownership for Mr. Skjodt shown in the table also includes
the maximum number of securities that Mr. Skjodt could acquire if he
were named the designee of, and exercised, the option held by
National Lampoon Acquisition Group, LLC, described in (j) below.)                                                      
|
| | (d) |  | Christopher R. Williams directly owns 121,721 shares of Common Stock
(he also has been granted an option by Mr. Durham to acquire 2,307
shares of Series B Preferred and warrants for 64,987 shares of
Common Stock).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (e) |  | Diamond Investments, LLC directly owns 92,399 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| | (f) |  | DC Investments, LLC directly owns 5,000 shares of Series B Preferred
and warrants to purchase 140,845 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (g) |  | Judy B. Laikin directly owns 26,000 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (h) |  | Samerian LLP directly owns 20,000 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | (i) |  | DW Leasing Company, LLC directly owns 17,350 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| | (j) |  | National Lampoon Acquisition Group, LLC holds an option permitting
it, or its designees, to acquire 20,095 shares of Series B Preferred
and warrants for 566,056 shares of Common Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Each member of the NLAG Group disclaims beneficial ownership of the securities
held by the other members of the NLAG Group.



---

|(6) |  | Consists of options to purchase shares of Common Stock.                                            
|--- |  | ---------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(7) |  | Includes 2,500 shares of Series B Preferred and warrants to purchase 70,423 shares of Common Stock.




ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

Bruce Vann, one of our directors, is a partner of the law firm Kelly Lytton and
Vann LLP and has been retained by us for various legal matters. Legal expenses
of approximately $119,000 were incurred with respect to work performed by Mr.
Vanns firm for us during the fiscal year ended July 31, 2002.

On July 14, 1986, James P. Jimirro, our Chairman, President and Chief Executive
Officer purchased 192,000 shares of our common stock for approximately
$115,000. For such shares, we received the sum of approximately $58,000 and a
note (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 $151,000.




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)

23



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|      |  |                                                                                                                                                        
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Companys Second Amended and Restated Articles of
Incorporation (1)                                                                                    
|3.2   |  | Companys Amended and Restated Bylaws (1)                                                                                                              
|4.1   |  | NLAG Registration Rights Agreement, dated May 17, 2002, among
the Company, the members of the NLAG Group, and GTH Capital, Inc. (1)                    
|4.2   |  | Jimirro Registration Rights Agreement, dated May 17, 2002,
between the Company and James P. Jimirro (1)                                                
|4.3   |  | Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan (2)                                                                   
|4.4   |  | Piggyback Registration Rights Agreement, dated September 3, 2002 (5)                                                                                   
|10.1  |  | First Amendment to Preferred Stock and Warrant Purchase Agreement, dated as of May 17, 2002 (1)                                                        
|10.2  |  | 2002 Employment Agreement Between J2 Communications and James
P. Jimirro, dated May 17, 2002 (1)                                                       
|10.3  |  | Note Termination Agreement, dated May 17, 2002, between the Company and James P. Jimirro (1)                                                           
|10.4  |  | Security Agreement, dated May 17, 2002, between the Company and James P. Jimirro (1)                                                                   
|10.5  |  | Absolute Assignment, dated May 17, 2002, between the Company and James P. Jimirro (1)                                                                  
|10.6  |  | Termination of Stock Appreciation Rights Agreement, dated May
17, 2002, between the Company and James P. Jimirro (1)                                   
|10.7  |  | Mutual Release, dated May 17, 2002, among the Company, James P.
Jimirro and the members of the NLAG Group (1)                                          
|10.8  |  | Restated Indemnification Agreement, dated May 17, 2002, between
the Company and James P. Jimirro (1)                                                   
|10.9  |  | 2002 Employment Agreement Between J2 Communications and Daniel
S. Laikin, dated May 17, 2002 (1)                                                       
|10.10 |  | Non-Qualified Stock Option Agreement, dated May 17, 2002,
between the Company and Daniel S. Laikin (1)                                                 
|10.11 |  | Indemnification Agreement, dated May 17, 2002, between the
Company and Daniel S. Laikin. (2)                                                           
|10.12 |  | Letter, dated May 17, 2002, regarding Termination of Surviving
Provisions of Letter Agreement, from the Company to Daniel S. Laikin
and Paul Skjodt (1)
|10.13 |  | Warrant Agreement, dated May 17, 2002, between the Company and
GTH Capital, Inc (1)                                                                    
|10.14 |  | Voting Agreement, dated May 17, 2002, among each of the
members of the NLAG Group and James P. Jimirro (1)                                             
|10.15 |  | Promissory Notes issued May 17, 2002, by the Company to law firms (1)                                                                                  
|10.16 |  | Form of Common Stock Warrant (including Schedule identifying material
terms (1)                                                                        
|10.17 |  | Agreement between Registrant and Harvard Lampoon, Inc. dated October 1, 1998 (3)                                                                       
|10.18 |  | First Amendment to Office Lease between Registrant and Avco
Center Corporation dated April 21, 2000 (4)                                                
|10.19 |  | Letter Agreement between Registrant and Batchelder & Partners,
Inc., dated August 16, 2000 (4)                                                         

24



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##### Table of Contents



|      |  |                                                                                                                                                                                
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20 |  | Amendment to Letter Agreement between Registrant and
Batchelder & Partners, Inc. dated August 16, 2000 (4)                                                                     
|10.21 |  | Warrant Issued by Registrant to George Vandemann dated August 18,
2000 (4)                                                                                                     
|10.22 |  | Asset Purchase Agreement dated August 30, 2002 between
National Lampoon Networks, Inc., Burly Bear Network, Inc.,
Constellation Venture Capital, L.P. and J2 Communications (5)
|10.23 |  | Consulting Agreement with Zelnick Media and related Warrant Agreements (6)                                                                                                     
|10.24 |  | Advisory Agreement with SBI USA and related Warrant Agreement (6)                                                                                                              
|21    |  | Subsidiaries of Registrant (7)                                                                                                                                                 
|27    |  | Financial Data Schedule (7)                                                                                                                                                    
|99.1  |  | [Certification pursuant to Section 906 of Sarbanes-Oxley]                                                                                                                      



---

|(1) |  | Incorporated by reference to Form 8-K filed on May 31, 2002.                                                                              
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Incorporated by reference to Form S-8 filed on June 26, 2002.                                                                             
|   
|   
|   
|   
|(3) |  | Incorporated by reference to Form 10-Q for the period ended October 31,
1998.                                                             
|   
|   
|   
|   
|(4) |  | Incorporated by reference to Form 10-K for the fiscal year ended July 31,
1999.                                                           
|   
|   
|   
|   
|(5) |  | Incorporated by referenced to Form 8-K filed on September 9, 2002.                                                                        
|   
|   
|   
|   
|(6) |  | Filed herewith                                                                                                                            
|   
|   
|   
|   
|(7) |  | Filed electronically herewith with the Securities and Exchange Commission,
omitted in copies distributed to shareholders or other persons.

(b)  FORMS 8-K

On May 31, 2002 we filed a Report on Form 8-k with respect to the
completion of the reorganization transactions previously reported in our Form
8-K filed on April 29, 2002 (the Reorganization Transactions), involving a
group headed by Daniel S. Laikin, Paul Skjodt and Timothy S. Durham and also
including National Lampoon Acquisition Group LLC, a California limited
liability company; Samerian, LLP, an Indiana limited liability partnership;
Diamond Investments, LLC, an Indiana limited liability company; DW Leasing
Company, LLC, an Indiana limited liability company; Christopher R. Williams;
Helen C. Williams; Judy B. Laikin; Ronald Holzer; and DC Investments, LLC, an
Indiana limited liability company (DCI)(collectively, the NLAG Group), and
James P. Jimirro, the Companys Chairman of the Board, President and Chief
Executive Officer. Certain of the Reorganization Transactions were undertaken
pursuant to a Preferred Stock and Warrant Purchase Agreement, dated April 25,
2002, as amended by the First Amendment to Preferred Stock and Warrant Purchase
Agreement, dated May 17, 2002 (the Purchase Agreement). The amendment added
Mr. Holzer and DCI as parties to the Purchase Agreement. As part of the
Reorganization Transactions, our Articles of Incorporation were amended on May
17, 2002 to designate 68,406 of the previously authorized 2,000,000 shares of
Preferred Stock as Series B Convertible Preferred Stock (Series B Preferred),
with each share of Series B Preferred being convertible into 28.169 shares of
Common Stock. The shares of Series B Preferred vote on a converted basis as a
class with the shares of Common Stock. Pursuant to the Purchase Agreement,
35,244 units, with each unit consisting of one share of Series B Preferred and
a warrant to purchase 28.169 shares of Common Stock, were issued to five
members of the NLAG Group for an aggregate purchase price of $3,524,400.

On June 2, 2000 we filed a Form 8-K announcing that we raised an
additional $500,000 through the sale of additional units of convertible
preferred stock and a warrant to purchase shares of the Companys common stock.
The units were sold to Daniel S. Laikin and Timothy Durham, shareholders and
members of our board, and members of the group which had earlier purchased
units at an initial closing on May 17, 2002.

On July 30, 2002 we filed a Report on Form 8-K with respect the denial by
Nasdaq of our appeal of the delisting of our common stock from the Nasdaq
SmallCap Market. Our common stock trades on the Over-the-Counter (OTC) Bulletin
Board.

(c)  SEE (a) ABOVE

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##### Table of Contents






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: October 29, 2002

| |  |     |  |                                          
| |  | --- |  | -----------------------------------------
| |  | By: |  | /s/   James
P. Jimirro                   
| |  |     |  |                                          
| |  |     |  | James P. 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.

|                        |  |                                                                                                        |  |                 
|----------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ----------------
|SIGNATURE               |  | TITLE                                                                                                  |  | DATE            
|                        |  |                                                                                                        |  |                 
|                       
|/s/James P. Jimirro     |  | Director, Chairman of the Board of
Directors and Chief Executive
Officer (Principal Executive
Officer) |  | October 29, 2002
|                       
|/s/James Toll           |  | Chief Financial Officer                                                                                |  | October 29, 2002
|                       
|/s/James Fellows        |  | Director                                                                                               |  | October 29, 2002
|                       
|/s/Bruce Vann           |  | Director                                                                                               |  | October 29, 2002
|                       
|/s/Daniel S. Laikin     |  | Director, Chief Operating Officer                                                                      |  | October 29, 2002
|                       
|Timothy S. Durham       |  | Director                                                                                               |  |                 
|                       
|/s/Paul Skjodt          |  | Director                                                                                               |  | October 29, 2002
|                       
|/s/Joshua A. Finkenberg |  | Director                                                                                               |  | October 29, 2002

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Certification by CEO and CFO pursuant to Section 302 of Sarbanes-Oxley

CERTIFICATIONS

James P. Jimirro, President and Chief Executive Officer and James Toll,
Chief Financial Officer, certify that:



| | 1. |  | We have reviewed this annual report on Form 10-K of J2
Communications;                                                                                                                                                                                                                                                   
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on our knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
|
| | 3. |  | Based on our knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial conditions, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.                  
|
| | 4. |  | The registrants other certifying officers and ourselves are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in the Exchange Act Rules 13a-14 and 15d-14, for
the registrant to have:                                                                                        

|   |  |                                                                                                                                                                                                                                                                                             
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | Designed such disclosure controls and procedures to
ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by
others within those entities, particularly during the period in
which this annual report is being prepared;
|  
|b) |  | Evaluated the effectiveness of the registrants
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this annual report (the Evaluation
Date); and                                                                                                  
|  
|c) |  | Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;                                                                                                                        



| | 5. |  | The registrants other certifying officers and ourselves have
disclosed, based on our most recent evaluation, to the registrants
auditors and the audit committee of registrants board of directors (or
persons performing the equivalent functions):
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|   |  |                                                                                                                                                                                                                                                                                               
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) |  | All significant deficiencies in the design or operation
of internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data
and have identified for the registrants auditors any material
weaknesses in internal controls; and
|  
|b) |  | Any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrants internal controls; and                                                                                                                                        



| | 6. |  | The registrants other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Dated: October 28, 2002



| | /s/ James P. Jimirro
James P. Jimirro
| | -------------------------------------



| | /s/ James Toll
James Toll
| | -------------------------

27



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J2 COMMUNICATIONS AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JULY 31, 2002, July 31, 2001 and July 31, 2000

|                                                                                                 |  |         
|------------------------------------------------------------------------------------------------ |  | --------
|Report of Independent Public Accountants                                                         |  | F-2, F-3
|                                                                                                
|Consolidated Balance Sheets as of July 31, 2002 and 2001                                         |  | F-4     
|                                                                                                
|Consolidated Statements of Operations for the Years
Ended July 31, 2002, 2001 and 2000           |  | F-5     
|                                                                                                
|Consolidated Statements of Shareholders Equity
for the Years Ended July 31, 2002, 2001 and 2000 |  | F-6     
|                                                                                                
|Consolidated Statements of Cash Flows for the Years
Ended July 31, 2002, 2001 and 2000           |  | F-7     
|                                                                                                
|Notes to Consolidated Financial Statements                                                       |  | F-8     

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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, 2002, and 2001,
and the related consolidated statements of operations, shareholders equity and
cash flows for each of the two years in the period 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, 2002 and the results of their consolidated
operations and their consolidated cash flows for each of the two years in the
period ended July 31, 2002 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 A to the
consolidated financial statements, the Companys net losses of $1,613,334 and
$3,076,516 in the last two years, negative working capital of $174,665 and
accumulated deficit of $9,892,008 at July 31, 2002 raise substantial doubt
about their ability to continue as a going concern. Managements plans in
regard to these matters are also described in Note A. 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
September 23, 2002

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##### Table of Contents



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

EXPLANATORY NOTE REGARDING REPORT OF
INDEPENDENT PUBLIC ACCOUNTANTS

On July 30, 2001, we decided to no longer engage Arthur Andersen LLP
(Andersen) as our independent public accountants and engaged Stonefield
Josephson, Inc. to serve as our independent public accountants for the year
ending July 31, 2002. More information regarding our change in independent
public accountants is contained in a Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 12, 2001 and amended on August 24,
2001.

We could not obtain permission of Andersen to the inclusion in this Annual
Report on Form 10-K of their Report of Independent Public Accountants, above.
Accordingly, the above Report of Independent Public Accountants is merely
reproduced from our Annual Report on Form 10-K for the year ended July 31, 2002
(although the consolidated balance sheet as of July 31. 2001, and the
consolidated statements of operations, shareholders equity and cash flows for
the year ended July 31, 1999 referred to in that report are not included
herein) and does not include the manual signature of Andersen.

Because Andersen has not consented to the inclusion of its report in this
Annual Report, it may be more difficult to seek remedies against Andersen and
the ability to seek relief against Andersen may be impaired.

30



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J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                                                      |                            |           |                           |           |                |           |            |           |  |           | 
|------------------------------------------ | -------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------- | ------------------------- | --------- | -------------- | --------- | ---------- | --------- |  | --------- | 
|                                           |                                                                                                                      |                            |           |                           |           | AS OF JULY 31,
|                                           |                                                                                                                      |                            |           |                           |           |               
|                                           |                                                                                                                      |                            |           |                           |           | 2002           |           | 2001      
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|CURRENT ASSETS                             |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           | Cash and cash equivalents                                                                                            |                            | $         | 1,024,207                 |           |                | $         | 324,472    |          
|                                           | Prepaid expenses and other current assets                                                                            |                            |           | 17,323                    |           |                |           | 32,685     |          
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           |                                                                                                                      |                            |           | Total current assets      |           |                | 1,041,530 |            |           |  | 357,157   | 
|NON-CURRENT ASSETS                         |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           | Fixed assets, net of accumulated depreciation                                                                        |                            |           | 7,123                     |           |                |           | 8,451      |          
|                                           | Intangible assets, net of accumulated amortization                                                                   |                            |           | 2,696,154                 |           |                |           | 2,936,154  |          
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           |                                                                                                                      |                            |           | Total non-current assets  |           |                | 2,703,277 |            |           |  | 2,944,605 | 
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|TOTAL ASSETS                               |                                                                                                                      | $                          | 3,744,807 |                           |           | $              | 3,301,762 |           
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|LIABILITIES AND SHAREHOLDERS EQUITY       |                                                                                                                      |                            |           |                           |           |                |           |           
|CURRENT LIABILITIES                        |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           | Accounts payable                                                                                                     |                            | $         | 310,951                   |           |                | $         | 242,451    |          
|                                           | Accrued expenses                                                                                                     |                            |           | 490,244                   |           |                |           | 620,705    |          
|                                           | Settlement payable                                                                                                   |                            |           |                          |           |                |           | 203,117    |          
|                                           | Stock appreciation rights payable                                                                                    |                            |           |                          |           |                |           | 843,096    |          
|                                           | Extension payments                                                                                                   |                            |           |                          |           |                |           | 200,000    |          
|                                           | Notes payable                                                                                                        |                            |           | 415,000                   |           |                |           |           |          
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           |                                                                                                                      |                            |           | Total current liabilities |           |                | 1,216,195 |            |           |  | 2,109,369 | 
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           |                                                                                                                      | TOTAL LIABILITIES          |           |                           | 1,216,195 |                |           |            | 2,109,369 | 
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|SHAREHOLDERS EQUITY                       |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           | Preferred Stock, no par value, 2,000,000 shares
authorized, no shares issued and outstanding
(cancelled, see Note F) |                            |           |                          |           |                |           |           |          
|                                           | Series B Preferred Stock, no par value, 68,406 shares
Authorized, 40,244 shares issued and outstanding               |                            |           | 2,585,318                 |           |                |           |           |          
|                                           | Common Stock, no par value, 15,000,000 shares authorized, 1,385,483 and 1,371,116 shares
issued, respectively        |                            |           | 9,986,762                 |           |                |           | 9,616,767  |          
|                                           | Less: Note receivable on common stock                                                                                |                            |           | (151,460                  | )         |                |           | (145,700   | )        
|                                           | Accumulated Deficit                                                                                                  |                            |           | (9,892,008                | )         |                |           | (8,278,674 | )        
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|                                           |                                                                                                                      | TOTAL SHAREHOLDERS EQUITY |           |                           | 2,528,612 |                |           |            | 1,192,393 | 
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY |                                                                                                                      | $                          | 3,744,807 |                           |           | $              | 3,301,762 |           
|                                           |                                                                                                                      |                            |           |                           |           |                |           |           

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

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J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |            |           |  
|------------------------------------------------------------------------ | -------------------------------------------------------- | ---------------------------- | ---------- | ---------------------------- | --------- | ---- | ---------- | ---------- | --------- | - | --------- | ---------- | --------- | -
|                                                                         |                                                          |                              |            | FOR THE YEARS ENDED JULY 31,
|                                                                         |                                                          |                              |            |                             
|                                                                         |                                                          |                              |            | 2002                         |           | 2001 |            | 2000      
|                                                                         |                                                          |                              |            |                              |           |      |            |           
|REVENUES                                                                 |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         | Trademark                                                |                              | $          | 913,491                      |           |      | $          | 270,408    |           |   | $         | 1,454,239  |          
|                                                                         | Video                                                    |                              |            | 19,208                       |           |      |            | 22,151     |           |   |           | 16,020     |          
|                                                                         | Internet                                                 |                              |            | 10,788                       |           |      |            | 13,685     |           |   |           | 9,956      |          
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         |                                                          | Total revenue                |            | $                            | 943,487   |      |            | $          | 306,244   |   |           | $          | 1,480,215 |  
|COSTS AND EXPENSES                                                       |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         | Costs related to trademark revenue                       |                              |            | 88,155                       |           |      |            | 22,221     |           |   |           | 144,578    |          
|                                                                         | Costs related to video revenue                           |                              |            | 1,176                        |           |      |            | 4,580      |           |   |           | 3,583      |          
|                                                                         | Costs related to internet revenue                        |                              |            | 32,256                       |           |      |            | 36,040     |           |   |           | 283,929    |          
|                                                                         | Amortization of intangible assets                        |                              |            | 240,000                      |           |      |            | 240,000    |           |   |           | 240,000    |          
|                                                                         | Proxy solicitation                                       |                              |            | 545,887                      |           |      |            | 1,532,837  |           |   |           |            |          
|                                                                         | Selling, general & administrative expenses               |                              |            | 2,538,282                    |           |      |            | 1,221,338  |           |   |           | 1,101,784  |          
|                                                                         | Stock appreciation rights (benefit)/expense              |                              |            | (843,096                     | )         |      |            | 379,695    |           |   |           | (1,148,056 | )        
|                                                                         | Conversion of stock appreciation rights
to stock options |                              |            | 140,894                      |           |      |            |           |           |   |           |           |          
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         |                                                          | Total costs and expenses     |            |                              | 2,743,554 |      |            |            | 3,436,711 |   |           |            | 625,818   |  
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         | OPERATING (LOSS)/INCOME                                  |                              |            | (1,800,067                   | )         |      |            | (3,130,467 | )         |   |           | 854,397    |          
|OTHER INCOME/(EXPENSE)                                                   |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         | Interest income                                          |                              |            | 12,849                       |           |      |            | 55,551     |           |   |           | 87,365     |          
|                                                                         | Minority interest in income of
consolidated subsidiary   |                              |            |                             |           |      |            |           |           |   |           | (113,846   | )        
|                                                                         | Reduction of deferred payroll                            |                              |            | 175,484                      |           |      |            |           |           |   |           |           |          
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         |                                                          | Total other (expense)/income |            |                              | 188,333   |      |            |            | 55,551    |   |           |            | (26,481   | )
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|                                                                         | (LOSS)/INCOME BEFORE INCOME TAXES                        |                              |            | (1,611,734                   | )         |      |            | (3,074,916 | )         |   |           | 827,916    |          
|Provision for income taxes                                               |                                                          |                              | 1,600      |                              |           |      | 1,600      |            |           |   | 1,500     |           
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|NET (LOSS)/INCOME                                                        |                                                          | $                            | (1,613,334 | )                            |           | $    | (3,076,516 | )          |           | $ | 826,416   |           
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|(Loss)earnings per share  basic                                         |                                                          | $                            | (1.17      | )                            |           | $    | (2.26      | )          |           | $ | 0.64      |           
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|Weighted average number of common
shares  basic                         |                                                          |                              | 1,380,597  |                              |           |      | 1,358,342  |            |           |   | 1,289,930 |           
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|Earnings/(loss) per share  diluted                                      |                                                          | $                            | (1.17      | )                            |           | $    | (2.26      | )          |           | $ | 0.62      |           
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           
|Weighted average number of common
and common equivalent shares  diluted |                                                          |                              | 1,380,597  |                              |           |      | 1,358,342  |            |           |   | 1,341,661 |           
|                                                                         |                                                          |                              |            |                              |           |      |            |            |           |   |           |           

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

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J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

|                            |                              |  |           |        |           |   |           |           |        |  |               |         |          |   |           |         |        |   |               |        |       |   |        |       |  |   |            |            |   |   |           |            |  
|--------------------------- | ---------------------------- |  | --------- | ------ | --------- | - | --------- | --------- | ------ |  | ------------- | ------- | -------- | - | --------- | ------- | ------ | - | ------------- | ------ | ----- | - | ------ | ----- |  | - | ---------- | ---------- | - | - | --------- | ---------- | -
|                            |                              |  | Preferred |        | Preferred |   | Common    |           | Common |  | Note          |         |          |   |           |         |        |   |               |        | Total
|                            |                              |  | Stock     |        | Stock     |   | Stock     |           | Stock  |  | Receivable on |         | Treasury |   |           |         |        |   | Shareholders'
|                            |                              |  | Shares    |        | Amount    |   | Shares    |           | Amount |  | Common Stock  |         | Stock    |   | Deficit   |         | Equity
|                            |                              |  |           |        |           |   |           |           |        |  |               |         |          |   |           |         |       
|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      | )      |       |   |       |       |  | $ | (8,278,674 | )          |   | $ | 1,192,393 |           
|Interest on note receivable |                              |  |           |        |           |   |           |           |        |  |               |         |          |   |           |         |        |   | (5,760        | )      |       |   |        |       |  |   |            |            |   |   | (5,760    | )         
|                            | Preferred stock issued       |  |           | 40,244 |           |   |           | 2,585,318 |        |  |               |         |          |   |           |         |        |   |               |        |       |   |        |       |  |   |            |            |   |   |           | 2,585,318  |  
|                            | Exercise of stock options    |  |           |        |           |   |           |           |        |  |               | 14,367  |          |   |           | 83,101  |        |   |               |        |       |   |        |       |  |   |            |            |   |   |           | 83,101     |  
|                            | Warrants issued for services |  |           |        |           |   |           |           |        |  |               |         |          |   |           | 146,000 |        |   |               |        |       |   |        |       |  |   |            |            |   |   |           | 146,000    |  
|                            | Conversion of SARs          |  |           |        |           |   |           |           |        |  |               |         |          |   |           | 140,894 |        |   |               |        |       |   |        |       |  |   |            |            |   |   |           | 140,894    |  
|                            | Net loss                     |  |           |        |           |   |           |           |        |  |               |         |          |   |           |         |        |   |               |        |       |   |        |       |  |   |            | (1,613,334 | ) |   |           | (1,613,334 | )
|                            |                              |  |           |        |           |   |           |           |        |  |               |         |          |   |           |         |        |   |               |        |       |   |        |       |  |   |            |            |   |   |           |           
|Balance at July 31, 2002    |                              |  | 40,244    |        |           | $ | 2,585,318 |           |        |  | 1,385,483     |         |          | $ | 9,986,762 |         |        | $ | (151,460      | )      |       |   |       |       |  | $ | (9,892,008 | )          |   |   | 2,528,612 |           
|                            |                              |  |           |        |           |   |           |           |        |  |               |         |          |   |           |         |        |   |               |        |       |   |        |       |  |   |            |            |   |   |           |           

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

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J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |          |         |       |            |  
|--------------------------------------------------------- | ------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | --------- | ---------------------------------------------------------------- | ---------- | ---------------------------- | ---------- | ---------- | ---------- | ----- | --------- | -------- | ------- | ----- | ---------- | -
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            | FOR THE YEARS ENDED JULY 31,
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                             
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            | 2002                         |            | 2001       |            | 2000 
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |      
|CASH FLOWS FROM OPERATING ACTIVITIES:                     |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|                                                          |                                                                           | Net income/(loss)                                                                                  |           | $                                                                | (1,613,334 | )                            |            | $          | (3,076,516 | )     |           | $        | 826,416 |      
|                                                          |                                                                           | Adjustments to reconcile net income/(loss) to net
cash (used in)/provided by operating activities: |           |                                                                  |            |                              |            |            |            |       |           |          |         |      
|                                                          |                                                                           |                                                                                                    |           | Depreciation and amortization                                    |            |                              | 248,451    |            |            |       | 253,720   |          |         |       | 250,661    |  
|                                                          |                                                                           |                                                                                                    |           | Stock appreciation rights (benefit)/expense                      |            |                              | (843,096   | )          |            |       | 379,695   |          |         |       | (1,148,056 | )
|                                                          |                                                                           |                                                                                                    |           | Conversion of stock appreciation rights to stock options         |            |                              | 140,894    |            |            |       |          |          |         |       |           |  
|                                                          |                                                                           |                                                                                                    |           | Minority interest in income of consolidated subsidiary           |            |                              |           |            |            |       |          |          |         |       | 113,846    |  
|                                                          |                                                                           |                                                                                                    |           | Other                                                            |            |                              | (5,760     | )          |            |       | (5,760    | )        |         |       | (5,760     | )
|                                                          |                                                                           |                                                                                                    |           | Stock issued for services                                        |            |                              |           |            |            |       | 271,263   |          |         |       |           |  
|                                                          |                                                                           |                                                                                                    |           | Warrants/options granted for services                            |            |                              | 146,000    |            |            |       | 287,000   |          |         |       |           |  
|                                                          |                                                                           | Changes in assets and liabilities:                                                                 |           |                                                                  |            |                              |            |            |            |       |           |          |         |      
|                                                          |                                                                           |                                                                                                    |           | Decrease/(increase) in accounts receivable                       |            |                              |           |            |            |       | 6,580     |          |         |       | 2,063      |  
|                                                          |                                                                           |                                                                                                    |           | Decrease/(increase) in inventory                                 |            |                              |           |            |            |       |          |          |         |       | 9,642      |  
|                                                          |                                                                           |                                                                                                    |           | Decrease/(increase) in prepaid expenses and
other current assets |            |                              | 15,362     |            |            |       | (10,472   | )        |         |       | 415        |  
|                                                          |                                                                           |                                                                                                    |           | Decrease/(increase) in other assets                              |            |                              |           |            |            |       | 10,758    |          |         |       | 4,895      |  
|                                                          |                                                                           |                                                                                                    |           | (Decrease)/increase in accounts payable                          |            |                              | 68,500     |            |            |       | (49,115   | )        |         |       | 94,922     |  
|                                                          |                                                                           |                                                                                                    |           | (Decrease)/increase in accrued expenses                          |            |                              | (130,461   | )          |            |       | 246,013   |          |         |       | (56,885    | )
|                                                          |                                                                           |                                                                                                    |           | (Decrease)
in income taxes payable                               |            |                              |           |            |            |       | (25,378   | )        |         |       | (13,801    | )
|                                                          |                                                                           |                                                                                                    |           | Increase in notes payable                                        |            |                              | 415,000    |            |            |       |          |          |         |       |           |  
|                                                          |                                                                           |                                                                                                    |           | (Decrease) in settlement payable                                 |            |                              | (203,117   | )          |            |       |          |          |         |       |           |  
|                                                          |                                                                           |                                                                                                    |           | (Decrease) in minority interest payable                          |            |                              |           |            |            |       |          |          |         |       | (300,080   | )
|                                                          |                                                                           |                                                                                                    |           | (Decrease)/increase in extension payments                        |            |                              | (200,000   | )          |            |       | 200,000   |          |         |       |           |  
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|                                                          | NET CASH AND CASH EQUIVALENTS (USED IN)/
PROVIDED BY OPERATING ACTIVITIES |                                                                                                    |           | (1,961,561                                                       | )          |                              |            | (1,486,834 | )          |       |           | (233,299 | )      
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                     |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|                                                          |                                                                           | Purchase of fixed assets                                                                           |           |                                                                  | (7,123     | )                            |            |            | (2,356     | )     |           |          | (11,578 | )    
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|                                                          |                                                                           | NET CASH AND CASH EQUIVALENTS (USED IN)/
PROVIDED BY INVESTING ACTIVITIES                          |           |                                                                  | (7,123     | )                            |            |            | (2,356     | )     |           |          | (11,578 | )    
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                     |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|                                                          |                                                                           | Exercise of stock options                                                                          |           |                                                                  | 83,101     |                              |            |            | 35,329     |       |           |          | 270,686 |      
|                                                          |                                                                           | Exercise of Stock Appreciation Rights shares                                                       |           |                                                                  |           |                              |            |            | (105,419   | )     |           |          |        |      
|                                                          |                                                                           | Purchase of Series B preferred shares                                                              |           |                                                                  | 2,585,318  |                              |            |            |           |       |           |          |        |      
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|                                                          |                                                                           | NET CASH AND CASH EQUIVALENTS
PROVIDED BY FINANCING ACTIVITIES                                     |           |                                                                  | 2,668,419  |                              |            |            | (70,090    | )     |           |          | 270,686 |      
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|NET INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS      |                                                                           |                                                                                                    | 699,735   |                                                                  |            |                              | (1,559,278 | )          |            |       | 25,809    |         
|CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR            |                                                                           |                                                                                                    | 324,472   |                                                                  |            |                              | 1,883,750  |            |            |       | 1,857,941 |         
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|CASH AND CASH EQUIVALENTS
AT END OF YEAR                  |                                                                           | $                                                                                                  | 1,024,207 |                                                                  |            | $                            | 324,472    |            |            | $     | 1,883,750 |         
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|Cash paid for:                                            |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|                                                          |                                                                           |                                                                                                    | Taxes     |                                                                  | $          | 1,643                        |            |            | $          | 5,401 |           |          | $       | 3,230 |           
|                                                          |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|Supplemental disclosure of non-cash financing
Activities: |                                                                           |                                                                                                    |           |                                                                  |            |                              |            |            |            |       |           |         
|Stock and options issued for services                     |                                                                           |                                                                                                    | 146,000   |                                                                  |            |                              | 558,263    |            |            |       |          |         

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

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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.

On May 17, 2002, the Company, James P. Jimirro, the Chairman of the Board,
President and Chief Executive Officer , and a group of investors known
collectively as the National Lampoon Acquisition Group (NLAG) completed a
Preferred Stock and Warrant Purchase Agreement, (the Purchase Agreement).
The Purchase Agreement called for, among other items, the purchase of 35,244
units, consisting of one share of Series B Preferred Stock and a warrant to
purchase 28.169 shares of the Company common stock, at $100 a unit. The Series
B Preferred Stock votes on an as converted basis as a class with the shares
of Common Stock. As part of the transaction entered into related to the
Purchase Agreement, one member of NLAG became Chief Operating Officer of the
Company, and entered into an employment agreement with the Company, and a
voting agreement was entered into providing for the election of three Jimirro
nominees, three NLAG nominees, and one nominee acceptable to both parties The
consummation of the Reorganization Transactions effectively concluded all of
the litigation between the Company, the members of the NLAG Group and Mr.
Jimirro.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Companys net losses of
$1,613,334 and $3,076,516 in the last two years, negative working capital of
$174,665 and an accumulated deficit of $9,892,008 raise substantial doubt about
its ability to continue as a going concern. 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.

Management recognizes that the Company must generate additional resources to
enable it to continue operations. The Purchase Agreement with NLAG authorized
the purchase of 29,256 additional Series B units at $100 each. At July 31,
2002 there were 24,256 unissued Series B units authorized remaining to be
purchased by the NLAG. If purchased, that would result in $2,425,600 of
additional capital to the Company. However no assurance can be given that NLAG
or any other party will purchase the 24,256 Series B units authorized, but not
issued, at July 31, 2002. The Company may also issue shares of common stock or
other series of preferred stock to investors as a means of raising capital. In
addition, the Company is very active in increasing operations through
acquisitions and forming new divisions in an effort to increase cash flow and
profitability. If management is unable to raise additional capital and cannot
increase cash flow through operations, the Company will not be able to meet its
obligations and may have to cease operations.

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 has not
experienced any losses in such accounts. The Company considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.

Intangible Assets  Intangible Assets consists primarily of the National
Lampoon trademark and 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.

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

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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, 2002, 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. On August 1, 2002 the Company will adopt SFAS 142 Goodwill and other
Intangibles and has not yet evaluated the impact on its financial position or
results of operations.

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 adoption did not have a material impact to the Companys financial position
or results of operations since the Company, as of the year ended June 30, 2002,
has not participated in such activities covered under this pronouncement after
the effective date.

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 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.

In April 2002, the FASB issued Statement No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This Statement rescinds FASB Statement No. 4, Reporting Gains
and Losses from Extinguishment of Debt,
and an amendment of that Statement, FASB Statement No. 64, Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements and FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. This Statement amends
FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency
between the required accounting for sale-leaseback transactions and the
required accounting for certain lease modifications that have economic effects
that are similar to sale-leaseback transactions. The Company does not expect
the adoption to have a material impact to the Companys financial position or
results of operations.

In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This Statement addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring). The provisions of this Statement are effective for exit or
disposal activities that are initiated after December 31, 2002, with early
application encouraged. The Company does not expect the adoption to have a
material impact to the Companys financial position or results of operations.

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 reflect
the potential dilution of securities that could share in the earnings of an
entity that were outstanding for the period. s per share.

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

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|                                                                     |  |                           |           |               |  |               |           |  |  |  |           | 
|-------------------------------------------------------------------- |  | ------------------------- | --------- | ------------- |  | ------------- | --------- |  |  |  | --------- | 
|                                                                     |  | For the Fiscal Year Ended
|                                                                     |  |                          
|                                                                     |  | July 31, 2002             |           | July 31, 2001 |  | July 31, 2000
|                                                                     |  |                           |           |               |  |              
|Weighted average number of common
shares used to compute basic EPS   |  |                           | 1,380,597 |               |  |               | 1,358,342 |  |  |  | 1,289,930 | 
|Weighted average number of common
share equivalents                  |  |                           |          |               |  |               |          |  |  |  | 51,731    | 
|                                                                     |  |                           |           |               |  |               |           |  |  |  |           | 
|Weighted average number of common
shares used to compute diluted EPS |  |                           | 1,380,597 |               |  |               | 1,358,342 |  |  |  | 1,341,661 | 
|                                                                     |  |                           |           |               |  |               |           |  |  |  |           | 

Options to purchase 1,148,131 and 296,996 common shares and 1,133,633 and 0
warrants are not included in the calculation of diluted EPS in the fiscal year
ended July 31, 2002 and 2001 respectively because their inclusion would be
anti-dilutive.

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J2 COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE B  ACCRUED EXPENSES

Accrued expenses consist of:

|                                         |  |               |         |               |  |   |         | 
|---------------------------------------- |  | ------------- | ------- | ------------- |  | - | ------- | 
|                                         |  | As of         |         | As of        
|                                         |  | July 31, 2002 |         | July 31, 2001
|                                         |  |               |         |              
|Accrued legal fees                       |  | $             | 65,000  |               |  | $ | 15,000  | 
|Accrued accounting fees                  |  |               | 12,552  |               |  |   | 20,000  | 
|Accrued payroll and related items        |  |               | 111,124 |               |  |   | 85,889  | 
|Accrued video royalties                  |  |               | 15,000  |               |  |   | 49,017  | 
|Accrued television and other royalties   |  |               | 212,274 |               |  |   | 168,914 | 
|Deferred
payroll  officers/shareholders |  |               | 13,362  |               |  |   | 188,845 | 
|Other                                    |  |               | 60,932  |               |  |   | 93,040  | 
|                                         |  |               |         |               |  |   |         | 
|                                         |  | $             | 490,244 |               |  | $ | 620,705 | 
|                                         |  |               |         |               |  |   |         | 

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 May of 2006 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:

|     |  |        |         |           |  |       |        |  |  |   |         | 
|---- |  | ------ | ------- | --------- |  | ----- | ------ |  |  | - | ------- | 
|     |  | Office |         | Auto/     |  |       |        | 
|Year |  | Space  |         | Equipment |  | Total
|     |  |        |         |           |  |      
|2002 |  |        | 126,748 |           |  |       | 12,418 |  |  |   | 139,166 | 
|2003 |  |        | 129,878 |           |  |       | 11,994 |  |  |   | 141,872 | 
|2004 |  |        | 136,138 |           |  |       | 11,994 |  |  |   | 148,132 | 
|2005 |  |        | 136,138 |           |  |       | 11,994 |  |  |   | 148,132 | 
|2006 |  |        | 22,690  |           |  |       | 4,997  |  |  |   | 27,687  | 
|     |  |        |         |           |  |       |        |  |  |   |         | 
|     |  | $      | 551,592 |           |  | $     | 53,397 |  |  | $ | 604,989 | 

The Companys aggregate lease payments were approximately $139,166, $142,433,
and $99,000 and for the years ended July 31, 2002, 2001 and 2000, 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 $16,000, $3,000, and $9,000 and for the years
ended July 31, 2002, 2001 and 2000, respectively.

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Guber-Peters Agreement  Pursuant to a July 24, 1987 Rights Agreement, NLI
granted the right to produce National Lampoon television programming to
Guber-Peters Entertainment Company (GPEC). NLI reacquired these rights from
GPEC pursuant to an October 1, 1990 Termination Agreement (Termination
Agreement) for the sum of $1,000,000, of which $500,000 was paid upon
execution. The remaining $500,000 is contingent on and payable through a 17.5%
royalty on NLIs cash receipts from each program produced by NLI or any
licensee (subject to certain minimum royalties for each program produced). The
Company guaranteed all of NLIs obligations under the Termination Agreement and
is the successor-in-interest to NLI as a result of its acquisition of NLI. As
of July 31, 2002, the Company has recorded royalty expense of approximately
$309,000 relating to the Termination Agreement including approximately $35,330,
$9,000, and $83,000 during the years ended July 31, 2002, 2001, and 2000,
respectively.

Employment Agreement  The Company has entered into a 2002 Employment Agreement
dated May 17, 2002 with James P. Jimirro, its Chairman, President and Chief
Executive Officer. The 2002 agreement terminated the 1999 Agreement and in
exchange for consideration of $1,100,00, Mr. Jimirro forgave the principal
balance and all interest accrued on all Contingent Notes and deferred salaries
totaling $3,224,482. Base salary for the Initial Term beginning January 1,
2002 and ending December 31, 2007 is $500,000 per year. If Mr. Jimirro remains
employed by the Company on December 31, 2003, the Jimirro Employment Agreement
will automatically be extended for an additional year. As of December 31, 2004
and December 31 of each year thereafter, so long as Mr. Jimirro remains
employed by the Company on such date, the Jimirro Employment Agreement will
again be automatically extended for an additional year so that at no time will
the remaining term under the Jimirro Employment Agreement be less than five
years. The Agreement can be cancelled after December 31, 2002 without cause
upon payment to Mr. Jimirro of a cash severance payment in the amount of
$1,400,000 and delivery of a promissory note providing for the Companys
payment to Mr. Jimirro of $1,000,000 in twelve equal monthly installments. To
secure future obligations to him, Mr. Jimirro was also granted a security
interest in substantially all of the Companys assets, including a pledge of
all the outstanding securities of all of their subsidiaries. In addition, Mr.
Jimirro will receive 50 percent of the amount the Company receives from
exploitation of the movie National Lampoons Van Wilder. The Agreement also
provides for the Company to grant Mr. Jimirro 5,000 shares of the Companys
common stock at that days fair market value on the last day of each month of
the Employment Term beginning January 31, 2003.

The Company has entered into a 2002 Employment Agreement dated May 17, 2002
with Daniel Laikin, its Director and Chief Operating Officer. The agreement
grants to Mr. Laikin compensation of $200,000 per year, which for the Agreement
year end May 17, 2003 will be paid in the form of Series B Preferred stock.
According to the Agreement, the Chief Operating Officer shall have general
operational control of the business and affairs of this corporation and reports
directly to the Board of Directors. Mr. Laikin was also granted 100,000 common
stock options at fair market value at date of grant, as part of the Agreement.

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.
The Company, on the advice of counsel, has eliminated that reserve as of July
31, 2002, which is reflected as a credit to legal fees and incorporated in
Selling general & administrative  expenses in the consolidated financial
statements.

Shareholder Rights Plan  On July 15, 1999, the Companys Board of Directors
adopted a Shareholder Rights Plan (Rights Plan). The Rights Plan was
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
carried a Purchase Right.

The Purchase Rights became redeemable upon the Acquisition on May 17,2002.
Subject to certain exceptions, the Purchase Rights were redeemable at a price
of $0.001 per right. Since the amount owed most Rightsholders was less than
$1.00, a letter was sent to all Rightsholders requesting they contact the
Company in order for them to receive the amount they were owed. As of October
15, 2002 none of the Rightsholders have requested payment.

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

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Security Agreement, is secured by the shares purchased. The unpaid principal
and interest outstanding at July 31, 2002 and 2001 was approximately $151,000
and $146,000, respectively.

NOTE E  MAJOR CUSTOMERS

During the year ended July 31, 2002, the Company earned revenue from three
significant customers of approximately $694,000 representing 21%, 15%, and 38%
of revenues. During the year ended July 31, 2001, the Company earned revenue
from three significant customers of approximately $245,000 representing 41%,
23% and 16% of revenues. 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.

NOTE F   STOCKHOLDER EQUITY

On May 17, 2002 the Company and the National Lampoon Acquisition Group (the
NLAG Group) entered into a Preferred Stock and Warrant Purchase Agreement,
pursuant to which we agreed to sell certain members of the NLAG Group 35,244
units, each such unit consisting of one share of Series B Preferred and a
warrant to purchase 28,169 shares of the Companys common stock at a purchase
price of $3.55 per share prior to the second anniversary of the date of
issuance of the warrant and $5.00 per share thereafter. The 35,244 units sold
were valued at $100 each, with the total amount due to the Company of
$3,524,400, reduced by $450,000 that had been previously paid to the Company in
the form of extensions of a prior letter agreement, and $574,000 which was in
the form of an offset for expenses previously paid by the NLAG that the Company
has agreed to pay pursuant to the Purchase Agreement.

Further as part of the May 17, 2002 Purchase Agreement, the Company amended and
restated the Restated Articles of Incorporation, as amended, to effect among
other things, the designation of 68,406 shares of the previously authorized
2,000,000 shares of Preferred Stock as Series B convertible Preferred Stock,
and the elimination of Series A Preferred shares as an authorized series of
preferred stock.

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NOTE G  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:

|                       |                   |  |           |          |             |   |                |             |          |   |       |       | 
|---------------------- | ----------------- |  | --------- | -------- | ----------- | - | -------------- | ----------- | -------- | - | ----- | ----- | 
|                       |                   |  |           |          |             |   | Option         |             | Weighted
|                       |                   |  | Number of |          | Exercise    |   | Average       
|                       |                   |  | Options   |          | Price Range |   | Exercise Price
|                       |                   |  |           |          |             |   |               
|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 |  |           | (12,002  | )           |   | $              | 1.69-$8.25  |          |   | $     | 2.94  | 
|                       |                   |  |           |          |             |   |                |             |          |   |       |      
|Balance, July 31, 2001 |                   |  | 296,996   |          |             | $ | 1.69-$14.00    |             |          | $ | 10.55 |      
|                       | Options granted   |  |           | 893,670  |             |   | $              | 3.50-$8.00  |          |   | $     | 3.96  | 
|                       | Options canceled  |  |           | (28,168  | )           |   | $              | 3.19-$16.13 |          |   | $     | 7.70  | 
|                       | Options exercised |  |           | (14,367  | )           |   | $              | 1.88-$$8.00 |          |   | $     | 5.78  | 
|                       |                   |  |           |          |             |   |                |             |          |   |       |      
|Balance, July 31, 2002 |                   |  | 1,148,131 |          |             | $ | 1.88-$16.13    |             |          | $ | 4.29  |      
|                       |                   |  |           |          |             |   |                |             |          |   |       |      

Of the exercisable options outstanding at July 31, 2002, 2001 and 2000,
1,118,131, 128,000, and 107,333, respectively, the weighted average exercise
prices were $5.65, $11.29, and $4.53. The weighted average remaining life of
the options outstanding at July 31, 2002 was 6.61 years.

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:

|                                                |  |                           |            |               |  |               |            |   |  |   |         | 
|----------------------------------------------- |  | ------------------------- | ---------- | ------------- |  | ------------- | ---------- | - |  | - | ------- | 
|                                                |  | For the Fiscal Year Ended
|                                                |  |                          
|                                                |  | July 31, 2002             |            | July 31, 2001 |  | July 31, 2000
|                                                |  |                           |            |               |  |              
|Net income/(loss)  as reported                 |  | $                         | (1,613,334 | )             |  | $             | (3,076,516 | ) |  | $ | 826,416 | 
|Net income/(loss)  pro forma                   |  | $                         | (3,887,825 | )             |  | $             | (3,426,802 | ) |  | $ | 341,421 | 
|Basic earnings/(loss) per share  as reported   |  | $                         | (1.17      | )             |  | $             | (2.26      | ) |  | $ | 0.64    | 
|Basic earnings/(loss) per share  pro forma     |  | $                         | (2.82      | )             |  | $             | (2.52      | ) |  | $ | 0.27    | 
|Diluted Earnings/(Loss) Per Share  as reported |  | $                         | (1.17      | )             |  | $             | (2.26      | ) |  | $ | 0.62    | 
|Diluted Earnings/(Loss) Per Share  pro forma   |  | $                         | (2.82      | )             |  | $             | (2.52      | ) |  | $ | 0.25    | 

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:

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|                                   |  |                           |      |               |  |               |       |   |  |  |       |  
|---------------------------------- |  | ------------------------- | ---- | ------------- |  | ------------- | ----- | - |  |  | ----- | -
|                                   |  | For the Fiscal Year Ended
|                                   |  |                          
|                                   |  | July 31, 2002             |      | July 31, 2001 |  | July 31, 2000
|                                   |  |                           |      |               |  |              
|Expected dividend yield            |  |                           | 00   | %             |  |               | 00    | % |  |  | 0.00  | %
|Expected stock price volatility    |  |                           | 77.2 | %             |  |               | 89.48 | % |  |  | 89.14 | %
|Risk free interest rate            |  |                           | 4.0  | %             |  |               | 5.5   | % |  |  | 6.27  | %
|Expected life of option (in years) |  |                           | 7.00 |               |  |               | 4.00  |   |  |  | 4.00  |  

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 had 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. At December 28, 2001 the stock
appreciation rights (SARs) were converted into common stock options having
the same terms as the original SARs. An expense of $140,894 was recorded in
relation to this conversion, as well as a benefit of $843,096 arising from the
elimination of the liability relating to the SARs. As of July 31, 2001, and
2000, the appreciation in these rights was approximately $843,000, and
$569,000, and is reflected under stock appreciation rights payable in the
accompanying consolidated balance sheets.

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J2 COMMUNICATIONS AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE H  INCOME TAXES

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

|                           |  |                           |       |               |  |               |       |  |  |   |       | 
|-------------------------- |  | ------------------------- | ----- | ------------- |  | ------------- | ----- |  |  | - | ----- | 
|                           |  | For the Fiscal Year Ended
|                           |  |                          
|                           |  | July 31, 2002             |       | July 31, 2001 |  | July 31, 2000
|                           |  |                           |       |               |  |              
|Federal income taxes       |  | $                         | 0     |               |  | $             | 0     |  |  | $ | 0     | 
|State income taxes         |  |                           | 1,600 |               |  |               | 1,600 |  |  |   | 1,500 | 
|                           |  |                           |       |               |  |               |       |  |  |   |       | 
|Provision for income taxes |  | $                         | 1,600 |               |  | $             | 1,600 |  |  | $ | 1,500 | 
|                           |  |                           |       |               |  |               |       |  |  |   |       | 

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

|                                                     |  |                           |     |               |  |               |    |   |  |  |     |   
|---------------------------------------------------- |  | ------------------------- | --- | ------------- |  | ------------- | -- | - |  |  | --- | --
|                                                     |  | For the Fiscal Year Ended
|                                                     |  |                          
|                                                     |  | July 31, 2002             |     | July 31, 2001 |  | July 31, 2000
|                                                     |  |                           |     |               |  |              
|Statutory federal income tax rate                    |  |                           | (34 | %)            |  |               | 34 | % |  |  | (34 | %)
|State income taxes                                   |  |                           |    |               |  |               |   |   |  |  |    |   
|Amortization of intangible assets                    |  |                           | 5   | %             |  |               | 7  | % |  |  | 10  | % 
|Other, primarily utilization of
valuation allowances |  |                           | 29  | %             |  |               | 27 | % |  |  | (44 | %)
|                                                     |  |                           |     |               |  |               |    |   |  |  |     |   
|Effective tax rate                                   |  |                           | 0   | %             |  |               | 0  | % |  |  | 0   | % 
|                                                     |  |                           |     |               |  |               |    |   |  |  |     |   

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 July 31, 2002 the Company has
available net operating loss carryforwards of approximately $6,295,430 and
$4,295,430 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:

|                                 |  |               |            |               |  |  |            |  
|-------------------------------- |  | ------------- | ---------- | ------------- |  |  | ---------- | -
|                                 |  | As of         |            | As of        
|                                 |  | July 31, 2002 |            | July 31, 2001
|                                 |  |               |            |              
|Net operating loss carryforwards |  |               | 2,518,172  |               |  |  | 1,925,000  |  
|Accrued liabilities              |  |               | 75,794     |               |  |  | 413,000    |  
|Royalty reserves                 |  |               | 6,000      |               |  |  | 87,000     |  
|                                 |  |               |            |               |  |  |            |  
|                                 |  |               | 2,599,966  |               |  |  | 2,425,000  |  
|Valuation allowance              |  |               | (2,599,966 | )             |  |  | (2,425,000 | )
|                                 |  |               |            |               |  |  |            |  
|Net deferred tax assets          |  |               |           |               |  |  |           |  
|                                 |  |               |            |               |  |  |            |  

Valuation allowances of $2,599,966 and $2,425,000 were recorded at July 31,
2002 and 2001, respectively, to offset the net deferred tax assets due to the
uncertainty of realizing the benefits of the tax assets in the future.

NOTE I  SEGMENT INFORMATION

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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, 2002, 2001 and 2000
concerning the Companys segments is as follows:

|                         |                                 |  |           |           |          |  |       |          |       |  |   |        |  |  |   |            |  
|------------------------ | ------------------------------- |  | --------- | --------- | -------- |  | ----- | -------- | ----- |  | - | ------ |  |  | - | ---------- | -
|                         |                                 |  | Trademark |           | Internet |  | Video |          | Total
|                         |                                 |  |           |           |          |  |       |          |      
|Year Ended July 31, 2002 |                                 |  |           |           |          |  |       |          |       |  |   |        |  |  |   |           
|                         | Segment revenue                 |  | $         | 913,000   |          |  | $     | 11,000   |       |  | $ | 19,000 |  |  | $ | 943,000    |  
|                         | Segment operating income/(loss) |  |           | (940,000  | )        |  |       | (795,000 | )     |  |   | 18,000 |  |  |   | (1,716,000 | )
|                         | Identifiable assets             |  |           | 7,000     |          |  |       |         |       |  |   |       |  |  |   | 7,000      |  
|                         | Capital expenditures            |  |           |          |          |  |       |         |       |  |   |       |  |  |   |           |  
|                         | Depreciation expense            |  |           |          |          |  |       | 8,000    |       |  |   |       |  |  |   | 8,000      |  
|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             |  |           |          |          |  |       | 20,000   |       |  |   |       |  |  |   | 20,000     |  
|                         | Capital expenditures            |  |           |          |          |  |       |         |       |  |   |       |  |  |   |           |  
|                         | Depreciation expense            |  |           |          |          |  |       | 7,000    |       |  |   |       |  |  |   | 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             |  |           |          |          |  |       | 20,000   |       |  |   |       |  |  |   | 20,000     |  
|                         | Capital expenditures            |  |           |          |          |  |       | 12,000   |       |  |   |       |  |  |   | 12,000     |  
|                         | Depreciation expense            |  |           |          |          |  |       | 11,000   |       |  |   |       |  |  |   | 11,000     |  

A reconciliation of segment operating income/(loss) to net income/(loss) before
income taxes for the fiscal years ended July 31, 2002, 2001 and 2000 is as
follows:

|                                                                            |  |                           |            |               |  |               |            |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------------------------- | ---------- | ------------- |  | ------------- | ---------- | - |  | - | --------- | -
|                                                                            |  | For the Fiscal Year Ended
|                                                                            |  |                          
|                                                                            |  | July 31, 2002             |            | July 31, 2001 |  | July 31, 2000
|                                                                            |  |                           |            |               |  |              
|Segment operating (loss)/income                                             |  | $                         | (1,717,000 | )             |  | $             | (979,000   | ) |  | $ | (167,000  | )
|Amortization of intangible assets                                           |  |                           | (240,000   | )             |  |               | (240,000   | ) |  |   | (240,000  | )
|Stock appreciation rights benefit/(expense)                                 |  |                           | 843,000    |               |  |               | (380,000   | ) |  |   | 1,148,000 |  
|Conversion of SARs to stock options                                        |  |                           | (140,000   | )             |  |               |           |   |  |   |          |  
|Other income                                                                |  |                           | 175,000    |               |  |               |           |   |  |   |          |  
|Interest income                                                             |  |                           | 13,000     |               |  |               | 56,000     |   |  |   | 87,000    |  
|Corporate expenses incurred related to
the change in control of the Company |  |                           | (546,000   | )             |  |               | (1,533,000 | ) |  |   |          |  
|                                                                            |  |                           |            |               |  |               |            |   |  |   |           |  
|Net income/(loss) before income taxes                                       |  | $                         | (1,612,000 | )             |  | $             | (3,076,000 | ) |  | $ | 828,000   |  
|                                                                            |  |                           |            |               |  |               |            |   |  |   |           |  

NOTE I  SEGMENT INFORMATION (CONTINUED)

A reconciliation of reportable segment assets to consolidated total assets as
of July 31, 2002 and 2001 is as follows:

|                                     |  |                           |           |               |  |   |           | 
|------------------------------------ |  | ------------------------- | --------- | ------------- |  | - | --------- | 
|                                     |  | For the Fiscal Year Ended
|                                     |  |                          
|                                     |  | July 31, 2002             |           | July 31, 2001
|                                     |  |                           |           |              
|Total assets for reportable segments |  | $                         | 7,000     |               |  | $ | 20,000    | 
|Goodwill not allocated to segments   |  |                           | 2,696,000 |               |  |   | 2,936,000 | 
|Cash and cash equivalents            |  |                           | 1,024,000 |               |  |   | 324,000   | 
|Short-term investments               |  |                           |          |               |  |   |          | 
|Other unallocated amounts            |  |                           | 18,000    |               |  |   | 22,000    | 
|                                     |  |                           |           |               |  |   |           | 
|Total assets                         |  | $                         | 3,745,000 |               |  | $ | 3,302,000 | 
|                                     |  |                           |           |               |  |   |           | 

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NOTE J  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 $0, $71,000, and $322,000 and for the
fiscal years ended July 31, 2002, 2001 and 2000, respectively.

NOTE K  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 $119,000, $46,000, and $25,000 were incurred with
respect to work performed by Mr. Vanns firm for the Company during the fiscal
years ended July 31, 2002, 2001 and 2000.

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

NOTE L  SUBSEQUENT EVENTS

Effective September 3, 2002, National Lampoon Networks, Inc. (NLNI), a
subsidiary of the Company founded August 30, 2002, acquired substantially all
of the assets of Burly Bear. Burly Bear was in the business of producing and
distributing entertainment through a network of affiliated college and other
educational television stations. The asset Purchase Agreement provided that
Burly Bear received as consideration, $200,000 in cash less certain
transactional expenses, shares of the Companys common Stock having an
aggregate value of $400,000 (resulting in the issuance of 73,801 shares of the
Companys common stock), and 150 shares of NLNI common Stock, representing 15%
of NLNIs issued and outstanding shares of Common Stock. The cash
consideration paid in the acquisition was received by the Company on August 29,
2002, from two existing shareholders upon their exercise of an option to
acquire 2,000 units, with each unit consisting of one share of the Companys
Series B Convertible Preferred Stock and one warrant to purchase 28.169 shares
of the Companys Common Stock, for a purchase price of $100 per unit.

The Company has entered into a consulting agreement with Zelnick Media Group,
headed by Stauss Zelnick, the former head of 20th Century Fox and Bertlesman.
Mr. Zelnick and his affiliates are providing marketing, development, production
and branding assistance to us. In particular, Scott Ziegler, a partner of
Zelnick Media Group, is assisting directly in certain television activities.
Zelnick Media Group is being compensated solely by the issuance to it of
300,000 warrants. 137,500 warrants are exercisable at $6.50 per share and
137,500 warrants are exercisable at $1.00 per share. 10,500 warrants were
allocated to Scott Ziegler with the balance to Zelnick Media Group.

Douglas Bennett has been retained as an executive vice president to oversee the
operations of National Lampoon. As compensation, the NLAG group assigned to
Mr. Bennett, with the Companys consent, an option to acquire 213 shares of Series B
Preferred Stock which NLAG had retained in connection with the Reorganization
Transactions, and a warrant to purchase up to 6,000 shares of the
Companys Common Stock
during the five year term thereof at an exercise price of $3.55 per share
during the first two years of the term and at an exercise price of $5.00
per share during the last three years of such term.

The Company has entered into a one year advisory agreement with SBI USA, an
Investor Relations/Corporate Advisory Services (SBI) company which is
affiliated with Softbank Investment Group, the investment banking/venture
capital firm. According to the terms of this agreement, SBI will assist the
Company through introductions to certain parties including Broker-Dealers,
Market Markers or small Institutional Investors, and will engage in Market
Making activities related to the Companys stock. In consideration for such
services, the Company granted to SBI USA nine month purchase warrants for the
purchase of 50,000 shares of common stock at an exercise price of $7.00 per
share.

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##### Table of Contents



STATEMENT OF OPERATIONS BY QUARTER
J2 COMMUNICATIONS
Unaudited

|                                                                                         |  |          |            |           |  |             |          |             |  |          |         |           |  |             |          |             |  |   |          |   |  |   |          |   |  |   |          |   |  |   |            |  
|---------------------------------------------------------------------------------------- |  | -------- | ---------- | --------- |  | ----------- | -------- | ----------- |  | -------- | ------- | --------- |  | ----------- | -------- | ----------- |  | - | -------- | - |  | - | -------- | - |  | - | -------- | - |  | - | ---------- | -
|                                                                                         |  | July 31, |            | April 30, |  | January 31, |          | October 31, |  | July 31, |         | April 30, |  | January 31, |          | October 31,
|                                                                                         |  | 2002     |            | 2002      |  | 2002        |          | 2001        |  | 2001     |         | 2001      |  | 2001        |          | 2000       
|                                                                                         |  |          |            |           |  |             |          |             |  |          |         |           |  |             |          |            
|Net Sales                                                                                |  |          | 124,519    |           |  |             | 443,447  |             |  |          | 222,774 |           |  |             | 152,747  |             |  |   | 8,394    |   |  |   | 133,704  |   |  |   | 23,071   |   |  |   | 141,075    |  
|Gross (Loss)/Profit                                                                      |  |          | (1,706,592 | )         |  |             | (103,536 | )           |  |          | 235,119 |           |  |             | (225,058 | )           |  |   | (541,079 | ) |  |   | (972,975 | ) |  |   | (344,299 | ) |  |   | (1,272,114 | )
|                                                                                         |  |          |            |           |  |             |          |             |  |          |         |           |  |             |          |             |  |   |          |   |  |   |          |   |  |   |          |   |  |   |            |  
|Income (loss) before extraordinary
items and the cumulative effect of
accounting changes |  |          | (1,527,232 | )         |  |             | (101,726 | )           |  |          | 238,485 |           |  |             | (222,861 | )           |  |   | (537,214 | ) |  |   | (964,784 | ) |  |   | (326,587 | ) |  |   | (1,247,931 | )
|                                                                                         |  |          |            |           |  |             |          |             |  |          |         |           |  |             |          |             |  |   |          |   |  |   |          |   |  |   |          |   |  |   |            |  
|Net income (loss)                                                                        |  | $        | (1,527,232 | )         |  | $           | (101,726 | )           |  | $        | 238,485 |           |  | $           | (222,861 | )           |  | $ | (537,214 | ) |  | $ | (964,784 | ) |  | $ | (326,587 | ) |  | $ | (1,247,931 | )
|                                                                                         |  |          |            |           |  |             |          |             |  |          |         |           |  |             |          |             |  |   |          |   |  |   |          |   |  |   |          |   |  |   |            |  
|(Loss)/Earnings per share before
cumulative effects of accounting
changes                |  | $        | (1.11      | )         |  | $           | (0.07    | )           |  | $        | 0.17    |           |  | $           | (0.16    | )           |  | $ | (0.40    | ) |  | $ | (0.07    | ) |  | $ | (0.24    | ) |  | $ | (0.92      | )
|                                                                                         |  |          |            |           |  |             |          |             |  |          |         |           |  |             |          |             |  |   |          |   |  |   |          |   |  |   |          |   |  |   |            |  

46