UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-K

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

For the Fiscal Year Ended December 31, ~~2003~~2004 Commission File No. 1-~~9502~~9738

MAGIC LANTERN GROUP, INC.
(Exact name of registrant as specified in its charter)

New York (State or other jurisdiction of incorporation or organization) 13-3016967 (I.R.S. Employer Identification No.) 1075 North Service Road West, Suite 27 Oakville, Ontario (Address of principal executive offices) L6M 2G2 (Zip Code) 1385 Broadway New York, New York 10018 (Address of Previous Principal Executive Offices and Zip Codes) Registrant's telephone number, including area code: (905) 827-2755 Securities registered pursuant to Section 12(b) of the Act: Title of each class: Common Stock, $.01 par value Name of each exchange on which registered: American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None

New York (State or other jurisdiction of incorporation or organization)	13-3016967 (I.R.S. Employer Identification No.)

1075 North Service Road West, Suite 27 Oakville, Ontario (Address of principal executive offices)	L6M 2G2 (Zip Code)

1385 Broadway New York, New York 10018 (Address of Previous Principal Executive Offices and Zip Codes)

Registrant's telephone number, including area code: (905) 827-2755

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

Title of each class: Common Stock, $.01 par value	Name of each exchange on which registered: American Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K under the Securities Exchange Act of 1934 is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated in Part III of this Form 10-K or any amendments to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act.).

Yes

[X]

As of December 31, ~~2003~~2004, there were 6773,~~087~~604,~~262~~289 shares of Common Stock outstanding, and the aggregate market value of shares held by unaffiliated shareholders was approximately $6621,~~416~~345,~~389~~244.

DOCUMENTS INCORPORATED BY REFERENCE

MAGIC LANTERN GROUP, INC. (formerly JKC Group, Inc. and Stage II Apparel Corp.) Page PART I Item 1. Business 1 Item 2. Properties 12 Item 3. Legal Proceedings 12 Item 4. Submission Of Matters To A Vote Of Security Holders 13 PART II Item 5. Market For the Company's Common Stock And Related Stockholder Matters 13 Item 6. Selected Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 Item 7A. Quantitative and Qualitative Disclosure About Market Risk 26 Item 8. Financial Statements and Supplementary Data 27 Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure 27 Item 9A. Controls and Procedures 27 PART III Item 10. Directors and Executive Officers of the Company 27 Item 11. Executive Compensation 28 Item 12. Security Ownership Of Certain Beneficial Owners And Management 28 Item 13. Certain Relationships And Related Transactions 28 Item 14. Principal Accountant Fees and Services 28 Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 29 Signatures 31

		Page

PART I

	Item 1. Business	3
	Item 2. Properties	16
	Item 3. Legal Proceedings	16
	Item 4. Submission Of Matters To A Vote Of Security Holders	16

PART II

	Item 5. Market For the Company's Common Stock And Related Stockholder Matters	18
	Item 6. Selected Financial Data	22
	Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	24
	Item 7A. Quantitative and Qualitative Disclosure About Market Risk	33
	Item 8. Financial Statements and Supplementary Data	34
	Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure	34
	Item 9A. Controls and Procedures	34

PART III

	Item 10. Directors and Executive Officers of the Company	35
	Item 11. Executive Compensation	37
	Item 12. Security Ownership Of Certain Beneficial Owners And Management	38
	Item 13. Certain Relationships And Related Transactions	38
	Item 14. Principal Accountant Fees and Services	39
	Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.	40

Signatures		74

PART I

Item 1. Business

Introduction

Founded in 1975, Magic Lantern is a Canadian distributor of educational and learning content in video and other electronic formats (collectively, the "Education and Distribution" segment). Magic Lantern has primarily exclusive distribution rights to over 300 film producers representing over 13,000 titles, and its customers include over 9,000 out of 12,000 English speaking schools in Canada. Its library includes content from numerous producers, including Disney Educational, Annenberg / CPB and CTV Television. Tutorbuddy Inc., a 100% owned subsidiary of Magic Lantern, is an Internet-enabled provider of content and related educational services on demand to students, teachers and parents. Sonoptic Technologies Inc., a 75% owned subsidiary of Magic Lantern, provides digital video encoding services and has developed a proprietary VideoBaseTM in ~~indexing~~ dexing software that allows users to aggregate, bookmark, re-sort and add their own comment boxes to existing content. Magic Lantern Group is headquartered in Oakville, Ontario near Toronto, Canada with additional offices in Saint John, New Brunswick and Vancouver, British Columbia, New York City and Greater Boston.

Recent Business Events

The ~~Agency~~Company ~~for~~has, ~~Instructional~~since ~~Technology~~its ~~("AIT")~~inception ~~has~~as ~~been~~Magic aLantern UGroup, Inc.S in Nov., ~~leader~~2002 ~~in educational~~faced ~~technology~~the ~~since~~daunting ~~1962.~~task Aof ~~non-profit~~being ~~organization,~~undercapitalized ~~AIT~~to isposition ~~one~~itself offor future growth and to manage the ~~largest~~ ~~providers~~ever escalating costs associated with now being a publicly reporting company in the wake of ~~instructional~~mandates TVput ~~programs~~forth in ~~North~~the ~~America~~Sarbanes-Oxley Act of 2002. Professional fees in the form on legal and audit have increased tremendously and many micro-cap companies have been considering the merits of being a ~~leading developer~~pubic company vis-à-vis a private company. The Board of ~~educational~~Directors ~~media~~of the Company, ~~including~~seeing ~~online~~the ~~instruction,~~ever ~~CDs,~~increasing ~~DVDs~~impact of this has for some time discussed the merits of de-listing and ~~instructional~~ ~~software~~returning to the status of a private company. As ~~AIT~~most ~~learning~~recently ~~resources~~at ~~are~~Board ~~used~~meetings onheld ~~six~~in ~~continents~~March and ~~reach~~ ~~nearly~~April 34this ~~million~~was ~~students~~discussed inand ~~North~~tabled ~~America~~for ~~each~~future ~~year~~consideration. Given ~~AIT~~the ~~products~~Company's ~~have~~history of losses and now the recording of the recently performed independe ~~received~~ nt ~~many~~valuation ~~national~~of goodwill and ~~international~~intangibles ~~honors,~~has ~~including~~resulted in an ~~Emmy~~impairment charge to Goodwill. That charge and ~~Peabody award~~its impact will need to be addressed immediately to stay above certain guidelines established by the AMEX for listed companies. The Board of Directors will give immediate attention to this matter.

~~Magic~~In ~~Lantern~~April ~~and~~of ~~AIT~~2004, ~~have~~the ~~partnered~~Company toentered ~~build~~into ~~and~~a ~~sell~~Convertible aPromissory ~~private-labeled~~Note ~~version~~ in the face amount of ~~Magic~~$1.5 ~~Lantern's~~million ~~Internet-based~~with ~~platform~~the ~~InSiteTM~~Laurus Master Funds, ~~branded~~based asin New York. The ~~Learning~~ ~~Source~~fixed ~~("TLS").~~conversion ~~TLS~~price ~~will~~of be$0.25 ~~marketed~~per toshare ~~instructional~~has ~~television stations~~predominately, ~~including~~since ~~more~~the ~~than~~onset ~~120~~of ~~PBS~~the ~~stations~~funding ,been aspriced ~~well~~beneath current market prices and "Laurus" has chosen to exercise their right as ~~school~~contained ~~districts across~~in the ~~United~~closing ~~States~~documents to convert the principal and/or interest into shares registered under an S3 Registration Statement that was also a condition of the funding. In ~~The~~December ~~ultimate~~of ~~target~~2004 isa tosubstantial ~~provide~~pay ~~user-friendly~~down ~~online resources~~on that note occurred, amounting to approx. $900,000. Based on Generally Accepted Accounting Principals (GAAP), the ~~approximately~~Company 53was ~~million~~required Kto take a one-12time ~~students~~charge ~~currently~~of ~~enrolled~~$4,917,000 in ~~U.S.~~ ~~schools.~~interest ~~TLS~~expense ~~marks~~for ~~Magic~~underlying ~~Lantern~~shares ~~Group's~~and ~~first~~warrants, ~~third-generation~~most of which due to the pay down will never be exercised. This charge, ~~video library~~and ~~streaming~~the ~~product~~impairment ~~marketed~~charge noted in the ~~United~~previous ~~States.~~paragraph account f or the majority of the Company's Net Loss for 2004.

~~The~~At ~~Learning~~a ~~Source~~meeting isof anthe ~~online~~Board ~~library~~of Directors, held April 14, 2005 (see subsequent events footnote) of ~~learning~~one ~~video~~of ~~for~~the ~~K-12~~Company's ~~educators~~two largest shareholders, ~~streamed~~ ~~via~~ZI Corporation, a proposal was put forth to extend to the ~~Internet.~~Company ~~The~~a ~~library~~bridge ~~offers~~loan ~~more~~in ~~than~~the ~~400~~form ~~programs,~~of ~~indexed, searchable~~a bydemand ~~keyword~~note bearing interest in the amount of 12% per annum in the amount of $250,000 ~~and~~in ~~correlated~~consideration tofor ~~state~~securitizing ~~curriculum~~the ~~standards~~$2 million Note Payable on the Company's books. Further ~~TLS~~consideration ~~makes lesson~~consists ~~planning~~of ~~easier;~~extending ~~teachers~~the ~~can~~maturity ~~search~~date of the note to January 2, ~~play~~2006 and ~~bookmark~~deferring ~~their~~all ~~favorite clips~~accrued ~~for~~interest ~~later~~on ~~use~~the innote ~~their~~to ~~classroom~~the new maturity date. The ~~Teachers~~Board ~~may~~of ~~also~~Directors ~~access~~of ~~online~~Magic ~~lesson plans~~Lantern ~~and~~Group, ~~assessment~~Inc. ~~tools~~is ~~created~~expected byto meet in the ~~experienced~~coming ~~educators~~week atto ~~AIT~~consider this proposal.

~~The~~During ~~launch~~2004, ofworking ~~The~~closely ~~Learning~~with ~~Source~~the isAgency ~~part~~for ofInstructional ~~Magic~~Technology ~~Lantern's~~("AIT") ~~aggressive expansion~~the ~~strategy~~collective togroup ~~create~~responded ato ~~revenue-generating~~five ~~market~~(5) ~~presence~~Request infor ~~the~~Proposals ~~United States~~from U.S. ByState ~~offering~~Educational ~~third~~School ~~generation~~Boards. To date, ~~video~~the ~~streaming~~group ~~digital~~has ~~services~~not ~~to increase~~been ~~revenues~~successful ~~from~~in ~~educational~~competing ~~digitized~~for ~~videos~~these incontracts, with the ~~United~~exception ~~States,~~of ~~a market~~California ~~segment~~when ~~carrying~~ the ~~potential~~results toof ~~generate~~their ~~future~~decision ~~earnings~~are ~~for~~not ~~the Company~~yet ~~has been tapped~~known.

In The ~~November~~Agency ~~2003,~~for ~~Magic~~Instructional ~~Lantern~~Technology ~~completed~~("AIT") ~~final~~has ~~arrangements~~been ~~for~~a ~~the~~U.S. ~~sale~~leader ~~of Image~~in ~~Media,~~educational ~~its~~technology ~~Vancouver-based~~since ~~videotape duplication facility~~1962. ~~The~~A ~~operation~~non-profit ~~was~~organization, ~~sold~~AIT tois ~~make~~one ~~way~~of ~~for~~the ~~increased~~largest ~~investment in~~providers ~~online~~of ~~service~~instructional ~~development.~~TV ~~Gross~~programs ~~proceeds~~in toNorth ~~the~~America ~~Company~~and ~~were~~a ~~approximately $145,000. The~~leading ~~purchase~~developer of ~~Image~~educational ~~Media~~media, ~~was~~including ~~made~~online ~~by BKR Productions~~instruction, ~~Inc.~~CDs, ~~a British~~DVDs ~~Columbia~~and ~~Corporation formed~~instructional ~~for~~software. ~~holding~~AIT ~~purposes~~learning byresources ~~the former~~are ~~manager~~used ofon ~~Image~~six ~~Media.~~continents ~~Transfer~~and ofreach ~~ownership~~nearly ~~and~~34 ~~operations~~million ~~occurred effective~~students ~~January~~in 1,North ~~2004~~America each year. ~~Included~~AIT inproducts ~~the~~have ~~sale~~received ~~were~~many ~~all~~national ~~installed~~and ~~technologies, customer~~international ~~lists~~honors, ~~promotional~~including ~~materials~~an Emmy and ~~existing~~Peabody ~~contracts~~award.

1 Magic Lantern and AIT have partnered to build and sell a private-labeled version of Magic Lantern's Internet-based platform InSiteTM, branded as The Learning Source ("TLS"). TLS will be marketed to instructional television stations, including more than 120 PBS stations, as well as school districts across the United States. The ultimate target is to provide user-friendly online resources to the approximately 53 million K-12 students currently enrolled in U.S. schools. TLS marks Magic Lantern Group's first third-generation, video library streaming product marketed in the United States.

~~Magic~~ The ~~Lantern~~Learning ~~operates~~Source ais ~~tape~~an ~~duplication~~online ~~facility~~library inof ~~connection~~learning ~~with~~video ~~its~~for ~~head office~~K-12 ~~operations~~educators, streamed via the Internet. The ~~sale~~library ofoffers ~~Image~~more ~~Media~~than 400 programs, ~~therefore~~indexed, ~~has~~searchable ~~permitted~~by ~~Magic Lantern~~keyword, and correlated to ~~reduce~~state ~~operational~~curriculum ~~redundancies~~standards. TLS makes lesson planning easier; teachers can search, play and ~~apply~~bookmark ~~capital~~their ~~realized~~favorite ~~from~~clips ~~the purchase~~for tolater ~~immediate~~use ~~expansion~~in ~~targets,~~their ~~principally~~classroom. ~~the~~Teachers ~~creation~~may ofalso ~~new~~access ~~revenue lines~~online ~~through~~lesson ~~roll-out~~plans and ~~expansion~~assessment oftools ~~current~~created ~~and~~by ~~future~~the ~~online~~experienced ~~offerings.~~educators at AIT.

~~During~~ The ~~the~~launch ~~year~~of ~~ended~~The ~~December~~Learning ~~31,~~Source ~~2003,~~is ~~the~~part ~~Company~~of ~~raised~~Magic ~~approximately $1,198,000~~Lantern's onaggressive ~~issuance~~expansion ofstrategy ~~promissory~~to ~~notes~~create ~~(the~~a ~~"Notes")~~revenue-generating ~~and~~market ispresence ~~obligated~~in ~~to repay~~the ~~approximately~~United $1States. By offering third generation,~~337,000~~ onvideo ~~maturity.~~streaming ~~The~~digital ~~Notes~~services ~~are~~to ~~due~~increase ~~within~~revenues ~~one~~from ~~year~~educational ~~of issuance,~~digitized ~~unless~~videos ~~extended~~in the United States, ata ~~the~~market ~~option~~segment ofcarrying the ~~holder,~~potential ~~for~~to agenerate ~~further~~future 18earnings ~~months. Of~~for the $1Company has been tapped.3 To ~~million~~date, ~~$387~~the Company and AIT along with another partner,~~000~~ ofCallisto ~~the~~have ~~notes~~presented ~~are~~to ~~denominated~~five inU.S. ~~Canadian~~state ~~dollars~~educational boards. Thus far, ~~with~~ the ~~remaining~~Company ~~$950,000~~has ~~denominated~~yet to secure a contract on any of these efforts. Competition from Discovery Learning in ~~USD~~the U.S. ~~Attached~~(who toacquired the ~~Notes~~two ~~are 1,450,000~~major ~~warrants~~competitors (of the ~~"Warrants"~~Company during the past 18 months), ~~exercisable~~has ~~for~~made asuccess ~~period~~difficult as the bidding of ~~three~~Discovery ~~years~~has ~~at an~~undermined ~~exercise~~the ~~price~~Company's bid's to the best of $its knowledge.~~25.~~

On In ~~September~~November ~~25,~~ 2003, ~~the~~Magic ~~Company~~Lantern ~~launched~~completed ~~Tutorbuddy~~final inarrangements ~~both~~for the ~~U.S.~~sale ~~and Canada.~~of ~~TutorbuddyTM~~Image ~~is a revolutionary~~Media, ~~state-of-the-art,~~its eVancouver-~~learning system~~based ~~designed~~videotape toduplication ~~deliver searchable, curriculum-correlated, digital video programs and learning objects online~~facility. ~~TutorbuddyTM, is designed for home use by students and parents.~~ The ~~Company~~operation ~~anticipates~~was ~~targeting~~sold ~~the~~to ~~U.S. market~~make inway ~~the~~for ~~upcoming~~increased ~~fiscal~~investment ~~year and has as a focus of its 2004 Business Plan an intensive marketing and promotional program~~ in ~~both~~online ~~the~~service Udevelopment.S. ~~and~~Gross ~~Canada~~proceeds to ~~build~~ on the ~~launch's momentum. The~~ Company ~~has~~were ~~also~~approximately ~~launched~~$145,000. The ~~and~~purchase ~~received encouraging~~of ~~response~~Image toMedia ~~the~~was ~~Company's~~made ~~institutional~~by ~~product~~BKR Productions, ~~Magic Lantern InSite~~Inc. ~~On October 24~~, ~~2003,~~a ~~the~~British ~~Company~~Columbia ~~announced~~Corporation ~~that~~formed ~~Red~~for ~~Deer~~holding ~~Public~~purposes ~~Schools,~~ by the ~~ninth~~former ~~largest~~manager ~~school~~of ~~district~~Image inMedia. ~~the~~Transfer ~~province~~ of ~~Alberta,~~ownership ~~Canada,~~and ~~agreed~~operations ~~to deploy~~occurred ~~Magic~~effective ~~Lantern~~January ~~InSiteTM~~1, ~~the Company's latest e-learning video service for schools~~2004. ~~InSite~~Included ~~will be distributed to nearly 10,000 students enrolled~~ in ~~Red~~the ~~Deer~~sale ~~Public's~~were 21all ~~elementary~~installed ~~and~~technologies, ~~secondary~~customer ~~schools. As broadband infrastructure to schools and homes continues to swell~~lists, ~~the~~promotional ~~Company~~materials and ~~its digital~~existing ~~products are correctly positioned to meet the demand for quality online educational content~~contracts.

~~Formation~~ Magic Lantern operates a tape duplication facility in connection with its head office operations. The sale of Image Media, therefore has permitted Magic Lantern to reduce operational redundancies and apply capital realized from the ~~"Company"~~purchase to immediate expansion targets, principally the creation of new revenue lines through roll-out and expansion of current and future online offerings which to date have been difficult to gain both in Canada and the U.S..

~~Magic~~On ~~Lantern~~January ~~was~~4, ~~acquired~~2005, inthe ~~October~~Company ~~1996~~entered byinto ~~NTN~~a ~~Interactive~~Subscription ~~Network~~Agreement ~~Inc.~~ (the "~~NTN~~Subscription Agreement") with Nite Capital, L.P., Inproviding ~~March~~for, ~~2002~~among other things, ~~members~~the unregistered sale, through a private placement, of ~~Magic~~1,000,000 ~~Lantern's~~shares ~~management~~of ~~formed~~common ~~MagicVision Media~~stock ~~Inc~~(the "Shares"), $0.01 par value per share (the "~~MagicVision~~Common Stock") toat ~~acquire~~a ~~100%~~price of ~~Magic~~$0.30 ~~Lantern's~~per ~~capital~~share, and a common stock ~~from NTN~~purchase ~~and~~warrant ~~contemporaneously~~to ~~sold~~purchase ~~their~~an ~~interests~~additional to500,000 Zishares ~~for~~of Common Stock exercisable at a price of $10.40 per share,~~359,000~~ ~~(including transaction~~subject ~~costs)~~to ~~plus~~customary ~~100~~adjustments,~~000~~ ~~common~~until ~~shares~~the offifth Zianniversary ~~valued~~of atJanuary ~~$499~~4,~~000~~ 2005. The Company also entered into a Registration Rights Agreement.

OnIn ~~August 2,~~connection ~~2002~~with the private placement, the Company ~~entered~~was ~~into~~obliged to pay a ~~stock~~cash ~~purchase~~fee ~~agreement~~to (the ~~"Purchase~~ ~~Agreement")~~placement ~~with Zi Corporation~~agent, aFirst ~~Canadian-based~~Montauk ~~provider~~Securities ~~of intelligent~~Corp. ~~interface solutions~~ ("ZiFirst Montauk"), for its services on its behalf. In addition, the Company's issued First Montauk and its assignees, common stock purchase warrants to purchase an aggregate of ~~Magic Lantern~~100,000 ~~Communications~~shares ~~Ltd~~of Common Stock, exercisable at $0.40 ~~("MLC")~~per ~~and~~share, ~~its~~subject ~~subsidiaries~~to ~~(collectively~~customary adjustments, "until ~~Magic Lantern")~~the fifth anniversary of January 4, 2005.

OnThe ~~November 7,~~Shares ~~2002, the Company~~ and ~~Zi consummated~~ the ~~transactions contemplated~~common bystock ~~the Purchase Agreement (the "Magic Lantern Transactions") following their approval by the Company's shareholders. The Company's acquisition of Magic Lantern was implemented through its~~ purchase ~~from~~warrants Ziwere ofissued ~~all the~~to ~~outstanding~~private ~~capital~~investors ~~stock of MagicVision,~~ in ~~consideration~~transactions ~~for~~that awere ~~three-year promissory~~exempt ~~note~~from ofregistration ~~the~~pursuant ~~Company~~to inSection ~~the~~4(2) ~~principal amount~~ of ~~$3,000,000 and 29,750,000 shares of~~ the ~~Company's~~Securities ~~common~~Act ~~stock, representing 45%~~ of ~~its common shares outstanding after the closing. The Purchase Agreement provides for additional stock and cash consideration up to $2~~1933,~~930,000~~ oras ~~offsets~~amended ~~against~~ (the ~~Company's~~ ~~promissory note up to $1 million based on Magic Lantern's operating results for the first twelve months after the closing. See~~ "~~Liquidity~~Securities ~~and Capital Resources - Liquidity.~~Act" ~~As part of the Magic Lantern Transactions~~), ~~the Company added three designees of Zi to its board of directors, implemented a new stock option plan primarily for management~~ and/or ~~employees~~Regulation ofD ~~Magic~~promulgated ~~Lantern, changed~~under ~~its corporate name to Magic Lantern Group, Inc. and, effective November 8, 2002, changed its AMEX trading symbol to "GML." After consummation of~~ the ~~Magic~~Securities ~~Lantern transactions, Alpha Omega Group ("AOG") held in record name approximately 47% of the Company's outstanding shares~~Act.

On December 30, 2004, the Company, through the private placement of equity securities, consummated the unregistered sale of 800,000 shares of common stock (the "Shares"), $0.01 par value per share (the "Common Stock"), and common stock purchase warrants to purchase an additional 800,000 shares of Common Stock (the "Warrants") to certain accredited investors. The Shares and the Warrants were issued to private investors in transactions that were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 (the "Securities Act") and/or Regulation D promulgated under the Securities Act.

~~Lancer~~As ~~Management Group II, LLC, Lancer Offshore, Inc., LSPV LLC, and Omnifund Ltd. (the "Lancer Group") have been collectively~~ a ~~significant~~result ~~shareholder~~ of ~~the~~ ~~Company since~~ the ~~final quarter of 2002. On July 10~~transactions, ~~2003,~~three ~~the~~term ~~Securities~~promissory ~~and Exchange~~note ~~Commission~~holders ~~brought a civil action in the United States District Court for the Southern District~~ of ~~Florida against Michael Lauer and Lancer Management I and II alleging securities fraud in connection with portfolio transactions effected by~~ the ~~Lancer Group management. While the complaint does not allege any fraud in connection with the~~ Company's ~~securities,~~converted ~~records~~an ~~produced~~aggregate ~~by the SEC in the court proceeding indicate that Lancer management had either not reported the extent~~ of ~~its ownership in portfolio companies or had underreported the ownership. According to a Form 13D filed by receiver to the Lancer Group on July 10~~$200,000 ~~2003,~~of ~~the~~principal ~~Lancer~~into ~~Group~~800,000 ~~in the aggregate, controls 45.1% of the Company's outstanding~~ shares as of ~~that~~Common ~~date.~~Stock ~~Even~~at ~~though~~a norate ~~wrongdoing has been alleged in connection with Lancer's ownership~~ of ~~Company~~$0.25 ~~securities,~~per ~~the~~share ~~Company, the financial statement impact, if any,~~ and ~~the~~received ~~market~~three-year ~~for~~Warrants its shares may be adversely affected by any court findings or the negative publicity generated by the Lancer proceedings or general market concerns about the possible actions by the receiver with respect to ~~portfolio~~purchase ~~securities held by Lancer. In addition~~800, on000 ~~November~~shares 4,of ~~2003~~Common ~~the~~Stock ~~receiver~~at ~~announced~~an ~~that~~exercise heprice ~~had~~of ~~appointed~~$0.40 ~~DDJ~~per ~~Capital to actively manage the Lancer portfolio securities~~share.

~~Magic~~During ~~Lantern Group~~December, ~~Inc.~~2004, ~~formerly~~the ~~JKC Group~~Company, ~~Inc.,~~through ~~and~~the ~~previously~~private ~~Stage~~placement ~~II Apparel~~of ~~Corp.~~equity ~~(the "Company")~~securities, ~~was~~consummated ~~engaged~~the ~~for~~unregistered ~~over~~sale ~~20 years~~of ~~primarily~~4,010,649 asshares ~~a distributor~~ of ~~proprietary~~common ~~and~~stock ~~licensed~~(the ~~brand~~"Shares"), ~~name~~$0.01 ~~casual~~par ~~apparel,~~value ~~active~~per ~~wear and~~share ~~collection~~(the ~~sportswear~~"Common ~~for~~Stock"), ~~men~~ and ~~boys.~~common Instock ~~response~~purchase warrants to apurchase ~~decline~~an inadditional ~~its apparel distribution operations~~4,010, ~~the~~649 ~~Company~~shares ~~elected~~of toCommon ~~contract~~Stock ~~those operations to third parties during~~ (the ~~last~~"Warrants") ~~two~~to ~~years~~certain asaccredited ~~part~~investors. The ofShares aand ~~strategy of reducing~~ the ~~costs~~Warrants ~~and~~were ~~inventory~~issued ~~risks~~to ~~associated~~private ~~with~~investors ~~its~~in ~~historical~~transactions ~~core business~~that ~~and~~were ~~repositioning~~exempt ~~the~~from ~~Company~~registration ~~through~~pursuant ~~one~~to orSection ~~more~~4(2) ~~acquisitions.~~of ~~To facilitate~~ the ~~change~~Securities inAct ~~strategic~~of ~~direction,~~1933 ~~in March 2002~~ (the ~~Company~~"Securities ~~obtained $1,500,000~~Act") inand/or ~~financing~~Regulation ~~from~~D anpromulgated ~~entity,~~under ~~Alpha~~the ~~Omega~~Securities ~~Group ("AOG")~~Act.

As a result of the transactions, two term promissory note holders of the Company converted an aggregate of $750,000 of principal and $2,662 of accrued interest into 3,010,649 shares of Common Stock at a rate of $0.25 per share and received three year Warrants to purchase 3,010,649 shares of Common Stock at an exercise price of $0.40 per share. In addition, the Company issued 1,000,000 Shares to an additional investor at a price of $0.25 per share, for gross proceeds of $250,000, along with three year Warrants to purchase 1,000,000 shares of Common Stock at an exercise price of $0.40 per share.

~~Following~~On May 3, 2004, Magic Lantern Group, Inc. (the ~~completion~~"Company") ofclosed the ~~AOG~~private ~~transaction~~placement of a $1,500,000 ~~and~~principal ~~facing~~secured ~~continued~~convertible ~~decline~~three-year ~~in its~~term ~~apparel~~note ~~business~~(the "Note") with the Laurus Master Fund, Ltd. ("Laurus Funds") in an offering exempt from the ~~Company~~registration ~~continued~~requirements toof ~~pursue~~the ~~its~~Securities ~~business~~Act ~~redirection by~~of ~~exploring~~1933, ~~potential~~as ~~acquisition~~amended ~~opportunities~~(the "Act"), ~~with~~pursuant ato ~~view~~Rule ~~toward~~506 ~~expanding existing~~of ~~licensing~~Regulation ~~operations~~D orpromulgated ~~adding~~under ~~compatible~~the ~~business~~Act. ~~lines~~The Note bears interest at the prime rate, ~~culminating~~ as reported in the ~~acquisition~~Wall Street Journal, plus 2% (which under no circumstances will be considered to fall below 6% on a combined basis), with interest and amortizing payments of ~~Magic~~principal ~~Lantern~~commencing August 1, 2004. AsThe ~~part~~interest ofpayable on the ~~transaction~~note tois ~~acquire~~adjustable ~~Magic Lantern,~~downward by 2% if the Company ~~(i)~~shall ~~added~~have ~~three~~registered ~~designees~~shares of ZiLaurus ~~Corporation,~~Funds' stock underlying the ~~vendor~~Note ~~of Magic~~on ~~Lantern~~a registration statement declared effective by the Securities and Exchange Commission, toand itthe Company's ~~board~~stock is oftrading ~~directors,~~at ~~(ii)~~a ~~implemented~~25% aor ~~new~~greater ~~stock~~premium ~~option plan~~to ~~primarily~~the ~~for~~fixed ~~management~~conversion ~~and~~price ~~employees~~under the Note of ~~Magic~~$0.25. ~~Lantern,~~The ~~(iii)~~interest ~~changed~~payment will be adjusted downward by 1% in the event the Company's ~~corporate~~has ~~name~~not toregistered ~~Magic~~shares ~~Lantern~~of ~~Group,~~Laurus ~~Inc.,~~Funds' ~~and~~stock ~~(iv)~~underlying ~~effective November 8,~~the ~~2002~~Note, ~~changed~~and the ~~AMEX~~Company's stock is trading ~~symbol~~at toa ~~GML. Zi Corporation~~25% ~~currently~~or ~~owns~~greater ~~45%~~premium ofto the ~~outstanding~~fixed ~~common~~conversion ~~stock~~price ofunder the ~~Company~~Note of $0.25.

~~Products~~Payments under the Note are convertible to common stock of the Company at the option of Laurus Funds at a fixed conversion price of $0.25. The Company may prepay outstanding principal and accrued interest under the Note by delivering to Laurus Funds in cash an amount that is equal to 125% of the aggregate amount of outstanding principal of the Note plus any accrued but unpaid interest and all other sums due, accrued or payable to Laurus Funds. As part of the transaction, Laurus Funds also received a seven-year warrant to purchase 1,100,000 shares the Company, exercisable at $0.30.

~~General~~Common shares issuable to Laurus Funds subject to Note conversion and issuable upon exercise of the warrant were registered for resale with the Securities and Exchange Commission pursuant to the terms of the registration rights agreement.

~~Our~~Payment ~~product~~of ~~focus~~all ~~following~~principal ~~the~~and ~~transaction~~interest ~~with~~under ~~Magic~~the ~~Lantern~~note, ~~became~~as ~~the~~well ~~sales and~~as ~~distribution~~performance of ~~educational~~the ~~and~~obligations ~~learning~~of ~~content~~the inCompany ~~video~~ and ~~other electronic~~its ~~formats.~~subsidiaries, Asunder aall ~~result~~ of ~~this~~the ~~transaction~~ancillary weagreements ~~acquired~~entered ~~distribution rights~~into toby ~~over~~the ~~300~~Company ~~film producers representing over 12,000 titles,~~ and ~~customer relationships~~its atsubsidiaries ~~9,000 out of 12,000 English speaking schools~~ in ~~Canada.~~connection ~~Our library~~with ~~includes~~the ~~content~~sale ~~from~~of ~~numerous~~the ~~producers,~~note ~~including:~~and ~~Disney Educational Productions~~warrant, ~~Annenberg~~are /secured ~~CPB~~by ~~and~~a ~~CTV~~security ~~Television.~~interest Inin ~~addition,~~favor ~~TutorbuddyTM is an Internet-enabled provider~~ of ~~content~~Laurus ~~and~~Funds ~~related~~in ~~educational~~all ~~services~~of ~~on demand~~the toassets ~~students,~~of ~~teachers~~both ~~and parents. Sonoptic provides digital video encoding services and has developed~~ the ~~proprietary~~Company ~~VideoBaseTM indexing software that allows users to aggregate, bookmark, re-sort~~ and ~~add their~~its ~~own comment boxes to existing content~~subsidiaries.

~~Magic~~The ~~Lantern~~Company ~~Group,~~paid ~~Inc.~~a ~~('Magic~~closing ~~Lantern")~~fee ~~has~~equal ~~grown~~ to ~~be a major source in Canada for educational video resources~~$58,500 ~~educational~~to television series, program repurposing and digital delivery. By 1994, Magic Lantern had developed a catalogue of more than 10,000 video titles covering all subject areas from pre-school through high school, post-secondary and general interest, with exclusive distribution agreements with more than 200 producers and suppliers. With over 9,000 of 12,000 Canadian schools among Magic Lantern's customer base, attention was focused on growth opportunities within the ~~education~~manager ~~sector. At this time, digital technologies were having an impact on video delivery methods with the continuing expansion~~ of ~~Broadband~~Laurus ~~delivery~~Funds ~~methods along with compression technology increasing capacity of satellites~~ and ~~fiber-optic~~paid ~~cable providing telephone companies with an opportunity to carry more than traditional voice and data. To address this ever changing technology landscape~~$29,500 ~~Magic Lantern responded by creating Sonoptic Technologies, Inc, in cooperation with the Government of New Brunswick~~ as areimbursement 25for ~~per cent minority partner, to develop an expertise and service offering in~~ the ~~field~~investor's oflegal ~~analog to digital conversion,~~ and ~~subsequent~~ ~~applications~~due ~~for~~diligence ~~this new digital form of video programs. Sonoptic began encoding the Magic Lantern library of educational video content in order to "pilot" a video-on-demand service.~~expenses

4During the year Laurus Master Funds converted a portion of the Note totaling $250,000 to common stock. The Company issued 1,124,211 shares of its common stock to Laurus Funds for this conversion of debt and interest. The portions of the Note were converted to common stock of the Company at the option of the note holder. The number of shares issued in the third quarter and fourth quarter were 428,942 and 695,269 common shares respectively, at a fixed conversion price of $0.25.

AsIn ~~part~~January ~~of our continuing "organic" growth strategy~~2005, wean ~~will require~~ additional ~~capital~~ ~~resources~~$6,193 topayable ~~complete~~under the ~~digital~~Note ~~encoding~~was ofconverted ~~the~~to ~~Magic~~common ~~Lantern~~stock ~~library as well as fund the further development~~ of ~~software capable of managing video delivered over~~ the ~~Internet.~~Company ~~Magic~~at Lantern acquired additional content through its acquisition of Image Media in 1998 (subsequently sold in 2003 as mentioned above), and was expanding its revenue base by utilizing its distribution channels for new products and services. Innovative programs for schools, such as its lease-to-own library program were launched (with the ~~recommendation~~option of the ~~Canadian~~ ~~Principals~~note ~~Association), and the Campbell Soup Company's "Labels for Education~~holder." The ~~debut~~Company ofissued ~~"Labels for Education" was managed~~24,770 ~~marketed~~shares ~~and delivered~~of byits ~~Magic~~common ~~Lantern~~stock ~~with~~at ~~over~~a ~~3,500~~fixed ~~Canadian~~conversion ~~schools taking part within the first six months~~ of ~~the program~~$0.25 ~~That program has now expanded~~ to ~~serve nearly~~satisfy ~~6,000 schools since~~ its ~~launch~~January ~~in 1996~~conversion.

~~TutorbuddyTM~~In ~~builds~~April ~~on the research & development of Sonoptic~~2005, ~~and has developed~~ an ~~on-line~~additional ~~educational~~$18,750 ~~video~~payable ~~library~~under ~~with~~the anNote ~~extensive~~was ~~information search~~converted ~~capability and content management system. TutorbuddyTM is branded and offered~~ to ~~Canadian~~common ~~schools~~stock ~~with~~of the ~~ultimate~~Company ~~market~~at ~~being~~ the ~~homes~~ option of ~~school-age children, some five million in Canada, when~~ the ~~service~~note ~~has proven effective in Canadian schools~~holder. ~~Concurrent~~The ~~with~~Company ~~providing~~issued ~~the~~75,000 ~~TutorbuddyTM innovation~~shares ~~in the current core market~~ of ~~Canada,~~its ~~where~~common ~~Magic~~stock ~~Lantern~~at ~~has~~ a ~~dominant~~ ~~position~~fixed ~~in the industry, plans include the expansion~~ conversion of ~~the traditional distribution business into the United States and Internationally~~$0. ~~Expanding~~25 to ~~global~~satisfy markets and developing a brand presence internationally while proving the digital service application in Canada is intended to be the springboard for the Magic Lantern's growth initiatives. Magic Lantern continues its ~~focus~~April ~~on becoming a respected and successful company in the delivery and management of educational video content, in both Canadian markets and worldwide~~conversion.

~~Product~~ During ~~Mix~~the year ended December 31, 2003, the Company raised approximately $1,198,000 on issuance of promissory notes (the "Notes") and is obligated to repay approximately $1,337,000 on maturity. The Notes are due within one year of issuance, unless extended, at the option of the holder, for a further 18 months. Of the $1.3 million, $387,000 of the notes are denominated in Canadian dollars, with the remaining $950,000 denominated in USD. Attached to the Notes are 1,450,000 warrants (the "Warrants"), exercisable for a period of three years at an exercise price of $.25.

On September 25, 2003, the Company launched Tutorbuddy in both the U.S. and Canada. TutorbuddyTM is a revolutionary, state-of-the-art, e-learning system designed to deliver searchable, curriculum-correlated, digital video programs and learning objects online. TutorbuddyTM, is designed for home use by students and parents. The Company planned on targeting the U.S. market in the latest fiscal year but due to lack of adequate capital and a distribution network failed to meet the Company's goal. The Company had also launched and received encouraging response to the Company's institutional product, Magic Lantern InSite™. On October 24, 2003, the Company announced that Red Deer Public Schools, the ninth largest school district in the province of Alberta, Canada, agreed to deploy Magic Lantern InSiteTM, the Company's latest e- ~~Marketing~~ learning ~~Strategy~~video service for schools. InSite will be distributed to nearly 10,000 students enrolled in Red Deer Public's 21 elementary and secondary schools. As broadband infrastructure to schools and homes continues to swell, the Company continues to be challenged by capital constrictions to position itself to meet the demand for quality online educational content. The Company determined that the technical feasibility of the product occurred in September, 2004 and commenced amortization.

5 Formation of the "Company"

~~Our~~ Magic ~~market~~Lantern ~~plan~~was ~~for~~acquired ~~growth~~ in ~~the~~October ~~Canadian~~1996 ~~market~~by ~~has~~NTN ~~involved~~Interactive ~~multiple initiatives~~Network ~~including~~Inc. i("NTN"). ~~installing~~In anMarch ~~Inside~~2002, ~~Sales~~members ~~call~~of ~~centre~~Magic ~~team~~Lantern's ~~and customer~~management ~~relations~~formed ~~prospect~~MagicVision ~~identification~~Media ~~system; ii) re-developing the Tutorbuddy home service (http://www~~Inc.~~tutorbuddy.com~~ ~~a retail interface to the InSite video engine~~("MagicVision") to aacquire ~~homework~~100% ~~help service targeting parents~~ of ~~school-age~~Magic ~~children;~~Lantern's ~~iii)~~capital ~~implementing~~stock afrom ~~test~~NTN ofand ~~market~~contemporaneously ~~readiness~~sold ~~for Tutorbuddy~~their ~~services~~interests into aZi ~~pre-Christmas offering aimed at home-based users; iv) entering into a province-wide paying pilot~~ for ~~InSite use in selected British Columbia school districts~~$1,359,000 ~~which~~(including ~~was~~transaction ~~the first large-scale commitment to online video services in Canadian education; and v~~costs) ~~launching~~plus an100,000 ~~Inside~~common ~~Sales-led marketing~~shares of ~~InSite~~Zi ~~(http://www.magiclanterninsite.com) based~~valued ~~on innovative per-teacher pricing which is now establishing significant traction~~ at ~~the building level in the Canadian provinces targeted so far~~$499,000.

~~Business~~ On ~~Development~~August 2, ~~USA~~2002, the Company entered into a stock purchase agreement (the "Purchase Agreement") with Zi Corporation, a Canadian-based provider of intelligent interface solutions ("Zi"), for the Company's purchase of Magic Lantern Communications Ltd. ("MLC") and its subsidiaries (collectively, " Magic Lantern").

~~Leveraging~~ On November 7, 2002, the ~~financial~~Company ~~base~~and ofZi ~~operations~~consummated ~~already~~the ~~established~~transactions incontemplated ~~Canada,~~by the ~~Company~~ ~~believes~~Purchase ~~its~~Agreement ~~future~~(the ~~growth~~"Magic ~~lies~~Lantern inTransactions") following their approval by the ~~United~~Company's ~~States~~shareholders. The ~~spearhead~~Company's acquisition of Magic Lantern was implemented through its purchase from Zi of all the ~~Company's~~outstanding UScapital ~~strategy~~stock of MagicVision (the then private parent company), in ~~2004~~consideration isfor toa ~~introduce~~three-year ~~InSite~~promissory ~~into~~note of the ~~United~~Company ~~States reconfigured~~in ~~for~~the USprincipal ~~school~~amount ~~markets~~of as$3,000,000 ~~"The~~and ~~Learning~~29,750,000 ~~Source"~~shares ~~through~~of the ~~Bloomington~~ ~~Indiana-based~~Company's ~~Agency~~common ~~for~~stock, ~~Instructional~~representing ~~Technology~~45% ~~("AIT")~~of its common shares outstanding after the closing. "The ~~Learning~~ ~~Source"~~Purchase isAgreement ~~currently~~provides ~~being~~for ~~offered~~additional stock and cash consideration up to ~~long-time~~$2,930,000 ~~PBS~~or ~~station~~offsets ~~customers of~~against ~~AIT~~the ~~for~~Company's ~~use~~promissory ~~with~~note ~~affiliated~~up ~~school~~to ~~districts.~~$1 million ~~One~~based ~~illustration~~on ~~would~~Magic beLantern's ~~Las Vegas,~~operating ~~Nevada~~results ~~where~~for the ~~local~~first ~~PBS~~twelve ~~station~~months ~~integrates~~after ~~with~~the ~~Clark~~closing. ~~County~~See ~~School~~&quo ~~District,~~ t;Liquidity and isCapital ~~the~~Resources ~~fastest~~-~~growing~~ ~~district~~Liquidity." inAs part of the ~~US.~~Magic ~~Other~~Lantern ~~PBS station-School~~Transactions, ~~District~~the ~~areas~~Company inadded ~~Los~~three ~~Angeles~~designees of Zi to its board of directors, implemented a new stock option plan primarily for management and ~~West~~employees ~~Virginia~~of ~~are~~Magic ~~expected~~Lantern, changed its corporate name to ~~begin~~ ~~trial~~Magic ~~shortly~~Lantern Group, Inc. ~~More~~and, ~~are~~effective ~~expected~~November 8, 2002, changed its AMEX trading symbol to ~~participate~~"GML." asAfter ~~demonstrations~~consummation ~~develop~~of the Magic Lantern transactions, Alpha Omega Group ("AOG") held in record name approximately 47% of the Company's outstanding shares.

~~Establishment~~[remainder of USpage ~~school~~left ~~market~~intentionally presence will enable the Company to expand product offerings to schools and homes. In essence, the website interface of InSite makes use of the same back-end web engine as Tutorbuddy for offering to homes and other businesses, particularly health and sports related entities, as a safe, secure video resource on the Web. Sales strategy will focus on online marketing based on tele-sales and live demo from the Web. An aggressive approach to building web-based tele-sales will occur through merger and acquisition of educational software sales companies as outlined below. blank]

~~Go-~~ Lancer Management Group II, LLC, Lancer Offshore, Inc., LSPV LLC, and Omnifund Ltd. (the "Lancer Group") have been collectively a significant shareholder of the Company since the final quarter of 2002. On July 10, 2003, the Securities and Exchange Commission brought a civil action in the United States District Court for the Southern District of Florida against Michael Lauer and Lancer Management I and II alleging securities fraud in connection with portfolio transactions effected by the Lancer Group management. While the complaint does not allege any fraud in connection with the Company's securities, records produced by the SEC in the court proceeding indicate that Lancer management had either not reported the extent of its ownership in portfolio companies or had underreported the ownership. According to~~-Market~~ ~~USA~~a Form 13D filed by receiver to the Lancer Group o n July 10, 2003, the Lancer Group, in the aggregate, controls 45.1% of the Company's outstanding shares as of that date. Even though no wrongdoing has been alleged in connection with Lancer's ownership of Company securities, the Company, the financial statement impact, if any, and the market for its shares may be adversely affected by any court findings or the negative publicity generated by the Lancer proceedings or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer.

•In Built The Learning Source ((http://www.aitlearningsource.net the USA version of InSite) in partnership with the US-based Agency for Instructional Technology; • Launched AIT The Learning Source to serve PBS network school district customers as initial targetsaddition, establishing a base for additional product offerings to school districts outside traditional PBS cachement areas • Aggressively changed the paradigm of rights licensing to fit Internet realities by re-defining digital rights as non-exclusive and non-geographically limited when "wrapped" in and enabled by online Web applications offering subscribed streaming delivery (e.g. accepted in principle as an early point of digital rights negotiations with Walt Disney Educational Media); • Acquired an expanded range of new US-based product and producer relationships based on ~~non-exclusive~~November ~~application-limited~~4, ~~digital~~2003 rights for US market offerings serving education and other online verticals beginning with professional health training and sports training and coaching; • Developed a US market entry roll-up strategy based on acquiring the ~~educationally~~receiver ~~specialized~~announced ~~and~~that ~~experienced~~he ~~sales~~had ~~forces~~appointed ofDDJ ~~educational~~Capital ~~software distributors; • Targeted and approached US educational software distributors industry with a focus on using their sales forces~~ to ~~market~~actively ~~value-added~~manage ~~online content services as a new channel to market (~~the ~~criteria~~Lancer ~~being~~portfolio ~~non-video content suppliers with customer databases, active sales programs, particularly in CRM-based telemarketing with a record of historical service to education)~~securities.

6 Magic Lantern Group, Inc., formerly JKC Group, Inc., and previously Stage II Apparel Corp. (the "Company"), was engaged for over 20 years primarily as a distributor of proprietary and licensed brand name casual apparel, active wear and collection sportswear for men and boys. In response to a decline in its apparel distribution operations, the Company elected to contract those operations to third parties during the last two years as part of a strategy of reducing the costs and inventory risks associated with its historical core business and repositioning the Company through one or more acquisitions. To facilitate the change in strategic direction, in March 2002 the Company obtained $1,500,000 in financing from an entity, Alpha Omega Group ("AOG").

~~Additional~~Following ~~opportunities~~the ~~for~~completion ~~growth~~of in the ~~U.S.~~AOG ~~will~~transaction, ~~include i)~~and ~~the~~facing ~~sub-distribution~~continued ofdecline ~~existing~~in ~~learning~~its ~~video~~apparel ~~titles~~business, ~~for which~~ the Company ~~has~~ ~~exclusive~~continued USto ~~distribution~~pursue ~~rights;~~its ~~ii)Online~~business ~~e-commerce~~redirection ~~sale~~by ofexploring ~~titles~~potential ~~in hard~~acquisition ~~copy~~opportunities, ~~format~~with ~~(disk~~a ~~and~~view ~~tape)~~toward ~~for~~expanding ~~which~~existing ~~the~~licensing ~~Company~~operations ~~has~~or ~~exclusive distribution~~adding ~~rights~~compatible ~~(currently~~business ~~some~~lines, ~~1000~~culminating ~~titles)~~in ~~through~~the ~~acquired~~acquisition ~~educational software~~of ~~sales~~Magic ~~forces~~Lantern. ~~employing~~As ~~direct~~part ~~mail,~~of ~~web~~the ~~sales~~transaction ~~and tele-sales~~ to ~~established~~ ~~client~~acquire ~~bases;~~Magic ~~iii)~~Lantern, ~~E-commerce~~the ~~links~~Company ~~from~~(i) ~~online~~added ~~applications promoting~~three ~~sales~~designees of ~~hard~~Zi ~~copy offerings~~Corporation, ~~such~~the asvendor ~~VHS,~~of ~~DVD~~Magic orLantern, ~~VCD~~to ~~copies,~~it's board of ~~programs~~ ~~being~~directors, ~~accessed~~(ii) asimplemented ~~online~~a ~~video~~new ~~stream;~~stock ~~iv)~~option ~~sale~~plan ofprimarily ~~user~~for ~~information~~management ~~to partners,~~and ~~allies~~employees ~~and~~of ~~competitors;~~Magic vLantern, (iii) ~~expanded~~changed ~~sale~~the ofCompany's ~~production~~corporate ~~services~~name ~~of Sonoptic~~to ~~video~~Magic ~~encoding~~Lantern Group, ~~indexing~~Inc., and ~~database~~(iv) ~~provisioning~~effective toNovember 8, ~~owners~~2002, ofchanged ~~video collections~~the ~~allowing~~AMEX ~~searchable~~trading ~~streaming~~symbol ~~collections~~to (eGML.g. Zi toCorporation ~~viewers~~currently ~~of content-intensive~~owns ~~websites~~45% ~~such~~of asthe ~~sports~~outstanding ~~television,~~common ~~self-help,~~stock ~~home~~of ~~renovation and~~the ~~food/cooking websites as examples)~~Company.

Customers. Following the change in business focus in connection with the transaction with Magic Lantern, the Company's customers are primarily educational institutions, family resource centers, and public libraries in Canada. Magic Lantern's ten largest customers for the year ended December 31, 2003 accounted for approximately $695,000 of revenue (Period from November 7, 2002 to December 31, 2002 represented $162,000 of revenue) and for the twelve months ended December 31, 2002, represented $775,000 of revenue, none of which individually accounted for more than 10% of sales. The Company's apparel products were historically sold primarily to national and regional specialty and department store chains, sporting goods stores and wholesale membership clubs throughout the United States, Canada and Mexico. The Company had 500 customer accounts in 2001, none of which individually accounted for more than 10% of sales in 2001.Products

~~Distribution~~General

~~Manufacturing~~ Our product focus following the transaction with Magic Lantern became the sales and distribution of educational and learning content in video, DVD and other electronic formats. As a result of this transaction we acquired distribution rights to over 300 film producers representing over 12,000 titles, and customer relationships at 9,000 out of 12,000 English speaking schools in Canada. Our library includes content from numerous producers, including: Disney Educational Productions, Annenberg / CPB and CTV Television. In addition, TutorbuddyTM is an Internet-enabled provider of content and related educational services on demand to students, teachers and parents. Sonoptic provides digital video encoding services and has developed the proprietary VideoBaseTM indexing software that allows users to aggregate, bookmark, re-sort and add their own comme nt boxes to existing content.

~~Manufacturing~~ Magic ~~Sources~~Lantern Group, Inc. ('Magic Lantern") has grown to be a source in Canada for educational video resources, educational television series, program repurposing and digital delivery. By 1994, Magic Lantern had developed a catalogue of more than 10,000 video titles covering all subject areas from pre-school through high school, post-secondary and general interest, with exclusive distribution agreements with more than 200 producers and suppliers. With over 9,000 of 12,000 Canadian schools among Magic Lantern's customer base, attention was focused on growth opportunities within the education sector. At this time, digital technologies were having an impact on video delivery methods with the continuing expansion of Broadband delivery methods along with compression technology increasing capacity of satellites and fiber-optic cable providing telephone companies wi th an opportunity to carry more than traditional voice and data. To address this ever changing technology landscape, Magic Lantern responded by creating Sonoptic Technologies, Inc, in cooperation with the Government of New Brunswick as a 25 per cent minority partner, to develop an expertise and service offering in the field of analog to digital conversion, and subsequent applications for this new digital form of video programs. Sonoptic began encoding the Magic Lantern library of educational video content and now has some 2,000+ programs that have been digitized, indexed and curriculum correlated for three provinces in Canada and all 50 states in the U.S. as part of our partnership with AIT.

~~Quality~~ As ~~Control~~part of our continuing "organic" growth strategy, we will require additional capital resources or partnerships, mergers or seek out entities who wish to acquire the Company to complete the digital encoding of the Magic Lantern library as well as fund the further development of software capable of managing video delivered over the Internet. Magic Lantern acquired additional content through its acquisition of Image Media in 1998 (subsequently sold in 2003 as mentioned above), and has been attempting to expand its revenue base by utilizing its distribution channels for new products and services. Innovative programs for schools, such as its lease-to-own library program were launched (with the recommendation of the Canadian Principals Association), and the Campbell Soup Company's "Labels for Education." The debut of "Labels for Educa tion" was managed, marketed and delivered by Magic Lantern with over 3,500 Canadian schools taking part within the first six months of the program. That program has now expanded to serve nearly 7,500 schools since its launch in 1996. Sonoptic Technologies now manages the website and certain administrative responsibilities that provide approximately $180,000 in revenue during the year ended 2004.

~~Imports~~ TutorbuddyTM builds on the research & development of Sonoptic, and ~~Import~~has ~~Restrictions~~developed an on-line educational video library with an extensive information search capability and content management system. TutorbuddyTM is branded and had been offered to Canadian schools with the ultimate market being the homes of school-age children, some five million in Canada, when the service has proven effective in Canadian schools. Concurrent with providing the TutorbuddyTM innovation in the current core market of Canada where certain levels of "social responsibility" have made it very difficult to penetrate the Canadian market where any form of commercialization is frowned upon in that country. However, with the proper partner and capital resources Tutorbuddy could establish itself in the United States and other English speaking countries where buying and adoption patterns are dramatically different.

~~Magic~~Product ~~Lantern's products consist primarily of content delivered on videotape and other electronic media~~Mix. ~~Certain of the videotapes offered for sale in Canada are sourced in the United States. There are no tariffs or taxes involved in the import of these products from the United States.~~

~~Backlog~~Following the Company's acquisition of Magic Lantern our product mix is comprised of video sales, video dubbing, and video encoding. Video sales accounted for approximately 82%, 66% and 61% of Magic Lantern's net sales in 2004, 2003 and 2002, respectively. Video dubbing accounted for approximately 1%, 22% and 25% of Magic Lantern's net sales in 2004, 2003 and 2002, respectively. Video encoding accounted for approximately 12%, 5% and 6% of Magic Lantern's net sales in 2004, 2003 and 2002, respectively. Sales made by the Magic Lantern Group following the company's November 7, 2002 acquisition of the group accounted for 95% of the company's sales in 2002 (stub-period)

~~The~~ Marketing ~~Company's backlog of orders totaled approximately $154,000 and $100,000 at December 31, 2003 and 2002, respectively~~Strategy.

~~Competition~~ The Company's traditional marketing strategy is focused on providing curriculum relevant content to educators through targeted advertising, faxing, and direct mailings principally to schools and school boards, public libraries, family resource centers, and other customers in Canada and the United States. The Company has adopted a marketing strategy to concentrate resources towards expanding the geographic and market reach of Magic Lantern's historic business. As previously stated, adequate sources of capital resources mandated a nominal marketing to expand revenue as planned.

~~Following~~ Our market plan for growth in the ~~Company's~~Canadian ~~acquisition~~market ofhas ~~Magic~~involved ~~Lantern,~~multiple ~~its business~~initiatives ~~shifted~~including: i) contracting with a Business Development professional to focus on the ~~distribution~~Province of ~~educational~~Ontario, ~~and~~the ~~learning~~most ~~content~~populous ~~in video~~of ~~and~~any ~~other~~of ~~electronic~~the ~~formats~~Canadian Provinces. ii) ~~The~~entering ~~content~~into ~~delivery~~a ~~industry~~province-wide ispaying ~~highly competitive~~pilot ~~and~~for ~~consists~~InSite ofuse ain ~~large~~selected ~~number~~Ontario ofand ~~suppliers~~British Columbia school districts, ~~certain~~which ofwas ~~whom~~the ~~are producers~~first medium-scale commitment to online video services in Canadian education; and ~~others~~iii) ~~only~~launching ~~distributors~~of InSite (http://www.magiclanterninsite.com) ~~Magic~~based ~~Lantern~~on ~~holds~~innovative ~~exclusive~~per-teacher ~~rights~~and per-student pricing which to ~~distribution~~ date has not established significant traction in ~~Canada~~the onCanadian ~~approximately~~provinces ~~33%~~targeted ofthus ~~its~~so ~~titles~~far. Marketing Ofprobes during 2004 indicated the ~~exclusive~~desire of educational sites preference towards having the physical video server located within the school's intranet and behind the ~~titles~~ ir ~~distributed,~~own ~~approximately~~firewalls ~~59%~~such ~~include~~that ~~digital~~the ~~rights~~students are protected from inappropriate and unprotected access to the Internet on an unfettered basis.

7Business Development USA

~~Competition~~ Leveraging ~~stems~~the ~~from~~financial ~~both~~base ~~traditional~~of ~~learning~~operations ~~video content~~already ~~providers~~established in Canada, the Company believes its only meaningful future growth lies in the United States and ~~digital~~Southeast ~~learning~~Asia ~~content~~to ~~providers~~lesser degree. ~~Some~~The spearhead of ~~these competitors~~the ~~are~~Company's ~~multi-national~~US ~~and~~strategy ~~regional~~in ~~firms~~2004 ~~offering~~was ~~services,~~to ~~systems~~introduce ~~and platforms~~InSite into the United States reconfigured for US school markets as "The Learning Source" through ~~established~~the ~~internet~~Bloomington ~~sites~~Indiana-based orAgency ~~proprietary~~for ~~networks~~Instructional Technology ("AIT"). ~~Many~~"The Learning Source" is currently being offered to long-time PBS station customers of ~~these~~ ~~competitors~~AIT ~~have~~for ~~substantially~~use ~~greater~~with ~~financial,~~affiliated ~~technical~~school districts. One illustration would be Las Vegas, ~~marketing~~Nevada where the local PBS station integrates with Clark County School District, and ~~deployment~~ ~~resources~~is ~~than~~the wefastest-growing dodistrict in the US. ~~Competitors~~Other ~~particularly~~PBS station-School District areas in ~~markets~~Los ~~outside Canada~~Angeles ~~have~~and ~~the~~West ~~added~~Virginia ~~advantage~~were ofpresented ~~offering~~to ain ~~greater~~response ~~diversity~~to oftheir ~~products~~RFP. In ~~and~~the case of ~~services~~ West ~~with~~Virginia, aDiscovery ~~substantial~~Learning ~~installed~~captured ~~customer~~that ~~base~~contract by underbidding the Consortium . The ~~Our~~California ~~analysis~~proposal ofwas ~~its competition~~most ~~within~~recently ~~these~~conducted ~~two~~and ~~industries~~results isare ~~set~~unknown. More ~~forth~~are ~~below~~expected to participate as demonstrations develop.

~~Traditional~~ With the presence of Discovery Learning ~~Video~~and ~~Content~~its ~~Providers~~vast financial resources, it will be extremely difficult for the Company to establish a US school market presence that should it be successful might enable the Company to expand product offerings to schools and homes. In essence, the website interface of InSite makes use of the same back-end web engine as Tutorbuddy for offering to homes and other businesses, particularly health and sports related verticals, as a safe, secure video resource on the Web. Sales strategy, in conjunction with a business combination of some nature, will focus on online marketing based on tele-sales and live demo from the Web.

~~Management believes the Company is currently one of the largest educational learning video providers~~ Go-to the Canadian education, library and special interest group markets. In management's opinion, Magic Lantern has attained this position as a result of several competitive factors, including its knowledge of the Canadian education system and the provincial Ministries of Education, brand recognition, supply-~~line~~Market ~~relationships with worldwide educational video producers and leadership in creating course correlated matching for educators for over 27 years.~~ USA

~~Traditional~~• ~~format~~Built ~~competitors~~The Learning Source ((http://www.aitlearningsource.net the USA version of InSite) in partnership with the ~~Company~~US-based Agency for Instructional Technology; • Launched AIT The Learning Source to serve PBS network school district customers as initial targets, establishing a base for additional product offerings to school districts outside traditional PBS cachement areas • Aggressively changed the paradigm of rights licensing to fit Internet realities by re-defining digital rights as non-exclusive and non-geographically limited when "wrapped" in ~~Canada~~ ~~include:~~and enabled by online Web applications offering subscribed streaming delivery (e.g. accepted in principle as an early point of digital rights negotiations with Walt Disney Educational Media); • Acquired an expanded range of new US-based product and producer relationships based on non-exclusive application-limited digital rights for US market offerings serving education and other online verticals beginning with professional health training; • Developed a US market entry roll-up strategy based on acquiring the educationally specialized and experienced sales forces of educational software distributors; • Targeted and approached US educational software distributors industry with a focus on using their sales forces to market value-added online content services as a new channel to market (the criteria being non-video content suppliers with customer databases, active sales programs, particularly in CRM-based telemarketing with a record of historical service to education).

• Additional ~~Canadian~~opportunities ~~Learning~~for ~~Company,~~growth ~~Inc~~in the U.,S. ~~focused~~will ~~primarily~~totally depend on ~~the~~a ~~kindergarten~~business tocombination ~~Grade~~that 12when ~~("K-12"~~concluded would include i) ~~markets~~the ~~and~~sub-distribution ~~special~~of ~~interest~~existing ~~groups,~~learning ~~has~~video titles for which the ~~advantage~~Company ofhas ~~representing~~exclusive ~~three~~US ~~major~~distribution ~~producers~~rights; ii)Online e-commerce sale of titles in ~~Canada~~hard ~~-AIMS,~~copy ~~Great~~format ~~Plains~~(disk and ~~Reading~~tape) ~~Rainbow.~~for •which ~~Visual~~the ~~Education~~Company ~~Centre~~has ~~benefits~~exclusive ~~from~~distribution ~~relationships~~rights ~~with~~(currently ~~producers~~some ~~such~~1000 astitles) ~~TVO,~~through ~~BBC,~~acquired ~~PBS,~~educational ~~Phoenix~~software ~~and~~sales ~~John~~forces ~~Cleese~~employing direct mail, asweb ~~well~~sales asand ~~the~~tele-sales ~~appeal~~to ofestablished ~~carrying~~client ~~French~~bases; ~~language~~iii) ~~content.~~E-commerce •links ~~Marlin~~from ~~Motion~~online ~~Pictures~~applications ~~Ltd.~~promoting ~~distinguishes~~sales ~~its~~of hard copy offerings, bysuch ~~supplementing~~as ~~its~~VHS, ~~K-12~~DVD ~~education~~or ~~video~~VCD ~~with~~copies, ~~business~~of ~~and~~programs ~~general~~being ~~industry~~accessed ~~content~~as ~~from~~online ~~suppliers~~video ~~including~~stream; ~~United~~iv) ~~Learning,~~sale ~~AGC~~of ~~and~~user ~~MTI,~~information ~~although~~to itpartners, ~~offers~~allies noand ~~option~~competitors; ~~for~~v) ~~course~~expanded ~~correlation.~~sale •of ~~McIntyre~~production ~~Media,~~services ~~providing~~of Sonoptic video toencoding, ~~the~~indexing ~~schools~~and indatabase ~~the~~provisioning ~~K-12~~to ~~market,~~own ers ~~with~~of ~~some~~video ~~health~~collections ~~market~~allowing ~~related~~searchable ~~content~~streaming collections (e.g. ~~McIntyre~~to ~~represents~~viewers ~~some~~of ~~well~~content-intensive ~~regarded~~websites ~~producers~~such inas ~~Canada~~sports ~~including~~television, ~~Sunburst~~self-help, ~~Meridian~~home renovation and ~~Learning~~food/cooking ~~Speed~~websites as examples).

~~Digital learning video content providers.~~ Customers

The Company's ~~has~~customers ~~agreements~~are ~~with~~primarily ~~many~~educational ofinstitutions, ~~its~~family ~~producers~~resource centers, and public libraries in Canada. Magic Lantern's ten largest customers for ~~its digitization~~the year ended December 31, ~~indexing~~2004 ~~and~~accounted ~~ultimately~~for ~~streaming~~approximately $774,000 of ~~their~~revenue ~~analog~~as ~~content~~compared ~~through~~ to $695,000 for the ~~Company's~~year ~~web-enabled~~ended ~~TutorbuddyTM~~December or31, ~~stand-alone~~2003 and ~~media offerings.~~for ~~Management~~the ~~believes~~twelve ~~these~~months ~~services~~ended ~~offer~~December ~~the~~31, ~~following~~2002, ~~competitive advantages:~~represented $775,000 of revenue, none of which individually accounted for more than 10% of sales.

• Access to its "crypto key," a technology developed by TutorbuddyTM to prevent downloading of content and subsequent re-purposing; • Use of the metadata collected from K-12 course correlation to ensure that descriptive material used for search corresponds to educators' needs; • Access to Magic Lantern's content library of over 5,500 titles for which we have digital rights; • Availability of innovative software tools (Video Based Streaming Solutions - VBSS) developed by TutorbuddyTM with full indexing and relevant search capabilities for all digitized, indexed video content; and • Leadership in the movement to include indexed and streaming rights versus, straight streaming of full content without indexing.

8Distribution

~~Although~~ Magic ~~management~~Lantern's ~~believes~~distribution ~~that~~strategy ~~competitors~~is ofto ~~TutorbuddyTM~~acquire licensing rights for video productions produced by other companies and ~~VBSS~~to ~~currently~~return ~~lack~~royalties as a ~~comparable~~percentage ~~range~~of gross receipts. The company maintains a library of ~~services~~over 12, ~~various~~000 ~~distributors~~master ~~now~~versions ~~offer~~of ~~learning~~the ~~video~~titles ~~content~~and creates VHS, DVD, CDR and VCD copies for sale in ~~streaming~~its ~~format~~duplication labs in Oakville, ~~providing~~ ~~competition~~Ontario ~~worldwide~~and ~~through~~Saint ~~Internet-enabled~~John, ~~services~~New Brunswick. These ~~competitors~~ ~~include:~~are packaged together with media bought directly from suppliers for whom we do not have masters in-house, and shipped to customers. The distribution of such products is governed by distribution agreements with suppliers and producers, many of which are, generally, exclusive as to territory.

• Imports ~~Classroom Video is an Australian based firm with a presence in the United States, Canada~~ and ~~the~~Import United Kingdom for its encoded indexed titles produced in house and generally provided on hard drives sold to end users. • United Streaming has established a presence in Canada through distribution arrangements with Marlin Motion Pictures, a traditional format competitor. • AIMS Multimedia provides a branded service with digital curriculum available in the United States.Restrictions

~~Other~~ Magic ~~streaming~~Lantern's ~~technologies~~products consist primarily of content delivered on videotape and ~~streaming~~other ~~packaging, although~~electronic ~~not~~media. ~~directly~~Certain ~~competitive,~~of ~~are~~the ~~generally~~videotapes ~~available~~offered ~~through~~for ~~television~~sale on in Canada are sourced in the ~~Web,~~United ~~production~~States. ~~and~~There ~~publication,~~are ~~event~~no ~~management,~~tariffs ~~entertainment,~~or ~~expert systems~~taxes ~~linked~~involved toin ~~education,~~the ~~university~~import ~~and~~of ~~test~~these ~~environments~~products ~~and~~from ~~promotion~~the ~~and sales~~United ~~demonstrations~~States.

~~Employees~~Backlog

As The ~~of December 31, 2003, the~~ Company's ~~had~~backlog 33of ~~salaried employees.~~orders Oftotaled ~~the~~approximately ~~33 employees~~$86,000 ~~5 provide executive~~ and ~~management services~~$154,000 ~~and 28~~at ~~provide~~December ~~clerical~~31, ~~services.~~2004 ~~None of the Company's employees are party to a collective bargaining agreement. We consider our working relationships with employees to be good~~ and ~~have~~2003, ~~never experienced an interruption of operations due to a labor dispute~~respectively.

~~Recurring Losses~~Competition

We The ~~have~~content delivery industry is highly competitive and consists of a ~~history~~large number of ~~losses~~suppliers, certain of whom are producers and ~~may~~others ~~continue~~only distributors. Magic Lantern holds exclusive rights to ~~incur~~distribution ~~losses~~in ~~from~~Canada ~~operations~~on approximately 33% of its titles. ~~Our~~ ~~net~~Of ~~losses~~the ~~were~~exclusive $2titles distributed,~~255,000~~ ~~for~~approximately 58% include digital rights. In the ~~year~~U.S. ~~ended~~the ~~December~~Company 31has fewer rights than in Canada, but with its license agreement with AIT that list of titles has expanded greatly. During 2003 and 2004, Discovery Learning U.S. ~~These losses~~acquired ~~primarily~~United ~~reflect~~Streaming ~~selling~~Learning and AIM Learning, ~~general~~the ~~and~~Company's ~~administrative~~two ~~("SG&A")~~most ~~expenses generally~~significant incompetitors. The ~~excess~~technology ofused ~~gross~~by ~~profit~~United ~~levels.~~Streaming ~~Our~~was ~~business~~originally ~~plan~~developed ~~contemplates continued~~under ~~expansion~~exclusive ~~efforts~~contract ~~that~~with ~~will~~the ~~entail~~Altschel ~~substantial~~Group ~~SG&A~~(subsequently United Streaming) and ~~related expenditures~~that ~~without~~contract ~~any~~prohibits ~~assurance~~the use of ~~deriving~~Videobase™ ~~profits~~technology ~~from~~except ~~operations.~~for ~~Our~~content owned ~~ability~~ toby ~~achieve~~the ~~profitable~~Atlschel ~~operations~~Group. The ~~through~~Company ~~operations~~believes that, upon review of the ~~Company~~contract ~~could be~~still ~~adversely~~in ~~affected~~force, bythat ~~delays~~United orStreaming ~~inefficiencies~~and inits ~~the~~parent ~~development~~company, ~~cycle~~Discovery ~~for new~~Learning, ~~products~~U.S. are in breach of that contract and ~~services,~~the ~~inability~~Company intends to ~~penetrate~~seeks ~~new~~remedial ~~geographic~~damages ~~markets,~~and ~~lack~~ recovery of ~~sponsor~~licensing orrevenue ~~consumer~~under ~~acceptance~~the terms of ~~those~~the ~~products~~contract. The Company believes this breach to be material and ~~services,~~recovery ~~competition~~ of revenues and ~~changing~~possible ~~technology~~damages to be significant.

~~Risks~~ Competition ~~Associated~~stems from both traditional learning video content providers and digital learning content providers. Some of these competitors are multi-national and regional firms offering services, systems and platforms through established internet sites or proprietary networks. Many of these competitors, such as Discovery Learning U.S. have substantially greater financial, technical, marketing and deployment resources than we do. Competitors particularly in markets outside Canada have the added advantage of offering a greater diversity of products and services with ~~Lancer~~a ~~Group~~substantial installed customer base. Our analysis of its competition within these two industries is set forth below.

~~The~~ Traditional ~~Lancer~~Learning ~~Group~~Video ~~has~~Content ~~been a significant shareholder of the Company since the last quarter of 2002~~Providers. On July 10, 2003, the Securities and Exchange Commission brought a civil action in the United States District Court for the Southern District of Florida against Michael Lauer and Lancer Management I and II alleging securities fraud in connection with portfolio transactions effected by the Lancer Group management. While the complaint does not allege any fraud in connection with the Company's securities, records produced by the SEC in the court proceeding indicate that Lancer management had either not reported the extent of its ownership in portfolio companies or had underreported the ownership. According to a Form 13D filed by receiver to the Lancer Group on July 10, 2003, the Lancer Group, in the aggregate, controls 45.1% of the Company's outstanding shares as of that date. Even though no wrongdoing has been alleged in connection with Lancer's ownership of Company securities, the Company, the financial statement impact, if any, and the market for its shares may be adversely affected by any court findings or the negative publicity generated by the Lancer proceedings or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer. In addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital to actively manage the Lancer portfolio securities.

9Management believes the Company is currently one of the largest educational learning video providers to the Canadian education, library and special interest group markets. In management's opinion, Magic Lantern has attained this position as a result of several competitive factors, including its knowledge of the Canadian education system and the provincial Ministries of Education, brand recognition, supply-line relationships with worldwide educational video producers and leadership in creating course correlated matching for educators for over 30 years.

~~Risk~~Traditional format competitors of ~~Inadequate~~the ~~Financial~~Company ~~Resources~~in Canada include:

~~The~~• ~~execution~~Canadian ofLearning ~~our~~Company, ~~business~~Inc., ~~plan~~focused ~~for~~primarily ~~expanding~~on ~~our~~the ~~trademark~~kindergarten ~~licensing and~~to eGrade 12 ("K-~~education~~12") ~~businesses~~markets ~~could~~and bespecial ~~impaired~~interest bygroups, ~~inadequate~~has ~~financial~~the ~~resources. Both~~advantage ~~Sonoptic's~~of ~~and~~representing ~~Tutorbuddy's~~three ~~business~~major producers in ~~particular~~Canada ~~requires~~-AIMS, ~~ongoing upgrades~~Great toPlains ~~components~~ and ~~facilities~~Reading asRainbow. ~~new~~• ~~technologies~~Visual ~~emerge.~~Education ToCentre ~~maintain leading-edge~~benefits ~~technical~~from ~~solutions~~relationships ~~for~~with ~~new~~producers ~~media~~such ~~and~~as toTVO, ~~remain~~BBC, ~~competitive~~PBS, ~~the Company~~Phoenix ~~requires~~and ~~significant~~John ~~capital~~Cleese, ~~expenditure~~as onwell anas ~~ongoing~~the ~~basis.~~appeal Inof ~~the absence~~carrying ofFrench ~~substantial~~language ~~increases~~content. in• ~~our~~Marlin ~~revenues~~Motion ~~our~~Pictures ~~working~~Ltd. ~~capital~~distinguishes ~~will~~its ~~likely be~~offerings ~~expended~~by ~~before~~supplementing ~~the~~its ~~end~~K-12 ofeducation ~~2004.~~video Inwith ~~that~~business ~~event,~~and wegeneral ~~will~~industry becontent ~~required~~from tosuppliers ~~either limit~~including ~~future~~United ~~development~~Learning, AGC and ~~marketing~~MTI, ~~activities~~although orit ~~raise~~offers ~~additional~~no ~~equity capital~~option orfor ~~incur~~course ~~more~~correlation. ~~debt~~• toMcIntyre ~~continue~~Media, ~~financing~~providing ~~those~~video ~~activities.~~to ~~The~~the ~~issuance of~~schools ~~additional~~in ~~equity~~the ~~could~~K-12 bemarket, ~~dilutive~~with tosome ~~existing~~health ~~stockholders,~~market ~~and~~related ~~the alternative~~content. ofMcIntyre ~~financing~~represents ~~development~~some ~~through~~well ~~borrowings~~regarded ~~could~~producers ~~reduce~~in ~~our operating~~Canada ~~flexibility~~including ~~and~~Sunburst, ~~weaken~~Meridian ~~our~~and ~~consolidated~~Learning ~~financial condition~~Speed.

~~Risk~~Digital oflearning ~~Customer~~video ~~Budget~~content ~~Reduction~~providers

~~Our~~ The ~~goal~~Company ofhas ~~maintaining~~agreements ~~our~~with ~~existing~~many ~~customer~~of ~~base~~its ~~and~~producers ~~extending~~for ~~our e-education~~its ~~products~~digitization, ~~and~~indexing ~~services to new markets could be hampered by cash constraints affecting both current~~ and ~~prospective~~ultimately ~~customers.~~streaming ~~Educational~~of ~~video products~~their ~~are~~analog ~~acquired~~content ~~mainly~~through ~~by libraries and schools in~~ the Company's ~~existing Canadian~~web-enabled ~~markets.~~TutorbuddyTM ~~These institutions represent approximately 90% of the Company's current customer base. They are funded by government and are therefore subject to reductions~~ or restand-~~allocation~~alone ofmedia ~~funding, either of which could adversely affect our prospects for achieving profitability through operations of the Company~~offerings. ~~Similar~~Management ~~constraints~~believes ~~could~~these ~~impair~~services ~~our~~offer ~~efforts to expand~~ the ~~Company's~~ ~~customer~~following ~~base~~competitive toadvantages: ~~new markets.~~

~~Uncertainties~~• inAccess ~~Product~~to its "crypto key," a technology developed by TutorbuddyTM to prevent downloading of content and ~~Market~~subsequent ~~Expansion~~re-purposing; ~~Plans~~• Use of the metadata collected from K-12 course correlation to ensure that descriptive material used for search corresponds to educators' needs; • Access to Magic Lantern's content library of over 5,500 titles for which we have digital rights; • Availability of innovative software tools (Video Based Streaming Solutions - VBSS) developed by TutorbuddyTM with full indexing and relevant search capabilities for all digitized, indexed video content; and • Movement to include indexed and streaming rights versus, straight streaming of full content without indexing.

~~Our~~ Although ~~planned~~management ~~expansion~~believes ofthat ~~the~~competitors ~~Company operations could be adversely affected by many~~ of ~~the~~TutorbuddyTM ~~technological, business~~ and ~~financial~~VBSS ~~risks~~currently ~~inherent~~lack ina ~~the commercialization~~comparable ofrange ~~new products for markets in which we are not an established participant. The success~~ of ~~the Lantern Group's e-education offerings in these markets will depend not only on securing sponsorship or licensing arrangements with educational organizations outside of Canada~~services, ~~but~~various ~~also~~distributors onnow ~~the~~offer ~~willingness~~learning ~~of teachers,~~video ~~students~~content ~~and their parents~~ in ~~existing~~streaming ~~and~~format, ~~new~~providing ~~geographic~~competition ~~markets~~worldwide ~~to utilize~~through ~~these resources. We could encounter resistance to implementation of our e~~Internet-~~education~~enabled ~~offerings and technology for any number of fiscal, cultural or political reasons beyond our control~~services. These ~~factors~~competitors ~~make the ultimate success of our plans for expanding the Lantern Group's offerings and markets highly uncertain.~~include:

~~Risk~~• ofClassroom ~~Inadequate~~Video ~~Marketing~~is ~~Resources~~an Australian based firm with a presence in the United States, Canada and the United Kingdom for its encoded indexed titles produced in house and generally provided on hard drives sold to end users. • United Streaming has established a presence in Canada through distribution arrangements with Marlin Motion Pictures, a traditional format competitor (Acquired by Discovery Learning U.S.). • AIMS Multimedia provides a branded service with digital curriculum available in the United States through its acquisition by Discovery Learning U.S..

~~The~~Other ~~limited~~streaming ~~exposure~~technologies ofand ~~the~~streaming ~~Lantern~~packaging, ~~Group~~although tonot ~~e-education~~directly ~~markets~~competitive, ~~outside Canada~~are ~~could~~generally ~~impair~~available ~~our~~through ~~ability~~television toon ~~penetrate those markets. In~~ the ~~absence~~Web, ~~of substantial~~production ~~market~~and ~~penetration~~publication, ~~our~~event ~~operations~~management, ~~may fail to generate sufficient sponsorship~~entertainment, ~~licensing~~expert orsystems ~~subscription~~linked ~~fees~~ to ~~attain~~education, ~~profitability.~~university ~~While~~and ~~we are~~test ~~beginning~~environments ~~to establish relationships with distributors~~ and ~~other intermediaries~~promotion ~~to facilitate marketing arrangements for the Company's products~~ and ~~services~~sales ~~in those markets, we expect to remain primarily dependent on our own limited marketing resources for executing our expansion plans~~demonstrations.

~~Risk of Technological Obsolescence~~Employees

~~The~~ As ~~e-education~~of ~~marketplace~~December is31, ~~characterized~~2004, bythe ~~rapid~~Company ~~technological changes~~had ~~that~~43 ~~could~~salaried ~~put~~employees. usOf atthe a43 ~~competitive~~employees, ~~disadvantage~~6 ~~and~~provide ~~hamper~~executive ~~our expansion plans. E-education products~~ and management services, ~~using different or better integrated platforms could be introduced~~ and ~~established~~37 inprovide ~~markets~~clerical ~~outside~~services. ~~Canada~~None ~~before our~~of ~~market expansion plans for~~ the Company's ~~products~~employees are ~~implemented~~party ~~and~~to ~~before market~~a ~~acceptance~~collective isbargaining ~~achieved for Tutorbuddy's services~~agreement. ~~Developers~~We ofconsider ~~similar products~~our ~~and~~working ~~services~~relationships ~~have~~with ~~experienced~~employees ~~time~~to ~~lags~~be ofgood ~~one~~and ~~year~~have ornever ~~more~~experienced ~~between commencement~~an ofinterruption ~~marketing activities through the completion~~ of ~~field~~operations ~~trials~~due ~~and ultimate~~to ~~sales~~a orlabor ~~subscriptions~~dispute. On IfApril ~~similar~~7, or2005 ~~longer~~a ~~delays~~30% ~~are~~reduction ~~encountered~~ in ~~our~~ ~~efforts~~employees towas ~~implement~~implemented ~~our~~by ~~business plan for~~ the Company, wein ~~could~~it's ~~face~~continuing ~~the risk~~efforts ofto ~~technological~~cut ~~obsolescence,~~operating ~~adversely affecting our prospects for market penetration and profitability~~costs.

~~Dependence~~Recurring ~~on Licensed Conten~~Losses

~~Because~~ We ~~our~~have ~~business~~a ishistory ~~dependent~~of onlosses ~~licensed~~and ~~content~~may continue to incur losses from operations. Our net losses were $15,899,000 for ~~our~~the eyear ended December 31, 2004. These losses primarily reflect recording of implicit interest expense associated with the financing transactions that occurred during the year. The underlying shares and warrants associated with these financings and debt conversions had a material impact on the net loss reflected. It its efforts to develop and compete in the "on-~~education offerings~~line" video streaming business, ~~our~~substantial spending reflected in selling, general and administrative ("SG&A") expenses have historically been in excess of gross profit levels since. Our business isplan, ~~subject~~combined with business combination would contemplate continued expansion efforts that will entail a reduction of SG&A through cost savings procedures imple mented in 2004 and related expenditures into new territories, specifically the United States without any assurance of deriving profits from operations. Our ability to achieve profitable operations through operations of the Company is questionable without a business combination.

10RISK FACTORS

~~risk~~Risks ofAssociated license terminations or adverse changes in license renewal terms as well as the risk of intense competition in markets where our rights to licensed content are non-exclusive. We believe our e-education offerings are distinguished in large part by the popularity of our video library. Most of our distribution agreements are renewable, and some condition renewal on minimum annual royalty payments from the Company ranging from approximately $3,000 to $15,000. These thresholds generally increase for each successive contract year. The distribution agreements also provide the producers with ~~termination~~Lancer rights if the Company defaults on these obligations or fails to comply with other provisions of the agreements. If the Company is unable to obtain renewals or replacements on comparable terms, acceptance of our e-education offerings could be severely impaired. Group

The Lancer Group has been a significant shareholder of the Company since the last quarter of 2002. On July 10, 2003, the Securities and Exchange Commission brought a civil action in the United States District Court for the Southern District of Florida against Michael Lauer and Lancer Management I and II alleging securities fraud in connection with portfolio transactions effected by the Lancer Group management. While the complaint does not allege any fraud in connection with the Company's securities, records produced by the SEC in the court proceeding indicate that Lancer management had either not reported the extent of its ownership in portfolio companies or had underreported the ownership. According to a Form 13D filed by receiver to the Lancer Group on July 10, 2003, the Lancer Group, in the aggregate, controls 45.1% of the Company's outstanding shares as of tha ~~Lack~~ t date. Even though no wrongdoing has been alleged in connection with Lancer's ownership of ~~Control~~Company ~~Over~~securities, ~~Licensed~~the ~~Content~~Company, the financial statement impact, if any, and the market for its shares may be adversely affected by any court findings or the negative publicity generated by the Lancer proceedings or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer. In addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital to actively manage the Lancer portfolio securities. Shares held by the receiver are restricted shares and not available for sale except under Rule 144 or private sale.

~~Because~~Risk ~~the Company distributes educational videos created by unaffiliated producers, we do not control the quantity or quality~~ of ~~the productions,~~Inadequate ~~any~~Financial ~~reduction in which could cause customer dissatisfaction and result in the loss of market share.~~Resources

~~Competition~~ The execution of our business plan for expanding our trademark licensing and e-education businesses will be impaired by inadequate financial resources. Both Sonoptic's and Tutorbuddy's business in particular requires ongoing upgrades to components and facilities as new technologies emerge. To maintain leading-edge technical solutions for new media and to remain competitive, the Company requires significant capital expenditure on an ongoing basis. In the absence of additional equity or a substantial increases in our revenues in the short term our working capital will likely be expended before the end of May, 2005. In that event, the Board of Directors is investigating the implications of delisting from the American Stock Exchange and disgorged of the substantial costs associated with being a publicly reporting company. Additional, as previously mentione d the Company is seeking out a partnership or business combination that would ensure its viability beyond May, 2005. Therefore, we will be required to either limit future development and marketing activities or raise additional equity capital or incur more debt to continue financing those activities. The issuance of additional equity could be dilutive to existing stockholders, and the alternative of financing development through borrowings could reduce our operating flexibility and further weaken our consolidated financial condition. As of April 21, 2005 the Company's cash position was $313,000 which, given the Company's debt obligations and accounts payable obligation would provide for continuing operations until June 30, 2005.

~~The~~Risk ~~intensely competitive and fragmented nature~~ of ~~the~~Customer ~~e-education industry~~Budget creates various market risks that could impair our ability to retain and expand the Company's current markets and market share. Principal competitors currently include multi-national and regional firms offering services, systems and platforms through established Internet sites or proprietary networks. In addition, many educational organizations provide a broad range of educational data base resources without charge. Most of these competitors have substantially greater financial, technical, marketing and deployment resources than us. Many of these competitors particularly in markets outside Canada have the added advantage of offering a greater diversity of products and services with a substantial installed customer base. These competitors could control these markets before we obtain any meaningful market share, adversely affecting our prospects for market penetration and profitability.Reductions

~~Dependence~~ Our ongoal of maintaining our existing customer base and extending our e-education products and services to new markets will be hampered by cash constraints affecting both current and prospective customers. Educational video products are acquired mainly by libraries and schools in the ~~Internet~~Company's existing Canadian markets. These institutions represent approximately 90% of the Company's current customer base. They are funded by government and ~~Computer~~are ~~Systems~~therefore subject to reductions or re-allocation of funding, either of which will adversely affect our prospects for achieving the possibility of profitability through operations of the Company. Similar constraints could impair our efforts to expand the Company's customer base to new markets.

~~Our~~Uncertainties ~~ability to expand the Company's delivery platforms and penetrate new markets could be frustrated without continued growth~~ in ~~the~~Product ~~use~~ and ~~efficient operation~~Market ofExpansion the Internet. Web-based markets for information, products and services are new and rapidly evolving. If Internet usage does not continue to grow or increases more slowly than anticipated, we could be unable to secure new sponsorship and subscription arrangements for the Company's offerings. To the extent our business relies on web-based delivery platforms, our operations will also be dependent on adequate network infrastructure, consistent quality of service and availability to customers of cost-effective, high-speed Internet access. If our systems cannot meet customer demand for access and reliability, these requirements will not be satisfied, and customer satisfaction could degrade substantially, adversely affecting our prospects for market penetration and profitability. Plans

~~Regulatory~~ Our ~~Risks~~recent planned reduction of certain of the Company operations could be adversely affected by many of the technological, business and financial risks inherent in the commercialization of new products for markets in which we are not yet an established participant. The success of the Lantern Group's e-education offerings in these markets will depend not only on securing sponsorship or licensing arrangements with educational organizations outside of Canada, but also on additional partnerships and/or and business combination and the willingness of teachers, students and their parents in existing and new geographic markets to utilize these resources. We could encounter resistance to implementation of our e-education offerings and technology for any number of fiscal, cultural or political reasons beyond our control. These factors make the ultimate success of ou r plans for expanding the Lantern Group's offerings and markets highly uncertain.

~~Our~~Risk ~~dependence~~of onInadequate ~~the~~Marketing Internet for growth in the makes our operations susceptible to Internet-related regulatory risks and uncertainties. The laws governing the Internet remain largely unsettled, even in areas where there have been legislative initiatives. It may take years to determine whether and how Internet services are affected by existing laws, including those governing intellectual property, privacy, libel, product liability and taxation. Future legislation or judicial precedents could reduce Internet use generally and decrease its acceptance as a communications and commercial medium, adversely affecting our prospects for achieving profitability.Resources

~~Risks~~ The ~~Associated~~limited exposure of the Lantern Group to e-education markets outside Canada could impair our ability to penetrate those markets. In the absence of substantial market penetration, our operations may fail to generate sufficient sponsorship, licensing or subscription fees to attain profitability. While we are beginning to establish relationships with ~~Dependence~~distributors and other intermediaries to facilitate marketing arrangements for the Company's products and services in those markets, we expect to remain primarily dependent on ~~Key~~our ~~Personnel~~own limited marketing resources for executing our expansion plans.

~~The~~Risk ~~execution~~ of ~~our~~Technological business plan for expanding our trademark licensing and operations will be severely hampered unless we are able to attract and retain highly skilled technical, managerial and marketing personnel for that purpose. Current compensation and benefit levels could contribute to the loss or reduced productivity of personnel and impair our ability to attract new personnel, either of which could have a material adverse affect on our operations and financial prospects. In addition, our operations require specific skills for digital encoding of analog video and indexing and managing digital video content. Specialized training must take place in the workplace, requiring an ongoing investment to effectively Obsolescence

11 The e-education marketplace is characterized by rapid technological changes that could put us at a competitive disadvantage and hamper our expansion plans. E-education products and services using different or better integrated platforms could be introduced and established in markets outside Canada before our market expansion plans for the Company's products are implemented and before market acceptance is achieved for Tutorbuddy's services in the United States. Developers of similar products and services have experienced time lags of one year or more between commencement of marketing activities through the completion of field trials and ultimate sales or subscriptions. If similar or longer delays are encountered in our efforts to implement our business plan for the Company, we could face the risk of technological obsolescence, adversely affecting our prospects for any market penetration and profitability.

~~integrate~~Dependence ~~new~~on ~~employees~~Licensed and assist existing staff attain the most up-to-date skills. Because demand for these skills is high in this competitive environment, the Company risks losing staff and its investment in developing their skills to larger firms with greater resources.Content

Because our business is dependent on licensed content for our e-education offerings, our business is subject to the risk of license terminations or adverse changes in license renewal terms as well as the risk of intense competition in markets where our rights to licensed content are non-exclusive. We believe our e-education offerings are distinguished in large part by the popularity of our video library. Most of our distribution agreements are renewable, and some condition renewal on minimum annual royalty payments from the Company ranging from approximately $3,000 to $130,000. These thresholds generally increase for each successive contract year. The distribution agreements also provide the producers with termination rights if the Company defaults on these obligations or fails to comply with other provisions of the agreements. If the Company is unable to obt ~~Control~~ ain byrenewals ~~Selling~~or ~~Stockholders~~replacements on comparable terms, acceptance of our e-education offerings could be severely impaired.

~~Because~~Lack ~~the Lancer Group and Zi Corporation collectively own 92.7%~~ of ~~our~~ ~~Common~~Control ~~Stock~~Over ~~outstanding,~~Licensed our other stockholders have no control over matters submitted for stockholder approval. Most matters submitted to a vote of our stockholders will require affirmative vote by holders of a majority of the votes cast, or a majority of the outstanding common stock in the case of a business combination or charter amendment and a plurality of the votes cast for each nominee for membership on our board of directors. Accordingly, our current stockholders other than Lancer Group and Zi Corporation will be unable to control the outcome of any proposed merger or other extraordinary transaction, the election of any board members or any other aspects of corporate governance, and the voting power to determine these matters will be shared by Zi and Lancer Group so long as they continue to hold a substantial portion of their Shares. Content

~~Item~~ Because 2.the ~~Properties~~Company distributes educational videos created by unaffiliated producers, we do not control the quantity or quality of the productions, any reduction in which could cause customer dissatisfaction and result in the loss of market share.

~~Magic Lantern is headquartered in Oakville Ontario, near Toronto, Canada with other offices in Saint John, New Brunswick and Vancouver, British Columbia New York City and Greater Boston..~~Competition

~~Item~~ The 3intensely competitive and fragmented nature of the e-education industry creates various market risks that could impair our ability to retain and expand the Company's current markets and market share in Canada. ~~Legal~~In ~~Proceedings~~the United States and Southeast Asia, competitors such as Discovery Learning and their recent acquisition strategy have and will have a profound impact on our business, principally in our efforts to expand in the United States. Hence, the Company has been seeking out a partnership and/or business combination to penetrate this market. This competitor could control these markets before we obtain any meaningful market share, adversely affecting our prospects for market penetration and profitability.

OnDependence ~~October~~on ~~20, 2003, Douglas Connolly, formerly President of Magic Lantern Communications, Ltd., (a subsidiary of~~ the ~~Company)~~Internet and ~~Wendy~~Computer Connolly were terminated by the Company. Both the Company and the Connollys are in disagreement over the terms of their termination, however, the parties continue to communicate in regards to this disagreement. Wendy Connolly subsequently filed action against the Company claiming damages in the amount of $250,000 for wrongful dismissal. On February 3, 2004, counsel to Wendy Connolly was formally served with a Statement of Defence and Counterclaim by the Company. The Statement of Defence and Counterclaim adds Doug Connolly as a defendant in the counterclaim. The counterclaim seeks damages as against both Wendy and Doug Connolly for damages in the amount of $500,000, an accounting to determine profits made by the Connollys in relation to the breach of their fiduciary duties, a permanent and interlocutory injunction restraining the Connollys from soliciting clients and utilizing confidential information, punitive damages in the amount of $1,000,000 plus interest and costs. The Company believes that claims made by Wendy Connolly are without merit.Systems

In Our ~~February~~ability ~~2001,~~to expand the Company's ~~brought~~delivery anplatforms ~~action~~and inpenetrate ~~New~~new ~~York County~~markets ~~Supreme~~could ~~Court~~be ~~against~~frustrated ~~Wear~~without Mecontinued ~~Apparel~~growth ~~Corp.~~in ~~for~~the ~~unpaid~~use ~~royalties aggregating~~and inefficient ~~excess~~operation of $1the Internet.5 ~~million~~Web-based ~~under~~markets afor ~~license~~information, ~~agreement~~products ~~entered~~and ~~with~~services ~~the Company~~are innew ~~October~~and ~~1999~~rapidly evolving. ~~The~~If ~~agreement~~Internet ~~provided~~usage andoes ~~exclusive~~not ~~license~~continue to ~~the Kid's~~grow ~~Headquarters~~or ~~division~~increases ofmore ~~Wear~~slowly Methan ~~Apparel~~anticipated, ~~for~~we ~~manufacturing~~could ~~and distribution~~be ofunable ~~boys'~~to ~~sportswear~~secure ~~lines~~new ~~under~~sponsorship ~~the~~and ~~Cross~~subscription ~~Colours~~arrangements ~~trademark, with a scheduled launch~~ for the ~~Fall~~Company's ~~2000 season~~offerings. ~~The~~To ~~Company settled~~ the ~~litigation~~ inextent ~~April~~our ~~2002~~business ~~for~~relies ~~$535,000,~~on ~~payable~~web-based indelivery ~~a contemporaneous installment of $335~~platforms,~~000~~ ~~and~~our ~~the~~operations ~~balance~~will ofalso ~~$200,000~~be ~~which~~dependent ~~was~~on ~~received~~adequate innetwork ~~January~~infrastructure, ~~2003~~consistent ~~was applied~~quality toof ~~fully~~service ~~offset~~and ~~amounts~~availability ~~owing~~ to R.customers ~~Siskind~~of ~~and Company~~cost-effective, ~~Inc.,~~high-speed ~~an affiliated~~Internet ~~company~~access. ~~Various~~If ~~miscellaneous~~our ~~claims~~systems ~~and~~cannot ~~suits~~meet ~~arising~~customer indemand ~~the ordinary~~for ~~course~~access ofand ~~business~~reliability, ~~have~~these ~~been~~requirements ~~filed~~will ~~against~~not ~~the~~be ~~Company. In the opinion of management~~satisfied, ~~none~~and ofcustomer ~~these~~satisfaction ~~matters~~could ~~will~~degrade ~~have~~substantially, ~~a material adverse effect on the~~adve ~~results~~ rsely ofaffecting ~~operations~~our orprospects ~~the~~for ~~financial~~market ~~position~~penetration ofand ~~the Company~~profitability.

~~Other~~Regulatory ~~Matters.~~ Risks

12 Our dependence on the Internet for growth makes our operations susceptible to Internet-related regulatory risks and uncertainties. The laws governing the Internet remain largely unsettled, even in areas where there have been legislative initiatives. It may take years to determine whether and how Internet services are affected by existing laws, including those governing intellectual property, privacy, libel, product liability and taxation. Future legislation or judicial precedents could reduce Internet use generally and decrease its acceptance as a communications and commercial medium, adversely affecting our prospects for achieving profitability.

Risks Associated with Dependence on Key Personnel

The execution of our business plan for expanding our trademark licensing and operations will be severely hampered unless we are able to attract and retain highly skilled technical, managerial and marketing personnel for that purpose. Current compensation and benefit levels could contribute to the loss or reduced productivity of personnel and impair our ability to attract new personnel, either of which could have a material adverse affect on our operations and financial prospects. In addition, our operations require specific skills for digital encoding of analog video and indexing and managing digital video content. Specialized training must take place in the workplace, requiring an ongoing investment to effectively integrate new employees and assist existing staff attain the most up-to-date skills. Because demand for these skills is high in this competitive enviro nment, the Company risks losing staff and its investment in developing their skills to larger firms with greater resources.

Control by Selling Stockholders

Because the Lancer Group and Zi Corporation collectively own 81.2% of our Common Stock outstanding, our other stockholders have no control over matters submitted for stockholder approval. Most matters submitted to a vote of our stockholders will require affirmative vote by holders of a majority of the votes cast, or a majority of the outstanding common stock in the case of a business combination or charter amendment and a plurality of the votes cast for each nominee for membership on our board of directors. Accordingly, our current stockholders other than Lancer Group and Zi Corporation will be unable to control the outcome of any proposed merger or other extraordinary transaction, the election of any board members or any other aspects of corporate governance, and the voting power to determine these matters will be shared by Zi and Lancer Group so long as they con tinue to hold a substantial portion of their Shares.

[ remainder of page left intentionally blank ]

Item 2. Properties

Magic Lantern is headquartered in Oakville Ontario, near Toronto, Canada with other offices in Saint John, New Brunswick and Vancouver, British Columbia New York City and Greater Boston.

Item 3. Legal Proceedings

On October 20, 2003, Douglas Connolly, formerly President of Magic Lantern Communications, Ltd., (a subsidiary of the Company) and Wendy Connolly were terminated by the Company. Both the Company and the Connollys are in disagreement over the terms of their termination, however, the parties continue to communicate in regards to this disagreement. Wendy Connolly subsequently filed action against the Company claiming damages in the amount of $250,000 for wrongful dismissal. On February 3, 2004, counsel to Wendy Connolly was formally served with a Statement of Defence and Counterclaim by the Company. The Statement of Defense and Counterclaim adds Doug Connolly as a defendant in the counterclaim. The counterclaim seeks damages as against both Wendy and Doug Connolly for damages in the amount of $500,000, an accounting to determine profits made by the Connollys in relation to the breach of their fiduciary duties, a permanent and interlocut ory injunction restraining the Connollys from soliciting clients and utilizing confidential information, punitive damages in the amount of $1,000,000 plus interest and costs. While the Company believes that claims made by Wendy Connolly are without merit, the parties are in final negotiation for a nominal settlement to avoid the substantial legal costs associated with a possible Trial. On April 25, 2005 the Company negotiated a settlement on the claim and counterclaims noted above, which parties agreed not to disclose the terms and conditions of the settlement.

In February 2001, the Company brought an action in New York County Supreme Court against Wear Me Apparel Corp. for unpaid royalties aggregating in excess of $1.5 million under a license agreement entered with the Company in October 1999. The agreement provided an exclusive license to the Kid's Headquarters division of Wear Me Apparel for manufacturing and distribution of boys' sportswear lines under the Cross Colours trademark, with a scheduled launch for the Fall 2000 season. The Company settled the litigation in April 2002 for $535,000, payable in a contemporaneous installment of $335,000 and the balance of $200,000 which was received in January 2003 was applied to fully offset amounts owing to R. Siskind and Company, Inc., an affiliated company. Various miscellaneous claims and suits arising in the ordinary course of business have been filed against the Company. In the opinion of management, none of these matters will have a material adverse effect on the results of operations or the financial position of the Company.

Other Matters.

The Lancer Group has been a significant shareholder of the Company since the last quarter of 2002. On July 10, 2003, the Securities and Exchange Commission brought a civil action in the United States District Court for the Southern District of Florida against Michael Lauer and Lancer Management I and II alleging securities fraud in connection with portfolio transactions effected by the Lancer Group management. While the complaint does not allege any fraud in connection with the Company's securities, records produced by the SEC in the court proceeding indicate that Lancer management had either not reported the extent of its ownership in portfolio companies or had underreported the ownership. According to a Form 13D filed by receiver to the Lancer Group on July 10, 2003, the Lancer Group, in the aggregate, controls 45.1% of the Company's outstanding shares as of that date. Even though no wrongdoing has been alleged in connection with Lancer's ownership of Comp any securities, the Company, the financial statement impact, if any, and the market for its shares may be adversely affected by any court findings or the negative publicity generated by the Lancer proceedings or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer. In addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital to actively manage the Lancer portfolio securities. The Company is not aware of any further actions nor developments with respect to this matter beyond what has been reported in this paragraph.

Item 4. Submission of Matters to a Vote of Security Holders

On ~~November~~June 31, ~~2003~~2004 the Company held its Annual meeting of shareholders to vote on (i) a proposal to elect to the Board of Directors of the Company, Howard Balloch, Richard Siskind, Michael R. MacKenzie, Michael Lobsinger, Richard Geist, Stephen Encarnacao and Ms. Tammy Wentzel, and (ii) a ~~proposal~~ toreview ~~approve~~of anthe ~~amendment~~recent Form 10-Q and to discuss a possible change in Audit Firms more focused on micro-cap companies and with resources located near the main operational center of the Company's ~~stock~~in ~~option~~Oakville, ~~plan~~ON, Canada., ~~A description~~and (iii) to hear the report of Bentley Associates recently engaged by the ~~proposal~~Board of Directors to pursue acquisition candidates and channel partner developments. Further, the Shareholders received a ~~tabulation~~presentation by Management of the ~~voting~~Company's onstatus ~~each~~and ~~proposal~~possible ~~is set~~future ~~forth~~plans. Lastly, ~~below:~~at the conclusion of the Shareholders meeting the newly elected Board of Directors met to appoint committee members for its Audit Committee and Compensatio n Committee.

Proposal	Votes For	Votes Against	Abstentions
1. Election of Directors	29,750,000	0	30,000,000
2. Amendment of Stock - Option Plan	29,750,000	0	30,000,000

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PART II

Trading Market

The Company's common stock is listed for trading on the AMEX under the symbol GML. The following table sets forth, for the periods indicated, its high and low sales prices as reported on the AMEX.

	Market Prices
	High	Low
2002:
First quarter	$.31	$.18
Second quarter	1.25	.20
Third quarter	.98	.40
Fourth quarter	1.75	.25
2003:
First quarter	$1.75	$.70
Second quarter	1.09	.70
Third quarter	1.00	.72
Fourth quarter	1.45	.72
2004:
First quarter	$1.24	$.85
Second quarter	1.09	.90
Third quarter	.95	.45
Fourth quarter	.80	.36

Security Holders

As of ~~April~~March 120, ~~2004~~2005, there were approximately ~~100~~800 holders of record.

Dividends

13 The Company has not paid cash dividends since its inception and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of the Board of Directors to employ all available funds in the development of our business.

Penny Stock Rules

As a result of current trading prices, the Company's common stock is subject to the penny stock rules under the Securities Exchange Act of 1934 (the "Exchange Act"). In the absence of an exemption from those rules, broker-dealers making a market in our common stock are required to provide disclosure to their customers on the risks associated with its ownership, its investment suitability for the customer, information on its bid and ask prices and information about any compensation the broker-dealer will receive for a transaction in the common stock. The application of these rules generally reduces market making activities and, based on prevailing trading volumes, has substantially limited the liquidity of the our common stock.

Compliance with AMEX Listing Requirements

The Company is currently not in compliance with AMEX listing requirements~~, and~~ ~~has~~as ~~been~~of ~~compliant throughout the year ended~~ December 31, ~~2003~~2004.

~~Recent~~Registration ~~Sales of Unregistered Securities~~Statement.

InOn ~~September~~December ~~and~~31, ~~November of 2003~~2002, the Company ~~raised approximately~~filed ~~$1,198,000~~a onregistration ~~issuance~~statement ofon ~~promissory~~Form ~~notes~~S-3 (with the ~~"Notes"),~~Securities ~~due within~~and ~~one~~Exchange ~~year,~~Commission ~~unless~~covering ~~extended~~64,300,000 atshares ~~the option~~ of ~~the~~common ~~holders~~stock. ~~for~~Of athe ~~further~~Shares ~~18 months.~~covered ~~Attached~~by to the ~~Notes~~Prospectus, ~~are 1~~31,~~450~~550,000 ~~warrants,~~were ~~exercisable~~issued ~~for~~by athe ~~period of~~Company ~~three~~in ~~years~~the atEquity anInfusion, ~~exercise~~29,750,000 ~~price~~were ofissued ~~$.25.~~by ~~On maturity,~~ the Company ~~is obligated~~as topart ~~repay~~of ~~approximately~~the ~~$1,337,000.~~consideration Ofon the ~~$1.3~~acquisition ~~million, $387,000~~ of ~~the~~ ~~Notes~~Magic ~~are~~Lantern ~~denominated~~and inup ~~Canadian~~to ~~dollars~~3,000,000 ~~which~~may ~~was~~be ~~equivalent~~issued atunder ~~the~~an ~~time of~~earn ~~issuance~~out toarrangement ~~CAD$500,000.~~for ~~The~~this ~~remaining~~acquisition. ~~$950,000~~See ~~worth~~"Equity ofInfusion" ~~Notes~~and ~~are denominated~~"Magic inLantern UAcquisition.~~S. Dollars.~~ "

~~Item~~Recent 6.Sales ~~Selected~~of ~~Financial~~Unregistered ~~Data~~Securities

~~The~~On ~~following~~February ~~table~~9, ~~presents~~2005, ~~selected~~the ~~financial~~Company ~~data~~entered ofinto ~~Magic Lantern~~a ~~Group,~~Consulting ~~Inc~~Agreement with National Financial Communications Corp. at("NFC"). In ~~and~~consideration for ~~the~~NFC's ~~year~~commitment ~~ended~~to ~~December~~provide 31services in ~~each~~accordance with the terms of that agreement, the ~~five years~~Company ~~through~~issued ~~2003.~~NFC ~~The~~a ~~selected~~common ~~financial~~stock ~~data~~purchase ~~presented~~warrant ~~below~~to ~~has~~purchase ~~been~~750,000 ~~derived from~~shares of Common Stock, which warrant vests upon the ~~Company's~~achievement ~~audited~~of ~~financial~~certain ~~statements~~performance milestones. The ~~For~~exercise ~~each~~price of the ~~three~~warrant ~~years through~~issued ~~December~~to ~~31,~~NFC ~~2003,~~is calculated based upon the ~~following~~timing ~~financial~~of ~~information~~the ~~should~~acceptance beof ~~read~~individual ~~in conjunction~~Statements ~~with~~of ~~Management's~~Work ~~Discussion~~by ~~and~~the ~~Analysis~~Marketing Committee of ~~Financial~~the ~~Condition~~Company's ~~and Results~~Board of ~~Operations~~Directors. The asCompany ~~well~~agreed asto ~~the~~reserve ~~Financial~~750,000 ~~Statements~~shares of Common Stock for issuance pursuant to the ~~Company~~warrant, ~~and related~~which ~~Notes~~Common ~~included~~Stock ~~elsewhere~~had inpreviously ~~this~~been ~~Report~~registered for resale pursuant to a registration statement on Form S-3/A (File No. 333-116147).

(In thousands, except per share amounts)
	2003	2002	2001	2000	1999
Income Statement Data:
Net revenue	$ 2,871	$ 386	$ 2,855	$ 9,891	$ 10,537
Cost of sales	1,209	188	3,068	8,158	7,982
Gross profit (loss)	1,662	198	(213)	1,733	2,555
Commission and other income	25	---	10	18	97
	1,687	198	(203)	1,751	2,652
Selling, general and administrative expenses	3,865	1,056	1,195	2,638	2,431
Gain on lease cancellation	---	---	---	---	(244)
Depreciation and amortization	814	136	209	---	---
Compensation adjustment from options	(1,091)	2,239	---	---	---
Impairment of goodwill	---	---	1,293	---	---
Impairment of trademark	---	181	---	---	---
Loss (gain) on sale of securities	---	---	11	(11)	(22)
Gain on settlement of litigation	---	(526)	(116)	---	---
Operating income (loss)	(1,901)	(2,888)	(2,795)	(876)	487
Royalty income	---	90	60	100	---
Interest expense, net	354	43	209	497	405
Income (loss) before income taxes	(2,255)	(2,841)	(2,944)	(1,273)	82
Income taxes	---	---	33	7	6
Net income (loss)	$ (2,255)	$ (2,841)	$ (2,977)	$ (1,280)	$ 76
Net income (loss) per common share: Basic and fully diluted	$ (.03)	$ (.09)	$ (.72)	$ (.31)	$ .02
Weighted average common shares outstanding, basic and diluted	66,483	31,561	4,127	4,124	4,037
	2003	2002	2001	2000	1999
Summary Balance Sheet Data:
Total assets	$ 12,653	$ 13,962	$ 492	$ 5,697	$ 6,409
Working capital (deficit)	(2,092)	(179)	(1,073)	69	292
Due to factor	---	---	514	2,636	1,817
Notes payable	572	---	403	0	0
Long term debt, excluding current portion	2,012	3,032	---	---	---
Shareholders' equity (deficit)	7,357	9,259	(865)	2,067	3,310

The warrant was issued to NFC in a transaction that was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and/or Regulation D promulgated under the Securities Act.

14On January 4, 2005, the Company entered into a Subscription Agreement (the "Subscription Agreement") with Nite Capital, L.P., providing for, among other things, the unregistered sale, through a private placement, of 1,000,000 shares of common stock (the "Shares"), $0.01 par value per share (the "Common Stock") at a price of $0.30 per share, and a common stock purchase warrant to purchase an additional 500,000 shares of Common Stock exercisable at a price of $0.40 per share, subject to customary adjustments, until the fifth anniversary of January 4, 2005. The Company also entered into a Registration Rights Agreement.

The Shares and the common stock purchase warrants were issued to private investors in transactions that were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and/or Regulation D promulgated under the Securities Act.

As a result of the transactions, three term promissory note holders of the Company converted an aggregate of $200,000.00 of principal into 800,000 shares of Common Stock at a rate of $0.25 per share and received three-year Warrants to purchase 800,000 shares of Common Stock at an exercise price of $0.40 per share.

During December, 2004, the Company, through the private placement of equity securities, consummated the unregistered sale of 4,010,649 shares of common stock (the "Shares"), $0.01 par value per share (the "Common Stock"), and common stock purchase warrants to purchase an additional 4,010, 649 shares of Common Stock (the "Warrants") to certain accredited investors. The Shares and the Warrants were issued to private investors in transactions that were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 (the "Securities Act") and/or Regulation D promulgated under the Securities Act.

The Company has received net proceeds of approximately $1.2 million USD from two new investors to strengthen its balance sheet and restructure certain debt obligations.

The Company will use the proceeds to prepay and restructure a significant portion of its current convertible debt and for working capital needs. The Company and Laurus Master Funds, Ltd. have reached an agreement whereby the Company will use a portion of the net proceeds from the new investors to pay approximately $800,000 of existing debt, accrued interest and prepayment premium in exchange for the removal of certain required approvals and offering restrictions in their entirety from the terms of their original financing agreement dated April 28, 2004.

On May 3, 2004, Magic Lantern Group, Inc. (the "Company") closed the private placement of a $1,500,000 principal secured convertible three-year term note (the "Note") with the Laurus Master Fund, Ltd. ("Laurus Funds") in an offering exempt from the registration requirements of the Securities Act of 1933, as amended (the "Act"), pursuant to Rule 506 of Regulation D promulgated under the Act. The Note bears interest at the prime rate, as reported in the Wall Street Journal, plus 2% (which under no circumstances will be considered to fall below 6% on a combined basis), with interest and amortizing payments of principal commencing August 1, 2004. The interest payable on the note is adjustable downward by 2% if the Company shall have registered shares of Laurus Funds' stock underlying the Note on a registration statement declared effective by the Securities and Exchange Commission, and the Company's stock is trading at a 25% or greater premium to the fixed conversion price under the Note of $0.25. The interest payment will be adjusted downward by 1% in the event the Company has not registered shares of Laurus Funds' stock underlying the Note, and the Company's stock is trading at a 25% or greater premium to the fixed conversion price under the Note of $0.25.

Payments under the Note are convertible to common stock of the Company at the option of Laurus Funds at a fixed conversion price of $0.25. The Company may prepay outstanding principal and accrued interest under the Note by delivering to Laurus Funds in cash an amount that is equal to 125% of the aggregate amount of outstanding principal of the Note plus any accrued but unpaid interest and all other sums due, accrued or payable to Laurus Funds. As part of the transaction, Laurus Funds also received a seven-year warrant to purchase 1,100,000 shares the Company, exercisable at $0.30.

Common shares issuable to Laurus Funds subject to Note conversion and issuable upon exercise of the warrant were registered for resale with the Securities and Exchange Commission pursuant to the terms of the registration rights agreement.

Payment of all principal and interest under the note, as well as performance of the obligations of the Company and its subsidiaries, under all of the ancillary agreements entered into by the Company and its subsidiaries in connection with the sale of the note and warrant, are secured by a security interest in favor of Laurus Funds in all of the assets of both the Company and its subsidiaries.

The Company paid a closing fee equal to $58,500 to the manager of Laurus Funds and paid $29,500 as reimbursement for the investor's legal and due diligence expenses

During the year Laurus Master Funds converted a portion of the Note totaling $250,000 plus accrued interest to common stock. The Company issued 1,124,211 shares of its common stock to Laurus Funds for this conversion of debt and interest. The portions of the Note were converted to common stock of the Company at the option of the note holder. The number of shares issued in the third quarter and fourth quarter were 428,942 and 695,269 common shares respectively, at a fixed conversion price of $0.25.

In January 2005, an additional $6,193 payable under the Note was converted to common stock of the Company at the option of the note holder. The Company issued 24,770 shares of its common stock at a fixed conversion of $0.25 to satisfy its January conversion.

In April 2005, an additional $18,750 payable under the Note was converted to common stock of the Company at the option of the note holder. The Company issued 75,000 shares of its common stock at a fixed conversion of $0.25 to satisfy its April conversion.

On July 9, 2003, stock certificates representing 600,000 shares were issued following the placement of 600,000 units, pursuant to subscription agreements. The Company received $260,000, net of issue costs of approximately $40,000 in the second quarter of 2003.

In September and November of 2003, the Company raised approximately $1,198,000 on issuance of promissory notes (the "Notes"), due within one year, unless extended, at the option of the holders for a further 18 months. Attached to the Notes are 1,450,000 warrants, exercisable for a period of three years at an exercise price of $.25. On maturity, the Company is obligated to repay approximately $1,337,000. Of the $1.3 million, $387,000 of the Notes are denominated in Canadian dollars, which was equivalent at the time of issuance to CAD$500,000. The remaining $950,000 worth of Notes are denominated in U.S. Dollars.

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Item 6. Selected Financial Data

The following table presents selected financial data of Magic Lantern Group, Inc. at and for the year ended December 31 in each of the five years through 2004. The selected financial data presented below has been derived from the Company's audited financial statements. For each of the three years through December 31, 2004, the following financial information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations as well as the Financial Statements of the Company and related Notes included elsewhere in this Report.

(In thousands, except per share amounts)


	2004	2003	2002	2001	2000
Income Statement Data:
Net revenue	$ 2,762	$ 2,871	$ 386	$ 2,855	$ 9,891
Cost of sales	899	1,209	188	3,068	8,158
Gross profit (loss)	1,863	1,662	198	(213)	1,733
Commission and other income	---	25	---	10	18
	1,863	1,687	198	(203)	1,751
Selling, general and administrative expenses	4,998	3,865	1,056	1,195	2,638
Gain on lease cancellation	---	---	---	---	---
Depreciation and amortization	1,310	814	136	209	---
Compensation adjustment from options	(740)	(1,091)	2,239	---	---
Impairment of goodwill	3,000	---	---	1,293	---
Impairment of trademark	---	---	181	---	---
Loss (gain) on sale of securities	---	---	---	11	(11)
Gain on settlement of litigation	---	---	(526)	(116)	---
Operating income (loss)	(6,705)	(1,901)	(2,888)	(2,795)	(876)
Royalty income	---	---	90	60	100
Interest expense, net	9,194	354	43	209	497
Income (loss) before income taxes	(15,899)	(2,255)	(2,841)	(2,944)	(1,273)
Income taxes	---	---	---	33	7
Net income (loss)	$ (15,899)	$ (2,255)	$ (2,841)	$ (2,977)	$ (1,280)
Net income (loss) per common share: Basic and fully diluted	$ (.24)	$ (.03)	$ (.09)	$ (.72)	$ (.31)

Weighted average common shares outstanding, basic and diluted	67,298	66,483	31,561	4,127	4,124


	2004	2003	2002	2001	2000
Summary Balance Sheet Data:
Total assets	$ 8,124	$ 12,653	$ 13,962	$ 492	$ 5,697
Working capital (deficit)	(6,030)	(2,092)	(179)	(1,073)	69
Due to factor	---	---	---	514	2,636
Notes payable	1,358	572	---	403	0
Long term debt, excluding current portion	216	2,012	3,032	---	---
Shareholders' equity (deficit)	1,111	7,357	9,259	(865)	2,067

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Founded in 1975, Magic Lantern Group, Inc (hereinafter "Magic Lantern") is a Canadian distributor of educational and learning content in video and other electronic formats (collectively, the "Education and Distribution" segment). Magic Lantern has primarily exclusive distribution rights to over 300 film producers representing over 12,000 titles, and its customers include 9,000 out of 12,000 English speaking schools in Canada. Its library includes content from numerous producers, including: Disney Educational Productions, Annenberg / CPB and CTV Television. Tutorbuddy Inc., a 100% owned subsidiary of Magic Lantern, is an Internet-enabled provider of content and related educational services on demand to students, teachers and parents. Sonoptic Technologies Inc., a 75% owned subsidiary of Magic Lantern, provides digital video encoding service ~~services~~ s and has developed proprietary videobase indexing software that allows users to aggregate, bookmark, re-sort and add their own comment boxes to existing content. Magic Lantern is headquartered in Oakville Ontario, near Toronto, Canada with other offices in Saint John, New Brunswick and Vancouver, British Columbia, New York City, and Greater Boston..

Magic Lantern was acquired in October 1996 by NTN Interactive Network Inc. ("NTN"). In March 2002, members of Magic Lantern's management formed MagicVision Media Inc. ("MagicVision") to acquire 100% of Magic Lantern's capital stock from NTN and contemporaneously sold their interests to Zi for $1,359,000 (including transaction costs) plus 100,000 common shares of Zi valued at $499,000.

On August 2, 2002, the Company entered into a stock purchase agreement (the "Purchase Agreement") with Zi Corporation, a Canadian-based provider of intelligent interface solutions ("Zi"), for the Company's purchase of Magic Lantern Communications Ltd. ("MLC") and its subsidiaries (collectively, " Magic Lantern").

On November 7, 2002, the Company and Zi consummated the transactions contemplated by the Purchase Agreement (the "Magic Lantern Transactions") following their approval by the Company's shareholders. The Company's acquisition of Magic Lantern was implemented through its purchase from Zi of all the outstanding capital stock of MagicVision, in consideration for a three-year promissory note of the Company in the principal amount of $3,000,000 and 29,750,000 shares of the Company's common stock, representing 45% of its common shares outstanding after the closing. The Purchase Agreement provides for additional stock and cash consideration up to $2,930,000 or offsets against the Company's promissory note up to $1 million based on Magic Lantern's operating results for the first twelve months after the closing. See "Liquidity and Capital Resources - Liquidity." As part of the Magic Lantern Transactions, the Company added three designees of Zi to its board of directors, implemented a new stock option plan primarily for management and employees of Magic Lantern, changed its corporate name to Magic Lantern Group, Inc. and, effective November 8, 2002, changed its AMEX trading symbol to "GML."

On September 25, 2003, the Company launched TutorbuddyTM, a revolutionary, state-of-the-art, e-learning system designed to deliver searchable, curriculum-correlated, digital video programs and learning objects online. TutorbuddyTM, designed for home use by students and parents, immediately received positive reviews from home users and the educational community. Intensive marketing and promotional programs have been implemented to continue to build on the launch's momentum. Similar success has been recently achieved by the Company's institutional product, Magic Lantern InSite. On October 24, 2003, the Company announced that Red Deer Public Schools, the ninth largest school district in the province of Alberta, Canada, agreed to deploy Magic Lantern InSiteTM, the Company's latest e-learning video service for schools. InSite will be ~~distributed~~distribu ted to nearly 10,000 students enrolled in Red Deer Public's 21 elementary and secondary schools. As broadband infrastructure to schools and homes continues to swell, the Company and its digital products are correctly positioned to meet the demand for quality online educational content. The Company determined that the technical feasibility of the product occurred in September, 2004 and commenced amortization.

15 The Company accounted for its acquisition of Magic Lantern under the purchase method. The purchase price for the acquired businesses was allocated among their assets and liabilities as of the closing date. For this purpose, the 29,750,000 shares of the Company's common stock issued to Zi as part of the purchase price for the acquired businesses was valued based on their market price in June 2002 when the terms of the Magic Lantern Transactions were established in a letter of intent between the parties. Based on the market price of $.31 per share for the Company's common stock at that time, the total purchase price and related transactions costs without regard to any adjustments for post-acquisition operating results aggregated approximately $12,363,000, of which approximately $6,868,000 has been allocated to goodwill, approximately $4,492,000 to intangible a ssets, and approximately $1,128,000 to property and equipment.

~~The~~ Risks ~~Company~~Associated ~~accounted~~with ~~for its acquisition of Magic Lantern under~~ the purchase method. The purchase price for the acquired businesses was allocated among their assets and liabilities as of the closing date. For this purpose, the 29,750,000 shares of the Company's common stock issued to Zi as part of the purchase price for the acquired businesses was valued based on their market price in June 2002 when the terms of the Magic Lantern Transactions were established in a letter of intent between the parties. Based on the market price of $.31 per share for the Company's common stock at that time, the total purchase price and related transactions costs without regard to any adjustments for post-acquisition operating results aggregated approximately $12,363,000, of which approximately $6,868,000 has been allocated to goodwill, , approximately $4,492,000 to intangible assets, and approximately $1,128,000 to property and equipment. Acquisition

~~Risks~~ Magic ~~Associated~~Lantern ~~with~~has a history of losses and may continue to incur losses from operations after its acquisition by the Company. For its last three fiscal years ending December 31, Magic Lantern ~~Acquisition~~incurred net losses aggregating 20.995 million. See "Liquidity and Capital Resources - Capital Resources." The Company's ability to achieve profitable operations through ownership of Magic Lantern could be adversely affected by a number of business risks, including delays or inefficiencies in the development cycle for Magic Lantern's new products and services, lack of sponsor or consumer acceptance of those products and services, inability to penetrate new geographic markets, competition and changing technology. A discussion of these and other related business risks is included in the Company's proxy statement dated June 1, 2004 for the Magic Lantern Transactions can be found at www./sec.gov/EDGAR.

Risks Associated with Lancer's Ownership of Company Shares.

~~Stock-Based~~ The ~~Compensation.~~Lancer ~~Although~~Group ~~the~~has ~~Company~~been ~~follows APB~~a ~~Opinion 25,~~significant ~~Accounting~~shareholder ~~for~~of ~~Stock~~the ~~Issued~~Company tosince ~~Employees,~~the ~~and~~last ~~has~~quarter ~~elected to~~of ~~account~~2002. ~~for~~On ~~options~~July ~~issued~~10, ~~under~~2003, ~~employee~~the ~~stock~~Securities ~~option~~and ~~plans~~Exchange ~~based~~Commission onbrought ~~the disclosure~~a ~~only~~civil ~~alternative~~action ~~provided~~ in ~~Financial~~the ~~Accounting~~United ~~Standards~~States ~~No. 123, Accounting~~District Court for ~~Stock-Based~~the ~~Compensation~~Southern ~~("FAS 123"),~~District asof ~~amended~~Florida byagainst ~~FAS 148,~~Michael ~~the~~Lauer ~~disclosure~~and ~~only~~Lancer ~~alternative~~Management isI ~~not~~and anII ~~available~~alleging ~~accounting~~securities ~~method~~fraud ~~for the~~in ~~Replacement~~connection ~~Options.~~with ~~See~~portfolio ~~"Equity~~transactions ~~Infusion"~~effected ~~below.~~by ~~Under FAS 123,~~ the ~~Replacement~~ ~~Options~~Lancer ~~must~~Group bemanagement. ~~valued~~While onthe acomplaint ~~quarterly~~does ~~basis,~~not ~~and~~allege ~~the~~any ~~compensation cost~~fraud ~~must~~in beconnection ~~recognized~~with ~~and~~the ~~adjusted~~Company's ~~quarterly~~securities, ~~for~~records ~~vested~~produced ~~options~~by orthe ~~ratably over~~SEC in the ~~vesting~~court ~~period~~proceeding ~~for~~indicate ~~unvested~~that ~~options.~~Lancer ~~Replacement~~management ~~Options~~had ~~covering~~either ~~a total~~not ofreported ~~1,762,000~~the ~~shares~~extent of ~~the~~its ~~Company's~~ownership ~~common~~in ~~stock~~portfolio ~~were~~companies ~~fully~~or ~~vested~~had ~~on issuance~~underreported ~~and~~the ~~are~~ownership. ~~exercisable~~According atto ~~prices~~a ~~ranging~~Form ~~from~~13D ~~$.30~~filed by receiver to ~~$.50~~the ~~per~~Lancer ~~share. Based~~Group on ~~the~~July ~~AMEX~~10, ~~closing~~2003, ~~price~~the ofLancer ~~$1.70~~Group, ~~per~~in ~~share for~~ the ~~common stock on December 31~~aggregate, ~~2002,~~controls 45.1% of the Company's ~~recorded~~outstanding ~~compensation~~shares ~~expense~~as of ~~$2,239,000~~that ~~for the~~date. ~~year~~Even ~~then~~though ~~ended,~~no ~~reflecting~~wrongdoing ~~the~~has ~~difference~~been ~~between~~alleged ~~the~~in ~~aggregate~~connection ~~exercise~~with Lancer's owner ~~price~~ ship of ~~the~~Company ~~Replacement~~securities, ~~Options and~~ the ~~market~~Company, ~~price of~~ the ~~underlying~~financial ~~shares. On~~statement ~~December 31~~impact, ~~2003~~if any, and the ~~closing~~market ~~price~~for ofits ~~the~~shares ~~Company's~~may ~~common~~be ~~stock~~adversely onaffected ~~the AMEX~~by ~~was~~any ~~$.99~~court ~~per~~findings ~~share.~~or ~~The~~the ~~decrease~~negative inpublicity ~~market~~generated ~~price~~by ~~from~~the ~~December~~Lancer ~~31,~~proceedings ~~2002 resulted~~or ingeneral anmarket ~~income~~concerns ~~adjustment~~about ofthe ~~$1,091,000~~possible ~~for~~actions by the ~~year~~receiver ~~ended December~~with ~~31,~~respect ~~2003,~~to ~~reversing~~portfolio ~~previously~~securities ~~recorded~~held ~~compensation~~by ~~expense, in 2002~~Lancer. As ~~long~~In asaddition, ~~the~~on ~~Replacement~~November ~~Options remain outstanding~~4, 2003 the ~~compensation~~receiver ~~expense remains~~announced ~~subject~~that tohe ~~ongoing~~had ~~quarterly~~appointed ~~adjustments~~DDJ ~~based~~Capital onto ~~changes~~actively inmanage the ~~market price~~Lancer ofportfolio ~~the Company's common stock~~securities.

16Stock-Based Compensation.

~~Magic~~ Although ~~Lantern~~the ~~Group,~~Company ~~Inc.~~follows APB Opinion 25, ~~formerly~~Accounting ~~JKC~~for ~~Group,~~Stock ~~Inc.~~Issued to Employees, and ~~previously~~ ~~Stage~~has IIelected ~~Apparel~~to ~~Corp.~~account (for options issued under employee stock option plans based on the disclosure only alternative provided in Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("~~Company~~FAS 123"), ~~was~~as ~~engaged~~amended by FAS 148, the disclosure only alternative is not an available accounting method for ~~over~~the 20Replacement Options. See "Equity Infusion" below. Under FAS ~~years primarily~~123, asthe aReplacement ~~distributor~~Options ofmust ~~proprietary~~be ~~and~~valued ~~licensed~~on ~~brand~~a ~~name~~quarterly ~~casual apparel~~basis, ~~activewear~~and the compensation cost must be recognized and ~~collection~~adjusted ~~sportswear~~quarterly for ~~men~~vested ~~and~~options ~~boys~~or ratably over the vesting period for unvested options. InReplacement ~~response~~Options tocovering a ~~decline~~ intotal ~~its~~of ~~apparel~~1,762,000 ~~distribution~~shares ~~operations,~~of the Company's ~~elected~~common tostock ~~contract those~~were ~~operations~~fully vested on issuance and are exercisable at prices ranging from $.30 to ~~third~~$.50 ~~parties~~per ~~during~~share. ~~the~~Based ~~last~~on ~~two~~the ~~years~~AMEX asclosing ~~part~~price of a$1.70 per ~~strategy~~ share for the common stock on December 31, 2002, the Company recorded compensation expense of ~~reducing~~$2,239,000 for the ~~costs~~year ~~and~~then ~~inventory~~ended, ~~risks~~reflecting ~~associated~~the ~~with~~difference ~~its historical~~between ~~core~~the ~~business~~aggregate exercise price of the Replacement Options and ~~repositioning~~the market price of the underlying shares. On December 31, 2003, the closing price of the Company's ~~through~~common ~~one~~stock oron ~~more acquisitions~~the AMEX was $.99 per share. The decrease in market price from December 31, ~~with~~2002 aresulted ~~view~~in ~~toward~~an ~~expanding~~income ~~existing~~adjustment ~~licensing~~of ~~operations~~$1,091,000 ~~and adding~~for ~~compatible~~the ~~business~~year ~~lines~~ended (December 31, 2003, reversing previously recorded compensation expense, in 2002. On December 31, 2004, the ~~"Business~~closing ~~Redirection")~~price of the Company's common stock on the AMEX was $0.45 per share. The decrease in the closing price resulted in an income adjustment of $951,000 for the year ended December 31, 2004. As long as the Replacement Options remain outstanding, the compensation expense remains subject to ongoing quarterly adjustments based on changes in the market price of the Company's common stock.

~~Business~~[ ~~Redirection~~remainder of page left intentionally blank]

Licensing

Equity Infusion

The AOG Transactions were approved by the Company's shareholders at a special meeting on December 27, 2001 and were completed on April 16, 2002 following American Stock Exchange ("AMEX") approval of its additional listing application for the new shares. The shares acquired by AOG and an additional 2.1 million shares issued to its advisor as part of the AOG Transactions represented 83% and 6%, respectively, of the Company's common stock outstanding after the closing of the AOG Transactions. In addition to the equity infusion, the reconstitution of the Company's board of directors with AOG designees as part of the AOG Transactions added substantial expertise to assist in the planned Business Redirection.

Magic Lantern Acquisition

AMEX Listing

Registration statement.

Results of Operations

Results of operations for the year ended December 31, ~~2003~~ 2004 and ~~2002~~2003 ~~(Results for the year ended December 31, 2002, include the results of Magic Lantern for the period from November 7, 2002 to December 31, 2002).~~

Seasonality.

~~Sale~~Following the acquisition of ~~Western~~Magic ~~Dubbing~~Lantern ~~Operations~~in 2002, our business shifted to video dubbing and distribution of video and electronic based educational and learning content ("Education and Distribution"). A significant portion of these sales are made to libraries and educational institutions, as such, we expect revenues to be cyclical based on varying fiscal budgets across Canada as well as seasonal due to the traditional school year, leaving the summer void of educational sales. Third quarter revenues to educational institutions have historically been lower by approximately 15% due to the school break in July and August.

18 Sale of Western Dubbing Operations

~~Years~~ On ~~Ended~~November ~~December~~28, 312003, the Company completed it previously announced sale of its Western dubbing operations (the "Image Media"), located in Vancouver, British Columbia, to a company controlled by a former employee. Management's decision to sell Image Media was based on the realization that the market for analog duplications services was shrinking and shifting towards digital format, which would have required significant investment in new duplication technologies. Cost of sales as a percentage of net sales was 55% and 53% for 2003 and 2002, respectively. Sales and cost of sales for 2003 were lower than 2002 due in part to the shrinking market for analog duplication services and 11 months of operations in 2003 compared to 12 months operations in 2002. Gross proceeds to the Company from the sale of Image Media were approximately $143,000. Also in connection with the sale of Image Media, the Company closed it office in Vancouver, locating remainin g employees to home office environments. Management is of the opinion that the sale of Image Media and the closure of the Vancouver office will reduce operating costs, while not negatively impacting future results. The Company continues to provide dubbing services at its Oakville, Ontario and Saint John's, New Brunswick offices.

Years Ended December 31, 2004 and 2003

Net sales were $2,762,000 for the year ended December 31, 2004, compared to $2,871,000 for 2003. The comparable slight decrease 4% in net sales primarily reflects an elimination of the Company's British Columbia based dubbing operations ("Dubbing West") which were sold in November 2003. Sales gains in other operations did not make up the loss of Dubbing West sales of $442,000 in the 2003 Period, and the operating costs associated with its operations were eliminated. During the first quarter of 2004, the Company created and staffed an inside telesales unit to directly market to its customers and installed a Customer Relationship Management system to support the inside sales unit. In addition, the Company added a content preview function and an e-commerce module to the www.magiclantern.ca website to allow its customers to select and order product online. The Company continues to build out these sales capabilities to ensure they are up to full strength for the fall back-to-school selling season. During the year ended December 31, 2004 and 2003, all revenues were derived from Education and Distribution.

Cost of goods sold decreased to $899,000 in 2004 compared to $1,209,000 in the same period last year, reflecting improved margins realized in the distribution sector versus the Company's lower margin Dubbing West business which it owned during the comparable period of 2003. Cost of goods sold as a percentage of net sales for the 2004 Period was 32% and 42% for the 2003 Period.

SG&A expenses of $4,998,000 for 2004 increased by $1,133,000 from $3,865,000 for 2003. Principal SG&A expenses are comprised of professional fees, salaries and benefits, advertising and promotion, costs associated with public company listing, reporting, compliance, occupancy costs and substantial expenses associated with the various financings that took place during the year.

Interest expense, net of interest income, aggregated $9,194,000 in 2004 compared to $354,000 in 2003, reflecting accrued interest on debt for 2004, as follows: $100,000 pertaining to Zi Corporation's $2 million, 5% note; $5,716,000 relating to the effective interest accrued on promissory notes in connection with the note/warrants issued in the second quarter of 2004, premium paid on early extinguishment of debt and intrinsic value attributed to the convertible beneficial feature of the debt instrument; $3,009,000 relating to the effective interest accrued on promissory notes in connection with the note/warrants issued in the fourth quarter of 2003, premium on extinguishment of debt and value attributed to the warrants as consideration of extinguishment of promissory notes; $39,000 on the Provincial Holdings Ltd. 6.75% note of $623,000 (Can $ 750,000); $220, 000 reflecting a fair value premium on the issuance of shares; $50,000 pertaining to the discount and interest accrued on the term promissory note issued reflecting the and approximately $27,000 of interest expense incurred on bank financing.

The Company recognized a net non-cash adjustment of $740,000 at December 31, 2004, of which, $951,000 reflects the compensation component of the Replacement Options issued as part of the AOG Transactions in April 2002 and $211,000 reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern on November 7, 2002.

For the comparative period in 2003, a net non-cash adjustment of $1,091,000 at December 31, 2003, of which, $1,251,000 reflects the compensation component of the Replacement Options issued as part of the AOG Transactions in April 2002 and $160,000 reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern.

The charge on the Replacement Options is based on the difference between the aggregate exercise price of the Replacement Options and the market value of the underlying shares on December 31, 2004.

During the year ended December 31, 2004, the Company recorded an impairment charge of approximately $3,000,000 on the goodwill as it was deemed by management and testing to be impaired. The remaining balance of goodwill on the balance sheet is $2,830,000.

The Company realized net loss of $15,899,000 or $.24 per share based on 67.3 million average shares outstanding for 2004, compared to a net loss of $2,255,000 or $.03 per share recognized in 2003 based on approximately 66.5 million average shares outstanding. Total shares outstanding as at December 31, 2004 and 2003 were 73,299,000 and 66,797,000, respectively. The operating loss for the year ended December 31, 2004 was $6,705,000 compared to $1,901,000 for 2003..

Years Ended December 31, 2003 and 2002

Net sales were $2,871,000 for the year ended December 31, 2003, compared to $386,000 for 2002. The increase primarily reflects a full year of operation of Magic Lantern's Education and Distribution business in 2003 compared to approximately two months in 2002. During the first quarter of 2003, the Company created and staffed an inside telesales unit to directly market to its customers and installed a Customer Relationship Management system to support the inside sales unit. In addition, the Company added a content preview function and an e-commerce module to the www.magiclantern.ca website to allow its customers to select and order product online. The Company continues to build out these sales capabilities to ensure they are up to full strength for the fall back-to-school selling season. During the year ended December 31, 2003, all revenues were derived from Education and Distribution. During the year ended December 31, 2002, $21,000 of revenues were derived from Apparel Distribution and $365,000 of revenues were derived from Education and Distribution.

Cost of goods sold increased to $1,209,000 in 2003 compared to $188,000 in the same period last year, reflecting a full year of operations of Magic lantern's Education and Distribution business. Education and Distribution accounted for $153,000 of cost of goods sold in 2002. Cost of goods sold as a percentage of net sales for Education and Distribution was 42.1% for the year ended December 31, 2003 compared with 48.7% for the year ended December 31, 2002.

SG&A expenses of $3,865,000 for 2003 increased by $2,809,000 from $1,056,000 for 2002, reflecting a full year of operations of Magic lantern's Education and Distribution business. Principal SG&A expenses are comprised of professional fees, salaries and benefits, advertising and promotion, costs associated with public company listing, reporting, and compliance, and, occupancy costs.

Interest expense, net of interest income, aggregated $354,000 in 2003 compared to $43,000 or in 2002, reflecting accrued interest on debt for 2003, as follows: $143,000 pertaining to Zi Corporation's $2 million, 5% note; $155,000 relating to the effective interest accrued on promissory notes in connection with the notes/warrants issued in the fourth quarter of 2003; $45,000 on the Provincial Holdings Ltd. 6.75% note of $580,000 (Can $ 750,000); and approximately $20,000 of interest expense incurred on bank financing. The Company recognized a net non-cash adjustment of $1,091,000 at December 31, 2003, of which, $1,251,000 reflects the compensation component of the Replacement Options issued as part of the AOG Transactions in April 2002 and $160,000 reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern on November 7, 2002. ~~For~~F or the comparative period in 2002, a net non-cash charge of $2,239,000, of which, $2,119,000 reflects the compensation component of the Replacement Options and $120,000 reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern. The charge on the Replacement Options is based on the difference between the aggregate exercise price of the Replacement Options and the market value of the underlying shares on December 31, 2003. See "Business Redirection - Stock-Based Compensation." The Company recorded a gain of $526,000 net of legal expenses recorded in the second quarter of 2002 on settlement of the Company's litigation against the domestic licensee of its Cross Colours trademark. See "Business Redirection - Licensing."

During the year ended December 31, 2002, the Company recorded an impairment charge of approximately $181,000 (the remaining balance) on the trademark as it was deemed by management to be worthless.

The Company realized net loss of $2,255,000 or $.03 per share based on 66.5 million average shares outstanding for 2003, compared to a net loss of $2,841,000 or $.09 per share recognized in 2002 based on approximately 31.6 million average shares outstanding. Total shares outstanding as at December 31, 2003 and 2002 were 66,797,000 and 66,147,000, respectively. The operating loss for the year ended December 31, 2003 was $1,901,000 compared to $2,888,000 for 2002, of which $376,000 relates to Magic Lantern for the period from November 7, 2002 to December 31, 2002.

Years Ended December 31, 2002 and 2001

Cost of goods sold decreased to $188,000 in 2002 compared to $3,068,000 in 2001, reflecting off-price sales of discontinued brands as part of the Company's efforts to reduce inventory and position itself to implement the Business Redirection. Education and Distribution accounted for $153,000 of cost of goods sold in 2002. Cost of goods sold as a percentage of net sales for Education and Distribution was 41.9%.

SG&A expenses of $1,056,000 for 2002 decreased by 11.6% from $1,195,000 for 2001, primarily reflecting an increase of $546,000 following the acquisition of Magic Lantern coupled with a contraction of $904,000 of the Company's apparel distribution business as part of the Business Redirection.

Interest expense, net of interest income, aggregated $43,000 in 2002 compared to $218,000 or 7.6% of sales in 2001, reflecting repayment of outstanding indebtedness and fees under the Company's credit facility with its factor. See "Liquidity and Capital Resources - Capital Resources."

The Company recognized a net non-cash charge of $2,239,000 at December 31, 2002, of which, $2,119,000 reflects the compensation component of the Replacement Options issued as part of the AOG Transactions in April 2002 and $120,000 reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern. The charge on the Replacement Options is based on the difference between the aggregate exercise price of the Replacement Options and the market value of the underlying shares on December 31, 2002. See "Business Redirection - Stock-Based Compensation." The Company recorded a gain of $526,000 net of legal expenses recorded in the second quarter of 2002 on settlement of the Company's litigation against the domestic licensee of its Cross Colours trademark. See "Business Redirection - Licensing."

During the year ended December 31, 2002, the Company recorded an impairment charge of approximately $181,000 (the remaining balance) on the "Cross Colours" trademark as it was deemed by management to be worthless.

The Company realized net loss of $2,841,000 or $.09 per share based on 31.6 million average shares outstanding for 2002, compared to a net loss of $2,944,000 or $.72 per share recognized in 2001 based on 4.1 million average shares outstanding. The operating loss for the year ended December 31, 2002, was $2,888,000, of which $376,000 relates to Magic Lantern for the period from November 7, 2002 to December 31, 2002, compared to an operating loss of $2,795,000 in the year ended December 31, 2001.

Liquidity and Capital Resources

Liquidity. The Company's cash position decreased to $~~465~~351,000 at December 31, ~~2003~~2004 compared to $~~696~~465,000 at December 31, ~~2002. During the year ended December 31,~~ 2003, the Company received $1,184,000 upon the issuance of promissory notes payable, with detachable warrants $260,000, net of issue costs of approximately $40,000 in exchange for 600,000 units consisting of one share of common stock of the Company and one warrant exercisable into one share of common stock of the Company, and $14,000 upon the exercise of stock options. For the year ended December 31, 2003, the Company used approximately $1,576,000 of cash to fund continuing operational requirements and approximately $113,000 and $263,000 for the purchase of fixed assets and for the capitalization of software development costs, respectively. During the third quarter, the Company invested approximately $222,000 (Can $300,000) in a Guaranteed Investments Certificates ("GIC") which is highly liquid investment available for withdrawal by the Company upon request. The GIC has been pledged as security for a line of credit, of which $104,000 has been drawn upon, and disclosed as bank indebtedness on the balance sheet, as at December 31, 2003.

20As of April 21, 2005 the Company's cash position was $313,000 which, given the Company's debt obligations and accounts payable obligation would provide for continuing operations until June 30, 2005. The Company has aggressively sought out sources of capital infusion in both private equity and debt infusion. Management has pursued virtually all possible avenues to raise additional capital and the overwhelming hurdle has been the on-going losses since the Company's inception and its current debt position. Potential investors have significant interest in the technology offered by the Company's subsidiary, Sonoptic Technologies, Inc. located in New Brunswick and its VideoBase™ indexing and meta-tagging utility. The Company's core legacy business is of little or no interest to the investment community. In fact, it is a roadblock to investors looking for leading or cutting edge technology that has potent ially significant upside potential.

~~Execution of Magic Lantern's business plan business will require capital resources substantially in excess of the Company's current cash reserves. To access the necessary capital needed~~Further, ~~Management is currently pursuing strategies with~~ the ~~goal of raising $1 million to $3 million during the first two quarters of 2004 in the form of debt and/or equity investments. Furthermore, the~~ Company ishas ~~exploring~~no ~~additional~~other ~~cost-cutting~~sources ~~measures to bring expenses in line with revenues. On November 2, 2003, in line with cost-cutting measures, the Company entered into a Purchase and Sale Agreement (the "Agreement") to dispose~~ of ~~its~~liquidity ~~dubbing~~at ~~assets located in~~ its ~~Vancouver British Columbia office~~disposal. ~~Gross proceeds to the Company were approximately $143,000. The Company completed its sale of the dubbing business on November 28, 2003.~~

~~For~~During the year ended December 31, 2003, the Company ~~spent~~ received $1,184,000 upon the issuance of promissory notes payable, with detachable warrants $260,000, net of issue costs of approximately $~~203~~40,000 onin ~~professional~~exchange ~~fees~~for 600,000 units consisting of one share of common stock of the Company and ~~certain~~one warrant exercisable into one ~~time~~share of common stock of the Company, and $14,000 upon the exercise of stock options. For the year ended December 31, 2003, the Company used approximately $1,576,000 of cash to fund continuing operational requirements and approximately $113,000 and $263,000 for the purchase of fixed assets and for the capitalization of software development costs, ~~including one~~respectively. ~~litigation~~During ~~settlement~~the third quarter, the Company invested approximately $222,000 (Can $300,000) in a Guaranteed Investments Certificates ("GIC") which is highly liquid investment available for withdrawal by the ~~amount~~Company upon request. The GIC has been pledged as security for a line of credit, of which $10104,000 has been drawn upon, and disclosed as bank indebtedness on the balance sheet, as at December 31, 2003.

At Execution ~~December 31,~~of ~~2002,~~Magic ~~the~~Lantern's ~~Company~~business ~~had~~plan ~~outstanding~~will ~~notes payable~~require ~~for~~capital ~~$176,000~~resources tosubstantially R.in ~~Siskind~~excess ~~and Company, Inc., an apparel company owned by Richard Siskind, the President and a director~~ of the Company's ~~("RSC").~~current ~~The notes~~cash ~~evidenced~~reserves. ~~indebtedness~~To toaccess ~~RSC for advances used by~~ the ~~Company~~necessary ~~primarily for~~capital ~~acquired~~needed, ~~apparel~~Management ~~inventory.~~pursued Instrategies ~~April~~with ~~2002,~~ the ~~Company~~goal ~~accepted~~of araising ~~settlement offer~~$1 ofmillion to $~~535,000~~3 inmillion ~~its~~during ~~litigation~~2004 ~~against~~in the ~~domestic~~form ~~licensee~~ of ~~its~~debt ~~Cross~~and/or ~~Colours~~equity ~~trademark~~investments. ~~The Company received an installment of $335~~Furthermore,~~000~~ at the ~~time~~Company ofexplored ~~settlement.~~additional Incost-cutting ~~accordance~~measures ~~with~~to ~~the~~bring ~~terms~~expenses ofin ~~the~~line ~~agreement~~with ~~for~~revenues. ~~the AOG~~On ~~Transactions~~November ~~(see 10-K~~2, ~~December 31~~2003, ~~2002),~~in ~~the~~line ~~Company~~with ~~applied~~cost-cutting ~~$328~~measures,~~000~~ of the ~~settlement~~Company ~~proceeds~~entered tointo ~~reduce~~a ~~its~~Purchase ~~obligations~~and ~~under~~Sale ~~its~~Agreement ~~notes~~(the ~~payable~~"Agreement") to ~~RSC and~~dispose ~~assigned~~of ~~RSC~~ its ~~rights~~dubbing toassets ~~the~~located ~~deferred settlement installment~~ in ~~satisfaction~~ of its ~~remaining~~Vancouver ~~obligations~~British ~~under~~Columbia ~~the notes~~office. InGross ~~January,~~proceeds ~~2003~~to the ~~remaining~~ ~~balance~~Company ofwere approximately $~~200~~145,000. ~~was~~The ~~received~~Company bycompleted ~~RSC~~its ~~and~~sale ~~applied~~of tothe ~~fully~~dubbing ~~offset the~~business ~~notes~~on ~~payable~~November to28, ~~RSC~~2003.

At December 31, 2002, the Company had outstanding notes payable for $176,000 to R. Siskind and Company, Inc., an apparel company owned by Richard Siskind, the President and a director of the Company ("RSC"). The notes evidenced indebtedness to RSC for advances used by the Company primarily for acquired apparel inventory. In April 2002, the Company accepted a settlement offer of $535,000 in its litigation against the domestic licensee of its Cross Colours trademark. The Company received an installment of $335,000 at the time of settlement. In accordance with the terms of the agreement for the AOG Transactions (see 10-K, December 31, 2002), the Company applied $328,000 of the settlement proceeds to reduce its obligations under its notes payable to RSC and assigned RSC its rights to the deferred settlement installment in satisfaction of its rema ining obligations under the notes. In January, 2003 the remaining balance of $200,000 was received by RSC and applied to fully offset the notes payable to RSC.

In accordance with the terms of the Purchase Agreement, Zi converted to, equity prior to the closing, all of its advances to the Lantern Group then outstanding and made an additional contribution to the capital of Magic Lantern required to increase Magic Lantern's cash position to approximately $300,000 at the time of the closing, resulting in a post-acquisition consolidated cash position of approximately $1 million.

Following the acquisition of Magic Lantern to December 31, 2002, the Company invested in property, equipment, and intangible assets in the aggregate amount of $91,000 and spent approximately $200,000 to fund operations.

The purchase price for the Magic Lantern acquisition included a three-year note issued by the Company to Zi at the closing of the Lantern Group Transactions on November 7, 2002 in the principal amount of $3,000,000, bearing interest at 5% per annum (the "Lantern Purchase Note"). Additional stock and cash consideration were payable if operating results of Magic Lantern had met certain revenue and cash flow targets for the first twelve months after the closing (the "Performance Period").

As the Lantern Revenues during the Performance Period were less than $5 million, no additional consideration will be paid to Zi and accordingly, the Note was reduced by $1 million, effective November 7, 2003. The reduction of the Note also resulted in a goodwill adjustment for the year ended December 31, 2003 in the amount of $1 million.

Capital Resources. Execution of Magic Lantern's business plan and the Company's branding strategies for its ongoing trademark licensing business may require capital resources substantially in excess of the Company's current cash reserves. Magic Lantern has historically relied on advances from its parent companies to address shortfalls in its working capital requirements.

Going concern. The Company's cash position as at April 21, 2005 was approximately $313,000, which at the current rate of operating activity is insufficient to cover operating costs to June 30, 2005. The Company's working capital deficiency at December 31, 2004 was approximately $6,030,000, which has worsened since December 31, 2003. Historically, the Company has sought financing from its major shareholders and, at present, is in negotiations with multiple potential investors to provide financing in the amount of approximately $1.0 million, which will provide cash to fund its current business plan, including its investment in its digitization program and based on the Company's increasing revenue stream will fund the Company for at least 5 months. Failing shareholder support and a longer-term financing solution, the sources of capital available to the C ompany include reduction of discretionary investments in the digitization program and sales and marketing programs designed to increase revenue over the next twelve months. Specifically, the Company could elect to shut down the operations of TutorbuddyTM and Sonoptic, which on a monthly basis would result in cash savings of approximately $10,000 but would involve expenditures to realize those savings. If the Company is unable to raise long-term financing it raises substantial doubt about its ability to continue as a going concern.

Going concern.

During 2003, the Company made application to the American Stock Exchange to issue a maximum of six million units. Each unit comprised of one common share at $0.50 per share and a three-year warrant, to purchase an additional common share, at $0.60 per share. As of December 31, 2003, 600,000 units had been subscribed for totaling $300,000, which had been received by the Company. On July 9, 2003, stock certificates representing the 600,000 shares were issued. During the year ended December 31, 2003, the Company received $1,198,000 upon the issuance of promissory notes

Capital requirements for ~~2004~~2005 also include, in part, the repayment of an approximate $~~580~~623,000 (CDN $750,000) loan, excluding accrued interest, by Sonoptic to its 25% shareholder, the Minister of Business New Brunswick, (formerly, Provincial Holdings Ltd.), unless extended. The Company is currently in the process of renegotiating the terms of the loan, which was due on September 30, 2003, and has received a no default letter from the Minister of Business New Brunswick, dated October 3, 2003. Although annual extensions of the loan maturity date have been granted in the past there can be no assurance that the loan will be renewed and on terms favorable to the Company.

Off-Balance Sheet Arrangements

The Company is not party to any material off-balance sheet arrangements.

Contractual Obligations and Commercial Commitments

The Company and its subsidiaries are parties to various leases related to office facilities and certain other equipment. We are also obligated to make payments related to our long term borrowings (see notes 98 and 13 12 to the financial statements).

The minimum commitments under non-cancelable operating leases consisted of the following at December 31, ~~2003~~2004:

(In thousands)

	Office Equipment	Premises	Total
2004	$ 18	$ 227	$ 245
2005	$ 45	$ 189	$ 234
2005	14	152	166
2006	40	190	230
2006	8	160	168
2007	29	190	219
2007	3	122	125
2008	22	124	146
2008	--	119	119
2009 and thereafter	19	47	66
2009	--	99	99
	$ 155	$ 740	$ 895
	$ 43	$ 879	$ 922

23 The cash flows of principal repayments of long term debt obligations consist of the following at December 31, 2004:

The cash flows of principle repayments of long term debt obligations consist of the following at December 31, 2004:

(In thousands)

2004	$ 759
2005	$ 2,924
2005	2,007
2006	145
2006	3
2007	62
2007	2
2008	9
2008	--
2009	--
	$ 2,771
	$ 3,140

The Promissory notes payable are due ~~September~~November and ~~November~~December, ~~2004,~~ 2005 in the amounts of $12,~~120~~000,000 and $~~200~~997,000, respectively, unless extended by the note-holders. ~~for~~The $997,000 anote ~~further~~is 18denominated ~~months~~in Canadian dollars (CAD$1,200,000). Interest will accrete monthly increasing the amount disclosed on the balance sheet of $~~572~~932,000 to the face value of the debt in the amount of $1997,~~320,~~000. Of the $1.3 million, $387,000 of the notes are denominated in Canadian dollars (CAD$500,000), the remaining $950,000 in USD. As security for the Notes, Zi Corporation, a major shareholder has agreed to place in escrow 6 million common shares of the Company. Attached to the Notes are 1 150,~~450,~~000 warrants (the "Warrants"), exercisable for a period of three years at an exercise price of $.25 for each $1.00 invested. Of the proceeds received, $~~764~~65,000 was allocated to Warrants, based on their estimated fair value, as determined using the Black-Scholes model, using a volatility of 46183.3010%, a risk-free interest rate of 2.28%, an expected useful life of three years, and expected dividend yield of zero percent. Notes payable were recorded at $~~572~~913,000, representing a discount to the maturity value of $1997,~~320,~~000. This resulted in an ~~effective~~effect ive interest rate on the ~~Notes~~Note payable of 956.89% ~~and 175% (on the US Dollar and Canadian Dollar denominated portions, respectively)~~.

Certain note-holder has agreed to extend matured note payable beyond its maturity date of December 2004. In consideration, the note will earn 2% per month payable in arrears compounded monthly. The $415,000 note is denominated in Canadian dollars (CAD$500,000).

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses and related disclosure of contingent assets and liabilities. On an ongoing basis management evaluates its estimates, including those related to the allowance for doubtful accounts and impairment of long-lived assets. Management bases its estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances, the results of which form a basis for making judgments about 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, however, management believes that its estimates, including those for the above described items, are reasonable and that the actual results will not vary significantly from the estimated amounts.

The following critical accounting policies relate to the more significant judgments and estimates used in the preparation of the consolidated financial statements:

Allowance for doubtful accounts: .

~~Goodwill, Intangible Assets and Long Lived Assets:~~ The Company ~~evaluates~~maintains ~~the~~an ~~carrying~~allowance ~~value~~for ofdoubtful ~~its~~accounts ~~long-lived~~for ~~assets,~~estimated ~~consisting primarily~~losses ofresulting ~~identifiable~~from ~~intangible~~customers ~~assets, and property, plant and equipment, whenever certain events~~ or ~~changes~~other inparties ~~circumstances~~failure ~~indicate~~to ~~that~~make ~~the~~payments ~~carrying amount~~on oftrade ~~these~~receivables ~~assets~~due ~~may not be recoverable. Such events or circumstances include, but are not limited~~ to, ~~a significant decline in~~ the Company~~'s market value, significant reductions in projected future cash flows or gross margins, or macroeconomic factors including a prolonged economic downturn~~. InThe ~~assessing the~~estimates ~~recoverability~~ of ~~long-lived~~this ~~assets,~~allowance ~~the Company compares the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows~~ is ~~less than the carrying amount of the assets, the Company will be required to write down such assets~~ based on ~~the~~ ~~excess of the carrying amount over the fair value of the assets. Fair value is generally determined by calculating the discounted future cash flows using~~ a ~~discount~~ ~~rate~~number ~~based upon the weighted average cost~~ of ~~capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows~~factors, including ~~gross~~: ~~profit~~(1) ~~margins~~historical experience, ~~long-term~~(2) ~~forecasts~~aging of the ~~amounts~~trade ~~and~~accounts ~~timing of overall market growth and the Company's percentage of that market~~receivable, ~~groupings~~(3) ofspecific ~~assets, discount~~information ~~rates~~obtained ~~and~~by ~~terminal growth rates. In addition, significant estimates and assumptions are required in~~ the ~~determination~~Company ofon the ~~fair~~financial ~~value~~condition of ~~our tangible long-lived assets~~customers, ~~including replacement cost, economic obsolescence,~~ and ~~the value~~(4) ~~that~~specific ~~could~~agreements ~~be realized in liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring the Company to write-down~~ or ~~write-off~~negotiated ~~long-lived~~amounts ~~assets~~with customers.

~~Although the company does not now believe that its existing long-lived assets will be impaired in the future~~Goodwill, weIntangible ~~continue~~Assets toand ~~periodically evaluate our long-lived assets for impairment in accordance with SFAS 144, "Accounting for the Impairment or Disposal of~~ Long Lived Assets~~," and acknowledge it is at least possible that such evaluation might result in future adjustments for impairment. Such an impairment might adversely affect our operating results.~~

The Company evaluates the carrying value of its long-lived assets, consisting primarily of identifiable intangible assets, and property, plant and equipment, whenever certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Such events or circumstances include, but are not limited to, a significant decline in the Company's market value, significant reductions in projected future cash flows or gross margins, or macroeconomic factors including a prolonged economic downturn. In assessing the recoverability of long-lived assets, the Company compares the carrying value to the undiscounted future cash flows the assets are expected to generate. If the total of the undiscounted future cash flows is less than the carrying amount of the assets, the Company will be required to write down such assets based on the excess of the carrying amount over the fair value of the assets. Fai r value is generally determined by calculating the discounted future cash flows using a discount rate based upon the weighted average cost of capital. Significant judgments and assumptions are required in the forecast of future operating results used in the preparation of the estimated future cash flows, including gross profit margins, long-term forecasts of the amounts and timing of overall market growth and the Company's percentage of that market, groupings of assets, discount rates and terminal growth rates. In addition, significant estimates and assumptions are required in the determination of the fair value of our tangible long-lived assets, including replacement cost, economic obsolescence, and the value that could be realized in liquidation. Changes in these estimates could have a material adverse effect on the assessment of our long-lived assets, thereby requiring the Company to write-down or write-off long-lived assets.

During the year the Company had an independent valuator evaluate and advise to the potential impairment of the intangible assets and goodwill under US GAAP. In the opinion of the independent valuator an impairment loss to intangible assets and goodwill exists, the Company recorded $20,000 and $3,000,000 respectively for this impairment.

We will continue to periodically evaluate our long-lived assets for impairment in accordance with SFAS 144, "Accounting for the Impairment or Disposal of Long Lived Assets," and acknowledge it is at least possible that such evaluation might result in future adjustments for impairment. Such an impairment might adversely affect our operating results.

Revenue Recognition

We recognize revenue in accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," as amended by SAB 101A and 101B and as revised by SAB 104, "Revenue Recognition" and Statement of Position No. 97-2, "Software Revenue Recognition."

Accordingly, we recognize revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectibility of those fees. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected.

We generate revenues mainly in two ways - Internet-based licensing and product sales. Internet revenues consist primarily of license fees that usually consist of an annual, up-front fee that is initially recorded as deferred revenue. This revenue is recognized ratably over the term of the license agreement beginning after delivery has occurred, upon customer acceptance or live date and, when we have determined that the fees from the agreement are fixed and determinable and there are no significant return or acceptance provisions. For Internet revenue arrangements in which we sell through a reseller, we do not recognize any revenue until an agreement has been finalized between the customer and our authorized reseller and the content has been delivered to the customer by our reseller. Revenue is not recognized under any circumstances, unless collectibility is deemed probable. Revenues from product sales represent the sales of analog media products and other offline products and revenues earned under certain royalty agreements. Revenues from product sales are generally recognized at the time title passes to customers, distributors or resellers. Revenues from royalty agreements are recognized as earned based upon performance or product shipment.

Stock-Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations in accounting for stock options and awards. Accordingly, no compensation costs for stock options is included in operating results since all awards were made at exercise prices at or above their fair value on the dates of grants.

In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, amending FASB Statement No. 123, Accounting for Stock Based Compensation." This statement amends SFAS No. 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on operating results of an entity's accounting policy decisions with respect to stock-based employee compensation. SFAS No. 148 also amends APB 28, "Interim Financial Reporting" to require disclosure about those effects in interim Financial information. We adopted the disclosure provisions for the year ended December 31, 2002.< /P>

The following table illustrates the effect on results of operations if the Company had applied the fair value recognition provisions of SFAS No. 123.

(In thousands)
	Year Ended December 31,
	2003		2002		2001
Net loss -- as reported	$	(2,255)	$	(2,841)		(2,977)
Net loss -- pro forma		( 2,422)		(2,919)		(3,029)
Loss per share -- as reported		(.03)		(.09)		(.72)
Loss per share -- pro forma		(.04)		(.09)		(.73)

(In thousands)
	Year Ended December 31,
	2004		2003		2002
Net loss -- as reported	$	(15,899)	$	(2,255)	$	(2,841)
Net loss -- pro forma		(16,244)		(2,422)		(2,919)
Loss per share -- as reported		(.24)		(.03)		(.09)
Loss per share -- pro forma		(.24)		(.04)		(.09)

Forward Looking Statements

This Report includes forward looking statements within the meaning of Section 21E of the Securities Exchange Act relating to matters such as anticipated operating and financial performance, business prospects, developments and results of the Company. Actual performance, prospects, developments and results may differ materially from anticipated results due to economic conditions and other risks, uncertainties and circumstances partly or totally outside the control of the Company, including risks of inflation, fluctuations in market demand for the Company's products, changes in future cost of sales, customer and licensee performance risks, trademark valuation intangibles and uncertainties in the availability and cost of capital. Words such as "anticipated," "expect," "intend," "plan" and similar expressions are intended tot o identify forward looking statements, all of which are subject to these risks and uncertainties.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

General

The Company does not hold any derivative securities or other market rate sensitive instruments.

~~Exchange~~ Our ~~Rate~~Consolidated ~~Risks~~financial statements are prepared in U.S. dollars, while our Canadian operations are conducted in Canadian currency. The company is subject to foreign currency exchange rate fluctuations in the Canadian dollar value of foreign currency-denominated transactions.

~~Magic~~Exchange ~~Lantern~~Rate pays a number of its content suppliers in U.S. dollars. Therefore, fluctuations in the value of the Canadian dollar against the U.S. dollar affects gross profit as well as net income. If the value of the Canadian dollar falls against the U.S. dollar, cost of sales will increase, reducing gross profit and net income. Conversely, if the value of the Canadian dollar rises against the U.S. dollar, gross profit and net income will increase. Based on its average annual net currency positions in 2003 and 2002, a 10% adverse change in average annual foreign currency exchange rates would not have been material to results reported in the consolidated financial statements for those periods. To date, we have not sought to hedge risks associated with fluctuations in exchange rates and therefore we continue to be subject to such risks. In the future, we may undertake such transactions. However, any hedging techniques implemented in such regard might not be successful in eliminating or reducing the effects of currency fluctuations.Risks

~~Interest~~ Magic ~~Rate~~Lantern ~~Risks~~pays a number of its content suppliers in U.S. dollars. Therefore, fluctuations in the value of the Canadian dollar against the U.S. dollar affects gross profit as well as net income. If the value of the Canadian dollar falls against the U.S. dollar, cost of sales will increase, reducing gross profit and net income. Conversely, if the value of the Canadian dollar rises against the U.S. dollar, gross profit and net income will increase. Based on its average annual net currency positions in 2004 and 2003, a 10% adverse change in average annual foreign currency exchange rates would not have been material to results reported in the consolidated financial statements for those periods. To date, we have not sought to hedge risks associated with fluctuations in exchange rates and therefore we continue to be subject to such risks. In the future, we may undert ake such transactions. However, any hedging techniques implemented in such regard might not be successful in eliminating or reducing the effects of currency fluctuations.

~~Magic~~Interest ~~Lantern~~Rate had various loans outstanding at December 31, 2003, excluding the Promissory notes payable (see - Contractual Obligations and Commercial Commitments), with an aggregate principal amount of approximately $2,606,000. Of this indebtedness, loans in the aggregate outstanding principal amount of $2,000,000 and $580,000 were interest bearing at a fixed rate of 5.00 % and 6.75% per annum, respectively. The Company did not use any derivative financial investments to manage its interest rate exposure.Risks

26 Magic Lantern had various loans outstanding at December 31, 2004, excluding the Promissory notes payable (see - Contractual Obligations and Commercial Commitments), with an aggregate principal amount of approximately $2,646,000. Of this indebtedness, loans in the aggregate outstanding principal amount of $2,000,000 and $628,000 were interest bearing at a fixed rate of 5.00 % and 6.75% per annum, respectively. The Company did not use any derivative financial investments to manage its interest rate exposure.

Item 8. Financial Statements and Supplementary Data

Financial Statements and Supplementary Data

~~Changes~~ The infinancial ~~and~~statements ~~Disagreements~~of ~~with~~the ~~Accountants~~Company inare ~~Accounting and~~hereby ~~Financial~~attached ~~Disclosure~~to this document beginning on page F-1.

~~Not~~Changes ~~applicable.~~in and Disagreements with Accountants in Accounting and Financial Disclosure

~~Item~~ Not 9applicable. ~~Changes in and Disagreements with Accountants in Accounting and Financial Disclosure~~

~~None~~Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure

~~Item 9A. Controls and Procedures~~None

~~The~~Item ~~Company carried out an evaluation under the supervision and with the participation of our management, including Robert A~~9A. ~~Goddard~~Controls ~~our Chief Executive Officer~~ and Acting Chief Financial Officer, to determine the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on this evaluation, the Chief Executive Officer and the chief Financial Officer concluded that these controls and procedures are effective in their design to ensure that information required to be disclosed by the registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information has been accumulated and communicated to the management of the registrant, including the above indicated officers, as appropriate to allow timely decisions regarding the required disclosures. There has been no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.Procedures

~~Changes~~The Company carried out an evaluation under the supervision and with the participation of our management, including Robert A. Goddard our Chief Executive Officer and Ron Carlucci, Chief Financial Officer, to determine the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that these controls and procedures are effective in ~~Internal~~their ~~Controls~~design to ensure that information required to be disclosed by the registrant in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information has been accumulated and communicated to the management of the registrant, including the above indicated officers, as appropriate to allow timely decisions regarding the required disclosures. There has been no change in our internal control over financial reporting that occurred during the fourth quarter of fiscal year 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~There~~Changes ~~were no changes~~ in ~~the~~Internal Company's internal control over financial reporting that occurred during the quarter ended December 31, 2003 that has materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.Controls

~~PART~~There ~~III~~were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2004 that has materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

~~Item~~PART ~~10. Directors and Executive Officers of the Company~~III

~~The~~Item ~~information~~10. ~~regarding directors is contained under the captions "Election of~~ Directors" and ~~"Security~~Executive ~~Ownership~~Officers of ~~Certain Beneficial Owners and Management" in~~ the Company~~'s definitive Proxy Statement to be filed within 120 days of the end of our fiscal year and is incorporated herein by reference.~~

~~The~~ Richard ~~information~~Siskind ~~regarding~~- Director, 58, joined the Company's ~~code~~as ofPresident, ~~ethics;~~Chief ~~audit~~Executive ~~committee~~Officer and ~~audit~~ ~~committee~~director ~~financial~~in ~~experts~~May is1998 ~~contained~~and ~~under~~served ~~the~~as ~~captions~~President ~~"Corporate Governance~~ and ~~Board~~Chief ~~Matters"~~Executive inOfficer until the completion of the Company's ~~definitive~~acquisition ~~Proxy~~of ~~Statement~~Magic toLantern. ~~be filed~~He ~~within~~has ~~120 days~~been in the apparel business for over 30 years, serving in a variety of roles and positions. By 1977, Mr. Siskind had assumed the ~~end~~position of ~~our~~president ~~fiscal~~of ~~year~~David Small Industries, Inc. In 1982, he co-founded Apparel Exchange, Inc., an affiliated company. Both companies sold off-price men's, women's and ischildren's ~~incorporated~~apparel ~~herein~~ and reached sales aggregating over $100 million by ~~reference~~1989. Mr. Siskind sold both companies in 1989. In 1991, he founded R. Siskind & Co. He is a director, sole shareholder and chief executive officer of R. Siskind & Co., which is in the business of purchasing top brand name men's and women's apparel and accessories, and redistributing it to a global clientele of upscale off-price retailers.

27 Michael R. Mackenzie -Director , 48, has served as a director of the Company since November 2002, having also joined the Board in connection with Lantern Transactions. Mr. MacKenzie has been the Director General and Managing Partner of Champagne Jacquesson & Fils, Dizy since 1998. He. was the Director of Jefferies Pacific Limited, Hong Kong, from 1994 to 1997 and is the Chairman of Mayfair Cellars Group, London and of Tasmanian Vineyards Pty. Mr. MacKenzie has served as director of three of Zi Corporation's Bermuda subsidiaries since July 2000 and as a Director of The Lindsell Train Investment Trust PLC since 2000. Mr. MacKenzie has served as a director of Zi Corporation since June 2001.

~~The~~ Richard ~~executive~~Geist ~~officers~~- ofDirector, 61, has served on the ~~Company~~Board since 2002. He is President of The Institute of Psychology and Investing, ~~their~~a ~~ages~~management consulting firm he joined in 1994. He also publishes a micro-cap market newsletter, ~~their~~Richard ~~positions~~Geist's Strategic Investing, and ~~offices~~ ~~with~~writes independent research reports for small and emerging companies. Dr. Geist serves as a Clinical Instructor in the ~~Company,~~Department of Psychiatry (Psychology) at Harvard Medical School and as a member of the ~~year~~Faculty ~~each~~of ~~assumed~~the ~~their~~Massachusetts ~~office~~Institute ~~with~~for Psychoanalysis. He is also a member of David Dreman's Institute of Psychology and Markets and Associate Editor of the ~~Company~~ ~~are~~Journal asof ~~follows:~~Behavioral Finance. Dr. Geist received his undergraduate degree and Doctorate in Psychology from Harvard University.

Name	Age	Position	Officer of Magic Lantern Group, Inc. Since
Robert A. Goddard	52	President and Chief Executive Officer	2003
George Wright	60	EVP and Chief Technology Officer	2002
Richard Siskind	57	Director	1998
Richard Geist	60	Director	2002
Howard Balloch	52	Director	2002
Michael R. Mackenzie	47	Director	2002
Michael Lobsinger	53	Director	2002
Stephen Encarnacao	55	Director	2003
Tammy Wentzel	40	Director	2003

Stephen Encarnacao - Director, 56, has served as a director of the Company since January 2003. Mr. Encarnacao is currently the Chief Marketing Officer of BrainShift Inc. His extensive background in brand and executive management in such well-known consumer products companies as H. J. Heinz, Synectics, Reebok International, Puma and Converse spans over three decades. He is a director and private investor in AirCardio Labs Inc, Blackburne Advanced Racquet Systems, Brand Leaders International.Ltd, Brainshift Inc. and Secure Enterprise Technology.

~~Item~~ Tammy 11Wentzel - Director, 41, has served as a director since 2003. ~~Executive~~Ms. ~~Compensation~~Wentzel has been a certified public accountant and has worked in such capacity at Denman & Co. LLP, Certified Public Accountants since 1983. Ms. Wentzel's practice focuses on accounting for companies in a variety of sectors based on generally accepted accounting principles (GAAP) and auditing based on generally accepted accounting standards (GAAS). Particularly, she is experienced in business tax matters and financial statement preparation. Ms. Wentzel has an Associate of Arts Degree in Accounting from AIB College of Business and is a member of the American Institute of Certified Public Accountants and The Iowa Society of Certified Public Accountants.

~~The~~Steven ~~information~~Fay ~~contained~~C.P.A, ~~under~~- ~~the~~Director, ~~caption~~40, ~~"Executive~~joined ~~Compensation"~~the ~~and "Summary~~Board ~~Compensation~~as ~~Table"~~a director in 2005. Mr Fay is a Certified Public Accountant who brings to the Company's ~~definitive~~almost ~~Proxy~~20 ~~Statement~~years toof ~~be filed~~financial ~~within~~consulting ~~120 days~~and strategic planning experience. Mr. Fay earned his BBA degree from the University of Notre Dame, a law degree from Suffolk University School of Law, and an LL. M. degree from the ~~end~~Boston University School of ~~our~~Law. ~~fiscal~~A ~~year~~practicing CPA since 1987, he founded and has been Managing Partner of Fay & Associates, P. C., an accounting and consulting firm based in Quincy, Massachusetts. He is ~~incorporated~~a ~~herein~~member ~~by reference~~and past Chairman of the Personnel Board for the Town of Braintree, Massachusetts. A recognized financial expert, Mr. Fay brings a wealth of management savvy and strategic vision to Magic Lantern.

~~Item~~H. 12Donald Hyde C.A ~~Security~~– ~~Ownership~~Director, 53, joined the Board as a director in 2004. Mr. Hyde C.A., has been a director for Zi Corporation since 2003. Donald brings auditing, accounting and tax expertise to Zi's board of ~~Certain~~ ~~Beneficial~~directors. ~~Owners~~He is currently Chairman of the Audit Committee and ~~Management~~also serves on the Compensation Committee. Donald received his Bachelor of Commerce degree from Carleton University in Ottawa in 1976. Upon graduation, Donald articled with Deloitte & Touche Canada and obtained his Chartered Accounting designation in 1979. From 1980 to 1990, Donald was the Vice President of Finance and Administration for an international oil and gas drilling and service company. In 1991, Donald acquired an existing public accounting practice in Calgary and has been operating as a sole practitioner specializing in the areas of auditing, accounting, taxation and financial consulting.

~~The~~Robert ~~information~~A. ~~contained~~Goddard ~~under~~- ~~the~~President ~~caption~~& ~~"Security~~CEO, ~~Ownership~~53 ofjoined ~~Certain Beneficial~~the ~~Owners~~Company ~~and~~in ~~Management"~~his present position in 2003. Prior to joining the Company's, ~~definitive~~Mr. ~~Proxy~~Goddard ~~Statement~~was employed with LocatePLUS Holdings Corporation as CFO and Treasurer where he re-staged a private company to be ~~filed~~bringing ~~within~~out ~~120~~the ~~days~~only ofIPO in the ~~end~~New ofEngland ~~our~~high ~~fiscal~~tech ~~year~~corridor isin ~~incorporated~~2002. ~~herein~~From 1997 to 1999, Mr. Goddard was employed by ~~reference~~ Wang Healthcare Information Systems (which was spun out from Wang Global) and has held CFO positions with technology companies from 1991-1997. Mr. Goddard was granted a full academic scholarship and holds a BS/BA from Northeastern University and graduated from the Corporate Financial Management Program at the Harvard Business School.

~~Item~~Greg 13Abrams - President, Sonoptic Technologies, Inc. ~~Certain~~46 ~~Relationships~~Greg worked for more than 20 years in Television broadcast production and ~~Related~~subsequently ~~Transactions~~as an independent national TV producer, director and composer. This solid background in traditional media production and delivery provides a strategic advantage in content production and development for new media and broadband video delivery. Mr. Abrams has been with Sonoptic Technologies since its inception in 1995. Greg is a member of the Society of Composers, Authors and Music Publishers of Canada (SOCAN), Canadian Guild of Film Composers (CGFC) and The Society of Motion Picture and Television Engineers (SMPTE).

~~The~~Jeff ~~information~~Lorenz ~~contained~~- ~~under~~Executive ~~the~~Vice ~~caption~~President, ~~"Certain Relationships~~Sales ~~and~~& ~~Related~~Marketing, ~~Transactions"~~34 is an accomplished leader who brings to Magic Lantern an extensive background in ~~the~~Sales ~~Company~~& Marketing. Jeff's ~~definitive~~experience ~~Proxy Statement~~spans toindustries besuch ~~filed~~as ~~within~~Hospitality, ~~120 days~~Business ofAutomation, Internet & E-Commerce, ASP, Telecommunications and Wireless Application Technology. For more than a decade, Jeff has worked in the ~~end~~technology ofsector ~~our~~developing ~~fiscal~~Sales Process', Sales Channels, and Sales Professionals. Jeff spent the last year ~~is incorporated~~with ~~herein~~Nextair byCorporation ~~reference~~building the Canadian Distribution Channel and prior to that, spent over five years at Allstream, AT&T Canada and Netcom Canada where he held various leadership roles in Sales and Consulting.

~~______________________~~ Ronald Carlucci – Chief Financial Officer, 48 is an accomplished financial executive with significant expertise in leading small to medium size companies in both a finance and operational roles. Prior to joining the Company Ron was a controller for growth-oriented companies in the manufacturing, construction and legal sector.

~~Item~~The ~~14.~~information ~~Principal~~regarding ~~Accountant~~directors ~~Fees~~is contained under the captions "Election of Directors" and ~~Services~~"Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement to be filed within 120 days of the end of our fiscal year and is incorporated herein by reference.

The information regarding the Company's code of ethics; audit committee and audit committee financial experts is contained under the ~~caption~~captions "~~Appointment~~Corporate OfGovernance ~~Independent Auditors~~and Board Matters" in the Company's definitive Proxy Statement to be filed within 120 days of the end of our fiscal year and is incorporated herein by reference.

28 During the year changes were made to the board of directors and executive officers of the company. On November 8, 2004 the board of directors elected H. Donald Hyde to the board. On December 2, 2004 the board accepted the voluntary resignation of Michael E. Lobsinger. Effective January 21, 2005 the number of members of the Registrant's Board of Directors was increased to nine and Mr. Stephen Fay was elected to fill one of the vacancies created.

~~PART~~ The IVexecutive officers of the Company, their ages, their positions and offices with the Company, and the year each assumed their office with the Company are as follows:

Name	Age	Position	Officer of Magic Lantern Group, Inc. Since
Robert A. Goddard	53	President and Chief Executive Officer	2003
George Wright*	71	EVP and Chief Technology Officer	2002
Ronald Carlucci	48	CFO & Treasurer	2004
Jeffrey lorenz	34	EVP – Global Sales & Marketing	2004
Richard Siskind	58	Director	1998
Richard Geist	61	Director	2002
Howard Balloch*	53	Director	2002
Michael R. Mackenzie	48	Director	2002
Stephen Encarnacao	56	Director	2003
Tammy Wentzel	41	Director	2003
H. Donald Hyde	53	Director	2004
Steve Fay	40	Director	2005

* see reports on Form 8-k

Item 11. Executive Compensation

The information contained under the caption "Executive Compensation" and "Summary Compensation Table" in the Company's definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.

Compensation of Named Executive Officers

The following table sets forth the total remuneration paid during the last three years to the chief executive officer and the Company's only other executive officer.

Summary Compensation Table
		Annual Compensation
Name and Principal Position	Year	Salary	Bonus	Other⁽¹⁾	Long Term Compensation Option/SAR Awards (#)	All Other Compensation
Robert A. Goddard(2), (8) President & Chief Executive Officer	2003 2004	$80,000 $150,000	---	---	1,000,000(3)	---
George Wright Executive Vice-President and Chief Technology Officer	2003 2004	$95,820(4) $118,000	.	.	400,000	.
Ron Carlucci Chief Financial Officer	2004	$77,000
Dale Kearns (6) Acting Chief Financial Officer	2003	$32,500	.	.	75,000	.
Harvey Gordon (7) President and Chief Financial Officer	2003	$79,850(9)	---	---	--	---
(1) Perquisites and other benefits did not exceed 10% of any named officer's total annual salary.
(2) On July 31, 2003 Mr. Goddard was appointed Interim Chief Executive Officer and Acting Chief Financial Officer, and on November 3, 2003 was named Chief Executive Officer.
(3) 125,000 options vested November 3, 2003. 250,000 options will vest November 3, 2004, and 125,000 will vest May 3, 2006. An additional, 500,000 options have been issued and will vest upon certain performance related milestones set forth under the terms of the Company's Incentive Option Plan- All options awarded to Mr. Goddard carry an exercise price of $0.75. 250,000 options have been issued under the Company's 2002 Option Plan. 150,000 Options have been issued under the Company's Incentive Plan.
(4) Represents salary of CDN$125,000 reported in US dollars at an exchange rate of 1.3612 as reported by the Federal Reserve Bank of New York on April 23, 2004. Of the reported salary CDN$25,000 is paid as consulting fees to an entity controlled by Mr. Wright.
(6) Mr. Kearns acted as Acting Chief Financial Officer from January 1, 2003 through June 9, 2003. In connection with his position he was awarded options exercisable at $0.75.
(7) Mr. Gordon served as President and Chief Executive Officer from November 7, 2002 until July 31, 2003. From July 31, 2003 until October 30, 2003 Mr. Gordon was employed by the Company as consultant.
(8) As of April 8, 2005 Mr. Goddard took a voluntary 20% wage deferral for an indefinite time period.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement to be filed within 120 days of the end of our fiscal year is incorporated herein by reference.

COMMON STOCK OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT

The following table shows the amount of common stock beneficially owned as of April 15, 2004 by (1) each person who we know owns beneficially more than 5% of the common stock, (2) each director of the Company, (3) each named executive officer and (4) the directors and named executive officers as a group.

5% Shareholders	Address of 5% Beneficial Owners	Common Stock Beneficially Owned(1)	Percentage of Class(1)
Zi Corporation	Suite 2100, 840 7th Avenue SW, Calgary, Alberta, T2P 3G2	29,750,000	40.8%
Marty Steinberg(2)	1111 Brickell Avenue,Suite 2500, Miami, Florida 33131	30,166,400	41.3%
Named Executive Officers and Directors
Robert A. Goddard(3)		375,000	0
George Wright		250,000	0
Richard Geist(4)		250,000	Less than 1%
Howard Balloch(5)		250,000	Less than 1%
Michael R. MacKenzie(5)		250,000	Less than 1%
Stephen Encarnacao(5)		350,000	Less than 1%
Richard Siskind(6)		3,400,000	4.7%
All named executive officers and directors as a group (10 persons)		2,930,000	4.0%

The information contained under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement to be filed within 30 days of the Company's annual general meeting to be held in June, 2005.

______________________
1 Mr. Siskind served as President and Chief Executive Officer following the company's transactions with AOG until the company's completion of its transaction with Magic Lantern. Mr. Siskind currently acts as a director of the Company.

On September 5, 2003 the Company issued a promissory note in the amount of CDN$500,000, along with detachable warrants providing for the purchase of up to 500,000 shares of common stock of the Company at an exercise price of $0.25, in consideration for CDN$500,000. The note and warrants were issued to Quarry Bay, Inc., an entity controlled by Michael Lobsinger, a director of the Company and the Chairman and a director of Zi Corporation, which holds 44.6% of the outstanding stock of the Company. The board reviewed the terms of the promissory note and warrants and believes that such terms were at least as favorable as could have been obtained by the Company from third parties.

On February 1, 2004 the Company engaged Dr. Richard Geist, a director of the Company, as consultant to aid the Company in identifying and executing certain financing transactions. Dr. Geist receives $8,000 per month and the agreement was renewed on July 1, 2004 for a period of one (1) year and is terminable upon 90 days written notice.

On April 15, 2004 the Company executed a demand promissory note in the amount of $50,000 with Zi Corporation at a rate of twelve percentage points (12%) per annum. Management believes that such terms are at least as favorable as those which could be obtained by the Company from unrelated third parties. The demand note was subsequently paid off during that same month.

It is the Company's policy to structure any transactions with related parties only on terms that are no less favorable to the Company than could be obtained on an arm's length basis from unrelated parties.

Item 14. Principal Accountant Fees and Services

The information contained under the caption "Appointment Of Independent Auditors" in the Company's definitive Proxy Statement to be filed within 30 days of the Company's annual general meeting to be held in June, 2005.

Fees Incurred for Services of Auditors

The following table sets forth the fees paid or accrued by the Company for professional services rendered by Schwartz, Levitsky and Feldman LLP for year ended December 31, 2004 and Mahoney Cohen & Company CPA, P.C. for the years ended December 31, 2003 and December 31, 2002:

Fee Category	2004	2003	2002

Audit Fees	58,000	$98,206	$68,161
Audit-Related Fees	--	33,849	--
Tax Fees	--	14,660	11,886
All Other Fees	--	0	81,483

Total Fees	58,000	$146,715	$161,530

Audit Fees were for professional services rendered for the audit of the Company's consolidated annual financial statements and review of its consolidated financial statements included in quarterly reports and services that are normally provided by Schwartz Levitsky Feldman llp and Mahoney Cohen & Company in connection with statutory and regulatory filing or engagements.

Audit-Related Fees in 2003 were for assurance and related services that are reasonably related to the performance of the audit or review of the Company's consolidated financial statements and are not reported under "Audit Fees." These services consisted primarily of accounting consultations related to an acquisition of technology assets.

Tax Fees were for professional services for federal, state and international tax compliance, tax advice and tax planning.

All Other Fees were for services other than the services reported above. In 2003 and 2002, these services consisted primarily of assistance in connection with the acquisition of Magic Lantern Communications.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(a) Financial Statements and Schedules:

(1) Financial Statements: The financial statements listed in the Index under Item 8 are included at the end of this Report.

(2) Schedules: Schedule II

(3) Exhibits:

Exhibit Number	Exhibit

2.1*	Amended and Restated Certificate of Incorporation of the Company

3.2*	By-Laws of the Company

4.1*	Form of Stock Certificate

10.1*	1987 Incentive Stock Option Plan

10.2	1998 Incentive Stock Option Plan

10.3	1998 Nonqualified Stock Option Plan-A (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)

10.4	1998 Nonqualified Stock Option Plan-B (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)

10.5	Magic Lantern 2002 Stock Option Plan (Incorporated herein by reference to the Registrant's Current Report on Form 8-K filed on August 8, 2002).

10.6	Magic Lantern Amended and Restated 2002 Stock Option Plan (Incorporated herein by reference to the Registrant's Proxy Statement on Schedule 14A filed on October 24, 2003).

10.7	Asset Purchase Agreement, dated November 2, 2003, by and between Brett Robinson and Magic Lantern Group, Inc.

10.8	Promissory Note Issued August 24, 2003.

14.1	Code of Ethics

23.1	Consent of Auditor

31.1	Certifications of Chief Executive Officer and Acting Chief Financial Officer, pursuant to Rule 13a-14(a).

32.1	Certifications of Chief Executive Officer and Acting Chief Financial Officer, pursuant to 19 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Incorporated by reference to the corresponding Exhibit filed with the Company's Registration Statement on Form S-1, as amended (Reg. No. 33-12959).

(b) Reports on Form 8-K:

• Current Report on Form 8-K dated ~~July~~May 163, ~~2003~~2004 regarding the Company's ~~cash~~private ~~position~~placement of a $1,500,000 principal secured convertible three-year term note to Laurus Master Funds Ltd. • Current Report on Form 8-K dated ~~July~~November 318, ~~2003~~2004 regarding the ~~resignation~~election of MrH. ~~Harvey~~Donald ~~Gordon~~Hyde as a new director of the Company's ~~CEO~~• ~~and~~Current Report on Form 8-K dated December 1, 2004 regarding the ~~appointment~~voluntary resignation of ~~Mr.~~Michael ~~Robert A~~E. ~~Goddard~~Lobsinger as ~~Interim~~a ~~CEO~~director of the Company • Current Report on Form 8-K dated ~~August~~December 1114, ~~2003~~2004 ~~regarding~~announcing the prepayment of principal debt to Laurus Master Funds Ltd. and agreed to amend the Securities Purchase Agreement as consideration for the Company's ~~launch~~partial redemption of ~~"Magic~~that ~~Lantern~~certain ~~Health~~Convertible ~~and~~Promissory ~~Medical,"~~Note aof ~~new~~the ~~operating~~Company ~~division~~dated April 28, 2004. • Current Report on Form 8-K dated ~~September~~December 1510, ~~2003~~2004 ~~announcing~~regarding ~~Initial~~the ~~Completion~~unregistered sale of common stock and common stock purchase warrants to certain accredited investors as consideration two term promissory note holders of the Company converted an aggregate of $750,000.00 of principal and $2,662.23 of accrued interest into 3,010,649 shares of Common Stock at a rate of $0.25 per share and received three year Warrants to purchase 3,010,649 shares of Common Stock at an exercise price of $0.40 per share. In addition, the Company issued 1,000,000 Shares to an additional investor at a price of $0.25 per share, for gross proceeds of $250,000.00, along with three year Warrants to purchase 1,000,000 ~~Million~~shares ~~Private~~of ~~Placement~~Common Stock at an exercise price of ~~Debentures~~$0.40 per share • Current Report on Form 8-K dated ~~September~~December 1730, ~~2003~~2004 regarding the ~~launch~~unregistered sale of ~~Tutorbuddy,~~common stock and common stock purchase warrants to certain accredited investors as consideration three term promissory note holders of the Company's ~~e-learning~~converted ~~system~~an aggregate of $200,000.00 of principal into 800,000 shares of Common Stock at a rate of $0.25 per share and received three year Warrants to purchase 800,000 shares of Common Stock at an exercise price of $0.40 per share • Current Report on Form 8-K dated ~~December~~January 114, ~~2003~~2005 regarding the ~~completion~~unregistered sale of common stock and common stock purchase warrants to Nite Capital, L.P., providing for 1,000,000 shares of common stock (the ~~sale~~"Shares"), $0.01 par value per share (the "Common Stock") at a price of ~~certain~~$0.30 ~~assets~~per itshare, ~~held~~and ina common stock purchase warrant to purchase an additional 500,000 shares of Common Stock exercisable at a price of $0.40 per share, subject to customary adjustments, until the fifth anniversary of January 4, 2005. The Company also entered into a Registration Rights Agreement. In connection with the private placement, the Company was obliged to pay a cash fee to the placement agent, First Montauk Securities Corp. ("First Montauk"), for its ~~media~~services ~~dubbing~~on ~~business~~its behalf. In addition, the Company issued First Montauk and its assignees, common stock purchase warrants to ~~BKR~~purchase ~~Media~~an aggregate of 100,000 ~~Inc~~shares of Common Stock, exercisable at $0.40 per share, asubject ~~company~~to ~~controlled~~customary byadjustments, ~~Brett~~until ~~Robinson~~the fifth anniversary of January 4, 2005. • Current Report on Form 8-K dated January 18, 2005 regarding changes in Company's Certifying Accountant • Current Report on Form 8-K dated January 21, 2005 regarding the election of Steve Fay as a ~~former~~new ~~employee~~director of the Company and increasing the number of members of the Company's Board of Directors to nine. • Current Report on Form 8-K dated February 9, in2005 ~~exchange~~regarding ~~for~~entry into material Definitive Agreement with national Financial Communications Corp. (NFC) and the unregistered Sales of Equity Securities as consideration for NFC to provide services in accordance with the terms of ~~CDN~~that ~~$200~~agreement. • Current Report on Form 8-K dated March 1,~~000~~ ~~less~~2005 anregarding ~~inventory~~changes ~~adjustment~~in Company's Certifying Accountant announcing the Company engaged Schwartz Levitsky Feldman LLP, as its independent auditor to audit the Company's financial statements for the fiscal year ended December 31, 2004. • Current Report on Form 8-k dated April 6, 2005 regarding departure of ~~CDN~~Directors ~~$12~~or Executive Officers and appointment of Principal Officers issued a press release announcing the voluntary resignation of our Chief Technology Officer and Executive Vice President,~~516~~ Mr. George Wright, aseffective ~~per~~March 31, 2005. • Current Report on Form 8-k dated April 14, 2005 regarding departure of Directors or Executive Officers and appointment of Principal Officers issued a press release announcing the ~~terms~~voluntary resignation of Howard R. Balloch from the ~~asset~~position ~~purchase~~of ~~agreement~~Chairman ~~governing~~of our Board of Directors. Mr. Stephen Encarnacao, one of our independent directors, was elected Interim Chairman of the ~~sale~~Board and will serve in that capacity until our next annual meeting of stockholders.

30[remainder of page left intentionally blank]

Magic Lantern Group, Inc. (formerly, JKC Group, Inc. and State II Apparel Corp):
Magic Lantern Group, Inc. (formerly, JKC Group, Inc. and State II Apparel Corp) CONSOLIDATED FINANCIAL STATEMENTS Together with Report of Independent Registered Public Accounting Firm December 31, 2004 and 2003
Index to Financial Statements
	Page
Independent Auditor's Report	i
Report of Independent Registered Public Accounting Firm, 2004	i
Balance Sheets - December 31, 2003 and 2002	F-1
Report of Independent Registered Public Accounting Firm, 2003	ii
Statements of Operations - For the years ended December 31, 2003, 2002 and 2001	F-2
Consolidated Balance Sheets - December 31, 2004 and 2003	F-1
Statements of Comprehensive Loss - For the years ended December 31, 2003, 2002 and 2001	F-3
Consolidated Statements of Operations - For the years ended December 31, 2004, 2003 and 2002	F-2
Statements of Shareholders' Equity (Deficit) - For the years ended December 31, 2003, 2002 and 2001	F-4
Consolidated Statements of Comprehensive Loss - For the years ended December 31, 2004, 2003 and 2002	F-3
Statements of Cash Flows - For the years ended December 31, 2003, 2002 and 2001	F-5
Consolidated Statements of Shareholders' Equity (Deficit) - For the years ended December 31, 2004, 2003 and 2002	F-4
Notes to Financial Statements	F-6 through F-22
Consolidated Statements of Cash Flows - For the years ended December 31, 2004, 2003 and 2002	F-5
Schedule II - Valuation and Qualifying Accounts	F-23
Notes to Consolidated Financial Statements	F-6 through F-24
Schedule I - Valuation and Qualifying Accounts	F-25

INDEPENDENT AUDITOR'S REPORT

To the Board of Directors and Shareholders of Magic Lantern Group, Inc.:

We have audited the accompanying balance sheets of Magic Lantern Group, Inc. and subsidiaries (formerly, JKC Group, Inc. and Stage II Apparel Corp.) as of December 31, 2003 and 2002, and the related statements of operations, comprehensive loss, shareholders' equity (deficit) and cash flows and the related Schedule II for each of the years in the three-year period ended December 31, 2003. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Magic Lantern Group, Inc. and subsidiaries (formerly, JKC Group, Inc. and Stage II Apparel Corp.) at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has sustained substantial losses for the years ended December 31, 2003, 2002, and 2001, has a working capital deficiency at December 31, 2003 and lacks long-term financing, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the accompanying financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Mahoney Cohen & Company, CPA, P.C.

New York, New York February 27, 2004

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Magic Lantern Group, Inc.

We have audited the accompanying consolidated balance sheet of Magic Lantern Group, Inc. as at December 31, 2004 and the related consolidated statement of operations, cash flows and stockholders' deficiency for the year ended December 31, 2004. 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 audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Magic Lantern Group, Inc. as at December 31, 2004 and the results of its operations and its cash flows for the year ended December 31, 2004 in accordance with generally accepted accounting principles in the United States of America.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant losses, has a working capital deficiency and lacks long-term financing. These conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also disclosed in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The consolidated financial statements of Magic Lantern Group, Inc. as at December 31, 2003 and for the years ended December 31, 2003 and 2002 were audited by other auditors whose report dated February 27, 2004 included an explanatory paragraph that there was substantial doubt about the Company's ability to continue as going concern and that those financial statements did not include any adjustments that might result from that uncertainty.

Toronto, Ontario, Canada

March 31, 2005, except for notes 12 & 17

which are as of April 26, 2005

Chartered Accountants

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Magic Lantern Group, Inc.

We have audited the accompanying balance sheet of Magic Lantern Group, Inc. and subsidiaries (formerly, JKC Group, Inc. and Stage II Apparel Corp.) as of December 31, 2003, and the related statements of operations, comprehensive loss, shareholders' equity (deficit) and cash flows and the related Schedule II for each of the two years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the a ccounting 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 financial statements referred to above present fairly, in all material respects, the financial position of Magic Lantern Group, Inc. and subsidiaries (formerly, JKC Group, Inc. and Stage II Apparel Corp.) at December 31, 2003, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has sustained substantial losses for the years ended December 31, 2003 and 2002, has a working capital deficiency at December 31, 2003 and lacks long-term financing, which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the accompanying financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ Mahoney Cohen & Company CPA, P.C.

MAHONEY COHEN & COMPANY, CPA, P.C.

New York, New York

February 27, 2004

New York, New York

February 27, 2004

F-1

MAGIC LANTERN GROUP, INC.
(formerly JKC Group, Inc. and Stage II Apparel Corp.)

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

		December 31,
		2003	2002
		2004	2003
ASSETS:
Current assets:
	Cash and cash equivalents	$ 465	$696
	Cash and cash equivalents (CAD $307)	$ 351	$ 465
	Accounts receivable - trade, net of allowance for doubtful accounts of $101 at December 31, 2003 ($70 - 2002)	446	386
	Accounts receivable - trade, net of allowance for doubtful accounts of $67 at December 31, 2004 ($101 - 2003) per Schedule I	281	446
	Miscellaneous receivables	74--	~~218~~74
	Inventories	7865	8278
	Prepaid expenses and other current assets	~~129~~70	~~110~~129
	Total current assets	~~1,192~~767	1,~~492~~192
	Property and equipment, at cost, less accumulated depreciation	1,018	1,110
	Property and equipment, at cost, less accumulated depreciation (note 6)	589	1,018
	Other assets:
	Intangible assets, net of accumulated amortization of $690 at December 31, 2003 (80 - 2002)	4,581	4,436
	Intangible assets, net of accumulated amortization of $1,575 at December 31, 2004 ($690 - 2003) (note 7)	3,907	4,581
	Goodwill	52,830	65,~~868~~830
	Cash surrender value of officers' life insurance	--	32
	Security deposit and other assets	31	32
	Security deposit and other assets	32	24
	TOTAL ASSETS	$8,124	$12,653
	TOTAL ASSETS	$12,653	$13,962
LIABILITIES:
LIABILITIES:
	Current liabilities:
	Current liabilities:
	Bank indebtedness	$131	$104
	Bank indebtedness	$104	$--
	Current portion of long-term debt	2,924	759
	Current portion of long-term debt	759	492
	Promissory Notes payable (note 14)	1,358	572
	Promissory Notes payable	572	--
	Accounts payable - trade	1,095	786
	Note payable to affiliate	--	176
	Accrued liabilities	1,026	786
	Accounts payable - trade	786	377
	Producer royalty accruals	263	277
	Accrued liabilities	786	476
	Total current liabilities	6,797	3,284
	Producer royalty accruals	277	137
Long-term liabilities:
	Other current liabilities	--	13
	Long-term debt, net of current portion (note 8)	9	12
	Total current liabilities	3,284	1,671
	Convertible term note payable (note 8)	207	--
Long-term liabilities:
	Note payable, including accrued interest (note 8)	--	2,000
	Long-term debt, net of current portion	12	10
	Total long-term liabilities	216	2,012
	Note payable, including accrued interest	2,000	3,022
	TOTAL LIABILITIES	7,013	5,296
	Total long-term liabilities	2,012	3,032
COMMITMENTS AND CONTINGENCIES (Note 12)
COMMITMENTS AND CONTINGENCIES (Note 13)
SHAREHOLDERS' EQUITY
SHAREHOLDERS' EQUITY (DEFICIT)
	Preferred stock, $.01 par value, 1,000 shares authorized; none issued and outstanding	--	--
	Common stock, $.01 par value, 100,000 shares authorized at December 31, 2003
	Common stock, $.01 par value, 100,000 shares authorized at December 31, 2004
	and 2002; 66,797 shares issued and outstanding at December 31, 2003 and
	and 2003; 73,299 shares issued and outstanding at December 31, 2004 and
	66,147 shares issued and outstanding at December 31, 2002	668	661
	66,797 shares issued and outstanding at December 31, 2003	733	668
	Additional paid-in capital	2029,~~021~~457	20,~~685~~021
	Deferred compensation	(~~351~~140)	(~~966~~351)
	Accumulated deficit	(1329,~~333~~232)	(1113,~~078~~333)
		7,005	9,302
		818	7,005
	Accumulated other comprehensive loss	352	(43)
	Accumulated other comprehensive income	293	352
	TOTAL SHAREHOLDERS' EQUITY	71,~~357~~111	97,~~259~~357
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY		$128,~~653~~124	$1312,~~962~~653
See Notes to Financial Statements.
See accompanying Notes to Consolidated Financial Statements.

F-12

Magic Lantern Group, Inc.
(formerly JKC Group, Inc. and Stage II Apparel Corp.)

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Year Ended December 31,
	2003	2002	2001
	2004	2003	2002
Net revenue	$2,~~871~~762	$ ~~386~~2,871	$ ~~2,855~~386
Cost of sales	~~1,209~~899	~~188~~1,209	~~3,068~~188
Gross profit (loss)	1,662	198	(213)
Gross profit	1,863	1,662	198
Commission and other income	25--	--25	10--
	1,687	198	(203)
	1,863	1,687	198
Selling, general and administrative expenses	34,~~865~~998	13,~~192~~865	1,~~404~~056
Loss on sale of marketable securities	--	--	11
Compensation adjustment for options	(740)	(1,091)	2,239
Compensation adjustment from options	(1,091)	2,239	--
Impairment of goodwill	3,000	--	--
Impairment of goodwill	--	--	1,293
Impairment of trademark	--	--	181
Impairment of trademark	--	181	--
Depreciation and amortization	1,310	814	136
Depreciation and amortization	814	136	209
Gain on settlement of litigation	--	--	(526)
Gain on settlement of litigation	--	(526)	(116)
Total expenses	8,568	3,588	3,086
Total expenses	3,588	3,086	2,592
Operating loss	(6,705)	(1,901)	(2,888)
Operating loss	(1,901)	(2,888)	(2,795)
Other income (expenses):
Other income (expenses):
Royalty income	--	--	90
Royalty income	--	90	60
Interest expense	(9,194)	(354)	(43)
Interest income	--	--	9
Loss before income taxes	(15,899)	(2,255)	(2,841)
Interest expense	(354)	(43)	(218)
Income taxes (note 11)	--	--	--
Loss before income taxes	(2,255)	(2,841)	(2,944)
Net loss	$ (15,899)	$ (2,255)	$ (2,841)
Income taxes	--	--	33
Basic and diluted net loss per common share:	(.24)	(.03)	$ (.09)
Net loss	$ (2,255)	$ (2,841)	$ (2,977)
Weighted average common shares outstanding:
Basic and diluted net loss per common share:	(.03)	$ (.09)	$ (.72)
Basic	67,298	66,483	31,561
Weighted average common shares outstanding:
Fully diluted	67,298	66,483	31,561
Basic	66,483	31,561	4,127
Fully diluted	66,483	31,561	4,127

See accompanying Notes to Consolidated Financial Statements.

F-2

Magic Lantern Group, Inc.

(In thousands)

		Year Ended December 31,
	2003	2002	2001
Net loss	$ (2,255)	$ (2,841)	$ (2,977)
Other comprehensive income (loss):
Foreign currency translation adjustment	395	(43)	--
Unrealized gains on securities:
Unrealized holding gains arising during the period	--	--	34
Less: reclassification adjustment for losses included in net loss		--	11
	395	(43)	45
Comprehensive loss	$ (1,860)	$ (2,884)	$ (2,932)

See Notes to Financial Statements.

F-3

Magic Lantern Group, Inc. (formerly JKC Group, Inc. and Stage II Apparel Corp.)

CONSOLIDATED STATEMENTS OF ~~SHAREHOLDERS'~~COMPREHENSIVE ~~EQUITY/DEFICIT~~LOSS

(In thousands)

	Common Stock		Additional Paid-In Capital	Deferred Compensation	Retained Earnings (Accumulated Deficit)	Treasury Treas. Stock	Accumulated Other Comprehensive Income (Loss)	Total Shareholders Equity (Deficit)
		Year Ended December 31,
	Shares	Amount
	2004	2003	2002
Balance at December 31, 2000	5,016	$50	$7,366	$--	$(3,425)	$(1,879)	$(45)	$2,067
Net loss	$ (15,899)	$ (2,255)	$ (2,841)
Unrealized gains on securities, net of reclassification adjustment	--	--	--	--	--	--	45	45
Other comprehensive income (loss):
Net loss	--	--	--	--	(2,977)	--	--	(2,977)
Foreign currency translation adjustment	(59)	395	(43)
Balance at December 31, 2001	5,016	50	7,366	--	(6.402)	(1,879)	--	(865)
	(59)	395	(43)
Issuance of common stock	31,211	312	1,144	--	(1,835)	1,879		1,500
Comprehensive loss	$ (15,958)	$ (1,860)	$ (2,884)
Exercise of stock options	170	2	44	--				46
Common stock issued in connection with the acquisition of Magicvision Media Inc.	29,750	297	8,926	--				9,223
Repriced options			2,114					2,114
Options issued			1,086	(966)				120
Revaluation of options			5					5
Foreign currency translation adjustment							(43)	(43)
Net loss	--	--	--	--	(2,841)	--	--	(2,841)
Balance at December 31, 2002	66,147	661	20,685	(966)	(11,078)	--	(43)	9,259
Issuance of shares, net of issue costs of approximately $40	600	6	254	--				260
Exercise of stock options	50	1	13	--				14
Warrants, in connection with notes payable			763					763
Warrants, in connection with services			11					11
Compensation adjustment from replacement options			(1,251)					(1,251)
Amortization of deferred compensation, net of cancellations				161				161
Cancellation of options			(454)	454				--
Foreign currency translation adjustment							395	395
Net loss	--	--	--	--	(2,255)	--	--	(2,255)
Balance at December 31, 2003	66,797	$668	$20,021	$(351)	$(13,333)	$ --	$352	$7,357

See accompanying Notes to Consolidated Financial Statements.

F-4

Magic Lantern Group, Inc. (formerly JKC Group, Inc. and Stage II Apparel Corp.)

CONSOLIDATED STATEMENTS OF ~~CASH~~SHAREHOLDERS' ~~FLOWS~~EQUITY(DEFICIT)

		Year Ended December 31,
		2003	2002	2001
Operating Activities:
Net loss		$ (2,255)	$ (2,841)	$ (2,977)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization	814	136	209
	Loss on abandonment of fixed assets	--	--	14
	Loss on sale of marketable securities	--	--	11
	Gain on settlement of litigation, net of legal expenses	--	(526)	--
	Impairment of goodwill	--	--	1,293
	Write-off of deferred charges	--	--	61
	Impairment of trademark	--	181	--
	Compensation (income) expense from options	(1,091)	2,239	--
	Bad debts	50	3	--
Changes in assets and liabilities, net of effect of MVM acquisition:
	Accounts receivable	(131)	265	(111)
	Miscellaneous receivable	132	308	--
	Inventory	(9)	25	2,808
	Prepaid expenses	(40)	75	50
	Other assets	(13)	--	29
	Accounts payable and accrued liabilities	1,156	89	(212)
	Due to affiliate	(176)	--	(275)
	Other current liabilities	(13)	--	(67)
	Other comprehensive loss (income)	0	(43)
Net cash provided by (used in) operating activities		(1,576)	(89)	833
Investing Activities:
	Purchase of property and equipment	(113)	(22)	--
	Purchase of intangible assets	(263)	(69)	--
	Cash acquired on the acquisition of MVM in excess of acquisition costs	--	212	--
	Sale of available-for-sale marketable securities	--	6	601
	Proceeds from redemption of officer's life insurance	--	--	171
	Proceeds from the sale of property and equipment	135	--	--
	Decrease in cash surrender value	35	--	13
	Net cash provided by (used in) investing activities	(206)	127	785
Financing Activities:
	Net proceeds from Notes payable with detachable warrants	1,184	--	--
	Net proceeds from private placement of Units, net of issue costs of approximately $40	260	--	--
	Borrowings from factor	--	--	262
	Bank indebtedness	104	--	--
	Repayment of long term debt	(4)	(79)	--
	Factor financing, net	--	(514)	(2,384)
	Issuance of common stock, net	--	1,500	--
	Proceeds from (repayments to) loans evidenced by note payable to affiliate	--	(298)	403
	Exercise of stock options	14	46	--
Net cash provided by (used in) financing activities		1,558	655	(1,719)
Effect of foreign exchange on cash		(7)	--	--
Net decrease in cash and cash equivalents		(231)	693	(101)
Cash and cash equivalents, beginning of year		696	3	104
Cash and cash equivalents, end of year		$ 465	$ 696	$ 3
Supplemental disclosures of cash flow information:
	Cash paid for income taxes	$ 0	$ 7	$ 33
	Cash paid for interest, excluding factoring fees	$ 0	$ 6	$ 164
Supplemental schedule of noncash investing and financing activities:
	Stock and note payable to purchase MVM	$ --	$ 12,223	$ --

(In thousands)

See Notes to Financial Statements.

	Common Stock		Additional Paid-In Capital	Deferred Compensation	Retained Earnings (Accumulated Deficit)	Treasury Treas. Stock	Accumulated Other Comprehensive Income (Loss)	Total Shareholders Equity (Deficit)
	Shares	Amount	Additional Paid-In Capital	Deferred Compensation	Retained Earnings (Accumulated Deficit)	Treasury Treas. Stock	Accumulated Other Comprehensive Income (Loss)	Total Shareholders Equity (Deficit)

Balance at December 31, 2001	5,016	50	7,366	--	(6,402)	(1,879)	--	(865)

Issuance of common stock	31,211	312	1,144	--	(1,835)	1,879		1,500
Exercise of stock options	170	2	44	--				46
Common stock issued in connection with the acquisition of MagicVision Media Inc.	29,750	297	8,926	--				9,223
Re-priced options			2,114					2,114
Options issued			1,086	(966)				120
Revaluation of options			5					5
Foreign currency translation adjustment							(43)	(43)
Net loss	--	--	--	--	(2,841)	--	--	(2,841)

Balance at December 31, 2002	66,147	661	20,685	(966)	(11,078)	--	(43)	9,259
Issuance of shares, net of issue costs of approximately $40	600	6	254	--				260
Exercise of stock options	50	1	13	--				14
Warrants, in connection with notes payable			763					763
Warrants, in connection with services			11					11
Compensation adjustment for replacement options			(1,251)					(1,251)
Amortization of deferred compensation, net of cancellations				161				161
Cancellation of options			(454)	454				--
Foreign currency translation adjustment							395	395
Net loss	--	--	--	--	(2,255)	--	--	(2,255)

Balance at December 31, 2003	66,797	$668	$20,021	$(351)	$(13,333)	$ --	$352	$7,357
Issuance of shares, Compensation for professional services provided	500	5	470					475
Warrants, in connection with professional services			146					146
Exercise of warrants in connection with professional services	67	1	16					17
Intrinsic value of beneficial conversion feature of Convertible debt security			4,917					4,917
Exercise of debt conversion	1,124	11	282					293
Warrants in connection with notes payable			1,219					1,219
Issuance of shares	1,000	10	460					470


Issuance of shares as consideration for extinguishment of notes payable - debt	3,811	38	1,632					1,670
Warrants in connection with consideration for extinguishment of notes payable - debt			1,245					1,245
Compensation adjustment from replacement options			(951)					(951)
Amortization of deferred compensation, net of cancellations				211				211
Foreign currency translation adjustment							(59)	(59)
Net loss					(15,899)			(15,899)

Balance at December 31, 2004	73,299	733	29,457	(140)	(29,232)	--	293	1,111

See accompanying Notes to Consolidated Financial Statements.

F-5

Magic Lantern Group, Inc. (formerly JKC Group, Inc. and Stage II Apparel Corp.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

		Year Ended December 31,
		2004	2003	2002
Operating Activities:
Net loss		$ (15,899)	$ (2,255)	$ (2,841)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
	Depreciation and amortization	1,310	814	136
	Impairment of goodwill	3,000	--	--
	Accrued interest on promissory note payable	100	--	--
	Intrinsic value of beneficial feature on convertible note payable	4,917	--	--
	Interest accretion on convertible note payable	639	--	--
	Value of warrants as consideration for extinguishment of notes payable	1,963	--	--
	Value of warrants as consideration for investment relations services	146	--	--
	Interest accretion of warrants on notes payable	926	--	--
	Issuance of shares as consideration of investment relations services	475	--	--
	Gain on settlement of litigation, net of legal expenses	--	--	(526)
	Premium on issuance of common shares	220	--	--
	Impairment of trademark	--	--	181
	Compensation (income) expense from options	(740)	(1,091)	2,239
	Bad debts	(34)	50	3
Changes in assets and liabilities, net of effect of MVM acquisition:
	Accounts receivable	165	(131)	265
	Miscellaneous receivable	74	132	308
	Inventory	13	(9)	25
	Prepaid expenses	59	(40)	75
	Other assets	--	(13)	--
	Accounts payable and accrued liabilities	507	1,156	89
	Due to affiliate	--	(176)	--
	Other current liabilities	14	(13)	--
Net cash provided by (used in) operating activities		(2,145)	(1,576)	(46)
Investing Activities:
	Purchase of property and equipment	(98)	(113)	(22)
	Capitalization of intangible assets	--	(263)	(69)
	Cash acquired on the acquisition of MVM in excess of acquisition costs	--	--	212
	Sale of available-for-sale marketable securities	--	--	6
	Proceeds from the sale of property and equipment	--	135	--
	Decrease in cash surrender value	--	35	--
	Net cash provided by (used in) investing activities	(98)	(206)	127
Financing Activities:
	Net proceeds from Notes payable with detachable warrants	978	1,184	--
	Net proceeds from convertible term note payable with detachable warrants	1,399	--	--
	Net proceeds from private placement of Units, net of issue costs of approximately $0, $40 in 2003	250	260	--
	Bank indebtedness	131	104	--
	Repayment of long term debt	(640)	(4)	(79)
	Factor financing, net	--	--	(514)
	Issuance of common stock, net	--	--	1,500
	Proceeds from (repayments to) loans evidenced by note payable to affiliate	--	--	(298)
	Exercise of stock options	--	14	46
Net cash provided by (used in) financing activities		2,118	1,558	655
Effect of foreign exchange on cash		11	(7)	(43)
Net decrease in cash and cash equivalents		(114)	(231)	693
Cash and cash equivalents, beginning of year		465	696	3
Cash and cash equivalents, end of year		$ 351	$ 465	$ 696

Supplemental disclosures of cash flow information:
	Cash paid for income taxes	$ 0	$ 0	$ 7
	Cash paid for interest, excluding factoring fees	$ 72	$ 0	$ 6

Supplemental schedule of non-cash investing and financing activities:
	Stock and note payable to purchase MVM	$ --	$ --	$ 12,223

See accompanying Notes to Consolidated Financial Statements.

F-6

Magic Lantern Group, Inc.
(formerly JKC Group, Inc. and Stage II Apparel Corp.)

NOTES TO FINANCIAL STATEMENTS

Note 1 - Description of Business and Going Concern:

Magic Lantern Group, Inc., a New York corporation formerly named JKC Group, Inc. and Stage II Apparel Corp. (the "Company"), was engaged for over thirty years in the design and distribution of casual apparel, activewear and collection sportswear for men and boys. Historically, the Company's product lines were sold primarily to merchandising chains under exclusive and non-exclusive brand name licenses as well as proprietary and private labels. In response to the decline in its apparel distribution business, the Company elected to contract those operations during the last two years as part of a strategy to emphasize trademark licensing while reducing the costs and inventory risks associated with its core business.

On November 7, 2002, as more fully described in note 3, the Company acquired 100% of the issued and outstanding shares of ~~Magicvision~~MagicVision Media Inc. a Canadian corporation ("MVM") and its wholly owned subsidiary Magic Lantern Communications Ltd. ("MLC"), a Canadian corporation. The Company and its subsidiaries are involved in the marketing and distribution of educational video and media resources throughout Canada. The Company has exclusive distributing rights to a wide variety of film producers representing various subject matters that are distributed to a customer base throughout Canada. Tutorbuddy, Inc., ("TBY") a wholly owned subsidiary of MLC, provides an Internet based content delivery service designed to deliver content and related educational services on demand to students, teachers and parents. Sonoptic Technologies, Inc., a 75% owned subsidiary of MLC ("STI"), provides art digital video encoding services and has developed a proprietary video base indexing software that allows users to aggregate, bookmark, re-sort and add their own comment boxes to pre-existing material content. The Company has a 100% wholly owned subsidiary, Magic Vision Digital Media Inc. that represents it diversification of operations into non-educational digital content delivery. The Company formed a 100% wholly-owned subsidiary DigiTron Ltd. to independently create and produce original TV broadcast programs. Magic Lantern is headquartered in Oakville Ontario, near Toronto, Canada with other offices in Saint John, New Brunswick and Vancouver, British Columbia, New York City, and Greater Boston, MA.

The accompanying consolidated financial statements have been prepared on the basis the Company will continue as a going concern. The Company has sustained substantial losses for the years ended December 31, ~~2003~~2004, ~~2002~~2003, and ~~2001~~ 2002. The Company's cash position at the current rate of operating activity is insufficient to cover operating costs to ~~May~~June 130, ~~2004~~2005. The Company's working capital deficiency at December 31, ~~2003~~2004 was approximately $16,~~927~~030,000, which has worsened since December 31, ~~2002~~2003. Historically, the Company has sought financing from its major shareholders. Failing shareholder support and a longer-term financing solution, the sources of capital available to the Company include ~~factoring~~ ~~of accounts receivable and~~ reduction of discretionary investments in the digitization program and sales and marketing programs designed to increase revenue over the next twelve months. If the Company is unable to raise long-term financing it raises substantial doubt about its ability to continu ~~continue~~ e as a going concern.

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.

F-6

Note 2 - Summary of Significant Accounting Policies:

Use of estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures made in the consolidated financial statements and accompanying notes. These estimates and assumptions are based on management's historical experience, best knowledge of current events and conditions and activities that the Company may undertake in the future. Actual results could differ from these estimates.

Certain estimates, such as those related to long-lived assets, goodwill and intangible assets depend upon subjective or complex judgments about matters that may be uncertain, and changes in those estimates could materially impact the consolidated financial statements

Principles of consolidation and minority interest in subsidiary:

The consolidated financial statements include the accounts of the Company for the period from November 7, 2002 to December 31, ~~2003~~2004 (see note 23), its wholly-owned subsidiary MVM and its wholly owned subsidiary MLC (collectively, the "Lantern Group"). The Company has a 100% wholly owned subsidiary in Magic Vision Digital Media Inc. and DigiTron Ltd. US corporations which have been non-operational during the year. The 25% minority interest liability with respect to STI is zero due to operating losses sustained by STI from its inception. Accordingly, 100% of the losses from STI are reflected in the statement of operations of the Company. All significant ~~intercompany~~ inter-company balances and transactions have been eliminated.

Concentration of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of accounts receivable. The Company believes that concentration with regard to accounts receivable is limited due to its large customer base.

Foreign exchange translation: The Company's subsidiaries maintain their books and records in Canadian dollars, their functional currency.

Canadian dollar accounts in these consolidated financial statements are generally translated into U.S. dollars on the following bases:

(i) The assets and liabilities are translated at the exchange rate in effect at the consolidated balance sheet date. (ii) Revenues and expenses are translated at the average rates of exchange in effect during the year. (iii) Resulting translation adjustments are reflected as a separate component of shareholders' equity. (iv) ~~Shareholder~~Shareholders's equity accounts and deficit relating to Magic Lantern are translated at the historical rate in effect at the time of acquisition (see note 3).

~~Accounts~~Bank ~~receivable~~indebtedness:

~~F-7~~The Company has invested approximately $249,000 (Can $300,000) in a Guaranteed Investments Certificates ("GIC") which is highly liquid investment available for withdrawal by the Company upon request. The GIC has been pledged as security for a line of credit, of which $131,000 and $104,000 has been drawn upon, and disclosed as bank indebtedness on the balance sheet, as at December 31, 2004 and 2003 respectively. Interest is charged at the rate of prime plus 1% on overdrawn balances.

~~Inventories~~Accounts receivable: The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company's estimate is based on historical collection experience and a review of the current status of trade accounts receivable.

Inventories:
Inventories consist of raw materials and finished goods held for sale, which are valued at the lower of cost (first-in, first-out method) or market. The following table summarizes the components of inventory as at December 31:

(In thousands)

	2003	2002
	2004	2003
Finished goods	$ 4651	$ 4746
Raw materials	3214	3532
	$ 78	$ 82
	$ 65	$ 78

~~Property and equipment:~~ F-7

~~Software~~Property ~~costs~~and equipment: Property and equipment is recorded at cost. Furniture and fixtures, computers and software, and masters are depreciated on a straight-line basis over five years, two to three years, and ten years, respectively. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or remaining lease term.

~~Income~~Software ~~taxes~~costs: The Company capitalizes qualifying software costs to be licensed to others once the point of technological feasibility is reached. Such costs are reported at the lower of unamortized costs and net realizable value. Amounts capitalized are amortized based on current and future revenue for each product with minimum amortization not less than straight-line amortization over the remaining estimated economic life of the product. Estimated useful lives of qualifying software costs range from two to three years. Such qualifying costs for the year were approximately $0 in 2004 ($263,000 in 2003).

~~Revenue~~Income ~~Recognition~~taxes: Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the

years in which those temporary differences are projected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

Revenue Recognition:
The Company generates revenues, net of estimates for returns, from video sales and video dubbing. STI's revenues are generated from video encoding.

Net revenue from sales are recognized upon shipment. Revenues from digital video dubbing and video encoding are recognized when the dubbing and encoding processes are completed and the products are shipped to the customer.

Revenue from video sales, video dubbing, video encoding, and other revenue for the year ended December 31, 2004 were approximately $2,259,000, $26,000, $334,000, and $143,000, respectively (for the year ended December 31, 2003 were approximately $1,887,000, $619,000, $142,000, and $223,000, ~~respectively (~~period from November 7, 2002 to December 31, 2002 approximately $227,000, $69,000, $17,000, and $73,000, respectively).

Revenue from distribution and licensing of proprietary exploitation rights is recognized when all of the following conditions are met: [i] persuasive evidence of a sale or licensing arrangement with a customer exists; [ii] the license period of the arrangement has begun; [iii] the arrangement fee is fixed or determinable; and [iv] collection of the arrangement fee is reasonably assured.

The Company recognizes ~~revenue from all categories of apparel sales at the time merchandise is shipped. Commissions from sales agency operations are recognized when services are provided to customers. The Company recognizes~~ royalty revenue under trademark license agreements when its contractual royalty rights are earned. Any payments received under these agreements in excess of amounts earned are recorded as deferred revenue.

Shipping and handling costs:

~~F-8~~The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with outbound freight are included in selling, general and administrative expenses and totaled approximately $124,000, $130,000, and $18,000 for the years ended December 31, 2004, 2003, and 2002, respectively.

~~The~~Advertising ~~Company includes shipping~~ and ~~handling fees billed to~~promotion: ~~customers~~The inCompany ~~net~~expenses ~~sales.~~advertising ~~Shipping~~ and ~~handling~~promotional costs ~~associated~~as ~~with~~incurred. ~~outbound freight~~Advertising ~~are included in selling, general~~ and ~~administrative~~promotional expenses ~~and~~were ~~totaled~~ approximately $~~130~~11,000, $1849,000, and $2138,000 for the years ended December 31, ~~2003,~~ ~~2002~~2004, 2003 and ~~2001~~2002, respectively.

Advertising and promotion:

Goodwill:

Goodwill represents the excess of purchase price over fair value of net assets acquired. Goodwill is tested for impairment and written off when impaired, rather than being amortized. Goodwill is deductible for income tax purposes.

~~Net Loss per Common Share~~F-8

~~The~~Net ~~Company~~Loss follows Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). Under FAS 128, companies that are publicly held or have complex capital structures are required to present basic and diluted earnings per ~~share~~Common ("EPS") on the face of the income statement. Basic EPS excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted and the resulting additional shares are dilutive because their inclusion decreases the amount of EPS. The following reconciles basic and diluted weighted average common shares outstanding for the years ended December 31Share:

	2003	2002	2001
Weighted average common shares outstanding - basic	66,483	31,561	4,127
Effect of dilutive securities:
Employee stock options	3,698	4,002	56
Exercise of warrants	200	--	--
Weighted average common shares and share equivalents outstanding - diluted	70,381	35,563	4,183

The Company follows Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). Under FAS 128, companies that are publicly held or have complex capital structures are required to present basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted and the resulting additional shares are dilutive because their inclusion decreases the amount of EPS.

~~Diluted shares have not been used in the calculation of EPS for the years ended December 31, 2003, 2002, and 2001 as they are anti~~Stock-~~dilutive.~~Based Compensation:

The Company follows SFAS No. 123, "Accounting for Stock-Based Compensation." The provisions of SFAS No. 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") but disclose the pro forma effects on net income (loss) had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option incentive plans and will implement SFAS 123 (revised ) when required to do so..

~~The~~At ~~Company~~December ~~follows~~31, ~~SFAS No. 123~~2004, ~~"Accounting~~the ~~for Stock-Based~~Company ~~Compensation."~~has ~~The~~four ~~provisions~~stock-based ofcompensation ~~SFAS~~plans, ~~No.~~more ~~123~~fully ~~allow~~described ~~companies~~in ~~to either~~Note ~~expense~~13. ~~the~~The ~~estimated~~Company ~~fair~~accounts ~~value~~for ofthose ~~stock~~plans ~~options~~under ~~or to continue to follow~~ the ~~intrinsic~~recognition ~~value~~and ~~method~~measurement ~~set~~principles ~~forth~~of inAPB ~~Accounting Principles Board~~ Opinion No. 25, "Accounting for Stock Issued to Employees", ~~("APB~~and ~~25")~~related ~~but disclose~~interpretations. ~~the~~No ~~pro~~stock-based ~~forma~~employee ~~effects~~compensation oncost ~~net~~is ~~income~~reflected ~~(loss)~~in ~~had~~net ~~the~~income, ~~fair~~as ~~value~~all ~~of the~~ options ~~been~~granted ~~expensed.~~under ~~The~~those ~~Company~~plans ~~has~~had ~~elected~~an toexercise ~~continue~~price equal to ~~apply~~the ~~APB~~market 25value ~~in accounting~~of ~~for~~the ~~its~~underlying common stock ~~option~~on ~~incentive~~the ~~plans.~~date ~~See~~of ~~Note 13-Stock Option Plans~~grant.

If the Company had elected to determine compensation expense as provided in FAS 123, the pro forma effect would have been as follows:

($in thousands except for per share data)

	Year Ended December 31,
	2004		2003		2002
Net loss -- as reported	$	(15,899)		(2,255)		(2,841)
Net loss -- pro forma		(16,244)		(2,422)		(2,919)
Loss per share -- as reported		(.24)		(.03)		(.09)
Loss per share -- pro forma		(.24)		(.04)		(.09)

The Black-Scholes model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility.

The value was estimated for 2004 using a weighted average expected life of three years, volatility of 51.93% to 152.18% and risk-free interest rate of 4.03%.The value was estimated for 2003 using a weighted average expected life of three to five years, volatility of 218% and risk-free interest rate ranging from 3% to 4%. The value was estimated for 2002 using a weighted average expected life of three to five years, volatility of 59.3% and risk-free interest rate ranging from 2.2% to 4.03%. The dividend yield was 0% for each of 2004, 2003 and 2002.

Outstanding stock options were not included in the computation of diluted net loss per share because their inclusion would have had an antidilutive effect for the periods presented.

F-9

Comprehensive Income:

The Company follows SFAS 130, Reporting Comprehensive Income, which establishes standards for reporting and display of comprehensive income and its components in financial statements.

Cash and cash equivalents

Cash and cash equivalents consist of cash and a highly liquid investment in Guaranteed Investments Certificates ("GIC"), available for withdrawal by the Company upon request. The GIC has been pledged as security for a line of credit, of which $~~104~~131,000 has been drawn upon by the Company as of December 31, ~~2003~~2004.

Recent pronouncements:

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. This statement is effective for contracts entered into or modified after June 30, 2003, except as for provisions that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, which should continue to be applied in accordance with their respective dates. The adoption of this pronouncement did not have a material effect on the results of operations or financial position.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement requires that certain financial instruments that, under previous guidance, issuers could account for as equity, be classified as liabilities in statements of financial position. Most of the guidance in SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this pronouncement did not have a material effect on the results of operations or financial position.

SFAS No. 151 - "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" SFAS No. 151 retains the general principle of ARB No. 43, Chapter 4, "Inventory Pricing,"that inventories are presumed to be stated at cost; however, it amends ARB No. 43 to clarify that abnormal amounts of idle facilities, freight, handling costs and spoilage should be recognized as current period expenses. Also, SFAS No. 151 requires fixed overhead costs be allocated to

inventories based on normal production capacity. The guidance in SAFS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of this pronouncement did not have a material effect on the results of operations or financial position.

SFAS 123 (Revised) -" Share Based Payment," requires the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award-the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25. SFAS No. 123 (Revised) is effective for the first interim or annual reporting period that begins after December 15, 2005. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is encouraged. The Company is currently evaluating the impact of this pronouncement and has determined it will have a negative effect on reported earnings.

SFAS 152 - In December 2004, the FASB issued SFAS No. 152 "Accounting for Real Estate Time-Sharing Transactions - an amendment of FASB Statements No. 66 and 67" ("SFAS 152"). This statement amends FASB Statement No. 66 "Accounting for Sales of Real Estate" to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position 04-2 "Accounting for Real Estate Time-Sharing Transactions" ("SOP 04-2"). SFAS 152 also amends FASB Statement No. 67 "Accounting for Costs and Initial Rental Operations of Real Estate Projects" to state that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions, with the accounting

F-10

for those operations and costs being subject to the guidance in SOP 04-2. The provisions of SFAS 152 are effective in fiscal years beginning after June 15, 2005. The adoption of this pronouncement did not have a material effect on the results of operations or financial position.

SFAS 153 - In December 2004, the FASB issued SFAS No. 153 "Exchanges of Non-monetary Assets - an amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 replaces the exception from fair value measurement in APB Opinion No. 29 for non-monetary exchanges of similar productive assets with a general exception from fair value measurement for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for all interim periods beginning after June 15, 2005.

The adoption of this pronouncement did not have a material effect on the results of operations or financial position.

At December 31, 2003, the Company has four stock-based compensation plans, more fully described in Note 13. The Company accounts for those plans under the recognition and measurement principals of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

In January 2003, the FASB has issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activity without additional subordinated financial support from other parties. FIN 46 applies to variable interest entities created after January 31, 2003, and it is effective as of July 31, 2003 for variable interest entities created prior to February 1, 2003. The Company does not expect the adoption of FIN 46 to have a material effect on its financial position, results of operations or cash flows.

Note 3 - Business Combination:

On November 7, 2002, following approval by the Company's shareholders, the Company and Zi Corporation (NYSE: ZICA; TSE: ZIC), ("Zi"), concluded a Share Purchase Agreement, resulting in the Company's purchase of the Lantern Group (note 1). The transaction also resulted in a change to the Company's corporate name to Magic Lantern Group, Inc. and a related change in the AMEX trading symbol for its common stock to "GML," effective November 8, 2002.

The Company has accounted for its acquisition of the Lantern Group under the purchase method of accounting. The consideration for the Lantern Group was 29,750,000 common shares of the Company, representing 45% of its common shares outstanding after giving effect to the transaction. Shares issued were valued at $.31 per share when the terms of the transaction were established in a letter of intent between the parties. In addition, the Company issued a promissory note in the amount of $3,000,000, bearing interest at 5% per annum ("the Lantern Purchase Note" or the "Note"); and

~~F-11~~the terms of the transaction were established in a letter of intent between the parties. In addition, the Company issued a promissory note in the amount of $3,000,000, bearing interest at 5% per annum ("the Lantern Purchase Note" or the "Note"); and incurred acquisition costs of approximately $141,000. The Share Purchase Agreement provides for a performance based consideration adjustment to the purchase consideration.

~~incurred~~The ~~acquisition~~Purchase ~~costs~~Agreement also provides for a reduction in the purchase price if Lantern Revenues during the Performance Period of ~~approximately~~one year are less than $~~141,000~~5 million. ~~The Share~~In ~~Purchase~~that ~~Agreement~~event, ~~provides~~the ~~for~~Company awill ~~performance~~be ~~based~~entitled ~~consideration adjustment~~to offset the amount of the shortfall, up to $1 million, against the ~~purchase~~principal ~~consideration.~~amount of the Note.

The Purchase Agreement also provides for a reduction in the purchase price if Lantern Revenues during the Performance Period are less than $5 million. In that event, the Company will be entitled to offset the amount of the shortfall, up to $1 million, against the principal amount of the Note.

The purchase price for the acquired businesses has been allocated among their assets and liabilities as of the closing date as follows:

(In thousands)

Cash	$ 353
Non-cash working capital	35
Property and equipment	1,128
Intangible assets	4,492
Goodwill	6,868
Indebtedness assumed	(513)
	$ 12,363

~~The following summarized unaudited pro forma information assumes the acquisition had occurred on January 1 of each year:~~F-11

~~Pro~~The ~~Forma~~following ~~Information (~~summarized unaudited, inpro ~~thousands,~~forma ~~except~~information ~~per~~assumes ~~share~~the ~~data) 2002 2001 Net~~acquisition ~~Revenue $~~had ~~2,557 $~~occurred ~~5,537 Net~~on ~~Loss (4,782) (4,676) Loss~~January ~~per~~1 ~~share~~of ~~- basic and diluted (.08) (.14)~~ 2002:

F-12

Pro Forma Information (unaudited, in thousands, except per share data)	2002

Net Revenue	$ 2,557
Net Loss	(4,782)
Loss per share - basic and diluted	(.08)

The pro forma results do not purport to be indicative of results that would have occurred had the acquisition been in effect for the ~~periods~~ period presented, nor do they purport to be indicative of the results that would be obtained in the future.

Note 4 - Segment Information:

In 2001, and 2002, up until the acquisition of the Lantern Group, the Company operated in the Apparel Distribution Segment, with sales primarily in the United States. Its customers were generally comprised of sporting goods and specialty store chains, mass merchandisers and various wholesale membership clubs. During 2001, approximately 47% of net sales were made to two customers. In April, 2002, the Company had substantially wound down the apparel segment and redirected its business (see note 5 - Equity Infusion), After the acquisition of the Lantern Group, the Company became involved in the marketing and distribution of educational and media resources throughout Canada, the Education, Distribution and ~~Distribution~~Geographic Segment, accordingly, the results for the year ended December 31, 2004 and 2003 are entirely derived from this segment.

Business segment information for the ~~years~~year ended December 31, ~~are~~ 2002 is as follows:

(In thousands)

	2002	~~2001~~
Net Revenue
Apparel	$ 21	~~$ 2,855~~
Education and Distribution	365	--
	$ 386	~~$ 2,855~~
Operating loss
Apparel	$ 2,512	~~$ 2,795~~
Education and Distribution	376	--
	$ 2,888	~~$ 2,795~~
Identifiable total assets
Apparel	$ 834	~~$ 492~~
Education and Distribution	13,128	--
	$ 13,962	~~$ 492~~
Capital expenditures
Apparel	$ --	~~$ --~~
Education and Distribution	91	--
	$ 91	~~$ --~~
Depreciation and amortization
Apparel	$ 27	~~$ 209~~
Education and Distribution	109	--
	$ 136	~~$ 209~~

F-1312

Note 5 - Equity Infusion:

On ~~April 16~~December 30, ~~2002~~2004, asthe ~~part~~Company, ofthrough the ~~planned~~private ~~redirection~~placement of ~~its business~~equity securities, consummated the ~~Company~~unregistered ~~completed~~sale aof ~~$1.5 million equity infusion by Alpha Omega Group~~800,000 ~~Inc.,~~shares aof ~~private~~common ~~investment~~stock ~~group~~ (the "~~AOG~~Shares"), ~~pursuant~~$0.01 topar avalue ~~stock~~per ~~purchase agreement~~share ~~with AOG dated as of August 23, 2001~~ (the "~~AOG~~Common ~~Agreement~~Stock")~~. In accordance with the AOG Agreement~~, ~~the~~and ~~Company issued 30 million shares of its~~ common stock topurchase ~~AOG~~warrants atto ~~$.05~~purchase ~~per share and~~ an additional ~~2.1 million~~800,000 shares ~~to AOG's advisory firm, representing 83% and 6%, respectively,~~ of ~~36,227,267~~Common ~~common shares~~Stock ~~outstanding after the issuance. The parties also consummated various related transactions covered by the AOG Agreement~~ (~~collectively with~~ the ~~equity infusion, the~~ "~~AOG Transactions~~Warrants"), ~~including~~to ~~the~~certain ~~reconstitution~~accredited ofinvestors. The ~~the~~Shares ~~Company's board~~and ofthe ~~directors~~Warrants ~~with~~were ~~three~~issued ~~designees~~to ofprivate ~~AOG,~~investors ~~an increase~~ in ~~the~~transactions ~~Company's authorized~~that ~~common~~were ~~stock~~exempt ~~to 100 million shares, transitional services~~ from ~~members~~ ofregistration ~~existing~~pursuant ~~management~~to ~~and~~Section ~~replacement~~4(2) of ~~outstanding stock options with new options for~~ the ~~same~~Securities ~~number~~Act of ~~shares~~1933 ~~exercisable for three years at the lower of $.50 per share or the exercise price of the replaced options~~ (the "~~Replacement~~Securities ~~Options~~Act"), ~~a change in the name from Stage II Apparel Corp. to "JKC Group, Inc."~~ and/or aRegulation ~~related~~D ~~change~~promulgated inunder the ~~American~~Securities ~~Stock Exchange ("AMEX") trading symbol for its common stock from "SA" to "JKC," effective April 18, 2002~~Act.

As a result of the transactions, three term promissory note holders of the Company converted an aggregate of $200,000 of principal into 800,000 shares of Common Stock at a rate of $0.25 per share and received three-year Warrants to purchase 800,000 shares of Common Stock at an exercise price of $0.40 per share.

As a result of the transactions, two term promissory note holders of the Company converted an aggregate of $750,000 of principal and $2,662 of accrued interest into 3,010,649 shares of Common Stock at a rate of $0.25 per share and received three year Warrants to purchase 3,010,649 shares of Common Stock at an exercise price of $0.40 per share. In addition, the Company issued 1,000,000 shares to an additional investor at a price of $0.25 per share, for gross proceeds of $250,000, along with three year Warrants to purchase 1,000,000 shares of Common Stock at an exercise price of $0.40 per share.

On June 10, 2004 the Company agreed to transfer 500,000 shares of common stock of the Corporation, par value $0.01 (the "Common Shares") to National Financial Corporation ("NFC") in consideration for investor relations and promotional services.

registered shares of Laurus Funds' stock underlying the Note, and the Company's stock is trading at a 25% or greater premium to the fixed conversion price under the Note of $0.25.

F-13

The Company paid a closing fee equal to $58,500 to the manager of Laurus Funds and paid $29,500 as reimbursement for the investor's legal and due diligence expenses

On April 16, 2002, as part of the planned redirection of its business, the Company completed a $1.5 million equity infusion by Alpha Omega Group, Inc., a private investment group ("AOG"), pursuant to a stock purchase agreement with AOG dated August 23, 2001 (the "AOG Agreement"). In accordance with the AOG Agreement, the Company issued 30 million shares of its common stock to AOG at $.05 per share and an additional 2.1 million shares to AOG's advisory firm, representing 83% and 6%, respectively, of 36,227,267 common shares outstanding after the issuance. The parties also consummated various related transactions covered by the AOG Agreement (collectively with the equity infusion, the "AOG Transactions"), including the reconstitution of the Company's board of directors with three designees of AOG, an increase in the Company's authorized common stock to 100 million shares, transition al services from members of existing management and replacement of outstanding stock options with new options for the same number of shares exercisable for three years at the lower of $.50 per share or the exercise price of the replaced options (the "Replacement Options"), a change in the name from Stage II Apparel Corp. to "JKC Group, Inc." and a related change in the American Stock Exchange ("AMEX") trading symbol for its common stock from "SA" to "JKC," effective April 18, 2002.

Note 6 - Property and Equipment:

Property and equipment consists of the following:

(In thousands)

	2003	2002
	2004	2003
Furniture and fixtures	~~$ 318~~322	$ ~~383~~318
Computer and software	~~128~~158	~~102~~128
Masters and libraries	665	~~568~~665
Leasehold improvements	~~111~~35	91111
	1,222	1,144
	1,218	1,222
Less: accumulated depreciation and amortization	~~204~~629	34204
	$ 1,018	$ 1,110
	589	$ 1,018

~~Note~~Property 7and equipment is recorded at cost. Furniture and fixtures, computers and software, and masters are depreciated on a straight-line ~~Intangible~~basis ~~Assets:~~over five years, two to three years, and ten years, respectively. Leasehold improvements are amortized on a straight-line basis over the shorter of the useful life or remaining lease term. Depreciation expense for the year ended December 31, 2004 and 2003 was approximately $425,000 and $170,000 , respectively.

~~Intangible~~Note ~~assets~~7 ~~consist~~- ofIntangible ~~the~~Assets ~~following at December 31, 2003~~ and ~~2002~~Goodwill:

~~(In~~At ~~thousands)~~least annually and when events and circumstances warrant a review, the Company evaluates the carrying value of its intangible assets for potential impairment. An impairment loss is recognized when the estimated net realizable value of any asset is less than its carrying value. Any impairment in assets is written down and charged to earnings in the year. To perform the evaluation, the company retained the services of an independent valuator to estimate the fair value of the intangible assets as of December 31, 2004. Management has reviewed and accepted the independent valuator's recommendation that an impairment charge of $20,000 to the carrying value of the intangible assets. This amount has been included in the amortization for the year.

2003 2002 Exclusive distribution agreements $ 3,409 $ 3,099 Internet and indexing software technologies 1,862 1,417 5,271 4,516 Less: accumulated amortization 690 80 $ 4,581 $ 4,436

Distribution agreements are being amortized on a straight line basis over six years. Amortization expense on distribution agreements for the year ended December 31, 2003 and 2002 was approximately $610,000 and $80,000, respectively. Amortization of software technology has not yet commenced since the related software has not yet been deployed. Once the software is deployed, the software will be amortized on a straight line basis over three years. The Company deployed its software, on a trial basis, on September 25, 2003 and anticipates commencing amortization of the software in the first quarter of 2004.

F-14

Intangible assets consist of the following at December 31, 2004 and 2003:

(In thousands)

	2004	2003
Exclusive distribution agreements	3,529	$ 3,409
Internet and indexing software technologies	1,953	1,862
	5,482	5,271
Less: accumulated+ amortization	1,575	690
	3,907	$ 4,581

Distribution agreements are being amortized on a straight line basis over six years. Amortization expense on distribution agreements for the year ended December 31, 2004 and 2003 was approximately $865,000 and $610,000, respectively. Amortization of software technology commenced in August 2004. The software is amortized on a straight line basis over three years. Amortization expense on software technology for the year ended December 31, 2004 was approximately $237,000.

Amortization expense for the next five years is expected to be approximately as follows:

(In thousands)

2004	$ 1,189
2005	1,299
2005	1,189
2006	1,299
2006	1,189
2007	1,082
2007	568
2008	227
2008	446

~~Note~~Two 8Statements -of Financial Accounting Standards ("SFAS") deal with Impairment; they are SFAS 142 "Goodwill and Intangible Assets" and SFAS 144 "Long ~~Term~~Lived ~~Debt:~~Assets".

The Company has two recorded Intangible Assets: Distribution Rights to educational videos and Software which digitally encodes them so that they can be sold as "information units".

SFAS 142 requires Intangible Assets to be amortized over their remaining useful lives unless they are considered indefinite. Management has determined that the Distribution Rights should be amortized on a straight-line basis over six years, while the Software's life is three years from August 2004.

Impairment Test Under SFAS 144

SFAS 144 has a two-step test to determine if a long-lived asset is impaired.

STEP 1

The first step compares the Cash Flows expected to be generated by the asset over the balance of its remaining life with the Carrying Amount. If the Cash Flows are greater there is no impairment; if they are less then the amount of the loss is obtained by deducting the Carrying Amount from the Fair Value of the asset.

DISTRIBUTION RIGHTS

Based on the independent valuators results it was their Opinion that no impairment on Distribution Rights exists.

SOFTWARE

Based on the independent valuators results it was their Opinion that a potential impairment on Software exists. And accordingly the Company recognized the impairment loss of $20,000 in the current period.

SFAS 142 Impairment of Goodwill

FASB 142 requires an annual assessment of the carrying value of goodwill and management engaged the services of an independent valuator to assist.

Under SFAS 142 a different two-step test is applied to determine the Impairment of Goodwill.

STEP 1

In Step one the Carrying Value of the Equity including Goodwill is compared with its Fair Value. If the fair value is less than the carrying amount, there is a potential impairment and proceed to Step two.

STEP 2

In Step 2 of the SFAS 142 Test the Book Values of all assets and liabilities are replaced by their Fair Values; the objective is to obtain an implied Fair Value for the Goodwill, which is very difficult to measure directly. Since goodwill cannot be measured directly, its value is determined as a residual amount after valuing all assets other than goodwill.

Based on the results of an independent valuator it was recommended that an impairment loss of $3,000,000 to goodwill exists. Management has accepted the results of the impairment as they relate to losses experienced by the Company over prolonged periods. And accordingly, the Company recognized the impairment in the current period.

Note 8 - Long Term Debt and Convertible Term Note Payable:

Long-term debt at December 31, consists of the following:

(In thousands)

	2003	2002
	2004	2003
Zi Corporation - Lantern Purchase Note (a)	$ 2,~~165~~265	$ 32,~~022~~165
Provincial Holdings Ltd. (b)	~~580~~646	~~475~~580
Atlantic Canada Opportunities Agency (c)	2622	2726
	2,771	3,524
Laurus Master Fund Ltd. (d)	207	0
Less: current portion	759	492
	3,140	2,771
	$ 2,012	$ 3,032
Less: current portion	2,924	759
	$ 216	$ 2,012

(a) Included in the Lantern Purchase note is approximately $~~165~~265,000 of accrued interest at December 31, ~~2003~~2004 ($22165,000 at December 31, ~~2002~~2003 ) which is due on June 30, 2004 in accordance with the Share Purchase Agreement (see note 3). The purchase note is ~~due~~an unsecured promissory note with an interest rate of 5% maturing on November 7, 2005. The Company has not made any interest payments since the inception of the promissory note. (b) In June 1995, STI received an advance of $~~475~~646,000 (Can $750,000) from PHL, its 25% shareholder. The PHL loan is evidenced by a demand promissory note with interest calculated at 6.75% per annum, which matured September 30, 2003. Included in accrued and other current liabilities is accrued interest of approximately $~~118~~137,000 at December 31, ~~2003~~2004 ($73118,000 at December 31, ~~2002~~2003). The PHL loan agreement provides for repayment in full of principal plus accrued interest at the earlier of: the commencement of redemption of shares pursuant to a redemption agreement (see note 13, Redemption of shares of subsidiary); the maturity date; or any breach of STI's obligations under the loan agreement or any other agreement with PHL. The Company is currently in the process of renegotiating the terms of its outstanding loan, held by the Minister of Business of New Brunswick, which was due on September 30, 2003, and has received a no default letter from the Minister of Business New Brunswick, dated October 3, 2003. Although annual extensions of the loan maturity date have been granted in the past there can be no assurance that the loan will be renewed and on terms favorable to the Company. (c) The loans made by Atlantic Canada Opportunities Agency to STI are unsecured and non-interest bearing. The loans are payable in monthly installments ranging from $176 per month to $1,445 per month and mature on various dates through April 2007. In May 2002, the terms of these loans were amended to suspend principal repayments until May 2004. (d) The Company issued on May 3, 2004, a $1,500,000 principal secured convertible three-year term note with the Laurus Master Fund, Ltd. The Note bears interest at the prime rate, as reported in the Wall Street Journal, plus 2% (which under no circumstances will be considered to fall below 6% on a combined basis), with interest and amortizing monthly payments of $45,454 principal commencing August 1, 2004. The face value of the secured convertible term note at December 31, 2004 is $610,000 but has been discounted to approximately $207,000. Interest will accrete monthly increasing the amount disclosed on the balance sheet of $207,000 to the face value of the debt in the amount of $610,000. Attached to the convertible term notes are 1,100,000 warrants, exercisable for a period of three years at an exercise price of $.30 for each $1.00 invested. Of the proceeds received, $957,000 was allocated to warrants, based on their estimated fair value, as determined using the Black-Scholes model, using a volatility of 200.90%, a risk-free interest rate of 2.28%, an expected useful life of three years, and expected dividend yield of zero percent. This resulted in an effective interest rate on the convertible term note payable of 34% at inception of the note. Payments under the Note are convertible to common stock of the Company at the option of Laurus Funds at a fixed conversion price of $0.25. Laurus converted to common stock approximately $293,000 of principal and interest during the year. In December 2004, the Company also elected to prepay outstanding principal in the amount of $640,000 in cash and an amount that is equal to 125% of the aggregate principal repaid ($160,000). Payment of all principal and interest under the note, as well as performance of the obligations of the Company and its subsidiaries, under all of the ancillary agreements entered into by the Company and its subsidiaries in connection with the sale of the note and warrant, are secured by a security interest in favor of Laurus Funds in all of the assets of both the Company and its subsidiaries.

Approximate future annual principal payments for long-term debt, for years ending December 31, are as follows:

(In thousands)

2004	$ 759
2005	2,924
2005	2,007
2006	145
2006	3
2007	62
2007	2
2008	9
2008	--
	$ 3,140
	$ 2,771

F-15

Note 9 - Fair Value of Financial Instruments:

The carrying amounts of financial instruments approximate their fair values as of December 31, ~~2003~~2004 and ~~2002~~2003. The methods and assumptions used to estimate the fair values of the financial instruments vary among the types of instruments. For cash, accounts receivable, bank indebtedness, current potion of long-term debt, accounts payable, ~~due to affiliate and other current liabilities, the short maturity of the instruments and obligations supports their fair values at their respective carrying amounts.~~

and other current liabilities, the short maturity of the instruments and obligations supports their fair values at their respective carrying amounts.

F-16

Note 10 - Related Party Transactions:

~~Indebtedness~~Promissory Notes Payable. In connection with the financing referred to ~~Affiliate~~in note 14, the Company received $323,000 (CDN$450,000) from a company controlled by one of its former directors.

~~Lease~~Consulting ~~from~~Fees. ~~Affiliate~~During the year ended December 31, 2004 the Company expensed consulting fees in the amount of $105,000 to one of the directors for these services. During the year ended December 31, 2003, the Company expensed consulting fees in the amount of $51,000 to a company controlled by one of its directors and $7,500 directly to the director for these services.

Promissory Notes Payable.

Consulting Fees.

Note 11 - Income Taxes:

a) The provision for income taxes consists of the following:

(In thousands)

	Year Ended December 31,
Provision for income taxes:	~~2003~~2004	~~2002~~2003	~~2001~~2002
Domestic:
Current:
Federal	$ --	$ --	$ 8--
State	--	--	25--
	$ --	$ --	$ 33--

F-16

The total provision for income taxes for the years ended December 31, 2003, 2002 and 2001 varied from the United States federal amounts computed by applying the U.S. statutory rate of 34% to pre-tax income (loss) as a result of the following:

(In thousands, except percentages)
	Year Ended December 31,
		2003	Rate		2002	Rate		2001	Rate
Computed expected tax (benefit)	$	(767)	34.0%	$	(966)	34.0%	$	(1,004)	34.0%
Utilization of NOL carryforward		--	--		--	--		--	--
State and local income taxes (benefit), net of federal income tax benefit		--	--		--	--		25	(.8)
Foreign taxes less than statutory rate		113	(5.0)		142	(5.0)		--	--
Change in valuation allowance		654	(29.0)		824	(29.0)		1,003	(34.0)
Adjustment of previously recorded tax benefit		--	--		--	--		--	--
Nondeductible expenses for income tax purposes		--	--		--	--		1	--
Other		--	--		--	--		8	(.3)
	$	--	--	$	--	--	$	33	(1.1)%

The tax effects of temporary differences that gave rise to a significant portion of the deferred tax assets and liabilities at December 31, 2003 and 2002 are as follows:

(In thousands)
		December 31,
			2003		2002
Current deferred tax assets:
	Inventory tax basis greater than financial statement basis	$	--	$	--
	Allowance for bad debt		34		24
	Less valuation allowance		(34)		(24)
	Net current deferred tax assets		--	$	--
Long-term deferred tax assets:
	Net operating loss carryforward	$	4,201	$	5,035
	Stock option compensation		(371)		762
	Amortization of goodwill and covenant not to compete		--		1,015
	Total long-term deferred tax assets		3,830		6,812
Less valuation allowance			(3,830)		(6,812)
	Net long-term deferred tax assets	$	--	$	--

For the years ended December 31, 2003, 2002 and 2001, the Company recorded net increases (decreases) in the total valuation allowance of $(2,982), $1,595,000 and $2,104,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of December 31, 2003, the Company had U.S. net operating loss carryforwards for income tax purposes of approximately $12,355,000 million expiring through 2022, subject to annual limitations. At December 31, 2003, the Company had Canadian net operating loss carry forwards for income tax purposes of approximately $1,759,000, expiring through 2010.

The change in ownership in 1998, the sale of common stock in April 2002 to AOG, and the acquisition of MVM in November 2002 has resulted in a limitation on future annual utilization of US net operating losses pursuant to Internal Revenue Code Sections 382 and 383.

F-17

b) The tax effects of temporary differences that gave rise to a significant portion of the deferred tax assets and liabilities at December 31, 2004 and 2003 are as follows:

(In thousands)
		December 31,
			2004		2003
Current deferred tax assets:
	Allowance for bad debt		23		34
	Less valuation allowance		(23)		(34)
	Net current deferred tax assets	$	--	$	--
Long-term deferred tax assets:
	Net operating loss carryforward	$	4,887	$	4,201
	Stock option compensation		(252)		(371)
	Goodwill		1,020		--
	Total long-term deferred tax assets		5,655		3,830
Less valuation allowance			(5,655)		(3,830)
	Net long-term deferred tax assets	$	--	$	--

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not, that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. The deferred tax asset has been fully provided for as realization is not considered "more likely than not". As of December 31, 2004, the Company had U.S. net operating loss carry-forwards for income tax purposes of approximately $8,449,000 expiring through 2022, subject to annual limitations. At December 31, 2004, the Company had Canadian net operating loss carry forwards for income tax purposes of approximately $2,134,000 ex piring through 2014.

The change in ownership in 1998, the sale of common stock in April 2002 to AOG, and the acquisition of MVM in November 2002 resulted in a limitation on future annual utilization of US net operating losses pursuant to Internal Revenue Code Sections 382 and 383.

F-18

Note 12 - Commitments and Contingencies:

License Agreements. The Company's agreements generally do not require minimum royalty payments or advertising expenditures. During the year the company signed an agreement with a producer that guarantees revenues, from the sale of the producer's product, of approximately $77,000 (CAD$100,000) and $97,000 (Can $125,000) for 2003. The Company has met these minimum royalty payment requirements. This guarantee was required by the producer as a condition to maintain exclusive distribution rights for it's product.

Litigation Settlement. The Company licensed its Cross Colours trademark for domestic sales of boys' sportswear apparel under an agreement with a three-year term scheduled to end in 2002. In 2000, following the licensee's failure to pay minimum royalties, the Company brought an action in New York County Supreme Court against the licensee for damages in excess of $1.5 million under the license agreement. Minimum royalties to the Company required under the agreement were $420,000 in 2001 and $660,000 in 2002. In April 2002, the Company accepted a settlement offer of $535,000 in its litigation against the domestic licensee. The settlement is payable in a contemporaneous installment of $335,000 and the balance of $200,000 in January 2003. The Company assigned its rights to the January 2003 settlement installment in satisfaction of its remaining obligations under notes payable to an affiliate. In January, 2003, the final installment in the amoun t of $200,000 was received by the affiliate and applied in full against the note payable to the affiliate in the amount of $176,000.

Miscellaneous Claims. Various miscellaneous claims and suits arising in the ordinary course of business have been filed against the Company. In the opinion of management, none of these matters will have a material adverse effect on the results of operations or the financial position of the Company. The Company has claims filed by solicitors for unpaid services, associated with financing and legal services rendered. The services claimed have been provided in these financial statements.

Other Matters. Lancer Management Group II, LLC, Lancer Offshore, Inc., LSPV LLC, and Omnifund Ltd. (the "Lancer Group") have been collectively a significant shareholder of the Company since the final quarter of 2002. On July 10, 2003, the Securities and Exchange Commission brought a civil action in the United States District Court for the Southern District of Florida against Michael Lauer and Lancer Management I and II alleging securities fraud in connection with portfolio transactions effected by the Lancer management. While the complaint does not allege any fraud in connection with the Company's securities, records produced by the SEC in the court proceeding indicate that Lancer management had either not reported the extent of its ownership in portfolio companies or had underreported the ownership. According to a Form 13D filed by receiver to the Lancer Group on July 10, 2003, the Lancer Group, in the aggregate, controls 45.1% of the Company's outstanding shares as of that date. Even though no wrongdoing has been alleged in connection with Lancer's ownership of Company securities, the Company, the financial statement impact, if any, and the market for its shares may be adversely affected by any court findings or the negative publicity generated by the Lancer proceedings or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer. In addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital on to actively manage the Lancer portfolio securities. As of December 31, 2004 there have been no further developments on the proceedings.

Lease commitments.

The future minimum annual lease payments under operating leases for the years ended December 31, are as follows:

(In thousands)

	Office Equipment	Premises	Total
2004	$ 14	$ 169	$ 183
2005	$ 45	$ 189	$ 234
2005	11	157	168
2006	40	190	230
2006	2	145	147
2007	29	190	219
2007	2	145	147
2008	22	124	146
2008, and thereafter	1	60	61
2009 and thereafter	19	47	66
	$ 30	$ 676	$ 706
	$ 155	$ 740	$ 895

Rent expense for 2003, 2002, and 2001 was approximately $219,000, $33,000, and $113,000, respectively.

Redemption of shares of subsidiary.

F-18

outstanding) may be redeemed by STI for an amount equal to a notional purchase price per share plus the increase per share in retained earnings of STI to the date of redemption and deducting therefrom the interest paid on the PHL loan. There has been no repayment on the loan as at December 31, 2003. The shares may be redeemed pro rata.

As at December 31, 2003, the redemption value of the shares equaled a nominal amount.

Employment agreements.

Claim and Counter Claim.

Note 13 - Stock Option Plans:

The Company maintains Incentive Stock Option Plans (the "Plans") adopted in 2002, 1998, and 1994 providing for the grant of options to purchase up to 4,500,000 shares, 1,000,000 shares, and 300,000 shares, respectively, of the Company's common stock to key employees of the Company. The purchase price per share of common stock issuable upon the exercise of options granted under the Plans is fixed by a Compensation Committee of the Board of Directors in an amount equal to, at least 100% of the market price of the common stock on the date of the grant or 110% of the market price for any grantee of an incentive stock option who directly or indirectly possess more than 10% of the total combined voting power of all classes of the stock of the Company or any parent or subsidiary thereof. Each option granted under the Plans is exercisable for periods of up to ten years from the date of grant.

In addition, Mr. Siskind, Director, has options to purchase 900,000 shares of common stock at an exercise price of $.50.

F-19

~~Stock~~Rent ~~option~~expense ~~activity~~ for ~~each~~2004, of2003, ~~the~~and ~~three~~2002 ~~years~~was ~~ended December~~approximately 31$196,000, ~~2003~~$219,000, isand ~~summarized~~$33,000, ~~below:~~respectively.

	Shares Subject to Options	Weighted Average Exercise Price Per Share
Balance at December 31, 2000	1,821,000		.781
Options granted	115,000		.300
Options exercised	--		--
Options canceled	(59,000)		.751
Balance at December 31, 2001	1,877,000		.752
Options granted	2,295,000		.382
Options exercised	(170,000)		.270
Balance at December 31, 2002	4,002,000	$	.437
Options granted	2,730,000		.75
Options cancelled	(825,000)		(.40)
Options exercised	(50,000)		.25
Balance at December 31, 2003	5,857,000	$	.61

Redemption of shares of subsidiary. STI is party to a redemption agreement dated March 15, 1995 and extended indefinitely with its 25% minority shareholder, Provincial Holdings Ltd. ("PHL"). Provided STI has repaid all indebtedness to PHL, the shares held by PHL (PHL holds twenty five of the one hundred common shares outstanding) may be redeemed by STI for an amount equal to a notional purchase price per share plus the increase per share in retained earnings of STI to the date of redemption and deducting therefrom the interest paid on the PHL loan. There has been no principal repayment on the loan as at December 31, 2004. The shares may be redeemed pro rata.

Option Exercisable and Available for Grant
Exercisable at December 31,
2001	1,877,000
2002	4,002,000
2003	3,124,000
Available for grant at December 31,
2001	323,000
2002	2,698,000
2003	793,000
Weighted average fair value of options granted during the year ended December 31,
2001	.30
2002	.56
2003	.34
Weighted average remaining contractual rights (in months) at December 31, 2003	31.2

As at December 31, 2004, the redemption value of the shares equaled a nominal amount.

~~Prior~~Employment toagreements. The ~~the~~Company ~~AOG~~entered ~~transactions,~~into ~~the~~employment ~~Company~~agreements ~~maintained~~with four ~~stock~~ ~~option~~executives ~~plans adopted since 1994. Three~~ of ~~these~~the ~~are~~Company ~~compensatory, designed to supplement~~ and/or ~~replace~~a ~~employee~~subsidiary ~~salaries and director fees with options for an aggregate~~ of ~~up to 2.2 million shares of~~ the Company's ~~common~~for ~~stock.~~a ~~The~~term ~~fourth such plan was adopted in connection with the 1998 change~~ of ~~control~~three asyears aeffective ~~result of~~March ~~AOG's~~18, ~~investment in the company~~2002, which ~~included~~all ~~the~~have ~~purchase~~expired by($39,000 ~~Richard Siskind~~remain ofin 12005).~~9 million~~ ~~shares~~The ofCompany ~~common~~entered ~~stock~~into ~~from~~an ~~the~~employment ~~company's~~agreement ~~original founders in connection~~ with ~~such~~Robert ~~transaction~~A. ~~As part of that transaction~~Goddard, ~~Mr. Siskind~~President ~~granted~~and ~~options~~Chief toExecutive ~~the~~Officer ~~founders~~for ~~to reacquire~~ a ~~total~~term of ~~1.5~~three ~~million shares from him at exercise prices ranging from $~~years.50 All tocontracts ~~$1.50~~can ~~per~~be ~~share~~extended ~~referred to~~for asan ~~the~~additional ~~founder's~~two ~~options,~~years ~~which are not reflected in the above table,~~ and ~~the Company~~may ~~issued~~be toterminated ~~Mr.~~by ~~Siskind~~either ~~options~~party toupon ~~purchase~~90 updays towritten ~~1.5~~notice ~~million~~or ~~newly~~at ~~issued shares~~any oftime common stock on the same terms as the founders options, exercisable only to the extent the founders options are exercised. During 1998, founder's options covering 1,350,000 shares of common stock were acquired from the holders by ~~Jon Siskind, a former officer and director of~~ the Company ~~and~~for ~~the son of Richard Siskind~~cause.

InClaim ~~connection~~and ~~with~~Counter ~~the~~Claim. On ~~company's~~October ~~acquisition~~20, 2003, Douglas Connolly, formerly President of Magic Lantern ~~The~~ Communications, Ltd., (a subsidiary of the Company) ~~agreed~~and Wendy Connolly were terminated by the Company. Both the Company and the Connollys are in disagreement over the terms of their termination, however, the parties continue to ~~create~~communicate ain ~~new~~regards ~~stock~~to ~~option~~this ~~plan~~disagreement. ~~authorizing~~Wendy Connolly susequently filed action against the ~~grant~~Company claiming damages in the amount of ~~options~~ $250,000 for wrongful dismissal. On February 3, 2004, counsel to ~~purchase~~Wendy anConnolly ~~aggregate~~was formally served with a Statement of 4Defence and Counterclaim by the Company.~~5 million~~ ~~shares~~The Statement of ~~common~~Defence ~~stock~~and Counterclaim adds Doug Connolly as a defendant in the counterclaim. The counterclaim seeks damages as against both Wendy and Doug Connolly for damages in the amount of $500,000, an accounting to determine profits made by the Connollys in relation to the breach of their fiduciary duties, a perman ~~representing~~ ent and interlocutory injunction restraining the Connollys from soliciting clients and utilizing confidential information, punitive damages in the amount of $1,000,000 plus interest and costs. The Company believes that claims made by Wendy Connolly are without merit. The matter is pending before the courts. On April 25, 2005 the Company negotiated a settlement on the claim and counterclaims noted above, which parties agreed not to disclose the terms and conditions of the settlement.

Note 13 - Stock Option Plans:

The Company maintains Incentive Stock Option Plans (the "Plans") adopted in 2002, 1998, and 1994 and subsequently modified in 2003 provides for the grant of options to purchase up to 4,500,000 shares, 1,000,000 shares, and 300,000 shares, respectively, of the Company's common stock to key employees of the Company. The purchase price per share of common stock issuable upon the exercise of options granted under the Plans is fixed by a Compensation Committee of the Board of Directors in an amount equal to, at least 100% of the market price of the common stock on the date of the grant or 110% of the market price for any grantee of an incentive stock option who directly or indirectly possess more than 10% of the total combined voting power of all classes of the stock of the Company or any parent or subsidiary thereof. Each option granted under the Plans is exercisable for periods of up to ten years from the date of grant.

In addition, Mr. Richard Siskind, a Director, has options to purchase 900,000 shares of common stock at an exercise

price of $.50.

F-20

6%Stock of common stock to provide performance incentives for incumbent management and employees of Magic Lantern, its parent company and its subsidiaries at the time of the Company's acquisition of Magic Lantern. Shares may be either previously unissued or reacquired shares. Shares that cease to be subject to an option ~~because~~activity ~~of its expiration or termination will again be available~~ for ~~the~~each ~~grant~~ of ~~options until termination of~~ the ~~plan.~~three Asyears atended December 31, ~~2002,~~2004 nois ~~options~~summarized ~~had been issued under this plan.~~below:

The Company follows APB Opinion 25, Accounting for Stock Issued to Employees, to account for employee stock option plans. An alternative method of accounting for stock options is Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Under FAS 123, employee stock options are valued at grant date using the Black-Scholes valuation model, and this compensation cost is recognized ratably over the vesting period. The Company has adopted the disclosure-only provision of FAS 123 and, as described in Note 2, will continue to apply APB 25 to account for stock options. If the Company had elected to determine compensation expense as provided in FAS 123, the pro forma effect would have been as follows:


	Shares Subject to Options	Weighted Average Exercise Price Per Share

Balance at December 31, 2001	1,877,000		.75

Options granted	2,295,000		.38
Options exercised	(170,000)		(.27)
Balance at December 31, 2002	4,002,000	$	.44

Options granted	2,730,000		.75
Options cancelled	(825,000)		(.40)
Options exercised	(50,000)		(.25)
Balance at December 31, 2003	5,857,000	$	.61
Options granted	350,000		.55
Options cancelled	(205,000)		(.75)

Balance at December 31, 2004	6,002,000		.60

(In thousands)
Option Exercisable and Available for Grant
	Year Ended December 31,
Exercisable at December 31,
	2003		2002		2001
2002	4,002,000
Net loss -- as reported	$	(2,255)	$	(2,841)		(2,977)
2003	3,127,000
Net loss -- pro forma		(2,422)		(2,919)		(3,029)
2004	4,016,167
Loss per share -- as reported		(.03)		(.09)		(.72)
Available for grant at December 31,
Loss per share -- pro forma		(.04)		(.09)		(.73)
2002	2,698,000
2003	843,000
2004	698,000
Weighted average fair value of options granted during the year ended December 31,
2002	.56
2003	.34
2004	.34
Weighted average remaining contractual rights (in months) at December 31, 2004	15.0

~~The~~Prior ~~Black-Scholes~~to ~~model~~the ~~was~~AOG ~~developed~~transactions, ~~for~~the ~~use~~Company inmaintained ~~estimating the~~four ~~fair~~stock ~~value~~option plans adopted since 1994. Three of ~~traded~~these ~~options~~are ~~that~~compensatory, ~~have~~designed noto ~~vesting~~supplement ~~restrictions~~or replace employee salaries and ~~are freely~~director ~~transferable~~fees with options for an aggregate of up to 2.2 Inmillion ~~addition,~~shares ~~option~~of ~~valuation~~the ~~models~~Company's ~~require~~common stock. The fourth such plan was adopted in connection with the ~~input~~1998 change of ~~highly~~ ~~subjective~~control ~~assumptions,~~as ~~including~~a result of AOG's investment in the ~~expected~~company, ~~stock~~which ~~price~~included ~~volatility.~~the

The value was estimated for 2003 using a weighted average expected life of three to five years, volatility of 218% and risk-free interest rate ranging from 3% to 4%. The value was estimated for 2002 using a weighted average expected life of three to five years, volatility of 59.3% and risk-free interest rate ranging from 2.2% to 4.03%. The value was estimated for 2001 using a weighted average expected life of one year, volatility of 172.16% and risk-free interest rate of 4.5%. The dividend yield was 0% for each of 2003, 2002 and 2001.

Outstanding stock options were not included in the computation of diluted net loss per share because their inclusion would have had an antidilutive effect for the periods presented. See Note 1 - Summary of Significant Accounting Policies - Net Loss per Common Share.

Although the Company follows APB Opinion 25, Accounting for Stock Issued to Employees, and has elected to account for options issued under employee stock option plans based on the disclosure only alternative provided in Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"). FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, dictates when the exercise price of a fixed price option award is reduced, the award shall be accounted for as variable from the date of the modification to the date the award is exercised, forfeited, or expires. Accordingly, the Replacement Options must be valued, and the compensation cost must be recognized and adjusted for vested options or ratably over the vesting period for unvested options. Replacement Options covering a total of 1,877,000 shares of the Company's common stock were fully vested on issuance and are exercisable at prices ranging from $.30 to $.50 per share. Based on the AMEX closing price of $.99 per share for the common stock on December 31, 2003 ($1.70 - December 31, 2002), the Company recorded compensation adjustment of approximately $1,251,000 for the year ended December 31, 2003 ($2,114,000 - December 31, 2002), reflecting the difference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares. As long as the Replacement Options remain outstanding, the compensation expense remains subject to ongoing adjustments based on changes in the market price of the Company's common stock.

Note 14. Promissory Notes Payable

F-21

~~within~~purchase ~~one~~by ~~year~~Richard ofSiskind ~~issuance, unless extended, at the option~~ of ~~the holder, for a further 18 months. Of the $~~1.3 9 million, ~~$387,000~~shares of ~~the notes are denominated in Canadian dollars (CAD$500,000), the remaining $950,000 in USD. As security for the Notes, Zi Corporation, a major shareholder has agreed to place in escrow 6 million~~ common ~~shares.~~stock ~~Attached~~from to the ~~Notes~~company's ~~are 1,450,000~~original ~~warrants~~founders (the "Warrants"), exercisable for a period of three years at an exercise price of $.25. Of the proceeds received, $763,000 was allocated to Warrants, based on their estimated fair value, as determined using the Black-Scholes model, using a volatility of 46.30%, a risk-free interest rate of 2.28%, an expected useful life of three years, and expected dividend yield of zero percent. Notes payable were recorded at $572,000, representing a discount to the maturity value of $1,337,000. This resulted in ~~an effective interest rate on the Notes payable of 95% and 175% (on the USD and Canadian Dollar denominated portions, respectively).~~

connection with such transaction. As part of that transaction, Mr. Siskind granted options to the founders to reacquire a total of 1.5 million shares from him at exercise prices ranging from $.50 to $1.50 per share referred to as the founder's options, which are not reflected in the above table, and the Company issued to Mr. Siskind options to purchase up to 1.5 million newly issued shares of common stock on the same terms as the founders options, exercisable only to the extent the founders options are exercised. During 1998, founder's options covering 1,350,000 shares of common stock were acquired from the holders by Jon Siskind, a former officer and director of the Company and the son of Richard Siskind.

In connection with the company's acquisition of Magic Lantern the Company agreed to create a new stock option plan authorizing the grant of options to purchase an aggregate of 4.5 million shares of common stock, representing

6% of common stock to provide performance incentives for incumbent management and employees of Magic Lantern, its parent company and its subsidiaries at the time of the Company's acquisition of Magic Lantern. Shares may be either previously un-issued or reacquired shares. Shares that cease to be subject to an option because of its expiration or termination will again be available for the grant of options until termination of the plan.

The Company follows APB Opinion 25, Accounting for Stock Issued to Employees, to account for employee stock option plans. An alternative method of accounting for stock options is Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Under FAS 123, employee stock options are valued at grant date using the Black-Scholes valuation model, and this compensation cost is recognized ratably over the vesting period. The Company has adopted the disclosure-only provision of FAS 123 and, as described in Note 2, will continue to apply APB 25 to account for stock options until it is required to implement SFAS 123(Revised). SFAS 123 (Revised)"Share Based Payment" will require the Company to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is require d to provide service in exchange for the award-the requisite service period. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The grant-date fair value of employee share options and similar

instruments will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. SFAS No. 123 (Revised) eliminates the use of APB Opinion No. 25. SFAS No. 123 (Revised) is effective for the first interim or annual reporting period that begins after December 15, 2005. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is encouraged.

FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, dictates when the exercise price of a fixed price option award is reduced, the award shall be accounted for as variable from the date of the modification to the date the award is exercised, forfeited, or expires. Accordingly, the Replacement Options must be valued, and the compensation cost must be recognized and adjusted for vested options or ratably over the vesting period for unvested options. Replacement Options covering a total of 1,877,000 shares of the Company's common stock were fully vested on issuance and are exercisable at prices ranging from $.30 to $.50 per share. Based on the AMEX closing price of $.45 per share for the common stock on December 31, 2004 ($0.99 - December 31, 2003), the Company recorded compensation adjustment of approximately $951,000 for the year ended December 31, 2004 ($1,251,000 - December 31, 2003), reflecting the dif ference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares. As long as the Replacement Options remain outstanding, the compensation expense remains subject to ongoing adjustments based on changes in the market price of the Company's common stock.

Note 14. Promissory Notes Payable

During the year ended December 31, 2004, the Company raised approximately $997,000 (denominated in CAD$1,200,000) on issuance of unsecured term promissory note (the "Note"). The term Note has an interest rate of 7.25% and the Company is obligated to repay approximately $72,000 of interest in equal monthly installments. The Note is due December 7, 2005, unless extended, at the option of the holder. Attached to the Note are 150,000 warrants (the "Warrants"), exercisable for a period of three years at an exercise price of $.25. Of the proceeds received, $65,000 was allocated to Warrants, based on their estimated fair value, as determined using the Black-Scholes model, using a volatility of 183.10%, a risk-free interest rate of 2.28%, an expected useful life of three years, and expected dividend yield of zero percent. Notes payable were recorded at $913,000, representing a discount to the maturity value of $997,000. Th is resulted in an effective interest rate on the Note payable of 7% .

F-22

During the year ended December 31, 2003, the Company raised approximately $1,198,000 on issuance of promissory notes (the "Notes") and is obligated to repay approximately $1,337,000 including interest on maturity. The Notes are due with-in one year of issuance, unless extended, at the option of the holder, for a further 18 months. Of the $1.3 million, $387,000 of the notes are denominated in Canadian dollars (CAD$500,000), the remaining $950,000 in USD. As security for the Notes, Zi Corporation, a major shareholder has agreed to place in escrow 6 million common shares. Attached to the Notes are 1,450,000 warrants (the "Warrants"), exercisable for a period of three years at an exercise price of $.25. Of the proceeds received, $763,000 was allocated to Warrants, based on their estimated fair value, as determined using the Black-Scholes model, using a volatility of 46.30%, a risk-free interest rate of 2.28%, an expected useful life of three years, and expected dividend yield of zero percent. Notes payable were recorded at $572,000, representing a discount to the maturity value of $1,337,000. This resulted in an effective interest rate on the Notes payable of 95% and 175% (on the USD and Canadian Dollar denominated portions, respectively).

In December, 2004 note holders of $950,000 of the $1.3 million maturing received common shares as consideration for the extinguishment of the debt at the maturity of their Notes. The Company is in the process of negotiating the extension terms of the remaining note of approximately $416,000 (CAD$500,000). As a result of the equity transactions described in note 5 all the these notes were converted into 3,010,649 common shares with the exception of the Canadian denominated note payable.

Promissory notes payable at December 31, consists of the following:

(In thousands)

	2004	2003
Promissory notes payable	$ 416	$ 1,337
Term promissory note	997	--
	1,413	1,337
Less: notes warrant discount	55	765
	1,358	572

Note 15. Purchase and Sale of Dubbing Assets

On November 2, 2003, the Company entered into a Purchase and Sale Agreement (the "Agreement") to dispose of its dubbing assets located in its Vancouver, British Columbia, Canada office. Gross proceeds to the Company were approximately $145,000. The closing of the Agreement occurred on November 28, 2003. The sale of the dubbing assets resulted in no significant gain or loss on disposal to the Company.

Note 16. Reclassifications

Certain amounts in 2003 and 2002 have been reclassified to conform with the presentation adopted in the current year.

Note 17. Subsequent Events

NoFollowing ~~material~~December 31, 2004 the following subsequent events ~~have~~ occurred.:

F On February 9, 2005, the Company entered into a Consulting Agreement with National Financial Communications Corp. ("NFC"). In consideration for NFC's commitment to provide services in accordance with the terms of that agreement, the Company issued NFC a common stock purchase warrant to purchase 750,000 shares of Common Stock, which warrant vests upon the achievement of certain performance milestones. The exercise price of the warrant issued to NFC is calculated based upon the timing of the acceptance of individual Statements of Work by the Marketing Committee of the Company's Board of Directors. The Company agreed to reserve 750,000 shares of Common Stock for issuance pursuant to the warrant, which Common Stock had previously been registered for resale pursuant to a registration statement on Form S-223/A (File No. 333-116147).

~~SCHEDULE II~~F-23

On January 4, 2005, the Company entered into a Subscription Agreement (the "Subscription Agreement") with Nite Capital, L.P., providing for, among other things, the unregistered sale, through a private placement, of 1,000,000 shares of common stock (the "Shares"), $0.01 par value per share (the "Common Stock") at a price of $0.30 per share, and a common stock purchase warrant to purchase an additional 500,000 shares of Common Stock exercisable at a price of $0.40 per share, subject to customary adjustments, until the fifth anniversary of January 4, 2005. The Company also entered into a Registration Rights Agreement.

In connection with the private placement, the Company was obliged to pay a cash fee to the placement agent, First Montauk Securities Corp. ("First Montauk"), for its services on its behalf. In addition, the Company issued First Montauk and its assignees, common stock purchase warrants to purchase an aggregate of 100,000 shares of Common Stock, exercisable at $0.40 per share, subject to customary adjustments, until the fifth anniversary of January 4, 2005. The Shares and the common stock purchase warrants were issued to private investors in transactions that were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and/or Regulation D promulgated under the Securities Act.

On April 20, 2005 the Company received proceeds from a demand loan in the amount of $250,000 from Zi Corporation with interest rate of 12% per annum.

On April 20, 2005 the Company agreed to amend and restate that certain Promissory Note (Zi Corporation) dated November 7, 2002 (as amended and restated, the "Note") to, among other things, provide for the deferment of interest payments thereon and an extension of the maturity date to January 2, 2006 and offers as consideration security interest in all the assets of the Company (after the first security position held by Laurus Master Fund Ltd.)

On April 25, 2005 the Company negotiated a settlement on the claim and counterclaims see note 12, with Wendy and Doug Connolly, which agreed not to disclose the terms and conditions of the settlement.

F-24

SCHEDULE I

VALUATION AND QUALIFYING ACCOUNTS

MAGIC LANTERN GROUP, INC.
(FORMERLY, JKC GROUP, INC., AND STAGE II APPAREL CORP.)

(In thousands)

Column A	Column B		Column C				Column D		Column E
	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts		Deductions		Balance at End of Period
Allowance for returns, discounts and bad debts:
Year ended December 31, 2004	$	101	$	(34)	$	--	$	--	$	67
Year ended December 31, 2003	$	70	$	50	$	(19)	$	--	$	101
Year ended December 31, 2002	$	--	$	3	$	67	$	--	$	70
Year ended December 31, 2001		24				--		(24)(1)		--

______________________________

F-2325

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, this ~~14th~~26th day of April, ~~2004~~ 2005.

MAGIC LANTERN GROUP, INC. By: /s/ Robert A. Goddard Robert A. Goddard Chief Executive Officer ~~and~~By: ~~Acting~~/s/ Ronald Carlucci Ronald Carlucci Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacity and on the date indicated.

	Title	Date
/s/ Richard Geist By: Richard Geist,	Director	April 1426, ~~2004~~2005
/s/ Howard Balloch By: Howard Balloch	Director	April 14, 2004
/s/ Steve Fay By: Steve Fay	Director	April 26, 2005
/s/ Michael Lobsinger By: Michael Lobsinger	Director	April 14, 2004
By: Don Hyde	Director	April 26, 2005
/s/ Stephen Encarnaceo By: Stephen Encarnaceo	Director	April 14, 2004
/s/ Michael Mackenzie By: Michael Mackenzie	Director	April 26, 2005
/s/ Richard Siskind By: Richard Siskind	Director	April 14, 2004
/s/ Stephen Encarnaceo By: Stephen Encarnaceo	Director	April 26, 2005
/s/ Richard Siskind By: Richard Siskind	Director	April 26, 2005
/s/ Tammy Wentzel	Director	April 26, 2005
By: Tammy Wentzel

31Exhibit

Exhibit Number	Exhibit
Number	Exhibit
2.1*	Amended and Restated Certificate of Incorporation of the Company
3.2*	By-Laws of the Company
4.1*	Form of Stock Certificate
10.1*	1987 Incentive Stock Option Plan
10.2	1998 Incentive Stock Option Plan
10.3	1998 Nonqualified Stock Option Plan-A (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)
10.4	1998 Nonqualified Stock Option Plan-B (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)
10.5	Magic Lantern 2002 Stock Option Plan (Incorporated herein by reference to the Registrant's Current Report on Form 8-K filed on August 8, 2002).
10.6	Magic Lantern Amended and Restated 2002 Stock Option Plan (Incorporated herein by reference to the Registrant's Proxy Statement on Schedule 14A filed on October 24, 2003).
10.7	Asset Purchase Agreement, dated November 2, 2003, by and between Brett Robinson and Magic Lantern Group, Inc.
10.8	Promissory Note Issued August 24, 2003.
14.1	Code of Ethics
23.1	Consent of Auditor
31.1	Certifications of Chief Executive Officer and Acting Chief Financial Officer, pursuant to Rule 13a-14(a).
32.1	Certifications of Chief Executive Officer and Acting Chief Financial Officer, pursuant to 19 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Incorporated by reference to the corresponding Exhibit filed with the Company's Registration Statement on Form S-1, as amended (Reg. No. 33-12959).

BFLODOCS 927791v1 (JVVZ01!.DOC)

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