UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K


(Mark One)





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





For the
Fiscal Year Ended July 31, 2008





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





For the
transition period from _______________ to ________________





Commission
File Number 001-32584





NATIONAL LAMPOON,
INC.


(Exact
name of registrant as specified in its charter)





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





8228
Sunset Boulevard


West Hollywood, California
90046


(Address
of principal executive offices)





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





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





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





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





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.





Yes o No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.





Yes o No x





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 o





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.





Large
accelerated filer o                                                                                           Accelerated
filer o





Non-accelerated
filer o (Do
not check if a smaller reporting
company)           Smaller
reporting company x





Indicate
by check mark whether the issuer is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No x





State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.  As of January 31, 2008, the aggregate market value of the
voting and non-voting common equity held by non-affiliates computed by reference
to the price at which the common equity was sold was $11,752,260.





Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.  The number of shares of the
registrant’s common stock, $0.0001 par value per share, outstanding as of
October 15, 2008 was 9,456,427.




DOCUMENTS
INCORPORATED BY REFERENCE





None











TABLE
OF CONTENTS





PagePART
      IITEM
      1.
            BUSINESS
            
            4ITEM
      1A.
            RISK FACTORS
            
            10ITEM
      2.
            PROPERTIES
            
            14ITEM
      3.
            LEGAL PROCEEDINGS
            
            15ITEM
      4.
            SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS
            
            15PART
      IIITEM
      5.
            MMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
      MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
            
            16ITEM
      6.
            SELECTED FINANCIAL DATA
            
            19ITEM
      7.
            MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
      RESULTS OF OPERATIONS
            
            19ITEM
      7A.
            QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK
            
            31ITEM
      8.
            FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
            
            F-1ITEM
      9.
            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
      FINANCIAL DISCLOSURE
            
            32ITEM
      9A(T).
            CONTROLS AND PROCEDURES
            
            32ITEM
      9B.
            OTHER INFORMATION
            
            33PART
      IIIITEM
      10.
            DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
      GOVERNANCE
            
            33ITEM
      11.
            EXECUTIVE COMPENSATION
            
            37ITEM
      12.
            SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
      AND RELATED STOCKHOLDER MATTERS
            
            41ITEM
      13.
            CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE
            
            43ITEM
      14.
            PRINCIPAL ACCOUNTING FEES AND SERVICES
            
            44ITEM
      15.
            EXHIBITS
            
            45













Note
Regarding Forward Looking Statements





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





·
            a
      decline in the general state of the economy, which impacts the amount of
      money spent by consumers for entertainment
  products,





·
            whether
      we will be able to raise capital as and when we need
  it,





·
            whether
      the entertainment products we produce or to which we license our brand
      will generate significant sales,





·
            whether
      our subsidiary, National Lampoon Networks, Inc., will be able to continue
      its relationships with its current advertisers and continue to attract new
      advertisers,





·
            our
      overall ability to successfully compete in our market and our
      industry,





·
            whether
      we will continue to receive the services of our executive officers and
      directors, particularly our Chief Executive Officer, Daniel S.
      Laikin,·
            unanticipated
      increases in development, production or marketing expenses related to our
      various business activities,





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














PART
I





ITEM
1.BUSINESS





History





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





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





Our
Business





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





·
            production
      and distribution of branded National Lampoon comedic content in the
      theatrical, home entertainment and digital markets,·
            licensing
      both our name and comedic content from our library for a wide variety of
      uses, including movies, television programming, radio broadcasts,
      recordings, electronic games and live events,·
            hosting
      approximately 60 Internet websites through which we sell advertising space
      and branded products,·
            reaching
      nearly 2 million college students in their dormitories and other places of
      residence through National Lampoon Network, our network of approximately
      200 affiliated college and other television stations,·
            developing
      and writing comedic content and licensing our brand for the publication of
      National Lampoon books,





Additionally,
because of our experience in the college and young adult market, we maintain
affiliations with and a presence at college campuses where we hold screenings
and distribute promotional goods as part of our distribution
network.





Motion
Picture Production and Distribution




We
produce feature films. Historically, motion pictures that carry our brand had
been produced and financed by third parties. We decided to develop, produce and
distribute motion pictures under the National Lampoon name in order to control
both the creative process and the distribution of the films and also to build a
film library and to expand our brand visibility.




As part
of our plan to increase the visibility of our brand in the film industry and to
expand our film library we also began acquiring and branding third-party films
for distribution in the U.S. and internationally.  For third party
films we pay finishing and prints and advertising costs that are recouped
through U.S. theatrical, home entertainment and international
sales.






4







In
October 2006 we invested in Red Rock Pictures Holdings, Inc. (“Red
Rock”).  We currently own approximately 14% of Red Rock’s outstanding
capital stock.  Red Rock was formed for the purpose of providing
financing and consulting services related to the production and exploitation of
motion pictures.We
have completed production on two films in partnership with Red Rock, “National Lampoon’s Bag Boy”and“National Lampoon’s
Ratko, the Dictator’s Son”. National Lampoon’s Bag Boy was delivered
during the year ended July 31, 2008 and National Lampoon’s Ratko: the
Dictator’s Sonis scheduled to be delivered during the first quarter of
the 2009 fiscal year.





We are in
post production on our third title, National Lampoon’s The Legend of
Awesomest Maximus, which we expect to deliver by the third quarter of the
2009 fiscal year.




We have
acquired distribution rights for seven films produced by unrelated third
parties.  We earn distribution fees from these films that we release
through all media including theatrical, home entertainment, foreign
distribution, and digital distribution.




We
released five motion pictures during the 2008 fiscal year, all of which we are
distributing. Of the titles released one was our production and four were
acquisitions. We expect to release at least five more titles during the 2009
fiscal year.




We have
an interest in National Lampoon Clubhouse, Inc., a production entity, which
produced the film Monster
Nightaka Trick or
Treat. Monster Nightwas released in the fall of 2006. During the 2007 fiscal year we licensed
the domestic and foreign video sales to a sub-distributor and terminated our
production agreement with Majestic Entertainment. We will no longer produce
films through National Lampoon Clubhouse.




The
following is a list of the 11 motion pictures in our library that we either
produced or acquired:





YearTitle
            
            Released
            
            Financier/DistributorNational
      Lampoon’s Monster Night
            
            2006
            
            National
      Lampoon Clubhouse, Inc.National
      Lampoon’s Bag Boy
            
            2008
            
            National
      Lampoon, Inc.National
      Lampoon’s Ratko the Dictator’s Son
            
            2009
            
            National
      Lampoon, Inc.National
      Lampoon’s Jake’s Booty Call
            
            2006
            
            The
      Romp, Inc.National
      Lampoon’s Electric Apricot: The Quest for Festaroo
            
            2007
            
            Bait
      ProductionsNational
      Lampoon’s Beach Party at the Treshold of Hell
            
            2008
            
            Threshold
      Productions, LLCNational
      Lampoon’s Homo Erectus
            
            2009
            
            Burnt
      Orange Development, LLCNational
      Lampoon’s One, Two, Many
            
            2008
            
            Breaking
      the Rules, LLCNational
      Lampoon’s Robodoc
            
            2009
            
            Robodoc,
      LLC.National
      Lampoon’s Bar Starz
            
            2009
            
            OBX
      ProductionsNational
      Lampoon’s the Legend of Awesomest Maximus
            
            2009
            
            National
      Lampoon, Inc.




We no
longer offer production services on third-party films. We earn revenues from
providing production services for our own productions as well as third party
productions that we acquire.




We are
currently developing for production and/or acquiring approximately four projects
per year which will carry the National Lampoon name. We have motion picture
output agreements with a domestic home video distributor and a cable television
broadcast company.  An output agreement guarantees a negotiated
payment or advance for the distribution rights for films in
development.  The minimum guarantee or advance may be paid over
various points of production of the film or upon full delivery of the finished
product.






5







We have
agreements with independent third parties for the limited platform theatrical
release and subsequent distribution of our films to home entertainment. During the 2008 fiscal
year, we released five films into a limited number of theaters in order to
promote the rental and sale on DVD.





Our
motion picture production and distribution revenues made up approximately 24% of
our revenues during the 2008 fiscal year.





Licensing





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





We
currently are a party to approximately 30 feature film branding
agreements.  Pursuant to these agreements, once the film is released
and begins earning revenues, the studio or distributor is entitled to recoup any
licensing fee, minimum guarantee or advance it paid to us under the agreement
and, if included in the agreement, interest.  Once this amount is
recouped, our participation in the revenues earned by the film may
begin.





The
following is a list of the 31 motion pictures bearing our brand:





YearTitle
            
            Released
            
            Financier/DistributorNational
      Lampoon’s Animal House
            
            1979
            
            Universal
      StudiosNational
      Lampoon Goes to the Movies
            
            1981
            
            United
      ArtistsNational
      Lampoon’s Class Reunion
            
            1982
            
            ABC/DisneyNational
      Lampoon’s Vacation
            
            1983
            
            Warner
      Bros.National
      Lampoon’s European Vacation
            
            1985
            
            Warner
      Bros.National
      Lampoon’s Class of ’86
            
            1986
            
            ParamountNational
      Lampoon’s Christmas Vacation
            
            1989
            
            Warner
      Bros.National
      Lampoon’s Loaded Weapon I
            
            1993
            
            New
      Line CinemaNational
      Lampoon’s Last Resort
            
            1994
            
            Trimark
      StudiosNational
      Lampoon’s Attack of the 52 Women
            
            1994
            
            ShowtimeNational
      Lampoon’s Senior Trip
            
            1995
            
            New
      Line CinemaNational
      Lampoon’s Favorite Deadly Sins
            
            1995
            
            ShowtimeNational
      Lampoon’s Dad’s Week Off
            
            1997
            
            ParamountNational
      Lampoon’s The Don’s Analyst
            
            1997
            
            ParamountNational
      Lampoon’s Men in White
            
            1998
            
            FoxNational
      Lampoon’s Golf Punks
            
            1998
            
            FoxNational
      Lampoon’s Van Wilder
            
            2001
            
            ArtisanNational
      Lampoon Presents Dorm Daze
            
            2003
            
            IndependentNational
      Lampoon’s Gold Diggers
            
            2005
            
            Lady
      P&A LLCNational
      Lampoon’s Blackball
            
            2005
            
            First
      Look EntertainmentNational
      Lampoon’s Going the Distance
            
            2005
            
            Think
      FilmsNational
      Lampoon’s Adam & Eve
            
            2006
            
            MRG
      Ent.National
      Lampoon’s Barely Legal
            
            2006
            
            Motion
      Picture Corp./Sony Pic. Rel.National
      Lampoon’s Cattle Call
            
            2006
            
            Cattle
      Call LLCNational
      Lampoon’s RepliKate
            
            2003
            
            Silver
      NitrateNational
      Lampoon’s Pledge This!
            
            2006
            
            Street
      Alien/Silver NitrateNational
      Lampoon’s Pucked (formerly Trouble with Frank)
            
            2006
            
            National
      Lampoon, Inc,National
      Lampoon’s Jake’s Booty Call
            
            2006
            
            National
      Lampoon, Inc.National
      Lampoon’s Dorm Daze II
            
            2006
            
            IndependentNational
      Lampoon’s Van Wilder II
            
            2006
            
            Lion’s
      GateNational
      Lampoon’s Van Wilder III: Freshman Year
            
            2009
            
            Tapestry
      Films, Inc./Paramount






6





We have
derived a substantial portion of our revenues from license fees relating to the
use of our name on new motion pictures and from royalties from previously
released motion pictures bearing our brand, including movies such as National Lampoon's Animal Houseand National Lampoon's
Vacation. Releasing a film with our brand enhances its ability to find
distribution outlets. Once a film is released with our brand, we earn revenues
from foreign sales, theatrical release, home video and DVD sales and rentals and
pay-per-view. Our licensing fees made up approximately 49.5% of our revenues
during the 2008 fiscal year.





National
Lampoon Networks




National
Lampoon Networks, Inc. (sometimes referred to in this report as "NLN") includes
our Internet, television and field marketing activities. Because of our
experience in the college and young adult market, we maintain affiliations with
college campuses where we hold live events, film screening and distribution of
promotional goods. Our customers, which are derived from various industries
including the beverage, motion pictures, mobile phone and pharmaceutical
industries, contract with us to provide these services.




NLN’s
Internet properties comprise several Internet destination sites including
NationalLampoon.com, DrunkUniversity.com, TOGATV.com, and
KnuckleheadVideo.com.  These destination sites are also part of the
National Lampoon Humor Network, an aggregated network of humor destinations on
the Internet.





Our
National Lampoon online networks now have over 200 affiliate websites and have
acquired or launched over 60 websites.  We believe that we provide an
appealing platform to those advertisers who want their commercial messages to
reach targeted young adult markets because we provide an integrated marketing
platform that includes Internet advertisers, on-air advertising, and field
marketing.





We
actively sell advertising space on these sites and networks in the form of video
streamed advertisements, full-page takeover advertisements and banner
advertisements, which we also provide for our titles in
distribution.





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





NLN's
television activities include delivering programming during the standard
academic school year to more than 200 affiliated college and other television
stations, reaching nearly two million college students in their dormitories and
other places of residence. Aside from providing an outlet for advertisers
targeting the college market, NLN develops, produces and distributes comedic
Internet and television programming to audiences through its network. NLN’s
activities made up approximately 23% of our revenues during the 2008 fiscal
year.






7







Publishing





During
the 2006 fiscal year we began publishing our books. As of July 31, 2008, we had
released 12 books including National Lampoon's Saddam Dump
[Saddam Hussein's Trial Blog], National Lampoon's Magazine
Rack, National
Lampoon's Jokes Jokes Jokes, National Lampoon's Not Fit For Print, National Lampoon's
Favorite Cartoons of the 21stCentury, National
Lampoon's Van Wilder Guide to Graduating College In Eight Years or More,
National Lampoon's Road Trip, National Lampoon's Animal House,
National Lampoon's Help!, National Lampoon's Jokes Jokes Jokes 2, National
Lampoon's Balls!and National Lampoon's Pimp it
Yourself. We expect to release approximately two books per year
going forward. Our publishing activities made up approximately 1% of our
revenues during the 2008 fiscal year.





Radio





In March
2005 NL Radio, LLC was formed.  We hold a 25% interest in this
entity.  NL Radio, LLC launched an entertainment radio format under
our brand.  We have licensed the content of our radio library, as well
as certain domain names, urls and websites, to NL Radio, LLC for this
purpose.  NL Radio, LLC used samples of the programming, called “pilot
programming,” to introduce the format and content to radio networks and local
stations.  If the programming is sold to a network it may be
syndicated, meaning that it would be distributed to stations affiliated with the
network.  Purchasers of the programming may broadcast segments of the
programming at their discretion, such as during “drive time” or as late night
programming.  The programming was launched on XM radio in fiscal
2007.  Our radio library includes approximately 80 hours of National
Lampoon radio programming consisting primarily of one to two minute short comedy
routines and one hour comedy sketches and parodies.  We earn revenues
from royalties when our programming is aired, ad sales, direct response
advertising and product promotion arrangements.  We also receive a
licensing fee equal to 8% of the gross receipts received by NL Radio, LLC from
all sources in connection with any use of our brand. Revenues from NL Radio, LLC
made up less than 1% of our revenues during the 2008 fiscal year.





Travel
Services Revenues





We
discontinued offering travel services and we do not expect to earn revenues from
this segment in the future.  During the year ended July 31, 2008,
revenues from travel services made up 1.5% of our revenues.  These
revenues were generated by the settlement of a legal action we brought against
one of our vendors.





Competition





Entertainment





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





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





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






8







Advertising





NLN
competes for advertisers with many other forms of advertising targeting the
young adult market.  These competing forms of advertising media
include other television and Internet advertising, radio, print, direct mail and
billboard.  NLN’s current list of advertisers continues to grow but
these advertisers are not contractually obligated to renew their advertising
contracts or to purchase set amounts of advertising in the future.  We
plan to continue to expand NLN by launching additional niche online networks and
by growing our existing networks by adding new Internet sites and driving
traffic to these sites. We have over 200 affiliates and have acquired or
launched over 60 websites to date. We intend to concentrate our efforts on
measured marketing and selling available advertising and marketing space on our
expanding network. We intend to continue to create, produce and acquire
programming for all of our web sites as well as our college television network
and capitalize on our expertise in the college and young adult market to
continue to grow revenue in these areas. Although NLN’s advertising and
promotion activities on the Internet have increased significantly during the
2008 fiscal year, NLN does not represent a significant presence in the
advertising industry.





Intellectual
Property





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





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





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





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





The
concurrent use agreement also provides that The Harvard Lampoon, Inc. will not
authorize any party to use the word “Lampoon” during the term of the agreement
without our written consent.  During the 2007 and 2008 fiscal years,
we paid The Harvard Lampoon, Inc. $66,070 and $0, respectively, in accordance
with the terms of this agreement.  We have accrued approximately
$45,550 in royalties as of July 31, 2008 due to The Harvard Lampoon,
Inc.





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






9







Employees





As of
October 15, 2008 we had 24 full-time employees.  We also hire
independent contractors, as needed.  We consider our employee
relations to be satisfactory at the present time.





ITEM
1A.RISK
FACTORS





In
addition to the factors discussed elsewhere in this report, the following risks
and uncertainties could materially adversely affect our business, financial
condition and results of operations.  Additional risks and
uncertainties not presently known to us or that we currently deem immaterial
also may impair our business operations and financial
condition.





Risks
Related To Our Business Operations





Our consolidated financial
statements have been prepared assuming that the Company will continue as a going
concern.





The
factors described below raise substantial doubt about our ability to continue as
a going concern. Our consolidated financial statements do not include any
adjustments that might result from this uncertainty. Our independent registered
public accounting firm has included an explanatory paragraph expressing doubt
about our ability to continue as a going concern in their audit reports for the
fiscal years ended July 31, 2008 and 2007.





We
sustained a net loss of $1,686,974 and a net loss attributable to common
stockholders of $3,272,572 for the fiscal year ended July 31,
2008.  As of July 31, 2008, we had an accumulated deficit of
$42,944,258.  Our last profitable quarter was the quarter ended July
31, 2008 and our last profitable fiscal year was the fiscal year ended July 31,
2000.  We may not attain operating profits in the future.





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





We have
not generated positive cash flow from operations over the past few
years.  Our capital requirements have been and will continue to be
significant.  In order to fund shortages of capital, we have borrowed
money from our major stockholders and sold our securities.  Our major
stockholders are not under any obligation to continue providing loans to
us.





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





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





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






10







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





We
may not be able to maintain the listing of our common stock on the American
Stock Exchange.





On
February 27, 2008 we received a letter from the American Stock Exchange which
indicated that we do not meet certain of the American Stock Exchange’s continued
listing standards as set forth in Part 10 of the Amex Company
Guide.  Specifically, we are not in compliance with Section
1003(a)(iv) of the Company Guide because we have sustained losses which are
substantial in relation to our overall operations or our existing financial
resources, or our financial condition has become so impaired that it appears
questionable, in the opinion of the American Stock Exchange, as to whether we
will be able to continue our operations and/or meet our obligations as they
mature.





We had
until March 27, 2008 to provide the American Stock Exchange with a specific plan
to achieve and sustain compliance with the continued listing
standards.  We submitted a plan to the American Stock Exchange on
March 27, 2008.  On May 16, 2008 we were notified by the American
Stock Exchange that our plan was accepted. On September 18, 2008 we were
notified that based on the staff’s review of the information we provided on
August 25, 2008, the American Stock Exchange extended our deadline to regain
compliance to November 15, 2008.





The
American Stock Exchange accepted our plan but we are still in the process of
implementing the plan and are not yet in compliance with the Company
Guide.  The American Stock Exchange is continuing to monitor our
progress toward compliance.





If we are
unable to adequately remedy our non-compliance, the American Stock Exchange will
likely delist our common stock.  If that were to happen, our common
stock would once again be quoted on the OTC Bulletin Board.





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





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





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





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





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





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






11







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





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





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





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





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





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





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





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





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





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






12







Risks
Related To National Lampoon Networks, Inc.





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





During
the 2008 fiscal year, advertising, promotion and licensing revenue earned by our
subsidiary National Lampoon Networks, Inc. accounted for approximately 13% of
all the revenue we earned.  National Lampoon Networks, Inc. earns
advertising revenue through its various Internet websites, on-air advertising
during its programming as well as through live promotional events. Our plan is
to increase our revenue by increasing National Lampoon Networks’ online
programming and expanding its network. We plan to continue to expand National
Lampoon Networks by launching additional niche online networks and by growing
our existing networks by adding new Internet sites and driving traffic to these
sites. We have over 200 affiliates and have acquired or launched approximately
60 websites to date. We intend to concentrate our efforts on measured marketing
and sell available advertising and marketing space on our expanding network. We
intend to continue to create, produce and acquire programming for all of our web
sites as well as our college television network and to capitalize on our
expertise in the college and young adult market to continue to grow revenue in
these areas.  If National Lampoon Networks, Inc. is unable to continue
to increase its programming and expand its Internet network as planned, it may
not be able to operate profitably.





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





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





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





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





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





·
            advertisers’
      budgetary constraints;





·
            the
      timing of completion of advertisements by advertisers;
  and





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





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






13







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





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





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





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





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





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





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





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





ITEM
2.DESCRIPTION OF
PROPERTY





Our
corporate offices are located in West Hollywood, California. We occupied these
premises under a sublease agreement that expired in April 2007. Since that time,
we have occupied the premises on a month-to-month basis. During the 2008 fiscal
year, our lease obligation totaled $218,631.






14







ITEM
3.LEGAL
PROCEEDINGS





RP Holdings, Inc. v. National
Lampoon Clubhouse, Inc. et al.  On or about April 10, 2008, RP
Holdings, Inc. filed a complaint, No. SCO97777, in the Superior Court of Los
Angeles County, California, alleging breach of contract and other common law and
statutory claims.  On June 4, 2008, the parties entered into a
Settlement Agreement and Release.  Pursuant to the Settlement
Agreement and Release, RP Holdings, Inc. agreed to dismiss the complaint against
us in exchange for a payment of $15,000 to be made in four installments.We made the first
installment on June 6, 2008.  As of October 15, 2008 three of the four
required installments were paid.





Brightcove Inc. v. National Lampoon,
Inc.On or about March 11, 2008, Brightcove Inc. filed a
complaint, CA No MICV2008-1006 Trial Court Civil Action 08-1006, in the Superior
Court of Middlesex County, Massachusetts, alleging breach of contract,
intentional tort and other common law and statutory claims.  On May
23, 2008, the parties entered into a Settlement Agreement and
Release.  Brightcove Inc. agreed to dismiss the complaint against us
in exchange for the payment of $84,122 to be made in six
installments.  We made the first installment on May 23, 2008 and as of
October 15, 2008 five of the six required installments were made.




National
Lampoon, Inc. v. Alma Investments (d/b/a Bahia Mar Hotel)(Los Angeles
Superior Court Case No. BC 356118). The Company filed this complaint on July 27,
2006. The action arose from an agreement the Company had with Bahia Mar Hotel
pursuant to which we were to provide to Bahia Mar Hotel an entertainment package
for the 2006 spring break. The Company alleged that Bahia Mar Hotel failed to
support the program, and, in fact, diverted some of the business to the
Company's competitors. In our complaint, we alleged causes of action for fraud,
breach of contract, promissory estoppel, quantum meruit and breach of the
covenant of good faith and fair dealing. On February 4, 2008, the Company
entered into a settlement agreement with Alma Investments. The Company agreed to
dismiss the complaint against Alma Investments in exchange for a payment of
$110,000 to be made upon execution of the settlement agreement. The settlement
amount was recognized as revenue earned by National Lampoon Tours, our wholly
owned subsidiary, and applied entirely towards approximately $143,000 in legal
fees directly related to the case. The remaining balance was written off by our
attorneys.





Screen Actor’s Guild v. National
Lampoon Clubhouse, Inc.  During late 2006, the Screen Actor’s
Guild (“SAG”) filed claims against National Lampoon Clubhouse, Inc.
(“Clubhouse”) for unpaid wages and pension, health and welfare benefits incurred
for the filming of Monster House aka
Trick or Treat.  SAG alleges
that certain actors were not paid in full and are owed more compensation,
expenses and benefits in the amount of approximately $30,000 under the SAG
agreement.  Clubhouse disputes these claims and intends to vigorously
defend this action.  Due to recent changes within SAG the arbitration
is being rescheduled to a date to be determined some time during the first
quarter of fiscal 2009.




American Cinema Distribution
Corporation v. National Lampoon, Inc. In August 2007, the American Cinema
Distribution Corporation (“ACDC”) filed claims against us for costs incurred on
the release of “National
Lampoon’s Pucked”. ACDC alleges that we did not perform distribution
services as agreed and that ACDC should be reimbursed for distribution costs it
incurred estimated at $65,000.  ACDC also alleges that it does not owe
distribution fees to us for marketing, publicity, promotional and advertising
services that we provided.  We allege that we provided these services
and that they have a value in excess of $290,000.  On September 23,
2008 we entered into a settlement agreement with the plaintiffs dated July 16,
2008.  We agreed to dismiss the complaint against the plaintiffs in
exchange for a payment of $20,000, which was made to us upon the execution of
the settlement agreement, and the right to retain 75% of the receipts after
payments to unions and guilds until we have been paid an additional sum of
$180,000.





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





Our
annual meeting of stockholders was held on June 20, 2008.  The matters
voted upon at the meeting included the election of directors, the ratification
of the appointment of Weinberg & Company, P.A. as our independent auditors
for the fiscal year ended July 31, 2008 and an increase to the number of shares
of common stock included in the National Lampoon, Inc. Amended and Restated 1999
Stock Option, Deferred Stock and Restricted Stock Plan.  7,968,625
shares were required to pass these actions.  The results of the voting
were as follows:





Election
of Directors





Name
      of Nominee
            For
            Against
            AbstainDaniel
      S. Laikin
            10,282,729
            
            493,838Timothy
      S. Durham
            10,270,186
            
            506,381Paul
      Skjodt
            10,280,697
            
            495,870Robert
      Levy
            10,742,270
            
            21,451James
      P. Jimirro
            9,566,381
            
            1,210,185Duncan
      Murray
            10,752,970
            
            23,597James
      Toll
            10,281,818
            
            494,749







15






Ratification
of Weinberg & Company, P.A. as our independent auditors for the fiscal year
ended July 31, 2008.





For
            Against
            Withheld10,773,597
            1,787
            1,808





Increase
the number of shares of common stock included in the National Lampoon, Inc.
Amended and Restated 1999 Stock Option, Deferred Stock and Restricted Stock
Plan.





For
            Against
            Withheld11,391,033
            1,096,491
            61,373





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





On June
25, 2008, 3 of our largest stockholders, Daniel S. Laikin, our Chief Executive
Officer and a director, and Timothy Durham and Paul Skjodt, both directors,
approved the following proposals by written consent:





·
            approval
      of an amendment to our Certificate of Incorporation requiring us to pay,
      on a quarterly basis, dividends accrued on our Series B Convertible
      Preferred Stock;





·
            approval
      of an amendment to the Certificate of Designations, Preferences, Rights
      and Limitations of our Series C Convertible Preferred Stock requiring us
      to pay, on a quarterly basis, dividends accrued on our Series C
      Convertible Preferred Stock; and





·
            approval
      of an agreement that will allow us to issue our securities as payment for
      loans made to us by Messrs. Laikin and
Durham.





As of
June 25, 2008, we had the equivalent of 16,057,155 shares of common stock
available to vote for these actions.  Collectively, Messrs. Laikin,
Durham and Skjodt voted a total of 8,204,322 shares in favor of the actions,
which represents a majority of the shares of voting stock that are issued and
outstanding.





PART
II





ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITYSECURITIES





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






16







High
            
            LowFiscal
      Year Ended July 31, 2008First
      Quarter Ended October 31, 2007
            
            $
            2.55
            
            $
            1.65Second
      Quarter Ended January 31, 2008
            
            $
            2.50
            
            $
            1.79Third
      Quarter Ended April 30, 2008
            
            $
            2.18
            
            $
            1.52Fourth
      Quarter Ended July 31, 2008
            
            $
            2.05
            
            $
            1.40





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





As of
October 15, 2008, we had approximately 324 stockholders of
record.  This number does not include an indeterminate number of
stockholders whose shares are held by brokers in street name.





Dividend
Policy





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





Dividends
accrue on our Series B and Series C Convertible Preferred
Stock.  Dividends accrue on a daily basis and continue until the date
on which the dividends are paid or upon the earlier to occur of (i) the date of
a Liquidation Event, or (ii) the date on which the Series B or Series C
Convertible Preferred Stock is converted.  We are required to pay the
dividends on January 31, April 30, July 31 and October 31.  Dividends
accrue at the rate of 9% per annum on the sum of the original purchase price of
the Series B or Series C Convertible Preferred Stock plus all accumulated and
unpaid dividends thereon (compounding annually).  Dividends that
accrue on our Series B and Series C Convertible Preferred Stock must be paid
with our common stock or with our Series D Convertible Preferred
Stock.





Dividends
on the Series B and Series C Convertible Preferred Stock are computed using the
closing price of the common stock, as reported by the exchange or regulated
quotation service on which our common stock is traded, on the trading date
immediately preceding the date that we become liable to pay the
dividend.  If no trades were made on that date, then the number of
shares to be issued will be computed using the closing price of the last date on
which trades were made and reported.  As of July 31, 2008, dividends
totaling $4,950,865 accrued to our Series B and Series C Convertible Preferred
Stock which requires us to issue 206,742 shares of common stock and 72,385
shares of Series D Convertible Preferred Stock in payment of the Series B
Convertible Preferred Stock dividends and 290,466 shares of common stock and
75,862 shares of our Series D Convertible Preferred Stock in payment of the
Series C Convertible Preferred Stock dividends based on a closing price of $1.43
per share on July 30, 2008 as reported by the American Stock
Exchange.





Equity
Compensation Plans





Set forth
in the table below is information regarding awards made during the fiscal year
ended July 31, 2008 pursuant to our two equity compensation plans, the National
Lampoon, Inc. 1999 Amended and Restated Stock Option, Deferred Stock and
Restricted Stock Plan and the National Lampoon, Inc. 2005 Consultant Plan, as
well as any other individual compensation arrangement under which our equity
securities are authorized for issuance to employees or
non-employees.






17







Plan
      Category
            
            Number of securities to be issued
      upon exercise of outstanding options, warrants and rights(1)
            
            Weighted
      average exercise price of outstanding options, warrants and
      rights
            
            Number
      of securities remaining available for future issuance under equity
      compensation plans (excluding securities reflected in column
      1)Equity
      Compensation Plan Approved by Security Holders
            
            
            6,508,722
            
            
            2.51
            
            
            (15,371)(2)Equity
      Compensation Plan Not Approved by Security Holders
            
            
            N/A
            
            
            N/A
            
            
            N/A




(1) This
number reflects the number of shares of our common stock covered by options that
have been granted from the National Lampoon, Inc. 1999 Amended and Restated
Stock Option, Deferred Stock and Restricted Stock Plan.  We have
issued 204,439 shares of common stock from the National Lampoon, Inc. 2005
Consultant Plan. As of July 31, 2008, 45,561 shares of common stock are
available for issuance from the National Lampoon, Inc. 2005 Consultant Plan. Our
Board of Directors approved an increase in the number of shares to be included
in the National Lampoon, Inc. 2005 Consultant Plan from 250,000 to 500,000.
However, we must submit an application to list these shares with the American
Stock Exchange before they can be issued. We intend to submit an application to
list the additional shares as soon as possible.




(2) This
number represents the shares of common stock issuable upon exercise of
outstanding options, warrants and rights in excess of the number of shares
available in the National Lampoon, Inc. 1999 Amended and Restated Stock Option,
Deferred Stock and Restricted Stock Plan.  Our Board of Directors and
our stockholders approved an increase in the number of shares to be included in
the National Lampoon, Inc. 1999 Amended and Restated Stock Option, Deferred
Stock and Restricted Stock Plan from 6,500,000 to 11,000,000. However, we must
submit an application to list these shares with the American Stock Exchange
before they can be issued. We intend to submit an application to list the
additional shares as soon as possible.





Sales
of Unregistered Securities





On July
9, 2008, we issued 2,525 shares of our common stock having a designated price of
$1.98 per share and a total value of $5,000 and granted warrants to purchase
20,000 shares of common stock having an exercise price of $1.98, a term of
two years and a total value of $12,951, as part of the acquisition cost of
a 51% ownership interest in JerkAss, LLC.  The price per share was the
subject of arm’s length negotiations between us and the seller, Richard
Lorbach.





On July
9, 2008, we issued 12,315 shares of our common stock having a designated price
of $2.03 per share with a total value of $25,000 and granted warrants to
purchase 20,000 shares of common stock having an exercise price of $2.50, a
term of two years and a total value of $6,489, as part of the acquisition
cost of 100% of the assets of Comedy Express, Inc. The price per share was the
subject of arm’s length negotiations between us and the sellers, who were the
shareholders of Comedy Express, Inc.





On July
9, 2008, we issued 12,380 shares of our common stock having a designated price
of $2.02 per share with a total value of $25,000, as part of the total
acquisition cost of $65,000 for the assets of Zing Fu Enterprises, LLC. 
6,190 shares were issued to Robert Ralian and 6,190 shares were issued to
Richard Lorbach. The price per share was the subject of arm’s length
negotiations between us and the sellers, Robert Ralian and Richard
Lorbach.





On July
9, 2008, we issued 8,334 shares of our common stock having a designated price of
$1.80 per share with a total value of $15,000, as part of the acquisition cost
of the assets of Drunk University from Site Hub, Inc. The price per share
was the subject of arm’s length negotiations between us and the seller, Sam
Elhag.





On July
9, 2008 we issued 10,000 shares of our common stock having a designated price of
$2.05 per share and capitalized $20,500 as capitalized production costs for the
purchase of a script.  The price per share was the subject of arm’s length
negotiations between us and the seller, Sam Elhag.





On July
31, 2008, we issued 87,411 shares of our common stock having a designated price
of $1.43 per share with a total value of $125,000 for the acquisition of 100% of
the assets of FFM, Inc.  The price per share was the subject of arm’s
length negotiations between us and the sellers, Ryan Thompson, Alan R. Wood and
Sean DeFreitas.






18







On July
31, 2008, we issued 44,520 shares of common stock having a designated price of
$1.46 per share with a total value of $65,000 for the acquisition of 100% of the
assets of Rivalfish, LLC.  The price per share was the subject of
arm’s length negotiations between us and the sellers, Michael Raspatello, Jonah
Ansell and Scott Merz.





On July
31, 2008, we issued 6,868 shares of common stock having a designated price of
$1.82 per share with a total value of $12,500 as part of the acquisition cost of
100% of the assets of 100k Tools, LLC.  The price per share was the
subject of arm’s length negotiations between us and the sellers, Ming Hou and
Brad Mills.





On July
31, 2008, we issued 39,285 shares of common stock having a designated price of
$1.40 per share with a total value of $55,000 for the acquisition of 100% of the
assets of Alle Von Technologies, LLC.  The price per share was the
subject of arm’s length negotiations between us and the seller, Glenn
Fogerty.





Unless
otherwise noted, we relied on section 4(2) of the Securities Act of 1933 to
issue the securities.





ITEM 6 SELECTED FINANCIAL
DATA





As a
smaller reporting company we are not required to provide this
information.





ITEM
7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS
OF OPERATION





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





Overview





We are a
media and entertainment company that creates and distributes comedic
content.  The National Lampoon brand was initially developed in 1970
through publication of National Lampoon Magazineand
later through the use of our name on motion pictures, including National Lampoon's Animal Houseand National Lampoon's
Vacation.  Our plan is to expand the use of our brand in order
to increase the revenues we generate through license fees, advertising and other
sources.  We are pursuing this plan as follows:





Motion
Picture Production and Distribution




We
produce feature films. Historically, motion pictures that carry our brand had
been produced and financed by third parties. We decided to develop, produce and
distribute motion pictures under the National Lampoon name in order to control
both the creative process and the distribution of the films and also to build a
film library and to expand our brand visibility.




As part
of our plan to increase the visibility of our brand in the film industry and to
expand our film library we also began acquiring and branding third-party films
for distribution in the U.S. and internationally.  For third party
films we pay finishing and prints and advertising costs that are recouped
through U.S. theatrical, home entertainment and international
sales.






19







In
October 2006 we invested in Red Rock Pictures Holdings, Inc. (“Red
Rock”).  We currently own approximately 14% of Red Rock’s outstanding
capital stock.  Red Rock was formed for the purpose of providing
financing and consulting services related to the production and exploitation of
motion pictures.We
have completed production on two films in partnership with Red Rock, National Lampoon’s Bag BoyandNational Lampoon’s
Ratko, the Dictator’s Son. National Lampoon’s Bag Boy was delivered
during the year ended July 31, 2008 and National Lampoon’s Ratko: the
Dictator’s Sonis scheduled to be delivered during the first quarter of
the 2009 fiscal year.





We are in
post production on our third title, National Lampoon’s The Legend of
Awesomest Maximusthat we expect to deliver by the third quarter of the
2009 fiscal year.




We
acquired distribution rights for seven films produced by unrelated third parties
including National Lampoon's
Jake's Booty Call, National Lampoon's Homo Erectus, National Lampoon
Presents Beach Party at the Threshold of Hell, National Lampoon Presents
Electric Apricot, National Lampoon Presents One, Two Many, National Lampoon’s
RobodocandNational
Lampoon’s Bar Starz.We earn distribution fees from these films that we
release through all media including theatrical, home entertainment, foreign
distribution, and digital distribution.




We
released five motion pictures during the 2008 fiscal year, all of which we are
distributing. Of our own titles we released National Lampoon's Bag Boy
and of our acquisitions we releasedNational Lampoon’s Jake’s Booty
Call, National
Lampoon’s One Two, Many, National Lampoon Presents Beach
Party on the Threshold of Hell and National Lampoon’s Electric
Apricot. We expect to release five more titles during the 2009 fiscal
year.




We have
an interest in National Lampoon Clubhouse, Inc., a production entity, which
produced the film Monster
Nightaka Trick or
Treat. Monster Nightwas released in the fall of 2006. During the 2007 fiscal year we licensed
the domestic and foreign video sales to a sub-distributor and terminated our
production agreement with Majestic Entertainment. We will no longer produce
films through National Lampoon Clubhouse.




The
following is a list of the 11 motion pictures in our library that we either
produced or acquired:





YearTitle
            
            Released
            
            Financier/DistributorNational
      Lampoon’s Monster Night
            
            2006
            
            National
      Lampoon Clubhouse, Inc.National
      Lampoon’s Bag Boy
            
            2008
            
            National
      Lampoon, Inc.National
      Lampoon’s Ratko the Dictator’s Son
            
            2009
            
            National
      Lampoon, Inc.National
      Lampoon’s Jake’s Booty Call
            
            2006
            
            The
      Romp, Inc.National
      Lampoon’s Electric Apricot: The Quest for Festaroo
            
            2007
            
            Bait
      ProductionsNational
      Lampoon’s Beach Party at the Treshold of Hell
            
            2008
            
            Threshold
      Productions, LLCNational
      Lampoon’s Homo Erectus
            
            2009
            
            Burnt
      Orange Development, LLCNational
      Lampoon’s One, Two, Many
            
            2008
            
            Breaking
      the Rules, LLCNational
      Lampoon’s Robodoc
            
            2009
            
            Robodoc,
      LLC.National
      Lampoon’s Bar Starz
            
            2009
            
            OBX
      ProductionsNational
      Lampoon’s the Legend of Awesomest Maximus
            
            2009
            
            National
      Lampoon, Inc.




We no
longer offer production services on unrelated third-party films. We earn
revenues from providing production services on our own productions as well as
third party productions that we acquire. Our production services are included in
the production budget and are recorded as the production’s capitalized
production costs.






20






We are
currently developing for production and/or acquiring approximately four projects
per year which will carry the National Lampoon name. We have motion picture
output agreements with a domestic home video distributor and a cable television
broadcast company.  An output agreement guarantees a negotiated
payment or advance for the distribution rights for films in
development.  The minimum guarantee or advance may be paid over
various points of production of the film or upon full delivery of the finished
product.





We have
agreements with independent third parties for the limited platform theatrical
release and subsequent distribution of our films to home entertainment. During the 2008 fiscal
year, we released five films as “platform theatrical releases” which is the
release of a motion picture in a small number of theaters in order to promote
the home entertainment sales.





For the
fiscal year ended July 31, 2008, revenues derived from motion picture production
and distribution totaled approximately $1,795,056 or approximately 24% of all
the revenues we earned during the year.





Licensing





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





We
currently are a party to approximately 30 feature film branding
agreements.  Pursuant to these agreements, once the film is released
and begins earning revenues, the studio or distributor is entitled to recoup any
licensing fee, minimum guarantee or advance it paid to us under the agreement
and, if included in the agreement, interest.  Once this amount is
recouped, our participation in the revenues earned by the film may
begin.





The
following is a list of the 31 motion pictures bearing our brand:





YearTitle
            
            Released
            
            Financier/DistributorNational
      Lampoon’s Animal House
            
            1979
            
            Universal
      StudiosNational
      Lampoon Goes to the Movies
            
            1981
            
            United
      ArtistsNational
      Lampoon’s Class Reunion
            
            1982
            
            ABC/DisneyNational
      Lampoon’s Vacation
            
            1983
            
            Warner
      Bros.National
      Lampoon’s European Vacation
            
            1985
            
            Warner
      Bros.National
      Lampoon’s Class of ’86
            
            1986
            
            ParamountNational
      Lampoon’s Christmas Vacation
            
            1989
            
            Warner
      Bros.National
      Lampoon’s Loaded Weapon I
            
            1993
            
            New
      Line CinemaNational
      Lampoon’s Last Resort
            
            1994
            
            Trimark
      StudiosNational
      Lampoon’s Attack of the 52 Women
            
            1994
            
            ShowtimeNational
      Lampoon’s Senior Trip
            
            1995
            
            New
      Line CinemaNational
      Lampoon’s Favorite Deadly Sins
            
            1995
            
            ShowtimeNational
      Lampoon’s Dad’s Week Off
            
            1997
            
            ParamountNational
      Lampoon’s The Don’s Analyst
            
            1997
            
            ParamountNational
      Lampoon’s Men in White
            
            1998
            
            FoxNational
      Lampoon’s Golf Punks
            
            1998
            
            FoxNational
      Lampoon’s Van Wilder
            
            2001
            
            ArtisanNational
      Lampoon Presents Dorm Daze
            
            2003
            
            IndependentNational
      Lampoon’s Gold Diggers
            
            2005
            
            Lady
      P&A LLCNational
      Lampoon’s Blackball
            
            2005
            
            First
      Look EntertainmentNational
      Lampoon’s Going the Distance
            
            2005
            
            Think
      FilmsNational
      Lampoon’s Adam & Eve
            
            2006
            
            MRG
      Ent.National
      Lampoon’s Barely Legal
            
            2006
            
            Motion
      Picture Corp./Sony Pic. Rel.National
      Lampoon’s Cattle Call
            
            2006
            
            Cattle
      Call LLCNational
      Lampoon’s RepliKate
            
            2003
            
            Silver
      NitrateNational
      Lampoon’s Pledge This!
            
            2006
            
            Street
      Alien/Silver NitrateNational
      Lampoon’s Pucked (formerly Trouble with Frank)
            
            2006
            
            National
      Lampoon, Inc,National
      Lampoon’s Jake’s Booty Call
            
            2006
            
            National
      Lampoon, Inc.National
      Lampoon’s Dorm Daze II
            
            2006
            
            IndependentNational
      Lampoon’s Van Wilder II
            
            2006
            
            Lion’s
      GateNational
      Lampoon’s Van Wilder III: Freshman Year
            
            2009
            
            Tapestry
      Films, Inc./Paramount






21





We have
derived a substantial portion of our revenues from license fees relating to the
use of our name on new motion pictures and from royalties from previously
released motion pictures bearing our brand, including movies such as National Lampoon's Animal Houseand National Lampoon's
Vacation. Releasing a film with our brand enhances its ability to find
distribution outlets. Once a film is released with our brand, we earn revenues
from foreign sales, theatrical release, home video and DVD sales and rentals and
pay-per-view.





Additionally,
we have completed an audit of Warner Bros. Entertainment, Inc. relating to its
exploitation of the films National Lampoon’s Vacation,
National Lampoon’s European
Vacation and National
Lampoon’s Christmas Vacation.  We have submitted the audit
reports to Warner Bros. and have started negotiations to recover royalties we
believe we are owed.  Based on the audit reports we expect a favorable
outcome from the negotiations.





For the
fiscal year ended July 31, 2008, revenues derived from licensing, exclusive of
publishing revenues but including the revenues earned by NL Radio LLC, as
described below, totaled approximately $3,697,024 or approximately 49.5% of all
the revenues we earned during the year.





National
Lampoon Networks





National
Lampoon Networks, Inc. (sometimes referred to in this report as "NLN") includes
our Internet, television and field marketing activities.  We believe
that, because of its integrated marketing platform that includes Internet
advertisers, on-air advertising, and field marketing, NLN provides an appealing
platform to advertisers who want their commercial messages to reach the college
age market.  Aside from providing an outlet for advertisers targeting
the college market, NLN develops, produces and distributes comedic Internet and
television programming to audiences through its network.





NLN’s
Internet properties comprise several Internet destination
sites.  These include NationalLampoon.com, DrunkUniversity.com,
TOGATV.com and KnuckleheadVideo.com.  We have acquired other websites
and we continue making such acquisitions on a regular basis.  We have
focused substantial resources toward launching these websites, and we plan to
continue doing so on an ongoing basis.  These destination sites are
also part of National Lampoon’s online networks, which include the National
Lampoon Humor Network and the Drunk University Network.  These are
aggregated online networks of more than 200 of the most popular humor and
college lifestyle destination sites on the Internet.  We sell
advertising space on our websites and networks in the form of video streamed
advertisements, full page takeover advertisements and banner
advertisements.  We also are actively engaged in
creating “branded entertainment” as well as custom promotional
content production and distribution for these Internet
destinations.





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






22







NLN's
television activities include delivering programming during the standard
academic school year to more than 200 affiliated college and other television
stations, reaching nearly two million college students in their dormitories and
other places of residence. Aside from providing an outlet for advertisers
targeting the college market, NLN develops, produces and distributes comedic
Internet and television programming to audiences through its
network.





For the
fiscal year ended July 31, 2008, revenues derived from National Lampoon
Networks, exclusive of licensing revenues, totaled approximately $1,762,467 or
approximately 23% of all the revenues we earned during the year.





Publishing





During
the 2006 fiscal year we began publishing our books.  As of July 31,
2008, we have released 12 books including National Lampoon's Saddam Dump
[Saddam Hussein's Trial Blog], National Lampoon's Magazine
Rack, National
Lampoon's Jokes Jokes Jokes, National Lampoon’s Not Fit For
Print, National
Lampoon’s Favorite Cartoons of the 21stCentury, National Lampoon’s Van
Wilder Guide to Graduating College In Eight Years or More, National Lampoon’s
Road Trip, National
Lampoon’s Animal House, National Lampoon’s Help!, National Lampoon’s Jokes Jokes
Jokes 2, National Lampoon’s Balls!and National Lampoon’s Pimp it
Yourself. Two more books, How Dumb Are You? and Hello Junk Mailwill be released during
the second and third quarters of the 2009 fiscal year. We expect to release
approximately two books per year.





For the
fiscal year ended July 31, 2008, revenues derived from our publishing activities
totaled approximately $71,017, or approximately 1% of all the revenues we earned
during the year.





Radio





In March
2005, NL Radio, LLC was formed.  We hold a 25% interest in this
entity.  In October 2006, NL Radio, LLC launched an entertainment
radio format under our brand.  We have licensed the content of our
radio library, as well as certain domain names, URLs and websites to NL Radio,
LLC for this purpose.  NL Radio, LLC used samples of the programming,
called “pilot programming”, to introduce the format and content to radio
networks and local stations.  If the programming is sold to a network
it may be syndicated, meaning that it would be distributed to stations
affiliated with the network.  Purchasers of the programming may
broadcast segments of the programming at their discretion, such as during "drive
time" or as late night programming.  Programming was launched on XM
radio during the fiscal year ended July 31, 2007.  Our radio library
includes approximately 80 hours of National Lampoon radio programming consisting
primarily of one to two minute short comedy routines and one-hour comedy
sketches and parodies.  Revenue is earned from ad sales, direct
response advertising and product promotion arrangements.  We receive a
licensing fee equal to 8% of the gross receipts received by NL Radio, LLC from
all sources in connection with any use of our brand.





For the
fiscal year ended July 31, 2008, revenues derived from NL Radio totaled
approximately $2,420, or less than 1% of all the revenues we earned during the
year.





Travel
Services Revenues





We no
longer provide travel services and no further revenues are expected to be earned
from this segment of our business. During the year ended July 31, 2008, revenue
attributable to travel services totaled approximately $110,000 or 1.5% of our
revenues. This revenue resulted from the settlement of a legal
action.





Business
Objective





We intend
to provide National Lampoon comedic content to as many consumers as possible by
expanding the use of our brand in the following ways:






23






·
            We
      plan to continue to expand NLN by launching additional niche online
      networks and by growing our existing networks by adding new affiliate
      Internet sites and driving traffic to these sites.  We have over
      200 affiliates and have acquired or launched over 60 websites to
      date.  We are concentrating our efforts on measured marketing
      and on selling available advertising and marketing space on our expanding
      network.  We plan to continue to create, produce and acquire
      programming for all of our web sites as well as for our college television
      network and capitalize on our expertise in the college and young adult
      market to continue to grow revenue in these
  areas.





·
            We
      intend to expand our film library by increasing the number of film
      products we produce internally.  We currently have two films in
      post production and one film completed and we are actively developing
      several new projects. We have finalized domestic and international
      distribution arrangements for all of our titles.  The domestic
      distribution arrangement includes a number of home video distributors and
      retailers and a domestic cable provider.  In some cases we are
      guaranteed a minimum payment upon delivery of the film to the respective
      broadcaster or distributor.·
            We
      plan to capitalize on our reputation and relationships with independent
      studios and other multimedia companies to expand the use of the National
      Lampoon brand.·
            We
      plan to create new licensing opportunities in markets outside of film,
      television and publishing, such as games, records, radio programming and
      live events.





·
            NLN
      continues to maintain a presence at third-party events and provide field
      marketing campaigns for various advertisers.  However, we no
      longer produce our own events.





·
            We
      began publishing and distributing books we created to continue
      capitalizing on the National Lampoon brand.  During the 2007
      fiscal year we published 8 books and during the 2008 fiscal year we
      published 4 more books. We have two books scheduled to be published during
      the 2009 fiscal year and our plan is to release two books per year going
      forward.





·
            During
      the 2008 fiscal year, NL Radio, LLC launched an entertainment radio format
      using our brand with a 24 hour/7 day-a-week channel on XM Satellite
      Radio.  We own a 25% interest in NL Radio,
  LLC.





Critical
Accounting Policies





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





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





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





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






24







Investments.  We
account for our investments in equity securities under SFAS 115, “Accounting for
Certain Investments in Debt and Equity Securities.”  We have
classified our investments as available for sale securities, and such securities
are carried at fair value.  The fair values for marketable equity
securities are based on quoted market prices.  Unrealized gains or
losses, net of tax, are included as a component of accumulated other
comprehensive income in stockholders’ equity.  Realized gains and
losses and declines in value considered to be other than temporary on available
for sale securities are included in other income (loss).





Reorganization
Transaction





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





Results
of Operations




We
operate in five business segments, namely, licensing and exploitation of the
National Lampoon trademark and related properties including the sale of products
to consumers and publishing of copyrighted material; advertising and promotion
through our Internet websites, field marketing, live events and television
programming on college campuses; production of film and television products; the
sale of travel packages to young adults, although we have discontinued all such
services and have no plans to offer them in the future; and
distribution.




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





Year
ended July 31, 2008 as compared to the year ended July 31, 2007





Summarized
financial information for the years ended July 31, 2008 and 2007 for our
segments is as follows:





Licensing
              &
            
            Advertising
      &
            
            
            
            
            
            TravelPublishing
            
            Promotion
            
            Production
            
            Distribution
            
            Services
            
            TotalFiscal
      Year Ended July 31, 2008Segment
      revenue
            
            $
            3,770,461
            
            $
            1,762,467
            
            $
            395,278
            
            $
            1,399,778
            
            $
            110,000
            
            $
            7,437,984Segment
      operating loss
            
            $
            (74,545
            )
            $
            (508,592
            )
            $
            (54,126
            )
            $
            (734,337
            )
            $
            (215,556
            )
            $
            (1,587,156
            )Depreciation
      expense
            
            $
            14,469
            
            $
            3,866
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            18,335Fiscal
      Year Ended July 31, 2007Segment
      revenue
            
            $
            4,078,738
            
            $
            1,975,827
            
            $
            44,500
            
            $
            —
            
            $
            —
            
            $
            6,099,065Segment
      operating income (loss)
            
            $
            1,421,273
            
            $
            (2,944,690
            )
            $
            (724,111
            )
            $
            —
            
            $
            —
            
            $
            (2,247,528
            )Depreciation
      expense
            
            $
            8,415
            
            $
            5,254
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            13,669





25





Since the
Reorganization Transaction, our business has changed.  As a result of
our acquisition of National Lampoon Networks, we began creating programming for
this division and undertaking advertising and promotion
activities.  We also began publishing National Lampoon
Books.  In the table above, licensing and publishing
revenues include the licensing of our name and sale of our books;
advertising and promotion revenues represents the revenue earned by National
Lampoon Networks which includes online and cable advertising as well as
advertising and promotion of the films released; production revenues include
films, television and home entertainment; distribution revenues includes
theatrical, home entertainment and digital distribution of our titles; and
travel services represents the revenues earned by National Lampoon Tours, Inc.
however we no longer offer travel services.





A
reconciliation of segment operating loss to net loss before income taxes for the
years ended July 31, 2008 and 2007 is as follows:





July
      31, 2008
            
            July
      31, 2007Total
      segment operating (loss)
            
            $
            (1,587,156
            )
            $
            (2,247,528
            )Amortization
      of intangible assets
            
            
            (247,333
            )
            
            (242,502
            )Interest
      expense
            
            
            (295,071
            )
            
            (51,299
            )Interest
      Income
            
            
            -
            
            
            5,832Equity
      in investee loss
            
            
            -
            
            
            (800
            )Write
      off of royalty payable
            
            
            396,250
            
            
            -Other
      income/expense
            
            
            46,336
            
            
            32,127Net
      loss before minority interest and income taxes
            
            $
            (1,686,974
            )
            $
            (2,504,170
            )





Licensing
Revenue and Publishing Revenue





Licensing
and publishing revenues were $3,770,461 for the year ended July 31, 2008, as
compared to $4,078,738 for the year ended July 31, 2007, representing a decrease
of $308,277 or 8%. The decrease for the twelve month period was partly
attributable to a decrease of $1,955,077, or approximately 69%, in motion
picture royalty payments which totaled $892,826 during the year ended July 31,
2008 compared to $2,847,903 during the year ended July 31, 2007. This decrease
was partly due to a settlement that we reached with Universal Studios during the
2007 fiscal year for unpaid royalties related to the exploitation of National Lampoon’s Animal
House. The amount totaled $2.24 million and no such settlement occurred
during the year ended July 31, 2008. Additionally, video royalty revenues were
$179,878 for the year ended July 31, 2008, as compared to $848,202 for the year
ended July 31, 2007, representing a decrease of $668,324 or approximately 79%.
Of the amount we received during the 2007 fiscal year, $662,295 related to our
settlement with Universal Studios. The decrease in royalties was offset by
increased revenues during the year ended July 31, 2008 of $1,492,196 derived
from sales of international distribution licenses for two of our titles compared
to $0 in such revenues for the same period in the prior year, as well as
television license revenues of $1,009,772 for the year ended July 31, 2008,
compared to $117,796 for the year ended July 31, 2007, representing an increase
of $891,976 or 757%. The increase was primarily due to sales of one of our
titles to Comedy Central. These increases were offset by a decrease in Internet
license revenues of $73,971, or approximately 60%, to $49,432 for the year ended
July 31, 2008, compared to $123,403 for the year ended July 31, 2007. The
decrease was partly due to a reduction in royalties that resulted from the
termination of two relationships during the first quarter of the 2008 fiscal
year. During the 2007 fiscal year, these relationships generated royalties in
the amount of $112,338. During the 2008 fiscal year, as a result of the
termination of these relationships, we received royalties of only $30,000.
Publishing revenues net of reserve for returns were $71,017 for the year ended
July 31, 2008, as compared to $125,891 for the year ended July 31, 2007,
representing a decrease of $54,874 or 44%. The decrease for the twelve month
period was due to the decreased number of books published.





Costs
related to licensing revenues were $77,858 for the year ended July 31, 2008, as
compared to $155,842 for the year ended July 31, 2007, representing a decrease
of $77,984 or 50%. The decrease in costs related to license revenues resulted
primarily from a decrease of $77,984 in royalty and commission expense to
$77,857 during the year ended July 31, 2008, from $155,841 during the year ended
July 31, 2007.






26







There was
an increase of $750,200 in amortization and impairment of capitalized production
costs to $1,348,473 for the year ended July 31, 2008 compared to $598,273 for
the year ended July 31, 2007. Amortization for current productions begins upon
theatrical and/or home video release. The increase was primarily due to the
amortization of capitalized film production costs of $1,136,471 due to
recognition of domestic and international licensing revenue from the release of
National Lampoon’s Bagboyand $119,394 due to revenue recognition for domestic and international
licensing of five other film titles. In addition we had $92,086 in amortization
of production costs for the production and distribution of a video of a live
show that was completed during the year ended July 31, 2008. The increase in
amortization of capitalized production costs was offset by a decrease in
amortization of capitalized production costs of $408,897 recorded for the
permanent impairment of National Lampoon’s Trick or
Treat as well as a write off totaling $133,858 for the remaining
capitalized production costs during the year ended July 31, 2007.





The
increase in costs related to publishing revenues for the year ended July 31,
2008 resulted from an increase of $125,154 in these costs, consisting of
$104,971 in amortized publishing costs and $20,183 in direct publishing costs as
compared to $0 in costs related to publishing revenues incurred during the
year ended July 31, 2007.  We recorded these costs against
sales during the year ended July 31, 2007.




Advertising
and Promotion Revenues




Advertising
and promotion revenues totaled $1,762,467 during the year ended July 31, 2008,
as compared to $1,975,827 for the year ended July 31, 2007, representing a
decrease of $213,360 or 11%. Of the $1,762,467 in advertising and promotion
revenues we earned, $983,065 was earned by National Lampoon Networks during the
2008 fiscal year, as compared to $1,688,606 earned by National Lampoon Networks
during the 2007 fiscal year, representing a decrease of $705,541, or 42%. The
decrease in revenue was the result of a $75,000 decrease in promotion revenues
mainly due to a reduced number of field promotion events and a decrease of
$600,677 in advertising revenues resulting from decreases in sponsored shoots,
field events and advertising spots on the college network. These decreases were
partially offset by an increase of $300,000 in Internet advertising on our new
websites and prints and advertising revenues of $479,401 charged on the release
of our titles. We continue to expand and improve our digital distribution and
entertainment capabilities resulting in increased revenue from our network and
affiliate network of Internet websites. Going forward, we expect to focus our
resources on increasing revenues generated from our Internet websites and from
product placement. While we intend to continue providing field promotion
services at events held by third parties, we intend to decrease the number of
field promotion events we produce.





Costs of
advertising and promotion revenue were $462,669 during the year ended July 31,
2008 compared to $1,608,195 for the year ended July 31, 2007, representing a
decrease of $1,145,526 or 71%. The significant decrease in costs of advertising
and promotion was the result of a number of factors.  Costs of live
events decreased by $407,839, as we reduced the number of live events related to
the promotion of our play-for-fun poker sites, CollegePoker, and we reduced
the number of live events that we produced. Although we produced fewer live
events we continue to provide sponsorship opportunities at live events organized
by third parties. Due to an improvement of our Internet capabilities, web
development and Internet service fees decreased by $104,148, to $181,991 for the
year ended July 31, 2008 from $286,139 during the year ended July 31,
2007.  We closed our New York office, which also provided savings to
us. As a result of closing our New York office, sales commissions declined by
$61,411 to $321,500 for the year ended July 31, 2008 from $382,911 during the
year ended July 31, 2007.  We also decreased video production during
the year ended July 30, 2008, resulting in a decrease of $52,323 of video
production costs to $28,413 from $80,736 of video production costs during the
fiscal year ended July 31, 2007. The decrease in costs related to advertising
and promotion revenues was also attributable to the allocation of $231,231 in
amortization of publishing costs and $186,079 in direct publishing costs to the
cost of advertising and promotion during the year ended July 31, 2007, whereas
those costs were allocated to costs of publishing revenues during the year ended
July 31, 2008.





Production
Revenues





For the
year ended July 31, 2008, production revenue was $395,278 as compared to $44,500
for the same period in 2007. Production revenues increased by $350,778, or 788%,
primarily due to a joint production agreement with Mania TV pursuant to which
shows made for Mania TV and Capazoo were also used on our Internet network. We
traditionally do not produce product unless we have a presale, minimum guarantee
or co-production agreement in place. This reduces our financial risk as
productions tend to be capital intensive. However, we are planning to expand our
productions and we are negotiating with domestic pay television broadcasters and
home video distributors for output arrangements which will guarantee us a
minimum return on each new motion picture release. The output arrangement
guarantees a pre-negotiated minimum guarantee or sales price for the licensing
of a specific media and territory. As these output arrangements are signed, we
will allocate additional internal resources to this segment of our
business.






27







Costs
related to production revenues were $142,311 during the year ended July 31,
2008, compared to $146,578 for the year ended July 31, 2007, for a difference of
$4,267.





Distribution
Revenues





For the
year ended July 31, 2008, distribution revenue was $1,399,778 as compared to $0
for the same period in 2007. Distribution revenues primarily resulted from the
DVD release of five of our titles on our distribution network, which includes
theatrical, home entertainment and digital distribution, during the year ended
July 31, 2008.





Costs
related to distribution revenues in the amount of $1,421,081 are primarily due
to distribution fees plus the cost of manufacturing, marketing and pick, pack
& ship directly related to the DVD release.





Travel
Services Revenues





During
the year ended July 31, 2008, travel services revenues were $110,000 compared to
$0 for the year ended July 31, 2007. This increase resulted from the settlement
of a legal action. We agreed to dismiss the complaint in exchange for a payment
of $110,000 to be made upon execution of the settlement agreement. The
settlement amount was recognized as revenue. Prior to the settlement we
discontinued our travel services business and no further revenues are expected
to be earned from this segment.





Other
Costs and Expenses





Selling,
general and administrative expenses during the year ended July 31, 2008 were
$5,447,594 as compared to $5,837,705 for the year ended July 31, 2007, a
decrease of $390,111 or approximately 7%. During the year ended July 31, 2008,
approximately 26% of our selling, general and administrative expenses consisted
of salary expense totaling $1,426,839, as compared to salary expense of
approximately $2,400,375, which represented 43% of selling, general and
administrative expenses for the year ended July 31, 2007. The decrease of
$973,536, or 41%, in salary expense for the year ended July 31, 2008 was
primarily due to the separation from service of our former President, Bruce
Long, as well as the closure of our New York office. During the year ended July
31, 2008, selling, general and administrative expenses also included consulting
fees of $395,833 as compared to $394,277 during the same period in the prior
year for a decrease of $1,556 as we continued to reduce our reliance on
consultants. Legal fees decreased by $55,520, or 19%, from $287,890 during the
year ended July 31, 2007 to $232,370 for the same period in 2008, offset by an
increase in investor and public relations costs of $154,747, or 54%, from
$289,230 for the period ended July 31, 2007 to $443,977 during the same period
in 2008.




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





Amortization
of intangible assets, which consists of the costs of our acquisition and
protection of the “National Lampoon” trademark, as well as the acquisition of
websites, domain names and other intangible assets was approximately $247,333
during the twelve months ended July 31, 2008 and $242,502 for the twelve months
ended July 31, 2007.






28






During
the year ended July 31, 2008, we recorded expenses of $1,176,823 associated with
the granting of stock, options and warrants to employees, advisors and
consultants as compared to expenses of $1,051,653 incurred for the year ended
July 31, 2007, for an increase of $125,170 or 12%. The increase is primarily due
to grants of options to our Chief Executive Officer pursuant to his employment
contract, our former President pursuant to his severance and consulting
agreement, consultants, employees, including our Chief Financial Officer, and
directors.





During
the year ended July 31, 2008, we recorded expenses of $620,349 associated with
stock issued for services as compared to expenses of $371,784 incurred for the
year ended July 31, 2007, for an increase of $248,565 or 67%. The increase is
primarily due to the continued increase in the number of consultants and vendors
being paid with shares of our common stock.





No
interest income was earned during the year ended July 31, 2008, compared to
$5,832 for the year ended July 31, 2007. We earned interest income of $5,832
during the year ended July 31, 2007 because we had significantly more cash on
deposit as a result of receiving $2.9 million in royalties from Universal
Studios. We had no similar capital infusion during the period ended July 31,
2008. There was an increase of $243,772 in interest expense to $295,071 during
the year ended July 31, 2008, from $51,299 during the year ended July 31, 2007.
The increase in interest expense is primarily due to an increase in production
and prints and advertising loans from related parties.





Other
income increased by $410,459 or 1,278% to $442,586 during the year ended July
31, 2008 compared to $32,127 for the year ended July 31, 2007. The increase for
the year ended July 31, 2008 was primarily due to the write off of a stale
accrued royalty. In July 1987, NLI granted the right to produce National Lampoon
television programming to GPEC. The royalty was recognized as an expense in
prior years. Approximately $396,250 remained on the books as a liability and was
written off during the year ended July 31, 2008.





For the
year ended July 31, 2008, we had a net loss of $1,686,974 as compared to a net
loss of $2,504,170 for the year ended July 31, 2007, representing a decrease in
net loss of $817,196 or 33%. The decrease in net loss for the year resulted
primarily from the significant increase in revenues from distribution along with
increases in production revenues and the legal settlement involving National
Lampoon Tours, Inc., which formerly provided travel services. The increase in
expenses for the year was a result of increases in distribution expenses and the
amortization of capitalized production costs and publishing costs, partially
offset by decreases in advertising and promotion costs and selling, general and
administrative costs.





During
the years ended July 31, 2008 and 2007, we had no provision for income taxes due
to the significant net operating losses incurred in prior periods and related
carry forward to the current period. We also accrued dividends of $1,585,598
during the fiscal period ended July 31, 2008 and $1,230,896, during the same
period in 2007 for an increase of $354,702 or 29%. The increase was primarily
due to an adjustment to the dividend accrual to include compound interest. The
addition of the accrued dividend resulted in a net loss attributable to common
shareholders of $(3,272,572) or $(0.39) per basic and fully diluted share for
the year ended July 31, 2008, as compared to a net loss attributable to common
shareholders of $(3,735,066) or $(0.49) per basic and fully diluted share for
the year ended July 31, 2007.





Liquidity
and Capital Resources





With the
exception of the first quarter of the fiscal year ending July 31, 2007, we have
not generated positive cash flow from operations over the past few years. Our
principal sources of working capital during the year ended July 31, 2008
consisted of loans from our officers and directors and licensing fees received
on distribution of product.




For the
year ended July 31, 2008, our net cash flow used in operating activities was
$758,580 as compared to $4,144,414 of net cash flow used in operating activities
during the year ended July 31, 2007. The decrease in cash flow usage from
operations was primarily attributable to an increase in revenue partially offset
by an increase in cash used for production costs. Cash provided by financing
activities was $935,813 for the fiscal year ended July 31, 2008, as compared to
$4,263,500 for the fiscal year ended July 31, 2007. The funds for the current
period were obtained from officers and directors and a related party and were
partially offset by the repayment of loans from officers and
directors.






29







Historically,
our principal source of funds used for operations and working capital has been
loans received from Daniel S. Laikin, our Chief Executive Officer, and Timothy
Durham, a director, and a shareholder. The aggregate amount of the loans and
accrued interest owed to these individuals at July 31, 2008 is $1,244,177 which
includes a loan in the amount of $75,162 recieved from Mr. Laikin for production
costs. These obligations are payable on demand. We plan to pay these obligations
from future revenues. In addition, Red Rock Picture Holdings, Inc. has provided
the company with funds for movie production. The aggregate amount of the loans
and accrued interest owed to Red Rock at July 31, 2008 is
$3,217,804.





Our
financial statements for the fiscal year ended July 31, 2008, contain an
explanatory paragraph as to our ability to continue as a “going concern.” This
qualification may impact our ability to obtain future financing.





As of
July 31, 2008 we had cash on hand of $2,267. We are currently devoting efforts
to raising additional capital through private investors and achieving profitable
operations. Our ability to continue as a going concern is dependent upon our
ability to develop additional sources of capital and revenue. Included in
receivables is $616,397 in minimum guarantee payments and accounts receivable
due from domestic and foreign distributors including Comedy Central, $250,000
(United States), Arts Alliance America, $209,581 (United States), LCT $85,000
(Russia)  and Beta $71,816 (Germany). We are currently delivering two
films for which the minimum guarantee payments are due upon notice of delivery
and we expect payments to be received by the second quarter of the 2009 fiscal
year.  We are currently in post production on one film for which
minimum guarantee payments are due upon notice of delivery and we expect
payments to be received in the third and fourth quarters of the 2009 fiscal
year.





Additionally
we have completed an audit of Warner Bros. Entertainment, Inc. relating to its
exploitation of the films National Lampoon’s Vacation,
National Lampoon’s European
Vacation and National
Lampoon’s Christmas Vacation. We have submitted the audit reports to
Warner Bros and we have been negotiating a settlement of the royalties that we
believe we are owed. Based on the audit reports we expect the negotiations and
settlement to be completed during the second quarter of the 2009 fiscal year.
The Company has not recorded an estimate of the amounts.





On
February 27, 2008 we received a letter from the American Stock Exchange which
indicated that we do not meet certain of the American Stock Exchange’s continued
listing standards as set forth in Part 10 of the Amex Company
Guide.  Specifically, we are not in compliance with Section
1003(a)(iv) of the Company Guide because we have sustained losses which are
substantial in relation to our overall operations or our existing financial
resources, or our financial condition has become so impaired that it appears
questionable, in the opinion of the American Stock Exchange, as to whether we
will be able to continue our operations and/or meet our obligations as they
mature.





We had
until March 27, 2008 to provide the American Stock Exchange with a specific plan
to achieve and sustain compliance with the continued listing
standards.  We submitted a plan to the American Stock Exchange on
March 27, 2008.  On May 16, 2008 we were notified by the American
Stock Exchange that our plan was accepted. On September 18, 2008 we were
notified that based on the staff’s review of the information we provided on
August 25, 2008, the American Stock Exchange extended our deadline to regain
compliance to November 15, 2008.





The
American Stock Exchange is continuing to monitor our progress toward
compliance.





If we are
unable to adequately remedy our non-compliance, the American Stock Exchange will
likely delist our common stock.  If that were to happen, our common
stock would once again be quoted on the OTC Bulletin Board.





Off-Balance
Sheet Arrangements





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






30







Contractual
Obligations





The table
below sets forth our contractual obligations as of July 31, 2008.





Payments
      Due by PeriodTotal
            
            Less
      than 1 year
            
            1 -
      3 years
            
            3 -
      5 years
            
            More
      than 5 yearsProduction
      loan, related party
            
            $
            3,292,967
            
            $
            1,147,763
            
            $
            2,145,204
            
            $
            -
            
            $
            -Notes
      Payable, related party
            
            $
            1,169,015
            
            $
            -
            
            $
            1,169,015
            
            $
            -
            
            $
            -





Recent
Accounting Pronouncements





In
September 2006, the FASB issued FASB Statement No. 157 (“FAS 157”), “Fair Value
Measurements,” which establishes a framework for measuring fair value in
accordance with GAAP and expands disclosures about fair value measurements. FAS
157 does not require any new fair value measurements but rather eliminates
inconsistencies in guidance found in various prior accounting pronouncements.
FAS 157 is effective for fiscal years beginning after November 15,
2007.





In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
for Financial Assets and Liabilities – including an amendment of FASB Statement
No. 115” (FAS 159). FAS 159, which becomes effective for the Company on August
1, 2008, permits companies to choose to measure many financial instruments and
certain other items at fair value and report unrealized gains and losses in
earnings. Such accounting is optional and is generally to be applied instrument
by instrument.





In
December 2007, the FASB issued FASB Statement No. 141(R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. Statement 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited.





In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS
No. 160 establishes accounting and reporting standards that require that
the ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity; the
amount of consolidated net income attributable to the parent and to the
non-controlling interest be clearly identified and presented on the face of the
consolidated statement of income; and changes in a parent’s ownership interest
while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently. SFAS No. 160 also requires that any retained
non-controlling equity investment in the former subsidiary be initially measured
at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets
forth the disclosure requirements to identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
No. 160 applies to all entities that prepare consolidated financial
statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160
must be applied prospectively as of the beginning of the fiscal year in which it
is initially applied, except for the presentation and disclosure requirements.
The presentation and disclosure requirements are applied retrospectively for all
periods presented. The Company does not have a non-controlling interest in one
or more subsidiaries.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(SFAS 161). This Statement requires enhanced disclosures about an entity’s
derivative and hedging activities, including (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133,“Accounting for Derivative
Instruments and Hedging Activities” (SFAS 133), and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.




We do not
believe that the adoption of the above recent pronouncements will have a
material effect on our consolidated results of operations, financial position,
or cash flows.





ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK





As a
smaller reporting company we are not required to provide this
information.






31




ITEM
8.            
FINANCIAL STATEMENTS
 
 The
      financial statements, together with the independent auditors' report
      thereon, appear beginning on page F-1 of this
  report.
  Report
      of Independent Registered Public Accounting Firm
              F-1Consolidated
      Balance Sheets at July 31, 2008 and 2007
              F-2Consolidated
      Statements of Operations for the Years Ended July 31, 2008 and
      2007
              F-3Consolidated
      Statements of Shareholders' Equity (Deficiency) for the Years Ended July
      31, 2008 and 2007
              F-4Consolidated
      Statements of Cash Flows for the Years Ended July 31, 2008 and
      2007
              F-5Notes
      to Consolidated Financial Statements
              F-6
  
 
   REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Board of Directors of National Lampoon, Inc.:
 
 We have
audited the accompanying consolidated balance sheets of National Lampoon, Inc.
and Subsidiaries (the "Company"), as of July 31, 2008 and 2007 and the related
consolidated statements of operations, shareholders' equity (deficiency) and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly
in all material respects, the consolidated financial position of National
Lampoon, Inc. and Subsidiaries as of July 31, 2008 and 2007, and the results of
their consolidated operations and their consolidated cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
  The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note A to the
consolidated financial statements, the Company has had recurring losses from
operations and had an accumulated deficit as of July 31, 2008. These factors
raise substantial doubt about its ability to continue as a going concern.
Management’s plan in regards to these matters is also described in Note A. These
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
 
 WEINBERG
& COMPANY, P.A.
 
 Los
Angeles, California
 October
31, 2008
  F-1
 
 NATIONAL
      LAMPOON, INC. AND SUBSIDIARIESCONSOLIDATED
      BALANCE SHEETSAs
      of
              
              
              As
      ofASSETS
              
              July
      31, 2008
              
              
              July
      31, 2007CURRENT
      ASSETSCash
              
              $
              2,267
              
              
              $
              85,706Accounts
      receivable, net of reserves of $181,619 and $461,810,
      respectively
              
              
              1,640,994
              
              
              
              358,342Canadian
      tax credits receivable
              
              
              226,729
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              78,464
              
              
              
              65,182Total
      current assets
              
              
              1,948,454
              
              
              
              509,230Fixed
      assets, net of accumulated depreciation of $193,738 and $177,510,
      respectively
              
              
              39,283
              
              
              
              37,431Capitalized
      production costs, net of $5,709,969 and $4,355,191 of amortization,
      respectively
              
              
              5,017,567
              
              
              
              5,483,508Capitalized
      publishing costs, net of $496,477 and $381,284 of amortization,
      respectively
              
              
              104,278
              
              
              
              62,179Intangible
      assets, net of accumulated amortization of $4,719,119 and $4,471,786,
      respectively
              
              
              1,956,871
              
              
              
              1,608,499Fair
      value of available-for-sale securities
              
              
              588,461
              
              
              
              -Total
      non-current assets
              
              
              7,706,460
              
              
              
              7,191,617TOTAL
      ASSETS
              
              $
              9,654,914
              
              
              $
              7,700,847LIABILITIES
      AND SHAREHOLDERS' EQUITY (DEFICIENCY)CURRENT
      LIABILITIESAccounts
      payable
              
              $
              1,340,157
              
              
              $
              929,606Accrued
      expenses
              
              
              310,691
              
              
              
              552,699Notes
      payable secured by Canadian tax credits receivable
              
              
              226,729
              
              
              
              -Deferred
      income
              
              
              1,007,960
              
              
              
              1,235,773Notes
      payable - related party, including interest of $64,036 and $42,734,
      respectively
              
              
              1,169,015
              
              
              
              1,258,862Production
      loans – related party, including interest of $168,837 and $89,729,
      respectively
              
              
              1,147,763
              
              
              
              3,728,545Total
      current liabilities
              
              
              5,202,315
              
              
              
              7,705,485Production
      loans – related party, including interest of $321,347 and $0,
      respectively
              
              
              2,145,204
              
              
              
              -TOTAL
      LIABILITIES
              
              
              7,347,519
              
              
              
              7,705,485COMMITMENTS
      AND CONTINGENCIESAccrued
      dividends payable in common stock
              
              
              -
              
              
              
              3,432,663SHAREHOLDERS'
      EQUITY (DEFICIENCY)Series
      B Convertible Preferred Stock, par value $.0001 per share, 68,406 shares
      authorized, 61,832 and 63,607 shares issued and outstanding,
      respectively
              
              
              6
              
              
              
              6Series
      C Convertible Preferred Stock, par value $.0001 per share, 250,000 shares
      authorized, 190,247 and 190,947 shares issued and outstanding,
      respectively
              
              
              18
              
              
              
              18Series
      D Convertible Preferred Stock, par value $.0001 per share, 500,000 shares
      authorized, 148,247 and no shares issued and outstanding,
      respectively
              
              
              15
              
              
              
              -Common
      Stock, par value $.0001 per share, 60,000,000 shares authorized, 9,325,580
      and 8,207,189 shares issued and outstanding, respectively
              
              
              933
              
              
              
              821Common
      stock issuable, 812,143 shares of common stock
              
              
              1,161,364
              
              
              
              -Additional
      paid-in capital
              
              
              43,500,856
              
              
              
              37,819,138Other
      Accumulated Comprehensive income
              
              
              588,461
              
              
              
              -Accumulated
      deficit
              
              
              (42,944,258
              )
              
              
              (41,257,284
              )TOTAL
      SHAREHOLDERS' EQUITY (DEFICIENCY)
              
              
              2,307,395
              
              
              
              (3,437,301
              )TOTAL
      LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
              
              $
              9,654,914
              
              
              $
              7,700,847The
      accompanying notes are an integral part of these consolidated financial
      statements.
 
 
 F-2
 
 NATIONAL
      LAMPOON, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF OPERATIONSYear
      ended July 31,2008
              
              
              2007REVENUESProduction
              
              $
              395,278
              
              
              $
              44,500Licensing
              
              
              3,699,444
              
              
              
              3,952,847Advertising
      & Promotion
              
              
              1,762,467
              
              
              
              1,975,827Publishing
              
              
              71,017
              
              
              
              125,891Distribution
              
              
              1,399,778
              
              
              
              -Tours
              
              
              110,000
              
              
              
              -Total
      revenues
              
              
              7,437,984
              
              
              
              6,099,065COSTS
      AND EXPENSESCosts
      related to production revenue
              
              
              142,311
              
              
              
              146,578Costs
      related to licensing revenue
              
              
              77,858
              
              
              
              155,842Costs
      related to advertising and promotion revenues
              
              
              462,669
              
              
              
              1,608,195Costs
      related to publishing revenues
              
              
              125,154
              
              
              
              -Costs
      related to distribution revenues
              
              
              1,421,081
              
              
              
              -Amortization
      of capitalized production costs
              
              
              1,348,473
              
              
              
              206,590Amortization
      of intangible assets
              
              
              247,333
              
              
              
              242,502Impairment
      of capitalized film costs
              
              
              -
              
              
              
              391,683Selling,
      general and administrative expenses
              
              
              5,447,594
              
              
              
              5,837,705Total
      costs and expenses
              
              
              9,272,473
              
              
              
              8,589,095OPERATING
      LOSS
              
              
              (1,834,489
              )
              
              
              (2,490,030
              )OTHER
      INCOME (EXPENSE)Interest
      income
              
              
              -
              
              
              
              5,832Interest
      expense
              
              
              (295,071
              )
              
              
              (51,299
              )Write
      off of royalty payable
              
              
              396,250
              
              
              
              -Equity
      in investee loss
              
              
              -
              
              
              
              (800
              )Other
      income
              
              
              46,336
              
              
              
              32,127Total
      other income/(expense)
              
              
              147,515
              
              
              
              (14,140
              )NET
      LOSS
              
              
              (1,686,974
              )
              
              
              (2,504,170
              )Preferred
      stock dividends
              
              
              (1,585,598
              )
              
              
              (1,230,896
              )NET
      LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS
              
              $
              (3,272,572
              )
              
              $
              (3,735,066
              )Net
      loss per share attributable to common shareholder - basic and
      diluted
              
              $
              (0.39
              )
              
              $
              (0.49
              )Weighted
      average number of common shares - basic and diluted
              
              
              8,430,267
              
              
              
              7,691,520The
      accompanying notes are an integral part of these consolidated financial
      statements.
 
 F-3
  NATIONAL
      LAMPOON, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIENCY)FOR
      THE YEARS ENDED JULY 31, 2008 AND 2007AccumulatedPreferred
              
              
              
              
              
              Common
              
              
              Common
              
              
              Additional
              
              
              OtherSeries
      B
              
              
              Series
      C
              
              
              Series
      D
              
              
              Stock
              
              
              Common
              
              
              Stock
              
              
              Stock
              
              
              Paid-in
              
              
              Comprehensive
              
              
              AccumulatedShares
              
              
              Shares
              
              
              Shares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Issuable
              
              
              Capital
              
              
              Income
              
              
              Deficit
              
              
              TotalBalance
      at August 1, 2006
              
              
              63,607
              
              
              
              224,761
              
              
              
              -
              
              
              $
              28
              
              
              
              7,134,847
              
              
              $
              713
              
              
              $
              -
              
              
              $
              37,246,615
              
              
              $
              -
              
              
              $
              (38,753,114
              )
              
              $
              (1,505,758
              )Exercise
      of stock options for cash
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              82,100
              
              
              
              8
              
              
              
              -
              
              
              
              131,802
              
              
              
              -
              
              
              
              -
              
              
              
              131,810Fair
      value of shares issued for services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              192,232
              
              
              
              19
              
              
              
              -
              
              
              
              358,125
              
              
              
              -
              
              
              
              -
              
              
              
              358,144Exercise
      of warrants for common stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,055
              
              
              
              1
              
              
              
              -
              
              
              
              8,999
              
              
              
              -
              
              
              
              -
              
              
              
              9,000Conversion
      of Series C shares into Common Shares
              
              
              -
              
              
              
              (33,814
              )
              
              
              -
              
              
              
              (4
              )
              
              
              676,280
              
              
              
              68
              
              
              
              -
              
              
              
              (64
              )
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of accrued dividends into Common Shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              111,108
              
              
              
              11
              
              
              
              -
              
              
              
              239,265
              
              
              
              -
              
              
              
              -
              
              
              
              239,276Fair
      value of options & warrants issued to consultants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              646,333
              
              
              
              -
              
              
              
              -
              
              
              
              646,333Fair
      value of vesting of employee stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              405,320
              
              
              
              -
              
              
              
              -
              
              
              
              405,320Employee
      bonuses paid in common stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,200
              
              
              
              1
              
              
              
              -
              
              
              
              13,639
              
              
              
              -
              
              
              
              -
              
              
              
              13,640Series
      B Dividend accrual
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (572,463
              )
              
              
              -
              
              
              
              -
              
              
              
              (572,463
              )Series
      C Dividend accrual
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (658,433
              )
              
              
              -
              
              
              
              -
              
              
              
              (658,433
              )Net
      Loss for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,504,170
              )
              
              
              (2,504,170
              )Balance
      at July 31, 2007
              
              
              63,607
              
              
              
              190,947
              
              
              
              -
              
              
              
              24
              
              
              
              8,207,822
              
              
              
              821
              
              
              
              -
              
              
              
              37,819,138
              
              
              
              -
              
              
              
              (41,257,284
              )
              
              
              (3,437,301
              )Fair
      value of shares issued for services
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              294,375
              
              
              
              30
              
              
              
              -
              
              
              
              620,319
              
              
              
              -
              
              
              
              -
              
              
              
              620,349Exercise
      of options for common stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,000
              
              
              
              -
              
              
              
              -
              
              
              
              8,000
              
              
              
              -
              
              
              
              -
              
              
              
              8,000Exercise
      of warrants for common stock
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              18,835
              
              
              
              2
              
              
              
              -
              
              
              
              33,432
              
              
              
              -
              
              
              
              -
              
              
              
              33,434Fair
      value of shares issued in exchange for acquisition of intangible
      assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              219,388
              
              
              
              22
              
              
              
              -
              
              
              
              338,903
              
              
              
              -
              
              
              
              -
              
              
              
              338,925Fair
      value of warrants issued for acquisition of intangible
    assets
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              19,440
              
              
              
              -
              
              
              
              -
              
              
              
              19,440Stock
      issued in exchange for capitalized production costs
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              10,000
              
              
              
              1
              
              
              
              -
              
              
              
              20,499
              
              
              
              -
              
              
              
              -
              
              
              
              20,500Conversion
      of Series B Shares into Common Shares
              
              
              (1,775
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              99,999
              
              
              
              10
              
              
              
              -
              
              
              
              (10
              )
              
              
              -
              
              
              
              -
              
              
              
              -Conversion
      of accrued dividends into Common Shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              37,729
              
              
              
              4
              
              
              
              -
              
              
              
              67,392
              
              
              
              -
              
              
              
              -
              
              
              
              67,396Conversion
      of Series C Shares into Common Shares
              
              
              -
              
              
              
              (700
              )
              
              
              -
              
              
              
              -
              
              
              
              14,000
              
              
              
              1
              
              
              
              -
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -Exercise
      of warrants for common stock through the cancellation of notes
      payable
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              418,432
              
              
              
              42
              
              
              
              -
              
              
              
              742,675
              
              
              
              -
              
              
              
              -
              
              
              
              742,717Fair
      value vesting of stock options and warrants issued to
      consultants
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              153,726
              
              
              
              -
              
              
              
              -
              
              
              
              153,726Fair
      value of vesting of employee stock options
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,023,097
              
              
              
              -
              
              
              
              -
              
              
              
              1,023,097Preferred
      stock dividend accrual
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,585,598
              )
              
              
              -
              
              
              
              -
              
              
              
              (1,585,598
              )Conversion
      of Series B and Series C dividends into Series D Shares
              
              
              -
              
              
              
              -
              
              
              
              148,247
              
              
              
              15
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,239,844
              
              
              
              -
              
              
              
              -
              
              
              
              4,239,859Common
      stock issuable on conversion of accrued dividends on preferred stock into
      Common Shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              711,006
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              711,006Common
      stock issuable on conversion of loans and accrued interest into Common
      Shares
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              450,358
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              450,358Increase
      in fair value of available-for-sale securities
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              588,461
              
              
              
              -
              
              
              
              588,461Net
      Loss for the period
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,686,974
              )
              
              
              (1,686,974
              )Balance
      at July 31, 2008
              
              
              61,832
              
              
              
              190,247
              
              
              
              148,247
              
              
              $
              39
              
              
              
              9,325,580
              
              
              $
              933
              
              
              $
              1,161,364
              
              
              $
              43,500,856
              
              
              $
              588,461
              
              
              $
              (42,944,258
              )
              
              $
              2,307,395The
      accompanying notes are an integral part of these consolidated financial
      statements.
  F-4
 
 NATIONAL
      LAMPOON, INC. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF CASH FLOWSYear
      ended July 31,2008
              
              
              2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      Loss
              
              $
              (1,686,974
              )
              
              $
              (2,504,170
              )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
              
              
              18,335
              
              
              
              13,669Amortization
      of intangible assets
              
              
              247,333
              
              
              
              242,502Loss
      on disposal of fixed assets
              
              
              3,145
              
              
              
              -Fair
      value of shares issued for services
              
              
              620,349
              
              
              
              371,784Fair
      value of vested stock options and warrants
              
              
              1,176,823
              
              
              
              1,051,653Amortization
      of capitalized production costs
              
              
              1,348,473
              
              
              
              206,590Impairment
      of capitalized film costs
              
              
              -
              
              
              
              391,683Provision
      for doubtful accounts
              
              
              -
              
              
              
              199,419Write
      off of royalty payable
              
              
              (396,250
              )
              
              
              -Undistributed
      loss of equity investment
              
              
              -
              
              
              
              800Changes
      in assets and liabilities(Increase)/decrease
      in accounts receivable, net
              
              
              (1,282,652
              )
              
              
              192,649Increase
      in Canadian tax credits receivable
              
              
              (226,729
              )
              
              
              -Increase
      in prepaid expenses and other assets
              
              
              (13,282
              )
              
              
              (6,360
              )(Increase)/decrease
      in publishing costs
              
              
              (42,099
              )
              
              
              23,673Increase
      in production costs
              
              
              (862,032
              )
              
              
              (5,147,941
              )Increase/(decrease)
      in accounts payable
              
              
              410,551
              
              
              
              (21,353
              )Increase/(decrease)
      in accrued expenses
              
              
              154,242
              
              
              
              (138,517
              )(Decrease)/Increase
      in deferred revenues
              
              
              (227,813
              )
              
              
              979,505NET
      CASH USED IN OPERATING ACTIVITIES
              
              
              (758,580
              )
              
              
              (4,144,414
              )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of fixed assets
              
              
              (23,332
              )
              
              
              (33,528
              )Purchase
      of intangible assets
              
              
              (237,340
              )
              
              
              (73,653
              )Investments
      in equity securities
              
              
              -
              
              
              
              (800
              )NET
      CASH USED IN INVESTING ACTIVITIES
              
              
              (260,672
              )
              
              
              (107,981
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Payments
      of production loans
              
              
              (1,282,369
              )
              
              
              (765,121
              )Borrowings
      on production loans
              
              
              846,791
              
              
              
              4,199,753Payments
      of notes payable, related party
              
              
              (452,902
              )
              
              
              (675,834
              )Proceeds
      from notes payable, related party
              
              
              1,556,130
              
              
              
              1,363,892Borrowings
      on notes payable, secured by Canadian tax credits
    receivable
              
              
              226,729
              
              
              
              -Proceeds
      from the exercise of stock options
              
              
              8,000
              
              
              
              131,810Proceeds
      from the exercise of warrants
              
              
              33,434
              
              
              
              9,000NET
      CASH PROVIDED BY FINANCING ACTIVITIES
              
              
              935,813
              
              
              
              4,263,500NET
      (DECREASE)/INCREASE IN CASH
              
              
              (83,439
              )
              
              
              11,105CASH
      AT BEGINNING OF YEAR
              
              
              85,706
              
              
              
              74,601CASH
      AT END OF YEAR
              
              $
              2,267
              
              
              $
              85,706SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATIONCash
      paid for:Taxes
              
              $
              20,778
              
              
              $
              10,290Interest
              
              $
              3,804
              
              
              $
              83,140Non-cash
      investing and financing activities:Accrued
      dividends on preferred stock payable in common shares and Series D
      Convertible Preferred Stock
              
              $
              1,585,598
              
              
              $
              1,230,896Conversion
      of accrued dividends on Convertible Preferred Stock to common
      stock
              
              $
              67,396
              
              
              $
              239,276Fair
      value of stock issued in exchange for intangible assets
              
              $
              338,925
              
              
              $
              -Increase
      in fair value of available-for-sale securities
              
              $
              588,461
              
              
              $
              -Common
      stock to be issued through cancellation of notes payable
              
              $
              450,358
              
              
              $
              -Fair
      value of warrants granted in exchange for intangible
assets
              
              $
              19,440
              
              
              $
              -Common
      stock issued in exchange for capitalized production costs
              
              $
              20,500
              
              
              $
              -Exercise
      of warrants into common stock through the cancellation of notes
      payable
              
              $
              742,717
              
              
              $
              -Common
      stock to be issued as payment of accrued dividends on preferred
      stock
              
              $
              711,006
              
              
              $
              -Issuance
      of Series D preferred stock issued as payment for accrued dividends on
      preferred stock
              
              $
              4,239,859
              
              
              $
              -The
      accompanying notes are an integral part of these consolidated financial
      statements.
 
  F-5
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 NOTE
A - BUSINESS ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
  Organization.The Company was formed in California in 1986 and was primarily engaged in
the acquisition, production and distribution of videocassette programs for
retail sale. During the 1991 fiscal year, the Company acquired all of the
outstanding shares of National Lampoon, Inc. (NLI). NLI was incorporated in 1967
and was primarily engaged in publishing National Lampoon Magazine and related
activities. Subsequent to the Company's acquisition of NLI, it de-emphasized its
videocassette business and publishing operations and began to focus primarily on
exploitation of the National LampoonTM trademark. The Company reincorporated in
Delaware under the name National Lampoon, Inc. in November 2002.
  On May
17, 2002 a group of investors gained voting control of the Company through the
acquisition of its Series B Convertible Preferred Stock and warrants to purchase
its common stock (the "Reorganization Transaction"). Since the Reorganization
Transaction, the Company's business has expanded to include operations other
than licensing. On September 3, 2002, the Company's subsidiary, National Lampoon
Networks, Inc., acquired Burly Bear Network, Inc. to gain access to campus
television stations. The division has since expanded to the internet and now
sells advertising space on four distinct National Lampoon websites. The vast
majority of our programming is developed for both the college network and the
internet. Aside from providing programming to the college stations and the
internet, National Lampoon Networks, Inc. provides an integrated marketing
approach to retailers who wish to target the college market. The Company has
also entered the home entertainment market, producing original motion pictures.
In 2004, the Company began to offer travel services during spring break through
its subsidiary, National Lampoon Tours, Inc. The Company has discontinued these
services, however, National Lampoon Tours will continue to maintain a
significant presence at Spring Break events so that we may offer advertising,
distribute promotional material and hold live events for our advertisers and
other customers. In 2006 the Company began publishing its own books and has also
expanded its licensing activities by licensing its name to other books, content
displayed over wireless communications devices and electronic
games.
  Going
Concern. The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern. The Company's
current fiscal year net loss of $1,686,974 along with the prior two years net
losses of $2,504,170 and $6,859,085 as well as negative working capital of
$3,253,861 and accumulated deficit of $42,944,258 at July 31, 2008, raises
substantial doubt about its ability to continue as a going concern. We are
currently devoting efforts to raising additional capital through private
investors and achieving profitable operations. Our ability to continue as a
going concern is dependent upon our ability to develop additional sources of
capital and revenue. The accompanying consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
As of October 15, 2008, we had a bank overdraft of approximately $49,118 and
receivables totaling $1,810,855. Included in receivables is $616,397 in minimum
guarantee payments and accounts receivable due from domestic and foreign
distributors including Comedy Central, $250,000 (United States), Arts Alliance
America, $209,581 (United States), LCT $85,000 (Russia)  and Beta
$71,816 (Germany). We are currently delivering two films for which the minimum
guarantee payments are due upon notice of delivery and we expect payments to be
received by the second quarter of the 2009 fiscal year.  We are
currently in post production on one film for which minimum guarantee payments
are due upon notice of delivery and we expect payments to be received in the
third and fourth quarters of the 2009 fiscal year.
 
 Additionally
we have completed an audit of Warner Bros. Entertainment, Inc. relating to its
exploitation of the films National Lampoon’s Vacation,
National Lampoon’s European
Vacation and National
Lampoon’s Christmas Vacation. We have submitted the audit reports to
Warner Bros and we have been negotiating a settlement of the royalties that we
believe we are owed. Based on the audit reports we expect the negotiations and
settlement to be completed during the second quarter of the 2009 fiscal
year.  The Company has not recorded an estimate of the
amounts.
  Our
principal source of funds used for operations and working capital has been loans
received from Daniel S. Laikin, our Chief Executive Officer, and Timothy Durham,
a director. The aggregate amount of the loans and accrued interest owed to Mr.
Laikin and Mr. Durham at July 31, 2008 is $1,244,178 up from $1,241,937 at July
31, 2007. These two individuals have expressed their continued support to
provide loans to us to meet any immediate working capital
requirements.
  Principles of
Consolidation.The accompanying consolidated financial statements of the
Company include the accounts of National Lampoon, Inc., its wholly owned
subsidiaries, National Lampoon Network, Inc and National Lampoon Tours, Inc.
along with its 50% ownership in National Lampoon Clubhouse, Inc., and its 100%
ownership in Bagboy Productions, Inc, Ratko Productions, Inc. and 301
Productions, Inc. During the 2007 fiscal year, the Company disposed of its
interest in Totally Baked, LLC pursuant to a settlement agreement with Laughter
Heals, Inc. The Company has the full and exclusive control of the management and
operation of the business of each subsidiary and participates in 100% of the
revenues and losses of its subsidiaries. The Company participates in 50% of the
revenues and net losses of National Lampoon Clubhouse, Inc. Inter-company
balances and transactions have been eliminated in consolidation.
   F-6
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
  Revenue
Recognition.  Royalty income from film contracts is derived from
the sale of DVDs or from the licensing of film rights to third parties. A
significant portion of royalty income is paid to the Company based on the
timetable associated with royalty statements generated by third party
processors, and is not typically known by the Company in advance of receiving
the royalty statements. This revenue is consequently not recognized until the
amount is either known or reasonably estimable or until receipt of the
third-party statements. The Company contracts with various agencies to
facilitate collection of royalty income. When the Company is entitled to
royalties based on gross receipts, revenue is recognized before deduction of
agency fees, which are included as a component of cost of revenue. The Company
recognizes revenue from television and film productions pursuant to American
Institute of Certified Public Accountants Statement of Position 00-2,
“Accounting by Producers or Distributors of Films” (“SOP 00-2”). The following
conditions must be met in order to recognize revenue under SOP 00-2:
(i) persuasive evidence of a sale or licensing arrangement exists;
(ii) the program is complete and has been delivered or is available for
immediate and unconditional delivery; (iii) the license period of the
arrangement has begun and the customer can begin its exploitation, exhibition or
sale; (iv) the arrangement fee is fixed or determinable; and
(v) collection of the arrangement fee is reasonably assured. Advance
payments received from buyers or licensees are included in the consolidated
financial statements as a component of deferred revenue.
  Film
Costs.Investment in film
costs includes the capitalization of costs incurred to produce the film content
including direct negative costs, production overhead, interest and development.
These costs are recognized as operating expenses on an individual film basis in
the ratio that the current year’s gross revenues bear to management’s estimate
of total ultimate gross revenues from all sources to be earned over a seven year
period. Capitalized production costs are stated at the lower of unamortized cost
or estimated fair value on an individual film basis. Revenue forecasts, based
primarily on historical sales statistics, are continually reviewed by management
and revised when warranted by changing conditions. When estimates of total
revenues and other events or changes in circumstances indicate that a film has a
fair value that is less than its unamortized cost, an impairment loss is
recognized in the current period for the amount by which the unamortized cost
exceeds the film’s fair value.
 
 Advertising
Expense.The Company expenses advertising costs as incurred. During the
years ended July 31, 2008 and 2007, the Company incurred approximately $2,500
and $1,000, respectively for corporate advertising costs.
 
 We also
incurred $442,330 in marketing and advertising expenses related to the release
of four of our titles during the year ended July 31, 2008. There were no such
costs during the year ended July 31, 2007.
  Use of Estimates.The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Management makes estimates that effect reserves for allowance for doubtful
accounts, estimated useful life of property and equipment, accrued expenses,
fair value of equity instruments, reserves for any commitments or contingencies,
debt issue costs, capitalized film costs, calculation of impairment,
amortization expense and deferred income taxes.
  Fixed Assets and
Related Depreciation.Fixed assets are stated at cost. Depreciation of
fixed assets is computed by the straight-line method over the estimated useful
lives of the assets ranging from three to five years.
  Concentration.The Company maintains its cash balances at financial institutions that
are federally insured; however, at times such balances may exceed federally
insured limits. The Company has not experienced any losses in such accounts. The
Company’s cash balances on deposit with banks are guaranteed by the Federal
Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk
for the amounts of funds held in bank accounts in excess of the insurance limit.
In assessing the risk, the Company’s policy is to maintain cash balances with
high quality financial institutions.
 
 During
the year ended July 31, 2008 four customers accounted for 14%, 11%, 14% and 13%,
respectively, of total revenue, while one customer accounted for 52% of total
revenue during the year ending July 31, 2007. As of July 31, 2008, the Company
had $255,982 (14%), $250,000 (14%), $241,709 (13%), $209,585 (12%) and $200,000
(11%) of accounts receivable due from its largest customers. As of July 31,
2007, the Company had $128,383 (16%), $85,571 (10%) and $121,681 (15%), of
accounts receivable due from its largest customers.
 
 The
Company currently does not rely on a single vendor for a majority of its
productions. Vendors can be easily replaced if the need arises. A change in
vendors would not cause a significant delay in the production process that would
ultimately affect operating results.
  Cash and Cash
Equivalents.Cash and cash equivalents include short-term investments
with an original maturity of three months or less.
 
 Fair Value of
Financial Instruments.The carrying amount of the Company’s financial
instruments including cash, accounts receivable, accounts payable, and accrued
expenses approximate their fair value as of July 31, 2008 due to their
short maturities. The carrying amounts of production loans and notes payable
approximate fair value because the related effective interest rates on these
instruments approximate the rates currently available to the
Company.
 
  F-7
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 Comprehensive
Income (Loss).SFAS No. 130, “Reporting Comprehensive Income”,
established rules for the reporting and display of comprehensive income and its
components. SFAS No. 130 requires unrealized gains or losses on the Company’s
available-for-sale securities adjustments to be reported as a separate component
(comprehensive income/loss) of shareholders’ equity. The components of
comprehensive income (loss) are as follows:
 
 Year
      ended July 31,2008
              
              
              2007Net
      Loss
              
              $
              (1,686,974
              )
              
              $
              (2,504,170
              )Fair
      value adjustment on available-for-sale securities
              
              
              588,461
              
              
              
              -Comprehensive
      Loss
              
              $
              (1,098,513
              )
              
              $
              (2,504,170
              )
 
 Investments.The Company accounts
for its investments in equity securities under SFAS 115, “Accounting for Certain
Investments in Debt and Equity Securities.” The Company has classified its
investments as available for sale securities, and such securities are carried at
fair value. The fair values for marketable equity securities are based on quoted
market prices. Unrealized gains or losses, net of tax, are included as a
component of accumulated other comprehensive income in shareholders’ equity.
Realized gains and losses and declines in value considered to be other than
temporary on available for sale securities are included in other income
(loss).
 
 Accounts
Receivable.The Company evaluates the collectability of its trade
accounts receivable based on a number of factors. In circumstances where the
Company becomes aware of a specific customer’s inability to meet its financial
obligations to the Company, a specific reserve for bad debts is estimated and
recorded, which reduces the recognized receivable to the estimated amount the
Company believes will ultimately be collected. In addition to specific customer
identification of potential bad debts, bad debt charges are recorded based on
the Company’s historical losses and an overall assessment of past due trade
accounts receivable outstanding.
 
 The
allowance for doubtful accounts and returns is established through a provision
for returns and discounts charged against sales. Receivables are charged off
against the allowance when payments are received or products returned. The
allowance for doubtful accounts and returns and discounts as of July 31, 2008
and 2007 was $181,619 and $461,810, respectively.
  Intangible
Assets. The
Company records intangible assets in accordance with Statement of Financial
Accounting Standard (SFAS) Number 142, “Goodwill and Other Intangible
Assets.” Goodwill and other intangible assets deemed to have indefinite lives
are not subject to annual amortization. Intangible assets which have finite
lives are amortized on a straight line basis over their remaining useful life;
they are also subject to annual impairment reviews. See Note D.
  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.
  As of
July 31, 2008, the Company has determined and tested for impairment in
accordance with SFAS 144, paragraphs 16-21, and concluded that the expected
future cash flows relating to its intangible assets will result in the recovery
of the carrying value of such asset. The continued realization of these
intangible assets, however, is dependent upon the continued exploitation of the
National Lampoon trademark for use in motion pictures, television, the internet,
merchandising and other appropriate opportunities. If these and other ventures
that the Company may enter into do not result in sufficient revenues to recover
the associated intangible assets, the Company's future results of operations may
be adversely affected by adjustments to the carrying values of such
intangible.
 
 Income
Taxes.Current
income tax expense is the amount of income taxes expected to be payable for the
current year. A deferred income tax asset or liability is established for the
expected future consequences of temporary differences in the financial reporting
and tax bases of assets and liabilities. The Company considers future taxable
income and ongoing, prudent and feasible tax planning strategies in assessing
the value of its deferred tax assets. If the Company determines that it is more
likely than not that these assets will not be realized, the Company will reduce
the value of these assets to their expected realizable value, thereby decreasing
net income. Evaluating the value of these assets is necessarily based on the
Company’s judgment. If the Company subsequently determined that the deferred tax
assets, which had been written down, would be realized in the future, the value
of the deferred tax assets would be increased, thereby increasing net income in
the period when that determination was made.
 
 Recent Accounting
Pronouncements.In September 2006, the FASB issued FASB Statement No. 157
(“FAS 157”), “Fair Value Measurements,” which establishes a framework for
measuring fair value in accordance with GAAP and expands disclosures about fair
value measurements. FAS 157 does not require any new fair value measurements but
rather eliminates inconsistencies in guidance found in various prior accounting
pronouncements. FAS 157 is effective for fiscal years beginning after November
15, 2007.
   F-8
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
  In
February 2007, the FASB issued FASB Statement No. 159, “The Fair Value Option
for Financial Assets and Liabilities – including an amendment of FASB Statement
No. 115” (FAS 159). FAS 159, which becomes effective for the Company on August
1, 2008, permits companies to choose to measure many financial instruments and
certain other items at fair value and report unrealized gains and losses in
earnings. Such accounting is optional and is generally to be applied instrument
by instrument.
 
 In
December 2007, the FASB issued FASB Statement No. 141(R), “Business
Combinations” (FAS 141(R)), which establishes accounting principles and
disclosure requirements for all transactions in which a company obtains control
over another business. Statement 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Earlier adoption is prohibited.
 
 In
December 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51”. SFAS
No. 160 establishes accounting and reporting standards that require that
the ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity; the
amount of consolidated net income attributable to the parent and to the
non-controlling interest be clearly identified and presented on the face of the
consolidated statement of income; and changes in a parent’s ownership interest
while the parent retains its controlling financial interest in its subsidiary be
accounted for consistently. SFAS No. 160 also requires that any retained
non-controlling equity investment in the former subsidiary be initially measured
at fair value when a subsidiary is deconsolidated. SFAS No. 160 also sets
forth the disclosure requirements to identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
No. 160 applies to all entities that prepare consolidated financial
statements, except not-for-profit organizations, but will affect only those
entities that have an outstanding non-controlling interest in one or more
subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective
for fiscal years, and interim periods within those fiscal years beginning on or
after December 15, 2008. Earlier adoption is prohibited. SFAS No. 160
must be applied prospectively as of the beginning of the fiscal year in which it
is initially applied, except for the presentation and disclosure requirements.
The presentation and disclosure requirements are applied retrospectively for all
periods presented. The Company does not have a non-controlling interest in one
or more subsidiaries.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(SFAS 161). This Statement requires enhanced disclosures about an entity’s
derivative and hedging activities, including (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS No. 133,“Accounting for Derivative
Instruments and Hedging Activities” (SFAS 133), and its related interpretations,
and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance, and cash flows. SFAS 161 is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008.
 
 The
Company does not believe that the adoption of the above recent pronouncements
will have a material effect on the Company’s consolidated results of operations,
financial position, or cash flows.
 
 Net Income or
Loss Per Share.  Basic loss per share is calculated by dividing net
loss available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted loss per share is calculated
assuming the issuance of common shares under the treasury stock method, if
dilutive, resulting from the exercise of stock options and warrants. Basic and
diluted loss per share is $(0.39) and $(0.49) for the twelve months ended July
31, 2008 and 2007, respectively. Basic and diluted loss-per-share is the same at
July 31, 2008 and 2007, as common equivalent shares have been excluded from the
computation due to the fact that they are anti-dilutive. Options and warrants to
purchase 6,508,722 and 8,627,647 common shares during the twelve months ended
July 31, 2008 and 2007 respectively, are not included in the calculation of
diluted earnings per share because their inclusion would be anti-dilutive.
10,253,371 and 7,402,431 shares that would be issuable upon conversion of the
convertible preferred stock are not included in the calculation of diluted
earnings per share during the twelve months ended July 31, 2008 and 2007,
respectively, because their inclusion would also be anti-dilutive.
 
 At July
31, 2008, there were 61,832 Series B Convertible Preferred Shares, 190,247
Series C Convertible Preferred Shares outstanding and 148,247 Series D
Convertible Preferred Shares outstanding. Upon conversion of the 61,832 Series B
Convertible Preferred Shares, 3,483,491 common shares would be issuable. Upon
conversion of the 190,247 Series C Convertible Preferred Shares, 3,804,940
common shares would be issuable. Upon conversion of the 148,247 Series D
Convertible Preferred Shares, 2,964,940 common shares would be issuable. This
would result in a diluted weighted average number of shares of 17,055,926 for
the year ended July 31, 2008.
  Each
Series B Convertible Preferred Share is convertible into 56.338 common shares.
Each Series C and Series D Convertible Preferred Share is convertible into 20
common shares. Warrants attached to the Series B and Series C Convertible
Preferred Stock are not included in the calculation of diluted earnings per
share during the year ended July 31, 2008 because their inclusion would be
anti-dilutive.
  Stock Based
Compensation.The Company periodically issues stock options and warrants
to employees and non-employees in non-capital raising transactions for goods and
services.
   F-9
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 The
Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R
effective January 1, 2006 and is using the modified prospective method in which
compensation cost is recognized beginning with the effective date (a) based on
the requirements of SFAS No. 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS No. 123R for all awards
granted to employees prior to the effective date of SFAS No. 123R that remained
unvested on the effective date. The Company accounts for stock option and
warrant grants issued and vesting to non-employees in accordance with EITF No.
96-18: “Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services” and
EITF 00-18 “Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees” whereas the value of the stock
compensation is based upon the measurement date as determined at either a) the
date at which a performance commitment is reached, or b) the date at which the
necessary performance to earn equity instruments is complete.
 
 NOTE
B - CAPITALIZED PRODUCTION COSTS
  The
following table summarizes the net capitalized film costs in various stages of
production at July 31, 2008 and 2007:
  July
      31,
              
              
              July
      31,2008
              
              
              2007In
      development - theatrical
              
              
              2,677,872
              
              
              
              5,379,398In
      development - television
              
              
              -
              
              
              
              7,110Completed
      - theatrical
              
              
              2,339,695
              
              
              
              97,000Total
      film costs
              
              $
              5,017,567
              
              
              $
              5,483,508
 
 The
Company expects to amortize within three years 90% of capitalized film costs
based on the estimated costs and ultimate revenue projected. The portion of the
costs of the Company's films that was amortized during the years ended July 31,
2008 and 2007 was $1,348,473 and $206,590, respectively. The portion of the
costs of the Company's films that are expected to be amortized during the
upcoming 12 months is approximately $1,593,216.
 
 NOTE
C - FIXED ASSETS
 
 Fixed
assets comprise the following as of July 31, 2008 and 2007:
 
 July
      31,
              
              
              July
      31,2008
              
              
              2007Computer
      equipment
              
              $
              179,596
              
              
              $
              172,291Camera
      and lighting equipment
              
              
              39,869
              
              
              
              38,433Furniture
      and office equipment
              
              
              4,217
              
              
              
              4,217Leasehold
      improvements
              
              
              9,339
              
              
              
              -233,021
              
              
              
              214,941Accumulated
      depreciation
              
              
              (193,738
              )
              
              
              (177,510
              )$
              39,283
              
              
              $
              37,431
 
 Depreciation
expense for the years ended July 31, 2008 and 2007 was $18,335 and $13,669,
respectively.
 
 NOTE
D – INTANGIBLE ASSETS
 
 Intangible
assets are comprised of the following as of July 31, 2008 and 2007:
  July
      31,
              
              
              July
      31,2008
              
              
              2007National
      Lampoon trademark
              
              $
              6,010,285
              
              
              $
              6,010,285Websites
              
              
              665,705
              
              
              
              70,0006,675,990
              
              
              
              6,080,285Accumulated
      amortization
              
              
              (4,719,119
              )
              
              
              (4,471,786
              )$
              1,956,871
              
              
              $
              $1,608,499
 
 Amortization
expense for the years ended July 31, 2008 and 2007 was $247,333 and $242,502,
respectively.
 
 The estimated aggregate
amortization as of July 31, 2008 for each of the next five years
is:
 
 Year
              
              Amount2009
              
              $
              373,5522010
              
              
              373,5522011
              
              
              373,5522012
              
              
              373,5522013
              
              
              373,341Thereafter
              
              
              95,322
 F-10
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 NOTE E - NOTES PAYABLE TO
RELATED PARTIES AND ACCRUED INTEREST
  Notes
payable to related parties and accrued interest consist of the following at July
31, 2008 and 2007:
 
 July
      31,
              
              
              July
      31,2008
              
              
              2007(A)
      Payable to Daniel Laikin
              
              $
              412,070
              
              
              $
              1,004,016(B)
      Payable to Timothy Durham
              
              
              756,945
              
              
              
              166,784(C)
      Payable to Christopher Williams
              
              
              -
              
              
              
              88,062$
              1,169,015
              
              
              $
              1,258,862
 
 (A) As of
July 31, 2008, the Company owed Daniel Laikin, the Company's Chief Executive
Officer, approximately $369,720 in principal and $42,350 in interest. As of July
31, 2007, the Company owed Mr. Laikin approximately $970,000 in principal
and $34,016 in interest. The loans bear interest at the rate of 6% per annum.
The obligations to Mr. Laikin are unsecured and payable on demand. During the
twelve months ending July 31, 2008, $544,654 of principal and $55,346 of
interest for a total of $600,000 was converted to common stock.  Mr.
Laikin cancelled $467,817 of principal amount by exercising warrants to purchase
a total of 263,559 shares of common stock at an exercise price of $1.775 per
share and converted the balance of the outstanding principal amount and the
accrued interest, totaling $132,183, into 92,436 shares of common stock at an
exercise price of $1.43 which was the closing price on the trading day
immediately preceding the conversion date. We must submit an application to list
these shares to the American Stock Exchange before they can be
issued.  We intend to submit an application to list the additional
shares as soon as possible.
 
 (B) As of
July 31, 2008, the Company owed Timothy Durham, a director, approximately
$735,259 in principal and $21,686 in interest. As of July 31, 2007, the Company
owed Mr. Durham approximately $162,794 in principal and $3,990 in interest.
The loans bear interest at the rate of 6% to 6.75% per annum. The obligations to
Mr. Durham are unsecured and payable on demand. During the twelve months ending
July 31, 2008, $479,560 of principal and $20,440 of interest for a total of
$500,000 was converted to common stock.  Mr. Durham cancelled $216,329
of principal amount by exercising warrants to purchase a total of 121,876 shares
of common stock at an exercise price of $1.775 per share and converted the
balance of the outstanding principal amount and the accrued interest, totaling
$283,671, into 198,371 shares of common stock at an exercise price of $1.43
which was the closing price on the trading day immediately preceding the
conversion date. We must submit an application to list these shares to the
American Stock Exchange before they can be issued.  We intend to
submit an application to list the additional shares as soon as
possible.
 
 (C) As of
July 31, 2008, the Company owed Christopher R. Williams, a shareholder, $0 in
principal and interest. As of July 31, 2007, the Company owed Mr. Williams
approximately $83,333 in principal and $4,729 in interest. During the twelve
months ended July 31, 2008, $83,333 of principal and $9,741 of interest for a
total of $93,074 was converted to common stock.  Mr. Williams
cancelled $58,570 in principal amount by exercising warrants to purchase a total
of 32,997 shares of common stock at an exercise price of $1.775 per share and
converted the balance of the outstanding principal amount and the accrued
interest, totaling $34,504, into 24,129 shares of common stock at an exercise
price of $1.43 which was the closing price on the trading day immediately
preceding the conversion date. We must submit an application to list these
shares to the American Stock Exchange before they can be issued.  We
intend to submit an application to list the additional shares as soon as
possible.
  NOTE
F - PRODUCTION LOANS FROM RELATED PARTIES AND ACCRUED INTEREST
  Outstanding
production loans from related parties and accrued interest consist of the
following as of July 31, 2008 and 2007:
 
 July
      31,
              
              
              July
      31,2008
              
              
              2007(A)  Red
      Rock Productions, Inc. - Bag Boy Productions, Inc.
              
              $
              1,070,854
              
              
              $
              1,695,792(B)
      Red Rock Productions, Inc. - Ratko Productions, Inc.
              
              
              2,146,950
              
              
              
              1,961,616(C)
      Dan Laikin
              
              
              75,163
              
              
              
              71,1373,292,967
              
              
              
              3,728,545Less
      current portion
              
              
              (1,147,763
              )
              
              
              (3,728,545
              )$
              2,145,204
              
              
              $
              -
   F-11
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 (A)
              On
      October 26, 2006, the Company entered into a financing agreement with Red
      Rock Productions Inc. (Red Rock) regarding the financing of the theatrical
      motion picture National
      Lampoon's Bag Boy.Red Rock's parent, Red Rock Pictures Holdings,
      Inc., is a publicly traded company and related party (See Note I). In
      accordance with the initial agreement, Red Rock agreed to loan the Company
      up to $2,000,000 (unless otherwise agreed to by both parties) to fund this
      film, with payments to be made on an approved cash flow as provided by the
      Company. Red Rock will be entitled to recoup its investment plus interest
      at 10% accruing on the average daily balance from the date the loan is
      provided to the Company. Red Rock will also be entitled to contingent
      participation of twenty five percent (25%) of all net contingent proceeds
      from the picture. Red Rock has a security interest in the film to the
      extent of the actual amount of the funding as long as there is an unpaid
      balance on the loan.  As a result of a modification to this financing
      agreement that was entered into on October 31, 2008, payment of this loan
      will now be made no later than March, 14, 2011.  The payments are to
      be made from the proceeds from the release of the film over an estimated
      revenue cycle of three years, as follows:  first the
      Company is to receive a 20% distribution fee; thereafter, the Company is
      to receive recoupment of all prints and advertising expenses incurred in
      connection with the distribution of the picture. The remaining gross
      receipts are to be split equally between the Company and Red Rock until
      such time as Red Rock has recouped its investment entirely. As of July 31,
      2008, the Company had a loan balance of $813,756 in principal
      and $257,098 in interest under this financing agreement for a total of
      $1,070,854.  Under the terms of the agreement and based on the
      expected cash flows of the film, the loan is expected to be repaid as
      follows: $356,951 during the 2009 fiscal year, $475,935 during the
      2010 fiscal year, and $237,968 during the 2011 fiscal year. As of July 31,
      2007, the Company received $1,642,888 in principal and $52,904 in interest
      was accrued under this financing agreement.
  (B)
              On
      October 26, 2006, the Company entered into a financing agreement with Red
      Rock Productions Inc. (Red Rock) regarding the financing of the theatrical
      motion picture National
      Lampoon's Ratko.Red Rock's parent, Red Rock Pictures Holdings,
      Inc., is a publicly traded company and related party (See Note I). In
      accordance with the initial agreement, Red Rock agreed to loan the Company
      up to $2,000,000 (unless otherwise agreed to by both parties) to fund this
      film, with payments to be made on an approved cash flow as provided by the
      Company. Red Rock will be entitled to recoup its investment plus interest
      at 10% accruing on the average daily balance from the date the loan is
      provided to the Company. Red Rock will also be entitled to contingent
      participation of twenty five percent (25%) of all net contingent proceeds
      from the picture. Red Rock has a security interest in the film to the
      extent of the actual amount of the funding as long as there is an unpaid
      balance on the loan. As a result of a modification to this financing
      agreement that was entered into on October 31, 2008, payment of this loan
      will now be made no later than January 31, 2012.  The payments
      are to be made from the proceeds from the release of the film over an
      estimated revenue cycle of three years, as follows: first the Company
      is to receive a 20% distribution fee; thereafter, the Company is to
      receive recoupment of all prints and advertising expenses incurred in
      connection with the distribution of the picture. The remaining gross
      receipts are to be split equally between the Company and Red Rock until
      such time as Red Rock has recouped its investment entirely. As of July 31,
      2008, the Company had a loan balance of $1,922,028 in principal
      and $224,922 in interest under this financing agreement for a total of
      $2,146,950.   Under the terms of the agreement and based on the
      expected cash flows of the film, the loan is expected to be repaid as
      follows: $715,649 during the 2009 fiscal year, $954,201 during the
      2010 fiscal year, and $477,100 during the 2011 fiscal year.  As of
      July 31, 2007, the Company received $1,928,928 in principal and $32,688 in
      interest was accrued under this fmancing agreement.
 
 (C)
              Mr.
      Laikin, the Company's Chief Executive Officer, has made various loans to
      us for film financing. As of July 31, 2008, he was owed $67,000 in
      principal and $8,163 in interest for production loans. The loans bear
      interest at the rate of 6% per annum. As of July 31, 2007, he was owed
      $67,000 in principal and $4,137 in interest for production
      loans.
 
 The
aggregate maturities of production loans from related parties and accrued
interest for each of the next five years and thereafter are as follows as of
July 31, 2008:
 
 Year
              
              Amount2009
              
              $
              1,147,7632010
              
              
              1,430,1362011
              
              
              715,0682012
              
              
              -$
              3,292,967
 
 NOTE
G - SHAREHOLDERS’ EQUITY
 
 Preferred
Stock
  Preferred
stock consists of 68,406 shares of Series B Convertible Preferred
Stock (“Series B Stock”), authorized having a par value of $0.0001 per share,
250,000 shares of Series C Convertible Preferred Stock (“Series C Stock”)
authorized having a par value of $0.0001 per share, and 500,000 shares of Series
D Convertible Preferred Stock (“Series D Stock”) authorized having a par value
of $0.0001 per share. As of July 31, 2008, there were 61,832 shares of Series B
Stock outstanding, 190,247 shares of Series C Stock outstanding and 148,247
shares of Series D Stock outstanding.
  Dividends
accrue on the Company's Series B Stock and Series C Stock. Prior to September
12, 2008, the Company was required to accrue dividends on the Series B Stock and
Series C Stock until it was converted to common stock at which time the
dividends were to be paid. On September 12, 2008, the Company filed
amendments to its Certificate of Incorporation (Series B Stock) and to the
Certificate of Designations, Preferences, Rights and Limitations (Series C
Stock). By filing these amendments, the Company is now required to pay the
dividends on a quarterly basis. Dividends accrue at the rate of 9% per annum on
the sum of the original purchase price of the Series B Stock or Series C Stock
plus all accumulated and unpaid dividends thereon (compounding
annually).
 
 During
the twelve-month periods ended July 31, 2008 and 2007, the Company accrued
$1,585,598 and $1,230,896, respectively, of Series B Stock and Series C Stock
dividends.
   F-12
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 Shareholders
have a choice in the way in which the accrued dividends will be paid to
them.  Shareholders may have the accrued dividends paid with common
stock.  Alternatively, shareholders may have the accrued dividends paid
with the Company’s Series D Stock.  Dividends may not be paid with cash.
The number of shares of Series D Stock or common stock that will be
issued in payment of a dividend will be computed by (i) dividing the amount of
the dividend by the closing price of a share of common stock as reported by the
exchange on which the common stock is traded on the trading day immediately
prior to the date on which the dividend is to be paid, and, as to the Series D
Stock only, (ii) dividing the quotient by 20.  During the year ended
July 31, 2008, the Company issued 148,247 shares of Series D Stock, valued at
$4,239,859, and has recorded 497,207 common shares to be issued pending the
approval of the listing of additional shares application we intend to file with
the American Stock Exchange, valued at $711,006, in connection with the payment
of the Series B Stock and Series C Stock dividends.
 
 Each
share of Series B Stock is convertible into 56.338 common shares. Each share of
Series C Stock and Series D Stock is convertible into 20 common
shares.
  During
the year ended July 31, 2007, 5,055 shares of the Company’s common stock were
issued upon exercise of warrants issued in conjunction the Company’s sale of its
Series B Stock that resulted in cash proceeds to the Company of approximately
$9,000.
 
 During
the year ended July 31, 2007, 33,814 shares of the Company's Series C Stock and
related accrued dividends of $239,276 were converted to 787,388 shares of the
Company’s common stock. The accrued dividends were converted into the Company’s
common stock based on the closing price of the Company’s common stock on the
trading day immediately preceding the conversion date.
 
 During
the year ended July 31, 2008, 1,775 shares of the Company's Series B Stock and
related accrued dividends of $58,613 were converted to 132,562 shares of the
Company’s common stock and 700 shares of the Company's Series C Stock and
related accrued dividends of $8,783 were converted to 19,166 shares of the
Company’s common stock. The accrued dividends were converted into the Company’s
common stock based on the closing price of the Company’s common stock on the
trading day preceding the conversion date.
 
 During
the year ended July 31, 2008, warrants issued in conjunction with the sale of
the Series B Stock were exercised to purchase 274,964 shares of the Company’s
common stock and warrants issued in conjunction with the sale of the Series C
Stock were exercised to purchase 143,468 shares of the Company’s common stock in
connection with the cancellation of $742,717 of notes payable, related
party.  (See Note E).
 
 During
the year ended July 31, 2008, warrants issued in conjunction with the sale of
the Series C Stock were exercised to purchase 18,835 shares of the Company’s
common stock. The exercise price per share was $1.775. The proceeds received
from the exercise of the warrants totaled $33,434.
 
 Common
Stock
  Common
stock consists of $0.0001 par value, 60,000,000 shares authorized,
9,325,580 shares issued, and 10,137,723 shares outstanding as of July 31,
2008.
  During
the year ended July 31, 2007, 192,232 shares of common stock with a value of
$358,144 were issued for services as follows: 139,842 shares of common stock at
stock prices ranging from $1.20 to $2.36 per share with a value of $262,825 were
issued to consultants for monthly consulting services, 27,547 shares of common
stock at a stock price of $1.50 per share with a value of $41,321 were issued to
a consultant for production services, 2,116 shares of common stock at a stock
price of $1.89 per share with a total value of $4,000 were issued to two
consultants for a one-time consulting fee, and 22,727 shares of common stock at
a stock price of $2.20 per share with a value of $49,999 were issued to a
professional services firm for services they provided.
 
 During
the year ended July 31, 2007, 6,200 shares of common stock at a stock price of
$2.20 per share with a value of $13,640 were issued to employees as a
bonus.
 
 During
the twelve months ended July 31, 2007, 82,100 shares of the Company’s common
stock were purchased through the exercise of stock options that resulted in cash
proceeds to the Company of approximately $131,810.
 
 During
the year ended July 31, 2008, 294,375 shares of common stock with a value of
$620,349 were issued for services as follows: 18,127 shares of common stock at
stock prices ranging from $1.68 to $2.34 per share with a value of $38,274 were
issued to employees as a bonus, 220,862 shares of common stock at stock prices
ranging from $1.52 to $2.55 per share with a value of $467,546 were issued to
various consultants for monthly consulting services, 4,171 shares of common
stock at a stock price of $2.15 per share with a value of $8,969 were issued to
Board members for fees owed, 7,826 shares of common stock at a stock price of
$2.40 per share with a value of $18,782 were issued to a former executive for
services provided, and 43,389 shares at a stock price of $2.00 per share valued
at $86,778 were issued to a professional services firm for services they
provided.
 
 During
the year ended July 31, 2008, 10,000 shares of common stock at a stock price of
$2.05 per share with a value of $20,500 were issued for the purchase of a script
and that value is included in capitalized production costs.
   F-13
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 During
the year ended July 31, 2008, 219,388 shares of common stock at stock prices
ranging from $1.40 to $2.03 per share with a value of $338,925 and 40,000
warrants with a value of $19,440 were issued to various parties in connection
with the acquisition of intangible assets. The shares were valued in accordance
with the various agreements based upon either the agreement date, date of
issuance, or the 5-day average closing stock price prior to the date of the
agreement. The warrants were valued at the fair market value using the Black
Scholes option pricing model. (See Note K)
 
 During
the year ended July 31, 2008, 314,936 shares of common stock were recorded as
common stock to be issued in exchange for the cancellation of notes payable,
related party in the amount of $450,358. (See Note E)
 
 During
the year ended July 31, 2008, 5,000 shares of the Company’s common stock were
purchased through the exercise of stock options that resulted in cash proceeds
to the Company of approximately $8,000.
 
 NOTE
H - COMMITMENTS AND CONTINGENCIES
  Leases
  The
Company's principal offices are located in West Hollywood, California where it
is subleasing approximately 6,000 square feet of property for approximately
$19,623 per month. The sublease expired on April 30, 2007 and became a month-to
month lease thereafter. The sublease agreement includes certain provisions for
rent adjustments based upon the lessor's operating costs and increases in the
Consumer Price Index.
  The
Company is obligated under an equipment lease for a photocopy machine of
approximately $540 per month.
 
 The
Company's rent expense was approximately $218,631 and $141,820, for the years
ended July 31, 2008 and 2007, respectively.
  Royalty
Agreements
  Harvard
Lampoon Agreement. Pursuant to an agreement between the Company and The Harvard
Lampoon, Inc. ("HLI"), as restated October 1, 1998, the Company is obligated to
pay HLI a royalty of 1.5% to 2% on the Company's net receipts from exploitation
of the National Lampoon trademark. Royalty payments under this agreement were
approximately $0 and $66,070, for the years ended July 31, 2008 and 2007,
respectively. At July 31, 2008 and 2007, we have accrued approximately $45,551
and $4,600, respectively, in royalties due to HLI.
  Guber-Peters
Agreement. Pursuant to a July 24, 1987 Rights Agreement, NLI granted the right
to produce National Lampoon television programming to Guber-Peters Entertainment
Company (GPEC). NLI reacquired these rights from GPEC pursuant to an October 1,
1990 Termination Agreement ("Termination Agreement") for the sum of $1,000,000,
of which $500,000 was paid upon execution. The remaining $500,000 is contingent
on and payable through a 17.5% royalty on NLI's cash receipts from each program
produced by NLI or any licensee (subject to certain minimum royalties for each
program produced). The Company guaranteed all of NLI's obligations under the
Termination Agreement and is the successor-in-interest to NLI as a result of its
acquisition of NLI. The full $500,000 was recognized as an expense in prior
years, with approximately $396,000 remaining on the books as a liability and was
written off during the year ended July 31, 2008.
 
 Film Finance
Commitments
  During
the year ended July 31, 2008 and 2007, the Company obtained $293,912 and
$3,571,816, respectively, of funding under finance agreements with Red Rock for
its motion picture projects, National Lampoon’s Bag Boy
and National Lampoon’s Ratko
the Dictator’s Son. The terms of the financing provide for the investors
to recoup their contribution plus interest from the first proceeds of these
films. After all costs are recouped by the Company, the investors are
entitled to 25% of the net contingent profits earned by the Company, which are
defined as net receipts after recoupment of negative and prints and advertising
costs and all other costs related to the production, release and distribution of
the title. The investors do not have any ownership rights in the film (See Note
I).
  The
Company has also entered into various distribution agreements for the marketing
and distribution of certain films listed below. The Company will receive varying
distribution fees ranging from 20% to 25% relating to the exploitation and
distribution of these films. These films will require the Company to contribute
certain production and print and advertising costs for the completion and
distribution of these films as follows:
  Funding
      CommitmentsPrints
      & Advertising
              
              
              TotalFilm
              
              Production
              
              
              Lower
              
              
              Upper
              
              
              Lower
              
              
              UpperHomo
      Erectus
              
              $
              90,000
              
              
              $
              200,000
              
              
              $
              400,000
              
              
              $
              290,000
              
              
              $
              490,000Beach
      Party at the Threshold of Hell
              
              
              50,000
              
              
              
              300,000
              
              
              
              500,000
              
              
              
              350,000
              
              
              
              550,000Electric
      Apricot - The Quest for Festaroo
              
              
              -
              
              
              
              300,000
              
              
              
              300,000
              
              
              
              300,000
              
              
              
              300,000One,
      Two, Many
              
              
              105,000
              
              
              
              300,000
              
              
              
              300,000
              
              
              
              405,000
              
              
              
              405,000Bar
      Starz
              
              
              -
              
              
              
              100,000
              
              
              
              150,000
              
              
              
              100,000
              
              
              
              150,000Robodoc
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -$
              245,000
              
              
              $
              1,200,000
              
              
              $
              1,650,000
              
              
              $
              1,445,000
              
              
              $
              1,895,000
   F-14
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
  Employment
Agreements
  Daniel
S. Laikin, Chief Executive Officer
 
 On
January 31, 2008, in accordance with the terms of his employment agreement, Mr.
Daniel S. Laikin, the Company's Chief Executive Officer, received an option to
purchase 100,000 shares of the Company's common stock at an exercise price of
$1.90 which was the market value of the common stock on the date of
grant.
 
 On
January 31, 2005 we entered into an Employment Agreement with Daniel S. Laikin.
The employment agreement was adopted and approved by our Board of Directors on
February 1, 2005. The employment agreement has a term of three years, but is
automatically extended for successive three-year terms unless designated members
of the Board of Directors notify Mr. Laikin that the Board does not intend to
renew the employment agreement or unless the employment agreement has been
terminated according to its terms.
  Pursuant
to the employment agreement, Mr. Laikin receives an annual salary of $250,000.
Mr. Laikin is also entitled to receive four weeks paid vacation. Mr. Laikin
receives an automobile allowance and is entitled to participate in any other
benefits offered generally to our employees and executives. He is also granted
an option to purchase 100,000 shares of our common stock on each anniversary of
the effective date of the employment agreement. The exercise price for the
options will be equal to the average of the last reported sale price for one
share of common stock during the five business days preceding the date of grant
or, if this method of valuing the common stock is not available, the Board will
determine, in good faith, the value of one share of common stock. The term of
each option will be 10 years. The options will be granted in accordance with the
National Lampoon, Inc. Amended and Restated 1999 Stock Option, Deferred Stock
and Restricted Stock Plan. Mr. Laikin is to meet annually with the Board of
Directors to set certain performance milestones that must be met bi-annually. If
those milestones are met, Mr. Laikin will receive a bi-annual bonus of $50,000.
If the milestones are exceeded, Mr. Laikin will receive additional compensation
that will be paid one-half in cash and one-half in stock.
 
 Mr.
Laikin's employment agreement may be terminated by us at any time during its
term for Cause. Cause is defined as (i) the willful and continued failure by Mr.
Laikin to substantially perform his duties to us in good faith (other than a
failure resulting from his incapacity due to physical or mental illness), or
(ii) the willful engaging in conduct which is demonstrably and materially
injurious to us. In order to terminate Mr. Laikin for Cause, five members of the
Board of Directors (not including Mr. Laikin) must determine at a meeting held
for such purpose that Mr. Laikin is guilty of the conduct triggering the right
to terminate him. If Mr. Laikin's employment is terminated by us for Cause, in
addition to any benefits mandated by law, we will pay to Mr. Laikin his full
annual salary in effect at the date of termination and other benefits to which
he is entitled through the date of termination at the rate in effect at the time
notice of termination is given.
  Mr.
Laikin's employment may be terminated by Mr. Laikin at any time, and will
terminate automatically upon his death or disability. Upon such termination, in
addition to any benefits mandated by law, we will pay to Mr. Laikin his full
annual salary in effect at the date of termination and other benefits to which
he is entitled through the date of termination at the rate in effect at the time
notice of termination is given.
  On
signing the Employment Agreement, we also agreed to enter into a separate
indemnity agreement with Mr. Laikin. A new indemnity agreement has not been
entered into, although we entered into an indemnity agreement with Mr. Laikin on
May 17, 2002.
 
 Douglas
S. Bennett, Former Chief Financial Officer
 
 On
January 31, 2008, in accordance with the terms of his consulting agreement, Mr.
Douglas S. Bennett, the Company's former President and Chief Financial Officer,
received an option to purchase 50,000 shares of the Company's common stock at an
exercise price of $1.90 which was the market value of the common stock on the
date of grant. Mr. Bennett’s employment agreement was terminated upon his
resignation on July 31, 2006. Mr. Bennett provided consulting services from
August 1, 2006 until January 31, 2008. Mr Bennett will no longer receive option
grants.
 
 Litigation
 
 On or
about April 10, 2008, Raleigh Studios filed a Complaint titled, RP Holdings, Inc. v. National
Lampoon Clubhouse, Inc. et al, CA No SCO97777, in the Superior Court of
Los Angeles County, California, alleging that the defendants breached a contract
known as the Raleigh Studios License Agreement, as well as certain additional
claims at common law and by statute. On June 4, 2008, a Settlement Agreement and
Release ("Agreement") was entered into between RP Holdings, Inc. dba Raleigh
Studios, ("Raleigh"), and National Lampoon Clubhouse, Inc. and National Lampoon,
Inc., (collectively "National Lampoon"). The plaintiff agreed to dismiss the
complaint against National Lampoon in exchange for a payment of $15,000 to be
made in four installments starting from the date of full execution of the
Agreement. The first installment of the payment was made June 6, 2008. As of
October 15, 2008 three of the four required installments were made.
   F-15
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 On or
about March 11, 2008, Brightcove, Inc. filed a Complaint titled, Brightcove Inc. v. National Lampoon,
Inc., CA No MICV2008-1006 TRIAL COURT CIVIL ACTION 08-1006, in the
Superior Court of Middlesex County, Massachusetts, alleging breach of contract
as well as certain intentional tort claims at common law and by statute. On May
23, 2008, a Settlement Agreement and Release ("Agreement") between Brightcove
Inc. and the Company was entered into.  Brightcove Inc. agreed to
dismiss the complaint against the Company in exchange for a payment of $84,122
to be made in six installments starting from the date of full execution of the
Agreement. The Company's first installment of the payment was made on May 23,
2008 and as of October 15, 2008 five of the six required installments were
made.
 
 National Lampoon, Inc. v. Alma
Investments (d/b/a Bahia Mar Hotel) (Los Angeles Superior Court Case No.
BC 356118). The Company filed this complaint on July 27, 2006. The action arose
from an agreement the Company had with Bahia Mar Hotel pursuant to which we were
to provide to Bahia Mar Hotel an entertainment package for the 2006 spring
break. The Company alleged that Bahia Mar Hotel failed to support the program,
and, in fact, diverted some of the business to the Company’s competitors. In our
complaint, we alleged causes of action for fraud, breach of contract, promissory
estoppel, quantum meruit and breach of the covenant of good faith and fair
dealing. On February 4, 2008, the Company entered into a settlement agreement
with Alma Investments. The Company agreed to dismiss the complaint against Alma
Investments in exchange for a payment of $110,000 to be made upon execution of
the settlement agreement. The settlement amount was recognized as revenue earned
by National Lampoon Tours, our wholly owned subsidiary, and applied entirely
towards approximately $143,000 in legal fees directly related to the case. The
remaining balance was written off by our attorneys.
 
 Screen Actor's Guild v. National
Lampoon Clubhouse, Inc. During late 2006, the Screen Actor's Guild
("SAG") filed claims against National Lampoon Clubhouse, Inc. ("Clubhouse") for
unpaid wages and pension, health and welfare benefits incurred for the filming
of "Monster House" aka "Trick or Treat". SAG alleges that certain actors were
not paid in full and are owed more compensation, expenses and benefit payments
under the SAG agreement. Clubhouse disputes these claims and intends to
vigorously defend this action. Due to recent changes within SAG the arbitration
with SAG is being rescheduled to take place on a date to be determined some time
during the second quarter of the 2009 fiscal year.
 
 American Cinema Distribution
Corporation v. National Lampoon, Inc. In August 2007, the American Cinema
Distribution Corporation ("ACDC") filed claims against the Company for costs
incurred on the release of "National Lampoon's Pucked". ACDC alleged that the
Company did not perform distribution services as agreed and that ACDC should be
reimbursed for distribution costs it incurred estimated at $65,000. ACDC also
alleged that it did not owe distribution fees to the Company for marketing,
publicity, promotional and advertising services the Company provided which
services the Company alleged have a value in excess of $290,000. On September
23, 2008 the Company entered into a settlement agreement with the plaintiffs
dated July 16, 2008. The Company agreed to dismiss the complaint against the
plaintiffs in exchange for a payment of $20,000 to be made immediately upon the
execution of the settlement agreement. Pursuant to the terms of the settlement
the Company shall also retain 75% of the receipts after payments to unions and
guilds until the Company has been paid the sum of $180,000 in addition to the
$20,000.
  NOTE
I - INVESTMENT IN RED ROCK
 
 In
October 2006, the Company invested $800 in Red Rock Pictures Holdings, Inc.,
("Red Rock") which was then merged into a publicly traded entity. The investment
at the time represented 11,769,236 shares or approximately 18% of the then total
outstanding shares of Red Rock. Three members of National Lampoon's board
of directors, Robert Levy, Timothy Durham and Daniel Laikin, also own stock in
Red Rock. The Company recorded the transaction under the equity method due to
the determination that it had significant influence, and recognized its
proportionate share of the investee's losses not to exceed the $800 investment.
In addition, the Company's investment had been determined to not be a variable
interest entity in accordance with FIN46(R) since Red Rock was not formed for
the primary benefit of the Company, and the Company does not have an obligation
to absorb the losses, nor receive any return.
 
 On or
about June 12, 2008, Red Rock announced its entry into a Material Definitive
Agreement for a Stock for Stock Exchange, a Completion of Acquisition and a
Departure of Directors or Certain Officers; Election of Directors; Appointment
for Certain Officers; and Compensatory Arrangements of Certain Officers.
Pursuant to these agreements, Red Rock has undergone significant changes to
management and control. On June 6, 2008, Robert Levy resigned as the Red Rock’s
President and Chief Executive Officer and was also appointed as Chairman of Red
Rock’s Board of Directors. On June 6, 2008, Reno R. Rolle was appointed as Red
Rock’s President, Chief Executive Officer, and a member of the Board of
Directors. Consequently, the Company's ownership decreased from 18% to 14% and
the Company changed the recording of the investment in Red Rock from the equity
method to the fair value method as defined in FAS 115. The Company determined
that its investment in Red Rock shares should be treated as an investment in
securities available for sale. The market value of each share of Red Rock as of
July 31, 2008 was quoted at $0.05 and the fair value of the common stock was
recorded as an adjustment to comprehensive income in the amount of
$588,461.
 
 Included
in the accompanying balance sheet for the period ended July 31, 2008 are notes
payable to Red Rock of $3,217,804. The loan agreements and amendments thereto
require payment of the loans on a date specified no later than three years after
the release date of the film and define the payments, which are to be made from
proceeds from the release of the film over an estimated revenue cycle of three
years, as follows: first the Company is to receive a 20% distribution fee;
thereafter, the Company is to receive recoupment of all prints and advertising
expenses incurred in connection with the distribution of the picture. The
remaining gross receipts are to be split equally between the Company and Red
Rock until such time as Red Rock has recouped its investment entirely. Based on
the estimates of proceeds the Company expects to receive from the films, the
Company anticipates that it will make a payment of approximately $1,147,763
toward the aggregate loan during the first year, and pay the balance over the
next two years, prior to or on the due date. In September 2006, Red Rock entered
into a sub lease agreement with the Company for office space at $2,000 per
month.
   F-16
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
  In August
2007 the Company entered into an agreement with a Red Rock consultant who is
also a shareholder of the Company for distribution and prints and advertising
(P&A) services for certain titles produced and released by the Company. The
consultant paid the Company $198,500 for P&A services rendered. The Company
recorded this payment as Advertising and Promotion Fees revenues and completed
$198,500 in services. There were no further payments due from the consultant to
the Company.
 
 During
the third quarter 2008, the Company entered into an agreement with Red Rock
whereby Red Rock agreed to advance funding to the Company for distribution and
prints and advertising (P&A) services for certain titles released by the
Company. According to the terms of the agreement, Red Rock will recoup the
amount of the total P&A funding advanced plus a one-time 20% premium, from
adjusted gross revenues from the release of the titles, and will be entitled to
five percent (5%) of all net contingent proceeds from the picture.
 
 Pursuant
to this agreement, the Company has invoiced Red Rock a total of $1,078,180 for
distribution and P&A services for three titlesNational Lampoon’s One, Two
Many, National
Lampoon’s Beach Party on the Threshold of Helland National Lampoon’s Electric
Apricot, which is included in Advertising and Promotion revenue for the
year ended July 31, 2008.
 
 Because a
portion of the distribution and P&A services had been performed previously
for a Red Rock consultant on National Lampoon’s Beach Party on
the Threshold of Hell and National Lampoon’s Electric
Apricot, the $198,500 the Company received from the consultant was
credited to Red Rock for these titles during the year ended July 31,
2008.
 
 Also, in
most cases, Red Rock negotiates additional profit participation with the
producers of each film.
 
 NOTE
J - INCOME TAXES
  The
Company accounts for income taxes in accordance with SFAS 109, Accounting for
Income Taxes. There was no income tax provision recorded for fiscal years ending
2008 and 2007 due to the significant net losses in both years.
  A
valuation allowance has been recorded for the total deferred tax assets as a
result of uncertainties regarding realization of the asset based upon the lack
of profitability and the uncertainty of future profitability. The income tax
benefit reconciled to the tax computed at the statutory rate was approximately
as follows for the year ended July 31, 2008.
  The tax
effects of significant temporary differences representing deferred tax assets as
of July 31, 2008 and 2007 are as follows:
  July
      31,
              
              
              July
      31,2008
              
              
              2007Deferred
      tax assets:Accrued
      Royalties
              
              $
              18,000
              
              
              $
              160,000Accrued
      Interest
              
              
              222,000
              
              
              
              53,000Accrued
      Expenses
              
              
              67,000
              
              
              
              46,000Net
      Operating losses
              
              
              12,640,000
              
              
              
              7,895,000Total
      Deferred Tax Asset
              
              
              12,947,000
              
              
              
              8,154,000Valuation
      Allowance
              
              
              (12,947,000
              )
              
              
              (8,154,000
              )Net
      deferred tax asset
              
              $
              -
              
              
              $
              -
 
 A
valuation allowance of $12,947,000 was recorded at July 31, 2008 an increase of
$4,793,000 from the prior-year balance of $8,154,000. The balances at July 31
2008 and 2007 were recorded to offset the net deferred tax assets due to the
uncertainty of realizing the net benefits of the tax assets in the
future.
  A
reconciliation between the statutory federal tax rate and the Company's
effective tax rate is as follows:
 
 July
      31,
              
              July
      31,2008
              
              2007Statutory
      Federal Income Tax Rate
              
              
              -34%
              
              -34%State
      Income Taxes Amortization of Intangible Assets
              
              
              9.3%
              
              9.3%Other,
      Increase in Valuation Analysis
              
              
              24.7%
              
              24.7%Effective
      Tax Rate
              
              
              0%
              
              0%The
      Company has unused net operating loss (NOL) carry forwards totaling
      $31,601,000 which expire at various dates from 2008 to
    2028.
   F-17
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 Effective
August 1, 2007, the Company adopted FASB Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,
Accounting for Income Taxes” (“FIN 48”). FIN 48 addresses the determination of
whether tax benefits claimed or expected to be claimed on a tax return should be
recorded in the financial statements. Under FIN 48, the Company may recognize
the tax benefit from an uncertain tax position only if it is more likely than
not that the tax position will be sustained on examination by the taxing
authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. At the date of
adoption, and as of July 31, 2008, the Company does not have a liability for
unrecognized tax benefits, and no adjustment was required at
adoption.
 
 The
Company files income tax returns in the U.S. federal jurisdiction and various
states. The Company is subject to U.S. federal or state income tax examinations
by tax authorities for years after 2002. During the periods open to examination,
the Company has net operating loss and tax credit carry-forwards for U.S.
federal and state tax purposes that have attributes from closed periods. Since
these net operating loss and tax credit carry-forwards may be utilized in future
periods, they remain subject to examination.
 
 The
Company’s policy is to record interest and penalties on uncertain tax provisions
as income tax expense. As of July 31, 2008, the Company has no accrued interest
or penalties related to uncertain tax positions.
  NOTE
K - STOCK OPTIONS AND WARRANTS
 
 A)
              Stock
      Options
 
 On
January 30, 2002, the Company’s board of directors adopted the Amended and
Restated 1999 Stock Option, Deferred Stock and Restricted Stock Plan (the "1999
Plan"), as approved by the Company's shareholders at its annual meeting on April
25, 2002 . The options are granted from time to time by the Compensation
Committee. Individuals eligible to receive options include employees of the
Company, consultants to the Company and directors of the Company. The options
will have a fixed price, which will not be less than 100% of the fair market
value per share on the grant date. The total number of options authorized is
11,000,000 pending the approval of the listing of additional shares application
we intend to file with the American Stock Exchange.
 
 During
the year ended July 31, 2008, the Company granted options to purchase 1,173,389
shares of the Company's common stock at $1.89 - $2.50 per share to employees and
consultants under the 1999 Plan. During the year ended July 31, 2007, the
Company granted options to purchase 1,065,000 shares of the Company's common
stock at $1.85 - $2.50 per share to employees and consultants under the 1999
Plan. The aggregate value of the options vesting during the years ended July 31,
2008 and 2007 was $1,152,724 and $872,542, respectively, and has been reflected
as compensation cost. As of July 31, 2008, the aggregate value of unvested
options was $814,450, which will be amortized as compensation cost as the
options vest, over 3 years.
 
 The fair
value of each option is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table.
Expected volatility is based on the volatility of the Company’s share price
during the year preceding the issuance date of the option. For purposes of
determining the expected life of the option, the full contract life of the
option is used; average risk-free interest of 5.50% and; dividend yield of
0%.
 
 The
weighted-average grant-date fair value of options granted during 2008 and 2007
was $0.96 and $1.44, respectively.
 
 Year
      ended
                July
      31, 2008
              
              Year
      ended
                July
      31, 2007Expected
      volatility
              
              
              39.5%-55.6
              %
              
              68.4%
      - 72.9
              %Weighted
      average volatility
              
              
              48.46
              %
              
              69.9
              %Expected
      dividends
              
              
              0
              %
              
              0
              %Expected
      term (in years)
              
              
              4.6-10
              
              
              7-10Risk
      free rate
              
              
              5.5
              %
              
              5.5
              %
   F-18
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 A summary
of option activity as of July 31, 2008 and 2007 and changes during the years
then ended is presented below:
 
 Shares
              
              
              
              Weighted-AverageWeighted-
              Remaining
              AggregateAverage
              Contractual
              IntrinsicExercise
      Price
              Terms
      (Years)
              Value
      (1)Outstanding
      at August 1, 2006
              
              
              4,663,393
              
              $
              2.66Granted
              
              
              1,065,000
              
              
              2.11Exercised
              
              
              (82,100)
              
              
              1.61Forfeited
      or expired
              
              
              (276,687)
              
              
              2.89Outstanding
      at July 31, 2007
              
              
              5,369,606
              
              
              2.55Granted
              
              
              1,173,389
              
              
              2.16Exercised
              
              
              (5,000)
              
              
              1.6Forfeited
      or expired
              
              
              (777,000)
              
              
              2.81Outstanding
      at July 31, 2008
              
              
              5,760,995
              
              $
              2.44
              
              
              4.15
              $
              -Exercisable
      at July 31, 2008
              
              
              4,774,663
              
              $
              2.49
              
              
              3.67
              $
              -Exercisable
      at July 31, 2007
              
              
              4,448,940
              
              $
              2.55
 
 (1) The
aggregate intrinsic value was calculated, as of July 31, 2008, as the difference
between the market price and the exercise price of the Company’s stock for the
options outstanding and exercisable, which were in the money.  As of
July 31, 2008 there were no options outstanding and exercisable which were in
the money.
 
 Additional
information regarding options outstanding as of July 31, 2008 is as
follows:
 
 Options
      outstanding
              
              Options
      exercisableExercise
      price
              
              Number
                outstanding
              
              Weighted
                average
                remaining
                contractual
                life
      (years)
              
              Weighted
                average
                exercise
      price
              
              Number
                exercisable
              
              Weighted
                average
                exercise
      price$1
      to $2
              
              
              2,211,606
              
              
              3.49
              
              $
              1.75
              
              
              2,101,606
              
              $
              1.75$2
      to $3
              
              
              2,219,389
              
              
              5.91
              
              
              2.26
              
              
              1,353,057
              
              
              2.29$3
      to $4
              
              
              998,000
              
              
              2.10
              
              
              3.26
              
              
              988,000
              
              
              3.26$4
      to $5
              
              
              132,000
              
              
              4.10
              
              
              4.13
              
              
              132,000
              
              
              4.13$5
      to $6
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -$6
      to $7
              
              
              100,000
              
              
              2.56
              
              
              6.41
              
              
              100,000
              
              
              6.41$7
      to $8
              
              
              100,000
              
              
              1.41
              
              
              7.38
              
              
              100,000
              
              
              7.38Total
              
              
              5,760,995
              
              
              4.15
              
              
              2.44
              
              
              4,774,663
              
              
              2.49
 
 A summary
of the status of the Company’s non-vested shares granted under the Company’s
stock option plan as of July 31, 2008 and changes during the year ended July 31,
2008 and 2007 is presented below:
 
 Non-vested
      Shares
              
              Shares
              
              Weighted-Average
      GrantDate
      Fair ValueNon-vested
      at August 1, 2006
              
              
              342,667
              
              $
              2.16Granted
              
              
              1,065,000
              
              
              1.44Vested
              
              
              (472,834)
              
              
              1.70Forfeited
              
              
              (14,167)
              
              
              1.08Non-vested
      at August 1, 2007
              
              
              920,666
              
              
              1.54Granted
              
              
              1,173,389
              
              
              0.96Vested
              
              
              (849,390)
              
              
              1.24Forfeited
              
              
              (258,333)
              
              
              1.44Non-vested
      at July 31, 2008
              
              
              986,332
              
              $
              1.10
 
 B)
              Warrants
 
  F-19
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 During
the year ended July 31, 2008, the Company granted 80,000 warrants to purchase
the Company’s common stock at $1.75 to $2.50 per share. 40,000 of those warrants
were granted in connection with the purchase of intangible assets and have been
valued at $19,440. During the year ended July 31, 2007, the Company granted
warrants to purchase 222,727 shares of the Company’s common stock at $2.50 and
$3.00 per share. The aggregate value of the warrants vesting during the years
ended July 31, 2008 and 2007 was $24,099 and $179,110, respectively, and has
been reflected as compensation cost. As of July 31, 2008, the aggregate value of
unvested warrants was $31,795, which will be amortized as compensation cost as
the warrants vest, in accordance with certain milestones to be met.
 
 The fair
value of each warrant is estimated on the date of grant using the Black-Scholes
option pricing model that uses the assumptions noted in the following table.
Expected volatility is based on the volatility of the Company’s share price
during the year preceding the issuance date of the warrant. For purposes of
determining the expected life of the warrant, the full contract life of the
warrant is used; average risk-free interest of 5.50% and; dividend yield of 0%.
 
 Year
      ended
                July
      31, 2008
              
              Year
      ended
                July
      31, 2007Expected
      volatility
              
              
              43.3%
      to 55.6
              %
              
              68.7%
      to 72.7
              %Weighted
      average volatility
              
              
              51.7
              %
              
              70.59
              %Expected
      dividends
              
              
              -
              %
              
              -
              %Expected
      term (in years)
              
              
              2
              
              
              2-10Risk
      free rate
              
              
              5.50
              %
              
              5.50
              %
 
 The
weighted-average grant date fair value of warrants granted during fiscal year
2008 and 2007 was $0.54 and $0.95, respectively.
 
 A summary
of warrant activity as of July 31, 2008 and 2007 and changes during the years
then ended is presented below:
  Shares
              
              
              
              Weighted-AverageWeighted-
              Remaining
              AggregateAverage
              Contractual
              IntrinsicExercise
      Price
              Terms
      (Years)
              Value
      (1)Outstanding
      at August 1, 2006
              
              
              1,084,004
              
              $
              3.74Granted
              
              
              222,727
              
              
              2.78Exercised
              
              
              -
              
              
              -Forfeited
      or expired
              
              
              (20,000)
              
              
              2.75Outstanding
      at July 31, 2007
              
              
              1,286,731
              
              
              3.59Granted
              
              
              80,000
              
              
              2.00Exercised
              
              
              -
              
              
              -Forfeited
      or expired
              
              
              (619,004)
              
              
              4.00Outstanding
      at July 31, 2008
              
              
              747,727
              
              $
              3.08
              
              
              2.92
              
              $             -Exercisable
      at July 31, 2008
              
              
              681,060
              
              $
              3.09
              
              
              1.75
              
              $             -Exercisable
      at July 31, 2007
              
              
              1,220,064
              
              $
              3.62
 
 The
aggregate intrinsic value was calculated, as of July 31, 2008, as the difference
between the market price and the exercise price of the Company’s stock for the
warrants which were in-the-money. As of July 31, 2008, there were no warrants
outstanding or exercisable which were in-the-money.
  Additional
information regarding warrants outstanding as of July 31, 2008 is as
follows:
 
 Warrants
      outstanding
              
              Warrants
      exercisableExercise
      price
              
              Number
                outstanding
              
              Weighted
                average
                remaining
                contractual
                life
      (years)
              
              Weighted
                average
                exercise
      price
              
              Number
                exercisable
              
              Weighted
                average
                exercise
      price$1
      to $2
              
              
              60,000
              
              
              1.36
              
              $
              1.83
              
              
              60,000
              
              $
              1.83$2
      to $3
              
              
              175,000
              
              
              7.32
              
              
              2.58
              
              
              175,000
              
              
              2.58$3
      to $4
              
              
              512,727
              
              
              1.60
              
              
              3.40
              
              
              446,060
              
              
              3.46Total
              
              
              747,727
              
              
              2.92
              
              $
              3.08
              
              
              681,060
              
              $
              3.09
 
  F-20
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 A summary
of the status of the Company’s non-vested shares granted as warrants as of July
31, 2008 and 2007 and changes during the years then ended is presented
below:
 
 Non-vested
      Shares
              
              Shares
              
              Weighted-Average
      GrantDate
      Fair ValueNon-vested
      at August 1, 2006
              
              
              -
              
              $
              -Granted
              
              
              222,727
              
              
              0.95Vested
              
              
              (156,060)
              
              
              1.15Forfeited
              
              
              -
              
              
              -Non-vested
      at July 31, 2007
              
              
              66,667
              
              
              0.48Granted
              
              
              80,000
              
              
              0.54Vested
              
              
              (80,000)
              
              
              0.54Forfeited
              
              
              -
              
              
              -Non-vested
      at July 31, 2008
              
              
              66,667
              
              $
              0.48
 
 NOTE
L - SEGMENT INFORMATION
  Segment
Reporting - SFAS No. 131, “Disclosures about Segments of an Enterprise and
Related Information” results in the use of a management approach in identifying
segments of an enterprise. The Company has been operating five business
segments: licensing and exploitation of the National LampoonTM trademark and
related properties including the sale of products to consumers; publishing,
advertising and promotion through field marketing, live events and the
distribution of television programming on college campuses; production of
television, and DVD products as well as production of motion pictures;
distribution through all media including theatrical, television and home
entertainment; and travel services which we no longer offer. Segment operating
income/(loss) excludes the amortization of intangible assets, interest income,
and income taxes. Selling, general and administrative expenses not specifically
attributable to any segment have been prorated based on revenue among the five
segments.
 
 Summarized financial information for
the years ended July 31, 2008 and July 31, 2007 concerning the Company's
segments is as follows:
 
 Licensing
                &
              
              Advertising
      &
              
              
              
              
              
              TravelPublishing
              
              Promotion
              
              Production
              
              Distribution
              
              Services
              
              TotalFiscal
      Year Ended July 31, 2008Segment
      revenue
              
              $
              3,770,461
              
              $
              1,762,467
              
              $
              395,278
              
              $
              1,399,778
              
              $
              110,000
              
              $
              7,437,984Segment
      operating loss
              
              $
              (74,545
              )
              $
              (508,592
              )
              $
              (54,126
              )
              $
              (734,337
              )
              $
              (215,556
              )
              $
              (1,587,156
              )Depreciation
      expense
              
              $
              14,469
              
              $
              3,866
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              18,335Fiscal
      Year Ended July 31, 2007Segment
      revenue
              
              $
              4,078,738
              
              $
              1,975,827
              
              $
              44,500
              
              $
              —
              
              $
              —
              
              $
              6,099,065Segment
      operating profit (loss)
              
              $
              1,421,273
              
              $
              (2,944,690
              )
              $
              (724,111
              )
              $
              —
              
              $
              —
              
              $
              (2,247,528
              )Depreciation
      expense
              
              $
              8,415
              
              $
              5,254
              
              $
              —
              
              $
              —
              
              $
              —
              
              $
              13,669
  A reconciliation of segment operating
loss to net loss before income taxes for years ended July 31, 2008 and 2007 is
as follows:
  Year
      ended
                July
      31, 2008
              
              
              Year
      ended
                July
      31, 2007Total
      segment operating (loss)
              
              $
              (1,587,156
              )
              
              $
              (2,247,528
              )Amortization
      of intangible assets
              
              
              (247,333
              )
              
              
              (242,502
              )Interest
      expense
              
              
              (295,071
              )
              
              
              (51,299
              )Interest
      Income
              
              
              —
              
              
              
              5,832Equity
      in investee loss
              
              
              —
              
              
              
              (800
              )Write
      off of royalty payable
              
              
              396,250
              
              
              
              -Other
      income/expense
              
              
              46,336
              
              
              
              32,127Net
      loss before minority interest and income taxes
              
              $
              (1,686,974
              )
              
              $
              (2,504,170
              )
 
  F-21
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 NOTE
M - CONTROLLED COMPANY STATUS
  The
Company is a "controlled company" as that term is defined in Section 801(a) of
the Rules of the American Stock Exchange. Three of its directors, Daniel S.
Laikin, Timothy S. Durham and Paul Skjodt, control over 50% of the voting power
of National Lampoon, Inc. As a controlled company, the Company is not subject to
Section 804 of the Rules of the American Stock Exchange. Section 804 requires
that nominees to the Board of Directors be made by either a nominating committee
comprised solely of independent directors or by a majority of the independent
directors. Instead, nominees to the Board of Directors are nominated in
accordance with the terms of that certain Voting Agreement entered into on May
17, 2002 among Daniel S. Laikin, Paul Skjodt, Timothy S. Durham, Ronald Holzer,
DC Investment, LLC, NL Acquisition Group LLC, Samerian LLP, Diamond Investments,
LLC, Christopher R. Williams, Helen C. Williams, DW Leasing Company, LLC, Judy
B. Laikin (all of whom are collectively referred to in this discussion as the
"NLAG Stockholders") and James P. Jimirro. The Voting Agreement was entered into
in conjunction with the reorganization transaction that took place on May 17,
2002. According to the terms of the Voting Agreement, the NLAG Stockholders
agree to vote for Mr. Jimirro and two directors nominated by Mr. Jimirro and,
conversely, Mr. Jimirro agrees to vote for three directors nominated by the NLAG
Stockholders. Since the termination of Mr. Jimirro's employment agreement and
payment of all amounts due to him, the NLAG Stockholders can now nominate and
vote for a seventh director. The Voting Agreement will terminate on the date as
of which Mr. Jimirro personally ceases to own beneficially (whether by reason of
his death or otherwise) at least 100,000 shares of common stock. Mr. Jimirro
owned 111,710 shares of the Company's common stock as of July 31, 2008. The
Voting Agreement prevents the Company from having a policy with regard to the
consideration of any director candidates recommended by security holders (other
than the NLAG Stockholders and Mr. Jimirro) or an independent committee whose
purpose is to nominate director candidates.
  NOTE
N - SUBSEQUENT EVENTS
  On
September 1, 2008, the Company amended an agreement with a consultant for
consulting and investor relations services. The consultant is to receive 24,000
restricted shares of common stock of the Company. The consultant will receive
2,000 restricted shares of common stock per month, payable in advance on a
quarterly basis. The shares will be delivered over the twelve month term of the
agreement. The shares will be priced at the market price on the date of
issuance. No shares have yet been issued under this amended agreement. Under the
previous twelve month agreement with this consultant, which commenced September
1, 2007, the Company issued 7,272 shares of its restricted common stock on
September 17, 2008 to the consultant. The Company expensed $6,690, which was
equivalent to the fair market value of the shares on the date of
issuance.
 
 Subsequent
to July 31, 2008, the Company issued 38,746 shares of the Company’s common stock
to various consultants for services rendered during this period.  The
Company expensed $50,710 for these services. The shares were priced at the fair
market value of the shares on the date of issuance or upon the value determined
by an agreement.
 
 During
the month of August 2008, warrants issued in conjunction with the sale of shares
of the Company's Series B Convertible Preferred Stock were exercised for the
purchase of 64,058 shares of the Company’s common stock. The per share exercise
price was $1.775 per share. The proceeds received from the warrant exercise
totaled $113,703.
 
 During
the month of August 2008, warrants issued in conjunction with the sale of shares
of the Company’s Series C Convertible Preferred Stock were exercised to purchase
21,264 shares of the Company’s common stock. The per share exercise price was
$1.775. The proceeds received from the warrant exercise totaled
$37,735.
 
 On
October 28, 2008, the Company entered into an employment agreement with Ms.
Lorraine Evanoff.
 
 Pursuant
to the employment agreement, Ms. Evanoff receives an annual salary of $100,000
for services rendered to us as our chief financial officer.  Ms.
Evanoff is entitled to participate in any other benefits offered generally to
the Company’s employees.
 
 The
employment agreement memorialized the grant of an option agreement made to Ms.
Evanoff on December 17, 2007.  Pursuant to this grant, Ms. Evanoff may
purchase 150,000 shares of the Company’s common stock at an exercise price of
$2.30.  The right to purchase 50,000 shares vested on December 17,
2007.  The right to purchase the remaining 100,000 shares will vest
over the 36 month period following that date.  Pursuant to the
employment agreement, Ms. Evanoff will receive an option to purchase 100,000
shares of the Company’s common stock on January 31st of each year, so long her
employment with the Company continues.  The exercise price for the
options will be equal to or greater than the closing price of the common stock
on the date of grant.  The term of each option will be 10
years.  Finally, pursuant to the employment agreement, Ms. Evanoff
will receive an option to purchase 100,000 shares of the Company’s common stock
on the date that the American Stock Exchange notifies the Company that it has
regained compliance with Section 1003(a)(iv) of the AMEX Company Guide, as
required by the letter the Company received on February 27, 2008 from the
American Stock Exchange.  All of the options were granted in
accordance with the National Lampoon, Inc. Amended and Restated 1999 Stock
Option, Deferred Stock and Restricted Stock Plan.
 
 Ms.
Evanoff's employment agreement may be terminated by the Company for cause or
without cause.  The employment agreement will terminate upon Ms.
Evanoff’s death or disability.  Ms. Evanoff may terminate the
agreement by giving the Company at least 30 days notice prior to her
termination.  If the agreement is terminated without cause, in
addition to any benefits mandated by law, the Company shall pay to Ms. Evanoff
the following termination benefits:  (i) all compensation earned
through the date of termination plus one month’s salary;
   F-22
 NATIONAL
LAMPOON, INC. AND SUBSIDIARIES
  NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
 
 FOR
THE YEARS ENDED JULY 31, 2008 AND 2007
 (ii) all
accrued but unused vacation benefits; (iii) all unvested options will
immediately vest, and (iv) Ms. Evanoff will have the right to exercise all
options for a period of 90 days following the termination date.
 
 The
employment agreement provides indemnification to Ms. Evanoff to the fullest
extent authorized or permitted by law from and against all expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by her or on her behalf in connection with any proceeding or any claim, issue or
matter if she acted in good faith and in a manner she reasonably believed to be
in or not opposed to the Company’s best interests and, with respect to any
criminal proceeding, she had no reasonable cause to believe her conduct was
unlawful.  The employment agreement also requires the Company to enter
into a separate indemnity agreement with Ms. Evanoff.


F-23







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





Not
applicable





ITEM
9A.(T)CONTROLS AND
PROCEDURES




Evaluation
of Disclosure Controls and Procedures




Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) under the Securities Exchange
Act of 1934 (the "Exchange Act")), as of the end of the period covered by this
annual report on Form 10-K. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that, as of such date, our
disclosure controls and procedures were effective.




Management's
Report on Internal Control over Financial Reporting




The
Company's management is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) or
15d-15(f) under the Exchange Act.




Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures
that:




• pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the issuer;




• provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the Company; and




• provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition
of the Company's assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that control may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Management
(under the supervision and with the participation of the Chief Executive Officer
and the Chief Financial Officer) has conducted an evaluation of its internal
control over financial reporting based on the criteria established in "Internal
Control—Integrated Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management
assessed the effectiveness of the Company's internal control over financial
reporting as of July 31, 2008. Based on this evaluation, management has
determined that the Company's internal control over financial reporting was
effective as of July 31, 2008.




Changes
in Internal Control




No
change in internal control over financial reporting was made during the fourth
quarter of the 2008 fiscal year that materially affected, or is likely to
materially affect, the Company's internal control over financial
reporting.






32








ITEM
9B.OTHER
INFORMATION





Not
applicable





PART
III





ITEM 10.DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CORPORATEGOVERNANCE





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





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





Name
            
            Age
            
            PositionDaniel
      S. Laikin
            
            46
            
            Chief
      Executive Officer and DirectorLorraine
      Evanoff
            
            46
            
            Chief
      Financial OfficerTimothy
      S. Durham
            
            46
            
            DirectorPaul
      Skjodt
            
            50
            
            DirectorRobert
      Levy
            
            54
            
            DirectorJames
      P. Jimirro
            
            67
            
            ChairmanDuncan
      Murray
            
            62
            
            DirectorJames
      Toll
            
            55
            
            Director





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





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





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





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





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





Election
of Directors





On May
17, 2002 a Voting Agreement was entered into among James P. Jimirro and the
members of the NLAG Group.  The Voting Agreement will terminate on the
last to occur of the following:  (i) 13 months following the date of
Mr. Jimirro’s separation from service, which occurred on January 28, 2005 or
(ii) the date as of which Mr. Jimirro personally first ceases to own
beneficially (whether by reason of his death or otherwise) at least 100,000
shares of our common stock (as increased proportionately on account of any
subdivision, share dividend, stock split or similar transaction and decreased
proportionately on account of any reverse stock split, combination or similar
transaction affecting our common stock which occurs after the date of the Voting
Agreement).  During the term of the Voting Agreement, Mr. Jimirro is
entitled to nominate three directors to the board of directors and Daniel S.
Laikin, our Chief Executive Officer, is entitled to nominate three
directors.  The seventh member of our board of directors was mutually
nominated by a majority of the directors nominated by Mr. Jimirro and Mr.
Laikin, until January 28, 2005.  Since Mr. Jimirro’s separation from
service, the seventh member of our Board of Directors is nominated by a majority
of the directors nominated by Mr. Laikin.  The parties to the Voting
Agreement, who collectively have voting control, have agreed to vote for those
persons nominated by Mr. Jimirro and Mr. Laikin.






33







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





Committees
of the Board of Directors





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





Business
Experience





DANIEL S.
LAIKIN has been a director since 2000 and was employed as our Chief Operating
Officer from May 17, 2002 until February 1, 2005 when he became our Chief
Executive Officer. Mr. Laikin served as Co-Chairman of Biltmore Homes, Inc., an
Indiana-based home building and real estate development company until 2000. He
also served as a managing partner of Four Leaf Partners, LLC, a closely held
investment company, concentrating on the startup and financing of high tech and
Internet-related companies. He is also on the board of directors of Obsidian
Enterprises, Inc., which was a public company until March 17, 2006.





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





TIMOTHY
S. DURHAM has served as a director since 2002.  He is the Chief
Executive Officer and Chairman of the board of directors of Obsidian
Enterprises, Inc., which was a public company until March 17, 2006, and has held
these positions since June 2001.  Since April 2000, he has served as a
Managing Member and the Chief Executive Officer of Obsidian Capital Company LLC,
which is the general partner of Obsidian Capital Partners LP.  Mr.
Durham founded in 1998, and since then has maintained a controlling interest in,
several investment funds, including Durham Capital Corporation, Durham Hitchcock
Whitesell and Company LLC, and Durham Whitesell Associates LLC.  From
1991 to 1998, Mr. Durham served in various capacities at Carpenter Industries,
Inc., including as Vice Chairman, President and Chief Executive
Officer.





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






34







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





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





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





DUNCAN
MURRAY was appointed to our board of directors on October 19, 2006. From 1998 to
his retirement in 2004, Mr. Murray served as Vice President, Business and Legal
Affairs, of Santa Monica based Transactional Marketing Partners, Inc. (“TMP”), a
direct response television consulting firm.  Before joining TMP, from
August 1986 through January of 2003, Mr. Murray served as our Vice-President of
Marketing and, prior to that, worked with The Walt Disney Company for 14 years
in a variety of capacities including Vice President-Sales Administration for The
Disney Channel and Director of Sales for Walt Disney Telecommunications
Company.  While at The Walt Disney Company, Mr. Murray was an integral
part of the small team that created and launched The Disney
Channel.  During his tenure as Vice President of Marketing for our
company, he oversaw stockholder relations, published the final 3 issues of
National Lampoon Magazine, and managed negotiations with Artisan Entertainment
for attachment of our name to the feature film National Lampoon’s Van
Wilder. Mr. Murray currently serves as a Director, Secretary and
Treasurer of The Greenburg Family Foundation, a health issues-related
philanthropic organization headquartered in Santa Monica and Palm Springs,
California.






35







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





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





Director
Compensation





As
compensation to the members of our board of directors for the services rendered
by them, during the fiscal year ended July 31, 2008 we paid fees ranging from
$1,000 to $2,369 to each of our directors and we awarded to each director an
option to purchase 50,000 shares of our common stock at an exercise price of
$2.15 per share.  These options vest immediately and have a term of 7
years.





The
following table sets forth certain information concerning compensation granted
to our directors during the 2008 fiscal year.  No options were
exercised by our directors during the last fiscal year.





DIRECTOR
      COMPENSATIONName
            Fees
      earned or paid in cash ($)
            Stock
      Awards ($)
            Option
      Awards ($)
            Non-Equity
      Incentive Plan Compensation ($)
            Non-Qualified
      Deferred Compensation Earnings ($)
            All
      Other Compensation ($)
            Total
      ($)Daniel
      S. Laikin
            
            -
            52,123
            -
            -
            1,000
            53,123Timothy
      S. Durham
            -
            -
            52,123
            -
            -
            1,000
            53,123Paul
      Skjodt
            -
            -
            52,123
            -
            -
            1,000
            53,123Robert
      Levy
            -
            -
            52,123
            -
            -
            1,000
            53,123James
      P. Jimirro
            -
            -
            52,123
            -
            -
            1,000
            53,123Duncan
      Murray
            -
            -
            52,123
            -
            -
            1,600
            53,723James
      Toll
            -
            -
            52,123
            -
            -
            2,369
            54,492


(1)
            The
      relative fair value of the options for the fiscal year ended July 31, 2008
      was estimated using the Black-Scholes option pricing model with the
      following assumptions: average risk-free interest of 5.50%; dividend yield
      of 0%; average volatility factor of the expected market price of the
      Company’s common stock of 43.5% - 55.6%; and a term of seven to ten
      years.






36





ITEM 11. EXECUTIVE
COMPENSATION





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





Summary
      Compensation TableName
      and principal position
            Year
            Salary
      ($)
            Bonus
      ($)
            Stock
      Awards ($)
            Option
      Awards ($) (1)
            Non-Equity
      Incentive Plan Compen-sation ($)
            Nonquali-fied
      Deferred Compen-sation Earnings
              ($)
            All
      Other Compen-sation ($)
            Total
      ($)Daniel
      S. Laikin,
            2008
            250,000
            
            
            126,038
            
            
            1,000
            377,038Chief
      Executive Officer and President
            2007
            250,000
            -
            -
            26,874
            -
            -
            3,000
            279,874Lorraine
      Evanoff,
            2008
            88,000(2)
            -
            -
            72,737
            -
            -
            -
            160,737Chief
      Financial Officer
            2007
            -
            -
            -
            -
            -
            -
            -
            -Bruce
      Long,
            2008
            27,000(3)
            -
            -
            -
            -
            -
            18,782
            45,782former
      President
            2007
            296,000
            -
            -
            37,072
            -
            -
            -
            333,072David
      Kane,
            2008
            15,000(4)
            -
            -
            7,185
            -
            -
            -
            22,185former
      Chief Financial Officer
            2007
            45,000(4)
            -
            -
            17,962
            -
            -
            -
            62,962


(1)
            The
      relative fair value of the options was estimated using the Black-Scholes
      option pricing model. The following assumptions were used for the fiscal
      year ended July 31, 2008: average risk-free interest of 5.50%; dividend
      yield of 0%; average volatility factor of the expected market price of our
      common stock of 39.5% to 55.6%; and a term of seven to ten years; The
      following assumptions were used for the fiscal year ended July 31, 2007:
      average risk-free interest of 5.50%; dividend yield of 0%; average
      volatility factor of the expected market price of our common stock of
      68.4% to 70.1%; and a term of seven to ten years;


(2)
            Lorraine
      Evanoff became Chief Financial Officer of the Company effective September
      15, 2007 with an annual salary of $100,000. The table above reflects
      compensation paid to Ms. Evanoff from September 15, 2007 through July 31,
      2008 only.


(3)
            Bruce
      Long separated from service July 31, 2007. The payments received by Mr.
      Long during the year ended July 31, 2008 represent vacation pay and
      severance pay.


(4)
            David
      Kane’s annual salary was $90,000.  Mr. Kane separated from
      service on September 30, 2007.  The table above includes only
      the salary paid to him during his period of
  employment.





Discussion
of Compensation





Our
compensation program consists of the following three components:





·
            base
      salary;





·
            bonuses;
      and





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





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






37







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





Bonuses
are used to reward exceptional performance, either by the individual or by the
company.  Bonuses are discretionary.  There is no single
method of computing bonuses.  The board of directors or the
compensation committee may establish any criteria to determine the amount of a
bonus.  No bonuses were paid to our executive officers during the 2008
fiscal year.





During
the 2007 fiscal year we granted options to purchase our common stock to Daniel
Laikin, Bruce Long and David Kane.  During the 2008 fiscal year we
granted options to purchase our common stock to Mr. Laikin and to Lorraine
Evanoff. We grant options or restricted stock because we believe that share
ownership by our employees is an effective method to deliver superior
stockholder returns by increasing the alignment between the interests of our
employees and our shareholders. No employee is required to own common stock in
our company.





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





OUTSTANDING
      EQUITY AWARDS AT FISCAL YEAR-ENDOPTION
      AWARDS
            STOCK
      AWARDSName
            Number
      of securities underlying unexercised options (#)
    Exercisable
            Number
      of securities underlying unexercised options (#)
              Unexercis-able
            Equity
      Incentive Plan Awards: Number of Securities underlying unexercised
      unearned options (#)
            Option
      exercise price ($)
            Option
      expiration date
            Number
      of shares or units of stock that have not vested (#)
            Market
      value of shares or units of stock that have not vested ($)
            Equity
      incentive plan awards: number of unearned shares, units or other rights
      that have not vested (#)
            Equity
      incentive plan awards: Market or payout value of unearned shares, units or
      other rights that have not vested (#)Daniel
      S. Laikin
            2,666
            -
            -
            1.75
            1/29/09
            -
            -
            -
            -Daniel
      S. Laikin
            200,000
            -
            -
            3.50
            5/17/09
            -
            -
            -
            -Daniel
      S. Laikin
            400,000
            -
            -
            3.13
            9/17/10
            -
            -
            -
            -Daniel
      S. Laikin
            15,000
            -
            -
            1.60
            6/16/14
            -
            -
            -
            -Daniel
      S. Laikin
            400,000
            -
            -
            1.76
            6/16/09
            -
            -
            -
            -Daniel
      S. Laikin
            25,000
            -
            -
            2.19
            10/27/15
            -
            -
            -
            -Daniel
      S. Laikin
            100,000
            -
            -
            2.98
            1/31/16
            -
            -
            -
            -Daniel
      S. Laikin
            33,333
            66,667
            -
            2.04
            1/31/17
            -
            -
            -
            -Daniel
      S. Laikin
            50,000
            -
            -
            2.15
            9/21/14
            -
            -
            -
            -Daniel
      S. Laikin
            -
            100,000
            -
            1.90
            1/31/18
            -
            -
            -
            -Lorraine
      Evanoff
            50,000
            100,000
            -
            2.30
            12/7/14
            -
            -
            -
            -





Employment
Agreements





Daniel
S. Laikin, Chief Executive Officer





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






38







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





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





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





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





Lorraine
Evanoff, Chief Financial Officer





On
October 28, 2008, the Company entered into an employment agreement with Ms.
Lorraine Evanoff.




Pursuant
to the employment agreement, Ms. Evanoff receives an annual salary of $100,000
for services rendered to us as our Chief Financial Officer.  Ms.
Evanoff is entitled to participate in any other benefits offered generally to
our employees.





The
employment agreement memorialized the grant of an option agreement made to Ms.
Evanoff on December 17, 2007.  Pursuant to this grant, Ms. Evanoff may
purchase 150,000 shares of our common stock at an exercise price of
$2.30.  The right to purchase 50,000 shares vested on December 17,
2007.  The right to purchase the remaining 100,000 shares will vest
over the 36 month period following that date.  Pursuant to the
employment agreement, Ms. Evanoff will receive an option to purchase 100,000
shares of our common stock on January 31st of each year, so long as her
employment with us continues.  The exercise price for the options will
be equal to or greater than the closing price of the common stock on the date of
grant.  The term of each option will be 10 years.  Finally,
pursuant to the employment agreement, Ms. Evanoff will receive an option to
purchase 100,000 shares of our common stock on the date that the American Stock
Exchange notifies us that we have regained compliance with Section 1003(a)(iv)
of the AMEX Company Guide, as required by the letter we received on February 27,
2008 from the American Stock Exchange.  All of the options were
granted in accordance with the National Lampoon, Inc. Amended and Restated 1999
Stock Option, Deferred Stock and Restricted Stock Plan.






39







Ms.
Evanoff's employment agreement may be terminated by us for cause or without
cause.  The employment agreement will terminate upon Ms. Evanoff’s
death or disability.  Ms. Evanoff may terminate the agreement by
giving us at least 30 days notice prior to her termination.  If the
agreement is terminated without cause, in addition to any benefits mandated by
law, we shall pay to Ms. Evanoff the following termination
benefits:  (i) all compensation earned through the date of termination
plus one month’s salary; (ii) all accrued but unused vacation benefits; (iii)
all unvested options will immediately vest, and (iv) Ms. Evanoff will have the
right to exercise all options for a period of 90 days following the termination
date.





The
employment agreement provides indemnification to Ms. Evanoff to the fullest
extent authorized or permitted by law from and against all expenses, judgments,
penalties, fines and amounts paid in settlement actually and reasonably incurred
by her or on her behalf in connection with any proceeding or any claim, issue or
matter if she acted in good faith and in a manner she reasonably believed to be
in or not opposed to our best interests and, with respect to any criminal
proceeding, she had no reasonable cause to believe her conduct was
unlawful.  The employment agreement also requires us to enter into a
separate indemnity agreement with Ms. Evanoff.





Code
of Business Conduct and Ethics





The board
of directors has adopted a Code of Business Conduct and Ethics that applies to
all employees, including executive officers, and members of the board of
directors.  We will provide to any person without charge, upon
request, a copy of our Code of Business Conduct and Ethics.  Requests
should be made in writing to Corporate Secretary, National Lampoon, Inc., 8228
Sunset Boulevard, Third Floor, Los Angeles, California 90046.





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





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





To our
knowledge, based solely upon review of the copies of such reports received or
written representations from the reporting persons, we believe that during the
2008 fiscal year our directors, executive officers and persons who own more than
10% of our common stock complied with all Section 16(a) filing requirements with
the exception of the following:





Name
      and Title
            Form
            TransactionsDavid
      Kane, former chief financial officer
            3/4
            Mr.
      Kane’s form 3 was filed on August 7, 2007 rather than on July 11, 2007.
      Mr. Kane filed a form 4 on August 7, 2007 to report the grant of stock
      options made on February 28, 2007.Robert
      Levy, director
            4
            Mr.
      Levy filed a form 4 on August 7, 2007 reporting 2 transactions (both
      granting stock options) that occurred on October 24, 2006 and February 28,
      2007.James
      Toll, director
            4
            Mr.
      Toll filed a form 4 on August 7, 2007 to report the grant of stock options
      made on February 28, 2007.  Mr. Toll filed a form 4 on November
      16, 2007 to report the grant of common stock and the grant of stock
      options made on September 21, 2007.






40






Daniel
      S. Laikin, chief executive officer and director
            4
            Mr.
      Laikin filed a form 4 on August 10, 2007 to report the grant of stock
      options made on January 31, 2007.  Mr. Laikin filed a form 4 on
      November 9, 2007 to report the grant of common stock and the grant of
      stock options made on September 21, 2007. Mr. Laikin filed a form 4 on
      January 14, 2008 to report the purchase of shares made on January 9,
      2008.Paul
      Skjodt, director
            4
            Mr.
      Skjodt filed a form 4 on November 13, 2007 to report the grant of stock
      options made on February 28, 2007 and the grant of common stock and the
      grant of stock options made on September 21, 2007.James
      Jimirro, director
            4
            Mr.
      Jimirro filed a form 4 on November 13, 2007 to report the grant of stock
      options made on February 28, 2007 and the grant of common stock and the
      grant of stock options made on September 21, 2007.Timothy
      S. Durham, director
            4
            Mr.
      Durham filed a report on November 13, 2007 to report the grant of stock
      options made on February 28, 2007 and the grant of common stock and the
      grant of stock options made on September 21, 2007.Duncan
      Murray, director
            4
            Mr.
      Murray filed a form 4 on November 16, 2007 to report the grant of stock
      options on February 28, 2007 and the grant of common stock and the grant
      of stock options made on September 21, 2007.Lorraine
      Evanoff, chief financial officer
            4
            Ms.
      Evanoff filed a form 4 on May 5, 2008 to report the grant of stock options
      made on December 7, 2007.





ITEM 12.SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENTAND
RELATED STOCKHOLDER MATTERS





The
following table sets forth information as of October 15, 2008 as to each person
or group who is known to us to be the beneficial owner of more than 5% of our
outstanding voting securities and as to the security and percentage ownership of
each of our executive officers and directors and of all of our officers and
directors as a group.





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






41







The
following table is based on a total of 16,744,858 shares of common stock
equivalents outstanding as of October 15, 2008 consisting of the
following:





·
            a
      total of 9,456,427 shares of common
stock;





·
            61,832
      shares of Series B Convertible Preferred Stock that may be converted into
      3,483,491 shares of common stock;
and





·
            190,247
      shares of Series C Convertible Preferred Stock that may be converted into
      3,804,940 shares of common stock.





Common
      Stock
            
            Series
      B Convertible Preferred Stock, on an as-converted basis(7)
            
            Series
      C Convertible Preferred Stock, on an as-converted
basis(11)Name
      and Position *
            
            Number
      of Shares
            
            Percentage
      Ownership of Class
            
            Number
      of Shares
            
            Percentage
      Ownership of Class
            
            Number
      of Shares
            
            Percentage
      Ownership of ClassDaniel
      S. Laikin, CEO
            
            
            4,616,056
            (1)
            
            35.36
            %
            
            1,687,379
            (9)
            
            48.44
            %
            
            1,894,040
            (13)
            
            49.78
            %Lorraine
      Evanoff, CFO
            
            
            100,400
            (2)
            
            1.05
            %
            
            -
            
            
            
            
            
            -
            
            
            -James
      P. Jimirro, Chairman
            
            
            1,712,083
            (3)
            
            15.48
            %
            
            -
            
            
            -
            
            
            -
            
            
            -Timothy
      Durham, Director
            
            
            1,947,099
            (4)
            
            18.23
            %
            
            994,253
            (10)
            
            28.54
            %
            
            1,347,140
            (14)
            
            35.41
            %Paul
      Skjodt, Director
            
            
            817,095
            (5)
            
            8.25
            %
            
            366,197
            (11)
            
            10.51
            %
            
            -
            
            
            -Robert
      Levy
            
            
            416,648
            (6)
            
            4.25
            %
            
            -
            
            
            -
            
            
            235,860
            (15)
            
            6.20
            %Officers
      and Directors as a Group (8 persons)
            
            
            9,726,347
            (7)
            
            57.55
            %
            
            3,047,829
            
            
            87.49
            %
            
            3,477,040
            
            
            91.38
            %Remaining
      Holders of Series B Convertible Preferred Stock as a Group
            
            
            -
            
            
            -
            
            
            435,662
            
            
            12.51
            %
            
            -
            
            
            -Remaining
      Holders of Series C Convertible Preferred Stock as a Group
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            327,900
            
            
            8.62
            %





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




(1) This
number includes 1,018,011 shares of common stock owned by Mr. Laikin or by an
entity controlled by him, options to purchase 1,225,999 shares of common stock,
a warrant to purchase 1,623,669 shares of common stock issued in conjunction
with the Series B Convertible Preferred Stock and a warrant to purchase 748,377
shares of common stock issued in conjunction with the Series C Convertible
Preferred Stock.




(2) This
number includes 400 shares of common stock owned by Ms. Evanoff or by an entity
controlled by her and options to purchase 100,000 shares of common
stock.




(3) This
number includes 111,710 shares of common stock owned by Mr. Jimirro or by an
entity controlled by him and options to purchase 1,600,373 shares of common
stock.




(4) This
number includes 721,889 shares of common stock owned by Mr. Durham or by an
entity controlled by him, options to purchase 128,333 shares of common stock, a
warrant to purchase 554,042 shares of common stock issued in conjunction with
the Series B Convertible Preferred Stock and a warrant to purchase 542,835
shares of common stock issued in conjunction with the Series C Convertible
Preferred Stock.




(5) This
number includes 365,757 shares of common stock owned by Mr. Skjodt or by an
entity controlled by him, options to purchase 128,333 shares of common stock,
and a warrant to purchase 323,005 shares of common stock issued in conjunction
with the Series B Convertible Preferred Stock.






42






(6) This
number includes 63,800 shares of common stock owned by Mr. Levy or by an entity
controlled by him, options to purchase 183,333 shares of common stock, and a
warrant to purchase 169,515 shares of common stock issued in conjunction with
the Series C Convertible Preferred Stock.




(7) This
number includes 100 and 200 shares of common stock owned by Mr. Toll and Mr.
Murray, respectively and options to purchase 58,333 shares each of common
stock.




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




(9) Mr.
Laikin owns 29,951 shares of Series B Convertible Preferred Stock that may be
converted into 1,687,379 shares of common stock.




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




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




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




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




(14) Mr.
Durham owns 67,357 shares of Series C Convertible Preferred Stock that may be
converted into 1,347,140 shares of common stock.




(15) Mr.
Levy owns 11,793 shares of Series C Convertible Preferred Stock that may be
converted into 235,860 shares of common stock.





ITEM 13.CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS AND DIRECTORINDEPENDENCE





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





On July
17, 2008 we undertook an offer to the holders of warrants issued in conjunction
with the sale of our Series B Convertible Preferred Stock and Series C
Convertible Preferred Stock.  The offer allowed the warrant holders
the opportunity to extend the term of the warrants.  The warrants
allow the holders to purchase shares of our common stock at a price of $1.775
per share.  In order to take advantage of the offer, a warrant holder
was required to exercise a portion of the warrants and purchase no less than 10%
of the shares of common stock covered by the warrants.  In exchange
for the partial exercise of the warrants prior to the expiration of the offer,
the expiration date of the warrants would be extended from December 9, 2008 to
December 9, 2010.  Daniel S. Laikin, our Chief Executive Officer,
director and a significant stockholder, Timothy Durham and Paul Skjodt, members
of the board of directors and significant stockholders, and Robert Levy, a
director, took advantage of this offer.  As a result of partially
exercising their warrants, 263,560 shares of common stock were issued to Mr.
Laikin, 121,875 shares were issued to Mr. Durham, 35,889 shares were issued to
Mr. Skjodt and 18,835 shares were issued to Mr. Levy.  Mr. Laikin
exercised his warrants by cancelling a total of $467,817 in principal and
accrued interest and Mr. Durham exercised his warrants by cancelling a total of
$216,329 in principal and accrued interest of loans these individuals made to us
from time-to-time.





On June
25, 2008, our board of directors approved an Agreement to Convert Debt with
Messrs. Laikin and Durham pursuant to which we agreed to issue shares of our
common stock in exchange for the cancellation of principal and interest owed to
these individuals for loans made to us from time to time.  Mr. Laikin
agreed to cancel a total of $132,183 in principal and accrued interest in
exchange for 92,436 shares of common stock and Mr. Durham agreed to cancel a
total of $283,671 in principal and accrued interest in exchange for 198,371
shares of common stock.  These shares were issued in September
2008.  The per share value of the common stock used to compute the
number of shares issued to Messrs. Laikin and Durham was $1.43, the last sale
price of the common stock on the trading day preceding the date that we received
instructions from these individuals to pay the principal and interest with
common stock.





During
the fiscal year ended July 31, 2007, we borrowed funds from Messrs. Laikin and
Durham for working capital which was used for the publication of National
Lampoon books.  A total of $250,000 was borrowed from Mr. Laikin, Mr.
Durham and a third party.  The loans accrued interest at the rate of
6% per annum and were payable on demand.  During the fiscal year ended
July 31, 2008, the largest aggregate amount of principal we owed on these loans
was $250,000 and $25,368 in interest was accrued.  In September 2008,
we repaid a portion of these loans by issuing 69,040 shares of common stock to
Mr. Laikin in payment of $89,667 in principal and $9,060 in interest and 59,837
shares of common stock to Mr. Durham in payment of $77,000 in principal and
$8,567 in interest and by issuing 32,997 shares of common stock and another
24,129 to be issued to a shareholder in payment of $83,333 in principal and
$9,741 in interest.  The principal and interest of the loans has been
paid in full.






43







On
January 31, 2008, in accordance with the terms of his consulting agreement, Mr.
Douglas S. Bennett, our former President and Chief Financial Officer, received
an option to purchase 50,000 shares of our common stock at an exercise price of
$1.90 which was the market value of the common stock on the date of
grant.  Mr. Bennett provided consulting services from August 1, 2006
until January 31, 2008.





As of
July 31, 2008, we owed Mr. Laikin $436,719 in principal and $50,513 in interest
for advances made to us from time-to-time for working capital.  The
loans are unsecured and bear interest at the rate of 6% per
annum.  The obligation to Mr. Laikin is payable on
demand.  During the fiscal year ended July 31, 2008, the largest
aggregate amount of principal outstanding of the loans was
$1,059,719.  As of July 31, 2008 23,394 shares of common stock were
issuable to Mr. Laikin in payment of $30,364 in principal and $3,089 in
interest.  We continue to owe $487,232 in principal to Mr. Laikin on
this loan.





As of
July 31, 2008, we owed Mr. Durham $735,259 in principal and $21,686 in interest
for advances made to us from time-to-time for working capital.  The
loans are unsecured and bear interest at the rate of 6% per
annum.  The obligation to Mr. Durham is payable on
demand.  During the fiscal year ended July 31, 2008, the largest
aggregate amount of principal outstanding of the loans was
$1,137,819.  As of July 31, 2008, 138,535 shares of common stock were
issuable to Mr. Durham in payment of $192,429 in principal and $5,676 in
interest.  We continue to owe $756,945 in principal to Mr. Durham on
this loan.





Red Rock
Pictures Holdings, Inc. (“Red Rock”), a publicly traded company and related
party, has made various loans to us.  The outstanding amount includes
loans made to us for film financing as discussed in Note F to our audited
financial statements.  As of July 31, 2008 we owed Red Rock $2,735,784
in principal and $482,020 in interest.  The loans bear interest at the
rate of 10% per annum.  During the fiscal year ended July 31, 2008,
$1,279,944 of principal and $152,425 of interest had been paid to Red
Rock.  The largest aggregate amount of principal outstanding of the
loans to Red Rock during the year ended July 31, 2008 was
$3,994,049.  The loan agreements, which were entered into on October
26, 2006, and the amendments thereto, which were entered into on October
31, 2008, require payment of the loans no later than three years after the
release date of the film and define the payments, which are to be made from
proceeds from the release of the film over an estimated revenue cycle of three
years, as follows: first the Company is to receive a 20% distribution fee;
thereafter, the Company is to receive recoupment of all prints and advertising
expenses incurred in connection with the distribution of the picture (please see
Note F to our financial statements.) The remaining gross receipts are to be
split equally between the Company and Red Rock until such time as Red Rock has
recouped its investment entirely. Based on the estimates of proceeds the Company
expects to receive from the films, the Company anticipates that it will make a
payment of approximately $1,147,763 toward the aggregate loan during the first
year, and pay the balance over the next two years, prior to or on the due date.
We continue to owe $3,217,804 in principal and interest to Red
Rock.





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





ITEM
14.PRINCIPAL ACCOUNTANT
FEES AND SERVICES





The
following table sets forth fees billed to us by our auditors during the fiscal
years ended July 31, 2008 and July 31, 2007 for: (i) services rendered for the
audit of our annual financial statements and the review of our quarterly
financial statements, (ii) services by our auditor that are reasonably related
to the performance of the audit or review of our financial statements and that
are not reported as Audit Fees, (iii) services rendered in connection with tax
compliance, tax advice and tax planning, and (iv) all other fees for services
rendered.





July
      31, 2008
            
            July
      31, 2007(i)
      Audit Fees
            
            $
            148,776
            
            $
            123,459(ii)
      Audit Related Fees
            
            $
            16,723
            
            $
            16,489(iii)
      Tax Fees
            
            $
            -
            
            $
            -(iv)
      All Other Fees
            
            $
            3,696
            
            $
            -







44






ITEM 15. EXHIBITS





Exhibit
      No.
            
            Title3.1
            
            Certificate
      of Incorporation of National Lampoon, Inc. (1)3.2
            
            Bylaws
      of National Lampoon, Inc. adopted August 27, 2002 (1)3.3
            
            First
      Amendment of Certificate of Incorporation of National Lampoon, Inc. (2)3.4
            
            Second
      Amendment to Certificate of Incorporation of National Lampoon,
      Inc.*3.5
            
            Third
      Amendment to Certificate of Incorporation of National Lampoon,
      Inc.*4.1
            
            Certificate
      of Designations, Preferences, Rights and Limitations of Series C
      Convertible Preferred Stock of National Lampoon, Inc. (2)4.2
            
            First
      Amendment to Certificate of Designations, Preferences, Rights and
      Limitations of Series C Convertible Preferred Stock of National Lampoon,
      Inc.*4.3
            
            Second
      Amendment to Certificate of Designations, Preferences, Rights and
      Limitations of Series C Convertible Preferred Stock of National Lampoon,
      Inc.*4.4
            
            Certificate
      of Designations, Preferences, Rights and Limitations of Series D
      Convertible Preferred Stock*4.5
            
            NLAG
      Registration Rights Agreement dated May 17, 2002 among the Registrant and
      members of the NLAG Group and GTH Capital, Inc. (3)4.6
            
            Jimirro
      Registration Rights Agreement dated May 17, 2002 (3)4.7
            
            Piggyback
      Registration Rights Agreement dated September 3, 2002 between the
      registrant and Constellation Venture Capital, L.P. as agent for certain
      individuals. (4)4.8
            
            Piggyback
      Registration Rights Agreement entered into among the registrant and the
      purchasers of Series C Convertible Preferred Stock (5)4.9
            
            J2
      Communications Voting Agreement dated May 17, 2002 among members of the
      NLAG Group and James P. Jimirro (3)4.10
            
            First
      Amendment to Voting Agreement dated June 7, 2002 *4.11
            
            Series
      C Voting Agreement entered into among the registrant and purchasers of
      Series C Convertible Preferred Stock (5)10.1
            
            2005
      Employment Agreement between the registrant and Daniel Laikin (6)10.2
            
            National
      Lampoon, Inc. 1999 Amended and Restated Stock Option, Deferred Stock and
      Restricted Stock Plan (6)10.3
            
            National Lampoon, Inc. 2005
      Consultant Plan(7)






45






10.4
            
            Agreement
      to Convert Debt between the registrant and Daniel S. Laikin and Timothy S.
      Durham*10.5
            
            Agreement
      to Convert Debt between the registrant and Christopher R.
      Williams*10.6
            
            Indemnification
      Agreement dated May 17, 2002 between National Lampoon, Inc. and Daniel S.
      Laikin (3)10.7
            
            Agreement
      between J2 Communications and Harvard Lampoon, Inc. dated October 1, 1998
      (6)10.8
            
            Indemnification
      Agreement dated May 17, 2002 between J2 Communications and Daniel S.
      Laikin (3)10.9
            
            Indemnification
      Agreement dated May 17, 2002 between J2 Communications and James P.
      Jimirro (3)10.10
            
            Common
      Stock Warrant for Series B Preferred Stockholders (3)10.11
            
            Series
      C Preferred Stock and Warrant Purchase Agreement (5)10.12
            
            Common
      Stock Purchase Warrant for Series C Preferred Stockholders (5)10.13
            
            Secured
      Promissory Note dated May 16, 2006 and Amendment dated June 6, 2006
      executed by the registrant in favor of Daniel Laikin, Timothy Durham and
      Christopher Williams.(8)10.14
            
            Financing
      Agreement dated October 31, 2006, by and between Ratko Productions, Inc.,
      a wholly owned subsidiary of National Lampoon, Inc. and Red Rock
      Productions, Inc. (8)10.15
            
            Financing
      Agreement dated October 31, 2006, by and between Bagboy Productions, Inc.,
      a wholly owned subsidiary of National Lampoon, Inc. and Red Rock
      Productions, Inc. (8)10.16
            
            Prints
      and Advertising Financing Agreement by and between National Lampoon, Inc.
      and Red Rock Productions, Inc.*21
            
            Subsidiaries
      of National Lampoon, Inc. *23
            
            Consent
      of Weinberg & Company, P.A.*31.1
            
            Certification
      by Chief Executive Officer/President pursuant toRule
      13a-14(a) of the Securities Exchange Act of
1934*31.2
            
            Certification
      by Chief Financial Officer pursuant toRule
      13a-14(a) of the Securities Exchange Act of
1934*32.1
            
            Certification
      Pursuant to18
      U.S.C. 1350*


* Filed
herewith.




(1)
Incorporated by reference from the registrant’s Form 10-K/A for the fiscal year
ended July 31, 2003 filed with the Securities and Exchange Commission on
December 19, 2003, file number 000-15284.




(2)
Incorporated by reference from the registrant’s Form 10-K for the fiscal year
ended July 31, 2004 filed with the Securities and Exchange Commission on October
29, 2004, file number 000-15284.




(3)
Incorporated by reference from the registrant’s Form 8-K filed with the
Securities and Exchange Commission on May 31, 2002, file number
000-15284.




(4)
Incorporated by reference from the registrant’s Form 8-K filed with the
Securities and Exchange Commission on September 9, 2002, file number
000-15284.




(5)
Incorporated by reference from the registrant’s Form 10-QSB filed with the
Securities and Exchange Commission on December 21, 2004, file number
000-15284.




(6)
Incorporated by reference from the registrant’s SB-2 Registration Statement
filed with the Securities and Exchange Commission on March 10, 2005 file number
333-123138




(7)
Incorporated by reference from the registrant’s definitive proxy statement filed
on December 13, 2005, file number 001-32584.




(8)
Incorporated by reference from the registrant’s Form 10-KSB filed with the
Securities and Exchange Commission on November 29, 2007, file number
001-32584.








46
 
   SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized on this 10th day of November 2008.
  NATIONAL
      LAMPOON, INC.By:
                /s/
      Daniel S. LaikinDaniel
      S. Laikin
                  Chief
      Executive Officer
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
   Signature
                  
                  Title
                  
                  Date/s/
      Daniel
      S. Laikin
                  
                  Chief
      Executive Officer, Director
                  
                  November 
      10, 2008Daniel
      S. Laikin/s/
      Lorraine
      Evanoff
                  
                  Chief
      Financial Officer
                  
                  November 
      10, 2008Lorraine
      Evanoff/s/
      James
      P. Jimirro
                  
                  Chairman
      of the board of directors
                  
                  November 
      10, 2008James
      P. Jimirro
 /s/
      Timothy
      Durham
                  
                  Director
                  
                  November 
      10, 2008Timothy
      Durham/s/
      Paul
      Skjodt
                  
                  Director
                  
                  November 
      10, 2008Paul
      Skjodt/s/
      Robert
      S. Levy
                  
                  Director
                  
                  November 
      10, 2008Robert
      S. Levy
 /s/
      Duncan
      Murray
                    
                    Director
                    
                    November 
      10, 2008Duncan
      Murray/s/
      James
      Toll
                    
                    Director
                    
                    November 
      10, 2008James
      Toll