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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

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        Unaudited Interim Financial Statements

        The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles and applicable Securities and Exchange Commission (SEC) regulations for interim financial information.  These financial statements are unaudited and, in the opinion of management, include all adjustments necessary to present fairly the balance sheets, statements of operations and statements of cash flows for the periods presented in accordance with accounting principles generally accepted in the United States.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations.  Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.  These financial statements and notes should be read in conjunction with the financial statements and notes thereto for the year ended December 31, 2003 included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 and are incorporated herein by reference.

        Going Concern       

        The accompanying financial statements have been prepared on the basis the Company has been considered as a going concern. The Company has sustained substantial losses for the years ended December 31, 2003, 2002, and 2001. The Company's cash position is in excess of $900,000 at May 24, 2004, and is sufficient to cover the current rate of operating activity until August 31, 2004.(see subsequent events footnote). The Company's working capital deficiency at March 31, 2004 was approximately $2,620,000, which has increased since December 31, 2003. Historically, the Company has sought financing from its major shareholders.  The Company continues to seek new equity financing from other funds and sources to support its strategic initiatives for new sales and revenue streams and expansion into the United States.

        Failing additional equity financing solutions, the sources of capital available to the Company include factoring of accounts receivable and a corporate reduction of discretionary investments and overall downsizing to achieve a neutral cash flow position.  The failure by the Company to raise additional financing raises substantial doubt about its ability to continue as a going concern.

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

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        At March 31, 2004, the Company has four stock-based compensation plans, more fully described in the annual report on Form 10-K. The Company accounts for those plans under the recognition and measurement principals of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

        Significant Customers and Concentrations

        As of March 31, 2004, one customer accounted for 21% and 25% of the Company's sale and accounts receivable, respectively.

        Cash and cash equivalents consist of cash and a highly liquid investment in Guaranteed Investments Certificates ("GIC"), available for withdrawal by the Company upon request. The GIC has been pledged as security for a line of credit, of which approximately $141,000 has been drawn upon by the Company as of March 31, 2004.

        The Company follows Statement of Financial Accounting Standards No. 128, Earnings Per Share ("FAS 128"). Under FAS 128, companies that are publicly held or have complex capital structures are required to present basic and diluted earnings per share ("EPS") on the face of the income statement. Basic EPS excludes dilution and is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted and the resulting additional shares are dilutive because their inclusion decreases the amount of EPS. The following reconciles basic and diluted weighted average common shares outstanding for the three months ended March 31, 2004 and 2003.

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Diluted shares have not been used in the calculation of EPS for the three months ended March 31, 2004 as they are anti-dilutive.

        Miscellaneous Claims. Various miscellaneous claims and suits arising in the ordinary course of business have been filed against the Company. In the opinion of management, none of these matters will have a material adverse effect on the results of operations or the financial position of the Company.

        Other Matters.          Lancer Management Group II, LLC, Lancer Offshore, Inc., LSPV LLC, and Omnifund Ltd. (the "Lancer Group") have been collectively a significant shareholder of the Company since the final quarter of 2002. On July 10, 2003, the Securities and Exchange Commission brought a civil action in the United States District Court for the Southern District of Florida against Michael Lauer and Lancer Management I and II alleging securities fraud in connection with portfolio transactions effected by the Lancer 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 the 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 the Lancer Group'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 Group proceedings, or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer Group. In addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital to actively manage the Lancer portfolio securities.

        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 Defence and Counterclaim adds Doug Connolly as a defendant in the counterclaim. The counterclaim seeks damages as against both Wendy and Doug Connolly in the amount of $500,000, an accounting to determine profits made by the Connollys in relation to the breach of their fiduciary duties, a permanent and interlocutory injunction restraining the Connollys from soliciting clients and utilizing confidential information, punitive damages in the amount of $1,000,000 plus interest and costs. The Company believes that claims made by Wendy Connolly are without merit.

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

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

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acquisition costs of approximately $141,000. The Share Purchase Agreement provides for a performance based consideration adjustment to the purchase consideration.

        The Share Purchase Agreement also provides for a reduction in the purchase price if the Company's revenues during the performance period are less than $5 million. In that event, the Company will be entitled to offset the amount of the shortfall, up to $1 million, against the principal amount of the Note.

        As the Magic Lantern's 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.

        The Company is involved exclusively in the marketing and distribution of educational and media resources throughout Canada, education and distribution segment. Accordingly the results for the periods ended March 31, 2004 and 2003 are entirely derived from this segment.

Intangible assets consist of the following at:

        Distribution agreements are being amortized on a straight line basis over six years. Amortization expense on distribution agreements for the three months ended March 31, 2004 was approximately $148,000, and $139,000 for the three months ended March 31, 2003. Amortization of software technology has not yet commenced since the related software has not yet been deployed. Once the software is deployed, the software will be amortized on a straight line basis over three years.

        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 SFAS 123 as amended by SFAS 148, the disclosure only alternative is not an available accounting method for the Replacement Options. Under SFAS 123, the Company's replacement options which were issued upon the Company's transaction with Magic Lantern Communication, Inc., and which are described in the Company's current proxy statement 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.  On March 31, 2004, the closing price of the

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Company's common stock on the AMEX was $0.95 per share. The decrease in market price from the end of the prior quarter resulted in an adjustment of $78,000 for the three months ended March 31, 2004, and $1,762,000 for the three months ended March 31, 2003, adjusting the previously recorded compensation adjustment in 2003. As long as the Replacement Options remain outstanding, the compensation adjustments remains subject to ongoing quarterly adjustments based on changes in the market price of the Company's common stock.

Note 10.     Subsequent Events

        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 will be registered under the terms of a registration rights agreement, pursuant to which a registration statement must be declared effective by the Securities and Exchange Commission no later than August 11, 2004.

        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.

        Founded in 1975, the Company 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

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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 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 Corporation ("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, 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." 

        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 assets, and approximately $1,128,000 to property and equipment.

          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 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 and its digital products are correctly positioned to meet the demand for quality online educational content.

        On May 3, 2004, the Company closed the private placement of a $1,500,000 principal secured convertible three-year term note with the Laurus Master Fund, Ltd. as described herein. The funding of the Company by Laurus Master Fund Ltd., and the Company's ongoing relationship with Laurus, serves to stabilize the Company and to foster its continued growth.

        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 $8.1 million.  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.

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        Risks Associated with Lancer's Ownership of Company Shares.  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 the 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 the Lancer Group'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 Group proceedings or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer Group. In addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital to actively manage the Lancer Group 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 SFAS 123 as amended by SFAS 148, the disclosure only alternative is not an available accounting method for the Replacement Options. Under SFAS 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 $.99 per share for the common stock on December 31, 2003, the Company recorded compensation adjustment of $1,091,000 for the year ended 2003, reflecting the difference between the aggregate exercise price of the Replacement Options and the market price of the underlying shares. On March 31, 2004, the closing price of the Company's common stock on the AMEX was $0.95 per share. The decrease in market price from the end of the prior quarter resulted in an adjustment of $71,000 for the three months ended March 31, 2004, and $1,762,000 for the three months ended March 31, 2003, adjusting the previously recorded compensation adjustment in 2003. As long as the Replacement Options remain outstanding, the compensation adjustments remains subject to ongoing quarterly adjustments based on changes in the market price of the Company's common stock.

        Quarters ended March 31, 2004 and 2003. Net sales were $746,000 for the quarter ended March 31, 2004, compared to $719,000 for the quarter ended March 31, 2003. The increase represents an increase of approximately 4% from the first quarter of 2003, and excludes revenues from the Company's Western Canadian dubbing operations which were sold by the Company in November 2003, and the Company's contract with the British Columbia Learning Connection ("BCLC") and which had contributed approximately $173,000 in net sales for the first quarter of 2003.  Taking into account the reduction of revenue from Western dubbing and BCLC operations, the Company's remaining business units increased revenue by 37% for the period ended March 31, 2004 as compared to the same period of 2003. 

        Cost of goods sold decreased to $190,000 in the quarter ended March 31, 2004 compared to $273,000 in the quarter ended March 31, 2003, reflecting improved margins realized in the distribution sector versus the Company's lower margin western dubbing business which it owned during the comparable period of 2003 and which was sold in November 2003. Cost of goods sold as a percentage of net sales for Education and Distribution was 25% for the quarter ended March 31, 2004 compared to 38% for the same period of 2003.

        SG&A expenses of $953,000 for the quarter ended March 31, 2004 decreased by $32,000 from $985,000 for the quarter ended March 31, 2003, reflecting closure of British Columbia office administration and other operating efficiencies. Principal SG&A expenses for the quarter ended March 31, 2004 were professional fees, salaries and benefits, advertising and promotion, and occupancy costs.

        Depreciation and amortization for the quarter ended March 31, 2004 was $205,000, as compared to $192,000 for the quarter ended March 31, 2003. Depreciation expense charged to property and equipment for the quarter ended March 31, 2004 was $57,000, as compared to $53,000 for the quarter ended March 31, 2003, and

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amortization expense of $148,000 for the quarter ended March 31, 2004, compared to $139,000 for the quarter ended March 31, 2003, and was charged to the Company's distribution agreements.

        Interest expense of $217,000 for the quarter ended March 31, 2004 reflects accrued interest on the notes payable to Zi Corporation, the Government of New Brunswick, Sonoptic's 25% shareholder, and accreted interest on the Company's promissory notes payable. Interest expense for the three month period ended March 31, 2003 was $53,000.

        The Company realized a net loss of $800,000 or $.01 per share based on approximately 66.8 million weighted average shares outstanding for the quarter ended March 31, 2004, compared to a net income of $887,000 or $.01 per share recognized in the quarter ended March 31, 2003 based on 66.2 million weighted average shares outstanding. Included in net loss for the quarter ended March 31, 2004 was a compensation expense of $52,000, as compared to $91,000 for the quarter ended March 31, 2003, which reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern and $71,000, as compared to $1,762,000 for the quarter ended March 31, 2003, which reflects an adjustment of the Company's replacement options reversing compensation expense recorded in 2002. The adjustment on the Company's replacement options, for the quarter ended March 31, 2004, is based on the difference between the aggregate exercise price of the Replacement Options and the market value of the underlying shares on March 31, 2004 ($0.95 per share) compared to December 31, 2003 market value ($0.99 per share).

        Liquidity. The Company's cash position decreased to $239,000 at March 31, 2004 compared to $465,000 at December 31, 2003. During the quarter ended March 31, 2004, the Company used approximately $310,000 of cash to fund continuing operational requirements and realized approximately $54,000 from a tenant leasehold allowance received during the period, and increased its bank indebtedness on the balance sheet by $37,000. The Company's cash position at March 31, 2003 was $188,000.

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

        Going concern.  The accompanying financial statements have been prepared on the basis the Company has been considered as a going concern. The Company has sustained substantial losses for the years ended December 31, 2003, 2002, and 2001. The Company's cash position is in excess of $900,000 at May 24, 2004, and is sufficient to cover the current rate of operating activity until August 31, 2004.(see subsequent events footnote). The Company's working capital deficiency at March 31, 2004 was approximately $2,620,000, which has increased since December 31, 2003. Historically, the Company has sought financing from its major shareholders.  The Company continues to seek new equity financing from other funds and sources to support its strategic initiatives for new sales and revenue streams and expansion into the United States.

        Failing additional equity financing solutions, the sources of capital available to the Company include factoring of accounts receivable and a corporate reduction of discretionary investments and overall downsizing to achieve a neutral cash flow position.  The failure by the Company to raise additional financing raises substantial doubt about its ability to continue as a going concern.

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

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        Capital requirements for 2004 also include, in part, the repayment of an approximate $580,000 (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.

        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.

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

The cash flows of principle repayments of long term debt obligations, excluding bank indebtedness and promissory notes payable consist of the following at March 31, 2004:

        The Note payable to Zi is payable in full on the third anniversary of the Closing. Accrued interest on the Note is payable at the end of the sixth calendar quarter after the Closing and thereafter in equal quarterly installments at the end of each calendar quarter in which any principal of the Note remains outstanding.

        The Promissory notes payable are due September and November, 2004, in the amounts of $1,120,000 and $200,000, respectively, unless extended by the holders for a further 18 months. Interest will accrete monthly increasing the amount disclosed on the balance sheet of $743,000 to the face value of the debt in the amount of $1,320,000. Of the $1.3 million, $387,000 of the notes are denominated in Canadian dollars (CAD$500,000), the remaining $950,000 in USD.  Attached to the Notes are 1,450,000 warrants (the "Warrants"), exercisable for a period of three years at an exercise price of $.25 for each $1.00 invested. Of the proceeds received, $764,000 was allocated to Warrants, based on their estimated fair value, as determined using the Black-Scholes model, using a volatility of 46.30%, a risk-free interest rate of 2.28%, an expected useful life of three years, and expected dividend yield of zero percent. Notes payable were recorded at $572,000, representing a discount to the maturity value of $1,320,000. This resulted in an effective interest rate on the Notes payable of 95% and 175% (on the US Dollar and Canadian Dollar denominated portions, respectively).

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        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.

        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.

        Impairment of long-lived assets: The Company's long-lived assets include property and equipment, intangible assets, and goodwill. Goodwill and intangible assets with an indefinite life are reviewed at least annually for impairment, while other long-lived assets are reviewed whenever events or changes in circumstances indicate that carrying values of these assets are not recoverable.

        This Quarterly Report contains "forward-looking statements". Such statements involve known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from the results expressed or implied by such statements, including general economic and business conditions affecting our customers and suppliers, competitors' responses to our products and services, particularly with respect to pricing, the overall market acceptance of such products and services and successful completion of our capital expansion program. We use words like "will," "may," "should," "plan," "believe," "expect," "anticipate." "intend," "future" and other similar expressions to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of their respective dates. These forward-looking statements are based on our current expectations and are subject to number of risks and uncertainties. Our actual operating results could differ materially from those predicted in these forward-looking statements, and any other events anticipated in the forward-looking statements may not actually occur.

        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.

        As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of the Company's

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disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon the evaluation, the Company's Chief Executive Officer and Acting Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.

        There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date this evaluation.

        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 Group 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 the 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 Group'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 Group proceedings or general market concerns about the possible actions by the receiver with respect to portfolio securities held by Lancer Group. In addition, on November 4, 2003 the receiver announced that he had appointed DDJ Capital to actively manage the Lancer Group portfolio securities.

        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 Defence and Counterclaim adds Doug Connolly as a defendant in the counterclaim. The counterclaim seeks damages as against both Wendy and Doug Connolly in the amount of $500,000, an accounting to determine profits made by the Connollys in relation to the breach of their fiduciary duties, a permanent and interlocutory injunction restraining the Connollys from soliciting clients and utilizing confidential information, punitive damages in the amount of $1,000,000 plus interest and costs. The Company believes that claims made by Wendy Connolly are without merit.

        None

Item 3.     Defaults Upon Senior Securities

        None.

        None.

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        None.

        (a)     Exhibits:

                    Exhibit 31.1 Exhibit 31.1 Section 302 Certification - Chief Executive Officer and Acting Chief Financial Officer.

                    Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes- Oxley Act of 2002.

        (b)     Reports on Form 8-K.

                    On May 7, 2004, Magic Lantern Group, Inc. filed a report on Form 8-K to disclose the sales of securities in the form of a convertible note and warrants in the amount up to $1,500,000 to Laurus Master Fund Ltd.

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.