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.

1

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See Notes to Condensed Consolidated Financial Statements.

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See Notes to Condensed Consolidated Financial Statements.

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See Notes to Condensed Consolidated Financial Statements.

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See Notes to Condensed Consolidated Financial Statements.

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                The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to SEC rules and regulations.  Operating results for the six months ended June 30, 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.

                The accompanying financial statements have been prepared on the basis the Company will continue as a going concern. The Company has sustained substantial losses for the years ended December 31, 2003, 2002, and 2001. The Company's cash position is in excess of $440,000 at August 10, 2004, and is sufficient to cover the current rate of operating activity until August 31, 2004 (see "contractual obligations and commercial commitments" found in Management's Discussion and Analysis). The Company's working capital deficiency at June 30, 2004 was approximately $2,280,000, which has increased slightly 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 Company's options for achieving a neutral cash flow portion include factoring of accounts receivable and a corporate reduction of discretionary investments and overall downsizing.  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.

                On May 3, 2004, 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.

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                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.  These warrants were valued at $958,000 and accrete into interest over the term of the note.  The effective interest rate is 34.4%.

                Common shares issuable to Laurus Funds subject to Note conversion and issuable upon exercise of the warrant were registered under the terms of a 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.

                Stock Based Compensation

                At June 30, 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.

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                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 $110,000 has been drawn upon by the Company as of June 30, 2004.

Note 4.     Inventories

                Inventories consist of raw materials and finished goods held for sale, which are valued at the lower of cost (first-in, first-out method) or market.  The following table summarizes the components of inventory as at June 30, 2004 and December 31, 2003:

(In thousands)

                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 and six months ended June 30, 2004 and 2003.

At June 30, 2004 and 2003, approximately 8,302,000 and 5,327,000 potential common shares respectively, are excluded from the determination of diluted net loss per share, as the effect of such shares is anti-dilutive.

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Note 6. Commitments and Contingencies

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

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                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.

                Magic Lantern's revenues during the performance period were less than $5 million, therefore 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 Canadathrough it'seducation and distribution segment. Accordingly the results for the periods ended June 30, 2004 and 2003 are entirely derived from this segment.

Intangible assets consist of the following:

Distribution agreements are being amortized on a straight-line basis over six years. Amortization expense on distribution agreements for the three and six months ended June 30, 2004 was approximately $147,000 and $295,000, respectively ($145,000 and $284,000, three and six months ended June 30, 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.

                Under FASB Interpretation No, 44, Accounting for Certain Transactions Including Stock Compensation (An interpretation of APB No.25), 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 June 30, 2004, the closing price of the Company's common stock on the AMEX was $0.93 per share. The decrease in market price from the end of the prior quarter resulted in an income adjustments of $35,000 and $106,000 for the three and six months, respectively, ended June 30, 2004, 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.

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Item 2

                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 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.

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                On September 25, 2003, the Company entered a fall season market trial targeted mainly to home audiences in Alberta, Canada. The trial was built around a beta release of Tutorbuddy™, the company's state-of-the-art online library of learning video a service delivering searchable, curriculum-correlated video programming on the World Wide Web. Tutorbuddy attracted immediate interest in early testing to parent groups involved in pre-trial mock-ups. Tutorbuddy also generated enthusiastic enquiry from educators and teachers given previews of the service. By completion of trial end, which occurred at the beginning of 2004, it had become clear to the Company that additional development was required in order to capitalize on the strong indicators of future adoption received from participants in early trials. Chief among the changes identified as critical were increased range and depth of library subject choice. Additional features such as monitored chat rooms, improved search functionality and new non-video content, specifically learning games, also emerged as elements critical to successful user adoption. This resulted in the Company's decision to re-evaluate the timing and sequence of the business plan and to undertake adding new content and features requested by trial users of the product. On a parallel path, success in institutional education, the Company's traditional market, added intensity to the drive for additional development and change in priorities. The Company's beta field-testing of a sister online library product in K-12 schools, Magic Lantern InSite, produced its first significant advancement with the announcement in October 2003 that the Red Deer Public Schools, the ninth largest school district in the Canadian province of Alberta agreed to partner deploy the beta release of the Company's InSite. With InSite in early use with the nearly 10,000 K-12 students enrolled in Red Deer Public's 21 elementary and secondary schools, the Company effectively applied development feedback from the home trial, including the decision to increase content depth and choice while refining and expanding the interface features and functionality.  Presently, the products are made available for trial and beta field-testing only.

                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, 2003 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.

                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 fourth 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 certain options outstanding prior to its acquisition of MLC (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 June 30, 2004, the closing price of the Company's common stock on the AMEX was $0.93 per share. The decrease in market price from the end of the prior quarter resulted in an income adjustment of $36,000 and $106,000 for the three and six months, respectively, ended June 30, 2004, 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.

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                Quarters ended June 30, 2004 and 2003. Net sales were $706,000 for the quarter ended June 30, 2004 (the "2004 Period"), compared to $807,000 for the quarter ended June 30, 2003 (the "2003 Period"). The reduction primarily reflects an elimination of the Company's British Columbia based dubbing operations ("Dubbing West") which were sold in November 2003. Sales gains made in other operations did not make up the loss of Dubbing West sales of $141,000 in the 2003 Period. Net sales from Resale goods operations exceeded the 2003 period by $75,000 as a result of increased sales efforts.

                Cost of goods sold decreased to $255,000 in the 2004 period compared to $299,000 in the 2003 Period, 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 36% and 39% for the 2003 Period.

                SG&A expenses of $1,367,000 for the 2004 Period increased by $522,000 from $845,000 for the 2003 Period, reflecting increased consulting and legal costs associated with securing additional financing with the Laurus Master Fund, LTD. Principal SG&A expenses for the 2004 Period were professional fees, salaries and benefits, advertising and promotion, and occupancy costs ($687,000, $416,000, $24,000, and $43,000, respectively). SG&A expenses in the second quarter of 2003 for principal SG&A costs were $111,000, $475,000, $45,000 and $59,000 respectively.

                Depreciation and amortization for the 2004 Period was $206,000 and for the 2003 Period was $202,000. Depreciation expense charged to property and equipment was $60,000 and amortization expense of $146,000 was charged to the distribution agreements, and for the 2003 Period, $57,000 and $145,000, respectively.

                Interest expense of $317,000 for the 2004 Period reflects accrued interest on the notes payable to Zi corporation, accreted interest on the company's promissory notes payable, Laurus Master Fund LTD and Sonoptic's 25% shareholder ($2 million , $973,000, $562,188 and $563,000 of debt, respectively). Interest expense for the Corresponding 2003 Period was $51,000 reflects accrued interest on the notes payable to Zi corporation and Sonoptic's 25% shareholder ($3 million and $553,000 of debt, respectively).

                The Company realized net loss of $1,457,000 or $.02 per share based on 66.8 million average shares outstanding for the 2004 Period, compared to a net loss of $1,159,000 or $.02 per share recognized in the 2003 Period based on 66.2 million average shares outstanding. Included in net income for the 2004 Period was compensation expense of $53,000, which reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern and $35,000, which reflects an income adjustment of the Replacement Options increasing the compensation income adjustment of $71,000 recorded in the first quarter of 2004. The adjustment on the Company's replacement options for the quarter ended June 30, 2004 is based on the difference between the aggregate exercise price of the Replacement Options and the market value of the underlying shares on June 30, 2004 ($0.93 per share) compared to March 31, 2004 market value ($0.95 per share).

                Six months ended June 30, 2004 and 2003. Net sales were $1,452,000 for the six months ended June 30, 2004 (the "First Six Months"), compared to $1,526,000 for the six months ended June 30, 2003 (the "Corresponding Period in 2003"). The reduction primarily reflects an elimination of its Dubbing West operations that were sold in November, 2003. Dubbing West and the Company's contract with the British Columbia Learning Connection ("BCLC") which had contributed sales of $358,000 during the first six months in 2003. During the First Six Months, excluding the sales of Dubbing West and BCLC, revenues were up 31% or $358,000. Net sales from the Company's dubbing operations and resale goods increased in First Six Months of 2004 by $92,000 from the Corresponding Period in 2003 as a result of increased sales efforts.

                The Company was successful in maintaining all of its relationships with its producers and continues converting non-exclusive contracts to exclusive Canadian contracts, blocking competition from selling these product lines in Canada. In addition, the Company continues its effort to secure new exclusive contracts for learning content from other Canadian competitors. These exclusive contracts increase the size of our exclusive library of learning content. The revenue from new content acquisition is typically delayed by 90 days as the company rolls-out a marketing program to inform the customers of the availability of the new content.

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                Cost of goods sold decreased to $445,000 in the First Six Months compared to $572,000 in the Corresponding Period in 2003, reflecting improved margins realized in the distribution sector and the disposal of Dubbing West operations in November 2003. Cost of Goods Sold as a percentage of sales was 31% for the First six months compared to 37% for the Corresponding Period in 2003.

                SG&A expenses of $2,320,000 for the First Six Months of 2004 increased by $490,000 from $1,830,000 for the Corresponding Period in 2003, reflecting increased consulting and legal cost associated with securing financing from the Laurus Master Fund, LTD. Principal SG&A expenses for the First Six Months of 2004 were professional fees, salaries and benefits, advertising and promotion, and occupancy costs ($877,000, $837,000, $111,000, and $87,000, respectively). Corresponding principal SG&A expenses for the First Six Months of 2003 were $297,000, $874,000, $159,000, and $114,000, respectively).

                Depreciation and amortization for the first six months of 2004 was $411,000 and for the 2003 Period was $394,000. Depreciation expense charged to property and equipment was $116,000 in 2004 and $110,000 in 2003 and amortization expense of $295,000 was charged to the distribution agreements, and for the 2003 Period was $284,000.

                Interest expense of $534,000 for the First Six Months reflects accrued interest on the notes payable to Zi Corporation, accreted interest on the company's promissory notes payable, Laurus Master Fund LTD. and Sonoptic's 25% shareholder ($2 million , $973,000, $562,188 and $563,000 of debt, respectively). In the Corresponding 2003 Period the interest expense was $104,000 which reflects the accrued interest on the notes payable to Zi corporation and Sonoptic's 25% shareholder ($3 million and $553,000of debt respectively.

                The Company realized net loss of $2,257,000 or $.03 per share based on 66.8 million average shares outstanding for the First Six Months, compared to a net loss of $272,000 or $.00 per share recognized in the Corresponding Period in 2003 based on 66.2 million average shares outstanding. Included in net income for the First Six Months was compensation expense of $105,000 (2003-$131,000), which reflects the intrinsic value of options issued in connection with the acquisition of Magic Lantern and $106,000 (2003-$1,233,000), which reflects an income adjustment of the Replacement Options reversing compensation expense recorded in 2003. The adjustment 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 June 30, 2004 ($0.93 per share) compared to December 31, 2003 market value ($0.99 per share).

                Liquidity. The Company's cash position increased to $629,000 at June 30, 2004 compared to $465,000 at December 31, 2003. During the quarter ended June 30, 2004, the Company received $1,399,000 from the sale to Laurus Master Fund Ltd a Convertible Term. For the period from January 1, 2004 to June 30, 2004, the Company used approximately $1,288,000 of cash to fund continuing operational requirements and realized $54,000 from a tenant leasehold allowance received during the period, and increased its bank indebtedness on the balance sheet by $6,000. The Company's cash position at June 30, 2003 was $142,000.

                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, Zi Corporation provided interim financing in April in the amount of $50,000 which was subsequently repaid in May 2004. On April 28, 2004 the Company authorized the sale to the Laurus Master Fund Ltd. (the "Purchaser") a Convertible Term Note in the aggregate principal amount of $1.5 million which is convertible into the six million shares of the Company's common stock, at a fixed conversion price of $0.25 per share. Additionally, in connection with the issuance of the Convertible Term Note, the Company issued to the Purchaser a warrant to purchase up to 1,100,000 shares of Common Stock at an exercise price of $0.30 per share. In addition Management is currently pursuing strategies with the goal of raising additional capital during the third and fourth quarters of 2004 in the form of debt and/or equity investments. Furthermore, the Company is exploring additional cost-cutting measures to bring expenses in line with revenues.

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                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 major shareholders 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 $440,000 at August 10, 2004, and is sufficient to cover the current rate of operating activity until August 31, 2004. The Company's working capital deficiency at June 30, 2004 was approximately $2,780,000, 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.

                Capital requirements for 2004 also include, in part, the repayment of an approximate $563,000 (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, $950,000 payable to certain noteholders and CDN$500,000 payable to certain noteholders. These obligations are discussed in greater detail in "Contractual Obligations and Commercial Commitments." The Company is currently in the process of renegotiating the terms of its outstanding loan, held by the Minister of Business of New Brunswick, which was due on September 30, 2003, and has received a no default letter from the Minister of Business New Brunswick, dated October 3, 2003. Although annual extensions of the loan maturity date have been granted in the past there can be no assurance that the loan will be renewed and on terms favourable 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 June 30, 2004:

                The cash flows of principle repayments of long term debt obligations consist of the following at June 30, 2004:

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(In thousands)

                A note payable to Zi, in the amount of $2,000,000, is payable in full on November 7, 2005. Accrued interest on the Note is payable at the end of the sixth calendar quarter after the closing, which occurred November 7, 2002, and thereafter in equal quarterly installments at the end of each calendar quarter in which any principal of the note remains outstanding.

                Promissory notes held by certain noteholders 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 $973,000 to the face value of the debt in the amount of $1,320,000.  $373,000 of the notes are denominated in Canadian dollars (CDN $500,000), the remaining $950,000 in USD.  Attached to the Notes are 1,450,000 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).

                A convertible term note held by Laurus Fund payable is due April, 2007 in the amount of $1,500,000. Interest will accrete monthly increasing the amount disclosed on the balance sheet of $574,000 to the face value of the debt in the amount of $1,500,000.  Attached to the convertible term notes are 1,100,000 warrants, exercisable for a period of three years at an exercise price of $.30 for each $1.00 invested. Of the proceeds received, $957,000 was allocated to warrants, based on their estimated fair value, as determined using the Black-Scholes model, using a volatility of 200.90%, a risk-free interest rate of 2.28%, an expected useful life of three years, and expected dividend yield of zero percent. A convertible term note payable was at $543,000, representing a discount to the maturity value of $1,500,000. This resulted in an effective interest rate on the convertible term note payable of 34%.

                The convertible term 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 convertible term 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.

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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.

                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.

None

None

                (a) Exhibits:

Exhibit 31.1             Section 302 Certification - Chief Executive Officer.

Exhibit 31.2            Section 302 Certification - 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.

Exhibit 32.2            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.

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                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.

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