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

FORM 10-K/A2

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

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

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

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


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



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

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





|Yes |  | No | [X]
|--- |  | -- | ---



As of December 31, 2003, there were 67,087,262 shares of
Common Stock outstanding, and the aggregate market value of shares held by
unaffiliated shareholders was approximately $3,733,153.

DOCUMENTS INCORPORATED BY REFERENCE

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



PART I

Item 1. Business

Introduction

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



Recent Business Events



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

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.



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.



1



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.



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. TutorbuddyTM is a revolutionary, state-of-the-art, e-learning
system designed to deliver searchable, curriculum-correlated, digital video
programs and learning objects online. TutorbuddyTM, is designed for
home use by students and parents. The Company anticipates targeting the U.S.
market in the upcoming fiscal year and has as a focus of its 2004 Business Plan
an intensive marketing and promotional program in both the U.S. and Canada to
build on the launch's momentum. The Company has also launched and received
encouraging response to the Company's institutional product, Magic Lantern
InSite. On October 24, 2003, the Company announced that Red Deer Public Schools,
the ninth largest school district in the province of Alberta, Canada, agreed to
deploy Magic Lantern InSiteTM, the Company's latest e-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.



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, 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." After
consummation of the Magic Lantern transactions, Alpha Omega Group ("AOG") held
in record name approximately 47% of the Company's outstanding shares.

2





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 on July
10, 2003, the Lancer Group, in the aggregate, controls 45.1% of the Company's
outstanding shares as of that date. Even though no wrongdoing has been alleged
in connection with Lancer's ownership of Company securities, the Company, the
financial statement impact, if any, and the market for its shares may be
adversely affected by any court findings or the negative publicity generated by
the Lancer proceedings or general market concerns about the possible actions by
the receiver with respect to portfolio securities held by Lancer. In addition,
on November 4, 2003 the receiver announced that he had appointed DDJ Capital to
actively manage the Lancer portfolio securities.



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").





3



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



Magic Lantern Group, Inc. ('Magic Lantern") has grown to be a major 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 with 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 in order
to "pilot" a video-on-demand service.

4





As part of our continuing "organic" growth strategy, we will require additional
capital resources 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 was expanding its revenue base by utilizing its distribution
channels for new products and services. Innovative programs for schools, such as
its lease-to-own library program were launched (with the recommendation of the
Canadian Principals Association), and the Campbell Soup Company's "Labels for
Education." The debut of "Labels for Education" 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 6,000 schools since its launch in 1996.



TutorbuddyTM 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. TutorbuddyTM is
branded and offered to Canadian schools with the ultimate market being the homes
of school-age children, some five million in Canada, when the service has proven
effective in Canadian schools. Concurrent with providing the TutorbuddyTM
innovation in the current core market of Canada, where Magic Lantern has a
dominant position in the industry, plans include the expansion of the
traditional distribution business into the United States and Internationally.
Expanding to global markets and developing a brand presence internationally
while proving the digital service application in Canada is intended to be the
springboard for the Magic Lantern's growth initiatives. Magic Lantern continues
its focus on becoming a respected and successful company in the delivery and
management of educational video content, in both Canadian markets and worldwide.

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 66%, 61% and 68% of Magic Lantern's net
sales in 2003, 2002 and 2001, respectively Video dubbing accounted for
approximately 22%, 25% and 14% of Magic Lantern's net sales in 2003, 2002 and
2001, respectively. Video encoding accounted for approximately 5%, 6% and 16% of
Magic Lantern's net sales in 2003, 2002 and 2001, 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. Prior to our
acquisition of Magic Lantern our emphasis was on our apparel business. These
apparel lines accounted for 100% of our net sales in 2001 and approximately 5%
in 2002. As our apparel business slowed we pursued a business redirection
culminating in our purchase of Magic Lantern. The acquired Magic Lantern
businesses now constitute our entire business.

Marketing Strategy. The Company's current 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. Prior to implementing its business redirection the Company was focused
on offering multiple product lines of quality casual apparel and activewear
distinguished by design, brand and label. Following the acquisition of Magic
Lantern, the Company has adopted a marketing strategy to concentrate resources
towards expanding the geographic and market reach of Magic Lantern's historic
business.

5



Our market plan for growth in the Canadian market has involved multiple
initiatives including i) installing an Inside Sales call centre team and
customer relations prospect identification system; ii) re-developing the
Tutorbuddy home service (http://www.tutorbuddy.com a retail
interface to the InSite video engine) to a homework help service targeting
parents of school-age children; iii) implementing a test of market readiness for
Tutorbuddy services in a pre-Christmas offering aimed at home-based users; iv)
entering into a province-wide paying pilot for InSite use in selected British
Columbia school districts, which was the first large-scale commitment to online
video services in Canadian education; and v) launching an Inside Sales-led
marketing of InSite (http://www.magiclanterninsite.com)
based on innovative per-teacher pricing which is now establishing significant
traction at the building level in the Canadian provinces targeted so far.

Business Development USA



Leveraging the financial base of operations already established in Canada, the
Company believes its future growth lies in the United States. The spearhead of
the Company's US strategy in 2004 is 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 are expected to
begin trial shortly. More are expected to participate as demonstrations develop.



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



Go-to-Market USA

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





6



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

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 and Saint John. 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.



Manufacturing

Manufacturing Sources. Following our change in business
focus in connection with our transaction with Magic Lantern there is no
manufacturing activity by or on behalf of the Company.

Quality Control. Magic Lantern's business primarily
involves the distribution of videocassette tapes that are either copied from
masters in Magic Lantern's possession or sourced directly from producers. Due to
the nature of the business, quality control issues are not material.
Historically, all finished products manufactured for the Company were inspected
by its employees or agents prior to acceptance and payment by the Company to
ensure design, quality and other production specifications were met.

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
$154,000 and $100,000 at December 31, 2003 and 2002, respectively.

Competition

Following the Company's acquisition of Magic Lantern, its
business shifted to the distribution of educational and learning content in
video and other electronic formats. 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 59% include digital rights.

7



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 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 27 years.

Traditional format competitors of the Company in
Canada include:

| |  | Canadian Learning Company, Inc.,
    focused primarily on the kindergarten to Grade 12 ("K-12") markets and
    special interest groups, has the advantage of representing three major
    producers in Canada -AIMS, Great Plains and Reading Rainbow.             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                     
| |  | Visual Education Centre benefits
    from relationships with producers such as TVO, BBC, PBS, Phoenix and John
    Cleese, as well as the appeal of carrying French language content.                                                                               
| |   |                                                                                                                                                                                                                                                                     
| | • | Marlin Motion Pictures Ltd. distinguishes its
    offerings by supplementing its K-12 education video with business and
    general industry content from suppliers including United Learning, AGC and
    MTI, although it offers no option for course correlation.
| |   |                                                                                                                                                                                                                                                                     
| | • | McIntyre Media, providing video to the schools
    in the K-12 market, with some health market related content.  McIntyre
    represents some well regarded producers in Canada including Sunburst,
    Meridian and Learning Speed.                                

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 TutorbuddyTM or stand-alone media
offerings. Management believes these services offer the following competitive
advantages:

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

8



Although management believes that competitors of TutorbuddyTM 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:

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

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, 2003, the Company had 33 salaried
employees. Of the 33 employees, 5 provide executive and management services, and
28 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.

Recurring Losses

We have a history of losses and may continue to incur losses from operations.
Our net losses were $2,255,000 for the year ended December 31, 2003. These
losses primarily reflect selling, general and administrative ("SG&A") expenses
generally in excess of gross profit levels. Our business plan contemplates
continued expansion efforts that will entail substantial SG&A and related
expenditures without any assurance of deriving profits from operations. Our
ability to achieve profitable operations through operations of the Company could
be adversely affected by delays or inefficiencies in the development cycle for
new products and services, inability to penetrate new geographic markets, lack
of sponsor or consumer acceptance of those products and services, competition
and changing technology.

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 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.

9



Risk of Inadequate Financial Resources

The execution of our business plan for expanding our trademark licensing
and e-education businesses could 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 substantial increases in our revenues our working capital will likely
be expended before the end of 2004. In that event, 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 weaken our consolidated financial condition.

Risk of Customer Budget Reduction

Our goal of maintaining our existing customer base and extending our
e-education products and services to new markets could 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 could
adversely affect our prospects for achieving 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 planned expansion 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 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 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
our 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. 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 market
penetration and profitability.

Dependence on Licensed Conten

Because our business is dependent on licensed content for our e-education
offerings, our business is subject to the

10



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 $15,000. 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 obtain 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. Principal competitors
currently include multi-national and regional firms offering services, systems
and platforms through established Internet sites or proprietary networks. In
addition, many educational organizations provide a broad range of educational
data base resources without charge. Most of these competitors have substantially
greater financial, technical, marketing and deployment resources than us. Many
of these competitors particularly in markets outside Canada have the added
advantage of offering a greater diversity of products and services with a
substantial installed customer base. These competitors could control these
markets before we obtain any meaningful market share, adversely affecting our
prospects for market penetration and profitability.

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, adversely affecting our prospects for market penetration
and profitability.

Regulatory Risks

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

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

11



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

Control by Selling Stockholders

Because the Lancer Group and Zi Corporation collectively own 92.7% 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 continue to hold a substantial portion of their Shares.

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 Companyclaiming damages in the amount of
$250,000 for wrongful dismissal. On February 3, 2004, counsel to Wendy Connolly
was formally served with a Statement of Defence and Counterclaim by the Company.
The Statement of Defence and Counterclaim adds Doug Connolly as a defendant in
the counterclaim. The counterclaim seeks damages as against both Wendy and Doug
Connolly for damages in the amount of $500,000, an accounting to determine
profits made by the Connollys in relation to the breach of their fiduciary
duties, a permanent and interlocutory injunction restraining the Connollys from
soliciting clients and utilizing confidential information, punitive damages in
the amount of $1,000,000 plus interest and costs. The Company believes that
claims made by Wendy Connolly are without merit.

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 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.



12



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

On November 3, 2003 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 Tammy Wentzel, and (ii) a
proposal to approve an amendment to the Company's stock option plan. A
description of the proposal and a tabulation of the voting on each proposal is
set forth below:

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

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.



|               | Market Prices
|-------------- | -------------
|               | High         
|2002:          |              
|               |              
|First quarter  | $.31         
|Second quarter | 1.25         
|Third quarter  | .98          
|Fourth quarter | 1.75         
|               |              
|2003:          |              
|               |              
|First quarter  | $1.75        
|Second quarter | 1.09         
|Third quarter  | 1.00         
|Fourth quarter | 1.45         





Security Holders

As of April 1, 2004, there were approximately 100 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.

13



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 in compliance with AMEX listing requirements,
and has been compliant throughout the year ended December 31, 2003.



Recent Sales of Unregistered Securities







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.



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 2003. 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, 2003, the following financial information should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations as well as the Financial Statements of the Company and
related Notes included elsewhere in this Report.

|(In thousands, except per share amounts)                      
|--------------------------------------------------------------
|                                                              
|                                                              
|                                                              
|Income Statement Data:                                        
|Net revenue                                                   
|Cost of sales                                                 
|Gross profit (loss)                                           
|Commission and other income                                   
|                                                              
|Selling, general and administrative expenses                  
|Gain on lease cancellation                                    
|Depreciation and amortization                                 
|Compensation adjustment from
    options                      
|Impairment of goodwill                                        
|Impairment of trademark                                       
|Loss (gain) on sale of
    securities                         
|Gain on settlement of litigation                              
|Operating income (loss)                                       
|Royalty income                                                
|Interest expense, net                                         
|Income (loss) before income taxes                             
|Income taxes                                                  
|Net income (loss)                                             
|Net income (loss) per common share:
   Basic and fully diluted
|                                                              
|Weighted average common shares outstanding, basic and diluted 
|                                                              
|                                                              
|                                                              
|Summary Balance Sheet Data:                                   
|Total assets                                                  
|Working capital (deficit)                                     
|Due to factor                                                 
|Notes payable                                                 
|Long term debt, excluding current portion                     
|Shareholders' equity (deficit)                                



14



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
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 for
$1,359,000 (including transaction costs) plus 100,000 common shares of Zi valued
at $499,000.



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



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

On September 25, 2003, the Company launched TutorbuddyTM,
a revolutionary, state-of-the-art, e-learning system designed to deliver
searchable, curriculum-correlated, digital video programs and learning objects
online. TutorbuddyTM, designed for home use by students and parents,
immediately received positive reviews from home users and the educational
community. Intensive marketing and promotional programs have been implemented to
continue to build on the launch's momentum. Similar success has been recently
achieved by the Company's institutional product, Magic Lantern InSite. On
October 24, 2003, the Company announced that Red Deer Public Schools, the ninth
largest school district in the province of Alberta, Canada, agreed to deploy
Magic Lantern InSiteTM, the Company's latest e-learning video service
for schools. InSite will be distributed 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.

15









The Company accounted for its acquisition of Magic Lantern
under the purchase method. The purchase price for the acquired businesses was
allocated among their assets and liabilities as of the closing date. For this
purpose, the 29,750,000 shares of the Company's common stock issued to Zi as
part of the purchase price for the acquired businesses was valued based on their
market price in June 2002 when the terms of the Magic Lantern Transactions were
established in a letter of intent between the parties. Based on the market price
of $.31 per share for the Company's common stock at that time, the total
purchase price and related transactions costs without regard to any adjustments
for post-acquisition operating results aggregated approximately $12,363,000, of
which approximately $6,868,000 has been allocated to goodwill, , approximately
$4,492,000 to intangible assets, 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 8.1 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 October 15,
2002 for the Magic Lantern Transactions.



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 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.

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 $1,091,000for the year ended
December 31, 2003, reversing previously recorded compensation expense, in 2002.
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.

16







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, activewear 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, with a view toward expanding existing licensing operations and
adding compatible business lines (the "Business Redirection").



Business Redirection



Licensing. To initiate the Business Redirection, the
Company granted an exclusive license to a large apparel company in October 1999
for domestic distribution of boys' sportswear lines under its Cross Colours
label. In January 2001, the Company entered into its first international
licensing arrangement with a Japanese apparel company for sales of men's and
ladies' apparel under the Cross Colours brand throughout Japan and its
territories and possessions. The licensing program alone was not expected to
reverse the Company's financial downturn in the near term. In addition to
inherent timing constraints, the Company was faced with performance defaults by
its domestic licensee early in 2000. In February 2001, the Company brought an
action for unpaid royalties against the licensee. Although the litigation was
settled in April 2002 for $535,000, payable $335,000 at the time of settlement
and the balance in January 2003, the absence of the anticipated revenue stream
during the first two years of the license substantially impaired the Company's
financial flexibility for executing its planned Business Redirection.
Consequently, in fiscal 2002, the Company wrote off its Cross Colours trademark.



Equity Infusion. To address these developments, the
Company entered into various discussions in 2001 for a potential strategic
alliance and / or equity infusion. Those discussions culminated in August 2001
with the execution of a stock purchase agreement with Alpha Omega Group, a
private investment group ("AOG"), for the issuance of 30 million shares of the
Company's common stock to AOG at $.05 per share or a total of $1.5 million. The
agreement also provided for related closing transactions (collectively with the
equity infusion, the "AOG Transactions"), including the addition of three
designees of AOG to the Company's board of directors, an increase in its
authorized common stock to 100 million shares, a change in its name to "JKC
Group, Inc." and a related change in the trading symbol for its common stock
on the American Stock Exchange (the "AMEX") to "JKC," effective April 18,
2002, transitional services from members of incumbent management and repricing
of outstanding stock options (the "Replacement Options").



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



Magic Lantern Acquisition. Following the closing of the
AOG Transactions, the Company continued to pursue its Business Redirection by
exploring acquisition opportunities, with a view toward expanding existing
licensing operations or adding compatible business lines. 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").

17





AMEX Listing. In March 2002, the Company was advised by
the AMEX that its common stock will be subject to delisting proceedings unless
an acceptable plan was submitted for regaining compliance with the applicable
shareholders' equity requirement of $4 million. The Company submitted a response
to the AMEX in April 2002 with the first phase of its plan for regaining
compliance with the listing standards. That phase was completed on April 16,
2002 with the $1.5 million equity infusion under the AOG Agreement. In June
2002, the Company received an extension for continuation of its AMEX listing
based on the second phase of its plan for increasing shareholders' equity
through the Magic Lantern acquisition. The compliance plan was timely completed
upon the closing of the Magic Lantern Transactions, which increased the
Company's shareholders' equity to approximately $9.6 million as of the closing
date on November 7, 2002. See "Liquidity and Capital Resources - Capital
Resources."



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 earnout
arrangement for this acquisition. See "Equity Infusion" and "Magic Lantern
Acquisition."



Results of Operations



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



Seasonality.



Sale 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 remaining
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.

18





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



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



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



Interest expense, net of interest income,
aggregated $354,000 in 2003 compared to $43,000 or in 2002, reflecting accrued
interest on debt for 2003, as follows: $143,000 pertaining to Zi Corporation's
$2 million, 5% note; $155,000 relating to the effective interest accrued on
promissory notes in connection with the notes/warrants issued in the fourth
quarter of 2003; $45,000 on the Provincial Holdings Ltd. 6.75% note of $580,000
(Can $ 750,000); and approximately $20,000 of interest expense incurred on bank
financing. The Company recognized a net non-cash adjustment of $1,091,000 at
December 31, 2003, of which, $1,251,000 reflects the compensation component of
the Replacement Options issued as part of the AOG Transactions in April 2002 and
$160,000 reflects the intrinsic value of options issued in connection with the
acquisition of Magic Lantern on November 7, 2002. For 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.

19





Years Ended December 31, 2002 and 2001. Net sales were
$386,000 for the year ended December 31, 2002, compared to $2,855,000  for 2001. The decrease primarily reflects a contraction of the Company's apparel
distribution business ("Apparel Distribution ") as part of its strategy to focus
on licensing opportunities and implement the Business Redirection, coupled with
net sales of Magic Lantern. 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 decreased to $188,000 in 2002 compared to
$3,068,000 in 2001, reflecting off-price sales of discontinued brands as part of
the Company's efforts to reduce inventory and position itself to implement the
Business Redirection. Education and Distribution accounted for $153,000 of cost
of goods sold in 2002. Cost of goods sold as a percentage of net sales for
Education and Distribution was 41.9%.



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



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



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



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

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



Liquidity and Capital Resources



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

20





Execution of Magic Lantern's business plan business will
require capital resources substantially in excess of the Company's current cash
reserves. To access the necessary capital needed, Management is currently
pursuing strategies with the goal of raising $1 million to $3 million during the
first two quarters of 2004 in the form of debt and/or equity investments.
Furthermore, the Company is exploring 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 $143,000. The
Company completed its sale of the dubbing business on November 28, 2003.



For the year ended December 31, 2003, the Company spent
approximately $203,000 on professional fees and certain one time costs including
one litigation settlement in the amount of $10,000.



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 remaining 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.

21



Going concern. The Company's cash position as at
March 29,
2004 was approximately  CDN $206,866, which at the current rate of operating
activity is insufficient to cover operating costs to December 31, 2004. The Company's
working capital deficiency at December 31, 2003 was approximately $2,092,000,
which has worsened since December 31, 2002.  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 $2.25 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 12 months. Failing shareholder support and a longer-term
financing solution, the sources of capital available to the Company include
factoring of accounts receivable and reduction of discretionary investments in
the digitization program and sales and marketing programs designed to increase
revenue over the next twelve months. Specifically, the Company could elect to
shut down the operations of TutorbuddyTM and Sonoptic, which on a
monthly basis would result in cash savings of approximately $10,000 but would involve
expenditures to realize those savings. If the Company is unable to raise
long-term financing it raises substantial doubt about its ability to continue as
a going concern.

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

Capital requirements for 2004 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.





22



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 9 and
13 to the financial statements).

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

(In thousands)





|     | Office Equipment | Premises | Total
|---- | ---------------- | -------- | -----
|2004 | $ 18             | $ 227    | $ 245
|2005 | 14               | 152      | 166  
|2006 | 8                | 160      | 168  
|2007 | 3                | 122      | 125  
|2008 | --               | 119      | 119  
|2009 | --               | 99       | 99   
|     | $ 43             | $ 879    | $ 922





23



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

(In thousands)





|2004 | $ 759  
|---- | -------
|2005 | 2,007  
|2006 | 3      
|2007 | 2      
|2008 | --     
|     | $ 2,771



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 $572,000 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).

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.

24



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. Fair 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.

Although the company does not now believe that its existing long-lived assets
will be impaired in the future, we 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.





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.

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

|(In thousands)               
|-----------------------------
|                             
|                             
|Net loss -- as reported      
|Net loss -- pro forma        
|Loss per share -- as reported
|Loss per share -- pro forma  

25



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 to 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 2003 and 2002, a 10%
adverse change in average annual foreign currency exchange rates would not have
been material to results reported in the consolidated financial statements for
those periods. To date, we have not sought to hedge risks associated with
fluctuations in exchange rates and therefore we continue to be subject to such
risks. In the future, we may undertake such transactions. However, any hedging
techniques implemented in such regard might not be successful in eliminating or
reducing the effects of currency fluctuations.



Interest Rate Risks

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



26



Item 8. Financial Statements and Supplementary Data

Financial Statements and Supplementary Data





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

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, 2003 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

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.

27



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:

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



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.



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.

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 120 days of the end of our fiscal year is
incorporated herein by reference.

______________________

Item 14. Principal Accountant Fees and Services

The information contained under the caption "Appointment Of Independent
Auditors" in the Company's definitive Proxy Statement to be filed within 120
days of the end of our fiscal year is incorporated herein by reference

28







PART IV



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

(a)Financial Statements and Schedules:

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

(2)Schedules: Schedule II

(3)Exhibits:





|ExhibitNumber                                                                                                                                                     | Exhibit                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                  |                                                                                                                                                                                                
|2.1*                                                                                                                                                              | Amended and Restated Certificate
    of Incorporation of the Company                                                                                                                           
|                                                                                                                                                                  |                                                                                                                                                                                                
|3.2*                                                                                                                                                              | By-Laws of the Company                                                                                                                                                                         
|                                                                                                                                                                  |                                                                                                                                                                                                
|4.1*                                                                                                                                                              | Form of Stock Certificate                                                                                                                                                                      
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.1*                                                                                                                                                             | 1987 Incentive Stock Option Plan                                                                                                                                                               
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.2                                                                                                                                                              | 1998 Incentive Stock Option Plan                                                                                                                                                               
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.3                                                                                                                                                              | 1998 Nonqualified Stock Option
    Plan-A (incorporated by reference to Exhibit 10.4 to the Company's Quarterly
    Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.4                                                                                                                                                              | 1998 Nonqualified Stock Option
    Plan-B (incorporated by reference to Exhibit 10.5 to the Company's Quarterly
    Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.5                                                                                                                                                              | Magic Lantern 2002 Stock Option
    Plan (Incorporated herein by reference to the Registrant's Current Report on
    Form 8-K filed on August 8, 2002).                                        
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.6                                                                                                                                                              | Magic Lantern Amended and
    Restated 2002 Stock Option Plan (Incorporated herein by reference to the
    Registrant's Proxy Statement on Schedule 14A filed on October 24, 2003).            
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.7                                                                                                                                                              | Asset Purchase Agreement, dated
    November 2, 2003, by and between Brett Robinson and Magic Lantern Group,
    Inc.                                                                          
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.8                                                                                                                                                              | Promissory Note Issued August
    24, 2003.                                                                                                                                                    
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.9                                                                                                                                                              | Employment Agreement by and
    between Magic Lantern Group, Inc. and Robert A. Goddard.                                                                                                       
|                                                                                                                                                                  |                                                                                                                                                                                                
|14.1                                                                                                                                                              | Code of Ethics                                                                                                                                                                                 
|                                                                                                                                                                  |                                                                                                                                                                                                
|23.1                                                                                                                                                              | Consent of Auditor                                                                                                                                                                             
|                                                                                                                                                                  |                                                                                                                                                                                                
|31.1                                                                                                                                                              | Certifications of Chief
    Executive Officer and Acting Chief Financial Officer, pursuant to Rule
    13a-14(a).                                                                              
|                                                                                                                                                                  |                                                                                                                                                                                                
|32.1                                                                                                                                                              | Certifications of Chief
    Executive Officer and Acting Chief Financial Officer, pursuant to 19 U.S.C. Section
    1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                                                                                                                                                                 
|* Incorporated by reference to the corresponding Exhibit filed with the
      Company's Registration Statement on Form S-1, as amended (Reg. No.
      33-12959).





29



(b)Reports on Form 8-K:

|• | Current Report on Form 8-K dated July 16, 2003 regarding the
  Company's cash position                                                                                                                                                                                                                                                                                                                                                  
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|• | Current Report on Form 8-K dated July 31, 2003 regarding the
  resignation of Mr. Harvey Gordon as the Company's CEO and the appointment of
  Mr. Robert A. Goddard as Interim CEO                                                                                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|• | Current Report on Form 8-K dated August 11, 2003 regarding the
  Company's launch of "Magic Lantern Health and Medical," a new operating
  division                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|• | Current Report on Form 8-K dated September 15, 2003 announcing
  Initial Completion of $1.1 Million Private Placement of Debentures                                                                                                                                                                                                                                                                                                     
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|• | Current Report on Form 8-K dated September 17, 2003 regarding
  the launch of Tutorbuddy, the Company's e-learning system                                                                                                                                                                                                                                                                                                               
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                         
|• | Current Report on Form 8-K dated December 11, 2003 regarding
  the completion of the sale of certain assets it held in connection with its
  media dubbing business, to BKR Media, Inc., a company controlled by Brett
  Robinson, a former employee of the Company, in exchange for consideration of
  CDN $200,000 less an inventory adjustment of CDN $12,516, as per the terms of
  the asset purchase agreement governing the sale.



30





|Magic Lantern Group, Inc. (formerly, JKC Group, Inc. and
    State II Apparel Corp):                     
|---------------------------------------------------------------------------------------------------------
|                                                                                                         
|Index to Financial Statements                                                                            
|                                                                                                         
|                                                                                                         
|Independent Auditor's Report                                                                             
|                                                                                                         
|Balance Sheets - December 31, 2003 and 2002                                                              
|                                                                                                         
|Statements of Operations - For the years ended
    December 31, 2003, 2002 and 2001                      
|                                                                                                         
|Statements of Comprehensive Loss - For the years ended
    December 31, 2003, 2002 and 2001              
|                                                                                                         
|Statements of Shareholders' Equity (Deficit) - For the
      years ended December 31, 2003, 2002 and 2001
|                                                                                                         
|Statements of Cash Flows - For the years ended December
    31, 2003, 2002 and 2001                      
|                                                                                                         
|Notes to Financial Statements                                                                            
|                                                                                                         
|Schedule II - Valuation and Qualifying Accounts                                                          





INDEPENDENT AUDITOR'S REPORT



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

We have audited the accompanying balance sheets of Magic
Lantern Group, Inc. and subsidiaries (formerly, JKC Group, Inc. and Stage II
Apparel Corp.) as of December 31, 2003 and 2002, and the related statements of
operations, comprehensive loss, shareholders' equity (deficit) and cash flows
and the related Schedule II for each of the years in the three-year period ended
December 31, 2003. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.



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



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



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



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



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



New York, New York
February 27, 2004

i



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

BALANCE SHEETS

(In thousands, except per share data)

|                                               |                                                                                                                         | December 31,
|---------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | ------------
|                                               |                                                                                                                         | 2003        
|ASSETS:                                       
|Current assets:                               
|                                               | Cash and cash
    equivalents                                                                                           | $
    465   
|                                               | Accounts
    receivable - trade, net of allowance for doubtful accounts of $101 
     at December 31, 2003 ($70 - 2002) | 446         
|                                               | Miscellaneous
    receivables                                                                                           | 74          
|                                               | Inventories                                                                                                             | 78          
|                                               | Prepaid expenses
    and other current assets                                                                           | 129         
|                                               | Total current assets                                                                                                    | 1,192       
|                                               |                                                                                                                         |             
|                                               | Property and
    equipment, at cost, less accumulated depreciation                                                      | 1,018       
|                                               |                                                                                                                         |             
|                                               | Other assets:                                                                                                          
|                                               | Intangible assets, net of accumulated amortization of $690 at December 31,
            2003 (80 -
    2002)             | 4,581       
|                                               | Goodwill                                                                                                                | 5,830       
|                                               | Cash surrender value of officers' life insurance                                                                        | --          
|                                               | Security deposit and other assets                                                                                       | 32          
|                                               | TOTAL ASSETS                                                                                                            | $12,653     
|                                               |                                                                                                                         |             
|LIABILITIES:                                  
|                                               | Current
    liabilities:                                                                                               
|                                               | Bank indebtedness                                                                                                       | $104        
|                                               | Current portion of long-term debt                                                                                       | 759         
|                                               | Promissory Notes payable                                                                                                | 572         
|                                               | Note payable to affiliate                                                                                               | --          
|                                               | Accounts payable - trade                                                                                                | 786         
|                                               | Accrued liabilities                                                                                                     | 786         
|                                               | Producer royalty accruals                                                                                               | 277         
|                                               | Other current liabilities                                                                                               | --          
|                                               | Total current liabilities                                                                                               | 3,284       
|                                               |                                                                                                                         |             
|Long-term
    liabilities:                    
|                                               | Long-term debt,
    net of current portion                                                                              | 12          
|                                               | Note payable,
    including accrued interest                                                                            | 2,000       
|                                               | Total long-term liabilities                                                                                             | 2,012       
|                                               |                                                                                                                         |             
|COMMITMENTS AND CONTINGENCIES (Note 13)       
|                                               |                                                                                                                        
|SHAREHOLDERS' EQUITY (DEFICIT)                
|                                               | Preferred stock,
    $.01 par value, 1,000 shares authorized; none issued and outstanding                               | --          
|                                               | Common stock,
    $.01 par value, 100,000 shares authorized at December 31, 2003                                       
|                                               | and 2002; 66,797 shares issued and outstanding at December 31, 2003 and                                                
|                                               | 66,147 shares issued and
    outstanding at December 31, 2002                                                           | 668         
|                                               | Additional
    paid-in capital                                                                                          | 20,021      
|                                               | Deferred
    compensation                                                                                               | (351)       
|                                               | Accumulated
    deficit                                                                                                 | (13,333)    
|                                               |                                                                                                                         | 7,005       
|                                               | Accumulated other
    comprehensive loss                                                                                | 352         
|                                               | TOTAL SHAREHOLDERS' EQUITY                                                                                              | 7,357       
|                                               |                                                                                                                         |             
|TOTAL
    LIABILITIES AND SHAREHOLDERS' EQUITY | $12,653                                                                                                                 | $13,962     
|                                               |                                                                                                                        
|See
    Notes to Financial Statements.         |                                                                                                                        

F-1



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

STATEMENTS OF OPERATIONS

(In thousands, except per share data)

|                                                 | Year Ended December 31,
|------------------------------------------------ | -----------------------
|                                                 | 2003                   
|Net revenue                                      | $2,871                 
|Cost of sales                                    | 1,209                  
|Gross profit (loss)                              | 1,662                  
|Commission and other income                      | 25                     
|                                                 | 1,687                  
|Selling, general and
    administrative expenses | 3,865                  
|Loss  on sale of marketable
    securities       | --                     
|Compensation adjustment from
    options         | (1,091)                
|Impairment of goodwill                           | --                     
|Impairment of trademark                          | --                     
|Depreciation and amortization                    | 814                    
|Gain on settlement of litigation                 | --                     
|Total
    expenses                               | 3,588                  
|Operating loss                                   | (1,901)                
|                                                
|Other income (expenses):                        
|Royalty
    income                               | --                     
|Interest
    income                              | --                     
|Interest
    expense                             | (354)                  
|Loss before income taxes                         | (2,255)                
|Income taxes                                     | --                     
|Net loss                                         | $ (2,255)              
|Basic and diluted net loss per
    common share: | (.03)                  
|Weighted average common shares
    outstanding: 
|Basic                                            | 66,483                 
|Fully
    diluted                                | 66,483                 



See Notes to Financial Statements.

F-2





Magic Lantern Group, Inc.





(In thousands)

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

See Notes to Financial Statements.

F-3



Magic Lantern Group, Inc.



STATEMENTS OF SHAREHOLDERS' EQUITY/DEFICIT



(In thousands)



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






See Notes to Financial Statements.

F-4



Magic Lantern Group, Inc.

STATEMENTS OF CASH FLOWS





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

See Notes to Financial Statements.

F-5





Magic Lantern Group, Inc.



NOTES TO FINANCIAL STATEMENTS





Note 1 - Description of Business:



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



On November 7, 2002, as more fully described in note 3, the
Company acquired 100% of the issued and outstanding shares of Magicvision Media
Inc. ("MVM") and its wholly owned subsidiary Magic Lantern Communications Ltd.
("MLC"), a Canadian corporation. The Company and its subsidiaries are involved
in the marketing and distribution of educational video and media resources
throughout Canada. The Company has exclusive distributing rights to a wide
variety of film producers representing various subject matters that are
distributed to a customer base throughout Canada. Tutorbuddy, Inc., ("TBY") a
wholly owned subsidiary of MLC, provides an Internet based content delivery
service designed to deliver content and related educational services on demand
to students, teachers and parents. Sonoptic Technologies, Inc., a 75% owned
subsidiary of MLC ("STI"), provides art digital video encoding services and has
developed a proprietary video base indexing software that allows users to
aggregate, bookmark, re-sort and add their own comment boxes to pre-existing
material content.



The 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 at the current rate of operating activity is
insufficient to cover operating costs to May 1, 2004. The Company's working capital
deficiency at December 31, 2003 was approximately $1,927,000, which has worsened
since December 31, 2002. Historically, the Company has sought financing from its
major shareholders.  Failing shareholder support and a longer-term
financing solution, the sources of capital available to the Company include
factoring of accounts receivable and reduction of discretionary investments in
the digitization program and sales and marketing programs designed to increase
revenue over the next twelve months.  If the Company is unable to
raise long-term financing it raises substantial doubt about its ability to
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.



F-6



Note 2 - Summary of Significant Accounting Policies:

Use of estimates:

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.

Principles of consolidation and minority interest in subsidiary:



The consolidated financial statements include the accounts of
the Company for the period from
November 7, 2002 to December 31, 2003 (see note 2), its wholly-owned subsidiary MVM and its wholly owned subsidiary MLC (collectively, the "Lantern Group"). The
25% minority interest liability with respect to STI is zero due to operating
losses sustained by STI from its inception. Accordingly, 100% of the losses from
STI are reflected in the statement of operations of the Company. All significant
intercompany balances and transactions have been eliminated.

Concentration of credit risk:

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

Foreign exchange translation:

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



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



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

Accounts receivable: 

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

F-7





Inventories:

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



(In thousands)





|               | 2003 | 2002
|-------------- | ---- | ----
|Finished goods | $ 46 | $ 47
|Raw materials  | 32   | 35  
|               | $ 78 | $ 82



Property and equipment:

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

Software costs:

The Company capitalizes qualifying software costs to be licensed to others
once the point of technological feasibility is reached. Such costs are reported
at the lower of unamortized costs and net realizable value. Amounts capitalized
are amortized based on current and future revenue with minimum amortization not
less than straight-line amortization over the remaining useful life. Estimated
useful lives of qualifying software costs range from two to three years. Such
qualifying costs for the year were approximately $263,000 in 2003 (period from November
7, 2002 to December 31, 2002, approximately $69,000).

Income taxes:

Deferred income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are projected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

Revenue Recognition:

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



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



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



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



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

Shipping and handling costs:

F-8



The Company includes shipping and handling fees billed to
customers in net sales. Shipping and handling costs associated with outbound
freight are included in selling, general and administrative expenses and totaled
approximately $130,000, $18,000, and $21,000 for the years ended December 31,
2003, 2002, and 2001, respectively.

Advertising and promotion:

The Company expenses advertising and promotional costs as incurred.
Advertising and promotional expenses were approximately $49,000 and $38,000 for
the years ended December 31, 2003 and 2002, respectively.



Goodwill:



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



Net Loss per Common Share:



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 years ended December
31





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





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



Stock-Based Compensation:



The Company follows SFAS No. 123, "Accounting for
Stock-Based Compensation." The provisions of SFAS No. 123 allow companies to
either expense the estimated fair value of stock options or to continue to
follow the intrinsic value method set forth in Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25") but
disclose the pro forma effects on net income (loss) had the fair value of the
options been expensed. The Company has elected to continue to apply APB 25 in
accounting for its stock option incentive plans. See Note 13-Stock Option Plans.



F-9



Comprehensive Income:



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



Cash and cash equivalents



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

Recent pronouncements:



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



In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." This statement requires that certain financial instruments that, under
previous guidance, issuers could account for as equity, be classified as
liabilities in statements of financial position. Most of the guidance in SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003.

F-10



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



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







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



Note 3 - Business Combination:



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



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

F-11



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



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



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



(In thousands)





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







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.



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





Pro Forma Information(unaudited, in thousands, except per share data)
      2002
      2001Net Revenue
      $ 2,557
      $ 5,537Net Loss
      (4,782)
      (4,676)Loss per share - basic and diluted
      (.08)
      (.14)






F-12



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

Note 4 - Segment Information:



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



Business segment information for the years ended December 31,
are as follows:



(In thousands)





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





F-13



Note 5 - Equity Infusion:



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





Note 6 - Property and Equipment:





Property and equipment for the years ended December 31, 2003:

Property and equipment consists of the following:

(In thousands)





|                                                | 2003    | 2002   
|----------------------------------------------- | ------- | -------
|Furniture and fixtures                          | $ 318   | $ 383  
|Computer and software                           | 128     | 102    
|Masters and libraries                           | 665     | 568    
|Leasehold improvements                          | 111     | 91     
|                                                | 1,222   | 1,144  
|Less: accumulated depreciation and amortization | 204     | 34     
|                                                | $ 1,018 | $ 1,110







Note 7 - Intangible Assets:



Intangible assets consist of the following at December 31,
2003 and 2002:



(In thousands)





2003
      2002Exclusive distribution agreements
      $ 3,409
      $ 3,099Internet and indexing software technologies
      1,862
      1,4175,271
      4,516Less: accumulated amortization
      690
      80$ 4,581
      $ 4,436






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



F-14



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



(In thousands)





|2004 | $ 1,189
|---- | -------
|2005 | 1,189  
|2006 | 1,189  
|2007 | 568    
|2008 | 446    



Note 8 - Long Term Debt:



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



(In thousands)





|                                           | 2003    | 2002   
|------------------------------------------ | ------- | -------
|Zi Corporation - Lantern Purchase Note (a) | $ 2,165 | $ 3,022
|Provincial Holdings Ltd. (b)               | 580     | 475    
|Atlantic Canada Opportunities Agency (c)   | 26      | 27     
|                                           | 2,771   | 3,524  
|Less: current portion                      | 759     | 492    
|                                           | $ 2,012 | $ 3,032







|(a) | Included in the Lantern Purchase note is
    approximately $165,000 of accrued interest at December 31, 2003 ($22,000 at
    December 31, 2002) which is due on June 30, 2004 in accordance with the
    Share Purchase Agreement (see note 3).  The purchase note is due on
    November 7, 2005.                                                                                                           
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                                                                                                                              
|(b) | In June 1995, STI received an advance of
    $475,000 (Can $750,000) from PHL, its 25% shareholder. The PHL loan is
    evidenced by a demand promissory note with interest calculated at 6.75% per
    annum, which matured September 30, 2003. Included in accrued and other
    current liabilities is accrued interest of approximately $118,000 at
    December 31, 2003 ($73,000 at December 31, 2002).
|    |                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The PHL loan agreement provides for
    repayment in full of principal plus accrued interest at the earlier of: the
    commencement of redemption of shares pursuant to a redemption agreement (see
    note 13, Redemption of shares of subsidiary); the maturity date; or
    any breach of STI's obligations under the loan agreement or any other
    agreement with PHL.                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                              
|(c) | The loans made by Atlantic Canada
    Opportunities Agency to STI are unsecured and non-interest bearing. The
    loans are payable in monthly installments ranging from $176 per month to
    $1,445 per month and mature on various dates through April 2007. In May
    2002, the terms of these loans were amended to suspend principal repayments
    until May 2004.                                   



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



(In thousands)





|2004 | $ 759  
|---- | -------
|2005 | 2,007  
|2006 | 3      
|2007 | 2      
|2008 | --     
|     | $ 2,771





F-15



Note 9 - Fair Value of Financial Instruments:



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



Note 10 - Related Party Transactions:



Indebtedness to Affiliate. At December 31, 2002 and 2001,
the Company was indebted to a company controlled by Richard Siskind (the
"Affiliate"), the former President, Chief Executive Officer and a director of
the Company in the aggregate amounts of $189,000 and $475,000, respectively. In
May 2001, the Company issued the Affiliate a promissory note evidencing $403,000
of the indebtedness, which bears interest at the rate of 8% per annum. At
December 31, 2002, the balance outstanding on the promissory note was
approximately $176,000. In January, 2003 the remaining balance was received by
the Affiliate and applied to fully offset the notes payable to the Affiliate.
Interest of approximately $10,000 and approximately $21,000 was paid to the
Affiliate in 2002 and 2001, respectively.

Lease from Affiliate. The Company utilized showroom,
office and warehouse space under sublease arrangements with the Affiliate. For
the years ended December 31, 2003, 2002, and 2001, rent expense charged to
operations, including warehouse and distribution charges aggregated
approximately $0, $0, and $113,000, respectively. The Company has no continuing
obligations under these arrangements.

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



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



Note 11 - Income Taxes:



The provision for income taxes consists of the following:



(In thousands)

|                            | Year Ended December 31,
|--------------------------- | -----------------------
|Provision for income taxes: | 2003                   
|Domestic:                   |                        
|Current:                    |                        
|Federal                     | $ --                   
|State                       | --                     
|                            | $ --                   
|                            |                        

F-16



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





|(In thousands, except percentages)                                              
|--------------------------------------------------------------------------------
|                                                                                
|                                                                                
|                                                                                
|Computed expected tax
    (benefit)                                             
|Utilization of NOL
    carryforward                                             
|State and local income taxes
    (benefit),
   net of federal income tax benefit
|Foreign taxes less than
    statutory rate                                      
|Change in valuation allowance                                                   
|Adjustment of previously
    recorded 
   tax benefit                           
|Nondeductible expenses for
    income
   tax purposes                           
|Other                                                                           
|                                                                                

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







|                               |                                                               
|------------------------------ | --------------------------------------------------------------
|(In thousands)                
|                               |                                                               
|                               |                                                               
|Current deferred tax assets:  
|                               | Inventory tax
    basis greater than financial statement basis
|                               | Allowance for bad
    debt                                    
|                               | Less valuation
    allowance                                  
|                               | Net current
    deferred tax assets                           
|Long-term deferred tax assets:
|                               | Net operating
    loss carryforward                           
|                               | Stock option
    compensation                                 
|                               | Amortization of
    goodwill and covenant not to compete      
|                               | Total long-term deferred tax assets                           
|Less
    valuation allowance   |                                                               
|                               | Net long-term
    deferred tax assets                         

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



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



F-17



Note 12 - Commitments and Contingencies:



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



Litigation Settlement. The Company licensed its Cross
Colours trademark for domestic sales of boys' sportswear apparel under an
agreement with a three-year term scheduled to end in 2002. In 2000, following
the licensee's failure to pay minimum royalties, the Company brought an action
in New York County Supreme Court against the licensee for damages in excess of
$1.5 million under the license agreement. Minimum royalties to the Company
required under the agreement were $420,000 in 2001 and $660,000 in 2002. In
April 2002, the Company accepted a settlement offer of $535,000 in its
litigation against the domestic licensee. The settlement is payable in a
contemporaneous installment of $335,000 and the balance of $200,000 in January
2003. The Company assigned its rights to the January 2003 settlement installment
in satisfaction of its remaining obligations under notes payable to an
affiliate. On January, 2003, the final installment in the amount of $200,000 was
received by the affiliate and applied in full against the note payable to the
affiliate in the amount of $176,000.



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



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



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



(In thousands)





|                     | Office Equipment | Premises | Total
|-------------------- | ---------------- | -------- | -----
|2004                 | $ 14             | $ 169    | $ 183
|2005                 | 11               | 157      | 168  
|2006                 | 2                | 145      | 147  
|2007                 | 2                | 145      | 147  
|2008, and thereafter | 1                | 60       | 61   
|                     | $ 30             | $ 676    | $ 706





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



Redemption of shares of subsidiary. STI is party to a
redemption agreement dated March 15, 1995 and extended indefinitely
with its 25% minority shareholder, Provincial Holdings Ltd. ("PHL"). Provided
STI has repaid all indebtedness to PHL, the shares held by PHL (PHL holds twenty
five of the one hundred common shares

F-18



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



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



Employment agreements. The Company entered into
employment agreements with four executives of the Company and/or a subsidiary of
the Company for a term of three years effective March 18, 2002, at annual base
salaries aggregating approximately $263,000, $266,000, and $269,000 for each of
the first three years of the contracts. In addition, these contracts provide for
annual automobile allowances in the aggregate amount of approximately $22,000.
The Company entered into an employment agreement with Robert A. Goddard, Chief
Executive Officer and Acting Chief Financial Officer for a term of three years. 
All contracts can be extended for an additional two years and may be terminated
by either party upon 90 days written notice or at any time by the Company for
cause.



Claim and Counter Claim. 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 susequently filed action against
the Company claiming damages in the amount of $250,000 for wrongful dismissal.  On February 3, 2004, counsel to Wendy Connolly
was formally served with a Statement of Defence and
Counterclaim by the Company. The Statement of Defence and Counterclaim adds Doug Connolly as a
defendant in the counterclaim. The counterclaim seeks damages as against both
Wendy and Doug Connolly for damages in the amount of $500,000, an accounting to
determine profits made by the Connollys in relation to the breach of their
fiduciary duties, a permanent and interlocutory injunction restraining the
Connollys from soliciting clients and utilizing confidential information,
punitive damages in the amount of $1,000,000 plus interest and costs. The
Company believes that claims made by Wendy Connolly are without merit.  The
remaining commitment under the employment agreements at December 31, 2003 is
approximately $258,000.





Note 13 - Stock Option Plans:



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



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



F-19



Stock option activity for each of the three years ended
December 31, 2003 is summarized below:



|                            
|----------------------------
|                            
|                            
|Balance at December 31, 2000
|                            
|Options granted             
|Options exercised           
|Options canceled            
|Balance at December 31, 2001
|                            
|Options granted             
|Options exercised           
|Balance at December 31, 2002
|                            
|Options granted             
|Options cancelled           
|Options exercised           
|Balance at December 31, 2003

|                                                                                     
|-------------------------------------------------------------------------------------
|Option Exercisable and Available for Grant                                           
|                                                                                     
|Exercisable at December 31,                                                          
|2001                                                                                 
|2002                                                                                 
|2003                                                                                 
|Available for grant at
    December 31,                                              
|2001                                                                                 
|2002                                                                                 
|2003                                                                                 
|Weighted average fair value
    of options granted during the year ended December 31,
|2001                                                                                 
|2002                                                                                 
|2003                                                                                 
|Weighted average remaining
    contractual
   rights (in months) at December 31, 2003

Prior to the AOG transactions, the Company maintained four
stock option plans adopted since 1994. Three of these are compensatory, designed
to supplement or replace employee salaries and director fees with options for an
aggregate of up to 2.2 million shares of the Company's common stock. The fourth
such plan was adopted in connection with the 1998 change of control as a result
of AOG's investment in the company, which included the purchase by Richard
Siskind of 1.9 million shares of common stock from the company's original
founders in connection with such transaction. As part of that transaction, Mr.
Siskind granted options to the founders to reacquire a total of 1.5 million
shares from him at exercise prices ranging from $.50 to $1.50 per share referred
to as the founder's options, which are not reflected in the above table, and the
Company issued to Mr. Siskind options to purchase up to 1.5 million newly issued
shares of common stock on the same terms as the founders options, exercisable
only to the extent the founders options are exercised. During 1998, founder's
options covering 1,350,000 shares of common stock were acquired from the holders
by Jon Siskind, a former officer and director of the Company and the son of
Richard Siskind.



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

F-20



6% of common stock to provide performance incentives for
incumbent management and employees of Magic Lantern, its parent company and its
subsidiaries at the time of the Company's acquisition of Magic Lantern. Shares
may be either previously unissued or reacquired shares. Shares that cease to be
subject to an option because of its expiration or termination will again be
available for the grant of options until termination of the plan. As at December
31, 2002, no options had been issued under this plan.



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



|(In thousands)               
|-----------------------------
|                             
|                             
|Net loss -- as reported      
|Net loss -- pro forma        
|Loss per share -- as reported
|Loss per share -- pro forma  

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



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



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

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



Note 14. Promissory Notes Payable



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

F-21



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 (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. Of the proceeds received, $763,000 was allocated to
Warrants, based on their estimated fair value, as determined using the Black-Scholes
model, using a volatility of 46.30%, a risk-free interest rate of 2.28%, an
expected useful life of three years, and expected dividend yield of zero
percent. Notes payable were recorded at $572,000, representing a discount to the
maturity value of $1,337,000. This resulted in an effective interest rate on the
Notes payable of 95% and 175% (on the USD and Canadian Dollar denominated
portions, respectively).

Note 15. Purchase and Sale of Dubbing Assets



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

Note 16. Reclassifications



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

Note 17. Subsequent Events



No material subsequent events have occurred.

F-22





SCHEDULE II





VALUATION AND QUALIFYING ACCOUNTS





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

(In thousands)



|Column A                                                  | Column B                            | Column C                         | Column D                     | Column E  
|--------------------------------------------------------- | ----------------------------------- | -------------------------------- | ---------------------------- | ----------
|                                                          | Balance at 
    Beginning of Period | Charged to
    Costs andExpenses | Charged to
    OtherAccounts | Deductions
|Allowance for returns,
    discounts 
     and bad debts:
|                                                         
|Year ended December 31, 2003                              | $                                   | 70                               | $                            | 50        
|Year ended December 31, 2002                              | $                                   | --                               | $                            | 3         
|                                                         
|Year ended December 31, 2001                              |                                     | 24                               |                              |           
|                                                         

______________________________





F-23



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, this 2nd day of June,
2004.

|    | MAGIC LANTERN GROUP, INC.
|--- | -------------------------
|By: | /s/ Robert A. Goddard    
|    |                          
|    |                          
|    |                          





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

|                                             | Title    | Date        
|-------------------------------------------- | -------- | ------------
|                                             |          |             
|/s/ Richard GeistBy: Richard Geist,          | Director | June 2, 2004
|                                             |          |             
|                                             |          |             
|/s/ Howard BallochBy: Howard Balloch         | Director | June 2, 2004
|                                             |          |             
|                                             |          |             
|/s/ Michael LobsingerBy: Michael Lobsinger   | Director | June 2, 2004
|                                             |          |             
|                                             |          |             
|/s/ Stephen EncarnaceoBy: Stephen Encarnaceo | Director | June 2, 2004
|                                             |          |             
|                                             |          |             
|/s/ Richard SiskindBy: Richard Siskind       | Director | June 2, 2004
|                                             |          |             
|                                             |          |             



31



|ExhibitNumber                                                                                                                                                     | Exhibit                                                                                                                                                                                        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                  |                                                                                                                                                                                                
|2.1*                                                                                                                                                              | Amended and Restated Certificate
    of Incorporation of the Company                                                                                                                           
|                                                                                                                                                                  |                                                                                                                                                                                                
|3.2*                                                                                                                                                              | By-Laws of the Company                                                                                                                                                                         
|                                                                                                                                                                  |                                                                                                                                                                                                
|4.1*                                                                                                                                                              | Form of Stock Certificate                                                                                                                                                                      
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.1*                                                                                                                                                             | 1987 Incentive Stock Option Plan                                                                                                                                                               
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.2                                                                                                                                                              | 1998 Incentive Stock Option Plan                                                                                                                                                               
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.3                                                                                                                                                              | 1998 Nonqualified Stock Option
    Plan-A (incorporated by reference to Exhibit 10.4 to the Company's Quarterly
    Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.4                                                                                                                                                              | 1998 Nonqualified Stock Option
    Plan-B (incorporated by reference to Exhibit 10.5 to the Company's Quarterly
    Report on Form 10-Q (File No. I-9502) for the quarter ended March 31, 1998)
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.5                                                                                                                                                              | Magic Lantern 2002 Stock Option
    Plan (Incorporated herein by reference to the Registrant's Current Report on
    Form 8-K filed on August 8, 2002).                                        
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.6                                                                                                                                                              | Magic Lantern Amended and
    Restated 2002 Stock Option Plan (Incorporated herein by reference to the
    Registrant's Proxy Statement on Schedule 14A filed on October 24, 2003).            
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.7                                                                                                                                                              | Asset Purchase Agreement, dated
    November 2, 2003, by and between Brett Robinson and Magic Lantern Group,
    Inc.                                                                          
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.8                                                                                                                                                              | Promissory Note Issued August
    24, 2003.                                                                                                                                                    
|                                                                                                                                                                  |                                                                                                                                                                                                
|10.9                                                                                                                                                              | Employment Agreement by and
    between Magic Lantern Group, Inc. and Robert A. Goddard.                                                                                                       
|                                                                                                                                                                  |                                                                                                                                                                                                
|14.1                                                                                                                                                              | Code of Ethics                                                                                                                                                                                 
|                                                                                                                                                                  |                                                                                                                                                                                                
|23.1                                                                                                                                                              | Consent of Auditor                                                                                                                                                                             
|                                                                                                                                                                  |                                                                                                                                                                                                
|31.1                                                                                                                                                              | Certifications of Chief
    Executive Officer and Acting Chief Financial Officer, pursuant to Rule
    13a-14(a).                                                                              
|                                                                                                                                                                  |                                                                                                                                                                                                
|32.1                                                                                                                                                              | Certifications of Chief
    Executive Officer and Acting Chief Financial Officer, pursuant to 19 U.S.C. Section
    1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|                                                                                                                                                                 
|* Incorporated by reference to the corresponding Exhibit filed with the
      Company's Registration Statement on Form S-1, as amended (Reg. No.
      33-12959).

32