Document:

Exhibit (4.3) 

[DATE] 

	 	
RE:  Stock Option Grants
Johnson Outdoors Inc.  
Stock Option Plan for Non-Employee Directors 

This letter is to confirm that on
[DATE], you were granted an option to purchase [NUMBER] shares of Johnson Outdoors Inc.
(“Company”) Class A Common Stock, $.05 par value (the “Class A Common
Stock”) pursuant to the terms of the Company’s 2003 Non-Employee Director Stock
Ownership Plan (the “Plan”). 

Your stock option to purchase up to
[NUMBER] shares of Class A Common Stock is subject to the terms and conditions of the
Plan. The option price is [PRICE] per share, which was the average of the high and low
prices of a share of Class A Common Stock in the over-the-counter market on [DATE], the
date of the grant. 

In accordance with the terms of the
Plan, your option is not exercisable until one year after the date of the grant unless
your status as a director of the Company terminates because of death prior to that time,
in which event the option becomes immediately exercisable in full and may be exercised for
a period of three (3) years after the date of death. If for any reason other than death
you cease to be a director of the Company within one year of the date of grant, the option
shall be cancelled as of the date of such termination. Subject to the foregoing, the
option expires ten (10) years after the date of grant, or if earlier, three (3) years
after you cease to be a director of the Company. 

	• 	Procedure
for Exercise. You may exercise your option in whole or in part at any time
after the option has become exercisable (as discussed above) by delivering written notice
to the Company together with payment of the option price in cash or previously acquired
shares of Class A Common Stock valued at their fair market value. 

	• 	Securities
Laws Matters. Applicable federal and state securities laws govern the
disposition by you of shares purchased through the exercise of your option. You may sell
such shares only (1) pursuant to an effective registration statement under the Securities
Act of 1933, as amended (“Act”); or (2) in a transaction which, in the opinion
of counsel for the Company, is exempt from registration thereunder, such as a sale which
fully complies with Rule 144 under the Act. 

[NAME] 
[DATE] 
Page 2 of 2 

	• 	Transferability.
Your options may not be transferred other than by will or under the laws of descent and
distribution, except that a Participant may, to the extent allowed by the Board or a
committee designated by the Board and in a manner specified by the Board or such
committee, (i) designate in writing a beneficiary to exercise the option after the
Participant’s death; or (ii) transfer any option. 

	• 	Conformity
with Plan. Your option is intended to conform in all respects with, and is
subject to all applicable provision of the Plan. Inconsistencies between this letter and
the Plan shall be resolved in accordance with the terms of the Plan. 

Please execute and return the
enclosed copy of this letter to me. By doing so, you agree to be bound by all of the terms
of this letter and of the Plan. 

		Very truly yours,
	
 	JOHNSON OUTDOORS INC.
	

 	                                                             
		Kevin J. Mooney
		Vice President of Human Resources

____________________________________

DirectorEXHIBIT 10.1

 

 

 

 

 

MAGIC LANTERN GROUP, INC.

SECURITIES PURCHASE AGREEMENT

April 28, 2004

 

Table of
Contents

	 	 	Page
	1.	Agreement to Sell and Purchase 
    .	1
	2.	Fees and Warrant 
    	1
	3.	Closing, Delivery and Payment	2
	 	3.1	Closing	2
	 	3.2	Delivery	2
	4.	
    Representations and Warranties of the Company	2
	 	4.1	Organization, Good Standing and Qualification 
    	3
	 	4.2	Subsidiaries	3
	 	4.3	Capitalization; Voting Rights
    	3
	 	4.4	Authorization; Binding Obligations
    	4
	 	4.5	Liabilities	5
	 	4.6	Agreements; Action 
    	5
	 	4.7	Obligations to Related Parties
    	6
	 	4.8	Changes 	6
	 	4.9	Title to Properties and
    Assets; Liens, Etc. 	7
	 	4.10	Intellectual Property
    	8
	 	4.11	Compliance with Other Instruments
    	8
	 	4.12	Litigation 	9
	 	4.13	Tax Returns and Payments
    	9
	 	4.14	Employees 	9
	 	4.15	Registration Rights and Voting Rights
    	10
	 	4.16	Compliance with Laws; Permits
    	10
	 	4.17	Environmental and Safety Laws
    	10
	 	4.18	Valid Offering 	11
	 	4.19	Full Disclosure	11
	 	4.20	Insurance 	11
	 	4.21	SEC Reports 	11
	 	4.22	Listing 	12
	 	4.23	No Integrated Offering
    	12
	 	4.24	Stop Transfer 	12
	 	4.25	Dilution 	12
	 	4.26	Patriot Act 	12
	5.	Representations and Warranties of the
    Purchaser 	13
	 	5.1	No Shorting 	13
	 	5.2	Requisite Power and Authority
    	13
	 	5.3	Investment Representations
    	13
	 	5.4	Purchaser Bears Economic Risk
    	14
	 	5.5	Acquisition for Own Account
    	14
	 	5.6	Purchaser Can Protect Its Interest
    	14
	 	5.7	Accredited Investor
    	14
	 	5.8	Legends 	14
	6.	Covenants of
    the Company	15
	 	6.1	Stop-Orders 	15
	 	6.2	Listing	16
	 	6.3	Market Regulations
    	16
	 	6.4	Reporting Requirements
    	16
	 	6.5	Use of Funds 	16
	 	6.6	Access to Facilities
    	16
	 	6.7	Taxes 	16
	 	6.8	Insurance 	17
	 	6.9	Intellectual Property
    	18
	 	6.10	Properties 	18
	 	6.11	Confidentiality
    	18
	 	6.12	Required Approvals
    	18
	 	6.13	Reissuance of Securities
    	19
	 	6.14	Opinion 	19
	7.	Covenants of the Purchaser
    	20
	 	7.1	Confidentiality
    	20
	 	7.2	Non-Public Information
    	20
	8.	Covenants of the Company and Purchaser
    Regarding Indemnification 	20
	 	8.1	Company Indemnification
    	20
	 	8.2	Purchaser's Indemnification
    	20
	 	8.3	Procedures 	20
	9.	Conversion of Convertible Note
    	20
	 	9.1	Mechanics of Conversion
    	20
	10.	Registration
    Rights	22
	 	10.1	Registration Rights Granted
    	22
	 	10.2	Offering Restrictions	22
	11.	Miscellaneous	22
	 	11.1	Governing Law 	22
	 	11.2	Survival 	23
	 	11.3	Successors 	23
	 	11.4	Entire Agreement
    	23
	 	11.5	Severability 	23
	 	11.6	Amendment and Waiver
    	23
	 	11.7	Delays or Omissions
    	23
	 	11.8	Notices 	24
	 	11.9	Attorneys' Fees
    	25
	 	11.10	Titles and Subtitles
    	25
	 	11.11	Facsimile Signatures; Counterparts
    	25
	 	11.12	Broker's Fees 	25
	 	11.13	Construction 	25

 

	
    
      LIST OF EXHIBITS

    
	Form of Convertible Term Note
     	Exhibit A

	Form of Warrant  	Exhibit B
	Form of Opinion  	Exhibit C
	Form of Escrow Agreement
     	Exhibit D

 

SECURITIES PURCHASE AGREEMENT

           THIS SECURITIES PURCHASE AGREEMENT (this "Agreement") is
made and entered into as of April 28, 2004, by and between MAGIC LANTERN GROUP, INC., a
New York corporation (the "Company"), and Laurus Master Fund, Ltd., a Cayman
Islands company (the "Purchaser").

RECITALS

           WHEREAS, the Company has authorized the sale to the
Purchaser of a Convertible Term Note in the aggregate principal amount of One Million Five
Hundred Thousand Dollars ($1,500,000) (the "Note"), which Note is convertible into shares
of the Company's common stock, $0.01 par value per share (the "Common Stock") at an
initial fixed conversion price of $0.25 per share of Common Stock ("Fixed Conversion
Price");

           WHEREAS, the Company wishes to issue a warrant to the
Purchaser to purchase up to 1,100,000 shares of the Company's Common Stock (subject to
adjustment as set forth therein) in connection with Purchaser's purchase of the Note;

           WHEREAS, Purchaser desires to purchase the Note and the
Warrant (as defined in Section 2) on the terms and conditions set forth herein; and

           WHEREAS, the Company desires to
issue and sell the Note and Warrant to Purchaser on the terms and conditions set forth
herein.

AGREEMENT

           NOW, THEREFORE, in consideration of the foregoing
recitals and the mutual promises, representations, warranties and covenants hereinafter
set forth and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:

           1.          Agreement
to Sell and Purchase. Pursuant
to the terms and conditions set forth in this Agreement, on the Closing Date (as defined
in Section 3), the Company agrees to sell to the Purchaser, and the Purchaser hereby
agrees to purchase from the Company, a Note in the aggregate principal amount of
$1,500,000 convertible in accordance with the terms thereof into shares of the Company's
Common Stock in accordance with the terms of the Note and this Agreement. The Note
purchased on the Closing Date shall be known as the "Offering." A form of the Note is
annexed hereto as Exhibit A. The Note will mature on the Maturity Date (as defined in the
Note). Collectively, the Note and Warrant and Common Stock issuable in payment of the
Note, upon conversion of the Note and upon exercise of the Warrant are referred to as the
"Securities."

           2.          Fees
and Warrant. On the Closing Date:

                        (a)     The Company will issue and deliver to
the Purchaser a Warrant to purchase up to 1,100,000 shares of Common Stock in connection
with the Offering (the "Warrant") pursuant to Section 1 hereof. The Warrant must be
delivered on the Closing Date. A form of Warrant is annexed hereto as Exhibit B. All the
representations, covenants, warranties, undertakings, and indemnification, and other
rights made or granted to or for the benefit of the Purchaser by the Company are hereby
also made and granted in respect of the Warrant and shares of the Company's Common Stock issuable
upon exercise of the Warrant (the "Warrant Shares").

                        (b)     Subject to the terms of Section 2(d)
below, the Company shall pay to Laurus Capital Management, LLC, the manager of the
Purchaser, a closing payment in an amount equal to three and nine-tenths percent (3.90%)
of the aggregate principal amount of the Note. The foregoing fee is referred to herein as
the "Closing Payment."

                        (c)     The Company shall reimburse the
Purchaser for its reasonable legal fees for services rendered to the Purchaser in
preparation of this Agreement and the Related Agreements (as hereinafter defined), and
expenses incurred in connection with the Purchaser's due diligence review of the Company
and its Subsidiaries (as defined in Section 6.8) and all related matters. Amounts required
to be paid under this Section 2(c) will be paid on the Closing Date and shall be $29,500
for legal fees and for expenses incurred while performing due diligence inquiries on the
Company and its Subsidiaries.

                        (d)     The
Closing Payment, the legal fees and the due diligence expenses (net of deposits previously
paid by the Company) shall be paid at closing out of funds held pursuant to a Funds Escrow
Agreement of even date herewith among the Company, Purchaser, and an Escrow Agent (the
"Funds Escrow Agreement") and a disbursement letter (the "Disbursement Letter").

           3.         Closing,
Delivery and Payment.

                       3.1     Closing.
Subject to the terms and conditions herein, the closing of the transactions contemplated
hereby (the "Closing"), shall take place on the date hereof, at such time or place as the
Company and Purchaser may mutually agree (such date is hereinafter referred to as the
"Closing Date").

                       3.2     Delivery.
Pursuant to the Funds Escrow Agreement in the form attached hereto as Exhibit C, at the
Closing on the Closing Date, the Company will deliver to the Purchaser, among other
things, a Note in the form attached as Exhibit A representing the aggregate principal
amount of $1,500,000 and a Warrant in the form attached as Exhibit B in the Purchaser's
name representing 1,100,000 Warrant Shares and the Purchaser will deliver to the Company,
among other things, the amounts set forth in the Disbursement Letter by certified funds or
wire transfer.

           4.          Representations
and Warranties of the Company.
The Company hereby represents and warrants to the Purchaser as follows (which
representations and warranties are supplemented by the Company's filings under the
Securities Exchange Act of 1934 (collectively, the "Exchange Act Filings"), copies of
which have been provided to the Purchaser):

2

                        4.1     Organization,
Good Standing and Qualification. Each of the Company and each of its Subsidiaries is a corporation,
partnership or limited liability company, as the case may be, duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization. Each of
the Company and each of its Subsidiaries has the corporate power and authority to own and
operate its properties and assets, to execute and deliver (i) this Agreement, (ii) the
Note and the Warrant to be issued in connection with this Agreement, (iii) the Master
Security Agreement dated as of the date hereof between the Company, certain Subsidiaries
of the Company and the Purchaser (as amended, modified or supplemented from time to time,
the "Master Security Agreement"), (iv) the Registration Rights Agreement relating to the
Securities dated as of the date hereof between the Company and the Purchaser, (v) the
Subsidiary Guaranty dated as of the date hereof made by certain Subsidiaries of the
Company (as amended, modified or supplemented from time to time, the "Subsidiary
Guaranty"), (vi) the Stock Pledge Agreement dated as of the date hereof among the Company,
certain Subsidiaries of the Company and the Purchaser (as amended, modified or
supplemented from time to time, the "Stock Pledge Agreement"), (vii) the Escrow Agreement
dated as of the date hereof among the Company, the Purchaser and the escrow agent referred
to therein and (viii) all other agreements related to this Agreement and the Note and
referred to herein (the preceding clauses (ii) through (viii), collectively, the "Related
Agreements"), to issue and sell the Note and the shares of Common Stock issuable upon
conversion of the Note (the "Note Shares"), to issue and sell the Warrant and the Warrant
Shares, and to carry out the provisions of this Agreement and the Related Agreements and
to carry on its business as presently conducted. Each of the Company and each of its
Subsidiaries is duly qualified and is authorized to do business and is in good standing as
a foreign corporation, partnership or limited liability company, as the case may be, in
all jurisdictions in which the nature of its activities and of its properties (both owned
and leased) makes such qualification necessary, except for those jurisdictions in which
failure to do so has not, or could not reasonably be expected to have, individually or in
the aggregate, a material adverse effect on the business, assets, liabilities, condition
(financial or otherwise), properties, operations or prospects of the Company and it
Subsidiaries, taken individually and as a whole (a "Material Adverse Effect").

                        4.2     Subsidiaries. Each direct and
indirect Subsidiary of the Company, the direct owner of such Subsidiary and its percentage
ownership thereof, is set forth on Schedule 4.2. For the purpose of this Agreement, a
"Subsidiary" of any person or entity means (i) a corporation or other entity whose shares
of stock or other ownership interests having ordinary voting power (other than stock or
other ownership interests having such power only by reason of the happening of a
contingency) to elect a majority of the directors of such corporation, or other persons or
entities performing similar functions for such person or entity, are owned, directly or
indirectly, by such person or entity or (ii) a corporation or other entity in which such
person or entity owns, directly or indirectly, more than 50% of the equity interests at
such time. All outstanding shares of capital stock of each Subsidiary have been duly
authorized, are validly issued and are fully paid and non-assessable.

                        4.3     Capitalization;
Voting Rights.

3

          (a)     The authorized
        capital stock of the Company, as of the date hereof consists of 101,000,000
        shares, of which 100,000,000are shares of Common Stock, par value $0.01 per share,
        66,797,000 shares of which are issued and outstanding , and 1,000,000 are shares
        of preferred stock, par value $0.01 per share of which no shares of are issued and
        outstanding. The authorized capital stock of each Subsidiary of the Company is set
        forth on Schedule 4.3.

         
                  (b)     Except as disclosed
        on Schedule 4.3, other than: (i) the shares reserved for issuance under the
        Company's stock option plans; and (ii) shares which may be granted pursuant to
        this Agreement and the Related Agreements, there are no outstanding options,
        warrants, rights (including conversion or preemptive rights and rights of first
        refusal), proxy or stockholder agreements, or arrangements or agreements of any
        kind for the purchase or acquisition from the Company of any of its securities.
        Except as disclosed on Schedule 4.3, neither the offer, issuance or sale of any of
        the Note or the Warrant, or the issuance of any of the Note Shares or Warrant
        Shares, nor the consummation of any transaction contemplated hereby will result in
        a change in the price or number of any securities of the Company outstanding,
        under anti-dilution or other similar provisions contained in or affecting any such
        securities.

                  (c)     All issued and
        outstanding shares of the Company's Common Stock: (i) have been duly authorized
        and validly issued and are fully paid and nonassessable; and (ii) were issued in
        compliance with all applicable state and federal laws concerning the issuance of
        securities.

                  (d)     The rights,
        preferences, privileges and restrictions of the shares of the Common Stock are as
        stated in the Company's Certificate of Incorporation (the "Charter"). The Note
        Shares and Warrant Shares have been duly and validly reserved for issuance. When
        issued in compliance with the provisions of this Agreement and the Company's
        Charter, the Securities will be validly issued, fully paid and nonassessable, and
        will be free of any liens or encumbrances; provided, however, that the Securities
        may be subject to restrictions on transfer under state and/or federal securities
        laws as set forth herein or as otherwise required by such laws at the time a
        transfer is proposed.

      
    
  

                        4.4     Authorization;
Binding Obligations.
All corporate, partnership or limited liability company, as the case may be, action on the
part of the Company and each of its Subsidiaries (including the respective officers and
directors) necessary for the authorization of this Agreement and the Related Agreements,
the performance of all obligations of the Company and its Subsidiaries hereunder and under
the other Related Agreements at the Closing and, the authorization, sale, issuance and
delivery of the Note and Warrant has been taken or will be taken prior to the Closing.
This Agreement and the other Related Agreements, when executed and delivered and to the
extent it is a party thereto, will be valid and binding obligations of each of the Company
and each of its Subsidiaries, enforceable against each such person in accordance with
their terms, except:

          (a)     as limited by
        applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
        general application affecting enforcement of creditors' rights; and

      
    
        4

                  (b)     general principles of equity that restrict the availability of
        equitable or legal remedies.

      
    
  

The sale of the Note and the subsequent conversion of the Note into
Note Shares are not and will not be subject to any preemptive rights or rights of first
refusal that have not been properly waived or complied with. The issuance of the Warrant
and the subsequent exercise of the Warrant for Warrant Shares are not and will not be
subject to any preemptive rights or rights of first refusal that have not been properly
waived or complied with.  

                        4.5     Liabilities.
Neither the Company nor any of its Subsidiaries has any contingent liabilities, except
current liabilities incurred in the ordinary course of business and liabilities disclosed
in any Exchange Act Filings.

                        4.6     Agreements;
Action. Except as
set forth on Schedule 4.6 or as disclosed in any Exchange Act Filings:

           (a)     
        there are no agreements, understandings, instruments, contracts, proposed
        transactions, judgments, orders, writs or decrees to which the Company or any of
        its Subsidiaries is a party or by which it is bound which may involve: (i)
        obligations (contingent or otherwise) of, or payments to, the Company in excess of
        $50,000 (other than obligations of, or payments to, the Company arising from
        purchase or sale agreements entered into in the ordinary course of business); or
        (ii) the transfer or license of any patent, copyright, trade secret or other
        proprietary right to or from the Company (other than licenses arising from the
        purchase of "off the shelf" or other standard products); or (iii) provisions
        restricting the development, manufacture or distribution of the Company's products
        or services; or (iv) indemnification by the Company with respect to infringements
        of proprietary rights.

                   (b)     Since December 31,
        2003 neither the Company nor any of its Subsidiaries has: (i) declared or paid any
        dividends, or authorized or made any distribution upon or with respect to any
        class or series of its capital stock; (ii) incurred any indebtedness for money
        borrowed or any other liabilities (other than ordinary course obligations)
        individually in excess of $50,000 or, in the case of indebtedness and/or
        liabilities individually less than $50,000, in excess of $100,000 in the
        aggregate; (iii) made any loans or advances to any person not in excess,
        individually or in the aggregate, of $100,000, other than ordinary course advances
        for travel expenses; or (iv) sold, exchanged or otherwise disposed of any of its
        assets or rights, other than the sale of its inventory in the ordinary course of
        business.

        
                   (c)     For the purposes of subsections (a) and (b) above, all
        indebtedness, liabilities, agreements, understandings, instruments, contracts and
        proposed transactions involving the same person or entity (including persons or
        entities the Company has reason to believe are affiliated therewith) shall be
        aggregated for the purpose of meeting the individual minimum dollar amounts of
        such subsections.

      
    
        5

      

                        4.7     Obligations
to Related Parties.
Except as set forth on Schedule 4.7, there are no obligations of the Company or any of its
Subsidiaries to officers, directors, stockholders or employees of the Company or any of
its Subsidiaries other than:

           (a)     for payment of salary
        for services rendered and for bonus payments;

                   (b)     reimbursement for
        reasonable expenses incurred on behalf of the Company and its Subsidiaries;

                   (c)     for other standard
        employee benefits made generally available to all employees (including stock
        option agreements outstanding under any stock option plan approved by the Board of
        Directors of the Company); and

        
                   (d)     obligations listed in the Company's financial statements or
        disclosed in any of its Exchange Act Filings.

      
    
  

Except as described above or set forth on Schedule 4.7, none of the
officers, directors or, to the best of the Company's knowledge, key employees or
stockholders of the Company or any members of their immediate families, are indebted to
the Company, individually or in the aggregate, in excess of $50,000 or have any direct or
indirect ownership interest in any firm or corporation with which the Company is
affiliated or with which the Company has a business relationship, or any firm or
corporation which competes with the Company, other than passive investments in publicly
traded companies (representing less than one percent (1%) of such company) which may
compete with the Company. Except as described above, no officer, director or stockholder,
or any member of their immediate families, is, directly or indirectly, interested in any
material contract with the Company and no agreements, understandings or proposed
transactions are contemplated between the Company and any such person. Except as set forth
on Schedule 4.7, the Company is not a guarantor or indemnitor of any indebtedness of any
other person, firm or corporation.

                        4.8     Changes. Since December 31, 2003
, except as disclosed in any Exchange Act Filing or in any Schedule to this Agreement or
to any of the Related Agreements, there has not been:

           (a)     any change in the
        business, assets, liabilities, condition (financial or otherwise), properties,
        operations or prospects of the Company or any of its Subsidiaries, which
        individually or in the aggregate has had, or could reasonably be expected to have,
        individually or in the aggregate, a Material Adverse Effect;

                   (b)     any resignation or
        termination of any officer, key employee or group of employees of the Company or
        any of its Subsidiaries;  

                   (c)     any material change,
        except in the ordinary course of business, in the contingent obligations of the
        Company or any of its Subsidiaries by way of guaranty, endorsement, indemnity,
        warranty or otherwise;

      
    
        6

           (d)     any damage,
        destruction or loss, whether or not covered by insurance, has had, or could
        reasonably be expected to have, individually or in the aggregate, a Material
        Adverse Effect;

                   (e)     any waiver by the
        Company or any of its Subsidiaries of a valuable right or of a material debt owed
        to it;

                   (f)     any direct or
        indirect loans made by the Company or any of its Subsidiaries to any stockholder,
        employee, officer or director of the Company or any of its Subsidiaries, other
        than advances made in the ordinary course of business;

                   (g)     any material change
        in any compensation arrangement or agreement with any employee, officer, director
        or stockholder of the Company or any of its Subsidiaries;  

                   (h)     any declaration or
        payment of any dividend or other distribution of the assets of the Company or any
        of its Subsidiaries;

                   (i)     any labor
        organization activity related to the Company or any of its Subsidiaries;

                   (j)     any debt, obligation
        or liability incurred, assumed or guaranteed by the Company or any of its
        Subsidiaries, except those for immaterial amounts and for current liabilities
        incurred in the ordinary course of business;

                   (k)     any sale, assignment
        or transfer of any patents, trademarks, copyrights, trade secrets or other
        intangible assets owned by the Company or any of its Subsidiaries;

                   (l)     any change in any
        material agreement to which the Company or any of its Subsidiaries is a party or
        by which either the Company or any of its Subsidiaries is bound which either
        individually or in the aggregate has had, or could reasonably be expected to have,
        individually or in the aggregate, a Material Adverse Effect;

                   (m)     any other event or
        condition of any character that, either individually or in the aggregate, has had,
        or could reasonably be expected to have, individually or in the aggregate, a
        Material Adverse Effect; or

        
                   (n)     any arrangement or commitment by the Company or any of its
        Subsidiaries to do any of the acts described in subsection (a) through (m) above.

      
    
  

                        4.9     Title
to Properties and Assets; Liens, Etc. Except as set forth on Schedule 4.9, each of the Company and each of its
Subsidiaries has good and marketable title to its properties and assets, and good title to
its leasehold estates, in each case subject to no mortgage, pledge, lien, lease,
encumbrance or charge, other than:

           (a)     those resulting from
        taxes which have not yet become delinquent;

      
    

        7

           (b)     minor liens and
        encumbrances which do not materially detract from the value of the property
        subject thereto or materially impair the operations of the Company or any of its
        Subsidiaries; and

        
                   (c)     those that have otherwise arisen in the ordinary course of
        business.

      
    
  

All facilities, machinery, equipment, fixtures, vehicles and other
properties owned, leased or used by the Company and its Subsidiaries are in good operating
condition and repair and are reasonably fit and usable for the purposes for which they are
being used. Except as set forth on Schedule 4.9, the Company and its Subsidiaries are in
compliance with all material terms of each lease to which it is a party or is otherwise
bound.

                        4.10     Intellectual
Property.

            (a)     Each of the Company
        and each of its Subsidiaries owns or possesses sufficient legal rights to all
        patents, trademarks, service marks, trade names, copyrights, trade secrets,
        licenses, information and other proprietary rights and processes necessary for its
        business as now conducted and to the Company's knowledge, as presently proposed to
        be conducted (the "Intellectual Property"), without any known infringement of the
        rights of others. There are no outstanding options, licenses or agreements of any
        kind relating to the foregoing proprietary rights, nor is the Company or any of
        its Subsidiaries bound by or a party to any options, licenses or agreements of any
        kind with respect to the patents, trademarks, service marks, trade names,
        copyrights, trade secrets, licenses, information and other proprietary rights and
        processes of any other person or entity other than such licenses or agreements
        arising from the purchase of "off the shelf" or standard products.

                    (b)     Neither the Company
        nor any of its Subsidiaries has received any communications alleging that the
        Company or any of its Subsidiaries has violated any of the patents, trademarks,
        service marks, trade names, copyrights or trade secrets or other proprietary
        rights of any other person or entity, nor is the Company or any of its
        Subsidiaries aware of any basis therefor.

                   
        (c)     The Company does not believe it is or will be necessary to utilize any
        inventions, trade secrets or proprietary information of any of its employees made
        prior to their employment by the Company or any of its Subsidiaries, except for
        inventions, trade secrets or proprietary information that have been rightfully
        assigned to the Company or any of its Subsidiaries.

      
    
  

                        4.11     Compliance
with Other Instruments.
Neither the Company nor any of its Subsidiaries is in violation or default of (x) any term
of its Charter or Bylaws, or (y) of any provision of any indebtedness, mortgage,
indenture, contract, agreement or instrument to which it is party or by which it is bound
or of any judgment, decree, order or writ, which violation or default, in the case of this
clause (y), has had, or could reasonably be expected to have, either individually or in
the aggregate, a Material Adverse Effect. The execution, delivery and performance of and
compliance with this Agreement and the Related Agreements to which it is a party, and the
issuance and sale of the Note by the Company and the other Securities by the  

8

Company each
pursuant hereto and thereto, will not, with or without the passage of time or giving of
notice, result in any such material violation, or be in conflict with or constitute a
default under any such term or provision, or result in the creation of any mortgage,
pledge, lien, encumbrance or charge upon any of the properties or assets of the Company or
any of its Subsidiaries or the suspension, revocation, impairment, forfeiture or nonrenewal
of any permit, license, authorization or approval applicable to the Company, its business
or operations or any of its assets or properties.  

                        4.12     Litigation. Except as set forth
on Schedule 4.12 hereto, there is no action, suit, proceeding or investigation pending or,
to the Company's knowledge, currently threatened against the Company or any of its
Subsidiaries that prevents the Company or any of its Subsidiaries from entering into this
Agreement or the other Related Agreements, or from consummating the transactions
contemplated hereby or thereby, or which has had, or could reasonably be expected to have,
either individually or in the aggregate, a Material Adverse Effect or any change in the
current equity ownership of the Company or any of its Subsidiaries, nor is the Company
aware that there is any basis to assert any of the foregoing. Neither the Company nor any
of its Subsidiaries is a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or instrumentality. There
is no action, suit, proceeding or investigation by the Company or any of its Subsidiaries
currently pending or which the Company or any of its Subsidiaries intends to initiate.

                        4.13     Tax
Returns and Payments. Each
of the Company and each of its Subsidiaries has timely filed all tax returns (federal,
state and local) required to be filed by it. All taxes shown to be due and payable on such
returns, any assessments imposed, and all other taxes due and payable by the Company or
any of its Subsidiaries on or before the Closing, have been paid or will be paid prior to
the time they become delinquent. Except as set forth on Schedule 4.13, neither the Company
nor any of its Subsidiaries has been advised:

            (a)     that any of its
        returns, federal, state or other, have been or are being audited as of the date
        hereof; or

        
                    (b)     of any deficiency in assessment or proposed judgment to its
        federal, state or other taxes.

      
    
  

The Company has no knowledge of any
liability of any tax to be imposed upon its properties or assets as of the date of this
Agreement that is not adequately provided for.  

                        4.14     Employees.
Except as set forth on Schedule 4.14, neither the Company nor any of its Subsidiaries has
any collective bargaining agreements with any of its employees. There is no labor union
organizing activity pending or, to the Company's knowledge, threatened with respect to the
Company or any of its Subsidiaries. Except as disclosed in the Exchange Act Filings or on
Schedule 4.14, neither the Company nor any of its Subsidiaries is a party to or bound by
any currently effective employment contract, deferred compensation arrangement, bonus
plan, incentive plan, profit sharing plan, retirement agreement or other employee
compensation plan or agreement. To the Company's knowledge, no employee of the Company or
any of its Subsidiaries, nor any consultant with whom the Company or any of its
Subsidiaries has contracted, is in violation of any term of any employment contract,
proprietary information 

9

agreement or any other agreement relating
to the right of any such individual to be employed by, or to contract with, the Company or
any of its Subsidiaries because of the nature of the business to be conducted by the
Company or any of its Subsidiaries; and to the Company's knowledge the continued
employment by the Company or any of its Subsidiaries of its present employees, and the
performance of the Company's and its Subsidiaries' contracts with its independent
contractors, will not result in any such violation. Neither the Company nor any of its
Subsidiaries is aware that any of its employees is obligated under any contract (including
licenses, covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would interfere with
their duties to the Company or any of its Subsidiaries. Neither the Company nor any of its
Subsidiaries has received any notice alleging that any such violation has occurred. Except
for employees who have a current effective employment agreement with the Company or any of
its Subsidiaries, no employee of the Company or any of its Subsidiaries has been granted
the right to continued employment by the Company or any of its Subsidiaries or to any
material compensation following termination of employment with the Company or any of its
Subsidiaries. Except as set forth on Schedule 4.14, the Company is not aware that any
officer, key employee or group of employees intends to terminate his, her or their
employment with the Company or any of its Subsidiaries, nor does the Company or any of its
Subsidiaries have a present intention to terminate the employment of any officer, key
employee or group of employees.

                        4.15     Registration
Rights and Voting Rights. Except as set forth on Schedule 4.15 and except as disclosed in Exchange Act
Filings, neither the Company nor any of its Subsidiaries is presently under any
obligation, and neither the Company nor any of its Subsidiaries has granted any rights, to
register any of the Company's or its Subsidiaries' presently outstanding securities or any
of its securities that may hereafter be issued. Except as set forth on Schedule 4.15 and
except as disclosed in Exchange Act Filings, to the Company's knowledge, no stockholder of
the Company or any of its Subsidiaries has entered into any agreement with respect to the
voting of equity securities of the Company or any of its Subsidiaries.

                        4.16     Compliance
with Laws; Permits.
Neither the Company nor any of its Subsidiaries is in violation of any applicable statute,
rule, regulation, order or restriction of any domestic or foreign government or any
instrumentality or agency thereof in respect of the conduct of its business or the
ownership of its properties which has had, or could reasonably be expected to have, either
individually or in the aggregate, a Material Adverse Effect. No governmental orders,
permissions, consents, approvals or authorizations are required to be obtained and no
registrations or declarations are required to be filed in connection with the execution
and delivery of this Agreement or any other Related Agreement and the issuance of any of
the Securities, except such as has been duly and validly obtained or filed, or with
respect to any filings that must be made after the Closing, as will be filed in a timely
manner. Each of the Company and its Subsidiaries has all material franchises, permits,
licenses and any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could, either individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.

                        4.17     Environmental
and Safety Laws. Neither the Company nor any of its Subsidiaries is in violation of
any applicable statute, law or regulation relating to 

10

the environment or occupational health and
safety, and to its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation. Except as set forth on Schedule
4.17, no Hazardous Materials (as defined below) are used or have been used, stored, or
disposed of by the Company or any of its Subsidiaries or, to the Company's knowledge, by
any other person or entity on any property owned, leased or used by the Company or any of
its Subsidiaries. For the purposes of the preceding sentence, "Hazardous Materials" shall
mean:

            (a)     materials which are
        listed or otherwise defined as "hazardous" or "toxic" under any applicable local,
        state, federal and/or foreign laws and regulations that govern the existence
        and/or remedy of contamination on property, the protection of the environment from
        contamination, the control of hazardous wastes, or other activities involving
        hazardous substances, including building materials; or

        
                    (b)     any petroleum products or nuclear materials.

      
    
  

                        4.18     Valid
Offering. Assuming the accuracy of the representations and warranties of the Purchaser
contained in this Agreement, the offer, sale and issuance of the Securities will be exempt
from the registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), and will have been registered or qualified (or are exempt from
registration and qualification) under the registration, permit or qualification
requirements of all applicable state securities laws.  

                        4.19     Full
Disclosure. Each of the
Company and each of its Subsidiaries has provided the Purchaser with all information
requested by the Purchaser in connection with its decision to purchase the Note and
Warrant, including all information the Company and its Subsidiaries believe is reasonably
necessary to make such investment decision. Neither this Agreement, the Related
Agreements, the exhibits and schedules hereto and thereto nor any other document delivered
by the Company or any of its Subsidiaries to Purchaser or its attorneys or agents in
connection herewith or therewith or with the transactions contemplated hereby or thereby,
contain any untrue statement of a material fact nor omit to state a material fact
necessary in order to make the statements contained herein or therein, in light of the
circumstances in which they are made, not misleading. Any financial projections and other
estimates provided to the Purchaser by the Company or any of its Subsidiaries were based
on the Company's and its Subsidiaries' experience in the industry and on assumptions of
fact and opinion as to future events which the Company or any of its Subsidiaries, at the
date of the issuance of such projections or estimates, believed to be reasonable.  

                        4.20     Insurance. Each of the Company
and each of its Subsidiaries has general commercial, product liability, fire and casualty
insurance policies with coverages which the Company believes are customary for companies
similarly situated to the Company and its Subsidiaries in the same or similar business.

                        4.21     SEC
Reports. Except as set
forth on Schedule 4.21, the Company has filed all proxy statements, reports and other
documents required to be filed by it under the Securities Exchange Act 1934, as amended
(the "Exchange Act") and each are accessible for review through the Securities and
Exchange Commission's EDGAR system. If requested, the 

11

Company will furnish the Purchaser
with physical copies of: (i) its Annual Reports on Form 10-KSB for its fiscal years ended
December 31, 2003 ; and (ii) its Quarterly Reports on Form 10-QSB for its fiscal quarter
ended September 31, 2003 , and the Form 8-K filings which it has made during the fiscal
year December 31, 2003 to date (collectively, the "SEC Reports"). Except as set forth on
Schedule 4.21, each SEC Report was, at the time of its filing, in substantial compliance
with the requirements of its respective form and none of the SEC Reports, nor the
financial statements (and the notes thereto) included in the SEC Reports, as of their
respective filing dates, contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading.

                        4.22     Listing. The Company's Common
Stock is listed for trading on the American Stock Exchange ("AMEX") and satisfies all
requirements for the continuation of such listing. The Company has not received any notice
that its Common Stock will be delisted from AMEX or that its Common Stock does not meet
all requirements for listing.  

                        4.23     No
Integrated Offering. Neither the Company, nor any of its Subsidiaries or affiliates,
nor any person acting on its or their behalf, has directly or indirectly made any offers
or sales of any security or solicited any offers to buy any security under circumstances
that would cause the offering of the Securities pursuant to this Agreement or any of the
Related Agreements to be integrated with prior offerings by the Company for purposes of
the Securities Act which would prevent the Company from selling the Securities pursuant to
Rule 506 under the Securities Act, or any applicable exchange-related stockholder approval
provisions, nor will the Company or any of its affiliates or Subsidiaries take any action
or steps that would cause the offering of the Securities to be integrated with other
offerings.

                        4.24     Stop
Transfer. The Securities
are restricted securities as of the date of this Agreement. Neither the Company nor any of
its Subsidiaries will issue any stop transfer order or other order impeding the sale and
delivery of any of the Securities at such time as the Securities are registered for public
sale or an exemption from registration is available, except as required by state and
federal securities laws.

                        4.25     Dilution.
The Company specifically acknowledges that its obligation to issue the shares of Common
Stock upon conversion of the Note and exercise of the Warrant is binding upon the Company
and enforceable regardless of the dilution such issuance may have on the ownership
interests of other shareholders of the Company.  

                        4.26     Patriot
Act. The Company
certifies that, to the best of Company's knowledge, neither the Company nor any of its
Subsidiaries has been designated, and is not owned or controlled, by a "suspected
terrorist" as defined in Executive Order 13224. The Company hereby acknowledges that the
Purchaser seeks to comply with all applicable laws concerning money laundering and related
activities. In furtherance of those efforts, the Company hereby represents, warrants and
agrees that: (i) none of the cash or property that the Company or any of its Subsidiaries
will pay or will contribute to the Purchaser has been or shall be derived from, or related
to, any activity that is deemed criminal under United States law; and (ii) no contribution
or payment by the Company or any of its Subsidiaries to the Purchaser, to the extent that
they are within the Company's and/or its Subsidiaries' control shall cause the 

12

Purchaser to be in violation of the United
States Bank Secrecy Act, the United States International Money Laundering Control Act of
1986 or the United States International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001. The Company shall promptly notify the Purchaser if any of these
representations ceases to be true and accurate regarding the Company or any of its
Subsidiaries. The Company agrees to provide the Purchaser any additional information
regarding the Company or any of its Subsidiaries that the Purchaser deems necessary or
convenient to ensure compliance with all applicable laws concerning money laundering and
similar activities. The Company understands and agrees that if at any time it is
discovered that any of the foregoing representations are incorrect, or if otherwise
required by applicable law or regulation related to money laundering similar activities,
the Purchaser may undertake appropriate actions to ensure compliance with applicable law
or regulation, including but not limited to segregation and/or redemption of the
Purchaser's investment in the Company. The Company further understands that the Purchaser
may release confidential information about the Company and its Subsidiaries and, if
applicable, any underlying beneficial owners, to proper authorities if the Purchaser, in
its sole discretion, determines that it is in the best interests of the Purchaser in light
of relevant rules and regulations under the laws set forth in subsection (ii) above.

           5.     Representations
and Warranties of the Purchaser.
The Purchaser hereby represents and warrants to the Company as follows (such
representations and warranties do not lessen or obviate the representations and warranties
of the Company set forth in this Agreement):

                        5.1     No
Shorting. The Purchaser or any of its affiliates and investment partners has not, will
not and will not cause any person or entity, directly or indirectly, to engage in "short
sales" of the Company's Common Stock as long as the Note shall be outstanding, subject to
compliance with applicable law, rules and regulations.

                        5.2     Requisite
Power and Authority.
The Purchaser has all necessary power and authority under all applicable provisions of law
to execute and deliver this Agreement and the Related Agreements and to carry out their
provisions. All corporate action on Purchaser's part required for the lawful execution and
delivery of this Agreement and the Related Agreements have been or will be effectively
taken prior to the Closing. Upon their execution and delivery, this Agreement and the
Related Agreements will be valid and binding obligations of Purchaser, enforceable in
accordance with their terms, except:

            (a)     as limited by
        applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
        general application affecting enforcement of creditors' rights; and

        
                    (b)     as limited by general principles of equity that restrict the
        availability of equitable and legal remedies.

      
    
  

                        5.3     Investment
Representations. Purchaser understands that the Securities are being offered and sold
pursuant to an exemption from registration contained in the Securities Act based in part
upon Purchaser's representations contained in the Agreement, including, without
limitation, that the Purchaser is an "accredited investor" within the meaning of
Regulation D under the Securities Act of 1933, as amended (the "Securities Act"). The
Purchaser confirms that it has received or has had full access to all the information it
considers necessary or appropriate t

13

o make an informed investment decision
with respect to the Note and the Warrant to be purchased by it under this Agreement and
the Note Shares and the Warrant Shares acquired by it upon the conversion of the Note and
the exercise of the Warrant, respectively. The Purchaser further confirms that it has had
an opportunity to ask questions and receive answers from the Company regarding the
Company's and its Subsidiaries' business, management and financial affairs and the terms
and conditions of the Offering, the Note, the Warrant and the Securities and to obtain
additional information (to the extent the Company possessed such information or could
acquire it without unreasonable effort or expense) necessary to verify any information
furnished to the Purchaser or to which the Purchaser had access.

                        5.4     Purchaser
Bears Economic Risk.
The Purchaser has substantial experience in evaluating and investing in private placement
transactions of securities in companies similar to the Company so that it is capable of
evaluating the merits and risks of its investment in the Company and has the capacity to
protect its own interests. The Purchaser must bear the economic risk of this investment
until the Securities are sold pursuant to: (i) an effective registration statement under
the Securities Act; or (ii) an exemption from registration is available with respect to
such sale.

                        5.5     Acquisition
for Own Account. The Purchaser is acquiring the Note and Warrant and the Note Shares
and the Warrant Shares for the Purchaser's own account for investment only, and not as a
nominee or agent and not with a view towards or for resale in connection with their
distribution.

                        5.6     Purchaser
Can Protect Its Interest.
The Purchaser represents that by reason of its, or of its management's, business and
financial experience, the Purchaser has the capacity to evaluate the merits and risks of
its investment in the Note, the Warrant and the Securities and to protect its own
interests in connection with the transactions contemplated in this Agreement and the other
Related Agreements. Further, Purchaser is aware of no publication of any advertisement in
connection with the transactions contemplated in the Agreement or the Related Agreements.

                        5.7     Accredited
Investor. Purchaser represents that it is an accredited investor within the meaning of
Regulation D under the Securities Act.

                        5.8     Legends.

           (a)     The Note shall bear
        substantially the following legend:  

        "THIS NOTE AND THE COMMON STOCK ISSUABLE UPON CONVERSION OF
            THIS NOTE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
            AMENDED, OR ANY APPLICABLE, STATE 

          
        
      
    
            14

SECURITIES LAWS. THIS NOTE AND THE COMMON
            STOCK ISSUABLE UPON CONVERSION OF THIS NOTE MAY NOT BE SOLD, OFFERED FOR SALE,
            PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
            AS TO THIS NOTE OR SUCH SHARES UNDER SAID ACT AND APPLICABLE STATE SECURITIES
            LAWS OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO MAGIC LANTERN GROUP,
            INC. THAT SUCH REGISTRATION IS NOT REQUIRED."

          
        
                   (b)     The Note Shares and
        the Warrant Shares, if not issued by DWAC system (as hereinafter defined), shall
        bear a legend which shall be in substantially the following form until such shares
        are covered by an effective registration statement filed with the SEC:

        "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
            REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
            STATE SECURITIES LAWS. THESE SHARES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED
            OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER
            SUCH SECURITIES ACT AND APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL
            REASONABLY SATISFACTORY TO MAGIC LANTERN GROUP, INC. THAT SUCH REGISTRATION IS
            NOT REQUIRED."

          
        
                   (c)     The Warrant shall
        bear substantially the following legend:

        "THIS WARRANT AND THE COMMON SHARES ISSUABLE UPON EXERCISE
            OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
            AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. THIS WARRANT AND THE COMMON
            SHARES ISSUABLE UPON EXERCISE OF THIS WARRANT MAY NOT BE SOLD, OFFERED FOR
            SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
            STATEMENT AS TO THIS WARRANT OR THE UNDERLYING SHARES OF COMMON STOCK UNDER
            SAID ACT AND APPLICABLE STATE SECURITIES LAWS OR AN OPINION OF COUNSEL
            REASONABLY SATISFACTORY TO MAGIC LANTERN GROUP, INC. THAT SUCH REGISTRATION IS
            NOT REQUIRED."

          
        
      
    
  

           6.     Covenants
of the Company. The Company
covenants and agrees with the Purchaser as follows:

                        6.1     Stop-Orders.
The Company will advise the Purchaser, promptly after it receives notice of issuance by
the Securities and Exchange Commission (the "SEC"), any state securities commission or any
other regulatory authority of any stop order or of any order preventing or suspending any
offering of any securities of the Company, or of the suspension of the qualification of
the Common Stock of the Company for offering or sale in any jurisdiction, or the
initiation of any proceeding for any such purpose.

15

                        6.2     Listing. The Company shall
promptly secure the listing of the shares of Common Stock issuable upon conversion of the
Note and upon the exercise of the Warrant on the AMEX (the "Principal Market") upon which
shares of Common Stock are listed (subject to official notice of issuance) and shall
maintain such listing so long as any other shares of Common Stock shall be so listed. The
Company will maintain the listing of its Common Stock on the Principal Market, and will
comply in all material respects with the Company's reporting, filing and other obligations
under the bylaws or rules of the National Association of Securities Dealers ("NASD")
and such exchanges, as applicable.  

                        6.3     Market
Regulations. The Company
shall notify the SEC, NASD and applicable state authorities, in accordance with their
requirements, of the transactions contemplated by this Agreement, and shall take all other
necessary action and proceedings as may be required and permitted by applicable law, rule
and regulation, for the legal and valid issuance of the Securities to the Purchaser and
promptly provide copies thereof to the Purchaser.

                        6.4     Reporting
Requirements. The
Company will timely file with the SEC all reports required to be filed pursuant to the
Exchange Act and refrain from terminating its status as an issuer required by the Exchange
Act to file reports thereunder even if the Exchange Act or the rules or regulations
thereunder would permit such termination.  

                        6.5     Use
of Funds. The Company agrees that it will use the proceeds of the sale of the Note and
the Warrant for general working capital purposes only.

                        6.6     Access
to Facilities. Each of
the Company and each of its Subsidiaries will permit any representatives designated by the
Purchaser (or any successor of the Purchaser), upon reasonable notice and during normal
business hours, at such person's expense and accompanied by a representative of the
Company, to:

           (a)     visit and inspect any
        of the properties of the Company or any of its Subsidiaries;

                   (b)     examine the corporate
        and financial records of the Company or any of its Subsidiaries (unless such
        examination is not permitted by federal, state or local law or by contract) and
        make copies thereof or extracts therefrom; and

        
                   (c)     discuss the affairs, finances and accounts of the Company or
        any of its Subsidiaries with the directors, officers and independent accountants
        of the Company or any of its Subsidiaries.

      
    
  

Notwithstanding the foregoing, neither the
Company nor any of its Subsidiaries will provide any material, non-public information to
the Purchaser unless the Purchaser signs a confidentiality agreement and otherwise
complies with Regulation FD, under the federal securities laws.

                        6.7     Taxes. Each of the Company and
each of its Subsidiaries will promptly pay and discharge, or cause to be paid and
discharged, when due and payable, all lawful taxes, assessments and governmental charges
or levies imposed upon the income, profits, property or business of the Company and its
Subsidiaries; provided, however, that any such tax, assessment, charge or levy need not be
paid if the validity thereof shall currently be contested in good faith 

16

by appropriate
proceedings and if the Company and/or such Subsidiary shall have set aside on its books
adequate reserves with respect thereto, and provided, further, that the Company and its
Subsidiaries will pay all such taxes, assessments, charges or levies forthwith upon the
commencement of proceedings to foreclose any lien which may have attached as security therefor.

                        6.8     Insurance. Each of the Company
and its Subsidiaries will keep its assets which are of an insurable character insured by
financially sound and reputable insurers against loss or damage by fire, explosion and
other risks customarily insured against by companies in similar business similarly
situated as the Company and its Subsidiaries; and the Company and its Subsidiaries will
maintain, with financially sound and reputable insurers, insurance against other hazards
and risks and liability to persons and property to the extent and in the manner which the
Company reasonably believes is customary for companies in similar business similarly
situated as the Company and its Subsidiaries and to the extent available on commercially
reasonable terms. The Company, and each of its Subsidiaries will jointly and severally
bear the full risk of loss from any loss of any nature whatsoever with respect to the
assets pledged to the Purchaser as security for its obligations hereunder and under the
Related Agreements. At the Company's and each of its Subsidiaries' joint and several cost
and expense in amounts and with carriers reasonably acceptable to Purchaser, the Company
and each of its Subsidiaries shall (i) keep all its insurable properties and properties in
which it has an interest insured against the hazards of fire, flood, sprinkler leakage,
those hazards covered by extended coverage insurance and such other hazards, and for such
amounts, as is customary in the case of companies engaged in businesses similar to the
Company's or the respective Subsidiary's including business interruption insurance; (ii)
maintain a bond in such amounts as is customary in the case of companies engaged in
businesses similar to the Company's or the respective Subsidiary's insuring against
larceny, embezzlement or other criminal misappropriation of insured's officers and
employees who may either singly or jointly with others at any time have access to the
assets or funds of the Company or any of its Subsidiaries either directly or through
governmental authority to draw upon such funds or to direct generally the disposition of
such assets; (iii) maintain public and product liability insurance against claims for
personal injury, death or property damage suffered by others; (iv) maintain all such
worker's compensation or similar insurance as may be required under the laws of any state
or jurisdiction in which the Company or the respective Subsidiary is engaged in business;
and (v) furnish Purchaser with (x) copies of all policies and evidence of the maintenance
of such policies at least thirty (30) days before any expiration date, (y) excepting the
Company's workers' compensation policy, endorsements to such policies naming Purchaser as
"co-insured" or "additional insured" and appropriate loss payable endorsements in form and
substance satisfactory to Purchaser, naming Purchaser as loss payee, and (z) evidence that
as to Purchaser the insurance coverage shall not be impaired or invalidated by any act or
neglect of the Company or any Subsidiary and the insurer will provide Purchaser with at
least thirty (30) days notice prior to cancellation. The Company and each Subsidiary shall
instruct the insurance carriers that in the event of any loss thereunder, the carriers
shall make payment for such loss to the Company and/or the Subsidiary and Purchaser
jointly. In the event that as of the date of receipt of each loss recovery upon any such
insurance, the Purchaser has not declared an event of default with respect to this
Agreement or any of the Related Agreements, then the Company and/or such Subsidiary shall
be permitted to direct the application of such loss recovery proceeds toward investment in
property, plant and equipment that would comprise "Collateral" secured by Purchaser's
security interest pursuant to its security agreement, with any surplus funds to be  

17

applied toward payment of the obligations
of the Company to Purchaser. In the event that Purchaser has properly declared an event of
default with respect to this Agreement or any of the Related Agreements, then all loss
recoveries received by Purchaser upon any such insurance thereafter may be applied to the
obligations of the Company hereunder and under the Related Agreements, in such order as
the Purchaser may determine. Any surplus (following satisfaction of all Company
obligations to Purchaser) shall be paid by Purchaser to the Company or applied as may be
otherwise required by law. Any deficiency thereon shall be paid by the Company or the
Subsidiary, as applicable, to Purchaser, on demand.  

                        6.9     Intellectual
Property. Each of the Company and each of its Subsidiaries shall maintain in full
force and effect its existence, rights and franchises and all licenses and other rights to
use Intellectual Property owned or possessed by it and reasonably deemed to be necessary
to the conduct of its business.

                        6.10     Properties. Each of the Company
and each of its Subsidiaries will keep its properties in good repair, working order and
condition, reasonable wear and tear excepted, and from time to time make all needful and
proper repairs, renewals, replacements, additions and improvements thereto; and each of
the Company and each of its Subsidiaries will at all times comply with each provision of
all leases to which it is a party or under which it occupies property if the breach of
such provision could, either individually or in the aggregate, reasonably be expected tohave
a Material Adverse Effect.

                        6.11     Confidentiality. The Company
agrees that it will not disclose, and will not include in any public announcement, the
name of the Purchaser, unless expressly agreed to by the Purchaser or unless and until
such disclosure is required by law or applicable regulation, and then only to the extent
of such requirement. Notwithstanding the foregoing, the Company may disclose Purchaser's
identity and the terms of this Agreement to its current and prospective debt and equity
financing sources.

                        6.12     Required
Approvals. For so long
as twenty-five percent (25%) of the principal amount of the Note is outstanding, the
Company, :

            (a)     shall not without the
        prior written consent of the Purchaser directly or indirectly declare or pay any
        dividends, other than dividends paid to the Company or any of its wholly-owned
        Subsidiaries [also consider restrictions on issuance and/or redemption of
        preferred equity interests];

                    (b)     shall not without the
        prior written consent of the Purchaser liquidate, dissolve or effect a material
        reorganization (it being understood that in no event shall the Company dissolve,
        liquidate or merge with any other person or entity (unless the Company is the
        surviving entity);

                    (c)     shall not without the
        prior written consent of the Purchaser become subject to (including, without
        limitation, by way of amendment to or modification of) any agreement or instrument
        which by its terms would (under any circumstances) restrict the Company's or any
        of its Subsidiaries right to perform the provisions of this Agreement, any other
        Related Agreement or any of the agreements contemplated hereby or thereby;  

      
    
        18

            (d)     shall not without the
        prior written consent of the Purchaser materially alter or change the scope of the
        business of the Company and its Subsidiaries taken as a whole;  

                    (e)     shall not without the
        prior written consent of the Purchaser (i) create, incur, assume or suffer to
        exist any indebtedness (exclusive of trade debt and debt incurred to finance the
        purchase of equipment (not in excess of five percent (5%) per annum of the book
        value of the Company's assets) whether secured or unsecured other than (w)
        indebtedness incurred by the Company from commercial banks in the United States or
        Canada which shall not exceed $100,000 for any such individual incurrence or
        $250,000 in the aggregate (x) the Company's indebtedness to Laurus, (y)
        indebtedness set forth on Schedule 6.12(e) attached hereto and made a part hereof
        and any refinancings or replacements thereof on terms no less favorable to the
        Purchaser than the indebtedness being refinanced or replaced, and (z) any debt
        incurred in connection with the purchase of assets in the ordinary course of
        business, or any refinancings or replacements thereof on terms no less favorable
        to the Purchaser than the indebtedness being refinanced or replaced; (ii) cancel
        any debt owing to it in excess of $50,000 in the aggregate during any 12 month
        period; (iii) assume, guarantee, endorse or otherwise become directly or
        contingently liable in connection with any obligations of any other Person, except
        the endorsement of negotiable instruments by the Company for deposit or collection
        or similar transactions in the ordinary course of business or guarantees of
        indebtedness otherwise permitted to be outstanding pursuant to this clause (e);
        and

                    (f)     shall not without the
        prior written consent of the Purchaser create or acquire any Subsidiary after the
        date hereof unless (i) such Subsidiary is a wholly-owned Subsidiary of the Company
        and (ii) such Subsidiary becomes party to the Master Security Agreement, the Stock
        Pledge Agreement and the Subsidiary Guaranty (either by executing a counterpart
        thereof or an assumption or joinder agreement in respect thereof) and, to the
        extent required by the Purchaser, satisfies each condition of this Agreement and
        the Related Agreements as if such Subsidiary were a Subsidiary on the Closing
        Date.

      
    
  

                        6.13     Reissuance
of Securities. The
Company agrees to reissue certificates representing the Securities without the legends set
forth in Section 5.7 above at such time as:

            (a)     the holder thereof is
        permitted to dispose of such Securities pursuant to Rule 144(k) under the
        Securities Act; or

        
                    (b)     upon resale subject to an effective registration statement
        after such Securities are registered under the Securities Act.

      
    
  

The Company agrees to cooperate with the Purchaser in connection with
all resales pursuant to Rule 144(d) and Rule 144(k) and provide legal opinions necessary
to allow such resales provided the Company and its counsel receive reasonably requested
representations from the selling Purchaser and broker, if any.

                        6.14     Opinion.
On the Closing Date, the Company will deliver to the Purchaser an opinion acceptable to
the Purchaser from the Company's external legal counsel. The Company will provide, at the
Company's expense, such other legal opinions in the future as are deemed 

19

reasonably necessary by the Purchaser (and
acceptable to the Purchaser) in connection with the conversion of the Note and exercise of
the Warrant.

           7.     Covenants
of the Purchaser. The Purchaser
covenants and agrees with the Company as follows:

                        7.1     Confidentiality.
The Purchaser agrees that it will not disclose, and will not include in any public
announcement, the name of the Company, unless expressly agreed to by the Company or unless
and until such disclosure is required by law or applicable regulation, and then only to
the extent of such requirement.

                        7.2     Non-Public
Information. The Purchaser agrees not to effect any sales in the shares of the
Company's Common Stock while in possession of material, non-public information regarding
the Company if such sales would violate applicable securities law.

           8.     Covenants
of the Company and Purchaser Regarding Indemnification.

                        8.1     Company
Indemnification. The
Company agrees to indemnify, hold harmless, reimburse and defend the Purchaser, each of
the Purchaser's officers, directors, agents, affiliates, control persons, and principal
shareholders, against any claim, cost, expense, liability, obligation, loss or damage
(including reasonable legal fees) of any nature, incurred by or imposed upon the Purchaser
which results, arises out of or is based upon: (i) any misrepresentation by the Company or
any of its Subsidiaries or breach of any warranty by the Company or any of its
Subsidiaries in this Agreement, any other Related Agreement or in any exhibits or
schedules attached hereto or thereto; or (ii) any breach or default in performance by
Company or any of its Subsidiaries of any covenant or undertaking to be performed by
Company or any of its Subsidiaries hereunder, under any other Related Agreement or any
other agreement entered into by the Company and/or any of its Subsidiaries and Purchaser
relating hereto or thereto.

                        8.2     Purchaser's
Indemnification.
Purchaser agrees to indemnify, hold harmless, reimburse and defend the Company and each of
the Company's officers, directors, agents, affiliates, control persons and principal
shareholders, at all times against any claim, cost, expense, liability, obligation, loss
or damage (including reasonable legal fees) of any nature, incurred by or imposed upon the
Company which results, arises out of or is based upon: (i) any misrepresentation by
Purchaser or breach of any warranty by Purchaser in this Agreement or in any exhibits or
schedules attached hereto or any Related Agreement; or (ii) any breach or default in
performance by Purchaser of any covenant or undertaking to be performed by Purchaser
hereunder, or any other agreement entered into by the Company and Purchaser relating
hereto.

                        8.3     Procedures. The procedures and
limitations set forth in Section 10.2(c) and (d) shall apply to the indemnifications set
forth in Sections 8.1 and 8.2 above.

           9.     Conversion
of Convertible Note.

                        9.1     Mechanics
of Conversion.

20

           (a)     Provided the
        Purchaser has notified the Company of the Purchaser's intention to sell the Note
        Shares and the Note Shares are included in an effective registration statement or
        are otherwise exempt from registration when sold: (i) upon the conversion of the
        Note or part thereof, the Company shall, at its own cost and expense, take all
        necessary action (including the issuance of an opinion of counsel reasonably
        acceptable to the Purchaser following a request by the Purchaser) to assure that
        the Company's transfer agent shall issue shares of the Company's Common Stock in
        the name of the Purchaser (or its nominee) or such other persons as designated by
        the Purchaser in accordance with Section 9.1(b) hereof and in such denominations
        to be specified representing the number of Note Shares issuable upon such
        conversion; and (ii) the Company warrants that no instructions other than these
        instructions have been or will be given to the transfer agent of the Company's
        Common Stock and that after the Effectiveness Date (as defined in the Registration
        Rights Agreement) the Note Shares issued will be freely transferable subject to
        the prospectus delivery requirements of the Securities Act and the provisions of
        this Agreement, and will not contain a legend restricting the resale or
        transferability of the Note Shares.

                   (b)     Purchaser will give
        notice of its decision to exercise its right to convert the Note or part thereof
        by telecopying or otherwise delivering an executed and completed notice of the
        number of shares to be converted to the Company (the "Notice of Conversion"). The
        Purchaser will not be required to surrender the Note until the Purchaser receives
        a credit to the account of the Purchaser's prime broker through the DWAC system
        (as defined below), representing the Note Shares or until the Note has been fully
        satisfied. Each date on which a Notice of Conversion is telecopied or delivered to
        the Company in accordance with the provisions hereof shall be deemed a "Conversion
        Date." Pursuant to the terms of the Notice of Conversion, the Borrower will issue
        instructions to the transfer agent accompanied by an opinion of counsel within
        three (3) business days of the date of the delivery to Borrower of the Notice of
        Conversion and shall cause the transfer agent to transmit the certificates
        representing the Conversion Shares to the Holder by crediting the account of the
        Purchaser's prime broker with the Depository Trust Company ("DTC") through its
        Deposit Withdrawal Agent Commission ("DWAC") system within three (3) business
        days after receipt by the Company of the Notice of Conversion (the "Delivery
        Date").

                   (c)     The Company
        understands that a delay in the delivery of the Note Shares in the form required
        pursuant to Section 9 hereof beyond the Delivery Date could result in economic
        loss to the Purchaser. In the event that the Company fails to direct its transfer
        agent to deliver the Note Shares to the Purchaser via the DWAC system within the
        time frame set forth in Section 9.1(b) above and the Note Shares are not delivered
        to the Purchaser by the Delivery Date, as compensation to the Purchaser for such
        loss, the Company agrees to pay late payments to the Purchaser for late issuance
        of the Note Shares in the form required pursuant to Section 9 hereof upon
        conversion of the Note in the amount equal to the greater of: (i) $350 per
        business day after the Delivery Date; or (ii) the Purchaser's actual damages from
        such delayed delivery. Notwithstanding the foregoing, the Company will not owe the
        Purchaser any late payments if the delay in the delivery of the Note Shares beyond
        the Delivery Date is solely out of the control of the Company and the Company is
        actively trying to cure the cause of the delay. The 

      
    
        21

Company
        shall pay any payments incurred under this Section in immediately available funds
        upon demand and, in the case of actual damages, accompanied by reasonable
        documentation of the amount of such damages. Such documentation shall show the
        number of shares of Common Stock the Purchaser is forced to purchase (in an open
        market transaction) which the Purchaser anticipated receiving upon such
        conversion, and shall be calculated as the amount by which (A) the Purchaser's
        total purchase price (including customary brokerage commissions, if any) for the
        shares of Common Stock so purchased exceeds (B) the aggregate principal and/or
        interest amount of the Note, for which such Conversion Notice was not timely
        honored.

      
    
  

Nothing contained herein or in any document referred to herein or
delivered in connection herewith shall be deemed to establish or require the payment of a
rate of interest or other charges in excess of the maximum permitted by applicable law. In
the event that the rate of interest or dividends required to be paid or other charges
hereunder exceed the maximum amount permitted by such law, any payments in excess of such
maximum shall be credited against amounts owed by the Company to a Purchaser and thus
refunded to the Company.

           10.     Registration
Rights.

                        10.1     Registration
Rights Granted. The Company hereby grants registration rights to the Purchaser
pursuant to a Registration Rights Agreement dated as of even date herewith between the
Company and the Purchaser.  

                        10.2     Offering
Restrictions. Except
as previously disclosed in the SEC Reports or in the Exchange Act Filings, or stock or
stock options granted to employees or directors of the Company(these exceptions
hereinafter referred to as the "Excepted Issuances"), neither the Company nor any of its
Subsidiaries will issue any securities with a continuously variable/floating conversion
feature which are or could be (by conversion or registration) free-trading securities
(i.e. common stock subject to a registration statement) prior to the full repayment or
conversion of the Note (together with all accrued and unpaid interest and fees related
thereto) (the "Exclusion Period").

           11.     Miscellaneous.

                        11.1     Governing
Law. THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAWS. ANY ACTION BROUGHT BY EITHER PARTY AGAINST THE OTHER CONCERNING THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT AND EACH RELATED AGREEMENT SHALL BE BROUGHT
ONLY IN THE STATE COURTS OF NEW YORK OR IN THE FEDERAL COURTS LOCATED IN THE STATE OF NEW
YORK. BOTH PARTIES AND THE INDIVIDUALS EXECUTING THIS AGREEMENT AND THE RELATED AGREEMENTS
ON BEHALF OF THE COMPANY AGREE TO SUBMIT TO THE JURISDICTION OF SUCH COURTS AND WAIVE
TRIAL BY JURY. IN THE EVENT THAT ANY PROVISION OF THIS AGREEMENT OR ANY RELATED AGREEMENT
DELIVERED IN CONNECTION HEREWITH IS INVALID OR UNENFORCEABLE UNDER ANY APPLICABLE STATUTE

22

OR RULE OF LAW, THEN SUCH PROVISION SHALL
BE DEEMED INOPERATIVE TO THE EXTENT THAT IT MAY CONFLICT THEREWITH AND SHALL BE DEEMED
MODIFIED TO CONFORM WITH SUCH STATUTE OR RULE OF LAW. ANY SUCH PROVISION WHICH MAY PROVE
INVALID OR UNENFORCEABLE UNDER ANY LAW SHALL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF
ANY OTHER PROVISION OF THIS AGREEMENT OR ANY RELATED AGREEMENT.

                        11.2     Survival. The representations,
warranties, covenants and agreements made herein shall survive any investigation made by
the Purchaser and the closing of the transactions contemplated hereby to the extent
provided therein. All statements as to factual matters contained in any certificate or
other instrument delivered by or on behalf of the Company pursuant hereto in connection
with the transactions contemplated hereby shall be deemed to be representations and
warranties by the Company hereunder solely as of the date of such certificate or
instrument.

                        11.3     Successors. Except as otherwise
expressly provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, heirs, executors and administrators of the parties hereto
and shall inure to the benefit of and be enforceable by each person who shall be a holder
of the Securities from time to time, other than the holders of Common Stock which has been
sold by the Purchaser pursuant to Rule 144 or an effective registration statement.
Purchaser may not assign its rights hereunder to a competitor of the Company.

                        11.4     Entire
Agreement. This Agreement, the Related Agreements, the exhibits and schedules hereto
and thereto and the other documents delivered pursuant hereto constitute the full and
entire understanding and agreement between the parties with regard to the subjects hereof
and no party shall be liable or bound to any other in any manner by any representations,
warranties, covenants and agreements except as specifically set forth herein and therein.

                        11.5     Severability.
In case any provision of the Agreement shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.

                        11.6     Amendment
and Waiver.

                   (a)     This Agreement may be amended or modified only upon the written
        consent of the Company and the Purchaser.

        
                   (b)     The obligations of the Company and the rights of the Purchaser
        under this Agreement may be waived only with the written consent of the Purchaser.
         

        
                   (c)     The obligations of the Purchaser and the rights of the Company
        under this Agreement may be waived only with the written consent of the Company.

      
    
  

                        11.7     Delays
or Omissions. It is agreed that no delay or omission to exercise any right, power or
remedy accruing to any party, upon any breach, default or noncompliance by another party
under this Agreement or the Related Agreements, shall impair any such right, power or
remedy, nor shall it be construed to be a waiver of any such breach, default or
noncompliance, or any acquiescence therein, or of or in any similar breach, default or

23

noncompliance thereafter occurring. All
remedies, either under this Agreement or the Related Agreements, by law or otherwise
afforded to any party, shall be cumulative and not alternative.

                        11.8     Notices. All notices required
or permitted hereunder shall be in writing and shall be deemed effectively given:

           (a)     upon personal
        delivery to the party to be notified;

                   (b)     when sent by
        confirmed facsimile if sent during normal business hours of the recipient, if not,
        then on the next business day;

                   (c)     three (3) business
        days after having been sent by registered or certified mail, return receipt
        requested, postage prepaid; or

        
                   (d)     one (1) day after deposit with a nationally recognized
        overnight courier, specifying next day delivery, with written verification of
        receipt.

      
    
  

All communications shall be sent as follows:

	                                If to the Company, to:	Magic Lantern Group, Inc.

    1075 North Service Road West

    Suite 27

    Oakville, Ontario L6M 2G2

    Attention: Chief Financial Officer

    Facsimile: 905-827-2944
	 	 
	                                	with a copy to:
	 	Hodgson Russ LLP

    150 King Street West Suite 2039

    Toronto, Ontario M5H 1J9
	 	Attention: Joseph P. Galda 

    Facsimile: 416-595-5021
	 	 
	                                If to the Purchaser, to:	Laurus Master Fund, Ltd.

    c/o Ironshore Corporate Services ltd.

    P.O. Box 1234 G.T.

    Queensgate House, South Church Street

    Grand Cayman, Cayman Islands

    Facsimile: 345-949-9877
	 	 
	 	with a copy to:

24

	 	 
	 	John E. Tucker, Esq.

    825 Third Avenue 14th Floor

    New York, NY 10022

    Facsimile: 212-541-4434

or at such other address as the Company or
the Purchaser may designate by written notice to the other parties hereto given in
accordance herewith.

                        11.9     Attorneys'
Fees. In the event that any suit or action is instituted to enforce any provision in
this Agreement, the prevailing party in such dispute shall be entitled to recover from the
losing party all fees, costs and expenses of enforcing any right of such prevailing party
under or with respect to this Agreement, including, without limitation, such reasonable
fees and expenses of attorneys and accountants, which shall include, without limitation,
all fees, costs and expenses of appeals.

                        11.10     Titles
and Subtitles. The titles of the sections and subsections of this Agreement are for
convenience of reference only and are not to be considered in construing this Agreement.

                        11.11     Facsimile
Signatures; Counterparts. This Agreement may be executed by facsimile signatures and
in any number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.

                        11.12     Broker's
Fees. Except as set forth on Schedule
11.12 hereof, each party hereto represents and warrants that no agent, broker, investment
banker, person or firm acting on behalf of or under the authority of such party hereto is
or will be entitled to any broker's or finder's fee or any other commission directly or
indirectly in connection with the transactions contemplated herein. Each party hereto
further agrees to indemnify each other party for any claims, losses or expenses incurred
by such other party as a result of the representation in this Section 11.12 being untrue.

                        11.13     Construction.
Each party acknowledges that its legal counsel participated in the preparation of this
Agreement and the Related Agreements and, therefore, stipulates that the rule of
construction that ambiguities are to be resolved against the drafting party shall not be
applied in the interpretation of this Agreement to favor any party against the other.

[the remainder of this page is intentionally left blank]

25

           IN WITNESS WHEREOF, the parties
hereto have executed the SECURITIES PURCHASE AGREEMENT as of the date set forth in the
first paragraph hereof.

	COMPANY:	 	PURCHASER:
	 	 	 
	Magic Lantern
    Group, Inc.	 	Laurus Master
    Fund, Ltd.
	 	 	 
	 	 	 
	By:	 	 	By:	 
	Name:	 	 	Name:	 
	Title:	 	 	Title:	 

 

26

EXHIBIT A

FORM OF CONVERTIBLE NOTE

A-1

EXHIBIT B

FORM OF WARRANT

B-2

EXHIBIT C

FORM OF OPINION

        1.     Each
of the Company and each of its Subsidiaries is a corporation duly incorporated, validly
existing and in good standing under the laws of the State of [Delaware] [other
jurisdiction] and has all requisite corporate power and authority to own, operate and
lease its properties and to carry on its business as it is now being conducted.  

        2.     Each of the Company and each of its Subsidiaries has the
requisite corporate power and authority to execute, deliver and perform its obligations
under the Agreement and the Related Agreements. All corporate action on the part of the
Company and each of its Subsidiaries and its officers, directors and stockholders
necessary has been taken for: (i) the authorization of the Agreement and the Related
Agreements and the performance of all obligations of the Company and each of its
Subsidiaries thereunder; and (ii) the authorization, sale, issuance and delivery of the
Securities pursuant to the Agreement and the Related Agreements. The Note Shares and the
Warrant Shares, when issued pursuant to and in accordance with the terms of the Agreement
and the Related Agreements and upon delivery shall be validly issued and outstanding,
fully paid and non assessable.  

        3.     The execution, delivery and performance by each of the Company
and each of its Subsidiaries of the Agreement and the Related Agreements to which it is a
party and the consummation of the transactions on its part contemplated by any thereof,
will not, with or without the giving of notice or the passage of time or both:

(a)     Violate the provisions of their respective Charter or
    bylaws; or

    (b)     Violate any judgment, decree, order or award of any court
    binding upon the Company or any of its Subsidiaries; or

    (c)     Violate any [insert jurisdictions in which counsel is
    qualified] or federal law

  

        4.     The Agreement and the Related Agreements will constitute, valid
and legally binding obligations of each of the Company and each of its Subsidiaries (to
the extent such person is a party thereto), and are enforceable against each of the
Company and each of its Subsidiaries in accordance with their respective terms, except:

(a) as limited by applicable bankruptcy, insolvency,
    reorganization, moratorium or other laws of general application affecting enforcement
    of creditors' rights; and

    (b) general principles of equity that
    restrict the availability of equitable or legal remedies.

  

        5.     To such counsel's
knowledge, the sale of the Note and the subsequent conversion of the Note into Note Shares
are not subject to any preemptive rights or rights of first refusal that have not been
properly waived or complied with. To such counsel's knowledge, the sale of the Warrant and
the subsequent exercise of the Warrant for Warrant Shares are not subject to any 

C-1

preemptive rights or, to such counsel's
knowledge, rights of first refusal that have not been properly waived or complied with.

        6.     Assuming the accuracy of the representations and warranties of
the Purchaser contained in the Agreement, the offer, sale and issuance of the Securities
on the Closing Date will be exempt from the registration requirements of the Securities
Act. To such counsel's knowledge, neither the Company, nor any of its affiliates, nor any
person acting on its or their behalf, has directly or indirectly made any offers or sales
of any security or solicited any offers to buy and security under circumstances that would
cause the offering of the Securities pursuant to the Agreement or any Related Agreement to
be integrated with prior offerings by the Company for purposes of the Securities Act which
would prevent the Company from selling the Securities pursuant to Rule 506 under the
Securities Act, or any applicable exchange-related stockholder approval provisions.  

        7.     There is no action, suit, proceeding or investigation pending
or, to such counsel's knowledge, currently threatened against the Company or any of its
Subsidiaries that prevents the right of the Company or any of its Subsidiaries to enter
into this Agreement or any of the Related Agreements, or to consummate the transactions
contemplated thereby. To such counsel's knowledge, the Company is not a party or subject
to the provisions of any order, writ, injunction, judgment or decree of any court or
government agency or instrumentality; nor is there any action, suit, proceeding or
investigation by the Company currently pending or which the Company intends to initiate.

        8.     The terms and provisions of the Master Security Agreement and
the Stock Pledge Agreement create a valid security interest in favor of Laurus, in the
respective rights, title and interests of the Company and its Subsidiaries in and to the
Collateral (as defined in each of the Master Security Agreement and the Stock Pledge
Agreement). 
Each UCC-1 Financing Statement naming
the Company or any Subsidiary thereof as debtor and Laurus as secured party are in proper
form for filing and assuming that such UCC-1 Financing Statements have been filed with the
Secretary of State of [Delaware], the security interest created under the Master Security
Agreement will constitute a perfected security interest under the Uniform Commercial Code
in favor of Laurus in respect of the Collateral that can be perfected by filing a
financing statement. After giving effect to the delivery to Laurus of the stock
certificates representing the ownership interests of each Subsidiary of the Company
(together with effective endorsements) and assuming the continued possession by Laurus of
such stock certificates in the State of New York, the security interest created in favor
of Laurus under the Stock Pledge Agreement constitutes a valid and enforceable first
perfected security interest in such ownership interests (and the proceeds thereof) in
favor of Laurus, subject to no other security interest. No filings, registrations or
recordings are required in order to perfect (or maintain the perfection or priority of)
the security interest created under the Stock Pledge Agreement in respect of such
ownership interests.

C-2

.

EXHIBIT D

FORM OF ESCROW AGREEMENT

 

	
    
      SCHEDULE 4.2

    

    Subsidiaries

    

 

	
    
    Name of Subsidiary
	
    
    Direct or Indirect Ownership
	
    
    Percentage Ownership
	
    
    Authorized Shares

	
    Magicvision Media, Inc. ("MVM")
	
    
    Direct
	
    
    100%
	
    
    Unlimited number of common shares.

	
    Magic Lantern Communications Ltd. ("MLC")
	
    
    Indirect
	
    
    100%  

    
    (Wholly owned subsidiary of MVM)
	
    
    Unlimited common voting shares; Unlimited Class A
    non-voting and Class B non-voting shares.

	
    Tutorbuddy, Inc.
	
    
    Indirect
	
    
    100%  

    
    (Wholly owned subsidiary of MLC)
	
    
    Unlimited number of common voting shares.

	
    Sonoptic Technologies, Inc.
	
    
    Indirect
	
    
    75%  

    
    (Subsidiary of MLC)

    
    The remaining 25% is owned by the Province of New Brunswick
	
    
    Unlimited number of common voting shares.

C-4

 

	
    
      SCHEDULE 4.3

    

    Capitalization; Voting Rights

    

 

(a)     See Schedule 4.2.

(b)     The Company has the following outstanding warrants:

	 	1.	Pursuant to the terms of a Consulting Agreement dated
    October 15, 2003, the Company granted stock options to National Financial
    Communications Corp. (D.B.A. OTC Financial Network) to purchase an aggregate of
    200,000 shares of the Company's common stock, 66,667 shares at an exercise price of
    $0.25 per share, 66,667 shares at an exercise price of $0.80 per share, and 66,666
    shares at an exercise price of $1.50 per share. The options are exercisable for a
    three year period commencing on the termination of the Consulting Agreement.  
	 	2.	A warrant to purchase 21,660 shares of the Company's
    common stock exercisable for three years at a price of $0.50 CDN per share was issued
    to Modern Rocket Media Productions.
	 	3.	During the year ended December 31, 2003, the Company
    raised approximately $1,198,000 on issuance of promissory notes (the "Notes").
    Attached to the Notes are 1,450,000 warrants (the "Warrants"), exercisable for a
    period of three years at an exercise price of $.25. See Schedule 6.12 for a breakdown
    of these warrants.  

        (c)     No exceptions.

        (d)     No exceptions.

C-5

         

      
    
  

	
    
      SCHEDULE 4.6

    

    Agreements; Action

    

 

(a)  

                             (i)
        No exceptions.

 (ii) None, other than as disclosed in Schedule 4.10(a).

     (iii) No exceptions.

     (iv) No exceptions.  

    
  

(b)                (i) No exceptions

                    (ii) No exceptions

                    (iii) No exceptions

                    (iv) No exceptions

C-6

	SCHEDULE 4.7

    

    Obligations to Related Parties

 

	(a)	The Company has entered into Employment Agreements with
    three executives of the Company (Robert A. Goddard, Pauline Weber and Richard Wright)
    and one executive of Sonoptic Technologies Inc. (Greg Abrams). At least one of these
    agreements provides for severance payments upon termination of employment and a change
    in control.
	 	 
	(b)	No exceptions.
	 	 
	(c)	The Employment Agreements
    discussed in section (a) above also provide for annual automobile allowances in the
    aggregate amount of approximately $16,000.  
	 	 
	(d)	No exceptions.

The following directors of the Company are also members of the Board of Directors of
the Company's affiliate, Zi Corp., which owns approximately 45% of the Company: Michael Lobsinger, Howard Balloch and Michael R. Mackenzie. Howard Balloch and Michael Mackenzie
beneficially own approximately 1% or less of the issued and outstanding common stock of Zi
Corp. Michael Lobsinger beneficially owns approximately 14% of the issued and outstanding
common stock of Zi Corp and is the Chief Executive Officer and Chairman of the Board of Zi
Corp. Additionally, Michael Lobsinger is the sole owner of Quarry Bay Investments, Inc.
which holds one of the Promissory Notes issued by the Company and set forth on Schedule
6.12.

Richard Geist, a member of the Company's board of directors and chairman of the
Company's audit committee, has a Consulting Agreement with the Company effective as of
February 1, 2004 whereby he is paid $5,000 USD per month for his services. This agreement
is renewable upon mutual agreement after 6 months.  

C-7

	
    
      SCHEDULE 4.8

    

    Changes

    

 

(a)      Since December 30, 2004, the Company continues to
have negative earnings and a continued working capital deficiency.

(b)      On March 19, 2004, Shane Hilkowitz, the Company's Vice President of Finance,
resigned. On April 12, 2004, the Company hired Ronald Carlucci to essentially replace Mr. Hilkowitz. Mr.
Carlucci is the Company's Director of Finance and Acting Chief Financial Officer.

(c)      No exceptions.

(d)      No exceptions.

(e)      No exceptions.

(f)       No exceptions.

(g)      No exceptions.

(h)      No exceptions.

(i)       No exceptions.

(j)      No exceptions.

    (k)     None, other than the licensing of the
    Company's intellectual property in the ordinary course of business.

  

(l)      No exceptions.

(m)   No exceptions.

(n)    No exceptions.

C-8

 

 

	
    
      SCHEDULE 4.9

    

    Title to Properties and Assets; Liens,
    Etc.

    

 

No exceptions.

C-9

 

	
    
      SCHEDULE 4.10

    

    Intellectual Property

    

 

    	(a)	The Company holds a strategic
        partnership, based on an equal revenue share, with the Agency for Instructional
        Technology ("AIT"). Pursuant to that agreement AIT, under a restricted license,
        offers Magic Lantern Group, Inc. content and videobase software on its website for
        use by AIT customers. 
	 	The Company has several hundred
        existing license agreements with entities that produce educational videos.
        Pursuant to the terms of these agreements, the Company is granted licensing rights
        for certain video productions in exchange for payment of a percentage of gross
        receipts in royalties. 
	 	
	 	The Company's subsidiary Tutorbuddy,
        Inc. has numerous license agreements with its producers for the digitization,
        indexing and ultimately streaming of the producer's analog content through the
        Company's web-enabled Tutorbuddy or stand-alone media offerings.
	(b)	No exceptions.
	(c)	No exceptions.

 

C-10

 

	
    
      SCHEDULE 4.12

    

    Litigation

    

Current Litigation

          On October 20, 2003, Douglas Connolly, the former 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. Subsequent to the termination, Wendy Connolly filed an action against the
Company claiming damages in the amount of $250,000 for wrongful dismissal. On
February 3, 2004, counsel to Wendy Connolly was formally served with a Statement of Defence and Counterclaim by the Company. The Statement of Defence and Counterclaim adds
Doug Connolly as a defendant in the counterclaim. The counterclaim seeks damages as
against both Wendy and Doug Connolly in the amount of $500,000, an accounting to determine
profits made by the Connollys in relation to the breach of their fiduciary duties, a
permanent and interlocutory injunction restraining the Connollys from soliciting clients
and utilizing confidential information, and 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.

Lancer Group Concerns

           The Lancer Group has been a significant shareholder of the Company since the fourth
quarter of 2002. On July 10, 2003, the Securities and Exchange Commission brought a civil
action in the United States District Court for the Southern District of Florida against
Michael Lauer and Lancer Management I and II alleging securities fraud in connection with
portfolio transactions effected by the Lancer Group management. While the complaint does
not allege any fraud in connection with the Company's securities, records produced by the
SEC in the court proceeding indicate that Lancer management had either not reported the
extent of its ownership in portfolio companies or had underreported the ownership.
According to a Form 13D filed by the receiver to the Lancer Group on July 10, 2003, the
Lancer Group, in the aggregate, controls 45.1% of the Company's outstanding shares as of
that date. It is unclear at this time what, if any, actions the receiver may take with
respect to the portfolio securities held by Lancer.  

C-11

 

	
    
      SCHEDULE 4.13

    

    Tax Returns and Payments

    

 

No exceptions.

C-12

 

	
    
      SCHEDULE 4.14

    

    Employees

    

 

The Company has entered into Employment Agreements with three executives of the Company
(Robert A. Goddard, Pauline Weber and Richard Wright), one executive of Sonoptic
Technologies Inc. (Greg Abrams). At least one of these agreements provides for severance
payments upon termination of employment and a change in control.

C-13

 

	
    
      SCHEDULE 4.15

    

    

    Registration Rights and Voting Rights

The Company has granted Demand Registration Rights covering 1,250,000 shares of common
stock underlying warrants issued to certain individual investors. Such demand for
registration may not be made until September 5, 2004. The Company is not required to
register the shares if (i) the Company is filing another registration statement within 120
days of the demand; (ii) it would be commercially unreasonable to do so; or (iii) it would
interfere with a material transaction.

C-14

 

	
    
      SCHEDULE 4.17

    

    Environmental and Safety Laws

    

None.

C-15

 

	
    
      SCHEDULE 4.21

    

    SEC Reports

    

No exceptions.

C-16

 

	
    
      SCHEDULE 4.23

    

    No Integrated Offering

    

No exceptions.  

C-17

 

	
    
      SCHEDULE 6.12

    

    Indebtedness

    

Loans

	
    Lender
	
    Date
	
    Amount
	
    Annual Interest Rate
	
    Terms

	Zi Corp.	November 7, 2002	$2,000,000 USD	5.0%	Repayment begins on March 31, 2004, and due quarterly
    thereafter. The Note matures on November 7, 2005.
	Zi Corporation  	April 15, 2004	$50,000 USD	12.0%	Demand Promissory Note.
	Provincial Holdings Limited (Province of New Brunswick)
    (made by Sonoptic Technologies)	March 15, 1995	$750,000 CDN	6.75%	Sonoptic failed to repay the
    note on September 30, 2003, and the Note is in default. Sonoptic has been in
    discussions with the Lender to amend the repayment terms of the Note.

Other Indebtedness

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. Attached to the
Notes are 1,450,000 warrants (the "Warrants"), exercisable for a period of three years at
an exercise price of $.25. Below is a breakdown of this issuance:

	
    Date	
    Holder	
    Amount of Promissory Note	
    Warrants Issued	
    Amount to be Received by Company upon Full Exercise
    of Warrants
	September 5, 2003	James Duncan McNeill	$500,000 USD	500,000	$125,000 USD
	September 5, 2003	Quarry Bay Investments, Inc.	$500,000 CDN	500,000	$125,000 CDN
	September 17, 2003	Gretchen Ross	$250,000 USD	250,000	$62,300 USD
	November 13, 2003	Jerold Flatt	$120,000 USD	120,000	$30,000 USD
	November 13, 2003	Jerold Flatt- Corp.	$40,000 USD	40,000	$10,000 USD
	November 13, 2003	Jerrold Flatt- IRA	$40,000 USD	40,000	$10,000 USD

C-18

 

	
    
      SCHEDULE 11.12

    

    Brokers Fees

    

 

The Company will pay a broker's fee, equal to 5% of the
transaction, to National Financial Communications upon the Closing of the financing
contemplated herein.

 

 

C-19

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