ITEM 1: THE BUSINESS
The Company was founded in March, 1986 by its Chairman of the Board and President, James P. Jimirro, the first President of both the Disney Channel and Walt Disney Home Video. The Company was originally formed primarily to engage in the acquisition, development and production of entertainment feature film and special-interest videocassette programs, and the marketing of these programs in the home video sell-through market. In 1990, the Company acquired National Lampoon, Inc., a publisher of a national satire and humor magazine and licensor of feature films.
Due to the increasing competitiveness of the videocassette market, resulting in declining volume and profitability, the Company has de-emphasized this segment of its business. The Company expects that its videocassette business, which has been declining in recent years, will continue to decline, and in the future will not be a significant part of its operations. The Company is now focusing on using the National Lampoon name in virtually every segment of the entertainment business. The first significant result of this effort was realized with the release in February, 1993 of the feature film "National Lampoon's Loaded Weapon I". This film achieved in excess of $28 million of theatrical revenue in its United States theatrical release. The Company is participating in the film's revenue as provided by the Company's licensing agreement with New Line Cinema, the producer and distributor of the film. The second picture under this licensed agreement, "National Lampoon's Senior Trip," was released in September of 1995. The theatrical revenue from this film was disappointing, however, as the company only licenses the "National Lampoon" name and has no risk of loss if theatrical boxoffice revenues do not meet expectation. The Company does not expect any significant contingent income from this film. The Company intends to continue its efforts to license the "National Lampoon" name to other producers of full length motion pictures. In fiscal 1994, a licensing agreement was entered into with Showtime Networks, Inc. which provides for the production of seven (7) movies made for initial viewing on the Showtime television channel over three (3) years. Four made-for-cable pictures had been produced under this arrangement as of the fiscal year ended July 31, 1997. As per the contract, Showtime has paid the producer fees due for five (5) movies as of July 31, 1997. The producer fees due for the sixth (6) and seventh (7) movies will be paid in the fiscal year ended July 31, 1998. The Company is currently seeking to replace the Showtime license agreement with a comparable entity that produces made-for-cable movies under a similar licensing arrangement.
RECENT DEVELOPMENTS AND MATERIAL INFORMATION
1.	Dependence on National Lampoon
	In October 1990, J2 Communications ("J2" or the "Company") acquired all of the outstanding stock of National Lampoon, Inc. ("NLI"), the publisher of the National Lampoon magazine and a developer of other film programming. Although substantial sums were expended by the Company in an attempt to return the magazine publishing operations to profitability, the Company was unable to achieve this objective. On December 23, 1992, as the sole secured creditor of NLI, J2 foreclosed against all of NLI's assets and the "National Lampoon" trademark. After this foreclosure, NLI was left with no remaining assets, although the Company has continued to exploit the trademark. The Company anticipates that a majority of future revenue will be dependent on exploiting the "National Lampoon" name. The Company is subject to several agreements, including a feature film agreement with New Line Cinema which led to the production of "National Lampoon's Loaded Weapon I" and "National Lampoon's Senior Trip," and an agreement with Showtime Networks, Inc. regarding movies made for cable television. The first movie made under this latter agreement was entitled "National Lampoon's Attack of the 5'2" Women" which first aired in August 1994. The second movie, "National Lampoon's Favorite Deadly Sins", was aired in November, 1995. The third movie, "National Lampoon's Dad's Week Off", aired in March 1997 and the fourth movie, "National Lampoon's The Don's Analyst", aired in September 1997, both on Showtime's affiliated network, The Movie Channel. The Showtime agreement has now expired, with only four (4) made-for-cable movies produced, and as such, the fifth thru seventh movies will not be produced. As per the contract, Showtime has paid the producer fees due for five (5) movies as of July 31, 1997. The producer fees due for the sixth (6) and seventh (7) movies will be paid in the fiscal year ended July 31, 1998. The Company is currently seeking to replace the Showtime license agreement with a comparable entity that produces made-for-cable movies under a similar licensing arrangement. The Company is a profit participant in these ventures and is substantially dependent on the performance of third parties to such agreements and upon the commercial success of the licensed products.
2.	Management contract of the Magazine
	In August 1993, the Company entered into an agreement with CR Cooper Publications, Inc., a magazine publisher, to print and distribute the magazine. Editorial control of the magazine content remained with the Company. The agreement called for the publication of a minimum of 4 issues during the first year of the agreement, 6 issues the second year and 10 issues for the third and subsequent years. The agreement was for a period of 3 years. In February 1996, the agreement was terminated by the Company because certain minimum performance targets were not met by the Publisher. Beginning with the 25th anniversary issue published in May 1996, the Company again began publishing the magazine. The Company's current agreement with Harvard Lampoon obligates the Company to publish at least one issue of the magazine a year with a minimum of 50,000 copies. The Company is complying with this obligation, but has not determined when and if it would publish more than the minimum requirement.
3.	Dependence on Key Personnel
	The Company is substantially dependent on the services of James P. Jimirro, who serves as the Company's Chairman of the Board and President. Although Mr. Jimirro is party to an employment agreement with the Company, the loss of his services could have a material adverse effect on the Company.
NATIONAL LAMPOON OPERATIONS
NLI and its subsidiaries were acquired by J2 effective October 24, 1990 upon approval of the shareholders of both companies. In December 1992, J2 foreclosed on all of the assets of NLI. Since that time, J2 has used the assets it acquired in such foreclosure in a separate division. This division, together with the prior NLI entity, is collectively referred to as "NL."
General
NL is engaged in various aspects of the entertainment business. It is the publisher of National Lampoon, a magazine of contemporary humor and satire. NL also creates, develops, and has produced (but does not finance) the production of motion pictures, television programs, and other entertainment media.
Motion Pictures, Television and Other Entertainment Activities
Motion Pictures: NL's motion picture activities have consisted principally of developing ideas for feature films, suggesting script writers, providing supervision of the scripting, and providing producer services in connection with the production of such films. NL has not financed the development, production or distribution of movies, and does not maintain a development department. Instead, NL is typically presented with film ideas by major movie studios for consideration with regard to financing of development, production, and distribution by such studios and obtaining the right to use the "National Lampoon" name. For these services, NL receives production and other fees and a participation in the profits, if any, of the movie which bears its name. After NL's first movie, "Animal House," NL's compensation arrangements for its comedy film projects financed and distributed by studios traditionally fell into a general pattern of cash fees for NL's producer services and for the use of the name "National Lampoon" in the film title, and a small percentage of the studio's "net profits" (after a certain level of revenues has been achieved) from the film.
To date, NL has been involved in the production of eight feature films, including the highly profitable 1978 film "Animal House," co-produced by NL and Ivan Reitman. This movie starred John Belushi and was financed and distributed by Universal Studios. For the last five years, revenues from this picture have consisted mainly of NL's share of fees derived from the licensing of the picture by Universal for showing by various independent television stations, and from the sale of videocassettes.
NL's other films have included "National Lampoon's Vacation" (released in 1983) and its sequels, "National Lampoon's European Vacation" (released in 1985), and "National Lampoon's Christmas Vacation" (released in 1989), all starring Chevy Chase and Beverly D'Angelo.
NL and New Line Cinema Corporation ("New Line") entered into an agreement, dated as of September 11, 1991, regarding the development and production, financing, and distribution of up to three (3) National Lampoon motion pictures each at budgets not greater than $10 million within four and one-half years of execution of the agreement (the "New Line Agreement"). The New Line Agreement provided NL with an advance fee for the use of the "National Lampoon" name in connection with each of the theatrical motion pictures to be produced and additional contingent compensation based on the gross revenues produced by the Picture.
New Line released the first film under this agreement, "National Lampoon's Loaded Weapon I," in February 1993. The film grossed in excess of $28 million at the domestic box-office. The second film, "National Lampoon's Senior Trip" was released in September, 1995 and was not a box office success. The New Line agreement expired on May 10, 1996, and as such, the third motion picture was never produced. Unless the Company licenses the rights and obtains a significant advance, revenue from theatrical feature film rights for fiscal year ended July 31, 1998 will be dependent on contingent compensation from previously licensed rights. The results will be lower feature film rights revenue for the fiscal year ended July 31, 1998, than in prior years.
In March, 1994, the Company signed an agreement with Showtime Networks, Inc. ("Showtime") to produce seven (7) movies over a three (3) year period to be aired initially on the Showtime Network or The Movie Channel. The agreement provides for the payment of a license fee to National Lampoon upon the commencement of principal photography of each film and contingent compensation based on revenues the films may generate from all sources. The Showtime agreement has now expired, with only four (4) made-for-cable movies produced, and as such, the fifth through seventh movies will not be produced. As per the contract, Showtime has paid the producer fees due for five (5) movies as of July 31, 1997. The producer fees due for the sixth (6) and seventh (7) movies will be paid in the fiscal year ended July 31, 1998. The Company is currently seeking to replace the Showtime license agreement with a comparable entity that produces made- for-cable movies under a similar licensing arrangement.
In the event that the Company does not replace the Showtime agreement with a comparable arrangement, filmed entertainment revenues could be negatively impacted.
Television: In July 1987 NL entered into an exclusive television agreement with Barris Industries, Inc. ("Barris"), a Los Angeles- based television production company. Barris is a predecessor of Guber-Peter Entertainment Company ("GPEC"), which was acquired by Sony Pictures (formerly Columbia Studios). Pursuant to the Barris Agreement, NL granted Barris the exclusive right to produce television programming of any kind utilizing the name "National Lampoon" for a term of five years. NL had not previously been significantly active in creating television programming, and this agreement did not produce any significant television activity.
Concurrent with the acquisition of NL by J2 Communications, the exclusive right to produce television programming under the name "National Lampoon" was re-acquired by NL on October l, 1990 from GPEC ("GPEC Agreement"). The purpose of this acquisition of rights was to ensure that NL had the ability to control the use of its name in the valuable medium of television and to develop comedy motion picture and other programs for broadcast in all areas of television distribution including network, syndication and cable.
The GPEC Agreement required the re-payment of $1,000,000 to GPEC, which was the consideration paid by GPEC to NL for the rights in 1987. This sum was payable by NL, fifty-percent ($500,000) on execution of the contract (and so paid), and fifty-percent ($500,000) payable out of seventeen and one-half percent (17 1/2%) of the gross receipts received by NL as a result of the exploitation of any new television programs bearing the National Lampoon name, with certain minimums due on commencement of principal photography or taping of the applicable programs. After this amount has been re-paid, NL shall have no further obligations to GPEC with respect to television. To date, $131,000 has been paid under the gross receipts provision of the agreement.
In 1997 NL entered into an agreement with Western International Syndication to develop a television awards spoof programs. In addition, NL is currently in negotiation with a major supplier of children's television programming to develop an animated children's television series.
Made-For-Video Movies:
"National Lampoon's Last Resort", a made-for-video movie produced by Rose & Ruby Productions, completed filming in July, 1993. The picture stars Corey Feldman & Corey Haim, and was distributed internationally by Moonstone Entertainment and in the U. S. by Vidmark in early 1994.
Motion Picture and Television Competition: Motion pictures and television development activities are highly competitive. NL is in competition with the major film studios as well as numerous independent motion picture and television production companies for the acquisition of literary properties, the services of creative and technical personnel, and available production financing. NL believes it has been, and will continue to be, aided in these endeavors by the recognition achieved by the "National Lampoon" name and by the great success achieved by its films, "National Lampoon's Animal House," "National Lampoon's Vacation," and "National Lampoon Loaded Weapon I; however, NL cannot guarantee that any project will actually be produced or if produced, will yield the success of past projects.
Other Activities
Internet: In August 1997, National Lampoon entered into an agreement with Internet Ventures Inc. to develop a National Lampoon site on the Worldwide Web.
As of October 1997, the Company began negotiations with On-Line Entertainment Network, Inc. (a subsidiary of Global Net Systems, Ltd.) to develop and distribute audio comedy programming over the Internet on a pay-per-listen basis. The Company believes that if an agreement is consummated, the site will develop into a multi- layered site featuring pre-recorded material (including the National Lampoon Radio Hour archives), new serialized programming, live on-line comedy performances, and general comedy merchandising.
Books: NL continues the publication of various books, including "National Lampoon's Treasury of Humor" with Simon and Schuster, and four "True Facts" books with Contemporary Books. Other NL books published include the third edition of "National Lampoon's Cartoon Book," and "National Lampoon White Bread Snaps".
Computer Games: "National Lampoon's Chess Meister 5 Billion and 1," a computer game produced by Spectrum HoloByte, is currently available nationwide. Also available is "The Personal Daily PlanIt", a daily planner featuring National Lampoon's Joke of the Day, distributed by Media Vision. In 1995, Trimark Interactive developed and distributed the CD-ROM title "National Lampoon's Blind Date." Other interactive titles being developed by National Lampoon include "National Lampoon Goes To Hell" and "National Lampoon I Can't Believe It's Not A Game Show".
NL has a number of merchandising arrangements, including a line of trading and post cards based upon National Lampoon magazine art. In addition, NL is in negotiations with At A Glance Landmark, which published the Company's 1998 calendar, to distribute the 1999 NL Life Sucks! PAGE-A-DAY CALENDAR AND HORRORSCOPE.
Recordings: Rhino Records has released a commemorative box titled The Best of The National Lampoon Radio Hour, a compilation of classic comedy from the 1970's show.
Theme Restaurants: National Lampoon continuing to explore the possibility of developing the "National Lampoon Cafe", a chain of restaurants with a comedy theme. Should the "National Lampoon Cafe" be funded, constructed and open to the public, it will be operating in a very competitive environment, therefore, there is no assurance that the Cafe would be successful.
Publishing Operations
National Lampoon Magazine: First published in March 1970, National Lampoon is distributed at newsstands, bookstores, and other retail outlets. Its audience is largely young, college educated, and affluent. Each issue of the magazine contains original articles, artwork, and photographs treating various matters in a satirical manner.
National Lampoon became a bi-monthly magazine in late 1986 with a $3.95 cover price with approximately 112 pages per issue. Commencing with the March 1991 issue, National Lampoon increased to a ten (10) times per year frequency and also reduced its cover price to $2.95 and lowered the page count to 84 pages. However, the continued economic recession and the advent of the Gulf War depressed all magazine circulation and related advertising revenues. Consequently, beginning with the December 1991 issue, the Company reverted to bi-monthly issues. In an effort to reverse the trend of NL losses over many years, in March 1992, the Company relocated the principal offices of National Lampoon, Inc. to Los Angeles, California, and closed the New York offices. After the April 1992 issue, NL suspended publication of National Lampoon for several months. NL recommenced publication of National Lampoon with the spring 1993 issue.
In August 1993 the Company entered into an agreement with CR Cooper Publications, Inc., a magazine publisher, to print and distribute the magazine. Editorial control of the magazine content remained with the Company. The agreement called for the publication of a minimum of 4 issues during the first year of the agreement, 6 issues the second year and 10 issues for the third and subsequent years. The agreement was for a period of 3 years; however in February 1996, the agreement was terminated by the Company because certain minimum performance targets were not met by the Publisher. Beginning with the 25th anniversary issue published in May 1996, the Company again began publishing the magazine. The Company published 55,000 copies of the 25th Anniversary 1996 issue and 62,000 copies of the 1997 issue. The Company's current agreement with Harvard Lampoon obligates the Company to publish at least one issue of the magazine a year with a minimum of 50,000 copies. The Company is complying with this obligation, but has not determined when and if it would publish more than the minimum requirement.
An agreement between NL and The Harvard Lampoon, Inc. provides that NL may use the "Lampoon" name perpetually, subject to, among other things, publication of the magazine at least once a year. Under the agreement, as amended, NL pays The Harvard Lampoon, Inc. royalties of up to 2% of all revenues derived from sales of publications using the name "National Lampoon," and royalties of up to 2% of "pre-tax profits" (as defined in the agreement) derived from non-publishing activities using such name. Except for this royalty arrangement, there is no connection between National Lampoon and The Harvard Lampoon. The name "National Lampoon" is a registered trademark of the Company.
Competition in Publishing: The magazine publishing industry is intensely competitive with respect to both readership and advertising. National Lampoon is one of the few nationally circulated magazines directed to an adult audience devoted exclusively to contemporary humor and satire. There are, however, a number of nationally distributed magazines devoted to contemporary subjects and events, some of which occasionally contain material similar to that contained in National Lampoon.
VIDEO OPERATIONS
The Company, which through 1993 was engaged in significant operations in the sell-through video market, has drastically diminished its video operations. The Company was currently engaged in the exploitation of "Dorf on Golf", the rights to which expired this year. After such time, the Company does not expect that its video operations will generate any significant revenue.
EMPLOYEES
As of October 24, 1997, the Company employed six (6) employees of whom three (3) are full time and three (3) are part-time.
ITEM 2:
ITEM 2: PROPERTIES
The Company leases office space of approximately 3,912 square feet at 10850 Wilshire Boulevard, Suite 1000, Los Angeles, California 90024 for a five (5) year period commencing on October 1, 1995. The Company's rental obligation is $6,454 per month. The space is utilized for office space, as well as storage of video masters, cassettes and back issues of the National Lampoon Magazine and other NL archival materials. In addition, it provides storage for legal, accounting and contract files related to past years for National Lampoon and J2 Communications. Management considers the Company's corporate offices generally suitable and adequate for their intended purposes.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
The Company, NLI and the officers and directors of NLI became the defendants in a lawsuit filed in 1990 in the Superior Court of the Southern District of New York in regard to the acquisition of NLI by the Company. The shareholders of NLI (the "Plaintiffs") filed the claim with respect to the tax treatment of the transaction with respect to the individual shareholders of NLI. The Company entered into a settlement agreement in August 1991, which must still be approved by the courts, under which the Company will issue an addition 125,000 shares of its common stock to the Plaintiffs and provide for the payment of attorneys' fees. The value of the shares to be issued is presented as a liability of $203,000 as of July 31, 1997, and 1996, as the shares have not yet been issued and the settlement has not been approved.
NLI had a motion picture development and consulting agreement with Matty Simmons, a former officer of NLI. In November 1992, Matty Simmons Productions, Inc. and Matty Simmons (collectively "Simmons") filed a complaint against the Company alleging breach of contract. In December 1993, this litigation was settled. The terms of the settlement agreement provide for the Company to pay Simmons a percentage (not to exceed $240,000 in total) of any amounts earned by the Company from certain previously released National Lampoon films. As of the fiscal year ended July 31, 1997, the Company has paid Matty Simmons the total amount owed under the terms of the settlement agreement.
On March 10, 1997 counsel for Harvard Lampoon, Inc. ("HLI") filed a demand for arbitration to the American Arbitration Association, asserting that the Company underpaid royalties under the HLI royalty agreement by approximately $226,000, plus unspecified late charges, for the period from July 1, 1992, through June 30, 1995, based on HLI's interpretation of the agreement. By agreement of both parties arbitration was stayed in order to a mediation under the auspices of the Judicial Arbitration and Mediation Services, which took place on May 8th and 9th, 1997. Settlement negotiations commenced at the mediation and arbitration proceedings continue to be stayed while settlement negotiations proceed. If settlement is not reached, J2 will vigorously contest HLI's claims in arbitration.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
	 PART II
ITEM 5:
ITEM 5:	MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
a.	Stock: The Company's Common Stock has been traded in the over-the-counter market since October 2, 1986 under the symbol JTWO. The following table sets forth for the periods shown, the high and low bid prices as reported by NASDAQ. The bid prices reflect interdealer prices without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
Common Stock 	
	 On October 24, 1997, the closing bid price for the Common Stock was 1 5/32 per share. The approximate number of holders of record of Common Stock on that date was 551. The Company has never paid a dividend on its Common Stock and presently intends to retain all earnings for use in its business.
b.	Warrants: The Company's Warrants were issued in connection with its acquisition of National Lampoon, Inc. The warrants began trading in the over-the-counter market on October 26, 1990 under the symbol JTWOW. The following table sets forth for the period indicated, the high and low bid prices reflect interdealer prices without retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.
Warrants
The approximate number of holders of record of Warrants are 180 as of October 24, 1997, although management has been advised that the number of beneficial holders exceeds 1,000.
ITEM 6:
ITEM 6:	SELECTED FINANCIAL DATA
The selected consolidated statement of operations data for the years ended July 31, 1995, July 31, 1996 and 1997 and the consolidated balance sheet data at July 31, 1996 and 1997 are derived from the Company's consolidated financial statements included elsewhere in this Annual Report that have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report, which is also included elsewhere in this Annual Report. Such selected consolidated financial data should be read in conjunction with those consolidated financial statements and the notes thereto. The selected consolidated income statement data for the years ended July 31, 1993 and 1994 are derived from audited consolidated financial statements of the Company which are not included herein.
	 Selected Consolidated Financial Data
	 	 Year ended July 31,
		 		 YEAR ENDED JULY 31
ITEM 7:
ITEM 7:	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED JULY 31, 1997 VERSUS JULY 31, 1996
Total revenues for 1997 increased $392,000 to $1,356,000 compared to $964,000 for 1996. Movies, television and theatrical revenues increased $431,000 primarily due to increased movie licensing revenue of previously licensed movies and payment of the license fees for two Showtime movies during fiscal year 1997. Videocassette sales decreased $92,000 to $219,000 from $311,000 from the prior year due to the company de-emphasizing the video segment of its business because of declining profitability. Royalty income increased $20,000 to $65,000 from $45,000 from the prior year, primarily due to increased revenue received from a newly licensed distributor. Publishing revenue increased $48,000 to $56,000 from $8,000 in the prior year due to a majority of revenue for the 25th anniversary issue of the National Lampoon magazine, which went on sale late in fiscal 1996, being recorded in fiscal 1997, along with the fiscal 1997 magazine issue. Other income fell to $46,000 in 1997 from $61,000 in the prior year 1996.
Cost of videocassettes sold as a percentage of sales increased to 48% in fiscal 1997 compared to 45% in 1996, primarily due to reductions in the sales price of certain videos as they are in the latter stages of their release pattern.
Costs of movies and television expenses increased $27,000 to $53,000 from $26,000 in the prior fiscal year, due primarily to additional payments required to be made on increased television revenue on the "GPEC" rights agreement.
Magazine editorial, production and distribution expense decreased $11,000 to $41,000 from $55,000 due primarily to last fiscal year's expense having included costs associated with prior editions of the magazine.
Royalty expenses increased $26,000 to $63,000 compared to $37,000 in 1996, primarily due to an increase in royalty income.
Selling, general and administrative expenses increased $67,000 to $792,000 in the current year as compared with $725,000 in the prior year. The increase was primarily due to an increase in salary expense, partially offset by a reduction in legal and accounting expenses.
Interest and other income for the year decreased $18,000 to $59,000 from $77,000 in the prior fiscal year primarily due to a decrease in yields on short term investment, as well as a reduction in the average short term investment balance during 1997.
Net income for the current year was $30,000, equal to $0.01 per share compared with a net loss of $236,000, equal to $0.07 per share. The increase in net income was due primarily to increased television and theatrical revenues which were partially offset by a reduction in video sales.
YEAR ENDED JULY 31, 1996 VERSUS JULY 31, 1995
Total revenues for the year were $964,000 compared with $1,284,000 in the prior year. Movies, television and theatrical revenues were $539,000 compared with $736,000 in the prior year. In the prior year, payments under a movie licensing agreement of $430,000 were received which were significantly higher than the $166,000 received in the current year. Video sales of $311,000 were reduced from $336,000 recorded in 1995. Royalty income from video licensing fell from $83,000 in the prior year to $45,000 in the current year. In 1995, a payment from a video licenses of $40,000 was received which related to revenues from prior years. The Company has de-emphasized the video segment of its business due to declining profitability. Other income fell to $61,000 from $129,000 in the prior year. In 1995 there was a payment of $50,000 received from a National Lampoon Audio product that did not recur in the current year.
Cost of videocassettes sold as a percentage of sales increased to 45% in fiscal 1996 compared with 31% in 1995 due primarily to reductions in the sales price of certain films in the current period as they are in the latter stages of their release period.
Cost of movies and television expenses remained unchanged between fiscal years 1996 versus 1995 primarily due to a fixed percentage payment made per agreement on certain television revenues, which was received in the same amounts in the current and prior fiscal years.
Cost of magazine primarily covers costs associated with prior editions of the magazine.
Royalty expenses for fiscal 1996 decreased $25,000 to $37,000 compared to $62,000 in 1995, primarily due to a settlement between the Company and a producer of a certain video which settlement reduced royalty expenses by $20,000.
Selling, general and administrative expenses were $725,000 in the current year as compared with $818,000 in the corresponding prior period. The decrease primarily reflects a reduction in salary related costs of $179,000, offset in part by an increase in legal expenses of $98,000.
The net loss for the current year was $236,000 equal to $0.07 per share compared with net income of $66,000 in the prior year, equal to $0.02 per share. The loss was due to sharply lower revenues, higher costs associated with publishing of the magazine, and higher legal expenses offset in part by lower salary costs as discussed above.
Liquidity and Capital Resources
Cash and short term investments at July 31, 1997 totaled $1,502,000, an increase of $368,000 from the prior year end.
The Company has no current plans for any significant capital expenditures in its current line of business and believes that its present level of cash and cash equivalents, augmented by internally generated funds, will provide sufficient cash resources through fiscal 1998.
The Company is considering establishing a restaurant chain to be called "National Lampoon Cafe." Should it enter this new line of business, significant capital would be required.
The Company has made a significant investment in the "National Lampoon" name and other intangible assets through its acquisition of NLI. Realization of these acquired assets ($3,896,000 at July 31, 1997) is dependent on the continued licensing of the "National Lampoon" name for use in feature films, video, television and audio distribution and merchandising of other appropriate opportunities. The Company has received approximately $5,583,000 in licensing revenues (including revenues received in connection with an agreement for the licensing of the name for three feature films - see Note 4) since the acquisition of the "National Lampoon" name in 1990. The Company is in the process of negotiating other licensing agreements and the development of other concepts, programs, etc. that could generate additional licensing fees in the future. If these and other licensing agreements that the Company may enter into in the future do not result in sufficient revenues to recover these acquired intangible assets over a reasonable period of time, the Company's future results of operations may be adversely affected by a write-off of or an adjustment to these acquired intangible assets.
In evaluating if there has been an impairment in the value of its long-lived assets, the Company follows the guidelines of SFAS No. 121. This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Management has determined that through the realization of future licensing agreements, expected future cash flows relating to the intangible assets will result in the recovery of the carrying amount of such assets.
ITEM 8:
ITEM 8:	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Index to Financial Statements of the Company is included in Item 14.
ITEM 9:
ITEM 9:	NONE
	 PART III
ITEM 10:
ITEM 10:	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth below, as of the date of this filing, lists each director and executive officer of the Company, the year in which he first became a director or executive officer, and his principal occupation during the past five years. Each Director is expected to hold office until the next annual meeting of stockholders and until his successor has been elected and qualified.
James P. Jimirro has been employed by the Company since its inception. From 1980 to 1985 he was the President of Walt Disney Telecommunications Company, which included serving as President of Walt Disney Home Video, a producer and distributor of family home video programming. While in this position, he also served as Corporate Executive Vice President of Walt Disney Productions. In addition, from 1983 until 1985, Mr. Jimirro served as the first President of The Disney Channel, a national pay cable television channel, which Mr. Jimirro conceived and implemented. Mr. Jimirro continued in a consulting capacity for the Walt Disney Company through July, 1986. From 1973 to 1980 he served as Director of International Sales and then as Executive Vice President of the Walt Disney Educational Media Company, a subsidiary of Walt Disney Productions. Before his move to Disney, Mr. Jimirro directed international sales for CBS, Inc. and later, for Viacom International.
James Fellows has been a member of the Board of Directors and the President of the Central Education Network, Inc., a Chicago, Illinois association of public television and educational associations, since 1983. From 1962 through 1982, Mr. Fellows worked in a variety of positions for the National Association of Educational Broadcasters (NAEB) in Washington, D.C., and became its President and Chief Executive Officer in 1978. NAEB was a non-profit organization concerned with educational and public telecommunications. Mr. Fellows is a director of numerous non- profit corporations including the Educational Development Center in Boston, Massachusetts, a producer of written and filmed educational materials; the Maryland Public Broadcasting Foundation, a corporate fund raiser for public television; and American Children's Television Festival.
Bruce P. Vann has been a partner in the law firm of Kelly Lytton Mintz & Vann since December, 1995, and from 1989 through December 1995 was a partner with the law firm of Keck, Mahin & Cate and Meyer & Vann. In all firms (located in Los Angeles, California), Mr. Vann has specialized in corporate and securities matters. Mr. Vann also serves, on a non-exclusive basis, as Senior Vice President of Largo Entertainment, a subsidiary of The Victor Company of Japan.
Rudy R. Patino joined the company on August 8, 1997 as Chief Financial Officer. He is a Certified Public Accountant, licensed in the State of California, and has worked as Chief Financial Officer and Controller for various entertainment companies over the last 15 years. From 1995 to 1997 he was Chief Financial Officer for Prism Entertainment Corporation, a producer and distributor of feature motion pictures. Prior to that, from 1986 to 1995, he was Vice President/Controller for Avalon Attractions, Inc. one of the largest live concert promoters in Southern California.
Duncan Murray has been with the Company since August 1986. Before that, he worked with The Walt Disney Company for fourteen years in a variety of capacities including Vice President-Sales Administration for The Disney Channel and Director of Sales for Walt Disney Telecommunications Company.
ITEM 11:
ITEM 11:	EXECUTIVE COMPENSATION
The Summary Compensation Table below includes, for each of the fiscal years ended July 31, 1997, 1996 and 1995, individual compensation for services to the Company and its subsidiaries of the Chief Executive Officer (the "Named Officer").
___________________
(1)	Does not include amounts of $12,500 in 1997, $9,700 in 1996, and $9,800 in 1995 paid to Jim Jimirro who is entitled to be reimbursed for expenses relating to entertainment, travel and living expenses when away from home.
(2)	Does not include $7,000 in 1997, $8,900 in 1996 and $12,500 in 1995 which the Company paid for Mr. Jimirro's health plan. The Company also provides Mr. Jimirro with a Company-owned vehicle for his use.
(3)	Does not include SAR's granted to Mr. Jimirro pursuant to his employment agreement. See the description of Mr. Jimirro's employment agreement under "Employment Agreements and Stock Option Plans" below.
(4)	The bonus for 1995 was accrued but not paid.
(5)	Effective June 1, 1992, Mr. Jimirro reduced the amount of salary he receives to $190,750. Mr. Jimirro does not expect to receive the unpaid portion unless there is a change in the control of the Company as defined by his employment agreement. The Company has not accrued any salary or bonus for Mr. Jimirro in regards to the above for the fiscal year ended July 31, 1996 and 1997.
Option Grants in Last Fiscal Year
Shown below is information on grants of stock options pursuant to the 1994 Stock Option Plan during the fiscal year ended July 31, 1997, to the Named Officer which are reflected in the Summary Compensation Table on page 17.
___________________________________________________________________________
___________________ (1) Options/SARS granted are immediately exercisable.
(2) Options/SARS granted with an exercise price (or initial valuation in the case of SARs) equal to the closing sale price of the Common Stock as quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") on December 28, 1996, the date of grant for Mr. Jimirro.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year- End Option Values
Shown below is information with respect to (i) options exercised by the Named Officer pursuant to the 1994 Plan during fiscal 1997 (of which there were none); and (ii) unexercised options granted in fiscal 1997 and prior years under the 1994 Plan to the Named Officer and held by them at July 31, 1997.
(1) Based on the closing sale price as quoted on NASDAQ on that date.
Director Compensation
Directors, with the exception of Mr. Jimirro, receive 4,000 stock options per year exercisable at the then market price as compensation for their services as a director.
Compensation Committee Interlocks and Insider Participation
During fiscal 1997, all matters concerning executive officer compensation were addressed by the entire Board of Directors as the Company did not have a compensation committee. Jim Jimirro, James Fellows, Gary Cowan and Bruce Vann were each directors of the Company during fiscal 1997.
EMPLOYMENT AGREEMENTS AND STOCK OPTIONS
In 1994, the Company entered into a new employment agreement with James P. Jimirro, effective July 1, 1994 (the "1994 Agreement"). Under the 1994 Agreement, which has a term of seven years, Mr. Jimirro will receive a base salary plus an incentive bonus following the end of each fiscal year during which Mr. Jimirro is employed by the Company. Mr. Jimirro's base salary for the first year will be $475,000 and will be adjusted annually by the greater of (i) 9% or (ii) 5% plus the percentage increase in the CPI Index. Effective June 1, 1992, the President reduced the amount of salary he receives to $191,000. The President does not expect to receive the unpaid portion unless there is a change in the control of the Company as defined by the agreement.
Mr. Jimirro's bonus is to be an amount equal to 5% of the Company's earnings in excess of $500,000 and up to $1 million; plus 6% of the next $1 million of earnings; plus 7% of the next $1 million of earnings; plus 8% of the next $2 million of earnings; and plus 9% of the next $2 million of earnings. If earnings exceed $7 million, then Executive shall, in addition to foregoing compensation, be entitled to such additional incentive compensation as may be determined by the Board based upon Executive's services and performance on behalf of the Company and the profitability of the Company.
The 1994 Agreement also provides that, on the date of each annual meeting of shareholders during its term, Mr. Jimirro will be granted stock options with respect to 50,000 shares of Common Stock and stock appreciation rights (SARs) with respect to 50,000 shares of Common Stock. The exercise price of each option and the initial valuation of each SAR will be equal to the fair market value of the Common Stock of the Company at the date of the grant. The options and SARs will be immediately exercisable non-statutory stock options, will have a term of seven years, and will be subject to all other terms identical to those contained in the Company's 1991 Employee Stock Option Incentive Plan (the "1991 Plan"). The 1991 Plan specifically provides for the grant of stock options and SARs to Mr. Jimirro in accordance with his employment agreement. The 1994 Agreement provides that if Mr. Jimirro's employment is terminated without cause, or is terminated by Mr. Jimirro for cause or under certain other circumstances, including a change in control of the Company (as defined below), then Mr. Jimirro generally is entitled to receive all payments and other benefits which would be due under the 1994 Agreement during its entire term; provided, that such payments would be reduced to the extent that such payments would constitute an "excess parachute payment" under the Internal Revenue Code of 1986, or any successor law applicable to payments of severance compensation to Mr. Jimirro. A "change in control" would be deemed to occur if (a) any person or group becomes the direct or indirect owner of securities with 25% or more of the combined voting power of the Company's then outstanding securities, (b) if there is a significant change in the composition of the Board of Directors of the Company, (c) upon the sale of all or substantially all of the assets of the Company, (d) upon the merger of the Company with any other corporations if the shareholders of the Company prior to the merger owned less than 75% of the voting stock of the corporation surviving the merger or (e) in certain other events. In addition to the foregoing benefits, Mr. Jimirro has the right, if he terminates his employment under certain circumstances (including following a change in control or a breach of the 1994 Agreement by the Company) to serve as a consultant to the Company for a period of five years (the "Consulting Period"). During the Consulting Period, Mr. Jimirro would be required to devote no more than 600 hours per year to the affairs of the Company, and would receive 50% of his salary as in effect on the date of termination of his employment. As a result of the foregoing, the Company would incur substantial expenses if Mr. Jimirro terminates his employment with the Company following a change in control of the Company, which may make the Company a less attractive acquisition candidate. The 1994 Agreement also provides Mr. Jimirro with certain registration rights pursuant to which, beginning in 1992, the Company will be required upon the request of Mr. Jimirro to register the sale of shares of the Company's Common Stock owned by Mr. Jimirro under the Securities Act of 1933. The 1994 Agreement is terminable by the Company only "for cause" as defined therein.
Any employee may participate in any bonus plan which may be established, as well all Employee Stock Option Plans.
In October of 1995 the Financial Accounting Standards Board issued SFAS No. 123. This statement establishes accounting standards for stock-based employee compensation plans. This statement will become effective for the consolidated financial statements in fiscal 1997 and encourages, but does not require, a fair-value based method of accounting for employee stock options or similar equity instruments. Management does not believe the impact of the provisions of the Statement on its assets will be material.
Stock Option Plans
In 1994 the Board of Directors approved an Employee Stock Option Plan and a Stock Option Plan for Non-Employee Directors. Both Plans were approved by Shareholders at the Shareholders' Meeting held March 2, 1995.
The Employee Stock Option Plan is to be administered by a Committee consisting of at least two members of the Board of Directors. All prior options granted under previous stock option plans are to be replaced by options granted under the 1994 Plan.
The 1994 Plan provides for a maximum number of options to be granted to be the greater of 1,075,000 or 30% of the Company's outstanding shares less 125,000 shares reserved for issuance under the Non-Employee Director Plan.
The term of the options granted shall not exceed 10 years and the exercise price shall be equal to 100% of the fair market value of the common stock on the date of grant.
The Non-Employee Directors Stock Option Plan is to be administered by a Committee consisting of at least two members of the Board of Directors. All prior options granted under previous stock option plans are to be replaced by options granted under the 1994 Plan.
The 1994 Plan provided for a maximum number of 125,000 options to be granted and further provides for the granting of 4,000 option shares per year to each Non-Employee Director as compensation for his services.
A maximum of 125,000 shares may be issued under the Plan at an exercise price equal to the fair market value of the stock on the date of grant. All options are to be immediately exercisable.
ITEM 12:
ITEM 12:	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the expected beneficial ownership of Common Stock as of October 24, 1997. The table shows the beneficial ownership to each person known to J2 who beneficially own more than 5% of the shares of J2 Common Stock, each current director, and all directors and officers as a group. Except as otherwise indicated, J2 believes that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable.
______________________________
(1)	Less than 1 percent.
(2)	The address for each shareholder listed is 10850 Wilshire Boulevard, Suite 1000, Los Angeles, California 90024.
(3)	Includes 450,000 stock options (See "Stock Option" section) as well as 60,000 Warrants purchased in the open market.
(4)	Includes 35,000 shares of Common Stock purchasable under the Company's Stock Option Plan.
(5)	Includes 30,000 shares of Common Stock purchasable under the Company's Stock Option Plan.
(6)	Includes 36,500 options granted to officers not listed on stock table.
ITEM 13.
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
	Bruce P. Vann and the law firms of Kelly Lytton Mintz & Vann, of which he is a partner, and Meyer & Vann, of which he was a partner for a portion of the year, performed services as attorneys for the Company. For the fiscal year ended July 31, 1997, Kelly & Lytton and Meyer & Vann earned approximately $3,000. Mr. Vann is a director of the Company and, as such, he (or his law firm) may receive additional compensation for services rendered to the Company.
	 PART IV
ITEM 14:
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this annual report:
1.	 	Financial Statements:
		The financial statements listed in the accompanying Index to Financial Statements are filed as part of this annual report.
2.		Exhibits:
		The exhibits listed below are filed as a part of this annual report.
		 2.1	Acquisition Agreement, dated as of July 31, 1990 between the Company, J2 Acquisition Corp., National Lampoon, Inc., Daniel L. Grodnik, and Tim Matheson, and related Agreement and Plan of Merger. (2)
		 3.1	Restated Articles of Incorporation. (3)
		 3.2	By-laws of the Company. (3)
		 4.1	Warrant Agreement dated as of October 15, 1990 between the Company and U.S. Stock of Transfer Corp. (2)
		10.1	Amendment to Employment Agreement between the Company and James P. Jimirro, dated as of May 26, 1988. (3)
		10.2	Agreement between National Lampoon, Inc. and New Line Cinema Corporation, dated as of April 20, 1990. (2)
		10.3	Lease between the Company and Pacific Properties. (5)
		10.4	Amended lease between the Company and Pacific Properties. (4)
		10.5	Second amended lease between the Company and Pacific Properties. (1)
	 	10.6	"National Lampoon" License Agreement Termination between National Lampoon, Inc. and Guber-Peters Entertainment Company, previously named Barris Industries, Inc., dated October 1, 1990. (1) 			 	 10.7	Showtime Agreement (8) 	 	 10.8	Jim Jimirro Employment Agreement (8)
		10.9	1994 Stock Option Plan for Employees (9)
		10.10	1994 Stock Option Plan for Non- Employee Directors (9)
	 21.1	List of subsidiaries of Registrant (8)
			(1) Filed as exhibit to the Company's Annual Report on Form 10-K for the Fiscal Year ended July 31, 1991.
			(2) Filed as an exhibit to Company Registration Statement on Form S-4, File No. 33-36203 	 			(3) Filed as an exhibit to that certain Form S-1 Registration Statement of the Company as filed with the Securities and Exchange Commission on July 28, 1986, September 22, 1986 and October 2, 1986 (The "S-1 Registration Statement").
			(4) Filed as an exhibit to the Company's Annual Report on Form 10-K for the Fiscal Year Ended July 31, 1988.
			(5) Filed as an exhibit to the Company's Annual Report of Form 10-K for the 		Fiscal Year Ended as of July 31, 1989.
			(6) Filed as an exhibit to that certain Registration Statement of the Company filed with the Securities and Exchange Commission on May 28, 1993.
			(7) Filed as an exhibit to that certain Registration Statement of the Company on Form S-1 filed with the Securities and Exchange Commission on October 28, 1993.
			(8) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the Fiscal year Ended July 31, 1995. 		 			(9) Filed as an Exhibit to that certain Registration Statement of the Company on Form S-8 filed with the Securities and exchange Commission on May 8, 1995.
	
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
	SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Los Angeles, State of California, on the 24th day of October, 1997.
J2 COMMUNICATIONS
October 24, 1997 By:/s/ James P. Jimirro JAMES P. JIMIRRO Chairman of the Board, President, and Chief Executive Officer (Principal 	 Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Los Angeles, State of California, on the 24th day of October, 1997.
Signatures	 Title Date
/s/ James P. Jimirro	 Chairman of the Board, October 24, 1997 JAMES P. JIMIRRO	 President, Chief Executive 	 Officer (Principal 	 Executive Officer) 	 and Director
/s/ Rudy R. Patino 	 Chief Financial Officer October 24, 1997 RUDY R. PATINO	 (Principal Financial Officer)
/s/ James Fellows 	 Director October 24, 1997 JAMES FELLOWS
/s/ Bruce P. Vann 	 Director October 24, 1997 BRUCE P. VANN
EXHIBIT 21.1
J2 COMMUNICATIONS
J2 COMMUNICATIONS AND SUBSIDIARIES
FINANCIAL STATEMENTS AS OF JULY 31, 1997 AND 1996 TOGETHER WITH AUDITOR'S REPORT
J2 COMMUNICATIONS AND SUBSIDIARIES
JULY 31, 1997
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS
FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of July 31, 1997 and 1996
Consolidated Statements of Operations for each of the three years in the period ended July 31, 1997
Consolidated Statements of Shareholders' Equity for each of the three years in the period ended July 31, 1997
Consolidated Statements of Cash Flows for each of the three years in the period ended July 31, 1997
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To J2 Communications:
We have audited the accompanying consolidated balance sheets of J2 Communications and subsidiaries, (a California corporation), as of July 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended July 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, a significant portion of the Company's assets is composed of certain intangible assets.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of J2 Communications and subsidiaries as of July 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 1997 in conformity with generally accepted accounting principles.
										 									 Arthur Andersen LLP
September 29, 1997 Los Angeles, California
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1997 AND 1996
ASSETS
The accompanying notes are an integral part of these consolidated balance sheets.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF JULY 31, 1997 AND 1996
LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated balance sheets.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1997
The accompanying notes are an integral part of these consolidated financial statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1997
The accompanying notes are an integral part of these consolidated financial statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED JULY 31, 1997
		
The accompanying notes are an integral part of these consolidated financial statements.
J2 COMMUNICATIONS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1997
1.	Summary of Significant Accounting Policies
Organization and Principles of Consolidation
J2 Communications (the "Company"), a California Corporation, was formed in March 1986, and was primarily engaged in the acquisition, development and production of entertainment and special-interest videocassette programs and the marketing, distribution and licensing of these programs for retail sale in the home video market. In fiscal 1991, the Company acquired all of the outstanding shares of National Lampoon, Inc. ("NLI"). NLI was incorporated in 1967 and was primarily engaged in various aspects of the publishing and entertainment industries. In December 1992, in consideration for the default of certain intercompany notes from NLI to the Company, NLI assigned the rights to the majority of its assets in full satisfaction of the notes. Included in these assets was NLI's 100 percent ownership interest in NL Communications, Inc., and Heavy Metal, Inc., which, upon this assignment, became subsidiaries of the Company.
Currently, the Company is primarily engaged in the licensing of the name "National Lampoon" in a variety of areas including motion pictures, home video, television, publishing and other entertainment media. The Company's revenues and income have and will continue to fluctuate based on the size, nature and timing of transactions whereby its names and trademarks are licensed. Despite the existence of a working capital deficit of $206,000 as of July 31, 1997, management of the Company believes that its cash and short-term investments at July 31, 1997, and projected cash flows in fiscal 1998 will be adequate to pay its liabilities as they become due.
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Cash Equivalents
Cash equivalents include certificates of deposit with original maturity dates of three months or less.
Short-Term Investments
In accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation at each balance sheet date. Marketable securities have been classified as held-to-maturity and are carried at cost.
Revenue Recognition
The Company recognizes licensing revenues based upon information provided by the licensee, with the exception of non-refundable advances from the licensing of the "National Lampoon" name, which are recognized when received. Revenues from the sale of videocassettes, net of estimated provisions for sales returns (which are not material for any period presented), are recognized when the units are shipped. Advances for future sales of videocassettes are deferred until the units are shipped. Publishing revenues include magazine sales and revenue from advertising included in the magazines. Single copy magazine sales are recognized as income in the month the issue becomes available for sale at the newsstand. Subscription revenues are apportioned equally over the subscription period. Advertising revenues are recognized concurrently with the recognition of magazine sales.
Intangible Assets
Intangible assets consist primarily of the right to license the "National Lampoon" name and are being amortized straight-line over a twenty-five year period. Management continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of intangible assets may warrant revision or that the remaining balance of intangible assets may not be recoverable. Factors that would indicate the occurrence of such events or circumstances include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, or the inability of the Company to renew, extend or replace existing contracts as they expire including licensing of the "National Lampoon" name. When factors indicate that intangible assets should be evaluated for possible impairment, the Company uses an estimate of the related business's undiscounted net income over the remaining life of the intangible assets in measuring whether the intangible assets are recoverable.
The Company has made a significant investment in the "National Lampoon" name and other intangible assets through its acquisition of NLI. Realization of these acquired assets is dependent on the continued licensing of the "National Lampoon" name for use in feature films, video, television and audio distribution and merchandising or other appropriate opportunities. The Company has received approximately $5,583,000 in licensing revenues (including revenues received in connection with an agreement for the licensing of the name for three feature films - see Note 5) since the acquisition of the "National Lampoon" name in fiscal 1991. The Company is in the process of negotiating other licensing agreements and the development of concepts, programs, and other opportunities that could generate additional licensing fees in the future. If these and other licensing agreements that the Company may enter into in the future do not result in sufficient revenues to recover these acquired intangible assets over a reasonable period of time, the Company's future results of operations may be adversely affected by a write-off of or an adjustment to these acquired intangible assets.
In evaluating if there has been an impairment in the value of its long-lived assets, the Company follows the guidelines of SFAS No. 121. This statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. Management has determined that through the realization of future licensing agreements, expected future cash flows relating to the intangible assets will result in the recovery of the carrying amount of such assets.
Per Share Information
Primary earnings per share are computed by dividing net earnings by the weighted average common shares outstanding and common share equivalents during the period. Common stock equivalents include, if dilutive, the number of shares issuable on exercise of the outstanding options less the number of shares that could have been purchased with the proceeds from the exercise of the options based on the average price of common stock during the year. The assumed exercise of all options and warrants during the years ended July 31, 1997, 1996 and 1995 was not dilutive and, therefore, was not included in the computation of weighted average shares outstanding.
Income Taxes
Deferred income tax assets and liabilities are computed annually for differences between the financial statement and tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.
Stock-Based Compensation
During the current year the Company adopted SFAS No. 123. This statement establishes accounting standards for stock-based employee compensation plans. This statement encourages, but does not require, a fair-value based method of accounting for employee stock options or similar equity instruments. The adoption of the statement did not have a material effect on the consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
New Financial Accounting Pronouncements
The Company has adopted the requirements of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of," issued in October 1995 and the pro-forma disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," issued in October 1995. The effect of the new financial accounting pronouncements was not material to the Company's consolidated financial statements.
In March 1997, the Financial Accounting Standard Board ("FASB")issued SFAS No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about Capital Structure" which are effective for financial statements for periods ending after December 15, 1997.
In June, 1997 the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of An Enterprise and Related Information" which are effective for the financial statements for periods ending after December 31, 1998.
Management does not believe adoption of SFAS No. 128, SFAS No. 129 and SFAS No. 130 will have a material effect on the Company's consolidated financial statements.
Reclassifications
Certain items in the 1996 and 1995 financial statements have been reclassified to conform with the 1997 presentation.
2.	Short-Term Investments
Short-term investments consist of United States Treasury bills and notes with original maturities of between three and twelve months. The following is an analysis of short-term investments:
No provision has been made for the change in market value for these investments as the Company intends to hold them until maturity. In determining realized net gains, the cost of the securities sold is based on specific identification.
3.	Deferred Revenues
Deferred revenues consist of the following:
4.	Accrued Expenses
Accrued expenses consist of the following:
5. 	Commitments and Contingencies
Made-For-Cable Agreement
In March, 1994, the Company signed an agreement with Showtime Networks Inc.("Showtime") to produce seven movies over a three year period to be aired initially on the Showtime Network or The Movie Channel. The agreement provides for the payment of a license fee to National Lampoon upon the commencement of principal photography of each film and contingent compensation based on revenues the films may generate from all sources. The Showtime agreement has now expired, with only four made-for-cable movies produced, and as such, the fifth through seventh movies will not be produced. Pursuant to the contract terms, Showtime has paid the producer fees due for five movies as of July 31, 1997. The producer fees due for the sixth and seventh movies of $300,000 will be paid in the fiscal year ended July 31, 1998. The Company is currently seeking to replace the Showtime license agreement. In the event that the Company is unable to replace the Showtime agreement with a comparable arrangement, movies, television, and theatrical revenues could be adversely impacted.
Revenue recognized under this agreement totaled $300,000, $150,000, and $150,000 for the years ended July 31, 1997, 1996, and 1995, respectively.
Motion Picture Agreement
NLI and New Line Cinema Corporation ("New Line") entered into an agreement, effective September 11, 1991, regarding the development, production, financing and distribution of three "National Lampoon" motion pictures, each at a budget not greater than $10 million, within four and one-half years of execution of the agreement. The agreement provided NLI with a non-refundable advance of $375,000 upon the execution of the agreement. The agreement was subsequently amended to extend its term through April 1, 1996.
The compensation to be received by NLI as a result of the use of its name is $250,000 for each of three motion pictures (payable on commencement of principal photography of the applicable film) plus 2-1/2 percent of distributors' gross receipts, as defined from all media in connection with the motion pictures. Revenues recognized under this agreement totaled $118,000, $166,000 and $430,000 for the years ended July 31, 1997, 1996 and 1995, respectively.
As of April 1, 1996, New Line had failed to produce the third motion picture due under the agreement, which was not extended further.
Reserve for Contract Payment on Sale of Stock
The Company has its videocassettes for the domestic market duplicated primarily by an independent duplication company, Technicolor Videocassette, Inc. ("Technicolor"), which warehouses the videocassettes and fulfills and ships orders for the Company. In April 1993, pursuant to a settlement agreement regarding an outstanding balance, the Company issued to Technicolor 157,000 shares of its common stock valued at $176,000, and a note in the amount of $87,000 to satisfy obligations owed to Technicolor. The Company paid the balance of the note in full during fiscal 1995. The agreement provides for an additional cash payment in the event that such common stock is sold, within a specified time period, for less than $2 per share. The Company has recorded a liability, included in accrued expenses, at July 31, 1997 and 1996, in the amount of $158,000 as a reserve against such contingent payments.
Joint Venture
As part of the acquisition of NLI, the Company acquired a 75 percent interest in a joint venture which only operations consist of revenues received from the licensing of a certain "National Lampoon" motion picture. The minority interest's share in the joint venture's revenue is deducted from movies, television and theatrical revenue. Total revenues received by the joint venture related to this motion picture were $287,000, $117,000, and $78,000 for each of the three years in the period ended July 31, 1997. Of this revenue the minority interest's share totaled $82,000, $46,000 and $30,000, respectively.
Leases
The Company is obligated under an operating lease expiring on September 30, 2001, for its office facility in Los Angeles, California. The facility lease includes certain provisions for rent adjustments based upon changes in the lessor's operating costs and increases in the Consumer Price Index.
The Company is obligated under an operating lease expiring in September 2003 for equipment located at its office facility.
The Company is also obligated under an operating lease expiring in November 1999 for an automobile leased on behalf of an employee of the Company.
The Company is committed to future minimum lease payments for the following years:
Rent expense totaled $79,000 for the year ended July 31, 1997, and $79,000 and $86,000, net of sublease income of $5,000 and $30,000 for the years ended July 31, 1996 and 1995, respectively.
Equipment lease expense totaled $8,000, $18,000 and $31,000 for the years ended July 31, 1997, 1996 and 1995, respectively.
Royalty Agreements
Pursuant to a royalty agreement between NLI and The Harvard Lampoon, Inc. ("HLI") NLI is required to pay HLI a royalty of up to 2 percent on all revenues derived from sales of any magazine or other publication using the name "Lampoon" as part of its title and a royalty of up to 2 percent of pretax profits, as defined in the agreement, on non-publishing activities using such name. Royalties payable under this agreement totaled $19,000, $11,000, and $15,000 for the years ended July 31, 1997, 1996, and 1995, respectively.
The Company has entered into various royalty agreements with the producers of videocassettes distributed by the Company. The Company is required to pay a royalty, according to each individual agreement, of a percentage of gross receipts, less certain expenses. Royalties payable under these agreements totaled $45,000, $26,000 and $47,000 for the years ended July 31, 1997, 1996, and 1995, respectively.
GPEC Agreement
In 1987, NLI sold the exclusive rights to produce television programming utilizing the name "National Lampoon" to Gurber- Peter Entertainment Company ("GPEC"). In 1991, under agreement with GPEC, NLI reacquired this right for $1,000,000, of which $500,000 was paid on execution of the agreement. The remaining $500,000 was payable out of the gross receipts of television programming, if any. To date, $131,000 has been paid under the gross receipts provision of the agreement.
Employment Agreement
The Company has entered into an employment agreement dated July 1, 1994, with its President and Chief Executive Officer. The agreement is for seven years and provides for annual base compensation of $475,000, with annual increases of the greater of 9 percent or 5 percent plus the percentage increase in the Consumer Price Index. Previously, the President had reduced the amount of salary he receives to $191,000. The President does not expect to receive the difference between the amount received and the amount provided for under the agreement unless there is a change in control of the Company, as defined by the agreement.
In addition, an annual bonus is payable to the President if the Company's pretax income exceeds specified levels. The amount is based on pretax earnings of the Company ranging from 5 percent to 9 percent over certain minimums. If earnings exceed $7,000,000, the President shall be entitled to such incentive compensation, as may be determined by the Board of Directors based upon the President's service and performance on behalf of the Company and the profitability of the Company. A bonus of $100,000 was earned during the year ended July 31, 1995. No bonus was earned in 1997 or 1996. Deferred bonuses for the President, included in accrued expenses, totaled $100,000 and $100,000 as of July 31, 1997 and 1996. In addition, certain officers have deferred salary of $89,000 and $99,000 as of July 31, 1997 and 1996, respectively, also included in accrued expenses.
The Company has also granted the President options to purchase 50,000 shares of its common stock and 50,000 stock appreciation rights (see Note 7) for each year of his employment contract. The price for each will be based on the fair value of the stock at the date of issuance.
Management Contract of Magazine
In August 1993, the Company entered into an agreement for a magazine publisher to print and distribute the National Lampoon magazine. In accordance with the terms of this agreement, the Company retained editorial control of the magazine's content and received a fee equal to 5 percent of all revenues generated by the magazine in its first year of publication, 6 percent in the second year and 7 percent for each year thereafter. In February 1996, the agreement was terminated by the Company because certain minimum performance targets had not been met by the publisher. The Company resumed publishing the magazine in May 1996. The Company earned revenues of $8,000 under this agreement during the year ended July 31, 1995. No revenues were earned related to this agreement in fiscal 1996 prior to termination of the agreement.
As part of this agreement, the publisher had agreed to assume the Company's liabilities relating to the magazine, including unearned subscription revenues and accrued retail display allowances of $79,000, included in accrued expenses as of July 31, 1997 and 1996, owed to various vendors for magazine shelf space. Because the Company holds title to the "National Lampoon" name, the Company continued to record liabilities for these amounts after termination of the agreement.
Litigation
	The Company, NLI and the officers and directors of NLI became the defendants in a lawsuit in regard to the acquisition of NLI by the Company. The shareholders of NLI (the "Plaintiffs") filed the claim in respect to the tax treatment of the transaction to the individual shareholders of NLI. The Company entered into a settlement agreement in August 1991, which must still be approved by the courts, under which the Company will issue an additional 125,000 shares of its common stock to the Plaintiffs and for the payment of attorneys' fees. The value of the shares to be paid is presented as a liability of $203,000 as of July 31, 1997, and 1996, as the shares have not yet been issued and the settlement has not been approved.
NLI had a motion picture development and consulting agreement with Matty Simmons, a former officer of NLI. In November 1992, Matty Simmons Productions, Inc. and Matty Simmons (collectively "Simmons") filed a complaint against the Company alleging breach of contract. In December 1993, this litigation was settled. The terms of the settlement agreement provide for the Company to pay Simmons a percentage (not to exceed $240,000 in total) of any amounts earned by the Company from certain previously released National Lampoon films. A total of $42,000, $66,000 and $62,000 was paid to Simmons during the years ended July 31, 1997, 1996 and 1995, respectively.
On August 20, 1996, counsel for HLI filed a demand for arbitration with the American Arbitration Association, asserting that the Company underpaid royalties payable under the HLI royalty agreement by approximately $226,000, plus unspecified late charges, for the period from July 1, 1992, through June 30, 1995, based upon HLI's interpretation of the agreement. By agreement of both parties arbitration has been stayed and the dispute is currently under mediation. Settlement discussions are continuing. Management believes that this claim will not have a material effect on the consolidated financial statements.
6.	Notes Receivable on Common Stock
In 1986, the Company issued 800,000 shares of common stock to certain of its officers and directors pursuant to its Restated Stock Purchase Plan. The shares were issued with 50 percent of the purchase price payable at the time of issuance and the remainder due in five years. The unpaid balance is due from the Company's President and Chief Executive Officer and bears interest at the rate of 10 percent, under promissory notes secured by the stock in favor of the Company.
7.	Stock Options and Stock Appreciation Rights
Stock Option Plans
In March 1995, shareholders approved the 1994 Employee Stock Option Plan and the 1994 Option Plan for Non-Employee Directors. These plans replaced the 1991 Stock Option Plan. All stock options subject to these plans are granted with an exercise price equivalent to the fair market value of the common stock at the time of the grant, except that in the case of the incentive stock options granted to a holder of 10 percent or more of the outstanding shares of common stock, such exercise price may not be less than 110 percent of the fair market value and may not be exercisable after the expiration of five years, versus ten years for regular stock options.
A summary of the stock options outstanding is below:
Of the options outstanding as of July 31, 1997, 1996, and 1995, 577,000, 564,000, and 481,000, respectively, were exercisable with a weighted average exercise price of $1.09, $1.1, and $1.1, respectively. The weighted average remaining contractual life of the options outstanding as of July 31, 1997 was 3.4 years.
The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" issued October 1995. In accordance with provisions of SFAS No. 123, the Company applies APB opinion 25 and related interpretations in accounting for its stock option plans and, accordingly, does not recognize compensation cost. If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as prescribed by SFAS No. 123, net income and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
							 Years ended July 31, 		 --------------------
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to August 1, 1995, the resulting pro-forma compensation cost may not be representative of the cost to be expected in future years.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
The weighted average fair value of options granted during fiscal 1997 and 1996 is $.36 and $.1, respectively.
Warrants
In connection with its acquisition of NLI in 1990, the Company issued 1,753,000 Series A warrants (including 148,000 warrants issued to certain creditors). The warrants expire on December 31, 1997, and entitle each holder to exchange one warrant for a share of the Company's common stock at a price of $2.00 per share. The Series A warrants are callable at a price of $2.00 per warrant on or after October 15, 1992, at the option of the Company if the closing price per share of common stock equals or exceeds 175% for a period of 20 trading days. There were 1,737,000 Series A warrants outstanding at July 31, 1997.
Stock Appreciation Rights
As of July 31, 1997, the President and Chief Executive Officer of the Company had stock appreciation rights which entitle the officer to receive cash equal to the difference between the fair market value and the appreciation base of the rights when they are exercised. As of July 31, 1997, appreciation in these rights amounted to approximately $37,000. This amount has been included as an accrued liability on the accompanying consolidated balance sheet.
As of July 31, 1997, a total of 350,000 rights were outstanding with appreciation basis of between $0.56 and $1.48 per share.
8.	Related Party Transactions
Legal fees of $3,000, $12,000 and $16,000, included in selling, general and administrative expenses, were incurred during fiscal 1997, 1996 and 1995, respectively, for services from legal firms, one of whose partners is a director of the Company.
See Note 6 for discussion of notes receivable from the Company's President and Chief Executive Officer.
9.	Income Taxes
The provision for income taxes is comprised as follows:
A reconciliation between the statutory federal rate and the Company's effective rate follows:
As of July 31, 1997, the tax effect of deductible timing differences and carryforwards is comprised of the following:
As of July 31, 1997, the Company had available for federal and state income tax purposes net operating loss carryforwards of approximately $1,721,000 and $747,000, respectively, expiring at various dates through 2011. Certain of the state net operating losses may be limited through statutory provisions.
10.	Major Customers
During the year ended July 31, 1997, the Company received $300,000 in revenues from a motion picture licensee representing 24 percent of total revenues. During the year ended July 31, 1996, the Company received $166,000 and $150,000 in revenues from two motion picture licensees representing 17 percent and 15 percent of total revenues, respectively. During the year ended July 31, 1995, the Company received $430,000 and $188,000 from two motion picture licensees representing 34 percent and 15 percent of total revenues.