##### 



As filed with the Securities and Exchange Commission on February 17, 2004




SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 20-F

o
    
    Registration statement pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934ORx
    
    Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended September 30, 2003ORo
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For 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, 2003 there were 31,047,027 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 o

Indicate by check mark which financial statement item the Registrant has
elected to follow:   Item 17 x   Item 18 o





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TABLE OF CONTENTS

PART IItem 1
    
    Identity of Directors, Senior Management and AdvisersItem 2
    
    Offer Statistics and Expected TimetableItem 3
    
    Key InformationItem 4
    
    Information on the CompanyItem 5
    
    Operating and Financial Review and ProspectsItem 6
    
    Directors, Senior Management and EmployeesItem 7
    
    Major Shareholders and Related Party TransactionsItem 8
    
    Financial InformationItem 9
    
    The Offer and ListingItem 10
    
    Additional InformationItem 11
    
    Quantitative and Qualitative Disclosures About Market RiskItem 12
    
    Description of Securities Other than Equity SecuritiesPART IIItem 13
    
    Defaults, Dividend Arrearages and DelinquenciesItem 14
    
    Material Modifications to the Rights of Security Holders and Use of ProceedsItem 15
    
    Controls and ProceduresItem 16
    
    ReservedPART IIIItem 17
    
    Financial StatementsItem 18
    
    Financial StatementsItem 19
    
    ExhibitsSignaturesCertifications


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|Item 1. |  | PART I
|------- |  | ------



|Item 1. |  | IDENTIFY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|------- |  | -----------------------------------------------------



| |  | Not applicable
| |  | --------------



|Item 2. |  | OFFER STATISTICS AND EXPECTED TIMETABLES
|------- |  | ----------------------------------------



| |  | Not applicable
| |  | --------------



|Item 3. |  | KEY INFORMATION
|------- |  | ---------------



|A. |  | Selected Financial Data
|-- |  | -----------------------

The following table sets forth in Canadian dollars selected financial data
for Envoy for the fiscal years indicated below prepared in accordance with
Canadian Generally Accepted Accounting Principles unless otherwise noted. The
following selected financial data should be read in conjunction with the more
detailed financial statements and the related notes thereto appearing elsewhere
in this Form 20-F and the discussion under Item 5 Operating and Analysis of
Financial Condition and Results of Operation herein. The selected financial
data does not include statements of operations data or balance sheet data of
any acquired operations prior to their respective acquisition effective dates.

Fiscal Years Ended September 30,20032
    
    20023
    
    20014
    
    20005
    19996(all amounts in thousands, except per share data)Statement of Operations Data:Net Revenue
    
    $
    42,427
    
    
    $
    59,121
    
    
    $
    82,786
    
    
    $
    60,790
    
    
    $
    41,787Earnings (loss) before unusual items,
gain on closure of subsidiaries,
restructuring costs, income taxes,
goodwill amortization and write-down
    
    
    18
    
    
    
    (6,503
    )
    
    
    3,393
    
    
    
    7,757
    
    
    
    5,490Net Earnings7
    
    
    2,539
    
    
    
    (53,379
    )
    
    
    (2,895
    )
    
    
    2,910
    
    
    
    2,877Net Earnings Per Share7 Basic
    
    $
    0.12
    
    
    
    ($2.54
    )
    
    
    ($0.14
    )
    
    $
    0.15
    
    
    $
    0.20Net Earnings Per Share7 Diluted
    
    $
    0.09
    
    
    
    ($2.54
    )
    
    
    ($0.14
    )
    
    $
    0.15
    
    
    $
    0.20




|1 |  | The financial statements of Envoy are prepared in accordance with Canadian
Generally Accepted Accounting Principles (Canadian GAAP), which differs in
certain significant respects from U.S. Generally Accepted Accounting Principles
(U.S. GAAP). Reconciliation to U.S. GAAP is set forth in Note 22 to the
Notes to the audited Financial Statements of Envoy. The following would be the
adjustments to the information provided above as an increase (decrease) to: Net
Revenue  2003 ($3,387), 2002 ($15,825), 2001 ($34,683); Earnings (loss) before
unusual items, gain on closure of subsidiaries, restructuring costs, income
taxes, goodwill amortization and write-down  2003 ($1,508), 2002 $1,554, 2001
($6,676); Net earnings  2003 $67, 2002 $3, 2001 ($935); Net Earnings per
share  basic  2003 $nil, 2002 $nil, 2001 ($0.04); Net earnings per share -
diluted  2003 $0.03, 2002 $nil, 2001 ($0.04).

3
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fiscal Years Ended September 30,2003
    
    2002
    
    2001
    
    2000
    
    1999(all amounts in thousands)Balance Sheet Data:Current Assets
    
    $
    18,228
    
    
    $
    27,447
    
    
    $
    51,138
    
    
    $
    43,337
    
    
    $
    44,521Total Assets
    
    
    37,351
    
    
    
    49,174
    
    
    
    113,850
    
    
    
    102,308
    
    
    
    75,748Total Debt8
    
    
    11,425
    
    
    
    14,003
    
    
    
    11,928
    
    
    
    10,832
    
    
    
    3,978Shareholders Equity9
    
    
    12,359
    
    
    
    9,779
    
    
    
    61,319
    
    
    
    62,687
    
    
    
    40,612Retained Earnings10
    
    
    (45,091
    )
    
    
    (47,630
    )
    
    
    5,603
    
    
    
    8,403
    
    
    
    5,493




|2 |  | The exchange rate utilized with respect to the Statement of Operations Data
for the year ended September 30, 2003 of Watt Gilchrist Limited (Gilchrist)
is £1.00 to $2.3425 Cdn. and with respect to the Balance Sheet Data of
Gilchrist is £1.00 to $2.2448 Cdn. The exchange rate utilized with respect to
the Statement of Operations Data of US activities is $1.00 U.S. to $1.4635 Cdn.
and with respect to the Balance Sheet Data of US activities is $1.00 U.S. to
$1.3499 Cdn. Except as set forth in footnotes 4, 5 and 6, no other
acquisitions by Envoy materially affect the comparability of the information in
the Selected Financial Data. During fiscal 2003, Envoy disposed of a number of
subsidiaries including Sage Information Consultants Inc. Sage, Devlin
Multimedia Inc. (Devlin) and Hampel Stefanides Inc. (Hampel) as described
in Notes 14 and 15 to the consolidated financial statements.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|3 |  | The exchange rate utilized with respect to the Statement of Operations Data
for the year ended September 30, 2002 of Gilchrist is £1.00 to $2.3119 Cdn. and
with respect to the Balance Sheet Data of Gilchrist is £1.00 to $2.4894 Cdn.
The exchange rate utilized with respect to the Statement of Operations Data of
Hampel is $1.00 U.S. to $1.5731 Cdn. and with respect to the Balance Sheet Data
of Hampel is $1.00 U.S. to $1.5872 Cdn. Except as set forth in footnotes 4, 5
and 6, no other acquisitions by Envoy materially affects the comparability of
the information in the Selected Financial Data.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4 |  | The Statement of Operations Data for the year ended September 30, 2001
includes the results of operations of The International Design Group (IDG),
acquired effective as of January 1, 2001, for the nine month period from
January 1, 2001 to September 30, 2001. See Item 4 Information on the Company
for a description of this acquisition. The exchange rate utilized with respect
to the Statement of Operations Data of Gilchrist is £1.00 to $2.2122 Cdn. and
with respect to the Balance Sheet Data of Gilchrist is £1.00 to $2.3264 Cdn.
The exchange rate utilized with respect to the Statement of Operations Data of
Hampel is $1.00 U.S. to $1.5785 Cdn. and with respect to the Balance Sheet Data
of Hampel is $1.00 U.S. to $1.5352 Cdn. Except as set forth in footnotes 4, 5
and 6, no other acquisitions by Envoy materially affect the comparability of
the information in the Selected Financial Data.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|5 |  | The Statement of Operations Data for the year ended September 30, 2000
includes the results of operations of Sage, acquired effective as of June 1,
2000, for the four month period from June 1, 2000 to September 30, 2000, and
the results of operations of Gilchrist, acquired effective as of July 1, 2000,
for the three month period from July 1, 2000 to September 30, 2000. See Item 4
Information on the Company for a description of such acquisitions. The
exchange rate utilized with respect to the Statement of Operations Data of
Gilchrist is £1.00 to $2.1885 Cdn. and with respect to the Balance Sheet Data
of Gilchrist is £1.00 to $2.2163 Cdn. The exchange rate utilized with respect
to the Statement of Operations Data of Hampel is $1.00 U.S. to $1.4722 Cdn. and
with respect to the Balance Sheet Data of Hampel is $1.00 U.S. to $1.5035 Cdn.
Except as set forth in footnotes 4, 5 and 6, no other acquisitions by Envoy
materially affect the comparability of the information in the Selected
Financial Data.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|6 |  | The Statement of Operations Data for the year ended September 30, 1999
includes the results of operations of Hampel acquired effective as of October
1, 1998, for the entire twelve month period, the results of operations of
Devlin acquired effective as of January 1, 1999 for the nine month period from
January 1, 1999 to September 30, 1999, and the results of operations of Watt
International, acquired effective as of May 1, 1999, for the five month period
from May 1, 1999 to September 30, 1999. See Item 4 Information on the
Company for a description of such acquisitions. The exchange rate utilized
with respect to the Statement of Operations Data of Hampel is $1.00 U.S. to
$1.5029 Cdn. and with respect to the Balance Sheet Data of Hampel is $1.00 U.S.
to $1.4674 Cdn. Except as set forth in footnotes 4, 5 and 6, no other
acquisitions by Envoy materially affect the comparability of the information in
the Selected Financial Data.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|7 |  | As reflected in Note 22 to the Notes to the audited Financial Statements of
Envoy, the net loss from operations for the years ended September 30, 2003,
2002 and 2001 were ($1,521), ($53,376) and ($3,831) respectively under U.S.
GAAP. The net earnings (loss) for the years ended September 30, 2003, 2002 and
2001 was $2,606, ($53,376), and ($3,831) respectively under U.S. GAAP. The
diluted net earnings (loss) per share for the years ended September 30, 2003,
2002 and 2001 was $0.12, ($2.54) and ($0.18), respectively under U.S. GAAP.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|8 |  | Total debt includes both the current and long term portion of debt.
|- |  | -------------------------------------------------------------------



|9 |  | As reflected in Note 22 to the Notes to the audited Financial
Statements of Envoy the shareholders equity as at September 30, 2003 and 2002
was $11,765 and $9,201, respectively under U.S. GAAP.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|10 |  | Retained earnings as of September 30, 2003, 2002, 2001, and 2000 excludes
the cumulative foreign currency translation adjustment of ($236), $1,348, $833
and ($314), respectively. See Note 2(f) to the Notes to the audited Financial
Statements of Envoy.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Envoy has never paid any dividends on its common shares and does not
anticipate that it will pay any cash dividends on its common shares in the
foreseeable future.

Exchange Rates

On February 17, 2004, the noon buying rate for Canadian dollars as
reported by the Federal Reserve Bank of New York was $1.00 U.S. to 1.3102 Cdn.
The following table sets forth for the periods indicated certain information
regarding the exchange rate into U.S. currency of Canadian dollars. The rate
of exchange means the noon buying rate in New York City for cable transfers in
foreign currencies as certified for customs purposes by the Federal Reserve
Bank of New York.

Fiscal Year Ended September 30,2003
    
    2002
    
    2001
    
    2000
    
    1999Average*
    
    $
    1.4553
    
    
    $
    1.5731
    
    
    $
    1.5353
    
    
    $
    1.4724
    
    
    $
    1.5033




|* |  | The average rate means the average of the exchange rates on the last day of
each month during the fiscal period.
|- |  | ----------------------------------------------------------------------------------------------------------------

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For the month endingJanuary 2004
    
    December 2003
    
    November 2003
    
    October 2003
    
    September 2003
    
    August 2003High
    
    $
    1.3300
    
    
    $
    1.3373
    
    
    $
    1.3385
    
    
    $
    1.3451
    
    
    $
    1.3918
    
    
    $
    1.4072Low
    
    
    1.2712
    
    
    
    1.2943
    
    
    
    1.2991
    
    
    
    1.3040
    
    
    
    1.3470
    
    
    
    1.3795




|B. |  | Capitalization and Indebtedness
|-- |  | -------------------------------



| |  | Not applicable
| |  | --------------



|C. |  | Reasons for the Offer and Use of Proceeds
|-- |  | -----------------------------------------



| |  | Not applicable
| |  | --------------



|D. |  | Risk factors
|-- |  | ------------

Envoys business, financial condition and results of operations could be
materially adversely affected by any of the following risks.

ThisForm 20-Fcontains forward-looking statements that involve risks and
uncertainties. Envoys actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including the risks faced by Envoy described below and elsewhere in this form.

General economic conditionsThe marketing and communication industry is
cyclical and as a result it is subject to downturns in general economic
conditions and changes in client business and marketing budgets.

Interest rate riskEnvoys debt under its lending facilities is
described in Note 10 to the Financial Statements. Our credit facility bears
interest that is calculated at variable rates. As a result we are vulnerable
to changes in interest rates. At September 30, 2003 the effective interest
rate on our facility was 8.0%, compared to 8.50% at September 30, 2002.

Foreign currency riskEnvoy is subject to currency risk through its
activities in the United States and in the United Kingdom. Unfavourable
changes in the exchange rate may affect the operating results of Envoy. Envoy
does not currently use derivative instruments or foreign currency contracts to
reduce its exposure to foreign currency risk.

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Key personnelEnvoys success depends in part upon its ability to hire
and retain key senior management and skilled technical, client service and
creative personnel able to create and maintain solid relationships with
clients. An inability to hire or retain qualified personnel could have a
material adverse effect on Envoy.

Credit riskEnvoy 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 or making commitments. Management believes that Envoy is
not subject to significant concentration of credit risk. As at September 30,
2003, Envoy had one customer, who represented 8% of accounts receivable and one
customer who represented 11% of accounts receivable as at September 30, 2002.

Envoys results of operations and its business depend on its relationship
with a limited number of large clients. Set forth below is the percentage of
net revenue during the fiscal year ended September 30, 2003 for each of Envoys
clients that accounted for 10% or more of its net revenue and for Envoys five
largest clients combined:

Fiscal Year EndedClient
    
    September 30, 2003ASDA Stores Limited
    
    
    25.5
    %Safeway Brands Inc.
    
    
    15.9
    %Wal-Mart Stores Inc.
    
    
    11.7
    %Five largest clients combined
    
    
    58.6
    %


Although Envoy has over 75 clients, a relatively small number contribute a
significant percentage of Envoy consolidated net revenue. For the year ended
September 30, 2003, the Companys top three clients accounted for over 50% of
its consolidated net revenue. As Envoys relationships with these clients have
been long-standing ones, the Company expects reliance on such clients to
continue into the future. The failure to achieve continued design wins from
one or more of these clients without adding new sources of net revenue could
have an adverse effect on Envoys financial results.

There can be no assurance that Envoy will be able to maintain its
historical rate of growth or its current level of revenue derived from any
client in the future.

Contract RiskThe realization of expected revenues from certain
agreements of the Company depends on the ability of Envoy to make satisfactory
proposals to its clients. Expected revenues may be delayed if proposals are
not submitted or accepted in the anticipated timeframe or may not be realized
at all if proposals are ultimately not accepted.



| |  | Item 4. INFORMATION ON THE COMPANY
| |  | ----------------------------------

The following Information on the Company contains forward-looking
statements, which involve risks and uncertainties. Envoys actual results
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including those set forth under
Item 3Risk Factors and elsewhere in thisForm 20-F.

ENVOY COMMUNICATIONS GROUP INC.

General

Envoy (or the Company) is a marketing and international consumer and
retail branding company with offices throughout North America and Europe.
Combining strategy, creativity and innovation, Envoys interconnected network
of companies delivers business-building solutions to over 200 leading global
brands and has successfully completed assignments in more than 40 countries
around the world.

Envoy conducts its branding services through its wholly-owned
subsidiaries, Watt International Inc. and Watt Gilchrist Limited (collectively,
Watt), which together form one of the worlds largest brand strategy and
design consultancies. With seven offices located throughout North America, the
United Kingdom and Continental Europe, Watts clients include The Great
Atlantic & Pacific Tea Company (A&P), Asda Stores Ltd., Carulla Vivero S.A.,
Cencosud S.A, Cott Beverages Ltd., Famous Players Ltd., Giant Food Inc.,
Gigante, S.A. de C.V., Immobilaria Las Verbenas S.A., Longs Drug Store
Corporation, Kraft Foods Inc., Next plc, Safeway Brands Inc., Shaws
Supermarkets, Inc., Sobeys Inc., Smart & Final Stores Corporation and Wal-Mart
Stores Inc.

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Envoy provides advertising and communications services through a 70% owned
subsidiary, John Street Inc. Clients of John Street include Harveys (a
division of Cara Operations Limited), Scott Paper Ltd., Tetley Canada, Moores,
Fuji Photo Film Canada Inc., The Family Channel Inc. and Viewers Choice.

In 2003 three customers accounted for 25.5%, 15.9% and 11.7% respectively
of net revenue. In 2002, three customers accounted for 18.9%, 12.9% and 12.7%
of net revenue. In both years, no other customers accounted for more than 10%
of net revenue.

Watt International Inc. and John Street Inc. each subsist under the laws
of the Province of Ontario and Watt Gilchrist Limited subsists under the laws
of the United Kingdom.

The principal place of business of Envoy is located at 172 John Street,
Toronto, Canada M5T 1X5. Envoy may be reached by telephone: (416) 593-1212
facsimile: (416) 593-4434. Envoys website is www.envoy.to. Information
contained in our website does not constitute a part of this Form 20-F.

A. History and Development of the Company

Envoy was incorporated under the laws of the Province of British Columbia,
Canada as Potential Mines Ltd. in December 1973 and was continued under the
laws of the Province of Ontario, Canada in December 1997. Since December 1997
Envoy has shifted the nature of its business to providing marketing,
communications and consumer and retail branding services for promoting clients
products, services and business messages utilizing such media as print,
broadcast and the Internet. Envoy has grown, in large part, through strategic
acquisitions. Certain material acquisitions by Envoy are described below.

Effective as of June 1, 1998, Envoy acquired Promanad Communications Inc.
(Promanad), an advertising, public relations and corporate identity agency.
Envoy expanded its geographic reach into the U.S. marketplace through its
acquisition of Hampel Stefanides Inc., effective as of October 1, 1998.

Effective as of January 1, 1999, Envoy acquired Devlin Multimedia Inc., a
Toronto-based website design and development company.

Effective as of May 1, 1999, Envoy acquired Watt International Inc. (Watt
International), through which Envoy acquired the operations, substantially all
of the assets and certain of the liabilities of The Watt Design Group Inc.
(Watt Design), a Toronto-based provider of design, packaging, retail
environments and marketing identity services to retailers. Envoy expanded its
geographical reach into the United Kingdom and the continental Europe
marketplace through its acquisition of Gilchrist Brothers Limited
(Gilchrist), a United Kingdom based digital imaging and design firm,
effective as of July 1, 2000. Effective as of January 1, 2001, Envoy acquired
The International Design Group (Canada) Inc., a Toronto-based retail planning
and design firm. IDG was amalgamated with Watt International effective
September 30, 2001. Watt International, Gilchrist and IDG are referred to
collectively as (Watt).

Effective as of June 1, 2000, Envoy acquired Sage Information Consultants
Inc., a digital professional service firm operating in the United States and
Canada.

During July 2001, Envoy launched John Street Inc. a Toronto based
advertising and Communications initiative to replace the advertising business
previously conducted by the Communiqué Group Inc. Envoy owns 70% of John
Street Inc., and the shares held by the minority shareholders are mandatorily
redeemable by Envoy at September 30, 2004 for cash consideration. 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 future
performance milestones.

Effective October 1, 2001, Envoy acquired 100% of the outstanding shares
of Commordore Conference Planners Inc. (Commodore), a conference and event
marketing company. Commodore was amalgamated with Communique Incentives Inc.
on acquisition.

On October 30, 2002, the assets of Devlin were sold to management of the
company.

On November 11, 2002, the operations of Sage were shut down and the assets
of Sage were liquidated.

On February 7, 2003, Envoy decided to discontinue the operations of Hampel
after conducting a review, in conjunction with Envoys banks, of the ongoing
viability, future prospects, cash needs and local debt situation of this
company. Following the liquidation of the assets, the shares of Hampel were
sold for nominal consideration.

8



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B. Business Overview

Services in the Envoy Group include:

Consumer and retail branding  Watt International, a wholly owned
subsidiary of Envoy, that management believes to be one of the worlds leading
brand strategy and design consultancies provides the following services:
strategic brand consulting, corporate identity and communications, retail
branding and store design, and package design. Watt also provides brand
management, pre-press and film through Watt Gilchrist, a sister company with
more than 100 years of experience.

Marketing  John St. Inc., a 70% owned subsidiary of Envoy provides
advertising and communications services that include creative concept
development, strategic planning and consulting, advertising production, media
planning and purchasing.

Net revenue by type of service for the last three fiscal years are as
follows: (all amounts in thousands)

Net revenue:
    
    Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Marketing
    
    $
    7,822
    
    
    $
    12,428
    
    
    $
    24,375Consumer and retail branding
    
    
    34,313
    
    
    
    38,204
    
    
    
    43,437Technology
    
    
    292
    
    
    
    8,489
    
    
    
    14,973$
    42,427
    
    
    $
    59,121
    
    
    $
    82,785


Net revenue by geographic region, based on the region the customer is
located, is as follows: (all amounts in thousands)

Net revenue:
    
    Fiscal 2003
    
    Fiscal 2002
    
    Fiscal 2001Canada
    
    $
    6,967
    
    
    $
    15,983
    
    
    $
    21,826United States
    
    
    18,185
    
    
    
    27,708
    
    
    
    40,970United Kingdom and
Continental Europe
    
    
    17,275
    
    
    
    15,430
    
    
    
    19,989$
    42,427
    
    
    $
    59,121
    
    
    $
    82,785


Our Strategic Direction

Over the past year Envoy has divested its technology services and remains
focused on the expansion and prosperity of its core business of consumer and
retail branding. The Watt group of companies (Watt), our branding business,
has proven successful at creating and executing private label programs and
landmark store design, making Envoy a world authority in brand strategy and
design for the retail sector.

In November 2003, Watt announced the launch of Gilchrist North America
(GNA), a state-of-the-art reprographics and brand management business, with
locations in Toronto, Bentonville and Boston. GNA will leverage the highly
experienced work force and sophisticated equipment of Gilchrist UK, Watts UK
based brand management company, to provide its clients with a superior product.
GNA has quickly become an integral part of our new client acquisition
strategy.

Also in November 2003, Watt announced the launch of Studio Watt, a
niche-focused agency devoted to serving the distinct needs of style-based
specialty and boutique labels throughout North America.

In January 2004, Watt announced the launch of ODIN, a web based software
system that manages every stage of the design process in real-time, from
concept development and package design to printing, packaging and getting the
product to market. With anytime, anywhere access, ODIN provides Watt clients
the ability to efficiently track and manage their projects, and know instantly
if there are any project deviations, timeline extensions, or delays from
suppliers. The efficiency gained through ODIN offers a significant competitive
advantage for Watt and its clients, and which management believes will ensure
at least a 20 percent increase in speed-to-market.

9



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Pursue strategic acquisitions.

Our historical growth has been achieved partially by way of strategic
acquisition. We have used this strategic acquisition strategy to extend
Envoys geographic reach and breadth of service offering and to add a
significant degree of diversification to our business model. The opportunities
for continued growth through acquisition are currently more limited as a result
of a shortage of available capital to fund such acquisitions.

In November 2003, Envoy announced its intention to embark on a strategic
M&A expansion plan to further enhance its leadership position in both North
America and Europe, and has hired Jefferies & Company, Inc. to advise it on
acquisition opportunities.

On February 10, 2004 Envoy announced that it has entered into an
underwriting commitment with Canaccord Capital Corporation (Canaccord) under
which Canaccord has agreed to buy from Envoy and sell to the public 26,315,800
Units (the Units) at C$1.33 per Unit, each Unit consisting of one common
share of Envoy (the Common Shares) and one half of one transferable common
share purchase warrant (the Warrants). Each whole Warrant will entitle the
holder to purchase one Common Share at a price of C$1.80 per Common Share for a
period of five years from the closing of the transaction.

The Units will be offered under Envoys final short form prospectus dated
February 13, 2004. The sale of the 26,315,800 Units will result in Envoy
receiving gross proceeds of approximately Cdn. $35 million. Envoy has also
granted to Canaccord an over-allotment option to purchase an additional
3,947,370 Units at Cdn. $1.33 per Unit for a period of 60 days from the closing
of the offering, which is expected to occur on or about February 20, 2004.

Management believes the offering will enable Envoy to achieve two
important goals. In addition to allowing Envoy to eliminate its debt, the size
of this offering will permit Envoy to engage in a meaningful M&A program.

Industry Overview

Consumer and Retail Branding

In all areas of marketing and product design, we believe that companies
are looking to extend their customer relationships and influence consumer
behavior. Consumer and retail branding services encompass the entire customer
experience, from product packaging to the retail environment, and are a key
component of a companys marketing communications strategy.

The consumer and retail branding services sector is rapidly evolving into
a global marketplace, as companies are increasingly looking for expertise in
the development and maintenance of their brands on a global basis. Companies
are looking to firms that can deliver a consistent message to consumers through
packaging and retail design, regardless of geography.

Retail is the second largest industry in the U.S. and one of the largest
industries worldwide. Unlike other, more volatile sectors, the retail industry
continues to grow at a steady rate, particularly as developing countries
achieve greater economic stability.

This reality, coupled with Watts lengthy history of success and
innovation in the retail industry, presents Envoy with a spectrum of
opportunities  from overall brand strategy to store design to private label
program development  with key customers like grocers, mass merchants,
pharmacies and home improvement companies. Envoy has made a series of
announcements subsequent to the 2003 fiscal year-end that highlight the
significant opportunities we are pursuing.

Advertising Market

In this environment we are seeing a shift in the market with larger
clients tapping into the creative and strategic resources of smaller, more
entrepreneurial shops where clients work directly with the firms senior
management. Not only are large Canadian clients assigning work to Canadian
boutiques, but US clients are also looking north of the border for a full range
of agency services

Government Regulations

The marketing communications industry is subject to extensive government
regulation, both domestic and foreign, with respect to the truth in and
fairness of advertising. There are also a number of US federal and state laws
and regulations directed at the advertising and marketing of specific products,
such as food and drug products. In addition, there has been an increasing
tendency on the part of businesses to resort to the judicial system, as well as
industry self-regulatory procedures, to

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challenge comparative advertising of their competitors on the grounds that
the advertising is false and deceptive. There can be no assurance Envoy will
not be subject to claims against it or Envoys clients by other companies or
governmental agencies or that such claims, regardless of merit, would not have
a material adverse effect on Envoys future operating performance.

C. Organizational Structure

Envoy has operations in the United States, the United Kingdom, Continental
Europe and Canada. Significant subsidiaries are as follows:

Company
    
    % of Ownership
    
    Jurisdiction of IncorporationCommuniqué Incentives Inc.
    
    
    100
    
    
    
    OntarioWatt International Inc.
    
    
    100
    
    
    
    OntarioWatt Gilchrist Limited
    
    
    100
    
    
    
    United KingdomJohn Street Inc.
    
    
    70
    
    
    
    Ontario


D. Property, Plants and Equipment

We currently operate offices in the following cities: Toronto, Canada,
London, UK, Leeds, UK, San Francisco, USA, Strassbourg, France, and
Bentonville, USA. The terms of our principal leases are as follows:

Envoys principal executive offices consist of a four-story office
building of approximately 20,000 square foot located at 172 John Street,
Toronto, Ontario. In addition to Envoy, Watt IDG, a division of Watt
International, and John Street Inc. are also located at these premises. These
premises have been leased pursuant to a lease with a term that commenced on
July 1, 1999 and expires in June 2009 at a current annual rent of $135,000 Cdn.
with rent increases each year of the lease term. In connection with the lease
negotiation, the landlord advanced to Envoy $750,000 Cdn. as a loan, with an
interest rate of 3.5% per annum to be repaid over 10 years. The leasehold
improvements involved modernization of the facilities and other modifications
expected to benefit both Envoy and the landlord. The principal balance of this
loan at September 30, 2003 was $481,297 Cdn.

Until January 2003, Envoys principal executive offices consisted of a
five-story office building of approximately 35,000 square feet located at 26-28
Duncan Street, Toronto, Ontario, Canada. In January 2003, Envoy exited the
Duncan Street facility after negotiating a release of the term of the lease
extension. Envoy had no further obligation to the landlord beyond February 1,
2003.

In October 2002 Envoy sold the assets of Devlin to management of the
subsidiary. The new company formed to acquire Devlin has been assigned all
future obligations for all leases formerly held by Devlin.

In 2003 when the Hampel business was closed down, Envoy negotiated a
settlement with the landlord agreeing to make 22 monthly payments of $33,316
(U.S) commencing on March 1, 2003, and a final payment of $150,000.00 (U.S.) in
February 2005. The payments are secured by a letter of credit in the amount of
$250,000 (U.S.) in favour of the landlord. During 2002 Envoy negotiated the
exit of approximately 18,000 square feet of office space located on the 12th
floor of 111 Fifth Avenue, New York, New York. Under the terms of the lease
settlement agreement Envoy agreed to pay the landlord on September 30, 2002
$500,000 (U.S.) cash, issued 250,000 common shares of Envoy at a price of $.50
(U.S.) per share and agreed to make 22 additional monthly payments of $36,638
(U.S.) commencing October 1, 2002. The payments are secured by a letter of
credit in the amount of $250,000 (U.S.) in favour of the landlord. The total
expense relating to the 12th floor termination agreement has been reflected as
restructuring costs in fiscal 2002.

The offices of Envoys wholly owned subsidiary, Watt International,
consist of an office building of approximately 26,600 square feet located at
300 Bayview, Toronto, Ontario, Canada. The premises are leased pursuant to a
lease with a current annual rent of $243,318 Cdn. that expires in March 2010.

The offices of Envoys wholly-owned subsidiary, Gilchrist, consist of an
industrial building of approximately 72,000 square feet located on Ring Road,
West Park, Leeds, West Yorkshire, England. The premises are leased pursuant to
a lease with a current annual rent of £150,000, which expires in October 2006.
Gilchrist has additional office space of approximately 950 square feet located
at 12 Great Newport Street, London, England. The premises are leased pursuant
to a lease with a current annual rent of £57,000, which expires in August 2005.

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|Item 5. |  | OPERATING AND FINANCIAL REVIEW AND PROSPECTS
|------- |  | --------------------------------------------

The following discussion should be read in conjunction with, and is
qualified in its entirety by, the financial statements of Envoy and notes
relating thereto included elsewhere in thisForm 20-F. The information
contained in this Item# 5 refers to financial statements of Envoy, which are
presented in Canadian dollars and are prepared in accordance with Canadian
GAAP. Canadian GAAP differs in certain significant respects from U.S. GAAP.
Reconciliation to U.S. GAAP is set forth in Note 22 to the Notes to the audited
Financial Statements of Envoy. Historical results of operations, percentage
relationships and any trends that may be inferred therefrom are not necessarily
indicative of the operating results of any future period.

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The following discussion contains forward-looking statements that are
subject to significant risks and uncertainties. There are a number of
important factors that could cause actual results to differ materially from
historical results and percentages and results anticipated by the
forward-looking statements contained in the following discussion. Statements
in thisForm 20-Fconcerning Envoys outlook or future economic performance,
anticipated profitability, revenues, commissions and fees, expenses or other
financial items and statements made with respect to any future events,
conditions, performance or other matters are forward looking statements as
that term is defined under the U.S. federal securities laws. Forward-looking
statements are subject to risks, uncertainties, and other factors, which could
cause actual results to differ materially from those stated in such statements.
Such risks, uncertainties and factors include, but are not limited to, (i) the
uncertain acceptance of the Internet and Envoys Internet and other technology,
(ii) there can be no assurance that Envoy will continue to be able to grow
profitably or manage its growth, (iii) risks associated with acquisitions, (iv)
risks associated with competition, (v) that Envoys quarterly operating results
have fluctuated in the past and are expected to fluctuate in the future, and
(vi) that the loss of services of certain key individuals could have a material
adverse effect on Envoys business, financial condition or operating results.

Overview

Net Revenue.(Referred to as gross margin in fiscal 1999 and prior) 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.

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.

Operating Expenses.Salaries and benefits, general and administrative
expenses and occupancy costs represent our operating expenses. Salaries and
benefits expenses include salaries, employee benefits, incentive compensation,
contract labour and other payroll related costs, which are expensed as
incurred. General and administrative costs include business development,
office costs, technology, professional services and foreign exchange.
Occupancy costs represent the costs of leasing and maintaining company
premises.

Tax Matters.With respect to Envoys 2003 fiscal year, Envoy had tax loss
carry forwards sufficient to cover its Canadian income tax liabilities and has
approximately $12.7 million in loss carry forwards. Details on income taxes
are set forth in Note 13 to the Notes to the audited consolidated Financial
Statements of Envoy.

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A.   Operating Results

Envoys 2003 results improved significantly compared to the previous year,
reflecting managements execution of the fiscal 2002 restructuring plan to more
closely align costs with projected revenue, to divest of non-core assets, to
reduce bank indebtedness and to focus resources on our consumer and retail
branding businesses.

During the 2nd quarter of fiscal 2003, Envoy decided to discontinue the
operations of our New York advertising agency, Hampel Stefanides Inc.
(Hampel, or the New York Agency) after conducting a review, in conjunction
with Envoys banks, of the ongoing viability, future prospects, cash needs and
local debt situation of this company. We also successfully terminated the
real-estate lease commitments associated with our New York Agency. The cost
associated with this termination of the real estate has been fully expensed in
the Financial Statements. Following the liquidation of the assets, the shares
of Hampel were sold for a nominal consideration. In the first quarter of
fiscal 2003, the assets of our technology company Devlin Multimedia Inc.
(Devlin) were sold, and our other technology company, Sage Information
Consultants Inc. (Sage), was shutdown.

As a result of our restructuring efforts and closure of unprofitable
businesses, our salaries and benefits and occupancy costs have decreased
significantly.

Our salaries decreased to $28.0 million from $45.1 million or 38% from the
previous year. As we stated in the second quarter, our goal was to improve our
labour to net revenue ratio to 62% from 72% in the second half of fiscal 2003.
We achieved our goal, as our labour to net revenue ratio was 62% for the 4th
quarter and was approximately 60% for the second half of fiscal 2003. We
expect our labour to net revenue ratio for fiscal 2004 to continue at these
levels.

Our occupancy costs have decreased to $3.3 million from $4.7 million or
31% from the previous year. As we stated in the second quarter of fiscal 2003,
we estimated that our occupancy to net revenue ratio would improve from 9% in
the second quarter of fiscal 2003 to 6.5% in the second half of fiscal 2003.
We achieved an occupancy to net revenue ratio of 6.2% for the 3rd quarter and
6.3% for the 4th quarter of fiscal 2003. We expect our occupancy to net
revenue ratio to continue to improve and be in the 5.7% range in fiscal 2004.

In April 2003, we normalized our banking arrangements with our bankers,
The Toronto-Dominion Bank and Fleet Bank. The new credit agreement with our
bankers provides for a demand operating line of credit of up to $7.0 million.
In order to obtain the new credit facility, we reduced our level of bank
borrowings by issuing $2.0 million of convertible debentures that mature during
the 2nd quarter of 2008, and renegotiated the terms of our existing debentures.
Costs associated with the new credit agreement have been charged to interest
expense. By September 30, 2003, we had reduced our total outstanding debt to
$11.4 million from $14.0 million at the end of fiscal 2002.

Management continues to focus on our core strength, consumer and retail
branding. In the 4th quarter of fiscal 2003, Watt represented 87% of our
business. In the third quarter of fiscal 2003, Watt signed new client
contracts valued at more than $12.0 million over a three to four year period.
This new business will begin positively impacting our revenue in the second
half of fiscal 2004.

Net revenue for the year ended September 30, 2003 was $42.4 million, which
included net revenue of $3.4 million from subsidiaries disposed of or shut down
during the year. At June 30, 2003 we had estimated that our net revenue for the
4th quarter would be consistent with our 3rd quarter in the range of $11.0
million. The actual net revenue for the 4th quarter was $10.8 million. Net
revenue in the second half of fiscal 2003 increased 2.5% over the net revenue
in the first half of fiscal 2003, slightly lower than our expected growth of
3.5%. This lower than anticipated growth is due to a number of factors,
including slower than anticipated start up of our new Watt division (providing
reprographic services in Canada), and the significant declines in the travel
business impacting the operations of our corporate events subsidiary.

As a result of the operational changes and financial changes discussed
above, management believes the business will continue to show improved earnings
and a strengthened balance sheet. Consistent with prior years, we expect the
second half of fiscal 2004 to be stronger than the first half of fiscal 2004,
reflecting the seasonal patterns in our business.

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Fiscal Year Ended September 30, 2003 compared to Fiscal Year Ended September 30, 2002

Net revenue for the twelve months ended September 30, 2003 was $42.4 million,
compared to $59.1 million for the twelve months ended September 30, 2002, a
decrease of $16.7 million or 28%.

Revenue Mix by type of service and by client location:

Net Revenue (in millions)By Type of Service
    
    2003
    
    % of total
    
    2002
    
    % of total
    
    2001
    
    % of totalMarketing
    
    $
    7.8
    
    
    
    18
    %
    
    $
    12.4
    
    
    
    21
    %
    
    $
    24.4
    
    
    
    29
    %Consumer and retail
branding
    
    
    34.3
    
    
    
    81
    %
    
    
    38.2
    
    
    
    65
    %
    
    
    43.4
    
    
    
    52
    %Technology
    
    
    0.3
    
    
    
    1
    %
    
    
    8.5
    
    
    
    14
    %
    
    
    15.0
    
    
    
    19
    %$
    42.4
    
    
    
    100
    %
    
    $
    59.1
    
    
    
    100
    %
    
    $
    82.8
    
    
    
    100
    %


By Client Location
    
    2003
    
    % of total
    
    2002
    
    % of total
    
    2001
    
    % of totalCanada
    
    $
    7.0
    
    
    
    17
    %
    
    $
    16.0
    
    
    
    27
    %
    
    $
    21.8
    
    
    
    26
    %United States
    
    
    18.2
    
    
    
    43
    %
    
    
    27.7
    
    
    
    47
    %
    
    
    41.0
    
    
    
    50
    %Europe *
    
    
    17.2
    
    
    
    40
    %
    
    
    15.4
    
    
    
    26
    %
    
    
    20.0
    
    
    
    24
    %$
    42.4
    
    
    
    100
    %
    
    $
    59.1
    
    
    
    100
    %
    
    $
    82.8
    
    
    
    100
    %




|* |  | Europe includes the United Kingdom and Continental Europe
|- |  | ---------------------------------------------------------

Net revenue by type of service:

Approximately $8.2 million of the decrease in revenue in fiscal 2003 compared
to fiscal 2002 is related to a decline in revenue from our technology business.
In the first quarter of fiscal 2003, the assets of our technology company,
Devlin Multimedia Inc. (Devlin), were sold and our other technology company,
Sage Information Consultants Inc. (Sage), was shutdown.

Net revenue from marketing has decreased by approximately $4.6 million. After
a lengthy review of all options available to us, Envoy closed its New York
Agency in February 2003 (see Note 14 to the Financial Statements). The $5.0
million decrease in net revenue from the closure of our New York Agency was
offset in part by growth in our Canadian advertising agency, which increased by
$1.1 million. The decrease in revenue was also a result of a decrease in our
corporate event business of $0.7 million, due to a decline in travel as a
result of a number of factors, including the Iraq war, SARS and the slowdown in
the North American economy. Based on our revenue forecast, we expect this
trend in corporate events revenue to continue in the first quarter of fiscal
2004.

Net revenue from consumer and retail branding services decreased approximately
$3.9 million, from $38.2 million to $34.3 million, a decline of 10%.
Approximately $1.9 million of this decrease relates to the closing of certain
unprofitable parts of the design business during fiscal 2002, including our
operations in Sweden, Boston and New York. Although net revenue in fiscal 2003
from our consumer and retail branding services are lower than last year, there
have been significant new business wins over the second half of fiscal 2003.
We believe that the balance of the decline in revenue is related primarily to
the timing of customer branding programs. Therefore, revenue from these sources
should improve in the coming year.

Net revenue by customer location:

Net revenue from Canada decreased approximately $9.0 million, from $16.0
million in fiscal 2002 to $7.0 million in fiscal 2003, a decline of 56%.
Approximately, $8.2 million of that was due to the restructuring of business in
2002, the shutdown of Sage and the sale of the assets of Devlin in 2003. Net
revenue from the US has decreased approximately $9.5 million. Approximately
$5.0 of the decline is due to the closure of our New York Agency, the US
revenue related to our shutdown of Sage and the closure of the Boston and New
York consumer and retail branding part of the business. The remainder of the
decline is due to reductions in business with other US customers in our ongoing
operations. Net revenue from Europe in our consumer retail branding has
increased approximately $1.8 million during fiscal 2003. We expect continued
growth and improvement from Europe in fiscal 2004.

15



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Our three largest clients in fiscal 2003 accounted for 54% of our net revenue
for the current period, while our three largest clients in fiscal 2002
accounted for 43% of our net revenue. In fiscal 2003, one client accounted for
26% of our net revenue compared to fiscal 2002 when there were no clients that
accounted for more than 20% of net revenue.

Operating ExpensesOperating expenses decreased by 39% to $37.3 million for
fiscal 2003 from $61.5 million in fiscal 2002. The primary reasons for the
decrease in operating expenses were a decrease in salaries and benefits of
$17.1 million, or 38%, and a decrease in general and administrative expenses of
$5.7 million, or 49%, which included the recognition of deferred foreign
exchange gains of $0.8 million from the closure of our New York Agency.
Occupancy costs decreased from $4.7 million to $3.3 million, a decline of $1.4
million, or 31%. The decline in operating expenses is the result of the
restructuring plan implemented in fiscal 2002, the closure of our New York
Agency and Sage, the sale of Devlin, the continued effort by management to
reduce costs by reducing or eliminating leased office space in Toronto and New
York and general reductions in staffing levels.

Salaries and benefits expenses for fiscal 2003 were $28.0 million, compared to
$45.1 million for fiscal 2002, a decrease of $17.1 million or 38%. We continue
to closely monitor salaries and benefits to ensure that our expected revenue
matches our labour costs.

General and administrative expenses for fiscal 2003 were $6.0 million, compared
to $11.7 million for the previous year. This represents a decrease of $5.7
million, or 49%. Included in general and administrative expenses for fiscal
2003 is a foreign exchange gain of $0.3 million. This gain consists of a
foreign exchange loss from operations of ($0.5) million and the recognition of
deferred foreign exchange gains of $0.8 million from the closure of our New
York Agency, details of which are provided in Note 14 to the Financial
Statements (also see Note 22 (e) for U.S. accounting for the foreign exchange).
Excluding the foreign exchange gain related to the closure of our New York
Agency, general and administrative expenses declined by 42%. This decline
reflects the significant efforts we have been making to reduce expenses
prudently and to incur expenditures that will add revenue and improve
efficiencies. In addition to the cost cutting reductions in our ongoing
business, our general and administrative expenses have decreased as a result of
the disposal of subsidiaries.

Occupancy costs for fiscal 2003 were $3.3 million, compared to $4.7 million for
fiscal 2002. This decrease of $1.4 million is a result of the termination of
office space obligations in both New York and Toronto, our restructuring
initiative in fiscal 2002, and the shutdown of our New York Agency. We expect
our annual occupancy expense going forward to be approximately $2.8 million as
the effect of our reductions impacts the full fiscal period.

Depreciation expenseDepreciation expense for fiscal 2003 decreased to $2.4
from $2.9 million in fiscal 2002, due to the closure of the subsidiaries
discussed earlier.

Interest expenseInterest charges for the year ended September 30, 2003 were
$2.7 million, compared to $1.2 million for the previous fiscal year. As
described in Note 10 to the Financial Statements, the increase in interest
expense is due to a number of factors as indicated below.

We issued $1.8 million of convertible debentures in April 2002, $2.0 million of
convertible debentures in September 2002 and $2.0 million of convertible
debentures in April 2003. The proceeds of the convertible debentures were used
to help fund our restructuring costs and to pay down our outstanding bank
facility. The convertible debentures carry interest at the rate of 10%, and an
imputed, non-cash interest expense, details of which are explained in Note 11.
During fiscal 2003, the imputed interest amounted to $0.7 million, compared to
$0.1 million in fiscal 2002. We also had expenses relating to our new credit
facility of $0.5 million in fiscal 2003, compared to $0.4 million in fiscal
2002. The interest rate of our bank facility increased from a blended rate of
approximately 3% in fiscal 2002 to 8% by the end of fiscal 2003. During fiscal
2003, convertible debentures totaling $1.4 million were converted. Subsequent
to the year-end all outstanding convertible debentures were converted to common
shares of Envoy.

As a result of the above, we expect that our annual interest expense will
decrease significantly by approximately $1.5 million in fiscal 2004. Most of
the decrease will be realized in the third and fourth quarters of fiscal 2004.

Unusual ItemDuring fiscal 2002, as a result of changes in the banking loan
arrangements, Envoy was no longer allowed to fully utilize its $40 million line
of credit and repayment terms were accelerated. Accordingly, the remaining
unamortized portion of deferred financing charges, totaling $0.8 million, was
written off. In fiscal 2003, all charges on the credit facility were expensed
as part of interest expense and financing costs.

16

RestructuringDuring fiscal 2002, management implemented a restructuring plan,
downsizing its workforce, exiting excess office space and writing off redundant
capital assets. Accordingly, Envoy recorded a restructuring expense of $10.9
million in fiscal 2002. The restructuring included a reduction of 156 people,
as well as the abandonment of 18,000 square feet of leased office space in New
York City and 35,000 square feet of leased office space in Toronto. The annual
expense savings in salaries, benefits and occupancy costs associated with the
restructuring was approximately $17.2 million. During fiscal 2003, a recovery
of $0.3 million of restructuring costs was recorded.

Gain on Closure of SubsidiariesDuring the 2nd quarter of fiscal 2003, Envoy
decided to discontinue the operations of Hampel after conducting a review, in
conjunction with Envoys banks, of the ongoing viability, future prospects,
cash needs and local debt situation of Hampel. As Envoys banks held a first
charge on the assets of Hampel, the net proceeds from the liquidation of those
assets were applied in reduction of Envoys debt obligations to the banks.
Consequently, there were not sufficient proceeds from the liquidation to make
any payment to the unsecured creditors of Hampel. Following the liquidation of
the assets, the shares of Hampel were sold for nominal consideration. As Envoy
has no obligation to pay the creditors of Hampel, the consolidated accounts of
Envoy reflect a gain on the shutdown of Hampel. We also successfully
terminated the real-estate lease commitments associated with Hampel. The cost
associated with the termination of this real estate has been fully expensed in
the Financial Statements. Further details are provided in Note 14 to the
Financial Statements. In the first quarter, we discontinued our technology
operations by disposing of Devlin, and shutting down Sage.

As a result of the above, we experienced a gain on closure of subsidiaries of
$2.5 million. Further detail is provided in Note 15 to the Financial
Statements. Also see Note 22 to the Financial Statements for U.S. accounting.

Income taxesIn 2003, our effective income tax rate, as a percentage of pretax
earnings before goodwill write-down and amortization, was 8.9% compared to the
2002 recovery rate of (26.7%). The difference relates primarily to Envoy having
a pretax loss in fiscal 2002, compared to a pretax profit in fiscal 2003.
Details are provided in Note 2(g) and Note 13 to the Financial Statements.

The major components of the 2003 income tax adjustments from the statutory
rates were items that were not taxable (or tax deductible) including the gain
on disposal of subsidiaries, differences in tax rates for income earned by
subsidiaries in both the UK and USA, and an increase in the valuation allowance
in Canada.

Envoy currently has recorded a substantial valuation allowance for losses
generated in Canadian companies that are not expected to be fully utilizable
against future income. Canada does not have a consolidated tax filing process
like the USA, and as such, losses that exist must be applied only against
income of that company. Where the losses are not expected to be available to
offset future income, the full value of these losses have not been recorded.

GoodwillIn accordance with the new accounting standards outlined in sections
1581 and 3062 of the CICA Handbook, goodwill is no longer amortized, but is
tested at least annually for impairment. As a result, there was no
amortization of goodwill during fiscal 2003. Transition rules in effect for
fiscal 2002 had allowed for the amortization of goodwill on businesses acquired
before July 1, 2001. Goodwill amortized in fiscal 2002 was $2.2 million.

During fiscal 2002, Envoy 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 impairment had
arisen. Accordingly, Envoy recorded a write-down of $37.9 million in fiscal
2002, primarily related to the goodwill associated with the businesses of Sage,
Promanad and Hampel. See Note 8 to the Financial Statements. At September 30,
2003, Envoy determined that no further charge for goodwill impairment was
required.

Net Earnings (loss)Envoy earned net income of $2.5 million in fiscal 2003,
compared to a loss of ($53.4) million in fiscal 2002. Included in the loss for
fiscal 2002 is a writedown of goodwill in the amount of ($37.9) million, and an
amortization of goodwill of ($2.2) million. The loss in fiscal 2002 before the
goodwill writedown and amortization was ($13.3) million.

Fiscal Year Ended September 30, 2002 compared to Fiscal Year Ended September 30, 2001

Net revenue decreased by 29%, to $59.1 million in the fiscal year ended
September 30, 2002, from $82.8 million in the fiscal year ended September 30,
2001. This decrease resulted from a combination of general economic slowdown
in the North American and U.K. marketplace as well as specific slowdown within
the advertising and technology markets, particularly in New York. Our revenue
from marketing activities decreased $12.0 million from $24.4 million to $12.4
million, the largest portion of this decrease being a decline in revenue in New
York of $11.7 million and a further decrease of approximately $300,000 in
revenue relating to the Canadian marketing group. Technology revenue decreased
$6.5 million from $15.0 million to $8.5 million. Again, part of the reduction
in revenue relates to the decline in business at our New York operations. Net
revenue from consumer and retail branding services decreased $5.2 million from
$43.4 to $38.2 million.

17



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##### 



Our five largest clients in fiscal 2002 accounted for 48.6% of our net
revenue for such period, while our five largest clients in fiscal 2001
accounted for 37.5% of our net revenue for such period. No single client
accounted for over 20% of our net revenue in either of such years.

Operating ExpensesSalaries and benefits, general and administrative and
occupancy costs represent our operating expenses. Salaries and benefits
expenses include salaries, employee benefits, incentive compensation, contract
labour, and other payroll related costs, which are expensed as incurred.
General and administrative costs include business development, office costs,
technology and professional services. Occupancy costs represent the costs of
leasing and maintaining company premises.

Operating expenses decreased by 19% to $61.5 million for fiscal 2002 from
$75.8 million in fiscal 2001. The primary reasons for the decrease in
operating expenses were a decrease in salaries and benefits of $8.6 million, or
16%, and a decrease in general and administrative expenses of $5.7 million, or
33%. Occupancy costs decreased slightly from $4.8 million to $4.7 million.

In response to the significant decrease in revenues experienced by the
Company in the first six months of the year, management implemented a plan to
reduce salary and benefit expenses during the second quarter. As a result of
this downsizing, a reduction of approximately $15.2 million in annual salary
and benefit expenses was achieved, although all of these savings were not
realized during the current year. General and administrative expenses also
decreased as a result of both cost saving measures initiated by management and
the overall decline in revenues. During fiscal 2002, the Company exited from
excess office space in New York and subsequent to year-end the Company exited
from excess office space in Toronto.

EBITDAEarnings before interest, taxes, depreciation and amortization
before unusual items, restructuring costs and goodwill write-down (Adjusted
EBITDA), we have excluded these charges as management believes such costs are
non-recurring in nature. In fiscal 2002, we had a loss of ($2.4) million in
Adjusted EBITDA, as defined, compared with income of $7.0 million in fiscal
2001.

Depreciation expenseDepreciation expense remained consistent at $2.9
million in fiscal 2002 and fiscal 2001.

Interest expenseInterest expense increased from $744,000 to $1.2
million. The increase in interest was largely due to an increase in interest
rates year over year on our borrowing under our credit facility. Our effective
rate of interest on this debt increased during the year to 8.5% from 4.5%. In
addition, interest expense increased because of the issuance of $3.8 million
convertible debentures during the year with interest being paid at 10% per
annum. The convertible debentures also have a non-cash interest expense
resulting from the accounting for the conversion features of the debentures.
See Note 11 to the audited consolidated financial statements. Interest expense
also includes fees associated with the restructuring of our bank loan facility
of $290,000.

Unusual ItemDuring 2002, as a result of changes in the banking loan
arrangements, the Company was no longer allowed to fully utilize its $40
million line of credit and repayment terms were accelerated. Accordingly, the
remaining unamortized portion of deferred financing charges totaling $751,000
was written off.

RestructuringAs mentioned above, in response to a general economic
downturn impacting the Companys business, management implemented a
restructuring plan during the first half of fiscal 2002. The restructuring
involved downsizing its workforce, exiting excess office space and writing off
redundant capital assets. Accordingly, the Company has recorded a
restructuring expense of $10.9 million. The restructuring includes a reduction
of 156 employees, as well as the abandonment of 18,000 square feet of leased
office space in New York City, and 35,000 square feet of leased office space in
Toronto. The annual expense savings in salaries, benefits and occupancy costs
associated with this restructuring is expected to be approximately $17.2
million.

The above factors resulted in a decrease in our earnings (loss) before
income taxes and goodwill amortization and goodwill write-down from $1.5
million to ($18.1) million.

18



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##### 



Income taxesIn 2002, our effective income tax rate as a percentage of
net income before goodwill amortization was (26.7%) compared to our 2001
effective tax rate of 92.2%. The difference relates primarily to the Company
having a pretax loss in fiscal 2002, compared to pretax income in fiscal 2001,
and certain expenses deducted in the accounts which have no corresponding
deduction for income taxes as set forth in Note 13 in our audited consolidated
financial statements. These expenses increased in 2002 due to the write-down
of goodwill, certain costs incurred in connection with equity financing, and
certain compensation expenses, which may not be deductible for tax purposes.
See also Note 2(g) in our audited consolidated financial statements. In 2002
management recorded a valuation allowance of approximately $2.4 million in the
carrying value of the deferred tax assets. The valuation allowance was
considered appropriate because, in the opinion of management it is likely not
able to realize the benefits.

Goodwill amortizationGoodwill amortization decreased from $3.0 million
to $2.2 million due largely to the write-down of goodwill during the year.
Goodwill is largely not deductible for income tax purposes.

Write-down of goodwillDuring the year 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 ended March
31, 2002, as well as later in fiscal 2002. Accordingly, the Company recorded a
write-down of $37.9 million, which primarily related to the goodwill associated
with the businesses of Sage, Promanad and Hampel. See Note 8 to the audited
consolidated financial statements.

Net Earnings (loss)Primarily as a result of the foregoing factors, net
loss increased from ($2.9) million in fiscal 2001 to ($53.4) million in fiscal
2002.

B.   Liquidity and Capital Resources

In September 2002, Envoy entered into a forbearance agreement with the
lenders under its bank credit facility, under which Envoy was required to meet
certain financial tests and to make a series of principal payments, with the
balance due on April 30, 2003.

In April 2003, the Company finalized the amendments to its banking
arrangements and thereby normalized its credit facilities with its bankers.
This new amendment gives the Company a demand operating line of $7,000,000.
Interest rates are variable based on certain leverage ratios ranging from Prime
plus 2.5% to 5.0% and at September 30, 2003 the effective interest rate was
8.0% (2002  8.5%). The demand operating facility is to be repaid and
cancelled by April 30, 2004. Of the outstanding borrowings as at September 30,
2003, $nil (2002  Cdn. $3,178,691; US $2,002,704) is denominated in U.S.
dollars. The facility is secured by a general security agreement against the
Company and all of its subsidiaries.

As a condition to the credit facility amendment, the Company amended the
terms of the existing debentures as described in Note 11 to the Financial
Statements.

As a condition to the amendment, the Company was required to raise
$2,000,000 to reduce its bank debt. On April 24, 2003 the Company issued
$2,000,000 convertible debentures as part of the refinancing plan. These
debentures may be converted into common shares, at a price of $0.15 each, for a
total of 13,333,333 common shares.

As a condition of the amendment, the Company issued to its bankers
warrants to purchase 2,300,000 common shares of the Company. Costs associated
with this new banking amendment have been charged to interest expense and
financing costs.

On October 31, 2003, the Company borrowed the amount of $4,500,000, of
which $4,000,000 was raised by way of secured debentures and $500,000 by way of
unsecured term notes. The loans bear interest at the rate of 10% per annum,
mature on October 31, 2006, and carry warrants entitling the lenders to
purchase, on or before April 24, 2008, one Envoy common share for each $2.00
principal amount of the loan at a price of $0.15 per share. These warrants
were part of the Warrants previously issued to Envoys bankers as described in
Note 10(a) and Note 10 (c), and released to Envoy as part of its commitment to
the bankers to raise additional funds to further reduce its bank indebtedness.
All of these warrants have been exercised subsequent to the year-end.
$3,800,000 of the loan proceeds were used to pay down the bank debt.

Our principal capital requirements have been used to fund acquisitions,
including related earnout, capital expenditures and working capital purposes.
The Company does not have any substantial earnout payments remaining on its
previous acquisitions.

19



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##### 



We had a working capital deficit of ($1.9) million and a cash balance of
$2.7 at September 30, 2003. At September 30, 2002, we had a working capital
deficit of ($7.7) million and a cash balance of $470,000. Working capital
includes the reclassification of bank debt of $6.1 million in fiscal 2003, and
$9.8 million in fiscal 2002, as a current liability due to the terms of the
amended banking agreement entered into with the lenders, which requires full
repayments of outstanding balances by April 30, 2004. The Company has used any
excess cash balances to fund its working capital requirements however, such
cash balance can vary significantly depending on client spending patterns and
collection results. Subsequent to year-end, the Company has arranged a $4.5
million replacement of a portion of the lending facility as described above.

Net cash provided by (used in) operating activities was $5.3 million for
the year ended September 30, 2003, ($20.9) million for the year ended September
30, 2002, and $19.9 million for the year ended September 30, 2001. Net cash
provide by (used in) operating activities before any increase or decrease in
non-cash operating working capital was $2.5 million for the year ended
September 30, 2003, ($7.6) million for the year ended September 30, 2002, and
$2.5 million for the year ended September 30, 2001. The increase in working
capital is primarily a result of the higher earnings during 2003 and 2001.

Net cash provided by (used in) financing activities was ($2.1) million for
the year ended September 30, 2003, $3.0 for the year ended September 30, 2002,
and ($0.3) million for the year ended September 30, 2001. The higher use of
cash related to financing activities has been the result of the changes in the
banking arrangements of Envoy over the past two years. Envoy has issued $2.0
million and $3.8 million of convertible debentures in fiscal 2003 and 2002
respectively (see Notes 10 and 11 to the consolidated financial statements) as
part of financing for this change in the bank borrowings of the Company.

Net cash used in investing activities was ($1.1) million for the year
ended September 30, 2003, ($3.7) million for the year ended September 30, 2002,
and ($5.4) million for the year ended September 30, 2001. The decrease is a
result of lower expenses relating to acquisitions during 2003 and a reduction
in capital expenditures over both of the previous two years.

At September 30, 2003 we had restricted cash of $1.0 million. At
September 30, 2002 we had restricted cash of $1.8 million. This cash
represents customer deposits held in trust for travel. See Note 4 to our
audited consolidated financial statements.

Prospectus

On February 6, 2004, Envoy filed with the securities regulatory
authorities of British Columbia, Alberta, Manitoba, Ontario, New Brunswick and
Prince Edward Island, a preliminary short form prospectus qualifying the
distribution in such provinces of units (Units) comprised of common shares of
Envoy and common share purchase warrants.

In connection with the distribution, Envoy will appoint Canaccord Capital
Corporation as its agent to offer Units for sale on an underwritten basis.
This transaction is subject to certain conditions including normal regulatory
approvals. Closing is anticipated to occur in late February 2004. The proceeds
will be used to repay, subject to negotiation with certain lenders, all of
Envoys outstanding loan indebtedness, with the balance to be used for possible
future acquisitions and for general corporate and working capital purposes.

On February 10, 2004 Envoy announced that it has entered into an
underwriting commitment with Canaccord Capital Corporation (Canaccord) under
which Canaccord has agreed to buy from Envoy and sell to the public 26,315,800
Units (the Units) at C$1.33 per Unit, each Unit consisting of one common
share of Envoy (the Common Shares) and one half of one transferable common
share purchase warrant (the Warrants). Each whole Warrant will entitle holder
to purchase one Common Share at a price of C$1.80 per Common Share for a period
of five years from the closing of the transaction.

The Units will be offered under Envoys final short form prospectus dated
February 13, 2004. The sale of the 26,315,800 Units will result in Envoy
receiving gross proceeds of approximately Cdn. $35 million. Envoy has also
granted to Canaccord an over-allotment option to purchase an additional
3,947,370 Units at Cdn. $1.33 per Unit for a period of 60 days from the closing
of the offering, which is expected to occur on or about February 20, 2004.

Management believes the offering will enable Envoy to achieve two
important goals. In addition to allowing Envoy to eliminate its debt, the size
of this offering will permit Envoy to engage in a meaningful M&A program.

20



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##### 



Critical Accounting Policies

The significant accounting policies used by Envoy in preparing its
consolidated financial statements are described in Note 2 to the Financial
Statements and should be read to ensure a proper understanding and evaluation
of the estimates and judgements made by management in preparing those Financial
Statements. Envoys Financial Statements are prepared in accordance with
Canadian generally accepted accounting principles. Envoy also prepares a
reconciliation to United States generally accepted accounting principles, which
is included in Note 22 to the Financial Statements.

Inherent in the application of some of those policies is the judgement by
management as to which of the various methods allowed under generally accepted
accounting principles is the most appropriate to apply in the case of Envoy.
As well, management must take appropriate estimates at the time the financial
statements are prepared.

Although all of the policies identified in Note 2 to the Financial
Statements are important in understanding the Financial Statements, the
policies discussed below are considered by management to be central to
understanding the Financial Statements, because of the higher level of
measurement uncertainties involved in their application.

GoodwillGoodwill represents the price paid for acquisitions in excess of
the fair market value of net tangible and intangible assets acquired.
Effective October 1, 2002, the Company adopted the recommendations of the CICA
Handbook Section 3062 Goodwill and Other Intangible Assets. These standards
require that goodwill and other intangible assets determined to have indefinite
lives are no longer amortized but tested for impairment based on the fair value
of the Companys reporting units on adoption of the standard and at least
annually thereafter. Transitional impairment tests for goodwill were completed
as at October 1, 2002 and an annual impairment test completed on March 31, 2003
and, as a result no write-down was required. Prior to 2003, the Company
amortized goodwill on a straight-line basis over periods ranging from 7 to 25
years and goodwill was considered to be impaired since the future anticipated
undiscounted cash flows from the acquired businesses were less than the
carrying value of goodwill. Goodwill arising on acquisitions completed after
June 30, 2001 was not amortized.

Income TaxesEnvoy accounts for income taxes using the liability method.
Under this method, future income taxes are recognized at the enacted or
substantially enacted tax rate expected to be applicable at the anticipated
date of the reversal for all significant temporary differences between the tax
and accounting bases of assets and liabilities and for certain tax carry
forward items. Future income tax assets and liabilities 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 operating results and
future tax rates could vary materially, and accordingly the value of income tax
assets and liabilities could change by material amounts.

Envoy currently has recorded a substantial valuation allowance for losses
generated in Canadian companies that are not expected to be fully utilizable
against future income. Canada does not have a consolidated tax filing process
like the USA, and as such, losses that exist must be applied only against
income of that company. Where the losses are not expected to be available to
offset future income, the full value of these losses have not been recorded.

Impact of Recently Issued Canadian Accounting Standards

Stock  Based Compensation and Other Stock-based Payments

In accordance with the requirements of the CICA Handbook, effective
October 1, 2002, Envoy adopted the new standards of the CICA Handbook Section
3870, Stock-based Compensation and Other Stock-based Payments. The standard
requires either the recognition of a compensation expense for grants of stock,
stock options and other equity instruments to employees, based on the estimated
fair value of the instrument at the grant date or, alternatively, the
disclosure of pro forma net earnings and earnings per share data, as if
stock-based compensation had been recognized in earnings. Envoy has elected to
record as an expense, only amounts given to directors and other non-employees
as compensation for work performed beyond the normal duties of the position and
to disclose pro forma net earnings and earnings per share data. See Note 12 to
the Financial Statements for more information.

Goodwill

In accordance with the new accounting standards outlined in sections 1581
and 3062 of the CICA Handbook, goodwill is no longer amortized, but is tested
at least annually for impairment. Transition rules in effect for fiscal 2002
had allowed for the amortization of goodwill on businesses acquired before July
1, 2001.

21



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|C. |  | Research and Development, Patents and Licenses, etc.
|-- |  | ----------------------------------------------------

Not applicable



|D. |  | Trend Information
|-- |  | -----------------

Not applicable



|E. |  | Off-balance sheet arrangements
|-- |  | ------------------------------

None



|F. |  | Commitments and Contractual Commitments
|-- |  | ---------------------------------------

Set out below is a summary of the amounts due and committed under contractual
cash obligations at September 30, 2003 (all amounts in thousands):

Due in 1 year
    
    Due between
    
    Due between
    
    Due afterTotal
    
    or less
    
    years 2 and 3
    
    years 4 and 5
    
    5 yearsBank credit facility
and other debt
    
    $
    8,193
    
    
    $
    6,858
    
    
    $
    942
    
    
    $
    258
    
    
    $
    135Operating leases
    
    
    8,562
    
    
    
    1,904
    
    
    
    3,225
    
    
    
    2,142
    
    
    
    1,291Restructuring and shut
down of subsidiaries
commitments
    
    
    1,352
    
    
    
    1,015
    
    
    
    337Convertible debentures*
    
    
    4,390
    
    
    
    
    
    
    
    
    
    
    
    4,390
    
    
    
    Total contractual cash
obligations
    
    $
    22,497
    
    
    $
    9,777
    
    
    $
    4,504
    
    
    $
    6,790
    
    
    $
    1,426




|* |  | The convertible debentures are repayable in cash at maturity on April 24,
2008. See Notes 10 and 11 to the Financial Statements. Subsequent to the
year-end, all convertible debentures have been converted into common shares of
Envoy.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other Commitments

The Company has letters of credit outstanding of U.S. $500,000 which
expire on April 30, 2004.

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.



|G. |  | Safe Harbor
|-- |  | -----------

Not applicable

Item 6. DIRECTORS AND SENIOR MANAGEMENT AND EMPLOYEES



|A. |  | Directors and Senior Management
|-- |  | -------------------------------

The following table sets forth certain information regarding the directors
and senior managers of Envoy as of January 31, 2004. Each director is elected
at the annual meeting of shareholders to serve until the next annual meeting or
until a successor is elected or appointed.

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PositionsName
    
    Age
    
    Held with EnvoyGeoffrey B. Genovese
    
    
    49
    
    
    President, Chairman and Chief
Executive Officer and DirectorJohn H. Bailey
    
    
    58
    
    
    Executive Vice President,
Corporate Secretary and
DirectorDavid Hull1,2
    
    
    47
    
    
    DirectorHugh Aird1,2
    
    
    50
    
    
    DirectorDavid Parkes1,2
    
    
    57
    
    
    DirectorLinda Gilbert
    
    
    35
    
    
    Chief Financial Officer




---

|1 |  | Member of the Audit Committee.       
|- |  | -------------------------------------
| 
|2 |  | Member of the Compensation Committee.

The principal occupations and positions for the past five years and, in
certain cases, prior years of the directors and executive officers of Envoy are
as follows:

Geoffrey B. Genovese. Mr. Genovese founded The Incentive Design Company
Ltd., a business and marketing communications company, in 1981. Envoy acquired
IDC in July 1991. Mr. Genovese currently serves as Chairman, President and
Chief Executive Officer of Envoy Communications Group Inc. and Chief Executive
Officer of Watt International Inc. Mr. Genovese was appointed Chairman in
September 2001. Mr. Genovese has been a Director of Envoy since July 1991.

John H. Bailey. Mr. Bailey is a barrister and a solicitor who has been in
private practice since 1973. Mr. Bailey earned a Bachelor of Commerce and a
Bachelor of Laws degree from the University of Toronto, and a Master of Laws
degree from York University. Mr. Bailey has been a Director of Envoy since
April 1994, Corporate Secretary since August 1997, and Executive Vice-President
since February 2004.

David Hull. Mr. Hull has been the President of Hull Life Insurance
Agencies Inc. since May 1991. Hull Life Insurance Agencies Inc. specializes in
estate planning and life and disability insurance. Prior thereto, Mr. Hull
served as Executive Vice President of Hull Life Insurance Agencies Ltd. and
Thomas I. Hull Insurance Ltd., members of The Hull Group of Companies. Mr.
Hull has been a Director of Envoy since January 1995.

Hugh Aird. Mr. Aird is presently Senior Relationship Manager, Morgan
Stanley Canada. Prior to joining Morgan Stanley Canada in 2003, Mr. Aird was
Vice President, Business Development, Mulvihill Capital Management Inc. Prior
to joining Mulvihill Capital Management Inc. in 2001, Mr. Aird was Vice
Chairman of Merrill Lynch Canada Inc. (formerly Midland Walwyn Capital Inc.).
Mr. Aird first became a director of Envoy on August 20, 1997. As a result of
personal commitments, Mr. Aird resigned as a director on April 1, 2003. On
November 24, 2003, Mr. Aird was re-elected as a director of Envoy.

David ParkesMr. Parkes is presently President of Freefone Inc. Prior to
joining Freefone Inc. in 2003, Mr. Parkes founded David Parkes & Assoc. in
2001. Mr. Parkes was President and CEO of Look Communications Inc. until 2001
and President and CEO of TeleSpectrum Canada Inc. until 1999. Mr. Parkes has
been a Director of Envoy since October 2002.

Linda Gilbert,CAMrs. Gilbert joined Envoy in 1999 as Director of
Finance. In 2003, Mrs. Gilbert was promoted to the position of Chief Financial
Officer. Prior to joining Envoy, Mrs. Gilbert was a manager of KPMG LLP in
Canada, an accounting firm.

The Ontario Business Corporations Act requires that a majority of Envoys
directors be Canadian residents. There are no arrangements or understandings
between any director or executive officer of Envoy pursuant to which he was
selected as such.

23



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##### 





|B. |  | Compensation
|-- |  | ------------

The following table sets forth in Canadian dollars all compensation for
the fiscal year ended September 30, 2003 paid to the Chief Executive Officer of
Envoy and the four other most highly compensated officers who served as
executive officers of the Company (the Named Executive Officers):

All OtherCompensationAnnual Compensation
    
    Long Term Compensation
    
    ($)Awards
    
    PayoutsSecurities
    
    RestrictedOther
    
    Under
    
    Shares
    
    LTIPName and Principal
    
    Salary
    
    Bonus
    
    Annual
    
    Option/SARs
    
    or Restricted
    
    PayoutsPosition
    
    ($)
    
    ($)
    
    ($)
    
    Granted (#)
    
    Share Units ($)
    
    ($)Geoffrey B. Genovese,
Chairman, President
and Chief Executive
Officer
    
    
    496,903
    
    
    
    
    
    135,000
    1
    
    
    
    
    
    
    
    
    
    Linda Gilbert,
Chief Financial
Officer, Envoy
    
    
    131,810
    
    
    
    
    
    
    
    
    
    75,000
    
    
    
    
    
    
    Stephen Bloomfield,
Executive
Vice President, Watt Gilchrist
    
    
    70,0002
    
    
    
    
    
    
    
    
    
    100,000
    
    
    
    
    
    
    Arthur Fleischmann,
President, John
Street Inc.
    
    
    225,000
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    Patrick Rodmell
Managing Director,
Watt International
Inc.
    
    
    204,288
    
    
    
    
    
    30,000
    
    
    
    100,000
    
    
    
    
    
    
    


1
    The amount was paid to a corporation related to Mr. Genovese as an annual
management fee.2
    The amount paid to Stephen Bloomfield is paid in Pounds sterling. For
the year ended September 30, 2003 the exchange rate for this payment would
be done at a rate of $2.3425 per pound.


The following table sets forth options granted under the Stock Option Plan to
the Named Executive Officers of the Company in the most recently completed
fiscal year:

Percentage of Total
    
    
    
    
    
    
    
    
    
    Market Value ofOptions Granted to
    
    
    
    
    
    
    
    
    
    Shares UnderlyingShares Under
    
    Employees in
    
    
    
    
    
    Exercise Price
    
    Options on Date ofName
    
    Options Granted (#)
    
    Financial Year
    
    Date of Grant
    
    ($/Security)
    
    Grant ($/Security)
    
    Expiry DateGeoff Genovese
    
    Nil
    
    Nil
    
    Nil
    
    Nil
    
    Nil
    
    NilLinda Gilbert
    
    
    25,000
    1
    
    
    1.37
    %
    
    October 28, 2002
    
    $0.25
    
    $0.25
    
    October 27, 200750,000
    3
    
    
    2.75
    %
    
    July 7, 2003
    
    $0.40
    
    $0.40
    
    July 6, 2008Arthur Fleischmann
    
    
    100,000
    2
    
    
    5.49
    %
    
    October 28, 2002
    
    $0.25
    
    $0.25
    
    October 27, 200750,000
    3
    
    
    2.75
    %
    
    July 7, 2003
    
    $0.40
    
    $0.40
    
    July 6, 2008Patrick Rodmell
    
    
    100,000
    2
    
    
    5.49
    %
    
    October 28, 2002
    
    $0.25
    
    $0.25
    
    October 27, 2007Stephen Bloomfield
    
    
    100,000
    2
    
    
    5.49
    %
    
    October 28, 2002
    
    $0.25
    
    $0.25
    
    October 27, 2007


24



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NOTES:



|1. |  | These options vest at the rate of
1/3rd during each of the 1st, 2nd and
3rd years of a five year term.
|-- |  | ------------------------------------------------------------------------------------------------------



|2. |  | These options vest at the rate of 1/3rd during each of the 2nd, 3rd and
4th years of a five year term.
|-- |  | ------------------------------------------------------------------------------------------------------



|3. |  | These options vest immediately.
|-- |  | -------------------------------

The following table sets forth options exercised under the Stock Option Plan to
the Named Executive Officers of the Company in the most recently completed
fiscal year and the value of unexercised options held by them as at the most
recent fiscal year:

Stock Options Exercised During 2003 Fiscal Year

Value ofUnexercised Options
    
    UnexercisedNumber of Shares
    
    
    
    
    
    at FY-End (#)
    
    In-the Money OptionsAcquired on
    
    Aggregate Value
    
    Exercisable/
    
    at FY-End ($)Name
    
    Exercise
    
    Realized ($)
    
    Unexercisable
    

Exercisable/Unexercisable1Geoff Genovese
    
    Nil
    
    Nil
    
    Nil
    
    NilLinda Gilbert
    
    
    38,334
    
    
    $
    31,350
    
    
    
    40,000/16,666
    
    
    $14,000/$14,166Arthur Fleischmann
    
    
    50,000
    
    
    $
    44,750
    
    
    
    150,000/100,000
    
    
    
    0/$85,000Patrick Rodmell
    
    Nil
    
    Nil
    
    
    7,500/100,000
    
    
    
    0/$85,000Stephen Bloomfield
    
    Nil
    
    Nil
    
    
    0/100,000
    
    
    
    0/$85,000




---

|1 |  | The closing stock price of the Common Shares of the Company on the
Toronto Stock Exchange on September 30, 2003 was $1.10.
|- |  | --------------------------------------------------------------------------------------------------------------------------

The Company does not provide any pension, retirement plan or other
remuneration for its directors or officers that constitutes an expense to the
Company, nor are there any plans or arrangements in respect of compensation
received or that may be received by executive officers in the Companys most
recently completed or current fiscal year to compensate such officers in the
event of the termination of employment or a change in control of the Company.

Employment Contracts and Termination Agreements

The Company and its subsidiaries, John Street Inc. (John St.), Watt
International Inc. (Watt) and Watt Gilchrist Limited (Gilchrist), have
entered into employment contracts with the Named Executive Officers.

Geoffrey B. Genovese has agreed to act as the Companys Chairman and
President and Chief Executive Officer at an annual base salary of $550,000,
together with a discretionary bonus based on the achievement of agreed upon
criteria established from time to time by the Compensation Committee. Mr.
Genovese has agreed to a 10% reduction in his base salary for an indefinite
period of time, commencing February 1, 2002. This agreement provides for a
severance payment equivalent to $300,000 plus an amount equal to three times
the total remuneration and other compensation paid to Mr. Genovese and his
management company during the 12 month period preceding termination, if Mr.
Genoveses employment is terminated, without cause, by the Company and a
severance payment equivalent to $300,000 plus an amount equal to two times the
total remuneration and other compensation paid to Mr. Genovese and his
management company during the 12 month period preceding termination, if there
is a change of control of the Company or Mr. Genovese ceases to be Chairman of
the Board of the Company, other than as a result of his resignation,
disqualification or death. An annual fee of $150,000, also reduced by 10% since
February 1, 2002, is also payable to Mr. Genoveses management company pursuant
to a management agreement with the Company. The management agreement has a
fixed term ending on September 30, 2004.

Linda Gilbert has agreed to act as the Companys Chief Financial Officer
at an annual salary of $150,000. This agreement provides for a severance
payment equivalent to her base salary for a period of up to six months, if her
employment is terminated, without cause, by the Company.

Arthur Fleischmann has agreed to act as the President of John St. at an
annual base salary of $300,000, together with an annual cash bonus based on the
performance of John St. This agreement provides for a severance payment
equivalent to his base salary and benefits for a period of ten months, if his
employment is terminated, without cause, by the Company.

25



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##### 



Patrick Rodmell has agreed to act as the Managing Director of Watt at an
annual base salary of $225,000 together with an annual cash bonus based on the
performance of Watt. This agreement provides for a severance payment equivalent
to his base salary and benefits for a period of up to four months, if his
employment is terminated, without cause, by the Company.

Stephen Bloomfield has agreed to act as Vice President and Chief Executive
Officer of Gilchrist at an annual base salary of £70,000 together with an
annual cash bonus based on the performance of Gilchrist. This agreement
provides for a severance payment equivalent to his base salary for a period of
twelve months, if his employment is terminated, without cause, by the Company.

Compensation of Directors

Certain directors, who are not officers of the Company or any of its
affiliates, are compensated for their services as directors and members of a
committee through a combination of annual and meeting attendance fees. Messrs.
Aird and Parkes are each entitled to receive an annual directors fee of
$25,000.00. In addition, each of Messrs. Aird, Parkes and Hull are entitled to
receive a fee of $500.00 for each Board meeting and $1,000.00 for each
committee meeting attended. No compensation is paid to the other directors for
their services as directors or members of a committee. Directors are also
entitled to participate in the Companys Stock Option Plan.

In the fiscal year ended September 30, 2003, Envoy paid approximately
$313,000 Cdn. to John H. Bailey, Barrister & Solicitor, for legal services
provided to Envoy.

Directors and Officers Liability Insurance

The Company maintains liability insurance for the benefit of the directors
and officers of the Company and its subsidiaries against liability incurred by
them in their respective capacities. The current annual policy limit is
$5,000,000. Under the policy, individual directors and officers are reimbursed
for losses incurred in their capacities as such, subject to a deductible of
$250,000 for claims arising in the United States and $150,000 for all other
claims. The deductible is the responsibility of the Company. The Company paid
the annual premium of $125,000.



|C. |  | Board Practices
|-- |  | ---------------

CORPORATE GOVERNANCE

The following describes the Companys corporate governance practices with
specific reference to the guidelines contained in the Report of the TSX
Committee on Corporate Governance in Canada (the TSX Report).

Mandate of the Board

The Board of Directors (the Board) holds meetings whenever appropriate
to oversee the conduct of the Companys business and monitor and evaluate the
day-to-day management of the Company. With respect to risk management
activities, the Board is presented, at each meeting, reports on operations,
financial status, material contracts and litigation.

In addition to the Boards statutory responsibilities under the Business
Corporations Act of Ontario, the Boards stewardship responsibilities include
the following: (a) assessing the principal risks arising from or incidental to
the business activities of the Company; (b) appointing all senior executives of
the Company and, through the Compensation Committee of the Board, developing
and implementing the executive compensation policies and reviewing the
performance of senior executives with reference to the Companys policies,
stated budget and other objectives; (c) overseeing the Companys policies
regarding public communications, investor relations and shareholder
communications; and (d) monitoring and assessing, through the Audit Committee
of the Board, the scope, implementation and integrity of the Companys internal
information, audit and control systems.

The Board has delegated the responsibility for monitoring the
effectiveness of the Companys internal information systems to the Company.
The Audit Committee is also responsible for reviewing and appraising the
soundness, adequacy and application of financial and other operating controls,
determining the extent of compliance with established policies, plans and
procedures and ascertaining the reliability and timeliness of management data
developed within the organization.

26



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##### 



Composition of the Board

The articles of the Company provide that there shall be a Board of not
less than 3 or more than 10 directors. There are currently five directors of
the Company, one of whom is an inside and related (as such terms are
defined in the TSX Report) director; one of whom is an outside and related
director; and three of whom are outside and unrelated directors. Geoffrey B.
Genovese, the Chairman and President of the Company is the inside and related
director. Hugh Aird, David Hull and David Parkes are the outside and unrelated
directors of the Company. John H. Bailey is an outside director but, as counsel
who provides ongoing legal services to the Company, may be considered to be a
related director. The Board intends to periodically examine its size and
constitution to ensure responsible corporate governance and effective corporate
management.

Governing Committees

The directors have established the Audit Committee and the Compensation
Committee to focus resources and expertise in certain areas of the Boards
mandate.

Audit Committee

The Board has delegated to the Audit Committee of the Board responsibility
for ensuring management has designed and implemented an effective management
system and for reviewing internal information, audit, control and management
systems. The Audit Committee is comprised of three directors, Hugh Aird, David
Parkes and David Hull. All three members of the Audit Committee are outside and
unrelated directors of the Company.

The Audit Committee is responsible for reviewing the Companys annual
consolidated financial statements and reporting to the Board in connection
therewith. The Audit Committee is also responsible for monitoring the
Companys internal controls and information gathering systems and dealing with
the Companys external auditors. On February 22, 2000, the Audit Committee
adopted a formal written audit committee charter, which specifies the auditors
accountability to the Board and the authority and responsibilities of the Audit
Committee.

Compensation Committee

The Compensation Committee is comprised of three directors, David Hull,
David Parkes and Hugh Aird, all of whom are outside and unrelated directors.
The Compensation Committee reviews, administers and monitors the Companys
executive compensation plans, policies and programs, including the compensation
of all executive officers and, if requested by the President, reviews the
compensation of any other officer or senior employee.

Corporate Governance Committee

The Board has not, as yet, established a Corporate Governance Committee as
recommended in the TSX Report and believes that the matters ordinarily
considered by such a committee are effectively administered by the Boards
outside and unrelated directors. Although, at present, the Board has determined
this to be the most practical approach to responsible corporate governance, the
Board will continue to evaluate this determination as circumstances dictate.

Expectations of the Board

The Board expects management of the Company to report to the Board in a
comprehensive, accurate and timely fashion on the business and affairs of the
Company generally and on specific matters that it considers to have material
consequences for the Company and its shareholders. Management is expected to
continually develop and review the Companys strategic plan to make the
decisions necessary to give effect to the plan; to adhere to the Companys
operational policies; and to monitor the Companys financial performance in
comparison to the annual budget, with the ultimate goal of enhancing
shareholder value.

Shareholder Communication

The objective of the Companys shareholder communication policy is to
ensure open and timely exchange of information relating to the Companys
business, affairs and performance, subject to the requirements of applicable
securities legislation and other statutory and contractual obligations limiting
the disclosure of such information. Information material to the Companys
business is released through news wire services, the general media, telephone
conferences and shareholder mailings, thereby ensuring timely dissemination.
Additionally, individual queries, comments or suggestions can be made at any
time directly to the Companys secretarial department located at its head
office.

27



---



##### 





|D. |  | Employees
|-- |  | ---------

As at January 31, 2004, Envoy has 154 full time employees based in
Toronto, Canada, 12 based in the United States, and 73 based in the United
Kingdom and Continental Europe. Of this total, 17 employees were engaged in
marketing, and 222 in consumer and retail branding.

As at January 31, 2003, Envoy has 175 full time employees based in
Toronto, Canada, 31 based in the United States, and 133 based in the United
Kingdom and Continental Europe. Of this total, 29 employees were engaged in
marketing, and 310 in consumer and retail branding.

As at January 31, 2002, Envoy had 292 full time employees based in
Toronto, Canada, 60 based in the United States, and 158 based in the United
Kingdom and Continental Europe. Of this total, 75 employees were engaged in
marketing, 361 in consumer and retail branding, and 73 in technology.



|E. |  | Share Ownership
|-- |  | ---------------

As of January 31, 2004, the options and other rights to purchase common
shares of Envoy consisted of stock options to purchase 1,229,748 common shares.

Options

Stock Option Plan

The Company has established a Stock Option Plan pursuant to which options
to purchase Common Shares and stock appreciation rights may be granted to
directors, officers, employees or certain consultants to the Company or any of
its subsidiaries, as determined by the Board, at prices to be fixed by the
directors, subject to limitations imposed by any Canadian stock exchange on
which the Common Shares are listed for trading and any other regulatory
authority having jurisdiction in such matters. The Common Shares subject to
each option shall become purchasable at such time or times as may be determined
by the directors. Stock appreciation rights (SARs) may only be granted in
conjunction with an option and, when exercised, entitle the holder to receive
an amount equal in value to the excess of the market value of the Common Shares
over the price of the related option. The excess amount is payable in Common
Shares having a market value equal to such excess. Options are non-assignable
and non-transferable by the option-holder and shall be exercisable during the
option-holders lifetime only by the option-holder. Stock appreciation rights
are non-transferable and terminate when the related option terminates.

The maximum number of Common Shares currently reserved for issuance upon
exercise of options under the Stock Option Plan is 4,000,000 Common Shares. As
at September 30, 2003 options to purchase 1,741,416 Common Shares have been
granted and are outstanding under the Stock Option Plan. There are no SARs
outstanding under the Stock Option Plan. The aggregate number of Common Shares
reserved for issuance to any one individual under the Stock Option Plan may not
exceed 5% of the issued and outstanding Common Shares.

During fiscal 2003, the President of the Company, Geoffrey B. Genovese,
elected to cancel his stock options to purchase 950,000 Common Shares, being
all of the options to purchase Common Shares granted to Mr. Genovese under the
Stock Option Plan. The cancellation of these stock options resulted in an
additional 950,000 Common Shares being available for grant, without increasing
the maximum number of Common Shares reserved for issuance upon exercise of
options under the Stock Option Plan.

28



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##### 



The following table describes the options to acquire common shares that
are outstanding pursuant to the Stock Option Plan or otherwise as of January
31, 2004:

Number of CommonShares UnderClass of Optionee
    
    Options Granted
    
    Exercise Price
    
    Date of ExpiryLinda Gilbert
    
    
    8,333
    
    
    $
    0.25
    
    
    October 27, 2007Linda Gilbert
    
    
    5,000
    
    
    $
    3.05
    
    
    August 1, 2007Linda Gilbert
    
    
    15,000
    
    
    $
    3.90
    
    
    March 7, 2004Arthur Fleischmann
    
    
    66,666
    
    
    $
    0.25
    
    
    October 27, 2007Arthur Fleischmann
    
    
    150,000
    
    
    $
    3.05
    
    
    August 1, 2007Patrick Rodmell
    
    
    66,666
    
    
    $
    0.25
    
    
    October 27, 2007Patrick Rodmell
    
    
    7,500
    
    
    $
    3.05
    
    
    June 27, 2006Stephen Bloomfield
    
    
    100,000
    
    
    $
    0.25
    
    
    October 27, 2007408,333
    
    
    $
    0.25
    
    
    October 27, 200775,000
    
    
    $
    0.61
    
    
    May 29, 2007232,250
    
    
    $
    3.05
    
    
    August 1, 200735,000
    
    
    $
    3.90
    
    
    March 7, 200415,000
    
    
    $
    6.20
    
    
    August 10, 2004Other
    
    
    45,000
    
    
    $
    7.40
    
    
    March 30, 2005Total
    
    
    1,229,748


29



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##### 



The following table sets forth shares owned by the Chairman, President and
Chief Executive Officer of Envoy and the four other most highly compensated
officers who served as executive officers of the Company as of January 31, 2004
(the Named Executive Officers):

Number of CommonIdentity of Person
    
    Shares Owned
    
    Percent of Outstanding ClassGeoff Genovese
    
    
    1,138,551
    
    
    
    1.80
    %Linda Gilbert
    
    
    733
    
    NilArthur Fleischmann
    
    
    Nil
    
    NilPatrick Rodmell
    
    
    Nil
    
    NilStephen Bloomfield
    
    
    Nil
    
    Nil


Convertible Debentures

As described in Note 11 to the audited consolidated financial statements,
Envoy issued one series of convertible debentures in fiscal 2003 for proceeds
of $2.0 million, and two series of convertible debentures in 2002 for proceeds
of $3.8 million. The debentures are convertible until their respective
maturity dates into a maximum of 38,666,667 common shares.

As at September 30, 2003 convertible debentures with a face value of $1,410,000
were converted into 9,400,000 common shares. Subsequent to the year-end, all
of the outstanding convertible debentures were converted into 29,266,667 common
shares by January 31, 2004.

Share Purchase Warrants

As described in Note 10 to the financial statements, Envoy issued 2,300,000
share purchase warrants to its bankers as part of normalizing its banking
facilities. These warrants were part of the Warrants previously issued to
Envoys bankers as described in Note 10(a) and Note 10 (c), and released to
Envoy as part of its commitment to the bankers to raise additional funds to
further reduce its bank indebtedness. All of these warrants have been exercised
subsequent to the year-end, and 2,300,000 common shares have been issued.

Item 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



|A. |  | Major Shareholders
|-- |  | ------------------

Ownership of Envoys securities are recorded on the books of its transfer
agent in registered form, however the majority of such shares are registered in
the name of intermediaries such as brokerage firms and clearing houses on
behalf of their respective clients and in general Envoy does not have knowledge
of the beneficial owners thereof, except for the beneficial ownership by
officers and directors of Envoy. Envoy is not directly or indirectly owned or
controlled by another corporation or entity or by any foreign government.
Envoy is not a party to any arrangement, and does not know of any other
arrangements, the operation of which may at a subsequent date result in a
change in control of Envoy.

At a special meeting of the shareholders Envoy held on January 8, 2004,
the shareholders approved an amendment to the Articles of the Company to
increase its authorized share capital from 50,000,000 common shares to
200,000,000.

As of January 31, 2004, Envoy had an authorized share capital of
200,000,000 common shares without par value, of which 62,950,363 shares were
issued and outstanding.

The following table sets forth certain information regarding the ownership
of outstanding common shares of Envoy as of January 31, 2004 with respect to
each person known by Envoy to be the owner either of record or beneficially of
more than 5% of the issued and outstanding common shares of Envoy. As used in
this table, beneficial ownership refers to the sole or shared power to vote
or direct the voting or to dispose or direct the disposition of any security.
A person is deemed to be the beneficial owner of securities that can be
acquired within 60 days from the date of this Form 20-F through the exercise of
any option, warrant or right. Common shares subject to options, warrants or
rights which are currently exercisable or exercisable within 60 days are deemed
outstanding for computing the ownership percentage of the person holding such
options, warrants or rights, but are not deemed outstanding for computing the
ownership percentage of any other person.

30



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##### 



Identity of Person or Group
    
    Number of Common Shares
    
    Percent of Outstanding ClassCDS & Co1
    
    
    58,403,014
    
    
    
    92.8
    %NCI Account
P.O. Box 1038 Station A
25 The Esplanade
Toronto, Ontario M5W 1G5Cede & Co.1
    
    
    3,146,987
    
    
    
    5.0
    %P.O. Box 20
Bowling Green Station
New York, NY 10274
USAGeoffrey B. Genevose2
    
    
    1,138,551
    
    
    
    1.8
    %




|1 |  | CDS & Co. and Cede & Co., respectively, are the record holders of these shares and in
general the ultimate beneficial owners of these shares are not known to Envoy.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



|2 |  | Includes common shares held by family members.
|- |  | ----------------------------------------------

See also Item 6.E. Share Ownership for information regarding outstanding
stock options to purchase 1,229,748 common shares.

As of January 31, 2004 there were 62,950,363 outstanding common shares of
Envoy of which 59,467,161 were held of record by 35 Non-U.S. residents and
3,483,202 of which were held of record by 136 U.S. residents. The foregoing
information regarding the number and the country of residence of Envoys
shareholders does not reflect those shareholders whose shares are being held of
record by brokerage clearing houses and in general the ultimate beneficial
owners of these shares are not known to Envoy.

As disclosed in Note 6 to the Financial statements, the following are
transactions that took place during fiscal 2003 that involved related parties:



|B. |  | Related Party Transactions
|-- |  | --------------------------

In October and November 2002 the Company sold the operations of Devlin
Multimedia Inc. (Devlin) to Catherine Devlin and Sage to a management group
of that company (see Note 15).

During the year, Richard Genovese, brother of the CEO and Christine
Genovese, wife of the CEO, loaned the Company $225,000 of which $150,000 was
outstanding to Richard Genovese at year-end. The loan bears interest at 10%
per annum and is repayable on demand.

During the year, Claudine Bailey, wife of the director and corporate
secretary, loaned the Company $75,000 which was repaid prior to year end. The
loan bore an interest rate of 10% per annum, and was repayable on demand.

During the year, Richard Genovese, Christine Genovese and Claudine Bailey
were part of the group that loaned the Company $2,000,000 of convertible
debentures described in Note 11. In total, these relatives of officers loaned
the Company $1,850,000, of which $1,070,000 was outstanding at year-end, and
were all converted by January 31, 2004.

Richard Genovese loaned $1,200,000 of which $870,000 was outstanding at
year-end. Christine Genovese loaned $400,000 of which $100,000 was outstanding
at year-end. Claudine Bailey loaned $250,000 of which $100,000 was outstanding
at year-end.

Except as disclosed above, no director or executive officer, and no
relative or spouse of the foregoing persons (or relative of such spouse) who
has the same house as such person or is an executive officer, or director, of
any parent or subsidiary of Envoy, has, or during the last fiscal year of Envoy
had, any material interest, direct or indirect, in any transactions, or in any
proposed transaction, which in either such case has materially affected or will
materially affect Envoy.

31



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##### 



Under the applicable Canadian provincial securities laws, insiders
(generally officers and directors of the Registrant and its subsidiaries) are
required to file individual insider reports of changes in their ownership in
the Registrants securities within 10 days following any trade in Envoys
securities. Copies of such reports are available for public inspection at the
offices of the British Columbia Securities Commission, Suite 1100, 865 Hornby
Street Vancouver, British Columbia V6Z 21-14 (telephone 604/660-4800), at the
offices of the Alberta Securities Commission, 410-300 5th Avenue, S.W.,
Calgary, Alberta T2P 3C4 (telephone 403/297-6454), at the offices of the Quebec
Securities Commission, Stock Tower Exchange, 800 Victoria Square, Montreal,
Quebec M42 1G3 (telephone 514/940-2150) and at the offices of the Ontario
Securities Commission, 20 Queen Street West, 18th Floor, Toronto, Ontario M5H
358 (telephone 416/597-0681).

Item 8. FINANCIAL INFORMATION

See Item 17 Financial Statements.

Item 9. THE OFFER AND LISTING



|A. |  | Offer and Listing Details
|-- |  | -------------------------

Envoys common shares are listed for trading on the Toronto Stock Exchange
(the TSX) under the symbol ECG and on the Nasdaq Small Cap Market
(Nasdaq) under the symbol ECGI. The common shares began trading on Nasdaq
on June 6, 2000 and on the TSX on September 3, 1997. From March 1984 until
September 2, 1997 Envoys shares traded on the Vancouver Stock Exchange.

The following table sets forth the reported high and low sale prices in
Canadian dollars for the common shares on the TSX for the fiscal, quarterly and
monthly periods indicated.

High
    
    LowFiscal 1999
    
    
    9.20
    
    
    
    3.40Fiscal 2000
    
    
    10.35
    
    
    
    4.80Fiscal 2001
    
    
    8.75
    
    
    
    2.10Quarterly 2002First Quarter
    
    
    2.90
    
    
    
    1.45Second Quarter
    
    
    1.75
    
    
    
    0.76Third Quarter
    
    
    1.16
    
    
    
    0.41Fourth Quarter
    
    
    0.49
    
    
    
    0.20Quarterly 2003First Quarter
    
    
    0.47
    
    
    
    0.14Second Quarter
    
    
    0.32
    
    
    
    0.11Third Quarter
    
    
    0.58
    
    
    
    0.11Fourth Quarter
    
    
    1.55
    
    
    
    0.39


32



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##### 



High
    
    LowFor the month endingJanuary 31, 2004
    
    
    1.82
    
    
    
    0.87December 31, 2003
    
    
    1.26
    
    
    
    1.04November 30, 2003
    
    
    1.45
    
    
    
    1.20October 31, 2003
    
    
    1.39
    
    
    
    1.18September 30, 2003
    
    
    1.55
    
    
    
    1.10August 31, 2003
    
    
    1.25
    
    
    
    0.69


The following table sets forth the reported high and low sale prices in US
dollars of trading for the common shares as reported on Nasdaq for the fiscal,
quarterly and monthly periods indicated.

High
    
    LowFiscal 2000
    
    $
    10.50
    
    
    $
    4.34Fiscal 2001
    
    
    5.88
    
    
    
    1.40Quarterly 2002First Quarter
    
    
    1.74
    
    
    
    0.95Second Quarter
    
    
    0.70
    
    
    
    0.51Third Quarter
    
    
    0.70
    
    
    
    0.30Fourth Quarter
    
    
    0.34
    
    
    
    0.13Quarterly 2003First Quarter
    
    
    0.29
    
    
    
    0.09Second Quarter
    
    
    0.22
    
    
    
    0.06Third Quarter
    
    
    0.42
    
    
    
    0.06Fourth Quarter
    
    
    1.14
    
    
    
    0.28For the month endingJanuary 31, 2004
    
    
    1.40
    
    
    
    0.66December 31, 2003
    
    
    0.94
    
    
    
    0.80November 30, 2003
    
    
    1.10
    
    
    
    0.89October 31, 2003
    
    
    1.14
    
    
    
    0.92September 30, 2003
    
    
    1.14
    
    
    
    0.81August 31, 2003
    
    
    0.92
    
    
    
    0.50


33



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##### 



On January 31, 2004 the closing price of the common shares as reported on
the TSX was $1.82 and on Nasdaq was US $1.34.

See Item 6.E. with respect to Share Ownership for information regarding
outstanding stock options to purchase 1,229,748 common shares.



|B. |  | Plan of Distribution
|-- |  | --------------------

Not applicable



|C. |  | Markets
|-- |  | -------

See above section A. Offer and listing details



|D. |  | Selling Shareholders
|-- |  | --------------------

Not applicable



|E. |  | Dilution
|-- |  | --------

Not applicable



|F. |  | Expenses of the issue
|-- |  | ---------------------

Not applicable

Item 10. ADDITIONAL INFORMATION



|A. |  | Share Capital
|-- |  | -------------

Not applicable



|B. |  | Memorandum and Articles of Association
|-- |  | --------------------------------------

Envoys memorandum and articles of association were previously filed with
our registration statement on Form 20-F dated April 20, 2000 for the fiscal
year ended September 30, 1999.



|C. |  | Material Contracts
|-- |  | ------------------

None



|D. |  | Exchange Controls and Other Limitations Affecting Security Holders
|-- |  | ------------------------------------------------------------------

There is no governmental law, decree or regulation in Canada that
restricts the export or import of capital, or that affects the remittance of
dividends, interest or other payments to a non-resident holder of common shares
of Envoy, other than withholding tax requirement. See Item 10.E. Taxation.

There is no limitation imposed by the laws of Canada, the laws of Ontario
or British Columbia or by the charter or other constituent documents of Envoy
on the right of a non-resident to hold or vote common shares of Envoy, other
than as provided in the Investment Canada Act (Canada) (the Investment Act).
The following discussion summarizes the material provisions of the Investment
Act which relate to the acquisition by a non-resident of common shares of
Envoy. This summary is not a substitute for independent advice from an
investors own advisor, and it does not take into account any future statutory
or regulatory amendments.

34



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##### 



The Investment Act generally prohibits implementation of a reviewable
investment by an individual, government or agency thereof, corporation,
partnership, trust or joint venture that is not a Canadian as defined in the
Investment Act (a non-Canadian), unless after review the minister responsible
for the Investment Act (the Minister) is satisfied that the investment is
likely to be of net benefit to Canada. An investment in common shares of Envoy
by a non-Canadian, other than a WTO investor (as defined in the Investment Act)
at any time Envoy is not controlled by a WTO investor, is reviewable under the
Investment Act if the investment is to acquire control of Envoy and the value
of the assets of Envoy is over $5,000,000 Cdn. for a direct acquisition and
over $50,000,000 Cdn. for an indirect acquisition or if an order for review is
made by the Federal Cabinet on the grounds that the investment relates to
Canadas cultural heritage or national identity. An investment in common
shares of Envoy by a WTO investor, or by a non-Canadian at any time Envoy is
controlled by a WTO investor, is reviewable under the Investment Act if the
investment is to acquire control of Envoy and the value of the assets of Envoy
is not less than Cdn. $150,000,000 in terms of constant 1992 dollars, which
for 2003 is Cdn. $223,000,000. A non-Canadian would acquire control of Envoy
for the purposes of the Investment Act if such investor acquired a majority of
the common shares of Envoy unless it could be established that, on the
acquisition, Envoy was not controlled in fact by the acquiror through the
ownership of common shares.

Certain transactions relating to common shares of Envoy would be exempt
from the Investment Act including:



| | (a) |  | an acquisition of common shares of Envoy by a person in the
ordinary course of that persons business as a trader or dealer in
securities,
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | an acquisition of control of Envoy in connection with the
realization of security granted for a loan or other financial
assistance and not for a purpose related to the provision of the
Investment Act,
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | an acquisition of control of Envoy by reason of an
amalgamation, merger, consolidation or corporate reorganization
following which the ultimate direct or indirect control in fact of
Envoy through the ownership of common shares, remained unchanged,
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) |  | an acquisition of voting interests by any person in the
ordinary course of a business carried on by that person that consists
of providing, in Canada, venture capital on terms and conditions not
inconsistent with such terms and conditions as may be fixed by the
Minister, and
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | an acquisition of control of a Canadian business for the
purpose of facilitating its financing and not for any purpose related
to the provisions of the Investment Act on the condition that the
acquirer divest itself of control within two years after it is
acquired or within such longer period as is approved by the Minister.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|E. |  | Taxation
|-- |  | --------

The following discussion is intended to be a general summary of certain
material Canadian federal income tax considerations applicable to holders of
common shares described below and is not intended to be, nor should it be
construed to be, legal or tax advice to any particular person, and no opinion
or representation with respect to income tax considerations is hereby given or
made. It does not take into account any particular partys individual
circumstances and does not address consequences peculiar to any party subject
to special provisions of Canadian income tax law. Each person should consult
their own tax advisors with respect to the tax consequences of an investment in
the common shares in their own particular circumstances.

The following summary is based upon the current provisions of the Income
Tax Act (Canada) (the ITA), and the regulations thereunder and the
Canada-United States Income Tax Convention (1980) as amended (the
Convention), all proposed amendments to the ITA and the regulations
thereunder and the Convention publicly announced by the Department of Finance,
Canada prior to the date hereof, and the current published administrative
policies and assessing practices of the Canada Customs and Revenue Agency.
Except for the foregoing, this summary does not take into account or anticipate
any changes in the law or the Convention or the administrative policies or
assessing practices of the Canada Customs and Revenue Agency whether by
legislative, governmental or judicial action or decision, and does not take
into account or anticipate provincial, territorial or foreign tax legislation
or considerations, which may differ significantly from the Canadian federal
income tax considerations described herein.

35



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##### 



The summary discusses the principal Canadian federal income tax
considerations under the ITA and the regulations thereunder generally
applicable to purchasers of common shares who at all times: (i) for purposes of
the ITA, are not, have not been and will not be or be deemed to be resident in
Canada while they held or hold common shares, deal at arms length with Envoy,
are not affiliated with Envoy, hold their common shares as capital property, do
not use or hold, and will not and will not be deemed to use or hold their
common shares in, or in the course of carrying on a business in Canada, and are
not financial institutions for the purposes of the mark-to-market rules, and
(ii) for purposes of the Convention, are residents of the U.S. and not
residents of Canada and will not hold their common shares as part of the
business property of, or so that their common shares are effectively connected
with, a permanent establishment in Canada or in connection with a fixed base in
Canada (a U.S. Holder).

Amounts in respect of common shares paid or credited or deemed to be paid
or credited as, on account or in lieu of payment of, or in satisfaction of,
dividends to a U.S. Holder will generally be subject to Canadian non-resident
withholding tax. Such withholding tax is levied at a rate of 25%, which may be
reduced pursuant to the terms of the Convention. Under the Convention, the
rate of Canadian non-resident withholding tax on the gross amount of dividends
beneficially owned by a U.S. Holder is 15%. However, where such beneficial
owner is a company which owns at least 10% of the voting stock of Envoy, the
rate of such withholding is 5%.

A U.S. Holder will not be subject to tax under the ITA in respect of any
disposition of common shares (other than a disposition to Envoy) unless at the
time of such disposition such common shares constitute taxable Canadian
property of the holder for purposes of the ITA. If the common shares are
listed on a prescribed stock exchange, for the purposes of the ITA, such as the
TSX, at the time they are disposed of, they will generally not constitute
taxable Canadian property of the U.S. Holder at the time of a disposition of
such shares unless at any time during the 60-month period immediately preceding
the disposition of the common shares, 25% or more of the issued shares of any
class or series of Envoy, or an interest therein or an option in respect
thereof, was owned by the U.S. Holder, by persons with whom the U.S. Holder did
not deal at arms length or by the U.S. Holder and persons with whom the U.S.
Holder did not deal at arms length. The common shares may also be taxable
Canadian property in certain other circumstances. Under the Convention, gains
derived by a U.S. Holder from the disposition of common shares will generally
not be taxable in Canada unless the value of the common shares is derived
principally from real property situated in Canada. If the common shares are
listed on a prescribed stock exchange for the purposes of the ITA at the time
they are disposed of by a U.S. Holder, the U.S. Holder will generally not be
required to comply with the provisions of section 116 of the ITA, which
requires notification to be given to the Canada Customs and Revenue Agency when
certain property is disposed of.



|F. |  | Dividend and Paying Agents
|-- |  | --------------------------

Not applicable



|G. |  | Statement by experts
|-- |  | --------------------

Not applicable



|H. |  | Documents on Display
|-- |  | --------------------

Any statement in this Annual Report about any of our contracts or other
documents is not necessarily complete. If the contract or document is filed as
an exhibit to this Annual Report, the contract or document is deemed to modify
our description. You must review the exhibits themselves for a complete
description of the contract or document. You may review a copy of our filings
with the SEC, including exhibits and schedules filed with this Annual Report,
at the SECs public reference facilities in Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549. You may also obtain copies of such
materials from the Public Reference Section of the SEC, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. You
may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. The SEC maintains a 67 Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. We began to file
electronically with the SEC in May 2000. You may read and copy any reports,
statements or other information that we file with the SEC at the addresses
indicated above and you may also access some of them electronically at the Web
site set forth above. These SEC filings are also available to the public from
commercial document retrieval services. We also file reports, statements and
other information with the Canadian Securities Administrators, or the CSAs, and
these can be accessed electronically at the CSAs System for Electronic
Document Analysis and Retrieval web-site at http://www.sedar.com.

36



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##### 



Item 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Except as described below, Envoy does not have any material position or
exposure with respect to any market risk sensitive instruments (as defined in
Item 11 in Form 20-F).

Interest rate riskThe Companys debt under its lending facilities is
described in Note 10 to the audited consolidated financial statements. Our
credit facility bears interest that is calculated at variable rates. As a
result we are vulnerable to changes in interest rates. At September 30, 2003
the effective interest rate on our facility was 8.0%.

Foreign Currency RiskThe Company is subject to currency risk through its
activities in the United States and United Kingdom. Unfavourable changes in
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, 2003, there
were no foreign currency contracts outstanding. As at September 30, 2003, the
Company has no balance outstanding on the U.S. portion of the bank credit
facility.

Item 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable

PART II

Item 13. DEFAULTS, DIVIDENDS ARREARAGES AND DELINQUENCIES

A. There has been no material default in the payment of principal, interest, a
sinking or purchase fund installment.

B. There is no preferred stock of Envoy or any of its significant subsidiaries
and accordingly there has been no material arrearage in the payment of
dividends or any other material delinquency not cured within 30 days, with
respect to any class of preferred stock of Envoy or any of its significant
subsidiaries.

Item 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

A. There have been no material modifications in the constituent
instruments defining any class of registered securities of Envoy.

B. There has been no material limitation or qualification of the rights
evidenced by any class of registered securities of Envoy by the issuance or
modification of any other class of securities of Envoy.

C. There has been no material withdrawal or substitution of assets
securing any class of registered securities of Envoy.

D. Not applicable

E. Not applicable

Item 15. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure
that the information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. After evaluating the effectiveness of the Companys disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14(c) and
15d-14(c)) September 30, 2003, the our Chief Executive Officer and Chief
Financial Officer have concluded that as of such date, the Companys disclosure
controls and procedure were adequate and effective to ensure that material
information relating to the Company and its consolidated subsidiaries would be
made known to them by others within those entities.

There were no significant changes in our internal controls or in other
factors that could significantly affect these disclosure controls and
procedures during the fiscal year, including any significant deficiencies or
material weaknesses of internal controls that would require corrective action.

37



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##### 



Item 16. RESERVED



|A. |  | Audit Committee Financial Expert
|-- |  | --------------------------------

The Board of Directors has determined that Envoy has at least one
financial expert serving on its audit committee, and that David Parkes is that
audit committee financial expert. David Parkes is an independent audit
committee member.



|B. |  | Code of Ethics
|-- |  | --------------

The Board of Directors has not, as yet, adopted a code of ethics for
Envoys CEO, CFO, chief accounting officer or controller, or for persons
performing similar functions. The Board believes that Envoys existing internal
control procedures and current business practices are adequate to promote
honest and ethical conduct and to deter wrongdoing on the part of these
executives. Nonetheless, Envoy is currently developing and will implement
during its 2004 fiscal year a code of ethics that will apply to these
executives. In accordance with applicable rules, the code of ethics, when
adopted, will be filed with the appropriate bodies and posted on Envoys
website.



|C. |  | Principal Accountant Fees and Services
|-- |  | --------------------------------------



| | (a) |  | Audit Fees were $165 in 2003 and $304 in 2002.
| | --- |  | ----------------------------------------------



| | (b) |  | Audit-Related Fees were $28 in 2003 and $35 in 2002 for
accounting assistance for specific issues, review of MD&A and
responses regulatory bodies.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | Tax Fees were $40 in 2003 and $62 in 2002.
| | --- |  | ------------------------------------------



| | (d) |  | All Other Fees were $nil in 2003 and $nil in 2002.
| | --- |  | --------------------------------------------------



|D. |  | Exemptions from the Listing Standards for Audit Committees
|-- |  | ----------------------------------------------------------

Not Applicable



|E. |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers
|-- |  | ----------------------------------------------------------------------

None

38



---



##### 



PART III

Item 17.  FINANCIAL STATEMENTS

(a)
    
    Envoy Communications Group Inc.Auditors' Report on the financial statements for the year ended September 30, 2003Comments by Auditor for U.S. Readers On Canada-U.S. Reporting Difference(i)
    
    Auditors' Report on the financial statements for the year ended September 30, 2002 and 2001
    
    
    F-1(ii)
    
    Consolidated Balance Sheets as at September 30, 2003 and 2002
    
    
    F-2(iii)
    
    Consolidated Statements of Operations for the years ended September 30, 2003, 2002 and 2001
    
    
    F-3(iv)
    
    Consolidated Statements of Retained Earnings (Deficit) for the years ended September 30,
    
    
    F-42003, 2002 and 2001(v)
    
    Consolidated Statements of Cash Flows for the years ended September 30, 2003, 2002 and 2001
    
    
    F-5(vi)
    
    Notes to Consolidated Financial Statements
    
    
    F-6


Item 18.  FINANCIAL STATEMENTS

Envoy has elected to provide financial statements pursuant to Item 17.

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 2    Not Applicable
| |  |  | ---------------------------



| |  |  | Exhibit 3    Not Applicable
| |  |  | ---------------------------



| |  |  | Exhibit 4    Not Applicable
| |  |  | ---------------------------



| |  |  | Exhibit 5    Not Applicable
| |  |  | ---------------------------



| |  |  | Exhibit 6    Not Applicable
| |  |  | ---------------------------



| |  |  | Exhibit 7    Not Applicable
| |  |  | ---------------------------



| |  |  | Exhibit 8
| |  |  | ---------

Subsidiaries of Registrant

Envoy has operations in the United States, the United Kingdom, Continental
Europe and Canada. Significant subsidiaries are as follows:

Company
    
    % of ownership
    
    Jurisdiction of incorporationCommunique Incentives Inc.
    
    
    100
    
    
    OntarioWatt International Inc.
    
    
    100
    
    
    OntarioWatt Gilchrist Limited
    
    
    100
    
    
    United KingdomJohn Street Inc.
    
    
    70
    
    
    Ontario




| |  |  | Exhibit 9        Not Applicable
| |  |  | -------------------------------



| |  |  | Exhibit 10    Not Applicable
| |  |  | ----------------------------



| |  |  | Exhibit 11    Not Applicable
| |  |  | ----------------------------



| |  |  | Exhibit 12    See attached
| |  |  | --------------------------



| |  |  | Exhibit 13    See attached
| |  |  | --------------------------

39



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##### 



SIGNATURES

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

Envoy Communications Group Inc.Date: February 17, 2004
    
    /s/ Geoffrey B. GenoveseName: Geoffrey B. Genovese
Title: Chairman, President and Chief Executive Officer






---



##### 





| | Envoy Communications
Group Inc.
Consolidated Financial Statements
(Expressed in Canadian dollars)
For the years ended September 30, 2003, 2002 and 2001
| | -------------------------------------------------------------------------------------------------------------------------------------------------------

ContentsAuditors Report  BDO Dunwoody LLP
    
    
    2Comments by Auditor for U.S. Readers On Canada-U.S. Reporting Difference
    
    
    2AAuditors Report  KPMG LLP
    
    
    3Financial StatementsConsolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Retained Earnings (Deficit)
    
    
    6Consolidated Statements of Cash Flows
    
    
    7-8Notes to Consolidated Financial Statements
    
    
    9-44






---



##### 



Auditors Report

To the Directors of Envoy Communications Group Inc.

We have audited the consolidated balance sheet of Envoy Communications Group
Inc. as at September 30, 2003 and the consolidated statement of operations,
retained earnings (deficit) and cash flows for the year then ended. 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 audit.

We conducted our audit in accordance with generally accepted auditing standards
in Canada and the United States. 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,
2003 and the results of its operations and its cash flows for the year then
ended in accordance with Canadian generally accepted accounting principles.

(signed) BDO Dunwoody LLP

Chartered Accountants

Toronto, Ontario
February 2, 2004

2



---



##### 



Comments by Auditor for U.S. Readers
On Canada-U.S. Reporting Difference

In the United States, reporting standard for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is a
change in accounting principles that has a material effect on the comparability
of the Companys financial statements, such as the change described in Note 2
(e) and 2 (h) of the financial statements. Our report to the Shareholders
dated February 2, 2004 is expressed in accordance with Canadian reporting
standards which do not require a reference to such a change in accounting
principles in the Auditors Report when the change is properly accounted for
and adequately disclosed in the financial statements.

(signed) BDO Dunwoody LLP

Chartered Accountants

Toronto, Ontario
February 2, 2004

2A



---



##### 



Auditors Report

To the Shareholders of Envoy Communications Group Inc.

We have audited the consolidated balance sheet of Envoy Communications Group
Inc. as at September 30, 2002 and the consolidated statement of operations,
retained earnings (deficit) and cash flows for the years ended September 30,
2002 and 2001. 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 generally accepted auditing
standards in Canada and the United States. 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 the results of its operations and its cash flows for the years ended
September 30, 2002 and 2001 in accordance with Canadian generally accepted
accounting principles.

(signed) KPMG LLP

Chartered Accountants

Toronto, Ontario
January 9, 2003, (except as to notes 22(d) and 22(e) which are as of February 2, 2004)

3



---



##### 



Envoy Communications Group Inc.
Consolidated Balance Sheets
(Expressed in Canadian dollars)

September 30
    
    2003
    
    2002AssetsCurrentCash
    
    $
    2,696,300
    
    
    $
    469,909Restricted cash (Note 4)
    
    
    1,047,997
    
    
    
    1,831,085Accounts receivable (Note 5)
    
    
    13,100,827
    
    
    
    20,528,048Income taxes recoverable
    
    
    
    
    
    
    2,779,717Future income taxes (Note 13)
    
    
    498,172
    
    
    
    855,000Prepaid expenses
    
    
    884,892
    
    
    
    983,06818,228,188
    
    
    
    27,446,827Capital assets(Note 7)
    
    
    5,861,317
    
    
    
    7,836,728Goodwill(Note 8)
    
    
    10,525,785
    
    
    
    11,314,283Other assets(Note 9)
    
    
    63,468
    
    
    
    116,649Future income taxes(Note 13)
    
    
    2,672,228
    
    
    
    2,459,228$
    37,350,986
    
    
    $
    49,173,715Liabilities and Shareholders EquityCurrentAccounts payable and accrued liabilities
    
    $
    10,787,930
    
    
    $
    21,019,267Income taxes payable
    
    
    322,244
    
    
    
    Deferred revenue
    
    
    1,283,265
    
    
    
    1,475,671Amounts collected in excess of pass-through costs incurred
    
    
    836,722
    
    
    
    2,104,522Bank credit facility and current portion of long-term debt (Note 10)
    
    
    6,857,953
    
    
    
    10,589,11420,088,114
    
    
    
    35,188,574Long-term debt(Note 10)
    
    
    4,566,962
    
    
    
    3,413,697Long-term portion of restructuring costs(Note 17)
    
    
    337,407
    
    
    
    792,27524,992,483
    
    
    
    39,394,546Shareholders equity:Share capital (Note 12)
    
    
    55,988,817
    
    
    
    54,339,390Convertible debentures (Note 11)
    
    
    1,673,408
    
    
    
    1,720,859Deficit
    
    
    (45,090,767
    )
    
    
    (47,629,529
    )Stock based compensation
    
    
    23,268
    
    
    
    Cumulative translation adjustment
    
    
    (236,223
    )
    
    
    1,348,44912,358,503
    
    
    
    9,779,169Commitments
and contingencies(Note 18)Subsequent events(Note 21)Reconciliation to United States generally accepted
accounting principles(Note 22)$
    37,350,986
    
    
    $
    49,173,715


On behalf of the Board:

(Genovese Sig)
    
    (Bailey Sig)Geoffrey B. Genovese,
    
    John H. Bailey,Director
    
    Director


The accompanying notes are an integral part of these financial statements.

4



---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Operations
(Expressed in Canadian dollars)

For the years ended September 30
    
    2003
    
    2002
    
    2001Net revenue
    
    $
    42,427,243
    
    
    $
    59,121,090
    
    
    $
    82,785,541Operating expenses:Salaries and benefits
    
    
    28,038,911
    
    
    
    45,096,981
    
    
    
    53,653,694General and administrative (Note 14)
    
    
    5,973,664
    
    
    
    11,669,901
    
    
    
    17,373,429Occupancy costs
    
    
    3,276,497
    
    
    
    4,728,817
    
    
    
    4,754,87537,289,072
    
    
    
    61,495,699
    
    
    
    75,781,998Depreciation
    
    
    2,387,817
    
    
    
    2,858,641
    
    
    
    2,866,679Amortization of intangible asset(Note 9)
    
    
    24,197
    
    
    
    24,197
    
    
    
    Interest expense and financing costs(Note 10)
    
    
    2,707,687
    
    
    
    1,245,126
    
    
    
    743,60042,408,773
    
    
    
    65,623,663
    
    
    
    79,392,277Earnings (loss) before unusual items,
gain on closure of subsidiaries,
restructuring costs, income taxes,
goodwill amortization and write-down
    
    
    18,470
    
    
    
    (6,502,573
    )
    
    
    3,393,264Unusual items(Note 16)
    
    
    
    
    
    
    750,648
    
    
    
    1,917,334Gain on closure of subsidiaries(Notes 14 and 15)
    
    
    (2,499,604
    )
    
    
    
    
    
    
    Restructuring costs (recovery)(Note 17)
    
    
    (267,212
    )
    
    
    10,857,534
    
    
    
    Earnings (loss) before income taxes,
goodwill amortization and write-down
    
    
    2,785,286
    
    
    
    (18,110,755
    )
    
    
    1,475,930Income taxes (recovery)(Note 13)
    
    
    246,524
    
    
    
    (4,853,540
    )
    
    
    1,359,731Earnings (loss) before goodwill amortization
and write-down
    
    
    2,538,762
    
    
    
    (13,257,215
    )
    
    
    116,199Goodwill amortization, net of income tax
recovery of $nil (2002  $24,000;
2001  $24,000)
    
    
    
    
    
    
    2,187,509
    
    
    
    3,011,571Write-down of goodwill(Note 8)
    
    
    
    
    
    
    37,934,711
    
    
    
    Net earnings (loss)
    
    $
    2,538,762
    
    
    $
    (53,379,435
    )
    
    $
    (2,895,372
    )Earnings
(loss) per share (notes 2(i) and 12(d)):Basic
    
    $
    0.12
    
    
    $
    (2.54
    )
    
    $
    (0.14
    )Diluted
    
    
    0.09
    
    
    
    (2.54
    )
    
    
    (0.14
    )Earnings (loss) per share before goodwill
amortization and write-down (notes 2(i)
and 12(d)):Basic
    
    
    0.12
    
    
    
    (0.63
    )
    
    
    0.01Diluted
    
    
    0.09
    
    
    
    (0.6
    )
    
    
    0.01


The accompanying notes are an integral part of these financial statements.

5



---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Retained Earnings (Deficit)
(Expressed in Canadian dollars)

For the years ended September 30
    
    2003
    
    2002
    
    2001Retained earnings (deficit),beginning of year
    
    $
    (47,629,529
    )
    
    $
    5,603,200
    
    
    $
    8,403,367Gain on redemption of shares(Note 12(b))
    
    
    
    
    
    
    146,706
    
    
    
    95,205Net earnings (loss)
    
    
    2,538,762
    
    
    
    (53,379,435
    )
    
    
    (2,895,372
    )Retained earnings (deficit),end of year
    
    $
    (45,090,767
    )
    
    $
    (47,629,529
    )
    
    $
    5,603,200


The accompanying notes are an integral part of these financial statements.

6



---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)

For the years ended September 30
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net earnings (loss)
    
    $
    2,538,762
    
    
    $
    (53,379,435
    )
    
    $
    (2,895,372
    )Items not involving cash:Future income taxes (recovery)
    
    
    (275,201
    )
    
    
    (1,780,072
    )
    
    
    (567,441
    )Depreciation
    
    
    2,387,817
    
    
    
    2,858,641
    
    
    
    2,866,679Amortization of intangible asset
    
    
    24,197
    
    
    
    24,197
    
    
    
    Goodwill amortization
    
    
    
    
    
    
    2,211,509
    
    
    
    3,035,571Write-down of goodwill
    
    
    
    
    
    
    37,934,711
    
    
    
    Amortization of deferred financing
charges
    
    
    108,996
    
    
    
    96,263
    
    
    
    65,936Write-down of deferred
financing charges
    
    
    
    
    
    
    750,648
    
    
    
    Convertible debentures accretion
    
    
    718,321
    
    
    
    133,870
    
    
    
    Stock based compensation
    
    
    23,268
    
    
    
    
    
    
    
    Gain on disposal of subsidiaries
    
    
    (2,499,604
    )
    
    
    
    
    
    
    Recognition of cumulative translation
on closure of Hampel Stefanides
(Note 14)
    
    
    (841,081
    )
    
    
    
    
    
    
    Write-down of capital assets
    
    
    356,865
    
    
    
    3,481,105
    
    
    
    Other
    
    
    
    
    
    
    52,500
    
    
    
    Net change in non-cash working capital
balances:Restricted cash
    
    
    783,088
    
    
    
    (1,672,585
    )
    
    
    297,962Accounts receivable
    
    
    (457,592
    )
    
    
    6,757,260
    
    
    
    7,389,275Prepaid expenses
    
    
    (172,823
    )
    
    
    353,652
    
    
    
    (174,654
    )Accounts payable and accrued liabilities
    
    
    (283,423
    )
    
    
    (16,905,696
    )
    
    
    12,440,922Income taxes payable/recoverable
    
    
    2,871,137
    
    
    
    (2,606,457
    )
    
    
    (1,145,133
    )Deferred revenue
    
    
    (192,406
    )
    
    
    1,175,600
    
    
    
    (758,380
    )Amounts collected in excess of
pass-through costs incurred
    
    
    232,784
    
    
    
    (175,514
    )
    
    
    (777,930
    )Other
    
    
    (9,422
    )
    
    
    (209,582
    )
    
    
    159,003Net cash provided by (used in)
operating activities
    
    
    5,313,683
    
    
    
    (20,899,385
    )
    
    
    19,936,438Cash flows from financing activities:Long-term debt borrowings
    
    
    1,079,441
    
    
    
    1,580,459
    
    
    
    8,137,183Long-term debt repayments
    
    
    (4,835,314
    )
    
    
    (2,539,248
    )
    
    
    (8,097,536
    )Issuance of common shares
    
    
    109,084
    
    
    
    
    
    
    
    383,670Issuance of convertible debentures
    
    
    2,000,000
    
    
    
    3,800,000
    
    
    
    Redemption of common shares
    
    
    
    
    
    
    (628,083
    )
    
    
    (1,295,475
    )Reduction (increase) in restricted cash
    
    
    
    
    
    
    
    
    
    
    394,625Long-term portion of restructuring costs
    
    
    (454,868
    )
    
    
    792,275
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    190,143Net cash provided by (used in)
financing activities
    
    
    (2,101,657
    )
    
    
    3,005,403
    
    
    
    (287,390
    )


The accompanying notes are an integral part of these financial statements

7



---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Cash Flows (continued)
(Expressed in Canadian dollars)

For the years ended September 30
    
    2003
    
    2002
    
    2001Cash flows from investing activities:Acquisition of subsidiaries, net of cash
acquired of $nil (2002 - $919,201;
2001 - $214,179)
    
    
    (104,137
    )
    
    
    (1,904,742
    )
    
    
    (1,669,168
    )Purchase of capital assets
    
    
    (1,132,189
    )
    
    
    (1,811,154
    )
    
    
    (3,756,134
    )Proceeds on sale of capital assets
    
    
    176,106
    
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    (1,060,220
    )
    
    
    (3,715,896
    )
    
    
    (5,425,302
    )Change in cash balance due to foreign
exchange
    
    
    74,585
    
    
    
    297,978
    
    
    
    452,645Increase (decrease) in cash
    
    
    2,226,391
    
    
    
    (21,311,900
    )
    
    
    14,676,391Cash,beginning of year
    
    
    469,909
    
    
    
    21,781,809
    
    
    
    7,105,418Cash,end of year
    
    $
    2,696,300
    
    
    $
    469,909
    
    
    $
    21,781,809Supplemental cash flow information:Interest paid
    
    $
    1,977,822
    
    
    $
    643,926
    
    
    $
    704,604Income taxes paid
    
    
    46,800
    
    
    
    581,077
    
    
    
    3,407,801Supplemental disclosure of non-cash
transactions:Conversion of debentures
    
    
    1,540,343
    
    
    
    
    
    
    
    Shares issued for non-cash consideration
    
    
    
    
    
    
    265,500
    
    
    
    3,908,156Capital assets acquired under capital
leases
    
    
    
    
    
    
    820,424
    
    
    
    


The accompanying notes are an integral part of these financial statements

8



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##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|1. |  | Nature of Business
|-- |  | ------------------



| |  | The Company, continued under the Business Corporations Act (Ontario),
has operations in the United States, the United Kingdom and Canada and
provides marketing, consumer and retail branding services.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Basis of Presentation
| |  | ---------------------



| | (a) |  | 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 22.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | Certain comparative figures have been reclassified to conform to
the financial statement presentation adopted for 2003.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------



|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, 2003 are as follows:
| |  |  | -----------------------------------------------------------------

% of
    
    Jurisdiction ofCompany
    
    ownership
    
    incorporationCommuniqué Incentives Inc.
    
    
    100
    
    
    OntarioWatt International Inc.
    
    
    100
    
    
    OntarioWatt Gilchrist Limited
    
    
    100
    
    
    United KingdomJohn 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.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9



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##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



| | (c) |  | Capital Assets
| | --- |  | --------------



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

Asset
    
    Basis
    
    RateAudiovisual equipment
    
    Straight line
    
    2-5 yearsComputer equipment and
software
    
    Declining balance
    
    30%-50%Furniture and equipment
    
    Declining balance
    
    20%Leasehold improvements
    
    Straight line
    
    Over term
of leasesEquipment 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.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
rateably 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.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



| |  |  | 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 represents the price paid for acquisitions in excess of the
fair market value of net tangible and intangible assets acquired.
Effective October 1, 2002, the Company adopted the recommendations of
the CICA Handbook Section 3062 Goodwill and Other Intangible Assets.
These standards require that goodwill and other intangible assets
determined to have indefinite lives are no longer amortized but tested
for impairment based on the fair value of the Companys reporting units
on adoption of the standard and at least annually thereafter.
Transitional impairment tests for goodwill were completed as at October
1, 2002 and an annual impairment test completed on March 31, 2003 and,
as a result no write-down was required. Prior to 2003, the Company
amortized goodwill on a straight-line basis over periods ranging from 7
to 25 years and goodwill was considered to be impaired since the future
anticipated undiscounted cash flows from the acquired businesses were
less than the carrying value of goodwill. Goodwill arising on
acquisitions completed after June 30, 2001 was not amortized.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11



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##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



| | (g) |  | Income Taxes
| | --- |  | ------------



| |  |  | The Company accounts for income taxes using the 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.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) |  | Stock-based Compensation
| | --- |  | ------------------------



| |  |  | Effective October 1, 2002, the Company adopted the recommendations of
the CICA Handbook Section 3870 Stock-based Compensation and Other
Stock-based Payments. These standards require that direct awards of
stock and liabilities based on the price of common stock be measured at
fair value at each reporting date, with the change in fair value
reported in the statement of operations, and encourages, but does not
require, the use of the fair value method for all other types of
employee stock-based compensation plans. The Company does not use the
fair value method to account for employee stock-based compensation
plans but discloses pro forma information for options granted after
October 1, 2002 (see Note 12). The Company records no compensation
expense when options are issued to employees or modified. Any
consideration paid by employees on the exercise of options is credited
to share capital.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (i) |  | Earnings Per Share
| | --- |  | ------------------



| |  |  | The Company uses the provisions of 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 and potential shares issuable upon exercise of convertible
debt and warrants.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (j) |  | Business Combinations
| | --- |  | ---------------------



| |  |  | The Company uses the 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.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|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.
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, 2003, an earnout payment of $nil
(2002  $193,000) was accrued.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
    
    $
    11,160Non-compete agreement
    
    
    72,590Non-cash working capital
    
    
    (517,544
    )Net liabilities
    
    
    (433,794
    )Consideration, less cash acquired of $919,201, October 1, 2001
    
    
    (171,187
    )Additional cash consideration included in accounts payable,
earn-out for 2002
    
    
    193,000Legal fees
    
    
    11,000Excess of purchase price over fair value of
net assets acquired allocated to goodwill
    
    $
    466,607




| |  |  | 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)(e)).
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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 2003 or 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 was being amortized over 25 years.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



| |  | Restricted cash includes a trust account established for Communiqué
Incentives Inc. for customer deposits of $1,047,997 (2002  $1,831,085).
| |  | --------------------------------------------------------------------------------------------------------------------------------------------



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

2003
    
    2002Trade receivables
    
    $
    6,512,040
    
    
    $
    11,921,393Accrued revenue
    
    
    4,317,799
    
    
    
    5,881,363Work in process
    
    
    2,270,988
    
    
    
    1,349,986Unbilled pass-through costs
    
    
    
    
    
    
    1,375,306$
    13,100,827
    
    
    $
    20,528,048




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



| |  | In October and November 2002 the Company sold the operations of Devlin
Multimedia Inc. (Devlin) and Sage to certain executives of the respective
subsidiaries (see Note 15).
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the year, relatives of the CEO loaned the Company $225,000 of which
$150,000 was outstanding at year end. The loan bears interest at 10% per
annum and is repayable on demand.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the year, relatives of a director loaned the Company $75,000 which
was repaid prior to year end. The loan bore an interest rate of 10% per
annum, and was repayable on demand.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the year, relatives of the CEO and a director were part of the group
that loaned the Company $2.0 million of convertible debentures described in
Note 11. In total, these relatives loaned the Company $1,850,000, of which
$1,070,000 was outstanding at year end.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Related party transactions are recorded at the exchange amount, being the
amount agreed to by the related parties.
| |  | ------------------------------------------------------------------------------------------------------------------



| |  | During 2003, Envoy paid one of its directors $312,589 (2002  $265,936;
2001  $300,020) for legal services provided to Envoy.
| |  | ------------------------------------------------------------------------------------------------------------------------------

14



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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

Accumulated
    
    Net book2003
    
    Cost
    
    depreciation
    
    valueAudiovisual equipment
    
    $
    
    
    
    $
    
    
    
    $
    Computer equipment and software
    
    
    9,813,701
    
    
    
    7,513,574
    
    
    
    2,300,127Furniture and equipment
    
    
    427,705
    
    
    
    293,588
    
    
    
    134,117Leasehold improvements
    
    
    4,014,240
    
    
    
    1,489,757
    
    
    
    2,524,483Equipment under capital leases
    
    
    1,741,118
    
    
    
    838,528
    
    
    
    902,590$
    15,996,764
    
    
    $
    10,135,447
    
    
    $
    5,861,317


Accumulated
    
    Net book2002
    
    Cost
    
    depreciation
    
    valueAudiovisual equipment
    
    $
    780,918
    
    
    $
    762,386
    
    
    $
    18,532Computer equipment and software
    
    
    13,115,157
    
    
    
    8,665,300
    
    
    
    4,449,857Furniture and equipment
    
    
    1,427,777
    
    
    
    1,151,402
    
    
    
    276,375Leasehold improvements
    
    
    8,233,909
    
    
    
    6,316,255
    
    
    
    1,917,654Equipment under capital leases
    
    
    1,940,971
    
    
    
    766,661
    
    
    
    1,174,310$
    25,498,732
    
    
    $
    17,662,004
    
    
    $
    7,836,728




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



| |  | The changes in the carrying amount of goodwill for the year ended September
30, 2003 were as follows:
| |  | -----------------------------------------------------------------------------------------------------

Goodwill, beginning of year
    
    $
    11,314,283Additions
    
    
    104,137Reduction charged to cumulative translation adjustment
    
    
    (892,635
    )Goodwill, end of year
    
    $
    10,525,785


Accumulated
    
    Net book2002
    
    Cost
    
    amortization
    
    valueGoodwill
    
    $
    57,417,846
    
    
    $
    46,103,563
    
    
    $
    11,314,283


15



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



| |  | In 2002, the Company performed assessments 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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In quantifying the impairment charge, the Company compared the expected
future undiscounted 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 undiscounted cash flows of
the respective operation.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

2003
    
    2002Non-compete agreement, net of accumulated
amortization of $48,394 (2002 - $24,197) (note 3(a))
    
    $
    24,197
    
    
    $
    48,394Other
    
    
    39,271
    
    
    
    68,255$
    63,468
    
    
    $
    116,649


16



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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

2003
    
    2002Bank credit facility (a)
    
    $
    6,115,746
    
    
    $
    9,838,192Promissory note, 8% per annum, repayable in five
monthly instalments commencing June 30, 2002 (b)
    
    
    
    
    
    
    295,615Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in monthly instalments
of $7,665 principal and interest
    
    
    481,297
    
    
    
    553,992Loan payable to landlord, 0.925% per annum,
due December 1, 2002, repayable in monthly
instalments of $6,728 principal and interest
    
    
    
    
    
    
    20,185Loan payable to landlord, 10.0% per annum, due
March 1, 2010, repayable in monthly instalments of
$3,956 principal and interest
    
    
    227,556
    
    
    
    251,444Loan payable to landlord, 10.0% per annum, due
April 1, 2005, repayable in monthly instalments of
$742 principal and interest
    
    
    31,479
    
    
    
    37,001Loan payable to landlord, 8.0% per annum, due
April 1, 2010, repayable in monthly instalments of
$561 principal and interest
    
    
    34,488
    
    
    
    38,337Capital lease, 12.3% over the lease period, repayable
in quarterly instalments of £7,919 principal and
interest, due November 2004
    
    
    86,295
    
    
    
    Capital lease, 12.3% over the lease period, repayable
in quarterly instalments of (2002 - $63,056 (£25,330))
principal and interest, due January 2003
    
    
    
    
    
    
    64,123Capital 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
    
    
    566,788
    
    
    
    820,424Promissory note, 10% per annum, due on demand (note 6)
    
    
    150,000
    
    
    
    Promissory note, 10% per annum, due on
September 30, 2006 (c)
    
    
    500,000
    
    
    
    Convertible debentures (note 11)
    
    
    3,231,266
    
    
    
    2,083,49811,424,915
    
    
    
    14,002,811Less current portion
    
    
    6,857,953
    
    
    
    10,589,114$
    4,566,962
    
    
    $
    3,413,697


17



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



| | (a) |  | In April 2003, the Company finalized the amendments to its
banking arrangements and thereby normalized its credit facilities with
its bankers. This new amendment gives the Company a demand operating
line of $7,000,000. Interest rates are variable based on certain
leverage ratios ranging from Prime plus 2.5% to 5.0% and at September
30, 2003 the effective interest rate was 8.0% (2002  8.5%). The
demand operating facility is to be repaid and cancelled by April 30,
2004. Of the outstanding borrowings as at September 30, 2003, $nil
(2002  Cdn. $3,178,691; US $2,002,704) is denominated in U.S.
dollars. The facility is secured by a general security agreement
against the Company and all of its subsidiaries.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a condition to the credit facility amendment, the Company
amended the terms of the existing debentures as described in Note
11.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a condition to the amendment, the Company was required to
raise $2,000,000 to reduce its bank debt. On April 24, 2003 the
Company issued $2,000,000 convertible debentures as part of the
refinancing plan. These debentures may be converted into common
shares at a price of $0.15 each for a total of 13,333,333 common
shares.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a condition of the amendment, the Company issued to its
bankers warrants to purchase 2,300,000 common shares of the
Company. Costs associated with this new banking amendment have
been charged to interest expense and financing costs.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Subsequent to year end, the Company has completed a new financing and
has renegotiated its bank facility (see Note 21).
| |  |  | -----------------------------------------------------------------------------------------------------------------------



| | (b) |  | During the third quarter of 2002, the Company negotiated new
repayment terms for a promissory note originally due on June 30, 2002
in respect of the Gilchrist acquisition. 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. The balance was paid in full during 2003.
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | In September 2003, the holder of the promissory note agreed to
postpone the maturity date from June 30, 2003 to September 30, 2006
and to reduce the rate of interest from 15% to 10% per annum. In
consideration of the foregoing and subsequent to the year end the
holder of the term note was issued a share purchase warrant to
purchase, on or before April 24, 2008, 50,000 of the Companys common
shares at an exercise price of $0.15 per share. The warrants were part
of the warrants previously issued to Envoys bankers (see (a) above).
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



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

2004
    
    $
    6,857,9532005
    
    
    313,2442006
    
    
    629,0372007
    
    
    125,4282008
    
    
    132,493Thereafter
    
    
    135,494$
    8,193,649




| |  | Interest and financing costs were charged to expense during the year for
the following:
| |  | ---------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Cash interest paid on credit facility, landlord
loans and capital leases
    
    $
    912,255
    
    
    $
    634,407
    
    
    $
    671,848Financing fees on credit facility
    
    
    311,053
    
    
    
    179,386
    
    
    
    71,752Accrued financing fee charges on credit facility
    
    
    179,685
    
    
    
    200,000
    
    
    
    Cash interest paid on convertible debentures
and amortization of debenture issue costs
    
    
    484,851
    
    
    
    59,130
    
    
    
    Accrued interest on debentures
    
    
    101,522
    
    
    
    38,333
    
    
    
    Accreted interest imputed on debentures
    
    
    718,321
    
    
    
    133,870
    
    
    
    Total interest and financing costs
    
    $
    2,707,687
    
    
    $
    1,245,126
    
    
    $
    743,600


19



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



| |  | In April 2003, as part of the renegotiation of the existing debt facility,
the Company amended the terms of the debentures issued on April 29, 2002
and September 12, 2002 as follows: the early repayment terms on the
debentures have been deferred to April 24, 2005; the debentures are
repayable in cash on maturity on April 24, 2008; both debentures are now
convertible into common shares at a price of $0.15 each, for a total of
25,333,333 common shares; and, the warrants attached to the convertible
debentures have been cancelled.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On April 24, 2003, the Company issued $2,000,000 in 10% convertible
debentures as part of the refinancing plan, which mature on April 24, 2008.
These debentures may be converted into common shares at a price of $0.15
each for a total of 13,333,333 common shares. Holders also have the right
to require the Company to purchase all or a portion of their debentures on
or after April 24, 2005 at the issue price plus accrued and unpaid
interest.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The debentures are bifurcated into a debt component, representing a yield
to maturity of 25.6% per annum over the five-year life, and an equity
component with proceeds allocated $1,465,929 to long-term debt and $534,071
to shareholders equity. That portion of offering expenses, related to the
debt component being $120,906 has been recorded as deferred financing fees
which are included in prepaid expenses, and the remaining $44,049 applied
to reduce the equity component.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | During the year, convertible debentures with a face value of $1,410,000
were converted into 9,400,000 common shares of the Company. Subsequent to
year end, all convertible debentures have been converted totalling
29,266,667 common shares.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On April 29, 2002, the Company issued $1,800,000 in 10% convertible
debentures which mature on April 29, 2007 (amended to April 24, 2008 as
discussed above). Prior to the amendments discussed above, the debentures
were convertible until the maturity date into 2,500,000 units of the
Company at a conversion price of $0.72 per unit. Each unit consisted of
one common share in the capital of the Company and one purchase warrant of
the Company. Each purchase warrant entitled the holder to purchase one
common share (2,500,000 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 had 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 included in prepaid expenses, and the remaining
$46,565 applied to reduce the equity component.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|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 (amended to April 24, 2008 as
discussed above). Prior to the amendments discussed above, the debentures
were convertible until the maturity date into 5,882,353 units of the
Company at a conversion price of $0.34 per unit. Each unit consisted of
one common share in the capital of the Company and one purchase warrant of
the Company. Each purchase warrant entitled the holder to purchase one
common share (5,882,353 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 had 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 included 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, 2003, the aggregate debt component carrying values of
all of the Companys convertible debentures is $3,231,266 (2002 -
$2,083,498). Principal repayments, based on scheduled maturity dates, is
$4,390,000 in 2008. However, this date may be accelerated to 2005, at the
option of the holders of the debentures.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

21



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



| | (a) |  | Authorized:
| | --- |  | -----------



| |  |  | 50,000,000 common shares without par value
(2002  50,000,000; 2001  50,000,000)
| |  |  | ---------------------------------------------------------------------------------



| |  |  | Issued:
| |  |  | -------

2003
    
    2002
    
    2001Number
    
    
    
    
    
    Number
    
    
    
    
    
    Numberof shares
    
    Amount
    
    of shares
    
    Amount
    
    of shares
    
    AmountBalance, beginning of year
    
    
    21,258,693
    
    
    $
    54,339,390
    
    
    
    21,192,719
    
    
    $
    54,883,305
    
    
    
    21,098,222
    
    
    $
    54,597,762Common shares issued
pursuant to:Conversion of
convertible debentures
    
    
    9,400,000
    
    
    
    1,540,343
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options
exercised
    
    
    388,334
    
    
    
    109,084
    
    
    
    
    
    
    
    
    
    
    
    101,000
    
    
    
    383,670Acquisitions (note 3)
    
    
    
    
    
    
    
    
    
    
    150,000
    
    
    
    213,000
    
    
    
    61,728
    
    
    
    284,332Repurchase of shares
pursuant to share
issuer bid
    
    
    
    
    
    
    
    
    
    
    (299,400
    )
    
    
    (774,789
    )
    
    
    (535,000
    )
    
    
    (1,390,680
    )Shares issued to
settle liability
with landlord
(note 17)
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    52,500
    
    
    
    
    
    
    
    21,293,319
    
    
    
    54,374,016
    
    
    
    20,725,950
    
    
    
    53,875,084Shares to be issued in
respect of contingent
consideration
    
    
    
    
    
    
    
    
    
    
    (34,626
    )
    
    
    (34,626
    )
    
    
    466,769
    
    
    
    1,008,221Balance, end of
year
    
    
    31,047,027
    
    
    $
    55,988,817
    
    
    
    21,258,693
    
    
    $
    54,339,390
    
    
    
    21,192,719
    
    
    $
    54,883,305


22



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



| | (b) |  | 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.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (c) |  | 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. The options have vesting periods
ranging from the date of grant up to five years. Once vested, options
are exercisable at any time until expiry. Expiry dates range between
2004 and 2008.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

23



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



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

WeightedaverageexerciseNumber
    
    price perof options
    
    shareOptions outstanding, September 30, 2000
    
    
    2,340,500
    
    
    $
    5.33Options granted
    
    
    780,000
    
    
    
    5.30Options exercised
    
    
    (101,000
    )
    
    
    3.80Options cancelled
    
    
    (340,000
    )
    
    
    5.87Options outstanding, September 30, 2001
    
    
    2,679,500
    
    
    
    5.31Options granted
    
    
    1,719,000
    
    
    
    1.15Options cancelled
    
    
    (1,199,500
    )
    
    
    5.37Options outstanding, September 30, 2002
    
    
    3,199,000
    
    
    
    3.06Options granted
    
    
    1,820,000
    
    
    
    0.26Options exercised
    
    
    (388,334
    )
    
    
    0.28Options cancelled
    
    
    (2,889,250
    )
    
    
    2.74Options outstanding, September 30, 2003
    
    
    1,741,416
    
    
    
    1.27Options exercisable, September 30, 2003
    
    
    1,049,750
    
    
    $
    1.95Options exercisable, September 30, 2002
    
    
    2,322,084
    
    
    $
    3.35Options exercisable, September 30, 2001
    
    
    1,491,510
    
    
    $
    5.07




| |  |  | The range of exercise prices for options outstanding and exercisable
options at September 30, 2003 are as follows:
| |  |  | ------------------------------------------------------------------------------------------------------------------

Number
    
    Weighted Average
    
    NumberExercise Price
    
    Outstanding
    
    Contractual Life
    
    Exercisable$0.25
    
    
    991,666
    
    
    
    4.08
    
    
    
    300,000$0.40
    
    
    20,000
    
    
    
    4.77
    
    
    
    20,000$0.61
    
    
    225,000
    
    
    
    3.67
    
    
    
    225,000$3.05
    
    
    394,750
    
    
    
    3.86
    
    
    
    394,750$3.90
    
    
    50,000
    
    
    
    0.44
    
    
    
    50,000$6.20
    
    
    15,000
    
    
    
    0.86
    
    
    
    15,000$7.40
    
    
    45,000
    
    
    
    1.50
    
    
    
    45,0001,741,416
    
    
    
    
    
    
    
    1,049,750


24



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



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



| | (d) |  | Earnings (loss) from operations per share:
| | --- |  | ------------------------------------------



| |  |  | The following table sets forth the computation of basic and diluted
earnings (loss) per share:
| |  |  | ----------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Numerator:Net earnings (loss) (i)
    
    $
    2,538,762
    
    
    $
    (53,379,435
    )
    
    $
    (2,895,372
    )Denominator:Denominator for basic net
earnings (loss) per share -
weighted average shares
outstanding
    
    
    21,674,064
    
    
    
    20,998,397
    
    
    
    21,160,616Effect of dilutive potential
common shares:Shares issuable pursuant to
warrants
    
    
    904,958
    
    
    
    
    
    
    
    Shares issuable under stock
options
    
    
    460,631
    
    
    
    
    
    
    
    Shares issuable under
conversion of debentures
    
    
    21,196,342
    
    
    
    
    
    
    
    Denominator for diluted net
earnings (loss) per share
    
    
    44,235,995
    
    
    
    20,998,397
    
    
    
    21,160,616




| | (i) |  | For fully diluted earnings per share in 2003, the
numerator is $3,843,456. This difference is due to the accounting
for convertible debentures which requires them to be treated as
if converted for purposes of fully diluted earnings per share.
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Included in the difference is cash interest of $477,377, accreted
interest of $718,321 and amortized debenture issue costs of $108,996.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------

25



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|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:
| |  |  | --------------------------------------------------------

2003
    
    2002
    
    2001Effect of dilutive potential common
shares:Shares issuable pursuant to
warrants
    
    
    
    
    
    
    7,882,353
    
    
    
    Shares issuable under stock
options
    
    
    
    
    
    
    3,199,000
    
    
    
    2,679,500Shares to be issued in respect
of contingent consideration
    
    
    
    
    
    
    
    
    
    
    1,772,241Shares issuable upon
conversion of convertible
debentures
    
    
    
    
    
    
    8,382,353
    
    
    
    




| |  |  | The Company records no compensation expense when options are issued to
employees but provides pro forma information for options granted after
October 1, 2002 as disclosed in the Summary of Significant Accounting
Policies.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The estimated fair value of the options granted during fiscal 2003 was
$175,203 (2002  $279,759) of which $23,268 (2002  $nil) was expensed
in the financial statements. No other value associated with the stock
options was recognized in the accounts of the Company.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The following assumptions were used in the calculation of this estimated fair value:
| |  |  | ------------------------------------------------------------------------------------



| |  |  | 4  Risk free interest rate 4.0%
(2002 
4.0%)        4  Expected
life 1.95 years (2002  1.36 years)4  Expected volatility 83.35% (2002 
76.0%)      4  Expected dividends $nil (2002  $nil)
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Assuming that the Company would have expensed the full value of the
stock options in their financial results, the following would be the
pro forma net income and earnings per share:
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003Pro forma net income
    
    $
    2,386,827Pro forma earnings per shareBasic
    
    $
    0.11Fully diluted
    
    $
    0.08


26



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|13. |  | Income taxes
|--- |  | ------------



| |  | Income tax expense (recovery) for the years ended September 30, 2003, 2002
and 2001 consists of:
| |  | ------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Current
    
    $
    102,696
    
    
    $
    (3,073,468
    )
    
    $
    1,927,172Future
    
    
    143,828
    
    
    
    (1,780,072
    )
    
    
    (567,441
    )$
    246,524
    
    
    $
    (4,853,540
    )
    
    $
    1,359,731




| |  | The income tax expense (recovery) attributable to income (loss) differs
from the amounts computed by applying the Canadian statutory rates of 37.1%
(2002  39.5%; 2001  42.5%) of pre-tax income (loss) as a result of the
following:
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Income tax expense (recovery)
at statutory rates
    
    $
    1,033,341
    
    
    
    37.1
    %
    
    $
    (7,153,748
    )
    
    
    (39.5
    )%
    
    $
    627,270
    
    
    
    42.5
    %Increase (decrease) in
income taxes resulting
from:Adjustment to future tax
assets for substantively
enacted changes in tax
laws and rates
    
    
    (179,597
    )
    
    
    (6.4
    )%
    
    
    654,691
    
    
    
    3.6
    %
    
    
    100,000
    
    
    
    6.8
    %Expenses (revenues)
deducted (included) in
the accounts that have no
corresponding deduction
(included) for income taxes
    
    
    (872,628
    )
    
    
    (31.3
    )%
    
    
    276,996
    
    
    
    1.5
    %
    
    
    665,323
    
    
    
    45.1
    %Impact of different tax
rate on earnings of
foreign subsidiaries
    
    
    (307,945
    )
    
    
    (11.1
    )%
    
    
    (483,406
    )
    
    
    (2.5
    )%
    
    
    (185,524
    )
    
    
    (12.6
    )%Change in valuation
allowance
    
    
    963,9133
    
    
    
    4.4
    %
    
    
    2,407,144
    
    
    
    13.3
    %
    
    
    
    
    
    
    Other
    
    
    (390,560
    )
    
    
    (13.8
    )%
    
    
    (555,217
    )
    
    
    (3.1
    )%
    
    
    152,662
    
    
    
    10.4
    %$
    246,524
    
    
    
    8.9
    %
    
    $
    (4,853,540
    )
    
    
    (26.7
    )%
    
    $
    1,359,731
    
    
    
    92.2
    %


27



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|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, 2003 and
2002 are presented below:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002Future tax assets:Capital assets
    
    $
    1,124,221
    
    
    $
    1,263,019Share issuance costs
    
    
    399,008
    
    
    
    422,369Non-capital losses expiring in 2010
    
    
    4,853,936
    
    
    
    3,890,104Other
    
    
    183,549
    
    
    
    189,8456,560,715
    
    
    
    5,765,337Less valuation allowance
    
    
    3,371,057
    
    
    
    2,407,144Net future tax assets
    
    
    3,189,658
    
    
    
    3,358,193Future tax liabilities:Goodwill
    
    
    19,258
    
    
    
    43,965Total net future tax assets
    
    
    3,170,400
    
    
    
    3,314,228Less current portion
    
    
    498,172
    
    
    
    855,000$
    2,672,228
    
    
    $
    2,459,228




| |  | At September 30, 2003, the Company has non-capital losses of approximately
$12,700,000 available to reduce future years taxable income, which expire
as follows:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

2007
    
    $
    55,0002008
    
    
    3,200,0002009
    
    
    6,010,0002010
    
    
    3,435,000$
    12,700,000




| |  | The Company has capital losses of approximately $14,000,000 for United
States tax purposes available for carryforward up to 2008 to be applied
against future capital gains.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | No provision has been made in the financial statements with respect to any
potential future income tax assets which may be associated with these
capital losses.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

28



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|14. |  | Closure of Hampel Stefanides Inc. (Hampel)
|--- |  | --------------------------------------------



| |  | On February 7, 2003, the Company decided to cease the operations of Hampel
after conducting a review, in conjunction with the Companys banks, of the
ongoing viability, future prospects, cash needs and local debt situation of
Hampel. As the Companys banks held a first charge on the assets of Hampel,
the net proceeds from the liquidation of those assets were applied in
reduction of the Companys debt obligations to the banks. Consequently,
there were not sufficient proceeds from the liquidation to make any payment
to the unsecured creditors of Hampel. As the Company has no obligation to
pay the creditors of Hampel, the consolidated accounts of the Company
reflect a gain on the shut-down of Hampel.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Following the liquidation of the assets, the shares of Hampel were sold for
a nominal consideration, and the purchaser assumed the liabilities. Based
on the sale of the shares of Hampel, included in general and administrative
expenses is the recognition of a cumulative translation gain of $841,081.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|15. |  | Closure of Subsidiaries
|--- |  | -----------------------



| |  | In the first quarter of fiscal 2003, the assets of our technology company
Devlin Multimedia Inc. (Devlin) were sold, and the Companys other
technology company, Sage Information Consultants Inc. (Sage), was shut
down. The results of operations prior to these closures have been included
in the results of operations for 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The sale of assets to Devlin was completed on October 30, 2002 at a price
equal to their net book value, and correspondingly no gain or loss on the
disposal was recorded. Legal expenses related to the disposal were
recorded to reduce the gain on disposal of subsidiaries, and income taxes
related to the closure of the company have been provided in the
consolidated provision.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Sage was closed effective November 11, 2002. All operations of the
business were halted and the assets and liabilities of the company were
realized over time. Envoy sold the rights to continue business with the
customers of Sage to a company formed by certain management employees of
Sage, and the proceeds of this agreement were used to offset some of the
costs incurred to close the business. A loss of $114,684 has been recorded
on the closure of Sage.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

29



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|16. |  | Unusual items
|--- |  | -------------



| |  | During 2002, as a result of changes in the bank 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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|17. |  | Restructuring costs
|--- |  | -------------------



| |  | In response to a general economic downturn impacting the Companys
business, management implemented a restructuring plan during the first half
of fiscal 2002 in order to bring costs more in line with expected revenue.
The restructuring involved downsizing its workforce, exiting excess office
space and writing off redundant capital assets. Accordingly, the Company
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.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Total restructuring costs accrued at September 30 are classified as:
| |  | --------------------------------------------------------------------

2003
    
    2002Accounts payable and accrued liabilities
    
    $
    214,060
    
    
    $
    1,702,345Long-term portion of restructuring costs
    
    
    337,407
    
    
    
    792,275$
    551,467
    
    
    $
    2,494,620


Totalprovision
    
    Accrual at(recovery)
    
    September 30,Cash
    
    Non-cash
    
    2003
    
    2003Severance
    
    $
    (74,969
    )
    
    $
    
    
    
    $
    (74,969
    )
    
    $
    56,885Lease exit costs
    
    
    (192,243
    )
    
    
    
    
    
    
    (192,243
    )
    
    
    494,582Write-down of capital assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (267,212
    )
    
    $
    
    
    
    $
    (267,212
    )
    
    $
    551,467


30



---



##### 



Envoy Communications Group
Inc.Notes to Consolidated Financial Statements


For the years ended September 30, 2003, 2002 and 2001



|17. |  | Restructuring costs (continued)
|--- |  | -------------------------------

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




|18. |  | 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:
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

2004
    
    $
    1,903,9672005
    
    
    1,687,4282006
    
    
    1,537,1372007
    
    
    1,074,7252008
    
    
    1,067,732Thereafter
    
    
    1,290,636$
    8,561,625




| |  |  | Rent expense under operating leases for the year ended September 30,
2003 amounted to $2,645,288 (2002  $2,041,417; 2001  $1,980,592).
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------



| | (b) |  | The Company has letters of credit outstanding of U.S. $500,000
which expire on April 30, 2004.
| | --- |  | ----------------------------------------------------------------------------------------------



| | (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.
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements


For the years ended September 30, 2003, 2002 and 2001



|19. |  | 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, 2003, the carrying value of the loans payable to
landlords was $774,820 (2002  $900,959) and their fair value was
$674,653 (2002  $671,000).
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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, 2003, there were no
foreign currency contracts outstanding.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

32



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements


For the years ended September 30, 2003, 2002 and 2001



|19. |  | Financial instruments (continued)
|--- |  | ---------------------------------



| |  |  | At September 30, 2003, the Company had U.S. $nil (2002  $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.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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,
2003, one customer represented 8% of accounts receivable (2002  one
customer represented 11% 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.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|20. |  | 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:
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Net revenue:Canada
    
    $
    6,966,653
    
    
    $
    15,982,433
    
    
    $
    21,826,277United States
    
    
    18,185,170
    
    
    
    27,708,424
    
    
    
    40,970,400United Kingdom and
Continental Europe
    
    
    17,275,420
    
    
    
    15,430,233
    
    
    
    19,988,864$
    42,427,243
    
    
    $
    59,121,090
    
    
    $
    82,785,541


33



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements


For the years ended September 30, 2003, 2002 and 2001



|20. |  | Segmented information (continued)
|--- |  | ---------------------------------



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

2003
    
    2002Capital assets:Canada
    
    $
    3,631,876
    
    
    $
    5,363,424United States
    
    
    
    
    
    
    261,566United Kingdom and Continental Europe
    
    
    2,229,441
    
    
    
    2,211,738$
    5,861,317
    
    
    $
    7,836,728


2003
    
    2002Goodwill:Canada
    
    $
    3,191,903
    
    
    $
    3,087,766United Kingdom and Continental Europe
    
    
    7,333,882
    
    
    
    8,226,517$
    10,525,785
    
    
    $
    11,314,283




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

2003
    
    2002
    
    2001Net revenue:Marketing
    
    $
    7,822,280
    
    
    $
    12,428,558
    
    
    $
    24,374,986Consumer and retail branding
    
    
    34,313,108
    
    
    
    38,203,746
    
    
    
    43,437,449Technology
    
    
    291,854
    
    
    
    8,488,786
    
    
    
    14,973,106$
    42,427,243
    
    
    $
    59,121,090
    
    
    $
    82,785,541




| | (d) |  | In 2003, the Company had three customers, which represented 26%,
16% and 12% of net revenue respectively. In 2002, the Company had
three customers which represented 19%, 12% and 12% of net revenue
respectively. In 2001, the Company had two customers which
represented 13.6% and 11.3% of net revenue, respectively.
| | --- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

34



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|21. |  | Subsequent events
|--- |  | -----------------



| |  | On October 31, 2003, the Company borrowed the amount of $4,500,000, of
which $4,000,000 was raised by way of secured debentures and $500,000 by
way of unsecured term notes. The loans bear interest at the rate of 10%
per annum, mature on October 31, 2006, and carry warrants entitling the
lenders to purchase, on or before April 24, 2008, one Envoy common share
for each $2.00 principal amount of the loan at a price of $0.15 per share.
These warrants were part of the Warrants previously issued to Envoys
bankers as described in Note 10(a) and Note 10 (c), and released to Envoy
as part of its commitment to the bankers to raise additional funds to
further reduce its bank indebtedness. All of these warrants have been
exercised subsequent to the year end. $3,800,000 of the loan proceeds were
used to pay down the bank debt.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | $100,000 of the $500,000 unsecured term notes were loaned by officers of
the Company and a further $150,000 of the unsecured term notes were loaned
by a relative of a director of the Company.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | At a special meeting of shareholders the Company held on January 8, 2004,
the shareholders approved an amendment to the Articles of the Company to
increase its authorized share capital from 50 million common shares to 200
million common shares.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|22. |  | 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, 2003, 2002 and 2001 required to conform
to US GAAP.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Net earnings (loss) based on
Canadian GAAP
    
    $
    2,538,762
    
    
    $
    (53,379,435
    )
    
    $
    (2,895,372
    )Stock-based compensation expense (a)
    
    
    
    
    
    
    
    
    
    
    (886,000
    )Foreign currency contracts, net of
income tax recovery of $35,703 (c)
    
    
    
    
    
    
    49,303
    
    
    
    (49,303
    )Convertible debentures (d)
    
    
    67,538
    
    
    
    (46,100
    )
    
    
    Net earnings (loss) based on
U.S. GAAP
    
    $
    2,606,300
    
    
    $
    (53,376,232
    )
    
    $
    (3,830,675
    )Net loss from continuing
operations
    
    $
    (1,521,001
    )
    
    $
    (15,888,170
    )
    
    $
    (4,038,840
    )Net earnings (loss) from discontinued
operations (note 22(e))
    
    $
    4,127,301
    
    
    $
    (37,488,062
    )
    
    $
    208,165


35



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|22. |  | Reconciliation to United States generally accepted accounting principles
(continued)
|--- |  | ------------------------------------------------------------------------------------



| |  | The calculation of diluted earnings (loss) per share used income from
continuing operations as the control number in determining whether
potential common shares are dilutive or antidilutive.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Earnings (loss) per share:Basic
    
    $
    0.12
    
    
    $
    (2.54
    )
    
    $
    (0.18
    )Diluted
    
    
    0.12
    
    
    
    (2.54
    )
    
    
    (0.18
    )Loss per share from continuing
operations:Basic
    
    $
    (0.07
    )
    
    $
    (0.76
    )
    
    $
    (0.19
    )Diluted
    
    
    
    (0.07
    )
    
    
    (0.76
    )
    
    
    (0.19
    )




| |  | The following adjustments are required in order to conform shareholders
equity based on Canadian GAAP to shareholders equity based on U.S. GAAP:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002Shareholders equity based on Canadian GAAP
    
    $
    12,358,503
    
    
    $
    9,779,169Convertible debentures (d)
    
    
    (593,958
    )
    
    
    (578,603
    )Shareholders equity based on U.S. GAAP
    
    $
    11,764,545
    
    
    $
    9,200,566




| |  | 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) |  | 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 22(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:
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|22. |  | Reconciliation to United States generally accepted accounting principles
(continued)
|--- |  | ------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Net earnings (loss) in accordance
with U.S. GAAP as reported
    
    $
    2,606,300
    
    
    $
    (53,376,232
    )
    
    $
    (3,830,675
    )Pro forma net earnings (loss)
    
    
    2,246,121
    
    
    
    (54,353,655
    )
    
    
    (4,719,780
    )Pro forma basic earnings (loss)
per share
    
    $
    0.10
    
    
    $
    (2.59
    )
    
    $
    (0.22
    )Pro forma diluted earnings (loss)
per share
    
    
    0.10
    
    
    
    (2.59
    )
    
    
    (0.22
    )




| |  | Compensation cost is reflected over the expected lives of the options.
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 2003 was $0.12 per
share (2002  $0.16; 2001 -$2.39).
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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:
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Risk-free interest rate
    
    
    4.00
    %
    
    
    4.00
    %
    
    
    4.70
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    Volatility factor of the future expected
market price of the Companys
common shares
    
    
    83
    %
    
    
    76
    %
    
    
    65
    %Weighted average expected life of the
options
    
    1.95 years
    
    1.36 years
    
    2.33 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.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

37



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|22. |  | Reconciliation to United States generally accepted accounting principles (continued)
|--- |  | ------------------------------------------------------------------------------------



| | (c) |  | 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, 2003 and 2002, there were no foreign currency
contracts outstanding.
| |  |  | ----------------------------------------------------------------------------------------

38



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|22. |  | Reconciliation to United States generally accepted accounting principles
(continued)
|--- |  | ------------------------------------------------------------------------------------



| | (d) |  | Convertible debentures:
| | --- |  | -----------------------



| |  |  | During 2003, the Company issued $2,000,000 (2002  $3,800,000) 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), and are redeemable in cash at the
option of the holder two years after the issue date. 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 $1,465,929 (2002  $1,949,628) allocated to long-term debt,
and $534,071 (2002  $1,850,372) to shareholders equity, respectively.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. As a result of accreting the debentures, $718,321 (2002
 $133,870) has been charged as interest expense for 2003. Under
Canadian GAAP, issue costs are allocated between the debt and equity
components which resulted in $44,048 (2002  $129,513) of the aggregate
$314,955 (2002  $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 stock portion of the conversion option
is considered a beneficial conversion feature. For the debentures
issued during 2002, an aggregate beneficial conversion feature of
$1,188,356 must be recorded as additional interest expense over the
minimum period to the earliest redemption date which has been amended,
in 2003, from April 29, 2004 and September 12, 2004 respectively to
April 24, 2005 for both the debentures issued in 2002. As a result
included in interest expense for the debentures during 2003 under U.S.
GAAP would be $486,856 (2002  $168,541) associated with the beneficial
conversion feature.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Under U.S. GAAP, costs associated with issuance of the debentures
cannot be apportioned between the debt and equity components.
Accordingly, at September 30, 2003 unamortized deferred financing fees
under U.S. GAAP would be higher by $68,695 (2002  $118,084). If the
Company had recorded the issue costs in accordance with U.S. GAAP,
additional amortization of $163,927 (2002  $11,429) would have been
charged to interest expense. Additionally, share capital would be
lower by $130,343 (2002  $nil).
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) |  | Discontinued operations:
| | --- |  | ------------------------



| |  |  | The businesses disposed of in the Gain on closure of subsidiaries, as
described in Notes 14 and 15, are treated as discontinued operations
under U.S. GAAP. This treatment requires that the results of
operations of these businesses be removed from the normal operations of
the Company, and be presented in summary form as earnings from
operations, gain on disposal of, and income taxes from those
discontinued businesses.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | As a result of the accounting for the disposed businesses as
discontinued operations under U.S. GAAP, the amounts reported as assets
and liabilities on the balance sheet would be different from those
reported under Canadian GAAP. The assets and liabilities of the
discontinued operations are as follows:
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

39



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



| | 22. |  | Reconciliation to United States generally accepted accounting principles
(continued)
| | --- |  | ------------------------------------------------------------------------------------



| | (e) |  | Discontinued operations: (continued)
| | --- |  | ------------------------------------

2003
    
    2002Current assets
    
    
    
    
    
    $
    9,262,277Long-term assets
    
    
    
    
    
    
    1,105,466Current liabilities
    
    
    
    
    
    
    9,983,488




| |  |  | As a result of accounting for the disposed businesses as discontinued
operations under U.S. GAAP, the amounts reported as revenues and
expenses in the Statements of Operations of the Company would be
different than those reported under Canadian GAAP. The revenues and
expenses of the discontinued operations are as follows:
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Net revenue
    
    $
    3,386,913
    
    
    $
    15,824,996
    
    
    $
    34,683,009Operating expenses
    
    
    2,649,784
    
    
    
    16,857,573
    
    
    
    28,190,551Depreciation
    
    
    70,217
    
    
    
    520,401
    
    
    
    661,504Interest expense and financing fees
    
    
    199
    
    
    
    727
    
    
    
    40,983Restructuring costs
    
    
    
    
    
    
    5,691,023
    
    
    
    Unusual item
    
    
    
    
    
    
    
    
    
    
    1,380,967Income taxes (recovery)
    
    
    (119,903
    )
    
    
    (2,552,010
    )
    
    
    1,999,098Goodwill amortization
    
    
    
    
    
    
    1,436,173
    
    
    
    2,201,741Write-down of goodwill
    
    
    
    
    
    
    31,359,171
    
    
    
    Earnings (loss) from discontinued
Operations (excluding gain)
    
    $
    786,616
    
    
    $
    (37,488,062
    )
    
    $
    208,165Pre-tax earnings (loss) from
discontinued operations
    
    $
    906,519
    
    
    $
    (34,936,052
    )
    
    $
    (1,790,932
    )Gain on discontinued operations
    
    
    3,340,685
    
    
    
    
    
    
    
    Income taxes (recovery) from
discontinued operations
    
    
    (119,903
    )
    
    
    (2,552,010
    )
    
    
    1,999,098Earnings (loss) from discontinued
operations
    
    $
    4,127,301
    
    
    $
    (37,488,062
    )
    
    $
    208,165


40



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



|22. |  | 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:
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Net earnings (loss) for the year in
accordance with U.S. GAAP
    
    $
    2,606,300
    
    
    $
    (53,376,232
    )
    
    $
    (3,830,675
    )Change in cumulative translation
adjustment account
    
    
    (1,584,672
    )
    
    
    515,569
    
    
    
    1,147,208$
    1,021,628
    
    
    $
    (52,860,663
    )
    
    $
    (2,683,467
    )




| | (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,
2003 and 2002.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (h) |  | 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,
2003 was $32,048 (2002  $226,037).
| | --- |  | -------------------------------------------------------------------------------------------



| | (ii) |  | U.S. GAAP requires the disclosure of accrued liabilities.
Accrued liabilities included in accounts payable and accrued
liabilities as at September 30, 2003 were $3,524,013
(2002  $4,779,517). As at September 30, 2003, Envoy had accrued
$1,326,700 (2002  $1,122,745) for the termination of certain
leased premises of Hampel Stefanides.
| | ---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | At September 30, 2003 and 2002, there were no other accrued
liabilities that exceeded 5% of current liabilities.
| |  |  | ----------------------------------------------------------------------------------------------------------------



| | (iii) |  | The Company has disclosed both net earnings before
goodwill amortization and earnings per share before goodwill
amortization, which are not permitted disclosures under U.S. GAAP.
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

41



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



| | (i) |  | Restructuring charges:
| | --- |  | ----------------------



| |  |  | Under U.S. GAAP restructuring charges would be included as operating
expenses in the consolidated statement of operations and the long term
portion of restructuring charges would be included in operating
activities on the consolidated statement of cash flows.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (j) |  | Goodwill amortization and goodwill write-downs:
| | --- |  | -----------------------------------------------



| |  |  | Under U.S. GAAP goodwill amortization and goodwill write-downs would be
included as operating expenses in the consolidated statement of
operations and the income taxes relating to these items would not be
netted against operating expenses.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (k) |  | Gain on redemption of shares:
| | --- |  | -----------------------------



| |  |  | Under U.S. GAAP there would be no gain on the redemption of shares
(Note 12 (b)).
| |  |  | ---------------------------------------------------------------------------------



| | (l) |  | Recent accounting pronouncements:
| | --- |  | ---------------------------------



| | (i) |  | 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.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

42



---



##### 



Envoy Communications Group Inc.
Notes to Consolidated Financial Statements

For the years ended September 30, 2003, 2002 and 2001



| | (ii) |  | 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.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) |  | In November 2002, the Emerging Issues Task Force
(EITF) reached a consensus on Issue No. 00-21, Revenue
Arrangements with Multiple Deliverables.EITF 00-21 provides
guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or
rights to use assets. The provisions of EITF 00-21 will apply to
revenue arrangements entered into in fiscal periods beginning
after June 15, 2003. The Company does not believe that the
adoption of these standards will have a material impact on its
consolidated financial statements.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iv) |  | In December 2002, the FASB issued Statement 148,
Accounting for Stock-Based Compensation, Transition and
Disclosure. Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. Statement
148 also requires that disclosures of the pro forma effect of
using the fair value method of accounting for stock-based employee
compensation be displayed more prominently and in a tabular
format. Additionally, Statement 148 requires disclosure of the
pro forma effect in interim financial statements. The Company
adopted the annual disclosure requirements of Statement 148, which
are effective for fiscal years ending after December 15, 2002 and
elected to continue to account for employee stock options under
APB No. 25.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

43



---



##### 





| | (v) |  | In January 2003, the FASB issued FASB Interpretation No.
46, or FIN 46, Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other
parties. FIN 46 is effective immediately for all new variable
interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1,
2003, the provisions of FIN 46 must be applied for fiscal year
ended September 30, 2004. The Company does not believe that the
adoption of these standards will have a material impact on its
consolidated financial statements.
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vi) |  | In May 2003, the FASB issued Statement 150, Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity. Statement 150 requires that certain
financial instruments that are settled in cash, including certain
types of mandatorily redeemable securities, be classified as
liabilities rather than as equity or temporary equity. Statement
150 is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of
the first interim period after June 15, 2003. The Company has not
determined the impact of the adoption of these standards on its
consolidated financial statements.
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------