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As filed with the Securities and
Exchange Commission on February 6, 2004

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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 20-F/A

[   ]      Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934

OR

[X]      Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



| |                                             
| | --------------------------------------------
| | For the fiscal year ended September 30, 2002

OR

[    ]        Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



| |                                   
| | ----------------------------------
| | For the
transition period from  to

Commission file number 0-30082

ENVOY COMMUNICATIONS GROUP INC.




(Exact name of Registrant as specified in its charter)




---

(Translation of Registrants name into English)


Ontario, Canada




(Jurisdiction of incorporation or organization)


172 John Street, Toronto, Ontario, Canada M5T 1X5




(Address of principal executive offices)


Securities registered or to be registered pursuant to Section 12(b) of the
Act: None

Securities registered or to be registered pursuant to Section 12(g) of the Act.

COMMON SHARES




(Title of Class)


The Nasdaq Small Cap Market




(Name of each exchange on which registered)


Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

NONE




(Title of Class)


Indicate the number of outstanding shares of each of the issuers classes of
capital or common stock as of the close of the period covered by the annual
report: At September 30, 2002 there were 21,528,694 common shares
outstanding.

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

Indicate by check mark which financial statement item the Registrant has
elected to follow:      Item 17 [  ] Item 18 [X]

Currency and Exchange Rates Information
All monetary amounts contained in this Form 20-F are, unless otherwise
indicated, expressed in Canadian dollars. On February 17, 2003 the noon
buying rate for Canadian Dollars as reported by the Federal Reserve Bank of
New York was $1.00 U.S. to $1.5209 Cdn. (see Item 9 for further exchange
rate information to U.S. currency.)



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1



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TABLE OF CONTENTS



|           |                               |  |  |  |  |  |  | 
|---------- | ----------------------------- |  |  |  |  |  |  | 
|PART III  
|           | Item 17. FINANCIAL STATEMENTS
|           | Item 18. FINANCIAL STATEMENTS
|           | Item 19. EXHIBITS            
|SIGNATURES
|EX-12.1   
|EX-13.1   



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EXPLANATORY NOTE

Shareholders equity and net loss for
the year based on U.S. GAAP as at, and for the year ended September
30, 2002 differ from the amounts previously reported by the Company
in its Annual Report on Form 20-F dated February 17, 2003,
constituting its Annual Information Form. Previously, the Company expensed the
beneficial conversion associated with its convertible debentures, and described
in note 20(e), totalling $1,188,356, immediately. However, this amount should
have been amortized over the two-year term of the debentures which would reduce
the charge in 2002 to $168,541, resulting in a decrease to net loss for the
year based on U.S. GAAP of $1,019,815. Accordingly, note 20 to the
Companys consolidated financial statements included in this amended
filing has been restated to correct for this matter. This amended
filing should be read in conjunction with the Companys Annual Report
on Form 20-F dated February 17, 2003.




PART III




Item 17. FINANCIAL STATEMENTS

Envoy has elected to provide financial statements pursuant to Item 18.




Item 18. FINANCIAL STATEMENTS



| | (a) |  | Envoy Communications Group Inc.
| | --- |  | -------------------------------

|      |  |                                                                                                    |  |    
|----- |  | -------------------------------------------------------------------------------------------------- |  | ---
|(i)   |  | Auditors Report on the financial statements for the year
ended September 30, 2002 and 2001        |  | F-1
|      |  | Comments by auditors for U.S. readers on Canada-U.S.
reporting difference                          |  |    
|(ii)  |  | Consolidated Balance Sheets as at September 30, 2002 and 2001                                      |  | F-2
|(iii) |  | Consolidated Statements of Operations for the years ended
September 30, 2002, 2001 and 2000        |  | F-3
|(iv)  |  | Consolidated Statements of Retained Earnings for the years
ended September 30, 2002, 2001 and 2000 |  | F-4
|(v)   |  | Consolidated Statements of Cash Flows for the years ended
September 30, 2002, 2001 and 2000        |  | F-5
|(vi)  |  | Notes to Consolidated Financial Statements                                                         |  | F-6




Item 19. EXHIBITS



| | (a) |  | Exhibit 1
      By-Law No. 1 of Envoy (as amended on May 2, 2000) &
Articles of Incorporation. Incorporated by reference from the
annual report, on form 20-F previously filed the Securities Exchange
Commission on May 15, 2000.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Exhibit 12.1 Certifications required by Rule 13a-14(a)                                                                                                                                                                            
|
| |     |  | Exhibit 13.1 Certifications required by Rule 13a-14(b)                                                                                                                                                                            

2



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SIGNATURES

The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.

|                       |  |                                     
|---------------------- |  | ------------------------------------
|                       |  | Envoy Communications Group Inc.     
|                       |  |                                     
|Date: February 6, 2004 |  | /s/ Geoffrey B. Genovese            
|                       |  |                                     
|                       |  | Name: Geoffrey B. Genovese          
|                       |  | Title: Chairman, President and Chief
|                       |  | Executive Officer                   





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|                                             
|---------------------------------------------
|Consolidated Financial Statements            
|(Expressed in Canadian dollars)              
|                                             
|ENVOY COMMUNICATIONS GROUP INC.              
|                                             
|Years ended September 30, 2002, 2001 and 2000





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|                            |  |                         
|--------------------------- |  | ------------------------
|KPMG LLP                    |  |                         
|Chartered Accountants       |  | Telephone (416) 228-7000
|Yonge Corporate Centre      |  | Telefax (416) 228-7123  
|4100 Yonge Street Suite 200 |  | www.kpmg.ca             
|Toronto ON M2P 2H3          |  |                         

AUDITORS REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheets of Envoy Communications Group
Inc. as at September 30, 2002 and 2001 and the consolidated statements of
operations, retained earnings (deficit) and cash flows for each of the years
in the three-year period ended September 30, 2002. These financial statements
are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at September
30, 2002 and 2001 and the results of its operations and its cash flows for
each of the years in the three-year period ended September 30, 2002 in
accordance with Canadian generally accepted accounting principles.

(KPMG LLP LOGO)

Chartered Accountants

Toronto, Canada

January 9, 2003, except
as to note 20(l) which is
as of February 2, 2004





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|                            |  |                         
|--------------------------- |  | ------------------------
|KPMG LLP                    |  |                         
|Chartered Accountants       |  | Telephone (416) 228-7000
|Yonge Corporate Centre      |  | Telefax (416) 228-7123  
|4100 Yonge Street Suite 200 |  | www.kpmg.ca             
|Toronto ON M2P 2H3          |  |                         

COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S REPORTING
DIFFERENCES

In the United States, reporting standards for auditors require the
addition of an explanatory paragraph (following the opinion paragraph)
when the financial statements are affected by conditions and events
that cast substantial doubt on the Companys ability to continue as a
going concern, such as those described in note 1 to the consolidated
financial statements, and when there is a retroactive adjustment such
as that described in note 20(l) to the consolidated financial
statements. Our report to the shareholders dated January 9, 2003,
except as to note 20(l) which is as of February 2, 2004, is expressed
in accordance with Canadian reporting standards, which do not permit a
reference to such events and conditions and which do not require a
reference to such retroactive adjustment in the auditors report when
such events and conditions and such adjustments are adequately
disclosed in the financial statements.

(KPMG LLP LOGO)

Chartered Accountants

Toronto, Canada

January 9, 2003, except
as to note 20(l) which is
as of February 2, 2004





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ENVOY COMMUNICATIONS GROUP INC.
Consolidated Balance Sheets
(Expressed in Canadian dollars)

September 30, 2002 and 2001

|                                                                                   |  |                                                                      |            |      |             |      |             |   |            | 
|---------------------------------------------------------------------------------- |  | -------------------------------------------------------------------- | ---------- | ---- | ----------- | ---- | ----------- | - | ---------- | 
|                                                                                   |  |                                                                      |            | 2002 |             | 2001
|                                                                                   |  |                                                                      |            |      |             |     
|Assets                                                                             |  |                                                                      |            |      |             |      |             |  
|Current assets:                                                                    |  |                                                                      |            |      |             |      |             |  
|                                                                                   |  | Cash                                                                 |            | $    | 469,909     |      |             | $ | 21,781,809 | 
|                                                                                   |  | Restricted cash (note 4)                                             |            |      | 1,831,085   |      |             |   | 158,500    | 
|                                                                                   |  | Accounts receivable (note 5)                                         |            |      | 20,528,048  |      |             |   | 26,940,137 | 
|                                                                                   |  | Income taxes recoverable                                             |            |      | 2,779,717   |      |             |   | 230,389    | 
|                                                                                   |  | Future income taxes (note 13)                                        |            |      | 855,000     |      |             |   | 712,000    | 
|                                                                                   |  | Prepaid expenses                                                     |            |      | 983,068     |      |             |   | 1,315,009  | 
|                                                                                   |  |                                                                      |            |      |             |      |             |   |            | 
|                                                                                   |  |                                                                      | 27,446,827 |      |             |      | 51,137,844  |  
|Capital assets (note 7)                                                            |  |                                                                      | 7,836,728  |      |             |      | 11,533,736  |  
|Goodwill (note 8)                                                                  |  |                                                                      | 11,314,283 |      |             |      | 49,675,115  |  
|Other assets (note 9)                                                              |  |                                                                      | 116,649    |      |             |      | 681,387     |  
|Future income taxes (note 13)                                                      |  |                                                                      | 2,459,228  |      |             |      | 822,156     |  
|                                                                                   |  |                                                                      |            |      |             |      |             |   |            | 
|                                                                                   |  | $                                                                    | 49,173,715 |      |             | $    | 113,850,238 |  
|                                                                                   |  |                                                                      |            |      |             |      |             |   |            | 
|Liabilities and Shareholders Equity                                               |  |                                                                      |            |      |             |      |             |  
|Current liabilities:                                                               |  |                                                                      |            |      |             |      |             |  
|                                                                                   |  | Accounts payable and accrued liabilities                             |            | $    | 21,019,267  |      |             | $ | 38,728,210 | 
|                                                                                   |  | Deferred revenue                                                     |            |      | 1,475,671   |      |             |   | 300,071    | 
|                                                                                   |  | Amounts collected in excess of pass-through costs incurred           |            |      | 2,104,522   |      |             |   | 1,574,407  | 
|                                                                                   |  | Bank credit facility and current portion of long-term debt
(note 10) |            |      | 10,589,114  |      |             |   | 10,965,089 | 
|                                                                                   |  |                                                                      |            |      |             |      |             |   |            | 
|                                                                                   |  |                                                                      | 35,188,574 |      |             |      | 51,567,777  |  
|Long-term debt (note 10)                                                           |  |                                                                      | 3,413,697  |      |             |      | 963,076     |  
|Long-term portion of restructuring costs (note 15)                                 |  |                                                                      | 792,275    |      |             |      |            |  
|Shareholders equity:                                                              |  |                                                                      |            |      |             |      |             |  
|                                                                                   |  | Share capital (note 12)                                              |            |      | 54,339,390  |      |             |   | 54,883,305 | 
|                                                                                   |  | Convertible debentures (note 11)                                     |            |      | 1,720,859   |      |             |   |           | 
|                                                                                   |  | Retained earnings (deficit)                                          |            |      | (47,629,529 | )    |             |   | 5,603,200  | 
|                                                                                   |  | Cumulative translation adjustment                                    |            |      | 1,348,449   |      |             |   | 832,880    | 
|                                                                                   |  |                                                                      |            |      |             |      |             |   |            | 
|                                                                                   |  |                                                                      | 9,779,169  |      |             |      | 61,319,385  |  
|Future operations (note 1 )                                                        |  |                                                                      |            |      |             |      |             |  
|Commitments and contingencies (notes 3 and 16)                                     |  |                                                                      |            |      |             |      |             |  
|Subsequent events (note 19)                                                        |  |                                                                      |            |      |             |      |             |  
|Reconciliation to United States generally accepted
accounting principles (note 20) |  |                                                                      |            |      |             |      |             |  
|                                                                                   |  |                                                                      |            |      |             |      |             |  
|                                                                                   |  | $                                                                    | 49,173,715 |      |             | $    | 113,850,238 |  
|                                                                                   |  |                                                                      |            |      |             |      |             |   |            | 

See accompanying notes to consolidated financial statements.

On behalf of the Board:

| |  |         
| |  | --------
| |  | Director
| |  |         
|
| |  | Director
| |  |         

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ENVOY COMMUNICATIONS GROUP INC.
Consolidated Statements of Operations
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000

|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | - | ----------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ---------- | 
|                                                                                                                                                                                |                            |   | 2002        |            | 2001 |   | 2000      
|                                                                                                                                                                                |                            |   |             |            |      |   |           
|Net revenue                                                                                                                                                                     |                            | $ | 59,121,090  |            |      | $ | 82,785,541 |            |   | $ | 60,790,280 |           
|Operating expenses:                                                                                                                                                             |                            |   |             |            |      |   |            |            |   |   |            |           
|                                                                                                                                                                                | Salaries and benefits      |   |             | 45,096,981 |      |   |            | 53,653,694 |   |   |            | 35,132,814 | 
|                                                                                                                                                                                | General and administrative |   |             | 11,669,901 |      |   |            | 17,373,429 |   |   |            | 12,953,898 | 
|                                                                                                                                                                                | Occupancy costs            |   |             | 4,728,817  |      |   |            | 4,754,875  |   |   |            | 2,552,854  | 
|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |           
|                                                                                                                                                                                |                            |   | 61,495,699  |            |      |   | 75,781,998 |            |   |   | 50,639,566 |           
|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |           
|Earnings (loss) before depreciation,
amortization of intangible asset,
interest expense, unusual items,
restructuring costs, income taxes,
goodwill amortization and write-down |                            |   | (2,374,609  | )          |      |   | 7,003,543  |            |   |   | 10,150,714 |           
|Depreciation                                                                                                                                                                    |                            |   | 2,858,641   |            |      |   | 2,866,679  |            |   |   | 1,986,691  |           
|Amortization of intangible asset (note 9)                                                                                                                                       |                            |   | 24,197      |            |      |   |           |            |   |   |           |           
|Interest expense                                                                                                                                                                |                            |   | 1,245,126   |            |      |   | 743,600    |            |   |   | 407,473    |           
|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |           
|Earnings (loss) before unusual items,
restructuring costs, income taxes,
goodwill amortization and write-down                                                                   |                            |   | (6,502,573  | )          |      |   | 3,393,264  |            |   |   | 7,756,550  |           
|Unusual items (note 14)                                                                                                                                                         |                            |   | 750,648     |            |      |   | 1,917,334  |            |   |   |           |           
|Restructuring costs (note 15)                                                                                                                                                   |                            |   | 10,857,534  |            |      |   |           |            |   |   |           |           
|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |           
|Earnings (loss) before income taxes,
goodwill amortization and write-down                                                                                                       |                            |   | (18,110,755 | )          |      |   | 1,475,930  |            |   |   | 7,756,550  |           
|Income taxes (recovery), excluding
the undernoted                                                                                                                               |                            |   | (4,853,540  | )          |      |   | 1,259,731  |            |   |   | 3,252,354  |           
|Impact of tax rate changes                                                                                                                                                      |                            |   |            |            |      |   | 100,000    |            |   |   |           |           
|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |           
|Earnings (loss) before goodwill amortization
and write-down                                                                                                                     |                            |   | (13,257,215 | )          |      |   | 116,199    |            |   |   | 4,504,196  |           
|Goodwill amortization, net of income tax
recovery of $24,000 (2001 - $24,000;
2000 - $24,000)                                                                                   |                            |   | 2,187,509   |            |      |   | 3,011,571  |            |   |   | 1,593,769  |           
|Write-down of goodwill (note 8)                                                                                                                                                 |                            |   | 37,934,711  |            |      |   |           |            |   |   |           |           
|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |           
|Net earnings (loss)                                                                                                                                                             |                            | $ | (53,379,435 | )          |      | $ | (2,895,372 | )          |   | $ | 2,910,427  |           
|                                                                                                                                                                                |                            |   |             |            |      |   |            |            |   |   |            |           
|Earnings (loss) per share (notes 2(i)
and 12(e)):                                                                                                                               |                            |   |             |            |      |   |            |            |   |   |            |           
|                                                                                                                                                                                | Basic                      |   | $           | (2.54      | )    |   | $          | (0.14      | ) |   | $          | 0.15       | 
|                                                                                                                                                                                | Diluted                    |   |             | (2.54      | )    |   |            | (0.14      | ) |   |            | 0.15       | 
|Earnings (loss) per share before goodwill
amortization and write-down (notes 2(i)
and 12(e)):                                                                                   |                            |   |             |            |      |   |            |            |   |   |            |           
|                                                                                                                                                                                | Basic                      |   |             | (0.63      | )    |   |            | 0.01       |   |   |            | 0.24       | 
|                                                                                                                                                                                | Diluted                    |   |             | (0.63      | )    |   |            | 0.01       |   |   |            | 0.23       | 

See accompanying notes to consolidated financial statements.

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ENVOY COMMUNICATIONS GROUP INC.
Consolidated Statements of Retained Earnings (Deficit)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000

|                                          |  |      |             |      |  |      |            |   |  |   |           | 
|----------------------------------------- |  | ---- | ----------- | ---- |  | ---- | ---------- | - |  | - | --------- | 
|                                          |  | 2002 |             | 2001 |  | 2000
|                                          |  |      |             |      |  |     
|Retained earnings, beginning of year      |  | $    | 5,603,200   |      |  | $    | 8,403,367  |   |  | $ | 5,492,940 | 
|Gain on redemption of shares (note 12(c)) |  |      | 146,706     |      |  |      | 95,205     |   |  |   |          | 
|Net earnings (loss)                       |  |      | (53,379,435 | )    |  |      | (2,895,372 | ) |  |   | 2,910,427 | 
|                                          |  |      |             |      |  |      |            |   |  |   |           | 
|Retained earnings (deficit), end of year  |  | $    | (47,629,529 | )    |  | $    | 5,603,200  |   |  | $ | 8,403,367 | 
|                                          |  |      |             |      |  |      |            |   |  |   |           | 

See accompanying notes to consolidated financial statements.

3



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ENVOY COMMUNICATIONS GROUP INC.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000

|                                      |                                                     |                                                            |                              |             |             |           |      |            |            |   |   |            |             |   | 
|------------------------------------- | --------------------------------------------------- | ---------------------------------------------------------- | ---------------------------- | ----------- | ----------- | --------- | ---- | ---------- | ---------- | - | - | ---------- | ----------- | - | 
|                                      |                                                     |                                                            |                              |             | 2002        |           | 2001 |            | 2000      
|                                      |                                                     |                                                            |                              |             |             |           |      |            |           
|Cash flows from operating activities: |                                                     |                                                            |                              |             |             |           |      |            |            |   |   |           
|                                      | Net earnings (loss)                                 |                                                            | $                            | (53,379,435 | )           |           | $    | (2,895,372 | )          |   | $ | 2,910,427  |            
|                                      | Items not involving cash:                           |                                                            |                              |             |             |           |      |            |            |   |   |            |            
|                                      |                                                     | Future income taxes                                        |                              |             | (1,780,072  | )         |      |            | (567,441   | ) |   |            | (285,344    | )
|                                      |                                                     | Depreciation                                               |                              |             | 2,858,641   |           |      |            | 2,866,679  |   |   |            | 1,986,691   |  
|                                      |                                                     | Amortization of intangible asset                           |                              |             | 24,197      |           |      |            |           |   |   |            |            |  
|                                      |                                                     | Goodwill amortization                                      |                              |             | 2,211,509   |           |      |            | 3,035,571  |   |   |            | 1,617,769   |  
|                                      |                                                     | Write-down of goodwill                                     |                              |             | 37,934,711  |           |      |            |           |   |   |            |            |  
|                                      |                                                     | Amortization of deferred financing
charges                 |                              |             | 96,263      |           |      |            | 65,936     |   |   |            | 9,990       |  
|                                      |                                                     | Write-down of deferred
financing charges                   |                              |             | 750,648     |           |      |            |           |   |   |            |            |  
|                                      |                                                     | Convertible debentures accretion                           |                              |             | 133,870     |           |      |            |           |   |   |            |            |  
|                                      |                                                     | Restructuring costs:                                       |                              |             |             |           |      |            |            |   |   |            |             |  
|                                      |                                                     |                                                            | Write-down of capital assets |             |             | 3,481,105 |      |            |            |  |   |            |             |  | 
|                                      |                                                     |                                                            | Other                        |             |             | 52,500    |      |            |            |  |   |            |             |  | 
|                                      | Net change in non-cash working capital
balances:    |                                                            |                              |             |             |           |      |            |            |   |   |            |            
|                                      |                                                     | Restricted cash                                            |                              |             | (1,672,585  | )         |      |            | 297,962    |   |   |            |            |  
|                                      |                                                     | Accounts receivable                                        |                              |             | 6,757,260   |           |      |            | 7,389,275  |   |   |            | 1,823,856   |  
|                                      |                                                     | Prepaid expenses                                           |                              |             | 353,652     |           |      |            | (174,654   | ) |   |            | 124,424     |  
|                                      |                                                     | Accounts payable and accrued liabilities                   |                              |             | (16,905,696 | )         |      |            | 12,440,922 |   |   |            | (10,519,909 | )
|                                      |                                                     | Income taxes payable/recoverable                           |                              |             | (2,606,457  | )         |      |            | (1,145,133 | ) |   |            | (787,622    | )
|                                      |                                                     | Deferred revenue                                           |                              |             | 1,175,600   |           |      |            | (758,380   | ) |   |            | 1,044,873   |  
|                                      |                                                     | Amounts collected in excess of
pass-through costs incurred |                              |             | (175,514    | )         |      |            | (777,930   | ) |   |            | 518,410     |  
|                                      |                                                     | Other                                                      |                              |             | (209,582    | )         |      |            | 159,003    |   |   |            | (126,812    | )
|                                      |                                                     |                                                            |                              |             |             |           |      |            |            |   |   |            |            
|                                      | Net cash provided by (used in)
operating activities |                                                            |                              | (20,899,385 | )           |           |      | 19,936,438 |            |   |   | (1,683,247 | )          
|Cash flows from financing activities: |                                                     |                                                            |                              |             |             |           |      |            |            |   |   |           
|                                      | Long-term debt borrowings                           |                                                            |                              | 1,580,459   |             |           |      | 8,137,183  |            |   |   | 5,198,442  |            
|                                      | Long-term debt repayments                           |                                                            |                              | (2,539,248  | )           |           |      | (8,097,536 | )          |   |   | (5,497,140 | )          
|                                      | Issuance of common shares                           |                                                            |                              |            |             |           |      | 383,670    |            |   |   | 10,939,807 |            
|                                      | Issuance of convertible debentures                  |                                                            |                              | 3,800,000   |             |           |      |           |            |   |   |           |            
|                                      | Redemption of common shares                         |                                                            |                              | (628,083    | )           |           |      | (1,295,475 | )          |   |   |           |            
|                                      | Reduction (increase) in restricted cash             |                                                            |                              |            |             |           |      | 394,625    |            |   |   | (277,330   | )          
|                                      | Long-term portion of restructuring costs            |                                                            |                              | 792,275     |             |           |      |           |            |   |   |           |            
|                                      | Other                                               |                                                            |                              |            |             |           |      | 190,143    |            |   |   |           |            
|                                      |                                                     |                                                            |                              |             |             |           |      |            |            |   |   |            |            
|                                      | Net cash provided by (used in)
financing activities |                                                            |                              | 3,005,403   |             |           |      | (287,390   | )          |   |   | 10,363,779 |            

4



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Consolidated Statements of Cash Flows (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000

|                                                   |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |             |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------ | - | ----------- | ---------- | ---- | - | ---------- | ---------- | - | - | ---------- | ----------- | -
|                                                   |                                                                                                                                |   | 2002        |            | 2001 |   | 2000      
|                                                   |                                                                                                                                |   |             |            |      |   |           
|Cash flows from investing activities:              |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |            
|                                                   | Acquisition of subsidiaries, net of cash
acquired (bank indebtedness assumed)
of $919,201 (2001 - $214,179;
2000 - ($941,385)) |   |             | (1,904,742 | )    |   |            | (1,669,168 | ) |   |            | (14,640,994 | )
|                                                   | Purchase of capital assets                                                                                                     |   |             | (1,811,154 | )    |   |            | (3,756,134 | ) |   |            | (2,428,228  | )
|                                                   | Increase in other assets                                                                                                       |   |             |           |      |   |            |           |   |   |            | (67,356     | )
|                                                   |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |             |  
|                                                   | Net cash used in investing activities                                                                                          |   |             | (3,715,896 | )    |   |            | (5,425,302 | ) |   |            | (17,136,578 | )
|Change in cash balance due to foreign
exchange     |                                                                                                                                |   | 297,978     |            |      |   | 452,645    |            |   |   | 261,010    |            
|                                                   |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |             |  
|Increase (decrease) in cash                        |                                                                                                                                |   | (21,311,900 | )          |      |   | 14,676,391 |            |   |   | (8,195,036 | )          
|Cash, beginning of year                            |                                                                                                                                |   | 21,781,809  |            |      |   | 7,105,418  |            |   |   | 15,300,454 |            
|                                                   |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |             |  
|Cash, end of year                                  |                                                                                                                                | $ | 469,909     |            |      | $ | 21,781,809 |            |   | $ | 7,105,418  |            
|                                                   |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |             |  
|Cash flows from operations per share
(note 12(e)): |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |            
|                                                   | Basic                                                                                                                          |   | $           | (0.36      | )    |   | $          | 0.12       |   |   | $          | 0.33        |  
|                                                   | Diluted                                                                                                                        |   |             | (0.36      | )    |   |            | 0.12       |   |   |            | 0.33        |  
|                                                   |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |             |  
|Supplemental cash flow information:                |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |            
|                                                   | Interest paid                                                                                                                  |   | $           | 643,926    |      |   | $          | 704,604    |   |   | $          | 407,474     |  
|                                                   | Income taxes paid                                                                                                              |   |             | 581,077    |      |   |            | 3,407,801  |   |   |            | 3,489,185   |  
|Supplemental disclosure of non-cash
transactions:  |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |            
|                                                   | Shares issued for non-cash consideration                                                                                       |   |             | 265,500    |      |   |            | 3,908,156  |   |   |            | 6,850,311   |  
|                                                   | Capital assets acquired under capital
leases                                                                                   |   |             | 820,424    |      |   |            |           |   |   |            |            |  
|                                                   |                                                                                                                                |   |             |            |      |   |            |            |   |   |            |             |  

See accompanying notes to consolidated financial statements.

5



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000

The Company, continued under the Business Corporations Act (Ontario), has
operations in the United States, the United Kingdom and Canada and provides
integrated marketing and communication services. The core disciplines are:
advertising, branding and digital professional services, which include
strategy, creative design and technology infrastructure services necessary to
build and maintain successful e-businesses.



|1. |  | Basis of presentation:
|-- |  | ----------------------



| | (a) |  | These consolidated financial statements have been prepared on the
going concern basis,
which assumes the Company will continue its operations in the
foreseeable future and will
be able to realize its assets and satisfy its liabilities in the normal
course of business.
Certain conditions exist and events have occurred, as further described
below that provide
uncertainty regarding the Companys ability to continue as a going
concern, with its existing
operations.                                                                                                                                                                                                                                                                                                                                                              
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | During the year, the Company entered into a Forebearance Agreement with
the lenders, which requires the Company to make monthly principal
payments from December 31, 2002 through to March 31, 2003 and repay the
balance of the loan by April 30, 2003. Consequently, the loan is
classified as a current liability and the working capital shortfall is
approximately $7.7 million as at September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | The Companys ability to repay its bank borrowings is dependent upon its
ability to generate positive cash flow from operations, secure
additional debt or equity financing under private placements, refinance
or renegotiate its debt facility and/or sell all of, or a part of, its
operating businesses. There can be no assurances that the Company will
be successful in doing so. In the event the Company is unable to repay
or refinance the bank loans from the above sources, then the application
of the going concern principle for financial statement reporting
purposes may no longer be appropriate. These consolidated financial
statements do not include any adjustments related to the recoverability
and classification of recorded asset amounts or the amounts and
classification of liabilities that may be necessary.
|
| | (b) |  | The consolidated financial statements have been prepared in
accordance with generally
accepted accounting principles in Canada, which vary in certain
significant respects from
generally accepted accounting principles in the United States. A
description of the
significant differences, as applicable to the Company, is included in
note 20.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (c) |  | Certain 2001 comparative figures have been reclassified to
conform to the financial
statement presentation adopted for 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

6



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|2. |  | Significant accounting policies:
|-- |  | --------------------------------



| | (a) |  | Principles of consolidation:                                                                                                                                                                                                 
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The consolidated financial statements include the accounts of the
Company and its subsidiaries, collectively known as Envoy
Communications Group Inc. Intercompany balances and transactions are
eliminated on consolidation.
|
| |     |  | Significant subsidiaries as at September 30, 2002 are as follows:                                                                                                                                                            

|                                  |  |           |     |                 |  |                |  | 
|--------------------------------- |  | --------- | --- | --------------- |  | -------------- |  | 
|                                  |  | %of       |     | Jurisdiction of
|Company                           |  | ownership |     | incorporation  
|                                  |  |           |     |                
|Communique Incentives Inc.        |  |           | 100 |                 |  | Ontario       
|Hampel Stefanides, Inc.           |  |           | 100 |                 |  | Delaware      
|Devlin Multimedia Inc.            |  |           | 100 |                 |  | Ontario       
|Watt International Inc.           |  |           | 100 |                 |  | Ontario       
|Sage Information Consultants Inc. |  |           | 100 |                 |  | Ontario       
|Gilchrist Brothers Limited        |  |           | 100 |                 |  | United Kingdom
|International Design Group        |  |           | 100 |                 |  | Ontario       
|John Street Inc.                  |  |           | 70  |                 |  | Ontario       



| | (b) |  | Use of estimates:                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue
and expenses during the year. Actual results could differ from those
estimates.

7



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|2. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (c) |  | Capital assets:                                                                                      
| | --- |  | -----------------------------------------------------------------------------------------------------
|
| |     |  | Capital assets are recorded at cost and are depreciated over their
estimated useful lives as follows:

|                                |  |                   |  |                    
|------------------------------- |  | ----------------- |  | -------------------
|Asset                           |  | Basis             |  | Rate               
|                                |  |                   |  |                    
|Audiovisual equipment           |  | Straight line     |  | 2 - 5 years        
|Computer equipment and software |  | Declining balance |  | 30%  - 50%         
|Furniture and equipment         |  | Declining balance |  | 20%                
|Leasehold improvements          |  | Straight line     |  | Over term of leases
|Equipment under capital leases  |  | Straight line     |  | 3 - 5 years        



| | (d) |  | Revenue recognition:                                                                                                                                             
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company presents as net revenue its net commission and fee
income earned as compensation for its services. Further, the
balance sheet reflects the following:
|

| | (i)  |  | deferred revenue representing only fees billed and
collected in advance of such fees being earned; and
| | ---- |  | ------------------------------------------------------------------------------------------------------
|
| | (ii) |  | the reimbursable pass-through costs which are
included in unbilled accounts receivable.               
|

| |  |  | Net revenue represents the Companys compensation for its agency
and non-agency services and is recognized only when collection of
such net revenue is probable. Agency services are those that
require the Company to incur external media and production costs
on behalf of its clients and for which it is entitled to pass
through the costs for reimbursement from its clients. The
reimbursement of pass-through costs are not included in net
revenue. The Companys agency and non-agency projects are
short-term in nature.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fees earned for non-agency services are recognized either upon
the performance of the Companys services when the Company earns
a per-diem fee, or in the case of a fixed fee, when the Companys
services are substantially complete and accepted by the client.
Fees earned but not yet billed are included in accounts
receivable. Fees billed to clients in excess of fees recognized
as net revenue are classified as deferred revenue.                                                                                        

8



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|2. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| |     |  | When the Companys compensation for its agency services is based on
commissions, net revenue is comprised of: (i) commissions earned from
media expenditures, which are recognized at the time the advertising
appears or is broadcast, or in respect of on-line advertising, either
ratably over the period of time the advertising appears or based on the
actual impressions delivered at the contractual rate per impression,
depending upon the terms of the arrangement; and (ii) commissions earned
on expenditures for the production of advertisements, which are
recognized upon the completion of the Companys services and acceptance
by the client, being the time at which the Company has no further
substantial obligations with respect thereto.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | When the Companys compensation for its agency services is fee-based,
net revenue is comprised of non-refundable monthly agency fees, which
are recognized in the month earned.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |     |  | Pass-through costs related to production are accrued and recorded in
accounts receivable, as unbilled reimbursable costs, at the time the
third party suppliers render their services. Pass-through costs related
to media are accrued at the time the advertisement appears or is
broadcast.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | (e) |  | Goodwill:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | Goodwill acquired prior to July 1, 2001 is initially stated at cost
with amortization being provided on a straight-line basis over periods
ranging from 7 to 25 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | As further described in notes 2(i)(ii) and 20(k)(ii)), in accordance
with new accounting standards, goodwill acquired after July 1, 2001 is
not amortized but is tested at least annually for impairment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |     |  | Annually, the Company assesses the recoverability of the carrying value
of its goodwill and the related amortization period. As part of the
evaluation, the Company considers several factors, including the
operating results and trends, movement in major clients and key client
service personnel, changes in client relationships and general economic
conditions. Significant changes in these factors could result in a
permanent impairment of goodwill.                                                                                                                                                                                                                                                                                                  

9



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|2. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| |     |  | Goodwill is considered to be impaired if the future anticipated
undiscounted operating cash flows from the acquired businesses are less
than the carrying value of the goodwill. These cash flow projections
require management to make certain assumptions regarding future revenue
and expenses. When impairment is determined, the related loss is
charged to earnings and is measured by the excess of the carrying value
of the goodwill over its fair value based on estimated discounted
future operating cash flows. The impact of such write-downs on the
amortization period is simultaneously assessed.                                                                                                                
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (f) |  | Foreign currency translation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | The financial statements of the Companys foreign subsidiaries, all of
which are self-sustaining operations, are translated using the current
rate method, whereby the assets and liabilities of such foreign
operations are translated at the exchange rate in effect at the
balance sheet date. Revenue and expenses are translated at the average
exchange rate for the year. Translation gains or losses are deferred
and included as a separate component of shareholders equity.                                                                                                                                                                                                                                           
|
| |     |  | In respect of the Companys and its subsidiaries foreign currency
transactions, at the transaction date, each asset, liability, revenue
and expense is translated into Canadian dollars by the use of the
exchange rate in effect at that date. At the year-end date, monetary
assets and liabilities are translated into Canadian dollars by using
the exchange rate in effect at that date. The resulting foreign
exchange gains and losses are included in earnings in the current
year. However, unrealized gains or losses on long-term debt that is
designated as a hedge of investments in foreign subsidiaries are
deferred and recorded as a separate component of shareholders equity.                                
|
| | (g) |  | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | The Company accounts for income taxes using the asset and liability
method. Under this method, future income taxes are recognized at the
enacted or substantially enacted tax rate expected to be applicable at
the date of reversal for all significant temporary differences between
the tax and accounting bases of assets and liabilities and for certain
tax carryforward items. Future income tax assets are recognized only
to the extent that, in the opinion of management, it is more likely
than not that the future income tax assets will be realized. Future
income tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of the substantive enactment
of the change.

10



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|2. |  | Significant accounting policies (continued):
|-- |  | --------------------------------------------



| | (h) |  | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company has a stock option plan for key employees and officers.
All stock options issued under this plan have an exercise price equal
to or greater than the fair market value of the underlying common
shares on the date of the grant. The Company does not record
compensation expense on the grant or modification of options under the
Plan. Consideration paid by employees on the exercise of stock options
is recorded as share capital. The stock option plan is described in
note 12(d).
|
| | (i) |  | Changes in accounting policies:                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|

| | (i)  |  | The Company adopted the new provisions of The Canadian
Institute of Chartered Accountants (CICA) Handbook Section
3500, Earnings per Share. Basic earnings per share is computed
using the weighted average number of common shares that are
outstanding during the year. Diluted earnings per share is
computed using the weighted average number of common and
potential common shares outstanding during the year. Potential
common shares consist of the incremental common shares issuable
upon the exercise of stock options using the treasury stock
method.                                                                                   
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | Previously, the Company calculated fully diluted earnings per share
using the imputed earnings method. The change in accounting policy
has been applied retroactively and the diluted earnings per share
figures presented for the comparative periods have been restated.                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (ii) |  | The Company adopted the new provisions of the CICA
Handbook Section 1581, Business Combinations. All business
combinations are accounted for using the purchase method of
accounting. The value of shares issued in a business combination
are measured using the average share price for a reasonable period
before and after the date the terms of the acquisition are agreed
to and announced. Effective July 1, 2001, goodwill acquired in
business combinations completed after June 30, 2001 was not
amortized and is subject to impairment testing. Intangible assets
that meet specific criteria are recognized and reported apart from
goodwill.

11



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|3. |  | Acquisition of subsidiaries:
|-- |  | ----------------------------



| | (a) |  | Effective October 1, 2001, the Company acquired 100% of the
outstanding shares of Commodore Conference Planners Inc.
(Commodore), a conference and event marketing company. Under
the terms of the acquisition, the initial purchase price
consisted of $611,113 in cash consideration excluding
acquisition costs. Of this cash consideration, $50,000 is
included in accounts payable at September 30, 2002 and will be
paid upon the receipt of income taxes recoverable as provided in
the purchase agreement. Additional consideration, to a maximum
of $475,000 cash, may be paid over a two-year period if certain
performance milestones are achieved for the 12-month periods
ending September 30, 2002 and 2003. For the twelve months ended
September 30, 2002, an earn-out payment of $193,000 is owing and
is included in accounts payable. As additional milestones are
met, the amounts will be accounted for as additional goodwill.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The acquisition of Commodore has been accounted for using the
purchase method of accounting. The fair value of the net assets
acquired at October 1, 2001 and consideration accounted for to
date was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

|                                                                                      |  |   |          |  
|------------------------------------------------------------------------------------- |  | - | -------- | -
|Capital assets                                                                        |  | $ | 11,160   |  
|Non-compete agreement                                                                 |  |   | 72,590   |  
|Non-cash working capital                                                              |  |   | (517,544 | )
|                                                                                      |  |   |          |  
|Net liabilities                                                                       |  |   | (433,794 | )
|Consideration, less cash acquired of $919,200, October 1, 2001                        |  |   | (171,187 | )
|Additional cash consideration included in accounts payable,
earn-out for 2002         |  |   | 193,000  |  
|                                                                                      |  |   |          |  
|Excess of purchase price over fair value of
net assets acquired allocated to goodwill |  | $ | 455,607  |  
|                                                                                      |  |   |          |  



| |  |  | The amount assigned to the non-compete agreement is amortized over
the term of the agreement. As a result of the adoption of new
accounting standards for business combinations, the goodwill
arising in connection with this acquisition is not amortized
(note 2(i)(ii)).
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|3. |  | Acquisition of subsidiaries (continued):
|-- |  | ----------------------------------------



| | (b) |  | Effective January 1, 2001, the Company acquired 100% of the
outstanding shares of
International Design Group, a Toronto-based international retail
planning and design firm.
Under the terms of the acquisition, the initial purchase price, which
consisted of $1,090,000
in cash consideration and 61,728 common shares of the Company with a
fair value of
$284,332, was paid upon closing. Additional consideration may be paid
over a three-year
period if certain performance milestones are achieved for the 12-month
periods ending
December 31. The earn-out amounts earned will be satisfied by a maximum
of $2,000,000
in cash and a maximum of 154,321 common shares of the Company. No
amounts were
owing by the Company in 2002 under the earn-out agreements. The
acquisition has been
accounted for using the purchase method of accounting.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The fair value of the net assets acquired was $1,198,684, excluding
cash acquired of $214,179. The net assets acquired consisted of working
capital and capital assets. The resulting excess purchase price over
the fair value of the net assets acquired of $336,382 was allocated to
goodwill and is being amortized over 25 years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | (c) |  | Effective July 1, 2000, the Company acquired 100% of the
outstanding shares of Gilchrist
Brothers Limited (Gilchrist), a United Kingdom-based digital imaging
and design firm, in
exchange for cash consideration of $3,235,798 (£1,460,000)
and a $5,325,215
(£2,402,750) non-interest bearing promissory note, repayable in
semi-annual instalments
over the next two years to June 30, 2002. The present value of the
promissory note of
$5,067,763 (£2,261,486), together with the initial cash consideration,
represent the total
purchase price. At September 30, 2002, $295,615 (£118,749) (2001
- $2,689,781
(£1,156,200) is included in long-term debt (note 10). The acquisition
has been accounted
for using the purchase method of accounting and the resulting goodwill
is being amortized
over 20 years.                                    

13



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|3. |  | Acquisition of subsidiaries (continued):
|-- |  | ----------------------------------------



| |  |  | The fair value of the net assets acquired at July 1, 2000 and
consideration accounted for to date was as follows:
| |  |  | -----------------------------------------------------------------------------------------------------------------

|                                                                                      |  |   |            |  
|------------------------------------------------------------------------------------- |  | - | ---------- | -
|Non-cash working capital                                                              |  | $ | 1,046,094  |  
|Capital assets                                                                        |  |   | 2,001,319  |  
|Long-term debt                                                                        |  |   | (2,165,325 | )
|                                                                                      |  |   |            |  
|Net assets                                                                            |  |   | 882,088    |  
|Total consideration, including bank indebtedness assumed                              |  |   | 8,593,970  |  
|                                                                                      |  |   |            |  
|Excess of purchase price over fair value of net assets
acquired allocated to goodwill |  | $ | 7,711,882  |  
|                                                                                      |  |   |            |  



| | (d) |  | Effective June 1, 2000, the Company, acquired 100% of the
outstanding shares of Sage Information Consultants Inc. (Sage), a
digital professional service firm operating in the United States and
Canada, in exchange for cash consideration of $6,750,000 and the
issuance of 503,145 common shares of the Company with a fair value of
$4,000,000.                                                                                                                                                                                                                                                                                                                                                                                            
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In June 2001, the Company determined that additional consideration was
payable based on Sages operating results for the 12 months ended May
31, 2001 and agreed to amend the terms of the purchase agreement with
respect to the payment of the earn-out for this period. Under the
amended terms, the Company agreed to pay $1,392,154 in cash
consideration, rather than the issuance of cash and shares under the
original terms. The excess of the cash consideration payable over the
fair value of the cash and shares otherwise issuable amounted to
$362,485 and is required to be expensed under generally accepted
accounting principles. As a result, only $1,029,669 of the amount
payable has been recorded as additional goodwill.
|
| |     |  | In March 2002, a settlement of the Companys obligations under the
earn-out agreements was reached and a final payment of $225,000 in cash
and 150,000 common shares with a value of $213,000 was made by the
Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |     |  | The acquisition has been accounted for using the purchase method of
accounting and the resulting goodwill is being amortized over 10
years.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

14



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|3. |  | Acquisition of subsidiaries (continued):
|-- |  | ----------------------------------------



| |  |  | The fair value of the net assets acquired at June 1, 2000 and
consideration accounted for to date was as follows:
| |  |  | -----------------------------------------------------------------------------------------------------------------

|                                                                                      |                      |   |            |         | 
|------------------------------------------------------------------------------------- | -------------------- | - | ---------- | ------- | 
|Non-cash working capital                                                              |                      | $ | 104,663    |        
|Capital assets                                                                        |                      |   | 141,578    |        
|Future income taxes                                                                   |                      |   | 53,000     |        
|                                                                                      |                      |   |            |        
|Net assets                                                                            |                      |   | 299,241    |        
|Total consideration, including bank indebtedness assumed,
June 1, 2000                |                      |   | 12,270,724 |        
|Additional cash consideration in 2001                                                 |                      |   | 1,029,669  |        
|Settlement of final purchase price in 2002:                                           |                      |   |            |        
|                                                                                      | Cash payment         |   |            | 225,000 | 
|                                                                                      | Common shares issued |   |            | 213,000 | 
|                                                                                      |                      |   |            |        
|Total consideration, including bank indebtedness assumed,
September 30, 2002          |                      |   | 13,738,393 |        
|                                                                                      |                      |   |            |        
|Excess of purchase price over fair value of net assets
acquired allocated to goodwill |                      | $ | 13,439,152 |        
|                                                                                      |                      |   |            |        



| | (e) |  | Effective October 1, 1998, the Company acquired 100% of the
outstanding shares of Hampel Stefanides, Inc. (Hampel Stefanides),
a full-service advertising and commercial design agency operating in
the United States, in exchange for initial cash consideration of
$5,587,349 (U.S. $3,649,000) and the issuance of 581,395 common
shares with a fair value of $2,296,800 (U.S. $1,500,000). In
September 1999, the Company recorded additional consideration of
$4,134,002. The consideration was paid on November 4, 1999 by way of
a cash payment of $1,703,802 and the issuance of 450,040 common
shares of the Company with a fair value of $2,430,200. During fiscal
2000, additional cash consideration of $554,788 (U.S. $375,000) was
paid. Additional cash consideration of $375,875 (U.S. $250,000) is
included in accounts payable and accrued liabilities as at September
30, 2001 and has been included as part of total consideration.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In September 2000, the Company determined that additional consideration
was owing, in the form of cash and shares of the Company, based on
Hampel Stefanides operating results for the year ended September 30,
2000 and such amount has been recorded as at September 30, 2000. The
aggregate consideration of $5,348,600 was paid on November 1, 2000 by
way of a cash payment of $1,724,776, which is included in accounts
payable and accrued liabilities, and the issuance of 444,641 common
shares of the Company with a fair value of $3,623,824, which were
included in share capital as at September 30, 2000.                                                                                                                                                                                                                                                                                                                                 

15



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|3. |  | Acquisition of subsidiaries (continued):
|-- |  | ----------------------------------------



| |  |  | In December 2001, the Company determined that additional consideration
was owing in the form of cash and shares, based on Hampel Stefanides
operating results for the year ended September 30, 2001 and such amount
has been recorded as at September 30, 2001. The aggregate consideration
of $2,909,150 consists of cash consideration of $1,900,929, which is
included in accounts payable and accrued liabilities, and the issuance
of 466,769 common shares of the Company with a fair value of
$1,008,221, which were included in share capital as at September 30,
2001 as shares to be issued (note 12(a)). Subsequent to September 30,
2001, 34,626 common shares related to the 2001 earn-out were not
issued. Correspondingly, the share capital of the Company has been
reduced by $34,626.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company has no remaining obligations under the earn-out agreement
in connection with Hampel Stefanides.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  |  | The acquisition has been accounted for using the purchase method of
accounting and the resulting goodwill is being amortized over 25 years.
The fair value of the net liabilities acquired on October 1, 1998 and
consideration accounted for to date was as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

|                                                                                |                                             |   |            |           |  
|------------------------------------------------------------------------------- | ------------------------------------------- | - | ---------- | --------- | -
|Non-cash working capital deficiency                                             |                                             | $ | (6,171,687 | )        
|Capital assets                                                                  |                                             |   | 1,676,664  |          
|Restricted cash                                                                 |                                             |   | 765,600    |          
|                                                                                |                                             |   |            |          
|Net liabilities                                                                 |                                             |   | (3,729,423 | )        
|Consideration, less cash acquired, September 30, 1999                           |                                             |   | 7,475,961  |          
|Additional consideration, September 30, 2000:                                   |                                             |   |            |          
|                                                                                | Cash                                        |   |            | 1,724,776 |  
|                                                                                | Issuance of 444,641 common shares           |   |            | 3,623,824 |  
|Additional consideration, September 30, 2001 :                                  |                                             |   |            |          
|                                                                                | Cash                                        |   |            | 1,900,929 |  
|                                                                                | Issuance of 466,769 common shares           |   |            | 1,008,221 |  
|Additional consideration, September 30, 2002:                                   |                                             |   |            |          
|                                                                                | Shares not issued relating to 2001 earn-out |   |            | (34,626   | )
|                                                                                |                                             |   |            |          
|Total consideration, less cash acquired, September 30, 2002                     |                                             |   | 15,699,085 |          
|                                                                                |                                             |   |            |          
|Purchase price and fair value of net liabilities acquired
allocated to goodwill |                                             | $ | 19,428,508 |          
|                                                                                |                                             |   |            |          

16



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|4. |  | Restricted cash:
|-- |  | ----------------



| |  |  | Restricted cash includes a trust account established for Communique
Incentives Inc. for customer deposits of $1,831,085 (2001  $158,500).
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------



|5. |  | Accounts receivable:
|-- |  | --------------------

|                            |  |      |            |      |  |   |            | 
|--------------------------- |  | ---- | ---------- | ---- |  | - | ---------- | 
|                            |  | 2002 |            | 2001
|                            |  |      |            |     
|Trade receivables           |  | $    | 12,433,301 |      |  | $ | 20,501,517 | 
|Accrued revenue             |  |      | 6,719,441  |      |  |   | 4,100,289  | 
|Unbilled pass-through costs |  |      | 1,375,306  |      |  |   | 2,338,331  | 
|                            |  |      |            |      |  |   |            | 
|                            |  | $    | 20,528,048 |      |  | $ | 26,940,137 | 
|                            |  |      |            |      |  |   |            | 



|6. |  | Related party transactions:
|-- |  | ---------------------------



| |  |  | Subsequent to September 30, 2002 (note 19(a)), the Company sold the
operations of Devlin Multimedia Inc. (Devlin) and Sage to certain
executives of the respective subsidiaries.                                            
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Included in accounts receivable as at September 30, 2001 is a net balance
of $321,893 owing from the former owner of Sage in respect of indemnified
receivables, net of the earn-out payment owing by the Company (note 3(d)).
|
| |  |  | Related party transactions are recorded at the exchange amount, being the
amount agreed to by the related parties.                                                                                                            



|7. |  | Capital assets:
|-- |  | ---------------

|                                |  |      |            |              |  |             |            |          |  |   |           | 
|------------------------------- |  | ---- | ---------- | ------------ |  | ----------- | ---------- | -------- |  | - | --------- | 
|                                |  |      |            |              |  | Accumulated |            | Net book
|2002                            |  | Cost |            | depreciation |  | value      
|                                |  |      |            |              |  |            
|Audiovisual equipment           |  | $    | 780,918    |              |  | $           | 762,386    |          |  | $ | 18,532    | 
|Computer equipment and software |  |      | 13,115,157 |              |  |             | 8,665,300  |          |  |   | 4,449,857 | 
|Furniture and equipment         |  |      | 1,427,777  |              |  |             | 1,151,402  |          |  |   | 276,375   | 
|Leasehold improvements          |  |      | 8,233,909  |              |  |             | 6,316,255  |          |  |   | 1,917,654 | 
|Equipment under capital leases  |  |      | 1,940,971  |              |  |             | 766,661    |          |  |   | 1,174,310 | 
|                                |  |      |            |              |  |             |            |          |  |   |           | 
|                                |  | $    | 25,498,732 |              |  | $           | 17,662,004 |          |  | $ | 7,836,728 | 
|                                |  |      |            |              |  |             |            |          |  |   |           | 

17



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|7. |  | Capital assets (continued):
|-- |  | ---------------------------

|                                |  |      |            |              |  |                |            |  |  |   |            | 
|------------------------------- |  | ---- | ---------- | ------------ |  | -------------- | ---------- |  |  | - | ---------- | 
|                                |  |      |            |              |  | Accumulated    |            |  |  |  
|2001                            |  | Cost |            | depreciation |  | Net book value
|                                |  |      |            |              |  |               
|Audiovisual equipment           |  | $    | 780,919    |              |  | $              | 750,126    |  |  | $ | 30,793     | 
|Computer equipment and software |  |      | 10,704,399 |              |  |                | 7,575,183  |  |  |   | 3,129,216  | 
|Furniture and equipment         |  |      | 3,967,088  |              |  |                | 2,714,054  |  |  |   | 1,253,034  | 
|Leasehold improvements          |  |      | 9,700,446  |              |  |                | 3,209,833  |  |  |   | 6,490,613  | 
|Equipment under capital leases  |  |      | 1,393,849  |              |  |                | 763,769    |  |  |   | 630,080    | 
|                                |  |      |            |              |  |                |            |  |  |   |            | 
|                                |  | $    | 26,546,701 |              |  | $              | 15,012,965 |  |  | $ | 11,533,736 | 
|                                |  |      |            |              |  |                |            |  |  |   |            | 



|8. |  | Goodwill:
|-- |  | ---------

|         |  |      |            |              |  |             |            |          |  |   |            | 
|-------- |  | ---- | ---------- | ------------ |  | ----------- | ---------- | -------- |  | - | ---------- | 
|         |  |      |            |              |  | Accumulated |            | Net book
|2002     |  | Cost |            | amortization |  | value      
|         |  |      |            |              |  |            
|Goodwill |  | $    | 57,417,846 |              |  | $           | 46,103,563 |          |  | $ | 11,314,283 | 
|         |  |      |            |              |  |             |            |          |  |   |            | 

|         |  |      |            |              |  |             |           |          |  |   |            | 
|-------- |  | ---- | ---------- | ------------ |  | ----------- | --------- | -------- |  | - | ---------- | 
|         |  |      |            |              |  | Accumulated |           | Net book
|2001     |  | Cost |            | amortization |  | value      
|         |  |      |            |              |  |            
|Goodwill |  | $    | 55,644,858 |              |  | $           | 5,969,743 |          |  | $ | 49,675,115 | 
|         |  |      |            |              |  |             |           |          |  |   |            | 



| |  |  | The Company performed an assessment of the carrying values of goodwill
recorded in connection with its various businesses. The assessment was
performed because a number of factors indicated that an impairment had
arisen commencing in the period ending March 31, 2002. The main indicators
of impairment were significant negative industry and economic trends
impacting both current operating results and expected future growth rates
and loss of significant clients. Based on these factors, the Company
concluded that significant permanent impairment existed with respect to
the Companys goodwill and other assets, which primarily related to the
goodwill associated with the businesses of Sage, Promanad and Hampel
Stefanides.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|8. |  | Goodwill (continued):
|-- |  | ---------------------



| |  |  | In quantifying the impairment charge, the Company compared the expected
future cash flows of each acquisition, to the respective carrying value of
the assets of the business, including assigned goodwill. The cash flow
periods used ranged between 5 and 25 years, consistent with the remaining
goodwill amortization period.                                                             
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As a result of the review, the Company determined that the carrying values
of certain acquired businesses were not fully recoverable. Accordingly,
the Company recorded two write-downs: $28,426,266 in the second quarter of
2002 and $9,508,445 in the fourth quarter of 2002 based on the amount by
which the goodwill exceeded the expected future cash flows of the
respective operation.



|9. |  | Other assets:
|-- |  | -------------

|                                                                              |  |      |         |      |  |   |         | 
|----------------------------------------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | 
|                                                                              |  | 2002 |         | 2001
|                                                                              |  |      |         |     
|Deferred financing charges                                                    |  | $    |        |      |  | $ | 634,936 | 
|Non-compete agreement, net of accumulated
amortization of $24,197 (note 3(a)) |  |      | 48,394  |      |  |   |        | 
|Other                                                                         |  |      | 68,255  |      |  |   | 46,451  | 
|                                                                              |  |      |         |      |  |   |         | 
|                                                                              |  | $    | 116,649 |      |  | $ | 681,387 | 
|                                                                              |  |      |         |      |  |   |         | 

19



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|10. |  | Bank credit facility and other debt:
|--- |  | ------------------------------------

|                                                                                                                                                                                                       |  |      |            |      |  |   |            | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ---------- | ---- |  | - | ---------- | 
|                                                                                                                                                                                                       |  | 2002 |            | 2001
|                                                                                                                                                                                                       |  |      |            |     
|Bank credit facility (a)                                                                                                                                                                               |  | $    | 9,838,192  |      |  | $ | 7,841,329  | 
|Promissory note, 8% per annum, repayable in five
monthly instalments commencing June 30, 2002 (b)                                                                                                      |  |      | 295,615    |      |  |   | 2,689,781  | 
|Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in monthly instalments
of $7,665 principal and interest                                                                          |  |      | 553,992    |      |  |   | 625,382    | 
|Loan payable to landlord, 0.925% per annum,
due December 1, 2002, repayable in monthly
instalments of $6,728 principal and interest                                                                    |  |      | 20,185     |      |  |   | 100,925    | 
|Loan payable to landlord, 10.0% per annum, due
March 1, 2010, repayable in monthly instalments of
$3,956 principal and interest                                                                        |  |      | 251,444    |      |  |   | 357,016    | 
|Loan payable to landlord, 10.0% per annum, due
April 1, 2005, repayable in monthly instalments of
$742 principal and interest                                                                          |  |      | 37,001     |      |  |   |           | 
|Loan payable to landlord, 8.0% per annum, due
April 1, 2010, repayable in monthly instalments of
$561 principal and interest                                                                           |  |      | 38,337     |      |  |   |           | 
|Capital lease, 12.3% over the lease period, repayable
in quarterly instalments of $63,056 (£25,330)
(2001 - $60,129 (£25,330)) principal and interest,
due January 2003                                |  |      | 64,123     |      |  |   | 284,507    | 
|Capital leases, 10.3% to 13. 9% over the lease period,
repayable in quarterly instalments of $15,997 (£6,426)
(2001 - $14,950 (£19,750)) principal and interest,
due between March 2002 and April 2002 |  |      |           |      |  |   | 29,225     | 
|Capital leases, 10.2% to 14% over the lease period,
repayable in monthly instalments of $33,136 principal
and interest, due between January 2005 and
February 2005                                     |  |      | 820,424    |      |  |   |           | 
|Convertible debentures (note 11)                                                                                                                                                                       |  |      | 2,083,498  |      |  |   |           | 
|                                                                                                                                                                                                       |  |      |            |      |  |   |            | 
|                                                                                                                                                                                                       |  |      | 14,002,811 |      |  |   | 11,928,165 | 
|Less current portion                                                                                                                                                                                   |  |      | 10,589,114 |      |  |   | 10,965,089 | 
|                                                                                                                                                                                                       |  |      |            |      |  |   |            | 
|                                                                                                                                                                                                       |  | $    | 3,413,697  |      |  | $ | 963,076    | 
|                                                                                                                                                                                                       |  |      |            |      |  |   |            | 

20



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|10. |  | Bank credit facility and other debt (continued):
|--- |  | ------------------------------------------------



| | (a) |  | During the year, the Company was in violation of certain
provisions under its bank credit
facility. As at September 30, 2002, the Company has entered into a
Forebearance
Agreement with the lenders under its bank credit facility, under which
the Company is
required to maintain certain financial tests. Under the Forebearance
Agreement, unless
there are further violations or defaults by the Company, the lenders
have agreed not to
enforce their rights or remedies under security agreements. The lenders
still have the right
to demand repayment of the borrowings at any time. The terms of the
Forebearance
Agreement require the Company to make a principal repayment of
$2,000,000 in
December 2002 and $1,000,000 in each of January, February and March
2003, with the
balance due on April 30, 2003.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | As permitted under the Forebearance Agreement, and subsequent
amendments, the Company has letters of credit available to be issued
in the amount of £250,000 and U.S. $500,000. The letters of credit
expire on April 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |     |  | Interest rates on the facility are variable based on certain leverage
ratios and, at September 30, 2002, the effective interest rate was
8.50% (2001  4.25%). The facility is secured by a general security
agreement guarantee against the Company and all of its subsidiaries.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |     |  | Of the outstanding borrowings, $3,178,691 (U.S. $2,002,704) is
denominated in U.S. dollars.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (b) |  | During the third quarter, the Company negotiated new repayment
terms for a promissory
note originally due on June 30, 2002 in respect of the Gilchrist
acquisition (note 3(c)) (the
Gilchrist note). Under the revised terms, the Gilchrist note is to
be repaid in five monthly
instalments commencing July 1, 2002 with interest on the principal
balance charged at 8%
per annum.                                                                                                                                                                                                                                                                                                                                                                                                                                     

21



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|10. |  | Bank credit facility and other debt (continued):
|--- |  | ------------------------------------------------



| |  | Principal repayments on long-term debt, excluding convertible debentures
(note 11), are as follows:
| |  | ---------------------------------------------------------------------------------------------------

|           |  |   |           
|---------- |  | - | ----------
|2003       |  | $ | 10,589,114
|2004       |  |   | 478,660   
|2005       |  |   | 265,071   
|2006       |  |   | 118,900   
|2007       |  |   | 189,599   
|Thereafter |  |   | 277,969   
|           |  |   |           
|           |  | $ | 11,919,313
|           |  |   |           



|11. |  | Convertible debentures:
|--- |  | -----------------------



| |  | On April 29, 2002, the Company issued $1,800,000 in 10% convertible
debentures which mature on April 29, 2007. The debentures are convertible
until the maturity date into 2,500,000 units of the Company at a
conversion price of $0.72 per unit. Each unit consists of one common share
in the capital of the Company and one purchase warrant of the Company.
Each purchase warrant entitles the holder to purchase one common share
(2.5 million common shares in aggregate) within the earlier of (a) 12
months of the date of conversion of the debenture, and (b) the maturity
date at a price of $0.90 per common share. Holders also have the right to
require the Company to purchase all or a portion of their debentures on or
after April 29, 2004 at the issue price plus accrued and unpaid interest.
In addition, upon a change in control occurring on or before April 29,
2004, the Company will be required to offer to purchase the debentures at
a purchase price equal to 101% of the issue price plus accrued and unpaid
interest to the repurchase date. The debentures are secured by a charge
over the Companys assets and undertakings, which charge will be subject
only to security interests in favour of the Companys bankers, equipment
leases and non-consensual liens. The net proceeds from the sale of the
debentures were used for general corporate purposes.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The debentures are bifurcated into a debt component, representing a yield
to maturity of 25.4% per annum over the five-year life, and an equity
component with proceeds allocated as $1,017,770 to long-term debt and
$782,230 to shareholders equity. That portion of offering expenses
related to the debt component, being $60,587 has been recorded as deferred
financing fees which are classified in prepaid expenses, and the remaining
$46,565 applied to reduce the equity component.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

22



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|11. |  | Convertible debentures (continued):
|--- |  | -----------------------------------



| |  |  | The principal amount of the debentures will increase as interest is
compounded using an effective interest rate method over two years, being
the earliest date at which they are redeemable at the option of the
holder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On September 12, 2002, the Company issued $2,000,000 in 10% convertible
debentures which mature on September 12, 2007. The debentures are
convertible until the maturity date into 5,882,353 units of the Company at
a conversion price of $0.34 per unit. Each unit consists of one common
share in the capital of the Company and one purchase warrant of the
Company. Each purchase warrant entitles the holder to purchase one common
share (5.9 million common shares in aggregate) within the earlier of (a)
twelve months of the date of conversion of the debenture, and (b) the
maturity date at a price of $0.34 per common share. Holders also have the
right to require the Company to purchase all or a portion of their
debentures on or after September 12, 2004 at the issue price plus accrued
and unpaid interest. In addition, upon a change in control occurring on or
before September 12, 2004, the Company will be required to offer to
purchase the debentures at a purchase price equal to 101% of the issue
price plus accrued and unpaid interest to the repurchase date. The
debentures are secured by a charge over the Companys assets and
undertakings, which charge will be subject only to security interests in
favour of the Companys bankers, equipment leases and non-consensual liens.
The net proceeds from the sale of the debentures were used for general
corporate purposes.
|
| |  |  | The debentures are bifurcated into a debt component, representing a yield
to maturity of 31.5% per annum over the five-year life, and an equity
component with proceeds allocated as $931,858 to long-term debt and
$1,068,142 to shareholders equity. That portion of the offering expenses
related to the debt component, being $72,365, has been recorded as deferred
financing fees which are classified in prepaid expenses, and the remaining
$82,948 applied to reduce the equity component.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | The principal amount of the debentures will increase as interest is
compounded using an effective interest rate method over two years, being
the earliest date at which they are redeemable at the option of the
holder.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | As at September 30, 2002, the aggregate debt component carrying values of
all of the Companys convertible debentures is $2,083,498. Principal
repayments, based on scheduled maturity dates, is $3,800,000 in 2007.
However, this date may be accelerated to 2004, at the option of the
holders of the debentures.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

23



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|12. |  | Share capital:
|--- |  | --------------



| | (a) |  | Authorized:                                                                                  
| | --- |  | ---------------------------------------------------------------------------------------------
|
| |     |  | 50,000,000
common shares without par value             (2001 - 50,000,000; 2000 - 50,000,000)
|
| |     |  | Issued:                                                                                      

|                                                                       |                                                           |  |            |          |        |   |            |          |        |  |            |          |        |   |            |            |   |  |            |           |  |   |            |            | 
|---------------------------------------------------------------------- | --------------------------------------------------------- |  | ---------- | -------- | ------ | - | ---------- | -------- | ------ |  | ---------- | -------- | ------ | - | ---------- | ---------- | - |  | ---------- | --------- |  | - | ---------- | ---------- | 
|                                                                       |                                                           |  | 2002       |          | 2001   |   | 2000      
|                                                                       |                                                           |  |            |          |        |   |           
|                                                                       |                                                           |  | Number     |          |        |   |            |          | Number |  |            |          |        |   | Number     |            |   |  |           
|                                                                       |                                                           |  | of shares  |          | Amount |   | of shares  |          | Amount |  | of shares  |          | Amount
|                                                                       |                                                           |  |            |          |        |   |            |          |        |  |            |          |       
|Balance, beginning of year                                             |                                                           |  | 21,192,719 |          |        | $ | 54,883,305 |          |        |  | 21,098,222 |          |        | $ | 54,597,762 |            |   |  | 18,349,005 |           |  | $ | 35,613,907 |           
|Common shares issued
for cash pursuant to:                             |                                                           |  |            |          |        |   |            |          |        |  |            |          |        |   |            |            |   |  |            |           |  |   |            |           
|                                                                       | Public offering                                           |  |            |         |        |   |            |         |        |  |            |         |        |   |            |           |   |  |            | 1,533,571 |  |   |            | 10,128,823 | 
|                                                                       | Stock options
exercised                                   |  |            |         |        |   |            |         |        |  |            | 101,000  |        |   |            | 383,670    |   |  |            | 214,000   |  |   |            | 811,100    | 
|                                                                       | Acquisitions (note 3)                                     |  |            | 150,000  |        |   |            | 213,000  |        |  |            | 61,728   |        |   |            | 284,332    |   |  |            | 557,005   |  |   |            | 4,420,108  | 
|                                                                       | Repurchase of shares
pursuant to share
issuer bid         |  |            | (299,400 | )      |   |            | (774,789 | )      |  |            | (535,000 | )      |   |            | (1,390,680 | ) |  |            |          |  |   |            |           | 
|                                                                       | Shares issued to
settle liability
with landlord
(note 15) |  |            | 250,000  |        |   |            | 52,500   |        |  |            |         |        |   |            |           |   |  |            |          |  |   |            |           | 
|                                                                       |                                                           |  |            |          |        |   |            |          |        |  |            |          |        |   |            |            |   |  |            |           |  |   |            |           
|                                                                       |                                                           |  | 21,293,319 |          |        |   | 54,374,016 |          |        |  | 20,725,950 |          |        |   | 53,875,084 |            |   |  | 20,653,581 |           |  |   | 50,973,938 |           
|Shares to be issued in
respect of contingent
consideration (note 3(e)) |                                                           |  | (34,626    | )        |        |   | (34,626    | )        |        |  | 466,769    |          |        |   | 1,008,221  |            |   |  | 444,641    |           |  |   | 3,623,824  |           
|                                                                       |                                                           |  |            |          |        |   |            |          |        |  |            |          |        |   |            |            |   |  |            |           |  |   |            |           
|Balance, end of year                                                   |                                                           |  | 21,258,693 |          |        | $ | 54,339,390 |          |        |  | 21,192,719 |          |        | $ | 54,883,305 |            |   |  | 21,098,222 |           |  | $ | 54,597,762 |           
|                                                                       |                                                           |  |            |          |        |   |            |          |        |  |            |          |        |   |            |            |   |  |            |           |  |   |            |           



| | (b) |  | Public offering:                                                                                                                                                                                                                                                                                                              
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | On June 5, 2000, the Company issued 1,533,571 common shares through a
public share offering for gross proceeds of $7.00 per share and
aggregate proceeds of $10,734,997. Net proceeds recorded as share
capital were $10,128,823 after deducting issue costs of $1,195,965 and
recording the related tax recovery of $589,791.

24



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|12. |  | Share capital (continued):
|--- |  | --------------------------



| | (c) |  | Repurchase of shares:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | During 2002, pursuant to a normal course issuer bid, the Company
repurchased and cancelled 299,400 common shares at an average price of
$2.10 per common share for total cash consideration of $628,083. As a
result of these purchases, $146,706 was recorded in retained earnings
as a gain on redemption.                                                                                                                                                                                                                           
|
| |     |  | During 2001, pursuant to a normal course issuer bid, the Company
repurchased and cancelled 535,000 common shares at an average price of
$2.42 per common share for total consideration of $1,295,475. As a
result of these repurchases, $95,205 was recorded as a gain on
redemption of shares in retained earnings. Under the terms of the
normal course issuer bid, the Company may repurchase and cancel up to
10% of the public float to July 26, 2002.                                                                            
|
| | (d) |  | Stock option plan:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |     |  | The Company has reserved 4,000,000 common shares under its stock option
plan. Under the plan, the options are exercisable for one common share
and the exercise price of the option must equal the market price of the
underlying share at the grant date. Options granted after November 1997
have vesting periods ranging from date of grant and up to five years.
Options granted prior to November 1997 vested upon grant. Once vested,
options are exercisable at any time until expiry. Expiry dates range
between 2002 and 2007.
|
| |     |  | In 2002, the Company obtained approval to re-price options. All
employees, excluding insiders and U.S. employees, were given the
opportunity to cancel their existing stock options with an exercise
price greater than $6 per share and replace them with new stock
options. Options were cancelled on January 31, 2002 and new options to
acquire 50% of the number of options cancelled were granted on August
2, 2002 at an exercise price of $3.05.                                                                               

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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|12. |  | Share capital (continued):
|--- |  | --------------------------



| |  |  | Details of the options are as follows:
| |  |  | --------------------------------------

|                                        |  |            |            |           |  |          |      | 
|--------------------------------------- |  | ---------- | ---------- | --------- |  | -------- | ---- | 
|                                        |  |            |            |           |  | Weighted
|                                        |  |            |            |           |  | average 
|                                        |  |            |            |           |  | exercise
|                                        |  | Number     |            | price per
|                                        |  | of options |            | share    
|                                        |  |            |            |          
|Options outstanding, September 30, 1999 |  |            | 2,076,500  |           |  | $        | 4.30 | 
|Options granted                         |  |            | 774,000    |           |  |          | 7.43 | 
|Options exercised                       |  |            | (214,000   | )         |  |          | 3.79 | 
|Options cancelled                       |  |            | (296,000   | )         |  |          | 4.72 | 
|                                        |  |            |            |           |  |          |      | 
|Options outstanding, September 30, 2000 |  |            | 2,340,500  |           |  |          | 5.33 | 
|Options granted                         |  |            | 780,000    |           |  |          | 5.30 | 
|Options exercised                       |  |            | (101,000   | )         |  |          | 3.80 | 
|Options cancelled                       |  |            | (340,000   | )         |  |          | 5.87 | 
|                                        |  |            |            |           |  |          |      | 
|Options outstanding, September 30, 2001 |  |            | 2,679,500  |           |  |          | 5.31 | 
|Options granted                         |  |            | 1,719,000  |           |  |          | 1.15 | 
|Options cancelled                       |  |            | (1,199,500 | )         |  |          | 5.37 | 
|                                        |  |            |            |           |  |          |      | 
|Options outstanding, September 30, 2002 |  |            | 3,199,000  |           |  |          | 3.06 | 
|                                        |  |            |            |           |  |          |      | 
|Options exercisable, September 30, 2002 |  |            | 2,322,084  |           |  | $        | 3.35 | 
|                                        |  |            |            |           |  |          |      | 
|Options exercisable, September 30, 2001 |  |            | 1,491,510  |           |  | $        | 5.07 | 
|                                        |  |            |            |           |  |          |      | 



| |  |  | The range of exercise prices for options outstanding and
options exercisable at September 30, 2002 are as follows:
| |  |  | ------------------------------------------------------------------------------------------------------------------

|               |  |                     |           |                     |  |                  |      |          |  |             |  |  |           |          |  |          |      |  |  | 
|-------------- |  | ------------------- | --------- | ------------------- |  | ---------------- | ---- | -------- |  | ----------- |  |  | --------- | -------- |  | -------- | ---- |  |  | 
|               |  | Options outstanding |           | Options exercisable
|               |  |                     |           |                    
|               |  |                     |           |                     |  | Weighted         |      |          |  |             |  |  |           |          |  | Weighted
|               |  |                     |           |                     |  | average          |      | Weighted |  |             |  |  |           | average 
|Range of       |  |                     |           |                     |  | exercise         |      | average  |  |             |  |  |           | exercise
|exercise price |  | Number              |           | price               |  | contractual life |      | Number   |  | price      
|               |  |                     |           |                     |  |                  |      |          |  |            
|$0.61 - $3.05  |  |                     | 1,799,000 |                     |  | $                | 1.32 |          |  | 4.47  years |  |  | 1,055,000 |          |  | $        | 1.03 | 
|$3.62 - $4.70  |  |                     | 755,000   |                     |  |                  | 3.96 |          |  | 0.90  years |  |  | 668,750   |          |  |          | 3.95 | 
|$6.20 - $8.15  |  |                     | 645,000   |                     |  |                  | 6.84 |          |  | 0.32  years |  |  | 598,334   |          |  |          | 6.78 | 

26



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|12. |  | Share capital (continued):
|--- |  | --------------------------



| | (e) |  | Earnings (loss) and cash flows from operations per share:                                     
| | --- |  | ----------------------------------------------------------------------------------------------
|
| |     |  | The following table sets forth the computation of basic and diluted
earnings (loss) per share:

|                                                      |                                                                                          |                                      |            |             |   |      |            |            |   |  |            |            |         | 
|----------------------------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------ | ---------- | ----------- | - | ---- | ---------- | ---------- | - |  | ---------- | ---------- | ------- | 
|                                                      |                                                                                          |                                      |            | 2002        |   | 2001 |            | 2000      
|                                                      |                                                                                          |                                      |            |             |   |      |            |           
|Numerator:                                            |                                                                                          |                                      |            |             |   |      |            |            |   |  |            |           
|                                                      | Net earnings (loss)                                                                      |                                      | $          | (53,379,435 | ) |      | $          | (2,895,372 | ) |  | $          | 2,910,427  |        
|                                                      |                                                                                          |                                      |            |             |   |      |            |            |   |  |            |            |        
|Denominator:                                          |                                                                                          |                                      |            |             |   |      |            |            |   |  |            |           
|                                                      | Denominator for basic
net earnings (loss)
per share -weighted
average shares
outstanding |                                      |            | 20,998,397  |   |      |            | 21,160,616 |   |  |            | 19,156,626 |        
|                                                      | Effect of dilutive
potential common
shares:                                              |                                      |            |             |   |      |            |            |   |  |            |            |        
|                                                      |                                                                                          | Shares issuable
pursuant
to warrants |            |             |  |      |            |            |  |  |            |            | 75      | 
|                                                      |                                                                                          | Shares issuable
under stock
options  |            |             |  |      |            |            |  |  |            |            | 516,263 | 
|                                                      |                                                                                          |                                      |            |             |   |      |            |            |   |  |            |            |        
|Denominator for diluted net
earnings (loss) per share |                                                                                          |                                      | 20,998,397 |             |   |      | 21,160,616 |            |   |  | 19,672,964 |           
|                                                      |                                                                                          |                                      |            |             |   |      |            |            |   |  |            |            |        

27



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|12. |  | Share capital (continued):
|--- |  | --------------------------



| |  |  | As the Company experienced a loss for the years ended September 30,
2002 and 2001, all potential common shares outstanding from dilutive
securities are considered anti-dilutive and are excluded from the
calculation of loss per share. Details of potential dilutive securities
are as follows:
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                            |                                                            |  |      |           |      |  |      |           |  |  |  |           | 
|------------------------------------------- | ---------------------------------------------------------- |  | ---- | --------- | ---- |  | ---- | --------- |  |  |  | --------- | 
|                                            |                                                            |  | 2002 |           | 2001 |  | 2000
|                                            |                                                            |  |      |           |      |  |     
|Effect of dilutive potential
common shares: |                                                            |  |      |           |      |  |      |           |  |  |  |          
|                                            | Shares
issuable pursuant to
warrants                       |  |      | 7,882,353 |      |  |      |          |  |  |  | 75        | 
|                                            | Shares issuable under stock
options                        |  |      | 3,199,000 |      |  |      | 2,679,500 |  |  |  | 2,340,500 | 
|                                            | Shares to be issued in respect
of contingent consideration |  |      |          |      |  |      | 1,772,241 |  |  |  | 2,172,246 | 
|                                            | Shares issuable upon
conversion of convertible
debentures  |  |      | 8,382,353 |      |  |      |          |  |  |  |          | 



| |  |  | Basic and diluted cash flows from operations per share have been
calculated using the cash flows from operating activities, excluding
net changes in non-cash working capital balances.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|13. |  | Income taxes:                                                                                   
|--- |  | ------------------------------------------------------------------------------------------------
|   
|    |  | Income tax expense (recovery) for the years ended September 30, 2002, 2001
and 2000 consists of:

|        |  |      |            |      |  |      |           |   |  |   |           |  
|------- |  | ---- | ---------- | ---- |  | ---- | --------- | - |  | - | --------- | -
|        |  | 2002 |            | 2001 |  | 2000
|        |  |      |            |      |  |     
|Current |  | $    | (3,073,468 | )    |  | $    | 1,927,172 |   |  | $ | 3,537,698 |  
|Future  |  |      | (1,780,072 | )    |  |      | (567,441  | ) |  |   | (285,344  | )
|        |  |      |            |      |  |      |           |   |  |   |           |  
|        |  | $    | (4,853,540 | )    |  | $    | 1,359,731 |   |  | $ | 3,252,354 |  
|        |  |      |            |      |  |      |           |   |  |   |           |  

28



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|13. |  | Income taxes (continued):                                                                                                                                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The income tax expense (recovery) attributable to income (loss) from
continuing operations differs from the amounts computed by applying the
Canadian statutory rates of 39.5% (2001 - 42.5%; 2000 - 44.1%) pretax
income (loss) as a result of the following.

|                                                    |                                                                                          |   |            |           |      |  |       |      |    |   |           |          |   |  |      |       |    |   |           |          |   |  |      |      |   
|--------------------------------------------------- | ---------------------------------------------------------------------------------------- | - | ---------- | --------- | ---- |  | ----- | ---- | -- | - | --------- | -------- | - |  | ---- | ----- | -- | - | --------- | -------- | - |  | ---- | ---- | --
|                                                    |                                                                                          |   | 2002       |           | 2001 |  | 2000 
|                                                    |                                                                                          |   |            |           |      |  |      
|Income tax expense (recovery)
at statutory rates    |                                                                                          | $ | (7,153,748 | )         |      |  | (39.5 | )%   |    | $ | 627,270   |          |   |  | 42.5 | %     |    | $ | 3,420,638 |          |   |  | 44.1 | %   
|Increase (decrease)
in income taxes
resulting from: |                                                                                          |   |            |           |      |  |       |      |    |   |           |          |   |  |      |       |    |   |           |          |   |  |      |     
|                                                    | Adjustment to
future tax
assets for
substantively
enacted
changes in tax
laws and rates  |   |            | 654,691   |      |  |       | 3.6  | %  |   |           | 100,000  |   |  |      | 6.8   | %  |   |           |         |   |  |      |     |   
|                                                    | Expenses deducted
in the
accounts which
have no
corresponding
deduction
for income taxes |   |            | 276,996   |      |  |       | 1.5  | %  |   |           | 665,323  |   |  |      | 45.1  | %  |   |           | 168,476  |   |  |      | 2.1  | % 
|                                                    | Impact of different
tax rate on
earnings of
foreign subsidiaries                         |   |            | (483,406  | )    |  |       | (2.5 | )% |   |           | (185,524 | ) |  |      | (12.6 | )% |   |           | (111,815 | ) |  |      | (1.4 | )%
|                                                    | Change in valuation
allowance                                                            |   |            | 2,407,144 |      |  |       | 13.3 | %  |   |           |         |   |  |      |      |    |   |           |         |   |  |      |     |   
|                                                    | Other                                                                                    |   |            | (555,217  | )    |  |       | (3.1 | )% |   |           | 152,662  |   |  |      | 10.4  | %  |   |           | (224,945 | ) |  |      | (2.9 | )%
|                                                    |                                                                                          |   |            |           |      |  |       |      |    |   |           |          |   |  |      |       |    |   |           |          |   |  |      |     
|                                                    |                                                                                          | $ | (4,853,540 | )         |      |  | (26.7 | )%   |    | $ | 1,359,731 |          |   |  | 92.2 | %     |    | $ | 3,252,354 |          |   |  | 41.9 | %   
|                                                    |                                                                                          |   |            |           |      |  |       |      |    |   |           |          |   |  |      |       |    |   |           |          |   |  |      |     

29



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|13. |  | Income taxes (continued):                                                                                                                                                   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The tax effects of temporary differences that give rise to significant
portions of the future tax assets and liabilities at September 30, 2002 and
2001 are presented below:

|                            |                                                   |   |           |           |      |   |           |         | 
|--------------------------- | ------------------------------------------------- | - | --------- | --------- | ---- | - | --------- | ------- | 
|                            |                                                   |   | 2002      |           | 2001
|                            |                                                   |   |           |           |     
|Future tax assets:          |                                                   |   |           |           |      |   |           |        
|                            | Capital assets                                    |   | $         | 1,263,019 |      |   | $         | 333,006 | 
|                            | Share issuance costs                              |   |           | 422,369   |      |   |           | 530,891 | 
|                            | Non-capital losses expiring in
2009 (2001 - 2009) |   |           | 3,890,104 |      |   |           | 712,000 | 
|                            | Other                                             |   |           | 189,845   |      |   |           |        | 
|                            |                                                   |   |           |           |      |   |           |         | 
|                            |                                                   |   | 5,765,337 |           |      |   | 1,575,897 |        
|Less valuation allowance    |                                                   |   | 2,407,144 |           |      |   |          |        
|                            |                                                   |   |           |           |      |   |           |         | 
|Net future tax assets       |                                                   |   | 3,358,193 |           |      |   | 1,575,897 |        
|Future tax liabilities:     |                                                   |   |           |           |      |   |           |        
|                            | Goodwill                                          |   |           | 43,965    |      |   |           | 41,741  | 
|                            |                                                   |   |           |           |      |   |           |         | 
|Total net future tax assets |                                                   |   | 3,314,228 |           |      |   | 1,534,156 |        
|Less current portion        |                                                   |   | 855,000   |           |      |   | 712,000   |        
|                            |                                                   |   |           |           |      |   |           |         | 
|                            |                                                   | $ | 2,459,228 |           |      | $ | 822,156   |        
|                            |                                                   |   |           |           |      |   |           |         | 



| |  | At September 30, 2002, the Company has non-capital losses of approximately
$9,340,000 available to reduce future years taxable income, which expire
as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  |  |           
|---- |  |  | ----------
|2008 |  |  | $3,175,000
|2009 |  |  | 6,165,000 
|     |  |  |           
|     |  |  | $9,340,000
|     |  |  |           



| |  | The Company also has non-capital losses available for carryforward for
United States State and City tax purposes amounting to approximately
$8,000,000, expiring in 2022.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|14. |  | Unusual items:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | During 2002, as a result of changes in the banking loan arrangements, the
Company was no longer allowed to fully utilize its line of credit and,
accordingly, the remaining unamortized portion of deferred financing
charges totalling $750,648 were written off.                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  | During 2001, the Company announced that it was terminating its discussions
in connection with the proposed acquisition of Leagas Delaney. Generally
accepted accounting principles require that the $1,917,334 of costs
incurred in connection with the proposed acquisition and the related
equity financing be expensed in full as of the date of abandonment. Costs
include legal, accounting, consulting and other out-of-pocket expenses
incurred in the negotiation and preparation of legal documents and
preparation of long-form prospectus materials prepared in connection with
the abandoned acquisition.                                                    
|   
|15. |  | Restructuring costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|    |  | In response to a general economic downturn impacting the Companys
business, management implemented a restructuring plan during the first
half of this fiscal year in order to bring costs more in line with
expected revenues. The restructuring involved downsizing its workforce,
exiting excess office space and writing off redundant fixed assets.
Accordingly, the Company has recorded a restructuring expense of
$10,857,534. The restructuring includes a reduction of staff, as well as
the abandonment of leased office space in New York City. As part of the
settlement with the landlord, the Company issued 250,000 common shares
with a cost of $52,500.

|                             |  |      |           |          |  |           |           |      |  |       |            |               |  |            |           | 
|---------------------------- |  | ---- | --------- | -------- |  | --------- | --------- | ---- |  | ----- | ---------- | ------------- |  | ---------- | --------- | 
|                             |  |      |           |          |  |           |           |      |  |       |            |               |  | Provision,
|                             |  |      |           |          |  |           |           |      |  | Total |            | September 30,
|                             |  | Cash |           | Non-cash |  | provision |           | 2002
|                             |  |      |           |          |  |           |           |     
|Severance                    |  | $    | 3,268,261 |          |  | $         |          |      |  | $     | 3,268,261  |               |  | $          | 1,013,424 | 
|Write-down of
capital assets |  |      |          |          |  |           | 3,481,105 |      |  |       | 3,481,105  |               |  |            |          | 
|Lease exit costs             |  |      | 4,055,668 |          |  |           | 52,500    |      |  |       | 4,108,168  |               |  |            | 1,481,196 | 
|                             |  |      |           |          |  |           |           |      |  |       |            |               |  |            |           | 
|Total restructuring charge   |  | $    | 7,323,929 |          |  | $         | 3,533,605 |      |  | $     | 10,857,534 |               |  | $          | 2,494,620 | 
|                             |  |      |           |          |  |           |           |      |  |       |            |               |  |            |           | 

31



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|15. |  | Restructuring costs (continued):                                          
|--- |  | --------------------------------------------------------------------------
|   
|    |  | Total restructuring costs accrued at September 30, 2002 are classified as:

|                                         |  |   |           | 
|---------------------------------------- |  | - | --------- | 
|Accounts payable and accrued liabilities |  | $ | 1,702,345 | 
|Long-term portion of restructuring costs |  |   | 792,275   | 
|                                         |  |   |           | 
|                                         |  | $ | 2,494,620 | 
|                                         |  |   |           | 



|16. |  | Commitments and contingencies:
|--- |  | ------------------------------



| | (a) |  | The Company has entered into operating lease agreements for
office premises and equipment with minimum annual lease payments over
the next five years as follows:
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

|           |  |   |           
|---------- |  | - | ----------
|2003       |  | $ | 4,402,963 
|2004       |  |   | 4,036,683 
|2005       |  |   | 3,840,998 
|2006       |  |   | 3,253,230 
|2007       |  |   | 8,932,271 
|Thereafter |  |   | 77,213    
|           |  |   |           
|           |  | $ | 24,543,358
|           |  |   |           



| |     |  | Rent expense under operating leases for the year ended September 30,
2002 amounted to $2,041,417 (2001 - $1,980,592; 2000 - $1,680,822).                                                                                                                                                                                                                                                                                     
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | The Company has letters of credit outstanding of Cdn. $150,000,
U.S. $500,000 and
£250,000 all of which expire on April 30, 2003.                                                                                                                                                                                                                                                                                            
|
| | (c) |  | The shares held by the minority shareholders of John Street Inc.,
representing a 30%
interest, are mandatorily redeemable by the Company at September 30,
2004 for cash
consideration and as such represents a financial liability of the
Company. No amount has
been accrued in the financial statements as the purchase price will be
determined and paid
over a three-year period based on certain performance milestones.
|
| | (d) |  | In the ordinary course of business, the Company and its
subsidiaries have legal
proceedings brought against them. Management does not expect the
outcome of these
proceedings, in aggregate, to have a material adverse effect
on the Companys
consolidated financial position or results of operations.                                                                                                                    

32



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|17. |  | Financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The estimated fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than a forced or liquidation sale. These estimates, although
based on the relevant market information about the financial instrument,
are subjective in nature and involve uncertainties and matters of
significant judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.



| | (a) |  | The carrying values and estimated fair values of the Companys
financial instruments are as follows:
| | --- |  | ----------------------------------------------------------------------------------------------------
|

| | (i)   |  | The carrying amounts of cash, restricted cash, accounts
receivable, accounts payable and accrued liabilities and
promissory note approximate their fair values due to the
short-term nature of these instruments.                                                                                                                                                                
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | The fair value of the Companys bank credit facility
approximates its carrying value as it bears an interest rate that
is at the current market rate.                                                                                                                                                                                                                            
|
| | (iii) |  | The fair values of the Companys long-term obligations
and convertible debentures are estimated using discounted cash
flow analysis which is based on the Companys current incremental
borrowing rates for similar types of borrowing arrangements. The
carrying values of the capital leases and convertible debentures
are not significantly different from their fair values.
|
| |       |  | As at September 30, 2002, the carrying value of the loans payable to
landlords was $900,959 (2001  $1,083,323) and their fair value was
$671,000 (2001  $1,083,323).                                                                                                                                                                                                           

33



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|17. |  | Financial instruments (continued):
|--- |  | ----------------------------------



| | (iv) |  | The fair value of foreign currency contracts are
estimated by obtaining quotes of the amount that the Company
would have to pay counterparties to terminate agreements. As at
September 30, 2001, the carrying amounts of the contracts were
($104,218) and their fair values were ($189,224). The Company had
no such contracts as at September 30, 2002.
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| | (b) |  | Risk management activities:
| | --- |  | ---------------------------
|

| | (i) |  | Currency risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company is subject to currency risk through its activities in
the United States and the United Kingdom. Unfavourable changes in
the exchange rate may affect the operating results of the Company.
The Company does not actively use derivative instruments to reduce
its exposure to foreign currency risk. However, dependent on the
nature, amount and timing of foreign currency receipts and payments,
the Company may enter into foreign currency contracts to mitigate
the associated risks. As at September 30, 2002, there were no
foreign currency contracts outstanding.
|
| |     |  | At September 30, 2002, the Company had U.S. $2,002,704 (Cdn.
$3,178,691) outstanding on the U.S. portion of the bank credit
facility. Prior to June 30, 2002, the U.S. dollar borrowings were
designated as a hedge against the Companys investment in its U.S.
operations, managing exposure to foreign currency risk. Commencing
July 1, 2002, the Company no longer hedged Watts U.S. dollar
receivables with foreign currency contracts and thus, the Companys
U.S. dollar borrowings are now a hedge of such receivables.                                                      
|
| |     |  | The Companys promissory note payable issued in connection with its
acquisition of Gilchrist (note 3(c)) serves as a hedge against the
Companys investment in its U.K. operations, managing exposure to
foreign currency risk.                                                                                                                                                                                                                                                                                                                                                        

34



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|17. |  | Financial instruments (continued):
|--- |  | ----------------------------------



| | (ii) |  | Credit risk:                                                                                                                                                                                                                                                                                                                                                                                                     
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | The Company manages its credit risk with respect to accounts
receivable by acting as an agent for its customers, by dealing
primarily with large creditworthy customers and by billing whenever
possible in advance of rendering services. As at September 30,
2002, the Company has one customer, which represents 11% of
accounts receivable (2001  one customer which represents 18% of
accounts receivable).
|
| |      |  | The Company is exposed to credit risk in the event of
non-performance by counterparties in connection with its foreign
currency contracts. The Company does not obtain collateral or other
security to support financial instruments subject to credit risk
but mitigates this risk by dealing with financially sound
counterparties only and, accordingly, does not anticipate loss for
non-performance.        



|18. |  | Segmented information:                                                                                                                                                                                                                                                                 
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company provides integrated marketing communication services to its
clients. While the Company has subsidiaries in Canada, the United States,
the United Kingdom and Continental Europe, it operates as an international
business and has no distinct reportable business segments.
|   
|    |  | The tables below set out the following information:                                                                                                                                                                                                                                    



| | (a) |  | The Companys external net revenue by geographic region based on
the region in which the customer is located is as follows:
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------

|             |                                       |   |            |            |      |   |            |            |  |   |            |            | 
|------------ | ------------------------------------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|             |                                       |   | 2002       |            | 2001 |   | 2000      
|             |                                       |   |            |            |      |   |           
|Net revenue: |                                       |   |            |            |      |   |            |            |  |   |            |           
|             | Canada                                |   | $          | 15,982,433 |      |   | $          | 21,826,277 |  |   | $          | 24,164,713 | 
|             | United States                         |   |            | 27,708,424 |      |   |            | 40,970,400 |  |   |            | 32,559,550 | 
|             | United Kingdom and
Continental Europe |   |            | 15,430,233 |      |   |            | 19,988,864 |  |   |            | 4,066,017  | 
|             |                                       |   |            |            |      |   |            |            |  |   |            |            | 
|             |                                       | $ | 59,121,090 |            |      | $ | 82,785,541 |            |  | $ | 60,790,280 |           
|             |                                       |   |            |            |      |   |            |            |  |   |            |            | 

35



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|18. |  | Segmented information (continued):
|--- |  | ----------------------------------



| | (b) |  | The Companys identifiable assets for each geographic area in
which it has operations are as follows:
| | --- |  | -----------------------------------------------------------------------------------------------------

|                |                                       |   |           |           |      |   |            |           | 
|--------------- | ------------------------------------- | - | --------- | --------- | ---- | - | ---------- | --------- | 
|                |                                       |   | 2002      |           | 2001
|                |                                       |   |           |           |     
|Capital assets: |                                       |   |           |           |      |   |            |          
|                | Canada                                |   | $         | 5,363,424 |      |   | $          | 7,997,668 | 
|                | United States                         |   |           | 261,566   |      |   |            | 1,316,098 | 
|                | United Kingdom and Continental Europe |   |           | 2,211,738 |      |   |            | 2,219,970 | 
|                |                                       |   |           |           |      |   |            |           | 
|                |                                       | $ | 7,836,728 |           |      | $ | 11,533,736 |          
|                |                                       |   |           |           |      |   |            |           | 

|          |                                       |   |            |           |      |   |            |            | 
|--------- | ------------------------------------- | - | ---------- | --------- | ---- | - | ---------- | ---------- | 
|          |                                       |   | 2002       |           | 2001
|          |                                       |   |            |           |     
|Goodwill: |                                       |   |            |           |      |   |            |           
|          | Canada                                |   | $          | 3,087,766 |      |   | $          | 21,956,307 | 
|          | United States                         |   |            |          |      |   |            | 19,706,227 | 
|          | United Kingdom and Continental Europe |   |            | 8,226,517 |      |   |            | 8,012,581  | 
|          |                                       |   |            |           |      |   |            |            | 
|          |                                       | $ | 11,314,283 |           |      | $ | 49,675,115 |           
|          |                                       |   |            |           |      |   |            |            | 



| | (c) |  | The Companys external net revenue by type of service is as follows:
| | --- |  | --------------------------------------------------------------------

|             |            |   |            |            |      |   |            |            |  |   |            |            | 
|------------ | ---------- | - | ---------- | ---------- | ---- | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|             |            |   | 2002       |            | 2001 |   | 2000      
|             |            |   |            |            |      |   |           
|Net revenue: |            |   |            |            |      |   |            |            |  |   |            |           
|             | Marketing  |   | $          | 12,428,558 |      |   | $          | 24,374,986 |  |   | $          | 28,772,421 | 
|             | Design     |   |            | 38,203,746 |      |   |            | 43,437,449 |  |   |            | 24,431,398 | 
|             | Technology |   |            | 8,488,786  |      |   |            | 14,973,106 |  |   |            | 7,586,461  | 
|             |            |   |            |            |      |   |            |            |  |   |            |            | 
|             |            | $ | 59,121,090 |            |      | $ | 82,785,541 |            |  | $ | 60,790,280 |           
|             |            |   |            |            |      |   |            |            |  |   |            |            | 



| | (d) |  | In 2002, the Company had three customers, which represented 19%,
12% and 12% of net revenue. In each of 2001 and 2000, the Company had
two customers which represented 13.6% and 11.3% of net revenue,
respectively.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|19. |  | Subsequent events:
|--- |  | ------------------



| | (a) |  | In October and November 2002, the Company sold the operations of
Devlin and Sage to
certain executives of the respective subsidiaries in exchange for cash
proceeds of
approximately $330,000. In addition to the cash payment on the sale
of Sage, the
Company is entitled to a fee on sales to certain former customers of
Sage.                                                                                                                                                                                        
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | In December 2002, the Company established a $500,000 line of
credit with a new lender
and borrowed the full amount of the facility. The loan is repayable on
June 30, 2003 and
bears interest at a rate of 15% per annum. The net proceeds of the
loan were used for
purposes of providing working capital. The loan is secured by a general
security agreement
against the assets of the Company subordinated to the borrowings under
the existing bank
credit facilities, capital leases and the convertible debentures.



|20. |  | Reconciliation to United States generally accepted accounting principles:                                                                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) as applied in
Canada. Set out below are the material adjustments to net earnings (loss)
for the years ended September 30, 2002, 2001 and 2000 required in order to
conform to U.S. GAAP.

|                                                                      |         |   |             |       |      |   |            |       |   |   |           |      | 
|--------------------------------------------------------------------- | ------- | - | ----------- | ----- | ---- | - | ---------- | ----- | - | - | --------- | ---- | 
|                                                                      |         |   | 2002        |       | 2001 |   | 2000      
|                                                                      |         |   |             |       |      |   |           
|                                                                      |         |   | (Restated - |       |      |   |            |       |   |   |          
|                                                                      |         |   | note 20(l)) |       |      |   |            |       |   |   |          
|Net earnings (loss) based on
Canadian GAAP                            |         | $ | (53,379,435 | )     |      | $ | (2,895,372 | )     |   | $ | 2,910,427 |     
|Stock-based compensation expense (a)                                  |         |   |            |       |      |   | (886,000   | )     |   |   |          |     
|Foreign currency contracts, net of
income tax recovery of $35,703 (d) |         |   | 49,303      |       |      |   | (49,303    | )     |   |   |          |     
|Convertible debentures (e)                                            |         |   | (46,100     | )     |      |   |           |       |   |   |          |     
|                                                                      |         |   |             |       |      |   |            |       |   |   |           |     
|Net earnings (loss) based on
U.S. GAAP                                |         | $ | (53,376,232 | )     |      | $ | (3,830,675 | )     |   | $ | 2,910,427 |     
|                                                                      |         |   |             |       |      |   |            |       |   |   |           |     
|Earnings (loss) per share:                                            |         |   |             |       |      |   |            |       |   |   |           |     
|                                                                      | Basic   |   | $           | (2.54 | )    |   | $          | (0.18 | ) |   | $         | 0.15 | 
|                                                                      | Diluted |   |             | (2.54 | )    |   |            | (0.18 | ) |   |           | 0.15 | 
|                                                                      |         |   |             |       |      |   |            |       |   |   |           |     

37



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
 (Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):                                                             
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The following adjustments are required in order to conform shareholders
equity based on Canadian GAAP to shareholders equity based on U.S. GAAP:

|                                                                      |  |             |           |      |  |   |            |  
|--------------------------------------------------------------------- |  | ----------- | --------- | ---- |  | - | ---------- | -
|                                                                      |  | 2002        |           | 2001
|                                                                      |  |             |           |     
|                                                                      |  | (Restated - |           |      |  |  
|                                                                      |  | note 20(l)) |           |      |  |  
|Shareholders equity based on Canadian GAAP                           |  | $           | 9,779,169 |      |  | $ | 61,319,385 |  
|Foreign currency contracts, net of income tax
recovery of $35,703 (d) |  |             |          |      |  |   | (49,303    | )
|Convertible debentures (e)                                            |  |             | (578,603  | )    |  |   |           |  
|                                                                      |  |             |           |      |  |   |            |  
|Shareholders equity based on U.S. GAAP                               |  | $           | 9,200,566 |      |  | $ | 61,270,082 |  
|                                                                      |  |             |           |      |  |   |            |  



| |  | Summary of accounting policy differences:                                                                                                                  
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The areas of material difference between Canadian and U.S. GAAP and their
impact on the consolidated financial statements of the Company are set out
below:



| | (a) |  | Stock-based compensation expense:                                                                                                                                                                                                                                                                                                                      
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | U.S. GAAP requires the Company to record compensation expense when
modifications are made which extend the lives of options. During the
year ended September 30, 2001, the Company extended the life of an
individuals option award and has therefore recorded the intrinsic
value of the option at the date of the extension as compensation
expense.
|
| | (b) |  | Business combinations:                                                                                                                                                                                                                                                                                                                                 
|
| |     |  | U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations for the year ended September 30,
2000 giving effect to the acquisition of Gilchrist as if it had
occurred as of October 1, 1999 which are as follows:                                                                                        

|                               |  |   |            | 
|------------------------------ |  | - | ---------- | 
|Net revenue                    |  | $ | 68,242,235 | 
|Net earnings                   |  |   | 2,602,527  | 
|Basic net earnings per share   |  |   | 0.14       | 
|Diluted net earnings per share |  |   | 0.13       | 

38



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| |  |  | U.S. GAAP requires the disclosure of the unaudited pro forma U.S. GAAP
consolidated results of operations for the year ended September 30,
2000 giving effect to the acquisition of Sage as if it had occurred as
of October 1, 1999 which are as follows:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                               |  |   |            | 
|------------------------------ |  | - | ---------- | 
|Net revenue                    |  | $ | 63,102,395 | 
|Net earnings                   |  |   | 950,950    | 
|Basic net earnings per share   |  |   | 0.05       | 
|Diluted net earnings per share |  |   | 0.05       | 



| | (c) |  | Stock-based compensation disclosures:                                                                                                                                                                                                                                                                                                                                                                      
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company measures compensation expense relating to employee stock
option plans for U.S. GAAP purposes using the intrinsic value method
specified by APB Opinion No. 25, which in the Companys circumstances
would not be materially different from compensation expense as
determined under Canadian GAAP, except as disclosed in note 20(a).                                                          
|
| |     |  | Had the Company determined compensation costs based on the fair value
at the grant date of its stock options consistent with the method
prescribed under Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards No. 123 (SFAS 123), the
Companys net earnings (loss) and earnings (loss) per share would have
been reported as the pro forma amounts indicated below:

|                                                             |  |             |             |      |  |      |            |   |  |   |           | 
|------------------------------------------------------------ |  | ----------- | ----------- | ---- |  | ---- | ---------- | - |  | - | --------- | 
|                                                             |  | 2002        |             | 2001 |  | 2000
|                                                             |  |             |             |      |  |     
|                                                             |  | (Restated - |             |      |  |      |            |   |  |  
|                                                             |  | note 20(l)) |             |      |  |      |            |   |  |  
|Net earnings (loss) in accordance
with U.S. GAAP as reported |  | $           | (53,376,232 | )    |  | $    | (3,830,675 | ) |  | $ | 2,910,427 | 
|Pro forma net earnings (loss)                                |  |             | (54,353,655 | )    |  |      | (4,719,780 | ) |  |   | 1,853,385 | 
|                                                             |  |             |             |      |  |      |            |   |  |   |           | 
|Pro forma basic earnings (loss)
per share                    |  | $           | (2.59       | )    |  | $    | (0.22      | ) |  | $ | 0.10      | 
|Pro forma diluted earnings (loss)
per share                  |  |             | (2.59       | )    |  |      | (0.22      | ) |  |   | 0.09      | 
|                                                             |  |             |             |      |  |      |            |   |  |   |           | 

39



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ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| |  |  | Pro forma net earnings (loss) reflect only those options granted during
the seven years ended September 30, 2002. Therefore, the full impact of
calculating compensation costs for stock options under SFAS 123 is not
reflected in the pro forma net earnings amounts presented above because
compensation cost is reflected over the expected lives of the options
and the compensation cost for options granted prior to October 1, 1995
is not considered. The notional compensation expense associated with
the Companys options is not deductible for Canadian income tax
purposes. Accordingly, the full amount of compensation expense is
reflected in the pro forma figures above, without any related tax
recovery.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The weighted average estimated fair value at the date of the grant, as
defined by SFAS 123, for options granted in fiscal 2002 was $0.16 per
share (2001 - $2.39; 2000 -$3.07).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | The fair value of each option granted was estimated on the date of the
grant using the Black-Scholes fair value option pricing model with the
following assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

|                                                                                     |  |            |      |            |  |            |      |   |  |  |      |  
|------------------------------------------------------------------------------------ |  | ---------- | ---- | ---------- |  | ---------- | ---- | - |  |  | ---- | -
|                                                                                     |  | 2002       |      | 2001       |  | 2000      
|                                                                                     |  |            |      |            |  |           
|Risk-free interest rate                                                              |  |            | 4.00 | %          |  |            | 4.70 | % |  |  | 4.70 | %
|Dividend yield                                                                       |  |            |     |            |  |            |     |   |  |  |     |  
|Volatility factor of the future expected
market price of the Companys
common shares |  |            | 76   | %          |  |            | 65   | % |  |  | 60   | %
|Weighted average expected life of the
options                                        |  | 1.36 years |      | 2.33 years |  | 2.56 years



| |  |  | The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including
the expected price volatility. Because the Companys employee share
options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in managements opinion,
the existing models do not necessarily provide a reliable single
measure of the fair value of its employee share options.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | For the purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options vesting period
on a straight-line basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

40



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| | (d) |  | Derivative financial instruments:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company enters into forward contracts to manage its exposure to
fluctuations in foreign exchange rates. Effective October 1, 2000, the
Company adopted the provisions of FASB Statement No. 133, Accounting
For Derivatives and Hedging Activities. SFAS No. 133 requires that all
derivatives be recognized as assets and liabilities on the balance sheet
and measured at fair value. Hedge accounting is only applied to
derivatives if the hedging relationship has been identified, and the
Company has formally documented the designation of the hedging
relationship and the method for assessing the effectiveness of the
hedging relationship. Both at inception of the hedging relationship and
throughout its term, the relationship must be effective in achieving
offsetting changes in the cash flows of the hedged item.
|
| |     |  | Under SFAS No. 133 for derivatives designated and effective as hedges of
future cash flows, changes in the fair value of the derivative are
recognized in other comprehensive income, with no impact on net earnings
until the hedged item is recognized in earnings. To the extent the hedge
is ineffective, or not designated or documented as a hedge, the change
in fair value of the hedge would be recognized in earnings each period.
During 2001, the Company had not designated and documented its foreign
exchange contracts as a hedge of future cash flows and, therefore, must
record the change in fair value as a charge against earnings.                                                                                                                                                                                     
|
| |     |  | Under Canadian GAAP, no accounting recognition is given to the fair
value of those forward contracts which are a hedge of future cash flows.
As at September 30, 2001, the fair value of foreign exchange forward
contracts, which were otherwise designated as a hedge of future cash
flows for Canadian GAAP, totalled ($85,006). This amount represents an
additional liability under U.S. GAAP, and this amount net of the related
tax recovery is recorded as a charge to U.S. GAAP net earnings.                                                                                                                                                                                                                                                                                                                                        
|
| |     |  | As at September 30, 2002, there were no foreign currency contracts
outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

41



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| | (e) |  | Convertible debentures:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | During 2002, the Company issued $3.8 million in convertible debentures.
The debentures are convertible at any time at the option of the holder
into common shares and common share purchase warrants of the Company
(note 11). Under Canadian GAAP, the debentures are bifurcated into a
debt component and an equity component, based on relative fair values,
which resulted in aggregate proceeds of $1,949,628 allocated to
long-term debt and $1,850,372 to shareholders equity, respectively for
the aggregate $3.8 million debentures. Under Canadian GAAP, the discount
resulting from allocating proceeds to the equity component must be
recorded as an additional interest expense, using an effective yield
method, over the minimum period to redemption being two years. As a
result of accreting the debentures, $133,870 has been charged as
interest expense for 2002. Under Canadian GAAP, issue costs are
allocated between the debt and equity components which resulted in
$129,513 of the aggregate $262,465 issue costs being applied to reduce
the equity allocation.
|
| |     |  | Under U.S. GAAP, any excess of the fair value of the shares over the
proceeds allocated to the common share portion of the conversion price
is considered a beneficial conversion feature. For the two debentures
issued during 2002, an aggregate beneficial conversion feature of
$1,188,356 must be recorded as interest expense over the minimum period
to the earliest redemption date. Although the debentures have a
five-year life, the holder has the option to demand repayment at the
second anniversary date, therefore such amount must be expensed over the
two-year term. Accordingly, $168,541 is recorded as interest expense
under U.S. GAAP. Under U.S. GAAP, costs associated with issuance of the
debentures cannot be apportioned between the debt and equity components.
Accordingly, deferred financing fees under U.S. GAAP would be $129,513
higher, for which $11,429 would be amortized in the current period.                                                                                                                                                    

42



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000

20.     Reconciliation to United States generally accepted accounting principles
(continued):



| | (f) |  | Comprehensive income:                                                                                                                                                             
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Companys comprehensive income represents U.S. GAAP net earnings
plus the change in the cumulative translation adjustment account in
respect of foreign operations as follows:

|                                                              |  |             |             |      |  |      |            |   |  |   |           | 
|------------------------------------------------------------- |  | ----------- | ----------- | ---- |  | ---- | ---------- | - |  | - | --------- | 
|                                                              |  | 2002        |             | 2001 |  | 2000
|                                                              |  |             |             |      |  |     
|                                                              |  | (Restated - |             |      |  |      |            |   |  |  
|                                                              |  | note 20(l)) |             |      |  |      |            |   |  |  
|Net earnings (loss) for the year in
accordance with U.S. GAAP |  | $           | (53,376,232 | )    |  | $    | (3,830,675 | ) |  | $ | 2,910,427 | 
|Change in cumulative translation
adjustment account           |  |             | 515,569     |      |  |      | 1,147,208  |   |  |   | 180,516   | 
|                                                              |  |             |             |      |  |      |            |   |  |   |           | 
|                                                              |  | $           | (52,860,663 | )    |  | $    | (2,683,467 | ) |  | $ | 3,090,943 | 
|                                                              |  |             |             |      |  |      |            |   |  |   |           | 



| | (g) |  | Reduction of capital:                                                                                                                                                                                                                                                                                                                                                                                                                          
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | In 1997, the share capital of the Company was reduced by $9,886,961
pursuant to a special resolution of its shareholders and was applied
against the deficit. This reduction in capital is not permitted under
U.S. GAAP. While the adjustment has no impact on shareholders equity,
under U.S. GAAP, capital stock would be increased by $9,886,961 and
retained earnings would be decreased by $9,886,961 as at September 30,
2002 and 2001.
|
| | (h) |  | Statements of cash flows:                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |     |  | The Company has disclosed cash flows from operations per share, which
is not permitted under U.S. GAAP.                                                                                                                                                                                                                                                                                                                                        
|
| | (i) |  | Other disclosures:                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |     |  | U.S. GAAP and the United States Securities and Exchange Commission
require the Company to disclose the following items, for which
disclosure is not required under Canadian GAAP:                                                                                                                                                                                                                                                              



| | (i) |  | The allowance for doubtful accounts as at September 30,
2002 was $226,037 (2001 - $1,432,668).
| | --- |  | ----------------------------------------------------------------------------------------------

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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| | (ii)  |  | As at September 30, 2002, the Company had a nil (2001 -
$32,158,672) unused line of credit.                                                                                                                                                                                                                                                                                                                                                                                         
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (iii) |  | U.S. GAAP requires the disclosure of accrued
liabilities. Accrued liabilities included in accounts payable and
accrued liabilities as at September 30, 2002 were $4,779,517
(2001 - $6,330,821). As at September 30, 2002, Envoy had accrued
$1,122,745 for the termination of certain leased premises of
Hampel Stefanides. At September 30, 2001, accrued liabilities
include $2,263,266 related to additional consideration for the
acquisition of Hampel Stefanides (note 3(e)).
|
| |       |  | At September 30, 2002, there were no other accrued liabilities that
exceeded 5% of current liabilities.                                                                                                                                                                                                                                                                                                                                                                             
|
| | (iv)  |  | The Company has disclosed both net earnings before
goodwill amortization and net earnings per share before goodwill
amortization, which are not permitted disclosures under U.S.
GAAP.                                                                                                                                                                                                                                                                                              



| | (j) |  | Restructuring charges:                                                                                                    
| | --- |  | --------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Under U.S. GAAP restructuring charges would be included as operating
expenses in the consolidated statement of operations.
|
| | (k) |  | Recent accounting pronouncements:                                                                                         



| | (i) |  | In October 2001, the FASB issued SFAS No. 144,

Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS No. 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of and
related literature and establishes a single accounting model,
based on the framework established in SFAS No. 121, for long-lived
assets to be disposed of by sale. The Company is required to adopt
SFAS No. 144 for its fiscal year beginning October 1, 2002. The
Company has not determined the impact of the adoption of SFAS No.
144 on its consolidated financial statements.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

44



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| | (ii) |  | In September 2001, the CICA issued Handbook Sections
1581, Business Combinations and 3062, Goodwill and Other
Intangible Assets. The new standards mandate the purchase method
of accounting for business combinations and require that goodwill
no longer be amortized but instead be tested for impairment at
least annually. The standards also specify criteria that
intangible assets must meet to be recognized and reported apart
from goodwill. The standards require that the value of the shares
issued in a business combination be measured using the average
share price for a reasonable period before and after the date the
terms of the acquisition are agreed to and announced. Previously,
the consummation date was used to value the shares issued in a
business combination. The new standards are substantially
consistent with United States GAAP.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | Under the new standards for Business Combinations, effective July
1, 2001, goodwill acquired in business combinations completed after
June 30, 2001 is not amortized. In addition, the criteria for
recognition of intangible assets apart from goodwill and the
valuation of the shares issued in a business combination must be
applied to business combinations completed after June 30, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |      |  | The Company is required to adopt the new standards for goodwill and
other intangible assets effective October 1, 2002, at which time,
the Company will discontinue amortization of all existing goodwill
and test for impairment in accordance with the new standards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |      |  | In connection with transitional goodwill impairment evaluation, as
specified in the new standard, the Company is required to assess
whether goodwill is impaired as of October 1, 2002. The Company has
up to six months to determine the fair value of its reporting units
and compare that to the reporting units carrying amounts. To the
extent a reporting units carrying amount exceeds its fair value,
the Company must perform a second step to measure the amount of
impairment in a manner similar to a purchase price allocation. This
second step is to be completed no later than September 30, 2003. Any
transitional impairment will be recognized as an effect of a change
in accounting principle which under Canadian GAAP, is recorded as a
charge to opening retained earnings as of October 1, 2002.                                                   

45



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| |       |  | As of September 30, 2002, the Company had unamortized goodwill of
$11,421,498, other than $455,607, resulting from an acquisition
during 2002 which is not being amortized and is subject to the
transitional provisions of Sections 1581 and 3062. Amortization
expense related to goodwill was $2,211,509 for 2002. Because of the
extensive effort required to comply with the remaining provisions
of Sections 1581 and 3062, the Company has not estimated the impact
of these provisions on its financial statements, beyond
discontinuing goodwill amortization.                                                                                                                
| | ----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (iii) |  | In August 2001, the FASB issued SFAS No. 143,
Accounting for Asset Retirement Obligations. This statement
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
for the associated asset retirement costs. SFAS No. 143 is
effective for the Companys fiscal year beginning October 1,
2002. The Company does not believe that the adoption of SFAS No.
143 will have a material impact on its consolidated financial
statements.                                                                                                                                                                           
|
| | (iv)  |  | Effective October 1, 2002, the Company will adopt the new
Canadian accounting standard for stock-based compensation and
other stock-based payments. The new standards will require
additional disclosures for options granted to employees and that a
compensation cost be recorded for the fair value of options
granted to non-employees and awards to employees that call for
settlement in cash or other assets, including stock appreciation
rights. The new standards for non-employees will be similar in
many respects to SFAS No. 123. The Company does not believe that
the adoption of these standards will have a material impact on its
consolidated financial statements.
|
| | (v)   |  | Effective October 1, 2003, the Company will be required
to adopt the new Canadian Accounting Guideline, Hedging
Relationships, that establishes standards for the documentation
and effectiveness of hedging relationships that are substantially
similar to the corresponding requirements in SFAS No. 133. The
Company does not believe that the adoption of these standards
will have a material impact on its consolidated financial
statements.                                                                                                                                                                                                                                 

46



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| | (vi) |  | In December 2002, the CICA issued Handbook Section 3063,
Impairment of Long-Lived Assets, and revised Section 3475,
Disposal of Long-Lived Assets and Discontinued Operations. These
new rules supersede the write-down and disposal provisions of CICA
Handbook Section 3061, Property, Plant and Equipment, as well as
current Handbook Section 3475, Discontinued Operations. The new
standards are based on SFAS 144. Under revised Handbook Section
3475, new standards are established for the recognition,
measurement, presentation and disclosure of the disposal of
long-lived assets as well as for the presentation and disclosure
of discontinued operations. New Handbook Section 3063 establishes
standards for the recognition, measurement and disclosure of the
impairment of long-lived assets held for use. Under the new
standards, an impairment loss is recognized when the carrying
amount of an asset held for use exceeds the sum of the
undiscounted cash flows expected from its use and eventual
disposition. An impairment loss is measured as the amount by which
the assets carrying amount exceeds its fair value.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | The new accounting recommendations contained in Handbook Section
3063 on the impairment of long-lived assets held for use should be
applied for years beginning on or after April 1, 2003. The revised
accounting recommendations contained in Handbook Section 3475 on
disposal of long-lived assets and discontinued operations should be

applied to disposal activities initiated by a companys commitment
to a plan on or after May 1, 2003. The Company has not determined
the impact of the adoption of these standards on its consolidated
financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

47



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##### Table of Contents



ENVOY COMMUNICATIONS GROUP INC.
Notes to Consolidated Financial Statements (continued)
(Expressed in Canadian dollars)

Years ended September 30, 2002, 2001 and 2000



|20. |  | Reconciliation to United States generally accepted accounting principles
(continued):
|--- |  | -------------------------------------------------------------------------------------



| | (l) |  | Restatement:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | Shareholders equity and net loss for the year based on U.S. GAAP as
at, and for the year ended September 30, 2002 differ from the amounts
previously reported as the Company previously expensed the beneficial
conversion associated with its convertible debentures, as described in
note 20(e), totalling $1,188,356, immediately. However, this amount
should have been amortized over the two-year term of the debentures

which would reduce the charge in 2002 to $168,541, resulting in a
decrease to net loss for the year based on U.S. GAAP of $1,019,815. The
effect of this restatement to basic and diluted loss per share for the
year ended September 30, 2002 was as follows:

|                                  |                        |  |   |       |  
|--------------------------------- | ---------------------- |  | - | ----- | -
|U.S. GAAP basic loss per share:   |                        |  |   |      
|                                  | As previously reported |  | $ | (2.59 | )
|                                  | Restated               |  |   | (2.54 | )
|U.S. GAAP diluted loss per share: |                        |  |   |      
|                                  | As previously reported |  | $ | (2.59 | )
|                                  | Restated               |  |   | (2.54 | )

48