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.).

As of December 31, 2004, there were 73,604,289 shares of Common Stock outstanding, and the aggregate market value of shares held by unaffiliated shareholders was approximately $21,345,244.

DOCUMENTS INCORPORATED BY REFERENCE

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

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 VideoBase^TM in 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 Company has, since its inception as Magic Lantern Group, Inc. in Nov., 2002 faced the daunting task of being undercapitalized to position itself for future growth and to manage the ever escalating costs associated with now being a publicly reporting company in the wake of mandates put forth in the 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 pubic company vis-à-vis a private company.  The Board of Directors of the Company, seeing the ever increasing impact of this has for some time discussed the merits of de-listing and returning to the status of a private company.  As most recently at Board meetings held in March and April this was discussed and tabled for future consideration.  Given the Company's history of losses and now the recording of the recently performed independe nt valuation of goodwill and intangibles has resulted in an impairment charge to Goodwill.  That charge and 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.

In April of 2004, the Company entered into a Convertible Promissory Note in the face amount of $1.5 million with the Laurus Master Funds, based in New York.  The fixed conversion price of $0.25 per share has predominately, since the onset of the funding ,been priced beneath current market prices and "Laurus" has chosen to exercise their right as contained in the closing 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 December of 2004 a substantial pay down on that note occurred, amounting to approx. $900,000.  Based on Generally Accepted Accounting Principals (GAAP), the Company was required to take a one-time charge of $4,917,000 in interest expense for underlying shares and warrants, most of which due to the pay down will never be exercised.  This charge, and the impairment charge noted in the previous paragraph account f or the majority of the Company's Net Loss for 2004.

At a meeting of the Board of Directors, held April 14, 2005 (see subsequent events footnote) of one of the Company's two largest shareholders, ZI Corporation, a proposal was put forth to extend to the Company a bridge loan in the form of a demand note bearing interest in the amount of 12% per annum in the amount of $250,000 in consideration for securitizing the $2 million Note Payable on the Company's books.  Further consideration consists of extending the maturity date of the note to January 2, 2006 and deferring all accrued interest on the note to the new maturity date.  The Board of Directors of Magic Lantern Group, Inc. is expected to meet in the coming week to consider this proposal.

During 2004, working closely with the Agency for Instructional Technology ("AIT") the collective group responded to five (5) Request for Proposals from U.S. State Educational School Boards.  To date, the group has not been successful in competing for these contracts, with the exception of California when the results of their decision are not yet known.

                The Agency for Instructional Technology ("AIT") has been a U.S. leader in educational technology since 1962. A non-profit organization, AIT is one of the largest providers of instructional TV programs in North America and a leading developer of educational media, including online instruction, CDs, DVDs and instructional software. AIT learning resources are used on six continents and reach nearly 34 million students in North America each year. AIT products have received many national and international honors, including an Emmy and Peabody award.

                Magic Lantern and AIT have partnered to build and sell a private-labeled version of Magic Lantern's Internet-based platform InSite^TM, 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.

                The Learning Source is an online library of learning video for K-12 educators, streamed via the Internet. The library offers more than 400 programs, indexed, searchable by keyword, and correlated to state curriculum standards. TLS makes lesson planning easier; teachers can search, play and bookmark their favorite clips for later use in their classroom. Teachers may also access online lesson plans and assessment tools created by the experienced educators at AIT.

                The launch of The Learning Source is part of Magic Lantern's aggressive expansion strategy to create a revenue-generating market presence in the United States. By offering third generation, video streaming digital services to increase revenues from educational digitized videos in the United States, a market segment carrying the potential to generate future earnings for the Company has been tapped.  To date, the Company and AIT along with another partner, Callisto have presented to five U.S. state educational boards.  Thus far, the Company has yet to secure a contract on any of these efforts.  Competition from Discovery Learning in the U.S. (who acquired the two major competitors of the Company during the past 18 months) has made success difficult as the bidding of Discovery has undermined the Company's bid's to the best of its knowledge.

                In November 2003, Magic Lantern completed final arrangements for the sale of Image Media, its Vancouver-based videotape duplication facility. The operation was sold to make way for increased investment in online service development. Gross proceeds to the Company were approximately $145,000.  The purchase of Image Media was made by BKR Productions, Inc., a British Columbia Corporation formed for holding purposes by the former manager of Image Media. Transfer of ownership and operations occurred effective January 1, 2004. Included in the sale were all installed technologies, customer lists, promotional materials and existing contracts.

                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 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..

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 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.  

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.

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.

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 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 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.

 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 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. Tutorbuddy^TM is a revolutionary, state-of-the-art, e-learning system designed to deliver searchable, curriculum-correlated, digital video programs and learning objects online. Tutorbuddy^TM, 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 InSite^TM, the Company's latest e- learning 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.

 Formation of the "Company"

              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 (the then private parent company), 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 &quo t;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." After consummation of the Magic Lantern transactions, Alpha Omega Group ("AOG") held in record name approximately 47% of the Company's outstanding shares.

[remainder of page left intentionally blank]

                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 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 addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital to actively manage the Lancer portfolio securities.

                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").

Following the completion of the AOG transaction, and facing continued decline in its apparel business, the Company continued to pursue its business redirection by exploring potential acquisition opportunities, with a view toward expanding existing licensing operations or adding compatible business lines, culminating in the acquisition of Magic Lantern. As part of the transaction to acquire Magic Lantern, the Company (i) added three designees of Zi Corporation, the vendor of Magic Lantern, to it's board of directors, (ii) implemented a new stock option plan primarily for management and employees of Magic Lantern, (iii) changed the Company's corporate name to Magic Lantern Group, Inc., and (iv) effective November 8, 2002, changed the AMEX trading symbol to GML.  Zi Corporation currently owns 45% of the outstanding common stock of the Company.

Products

General

                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, Tutorbuddy^TM 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 VideoBase^TM indexing software that allows users to aggregate, bookmark, re-sort and add their own comme nt boxes to existing content.

                Magic 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.

                As 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.

                Tutorbuddy^TM builds on the research & development of Sonoptic, and has developed an on-line educational video library with an extensive information search capability and content management system. Tutorbuddy^TM 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 Tutorbuddy^TM 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.

Product Mix.

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)

 Marketing Strategy.

 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.

                Our market plan for growth in the Canadian market has involved multiple initiatives including: i) contracting with a Business Development professional to focus on the Province of Ontario, the most populous of any of the Canadian Provinces.  ii) entering into a province-wide paying pilot for InSite use in selected Ontario and British Columbia school districts, which was the first medium-scale commitment to online video services in Canadian education; and iii) launching of InSite (http://www.magiclanterninsite.com) based on innovative per-teacher and per-student  pricing which to date has not established significant traction in the Canadian provinces targeted thus so far.  Marketing probes during 2004 indicated the desire of educational sites preference towards having the physical video server located within the school's intranet and behind the ir own firewalls such that the students are protected from inappropriate and unprotected access to the Internet on an unfettered basis.

Business Development USA

            Leveraging the financial base of operations already established in Canada, the Company believes its only meaningful future growth lies in the United States and Southeast Asia to lesser degree. The spearhead of the Company's US strategy in 2004 was to introduce InSite into the United States reconfigured for US school markets as "The Learning Source" through the Bloomington Indiana-based Agency for Instructional Technology ("AIT"). "The Learning Source" is currently being offered to long-time PBS station customers of AIT for use with affiliated school districts. One illustration would be Las Vegas, Nevada where the local PBS station integrates with Clark County School District, and is the fastest-growing district in the US. Other PBS station-School District areas in Los Angeles and West Virginia were presented to in response to their RFP.  In the case of West Virginia, Discovery Learning captured that contract by underbidding the Consortium .  The California proposal was most recently conducted and results are unknown.   More are expected to participate as demonstrations develop.

               With the presence of Discovery Learning and its 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.

Go-to-Market USA

                Additional opportunities for growth in the U.S. will totally depend on a business combination that when concluded would include i) the sub-distribution of existing learning video titles for which the Company has exclusive US distribution rights; ii)Online e-commerce sale of titles in hard copy format (disk and tape) for which the Company has exclusive distribution rights (currently some 1000 titles) through acquired educational software sales forces employing direct mail, web sales and tele-sales to established client bases; iii) E-commerce links from online applications promoting sales of hard copy offerings, such as VHS, DVD or VCD copies, of programs being accessed as online video stream; iv) sale of user information to partners, allies and competitors; v) expanded sale of production services of Sonoptic video encoding, indexing and database provisioning to own ers of video collections allowing searchable streaming collections (e.g. to viewers of content-intensive websites such as sports television, self-help, home renovation and food/cooking websites as examples).

 Customers

 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, 2004 accounted for approximately $774,000 of revenue as compared to $695,000 for the year ended December 31, 2003  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.

.

Distribution

 Magic Lantern's distribution strategy is to acquire licensing rights for video productions produced by other companies and to return royalties as a percentage of gross receipts. The company maintains a library of over 12,000 master versions of the titles and creates VHS, DVD, CDR and VCD copies for sale in its duplication labs in Oakville, Ontario and Saint John, New Brunswick. These 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 and Import Restrictions

                Magic Lantern's products consist primarily of content delivered on videotape and other electronic media. 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

                The Company's backlog of orders totaled approximately $86,000 and $154,000 at December 31, 2004 and 2003, respectively.

Competition

                The content delivery industry is highly competitive and consists of a large number of suppliers, certain of whom are producers and others only distributors. Magic Lantern holds exclusive rights to distribution in Canada on approximately 33% of its titles. Of the exclusive titles distributed, approximately 58% include digital rights.  In the U.S. the Company has 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. acquired United Streaming Learning and AIM Learning, the Company's two most significant competitors.  The technology used by United Streaming was originally developed under exclusive contract with the Altschel Group (subsequently United Streaming) and that contract prohibits the use of Videobase™ technology except for content owned by the Atlschel Group.  The Company believes that, upon review of the contract still in force, that United Streaming and its parent company, Discovery Learning, U.S. are in breach of that contract and the Company intends to seeks remedial damages and recovery of licensing revenue under the terms of the contract.  The Company believes this breach to be material and recovery of revenues and possible damages to be significant.

                Competition 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 a substantial installed customer base. Our analysis of its competition within these two industries is set forth below.

 Traditional Learning Video Content Providers.    

Management 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.

Traditional format competitors of the Company in Canada include:

Digital learning video content providers   

        The Company has agreements with many of its producers for its digitization, indexing and ultimately streaming of their analog content through the Company's web-enabled Tutorbuddy^TM or stand-alone media offerings. Management believes these services offer the following competitive advantages:

                Although management believes that competitors of Tutorbuddy^TM and VBSS currently lack a comparable range of services, various distributors now offer learning video content in streaming format, providing competition worldwide through Internet-enabled services. These competitors include:

Other streaming technologies and streaming packaging, although not directly competitive, are generally available through television on the Web, production and publication, event management, entertainment, expert systems linked to education, university and test environments and promotion and sales demonstrations.

Employees

                As of December 31, 2004, the Company had 43 salaried employees. Of the 43 employees, 6 provide executive and management services, and 37 provide clerical services. 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 never experienced an interruption of operations due to a labor dispute.  On April 7, 2005 a 30% reduction in employees was implemented by the Company in it's continuing efforts to cut operating costs.

Recurring Losses

                We have a history of losses and may continue to incur losses from operations. Our net losses were $15,899,000 for the year 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-line" video streaming business, substantial spending reflected in selling, general and administrative ("SG&A") expenses have historically been in excess of gross profit levels since. Our business plan, 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.

RISK FACTORS

Risks Associated with Lancer 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 t 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.  Shares held by the receiver are restricted shares and not available for sale except under Rule 144 or private sale.

Risk of Inadequate Financial Resources

                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.

Risk of Customer Budget Reductions

                Our goal 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 Company's existing Canadian markets. These institutions represent approximately 90% of the Company's current customer base. They are funded by government and are 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.

Uncertainties in Product and Market Expansion Plans

                Our 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.

Risk of Inadequate Marketing Resources

                The 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 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 our own limited marketing resources for executing our expansion plans.

Risk of Technological Obsolescence

                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.

Dependence on Licensed 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 ain renewals or replacements on comparable terms, acceptance of our e-education offerings could be severely impaired.

Lack of Control Over Licensed Content

                Because the 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.

Competition

                The intensely 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. In 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.

Dependence on the Internet and Computer Systems

                Our ability to expand the Company's delivery platforms and penetrate new markets could be frustrated without continued growth in the use and efficient operation of 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, adve rsely affecting our prospects for market penetration and profitability.

Regulatory Risks

                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 June 1, 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 review of the 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 in Oakville, ON, Canada., and (iii) to hear the report of Bentley Associates recently engaged by the Board of Directors to pursue acquisition candidates and channel partner developments.  Further, the Shareholders received a presentation by Management of the Company's status and possible future plans.  Lastly, 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.               

[ remainder of page left intentionally blank]

PART II

Item 5. Market for the Company's Common Stock and Related Shareholder Matters

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.

Security Holders

As of March 20, 2005, there were approximately 800 holders of record.

Dividends

                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 as of December 31, 2004.

Registration Statement.

On December 31, 2002, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission covering 64,300,000 shares of common stock. Of the Shares covered by the Prospectus, 31,550,000 were issued by the Company in the Equity Infusion, 29,750,000 were issued by the Company as part of the consideration on the acquisition of Magic Lantern and up to 3,000,000 may be issued under an earn out arrangement for this acquisition. See "Equity Infusion" and "Magic Lantern Acquisition."

Recent Sales of Unregistered Securities

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-3/A (File No. 333-116147).

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.  

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 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.  

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.

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.   

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.

[ remainder of page left intentionally blank]

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.

[ remainder of page left intentionally blank]

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 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 Tutorbuddy^TM, a revolutionary, state-of-the-art, e-learning system designed to deliver searchable, curriculum-correlated, digital video programs and learning objects online. Tutorbuddy^TM, 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 InSite^TM, the Company's latest e-learning video service for schools. InSite will be 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.

                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.

 Risks Associated with the Magic Lantern Acquisition

 Magic Lantern 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 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

 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 owner ship 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.

Stock-Based Compensation.

 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"), as amended by FAS 148, the disclosure only alternative is not an available accounting method for the Replacement Options. See "Equity Infusion" below. Under FAS 123, the Replacement Options must be valued on a quarterly basis, and the compensation cost must be recognized and adjusted quarterly for vested options or ratably over the vesting period for unvested options. Replacement Options covering a total of 1,762,000 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 $1.70 per share for the common stock on December 31, 2002, the Company recorded compensation expense of $2,239,000 for the year then ended, reflecting the difference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares. On December 31, 2003, the closing price of the Company's common stock on the AMEX was $.99 per share. The decrease in market price from December 31, 2002 resulted in an income adjustment of $1,091,000 for the year ended December 31, 2003, reversing previously recorded compensation expense, in 2002. On December 31, 2004, the closing 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.

[ remainder of page left intentionally blank]

Results of Operations

                Results of operations for the year ended December 31, 2004 and 2003

Seasonality

Following the acquisition of Magic Lantern 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.

 Sale of Western Dubbing Operations

 On November 28, 2003, 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 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. 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.

Liquidity and Capital Resources

                Liquidity. The Company's cash position decreased to $351,000 at December 31, 2004 compared to $465,000 at December 31, 2003.

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 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.

Further, the Company has no other sources of liquidity at its disposal.

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.

                Execution of Magic Lantern's business plan will require capital resources substantially in excess of the Company's current cash reserves. To access the necessary capital needed, Management pursued strategies with the goal of raising $1 million to $3 million during 2004 in the form of debt and/or equity investments. Furthermore, the Company explored additional cost-cutting 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 dubbing assets located in its Vancouver British Columbia office. Gross proceeds to the Company were approximately $145,000. The Company completed its sale of the dubbing business on November 28, 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 Tutorbuddy^TM 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.

                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 2005 also include, in part, the repayment of an approximate $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 8 and 12 to the financial statements).

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

(In thousands)

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

(In thousands)

The Promissory notes payable are due November and December, 2005 in the amounts of $2,000,000 and $997,000 respectively, unless extended by the note-holders. The  $997,000 note is denominated in Canadian dollars (CAD$1,200,000). Interest will accrete monthly increasing the amount disclosed on the balance sheet of $932,000 to the face value of the debt in the amount of $997,000. Attached to the Notes are 150,000 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, $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. This resulted in an effect ive interest rate on the Note payable of 6.89%.

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.

The Company maintains an allowance for doubtful accounts for estimated losses resulting from customers or other parties failure to make payments on trade receivables due to the Company. The estimates of this allowance is based on a number of factors, including: (1) historical experience, (2) aging of the trade accounts receivable, (3) specific information obtained by the Company on the financial condition of customers, and (4) specific agreements or negotiated amounts with customers.

Goodwill, Intangible Assets and Long Lived Assets

 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

.

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 t 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.

                Our Consolidated 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.

Exchange Rate Risks

                Magic Lantern 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.

Interest Rate Risks

                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

 The financial statements of the Company are hereby attached to this document beginning on page F-1.

Changes in and Disagreements with Accountants in Accounting and Financial Disclosure

 Not applicable.

Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure

None

Item 9A. Controls and Procedures

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 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 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Changes in Internal Controls

There 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.

PART III

Item 10. Directors and Executive Officers of the Company

                Richard Siskind - Director, 58, joined the Company as President, Chief Executive Officer and director in May 1998 and served as President and Chief Executive Officer until the completion of the Company's acquisition of Magic Lantern. He has been in the apparel business for over 30 years, serving in a variety of roles and positions. By 1977, Mr. Siskind had assumed the position of president of 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 children's apparel and reached sales aggregating over $100 million by 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.

                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.

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

                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.

                Tammy Wentzel - Director,  41, has served as a director since 2003. Ms. 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.

Steven Fay C.P.A, - Director, 40, joined the Board as a director in 2005.  Mr Fay is a Certified Public Accountant who brings to the Company almost 20 years of financial consulting 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 Boston University School of Law. A 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 a member 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.

H. Donald Hyde C.A – 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 directors. He is currently Chairman of the Audit Committee and 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.

Robert A. Goddard - President & CEO, 53 joined the Company in his present position in 2003. Prior to joining the Company, Mr. Goddard was employed with LocatePLUS Holdings Corporation as CFO and Treasurer where he re-staged a private company to bringing out the only IPO in the New England high tech corridor in 2002. From 1997 to 1999, Mr. Goddard was employed by 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.

Greg Abrams - President, Sonoptic Technologies, Inc. 46 Greg worked for more than 20 years in Television broadcast production and subsequently 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).

Jeff Lorenz - Executive Vice President, Sales & Marketing, 34 is an accomplished leader who brings to Magic Lantern an extensive background in Sales & Marketing. Jeff's experience spans industries such as Hospitality, Business Automation, Internet & E-Commerce, ASP, Telecommunications and Wireless Application Technology. For more than a decade, Jeff has worked in the technology sector developing Sales Process', Sales Channels, and Sales Professionals. Jeff spent the last year with Nextair Corporation 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.

The information regarding directors is contained under the captions "Election of Directors" and "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 captions "Corporate Governance 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.

                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.

 The executive 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:

* 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.

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.

Item 13. Certain Relationships and Related Transactions

                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.