##### 



Exhibit 17
 Envoy Communications
Group Inc.
 Consolidated Financial Statements
(Expressed in Canadian dollars)
For the years ended September 30, 2006,
2005 and 2004
 ContentsAuditors Report  BDO Dunwoody LLP
    
    
    2Comments by Auditor for U.S. Readers on Canada-U.S.
Reporting Differences
    
    
    3Financial StatementsConsolidated Balance Sheets
    
    
    4Consolidated Statements of Operations
    
    
    5Consolidated Statements of Deficit
    
    
    6Consolidated Statements of Cash Flows
    
    
    7-8Notes to Consolidated Financial Statements
    
    
    9-43




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##### 



F-1
 Auditors Report
 To the Shareholders of Envoy Communications Group Inc.
    
  
 2




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##### 



F-1
 Comments by Auditor for U.S. Readers
On Canada-U.S. Reporting Differences
  
  
 3




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##### 



F-2
Envoy Communications Group Inc.
 Consolidated Balance Sheets
(Expressed in Canadian dollars)
 September 30
    
    2006
    
    
    2005AssetsCurrentCash
    
    $
    758,195
    
    
    $
    2,324,074Cash held in escrow (Note 19)
    
    
    2,700,000
    
    
    
    Investments (Note 3)
    
    
    57,367,535
    
    
    
    22,113,957Accounts receivable (Note 4)
    
    
    4,659,635
    
    
    
    9,141,717Future income taxes (Note 13)
    
    
    963,967
    
    
    
    301,384Prepaid expenses and deferred charges
    
    
    1,758,889
    
    
    
    492,057Loans receivable (Note 7)
    
    
    492,923
    
    
    
    265,082Discontinued operations (Note 19)
    
    
    
    
    
    
    10,121,02768,701,144
    
    
    
    44,759,298Investments(Note 3)
    
    
    1,001,354
    
    
    
    10,994,238Loans receivable(Note 7)
    
    
    1,357,802
    
    
    
    1,810,403Capital assets(Note 5)
    
    
    2,057,542
    
    
    
    2,834,183Goodwill and other assets
    
    
    4,416,609
    
    
    
    4,416,609Future income taxes(Note 13)
    
    
    3,739,203
    
    
    
    5,308,089Discontinued operations(Note 19)
    
    
    
    
    
    
    13,934,389$
    81,273,654
    
    
    $
    84,057,209Liabilities and Shareholders EquityCurrentAccounts payable and accrued liabilities
    
    $
    4,885,496
    
    
    $
    2,386,507Deferred revenue
    
    
    1,089,534
    
    
    
    614,051Current portion of long-term debt (Note 8)
    
    
    84,862
    
    
    
    108,925Discontinued operations (Note 19)
    
    
    
    
    
    
    7,140,1506,059,892
    
    
    
    10,249,633Long-term debt(Note 8)
    
    
    167,173
    
    
    
    252,0936,227,065
    
    
    
    10,501,726Shareholders equityShare capital (Note 10)
    
    
    97,186,342
    
    
    
    105,204,765Contributed surplus (Note 11)
    
    
    10,787,651
    
    
    
    5,574,057Warrants (Note 10)
    
    
    6,542,456
    
    
    
    6,542,456Deficit
    
    
    (40,266,401
    )
    
    
    (42,402,587
    )Stock based compensation (Note 10)
    
    
    847,546
    
    
    
    789,792Cumulative translation adjustment
    
    
    (51,005
    )
    
    
    (2,153,000
    )75,046,589
    
    
    
    73,555,483$
    81,273,654
    
    
    $
    84,057,209
 On behalf of the Board:(signed)
    
    (signed)Geoffrey B. Genovese,
    
    John H. Bailey,Director
    
    Director
  4




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##### 



F-3
Envoy Communications Group Inc.
 Consolidated Statements of Operations
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2006
    
    
    2005
    
    
    2004Net revenue(Note 2)
    
    $
    9,671,504
    
    
    $
    19,567,045
    
    
    $
    15,837,776Operating expenses:Salaries and benefits (Note 10)
    
    
    10,674,384
    
    
    
    14,691,680
    
    
    
    12,585,399General and administrative
    
    
    3,029,595
    
    
    
    2,890,539
    
    
    
    2,992,555Occupancy costs
    
    
    1,029,385
    
    
    
    1,098,509
    
    
    
    1,128,59814,733,364
    
    
    
    18,680,728
    
    
    
    16,706,552Depreciation
    
    
    799,961
    
    
    
    966,282
    
    
    
    1,123,097Investment earnings(Note 3)
    
    
    (1,016,632
    )
    
    
    (2,830,676
    )
    
    
    (406,683
    )Interest (income) expense and
financing costs(Note 9)
    
    
    24,333
    
    
    
    (19,231
    )
    
    
    3,586,71314,541,026
    
    
    
    16,797,103
    
    
    
    21,009,680(Loss) earnings before restructuring expense,
income taxes and discontinued operations
    
    
    (4,869,522
    )
    
    
    2,769,942
    
    
    
    (5,171,904
    )Restructuring expense(Note 14)
    
    
    (642,897
    )
    
    
    
    
    
    
    (Loss) earnings before income taxes and
discontinued operations
    
    
    (5,512,419
    )
    
    
    2,769,942
    
    
    
    (5,171,904
    )Income tax recovery(Note 13)
    
    
    (120,393
    )
    
    
    (303,731
    )
    
    
    (391,072
    )(Loss) earnings from continuing operations
    
    
    (5,392,026
    )
    
    
    3,073,673
    
    
    
    (4,780,832
    )Gain (loss) on disposal of discontinued operations,
net of income taxes(Note 19)
    
    
    5,721,229
    
    
    
    1,799,631
    
    
    
    (465,576
    )Earnings from discontinued operations,
net of income taxes(Note 19)
    
    
    1,806,983
    
    
    
    1,068,386
    
    
    
    2,139,604Net (loss) earnings
    
    $
    2,136,186
    
    
    $
    5,941,690
    
    
    $
    (3,106,804
    )(Loss) earnings per share(Note 12)Basic
    
    $
    0.10
    
    
    $
    0.27
    
    
    $
    (0.18
    )Diluted
    
    $
    0.10
    
    
    $
    0.27
    
    
    $
    (0.18
    )(Loss) earnings per share  continuing operationsBasic
    
    $
    (0.27
    )
    
    $
    0.14
    
    
    $
    (0.28
    )Diluted
    
    $
    (0.27
    )
    
    $
    0.14
    
    
    $
    (0.28
    )Earnings per share  discontinued operationsBasic
    
    $
    0.37
    
    
    $
    0.13
    
    
    $
    0.10Diluted
    
    $
    0.37
    
    
    $
    0.13
    
    
    $
    0.10Weighted average number of common
shares outstanding  basic
    
    
    20,450,230
    
    
    
    22,137,757
    
    
    
    17,062,152Weighted average number of common
shares outstanding  fully diluted
    
    
    20,459,736
    
    
    
    22,165,754
    
    
    
    17,062,152
  5




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##### 



F-4
Envoy Communications Group Inc.
 Consolidated Statements of Deficit
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2006
    
    
    2005
    
    
    2004Deficit,beginning of period
    
    $
    (42,402,587
    )
    
    $
    (48,344,277
    )
    
    $
    (45,237,473
    )Net (loss) earnings
    
    
    2,136,186
    
    
    
    5,941,690
    
    
    
    (3,106,804
    )Deficit,end of period
    
    $
    (40,266,401
    )
    
    $
    (42,402,587
    )
    
    $
    (48,344,277
    )
  6




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##### 



F-5
Envoy Communications Group Inc.
 Consolidated Statements of Cash Flows
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2006
    
    
    2005
    
    
    2004Cash flows from operating activities:Net (loss) earnings
    
    $
    2,136,186
    
    
    $
    5,941,690
    
    
    $
    (3,106,804
    )Items not involving cash:(Gain) loss on disposal of discontinued operations
    
    
    (5,721,229
    )
    
    
    (1,799,631
    )
    
    
    465,576Income from discontinued operations
    
    
    (1,806,983
    )
    
    
    (1,068,386
    )
    
    
    (2,139,604
    )Depreciation
    
    
    799,961
    
    
    
    966,282
    
    
    
    1,123,097Amortization of deferred financing charges
    
    
    
    
    
    
    
    
    
    
    21,110Convertible debenture accretion
    
    
    
    
    
    
    
    
    
    
    126,273Debentures and term notes accretion
    
    
    
    
    
    
    
    
    
    
    2,426,718Stock based compensation
    
    
    57,754
    
    
    
    344,150
    
    
    
    200,117Future income taxes (recovery)
    
    
    906,303
    
    
    
    (618,188
    )
    
    
    (334,016
    )Realized (gains) losses and writedowns on
investment portfolio
    
    
    65,490
    
    
    
    (1,633,967
    )
    
    
    61,650Net change in non-cash working capital balances:Accounts receivable
    
    
    4,482,082
    
    
    
    (1,195,206
    )
    
    
    (1,584,572
    )Prepaid expenses
    
    
    (1,266,832
    )
    
    
    (129,649
    )
    
    
    98,469Accounts payable and accrued liabilities
    
    
    2,498,989
    
    
    
    855,398
    
    
    
    (1,826,249
    )Income taxes payable/recoverable
    
    
    
    
    
    
    
    
    
    
    237,290Deferred revenue
    
    
    475,483
    
    
    
    (1,437,146
    )
    
    
    1,009,213Long-term restructuring costs
    
    
    
    
    
    
    
    
    
    
    (337,407
    )Other
    
    
    25,784
    
    
    
    (75,449
    )
    
    
    (49,980
    )Net cash provided by (used in) operating
activities
    
    
    2,652,988
    
    
    
    149,898
    
    
    
    (3,609,119
    )Cash flows from financing activities:Long-term debt borrowings
    
    
    
    
    
    
    
    
    
    
    4,500,000Long-term debt repayments
    
    
    (108,983
    )
    
    
    (279,405
    )
    
    
    (5,150,000
    )Short-term bank facility repayments
    
    
    
    
    
    
    
    
    
    
    (6,885,125
    )Issuance of common shares, net of
share issue costs
    
    
    25,000
    
    
    
    47,917
    
    
    
    60,670,009Share buy back under normal
course issuers bid
    
    
    (2,829,831
    )
    
    
    (7,442,910
    )
    
    
    (816,549
    )Net cash provided by (used in) financing
activities
    
    
    (2,913,814
    )
    
    
    (7,674,398
    )
    
    
    52,318,335
  7




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##### 



F-5
Envoy Communications Group Inc.
 Consolidated Statements of Cash Flows (continued)
(Expressed in Canadian dollars)
 For the years ended September 30
    
    2006
    
    
    2005
    
    
    2004Cash flows from investing activities:Loans receivable
    
    
    224,760
    
    
    
    33,516
    
    
    
    Cash outlay on sale of subsidiary
    
    
    (794,453
    )
    
    
    
    
    
    
    Purchase of capital assets
    
    
    (23,320
    )
    
    
    (771,531
    )
    
    
    (493,685
    )Proceeds on sale of
subsidiary, net of cash held in escrow
    
    
    24,300,000
    
    
    
    
    
    
    
    Investments
    
    
    (25,326,184
    )
    
    
    14,956,214
    
    
    
    (46,430,442
    )Net cash provided by (used in) investing
activities
    
    
    (1,619,197
    )
    
    
    14,218,199
    
    
    
    (46,924,127
    )Change in cash balance due to foreign
exchange
    
    
    480,322
    
    
    
    383,934
    
    
    
    670,823Net change in cash from continuing operations
    
    
    (1,399,701
    )
    
    
    7,077,633
    
    
    
    2,455,912Cash flows from discontinued operations:Net cash provided by operating activities
    
    
    4,835,618
    
    
    
    1,742,742
    
    
    
    755,668Net cash used in financing activities
    
    
    (4,614,317
    )
    
    
    (1,129,458
    )
    
    
    (644,533
    )Net cash used in investing activities
    
    
    (1,376,485
    )
    
    
    (7,916,224
    )
    
    
    (976,784
    )Change in cash balance due to foreign
exchange
    
    
    (552,754
    )
    
    
    (208,036
    )
    
    
    (691,296
    )Net change in cash from discontinued operations
    
    
    (1,707,938
    )
    
    
    (7,510,976
    )
    
    
    (1,556,945
    )Net change in cash
    
    
    (3,107,639
    )
    
    
    (433,343
    )
    
    
    898,967Cash (bank indebtedness),beginning of
year  continued operations
    
    
    2,324,074
    
    
    
    1,479,156
    
    
    
    (320,723
    )Add: cash, beginning of year for discontinued
operations
    
    
    1,885,846
    
    
    
    3,164,107
    
    
    
    4,065,020Less: cash, end of year for discontinued
operations
    
    
    (344,086
    )
    
    
    (1,885,846
    )
    
    
    (3,164,108
    )Cash, end of year
    
    $
    758,195
    
    
    $
    2,324,074
    
    
    $
    1,479,156Supplemental cash flow information:Interest paid
    
    $
    24,333
    
    
    $
    34,559
    
    
    $
    955,513Income taxes paid
    
    
    
    
    
    
    
    
    
    
    Supplemental disclosure of non-cash
transactions:Conversion of debentures
    
    
    
    
    
    
    
    
    
    $
    4,200,284
  8




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##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 1.
    
    Nature of BusinessThe Company, continued under the Business Corporations Act
(Ontario), operated in the United States, the United Kingdom and
Canada during the year, providing consumer and retail branding
services. United Kingdom operations have been sold during
September 2006. During the year the Company announced the launch
of Envoy Capital Group, a merchant banking division.Basis of Presentation
 (a)
    
    The consolidated financial statements have been prepared by management 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 21.(b)
    
    Certain comparative figures have been reclassified to conform to the financial
statement presentation adopted for 2006.(c)
    
    The comparative figures have been restated as a result of the discontinued
operations described in Note 19.
 2.
    
    Significant Accounting Policies
 (a)
    
    Principles of ConsolidationThe 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, 2006, 2005 and 2004 are as follows:
 2006
    
    
    2005
    
    
    2004
    
    
    Jurisdiction ofCompany
    
    % ownership
    
    
    % ownership
    
    
    % ownership
    
    
    incorporationWatt International Inc.
    
    
    100
    
    
    
    100
    
    
    
    100
    
    
    OntarioWatt Gilchrist Limited
    
    
    
    
    
    
    100
    
    
    
    100
    
    
    United KingdomJohn Street Inc.
    
    
    
    
    
    
    
    
    
    
    100
    
    
    OntarioParker Williams
Design Limited
    
    
    
    
    
    
    65
    
    
    
    
    
    
    United Kingdom
 9




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##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 2.
    
    Significant Accounting Policies (continued)
 (b)
    
    Use of EstimatesThe preparation of financial statements in conformity with Canadian 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.(c)
    
    Capital AssetsCapital assets are recorded at cost and are depreciated over their estimated useful lives
as follows:
 Asset
    
    Basis
    
    RateComputer equipment and software
    
    Declining balance
    
    30%  50%Furniture and equipment
    
    Declining balance
    
    20%Leasehold improvements
    
    Straight line
    
    initial term of lease + 1 option periodEquipment under capital leases
    
    Straight line
    
    3  5 years
 (d)
    
    Revenue RecognitionThe 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 fees billed and collected in advance of
such fees being earned;(ii)
    
    unbilled accounts receivable represents reimbursable pass-through costs;
and(iii)
    
    work in process represents costs incurred on projects for which revenue
has not yet been recognized for accounting purposes.
 Included in work in process are charges for staff time at standard cost and third party
charges. The standard cost rate provides for the recovery of actual labour and overhead
costs incurred. The third party charges are for actual costs related to outsourced goods
and services for specific projects.
 10




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##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 2.
    
    Significant Accounting Policies (continued)
 Net revenue represents the Companys compensation for its non-agency services and is
recognized only when collection of such net revenue is probable. The Companys
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.(e)
    
    GoodwillGoodwill represents the price paid for acquisitions in excess of the fair market value of
net tangible and intangible assets acquired. Goodwill is carried at cost, less
impairment losses if any.The Company uses a two-step impairment test on an annual basis, or when
significant business changes have occurred that may have had an adverse impact on
the fair value of the goodwill. To determine whether impairment has occurred, the
fair value of the reporting unit is compared to its carrying amounts, including
goodwill. When the fair value is in excess of its carrying amount, the goodwill is
not considered to be impaired, and the second step of the impairment test is not
necessary.When the carrying amount of the reporting unit as determined in the first step
exceeds the fair value, then the fair value of the goodwill is determined in the
same manner as followed on a business combination. An impairment loss is
recognized when the carrying amount of the goodwill of a reporting unit exceeds its
fair value. It is not reversed in the event that the fair value subsequently
increases.(f)
    
    Intangible assetsThe Company uses the provisions of the CICA Handbook section 1581, Business
Combinations and section 3062, Goodwill and other intangible assets to determine the
value of intangible assets acquired in an acquisition. In determining the value, the
Company considers the expected impact on cash flows of the asset, the inherent
uncertainty of estimates, and the time value of money. The intangible assets are
amortized over a period considered to represent their useful life. Intangible assets are
reviewed each year and if circumstances indicate that the carrying amounts may not be
recoverable, a write-down would be charged to operations in the period.
 11




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##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 2.
    
    Significant Accounting Policies (continued)
 (g)
    
    Foreign currency translationThe 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 as Cumulative Translation Adjustment.In respect of the Company and its subsidiaries foreign currency transactions, at the
transaction date each asset, liability, revenue and expense is translated into the base
currency of the unit by the use of the exchange rate in effect at that date. At the
year-end date, monetary assets and liabilities are translated into the base currency of
the unit 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.(h)
    
    Income taxesThe 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.(i)
    
    Stock-based compensationEffective October 1, 2003 the Company adopted the recommendations of The Canadian
Institute of Chartered Accountants (CICA) handbook section 3870, Stock-Based
Compensation and Other Stock-Based Payments. These standards require that direct awards
of stock or liabilities incurred, or other compensation arrangements that are 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.
 12




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##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 2.
    
    Significant Accounting Policies (continued)
 (j)
    
    Earnings per shareThe 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 and warrants under the
treasury stock method and potential shares issuable upon conversion of convertible
debt using the if converted method.(k)
    
    Business combinationsThe 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. Intangible assets that meet specific criteria
are recognized and reported apart from goodwill.(l)
    
    InvestmentsThe Company uses the provisions of the CICA Handbook section 3010, Temporary
Investments, and section 3050 Long-term investments. Investments are classified as
short term or long term based on managements intended holding period. Investments are
classified as current assets only if capable of reasonably prompt liquidation, and
include temporary holdings of marketable securities.Short term investments are carried at the lower of carrying value and market value of the
portfolio at the balance sheet date. Investments are classified as long term assets where
management has indicated a long term intended holding period. The long term investments
are carried at carrying value and are written down to market price if there has been a
decline in value in the portfolio that is not considered to be temporary. Once a
write-down has been made of the short term or the long term portfolio, it is not reversed
in the event of a subsequent increase in value. For the purposes of calculating a gain
or loss on the sale of an investment, the cost of the investment sold is calculated on
the basis of the average carrying value.
 13




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##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 2.
    
    Significant Accounting Policies (continued)
 (m)
    
    Impairment of long-lived assetsIn accordance with CICA Handbook section 3063, Impairment of long-lived
assets, 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.(n)
    
    Discontinued operationsEffective October 1, 2004, the Company uses the provisions of the CICA Handbook section
3475, Disposal of long-lived assets and discontinued operations. The results of
operations of a business that has either been disposed of, or is held for sale, is
reported as discontinued operations if the operations and cash flows of the
component have been (or will be) eliminated from the Companys ongoing operations,
and the Company will not have any significant continuing involvement in the
operations of the component after the disposal transaction. The results of
discontinued operations, less applicable taxes are reported as a separate element of
income or loss before extraordinary items for both current and prior periods.
 14




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 3.
    
    Investments
 2006
    
    
    2005Short termCash
    
    $
    696,013
    
    
    $
    1,217,017Fixed income
    
    
    4,674,554
    
    
    
    1,703,543Equities
    
    
    22,280,931
    
    
    
    748,935GICs
    
    
    23,000,000
    
    
    
    Discount securities
    
    
    6,716,037
    
    
    
    20,896,940$
    57,367,535
    
    
    $
    22,113,957Long termReal estate (note 7)
    
    $
    1,001,354
    
    
    $
    Discount securities
    
    
    
    
    
    
    8,541,760Fixed income
    
    
    
    
    
    
    1,703,543Equities
    
    
    
    
    
    
    748,935$
    1,001,354
    
    
    $
    10,994,238Total investments
    
    $
    58,368,889
    
    
    $
    33,108,195
 As at September 30, 2006 the portfolio was invested in marketable securities, including
discount notes, fixed income securities, GICs and common shares. All financial
instruments held in the portfolio are traded in active and liquid markets, and the fair
market value of the portfolio was determined by using the closing market prices at September
30, 2006 of the individual financial instruments. The specific investments within portfolio
will vary depending on market conditions. At September 30, 2006, the discount securities
mature within six months at their face value. The fixed income securities are interest
bearing, liquid instruments with maturities up to 30 years, and bear interest at rates that
average 5.65%.Included in cash is $685,000 held in trust for an investment transaction that was completed
subsequent to year end.The fair value of the short term and long term investments at September 30, 2006 was
$57,609,913 and $1,001,354 (2005  $22,113,957 and $10,988,369), respectively. The investment
portfolio, including interest income on John Street loans and other income, earned $1,016,632
during fiscal 2006 (2005  $2,830,676 and 2004  $ 406,683), after deducting fees and
expenses.
 15




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 4.
    
    Accounts receivable
 2006
    
    
    2005Trade receivables
    
    $
    2,981,562
    
    
    $
    6,348,505Accrued revenue
    
    
    463,193
    
    
    
    1,478,168Work in process
    
    
    1,214,880
    
    
    
    1,315,044$
    4,659,635
    
    
    $
    9,141,717
 5.
    
    Capital assets
 Accumulated
    
    
    Net book2006
    
    Cost
    
    
    depreciation
    
    
    valueComputer equipment and software
    
    $
    3,644,508
    
    
    $
    3,024,008
    
    
    $
    620,500Furniture and equipment
    
    
    471,909
    
    
    
    433,945
    
    
    
    37,964Leasehold improvements
    
    
    3,636,285
    
    
    
    2,260,912
    
    
    
    1,375,373Equipment under capital leases
    
    
    968,330
    
    
    
    944,625
    
    
    
    23,705$
    8,721,032
    
    
    $
    6,663,490
    
    
    $
    2,057,542
 Accumulated
    
    
    Net book2005
    
    Cost
    
    
    depreciation
    
    
    valueComputer equipment and software
    
    $
    3,612,108
    
    
    $
    2,650,652
    
    
    $
    961,456Furniture and equipment
    
    
    499,715
    
    
    
    423,360
    
    
    
    76,355Leasehold improvements
    
    
    3,625,725
    
    
    
    1,868,259
    
    
    
    1,757,466Equipment under capital leases
    
    
    963,519
    
    
    
    924,613
    
    
    
    38,906$
    8,701,067
    
    
    $
    5,866,884
    
    
    $
    2,834,183
 6.
    
    Acquisition of subsidiariesOn February 28, 2005, the Company through its subsidiary ECG Holdings (UK) Limited (ECGH),
acquired 65% of the outstanding shares of Parker Williams Design Limited (Parker Williams),
a London, UK based packaging design and brand specialist company. The purchase price of
£1,818,000, equivalent to $4,324,113, was paid in cash on completion. The remaining 35% of
the Parker Williams shares (Management Shares) continued to be held by senior management of
Parker Williams (Management Shareholders), subject to certain options described below.
 16




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 6.
    
    Acquisition of subsidiaries (continued)ECGH had the option to acquire from the Management Shareholders and the Management
Shareholders had the option to require ECGH to purchase from them, at various stages over a
period of 4 years following completion, the Management Shares for a purchase price based on
the profitability of Parker Williams for certain defined periods following completion.The acquisition was accounted for using the purchase method of accounting. The fair value of
the net assets acquired was £128,961 ($306,733) consisting of working capital and capital
assets. The resulting excess purchase price, including acquisition expenses, over the fair
value of the net assets acquired of £1,884,894 ($4,152,369) was allocated to goodwill and an
amount of £139,000 ($330,849) was allocated to intangible assets consisting of customer
relationships and non-compete agreements.In March 2006, the Company, through its subsidiary ECGH, acquired an additional 5% of the shares of Parker Williams from two former employees as per the terms and conditions of the
sale and purchase agreement for £52,679 ($104,758).The additional acquisition in March 2006 was accounted for using the purchase method of
accounting. The fair value of the net assets acquired was £34,955 ($69,511) consisting of
working capital and capital assets, resulting in goodwill of £17,724 ($35,247).In June 2006, Envoy increased its ownership in Parker Williams to approximately 80% by
acquiring, through its subsidiary ECGH, approximately 10% of the shares from three
shareholder managers as per the terms and conditions of the sale and purchase agreement for
£166,833 ($341,174) and in addition a one time performance based payout cost estimated to be
£223,635 ($474,106).The June 2006 acquisition was accounted for using the purchase method of accounting. The
fair value of the net assets acquired was £62,918 ($128,668) consisting of working capital
and capital assets, resulting in goodwill of £327,550 ($686,612).On September 15, 2006 Envoy sold its wholly owned subsidiary ECG Holdings (UK) Limited and
related assets and business operations. See note 19 Discontinued operations.
 17




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 6.
    
    Acquisition of subsidiaries (continued)Parker Williams acquisition in Canadian Dollars
 AdditionalOriginal
    
    
    Additional
    
    
    AcquisitionAcquisition
    
    
    Acquisition
    
    
    (approx.Assets acquired and liabilities assumed:
    
    (65%)
    
    
    (5%)
    
    
    10%)Total assets
    
    $
    1,796,438
    
    
    $
    2,489,308
    
    
    $
    2,313,451Total liabilities
    
    
    (1,324,541
    )
    
    
    (1,099,084
    )
    
    
    (1,169,003
    )Previously owned
    
    
    
    
    
    
    (903,646
    )
    
    
    (801,113
    )Minority interest
    
    
    (165,164
    )
    
    
    (417,067
    )
    
    
    (214,667
    )Net assets acquired
    
    
    306,733
    
    
    
    69,511
    
    
    
    128,668Intangible assets
    
    
    330,849
    
    
    
    
    
    
    
    Goodwill
    
    
    4,152,369
    
    
    
    35,247
    
    
    
    686,612Purchase price including
costs
    
    $
    4,789,951
    
    
    $
    104,758
    
    
    $
    815,280
 7.
    
    Related party transactionsDuring the year one of the Company directors charged the Company $230,785 (2005  $57,500;
2004  $266,100) for legal services.During the year the Company invested $125,000 in Matiadeka Ventures Inc., a Capital Pool
Company (CPC), which filed a preliminary prospectus on September 18, 2006 to complete an
Initial Public Offering (IPO) in Ontario. This transaction is deemed to be a related party
transaction by virtue of certain directors and officers of the Company being shareholders in
the CPC. Upon completion of the IPO, the Company will own 9.30% and, as a group with the
directors and officers, it will own 16.29% of the CPC.
 18




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 7.
    
    Related party transactions (continued)In April 2006, ECG Properties Inc. (ECGP), a newly created wholly-owned subsidiary of the
Company, entered into an agreement with an officer of the Company to jointly purchase three
investment properties located on Queen Street West in Toronto. The agreement provides that
the costs of acquisition, including legal fees, disbursements and land transfer taxes, be
funded equally by both parties. It is anticipated that within 12 months from the acquisition
the properties will be severed and separate legal ownership established. The total costs of
acquisition, surveying and consulting related to all properties is estimated to be
$3,000,000, with Envoys share expected to be $1,500,000. The expenses are initially funded
by ECGP and then reimbursed by the related party within 10 days of demand. As of September
30, 2006, ECGP had net expenditures of $1,001,354, including a receivable from the related
party of $56,221. Subsequent to the year end, the agreement was terminated and the Company
purchased the related parties interest in the properties for a cash payment of $945,133 net
of a loan receivable of $56,221.In March 2006, the Company, through its subsidiary ECGH, acquired an additional 5% of the shares of Parker Williams from two former employees as per the terms and conditions of the
sale and purchase agreement for £52,679 ($104,758).In June 2006, Envoy increased its ownership in Parker Williams to approximately 80% by
acquiring, through its subsidiary ECGH, approximately 10% of the shares from three
shareholder managers as per the terms and conditions of the sale and purchase agreement for
£166,833 ($341,174) and in addition a one time performance based payout cost estimated to be
£223,635 ($474,106). Performance based consideration payment is due on June 30, 2008. The
group of three shareholder managers will continue to own collectively approximately 20% of
Parker Williams. Effective September 15, 2006 Envoy sold its wholly owned UK subsidiary ECGH
and related UK business Parker Williams and Gilchrist. See note 19 Discontinued Operations
and Note 6 Acquisition of Subsidiaries.
 19




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 7.
    
    Related party transactions (continued)At September 30, 2004, Envoy purchased from the executive officers of John Street Inc. the
30% of the shares of John Street Inc. which it did not already own. Effective June 30, 2005,
Envoy completed the sale of the shares of its John Street Inc. subsidiary (John Street) and
related assets to the management of John Street for a gross sale price of $1,500,000. The
purchase price for the shares was $1,200,000 and for the related assets was $300,000. The
sale transaction produced a net gain of $1,801,507. As at June 30, 2005, John Street was also
indebted to Envoy in the amount of $675,000. These loans are payable over a period of 5 years
and, except for interest free periods totalling 12 months, carry interest at the rate of 8%
per annum. The repayment of these loans requires quarterly payments totalling $100,501 to be
made by June 30, 2006, followed by 48 monthly payments of $41,145 beginning July 31, 2006.
These loans are secured against 100% of the common shares in the capital of John Street and
security interest in the assets. At September 30, 2006, the amount of these loans receivable
was $1,850,725 of which $492,923 was current and $1,357,802 was long term.During fiscal 2004, certain executives of the Company loaned the Company an amount of
$100,000, and a relative of a director loaned the Company an amount of $150,000. These
debentures bore an interest rate of 10% per annum, and included warrants to purchase a total
of 125,000 shares at $0.15 per share. During fiscal 2004, these debentures were repaid.At January 1, 2004, the Company sold the operations of Communique Incentives Inc. to an
executive of the subsidiary (see Note 19).Related party transactions are recorded at the exchange amount, being the amount agreed to by
the related parties.8.
    
    Long-term debt
 2006
    
    
    2005Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in blended monthly
instalments of $7,666
    
    $
    252,035
    
    
    $
    324,341Due between January 2005 and
January 2006
    
    
    
    
    
    
    36,677252,035
    
    
    
    361,018Less current portion
    
    
    84,862
    
    
    
    108,925$
    167,173
    
    
    $
    252,093
 20




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 9.
    
    Interest expense and financing (income) costsInterest expense and financing (income) costs during the year arose from the following:
 2006
    
    
    2005
    
    
    2004Cash interest paid (earned) on credit facility,
landlord loans, capital leases and
bank balances
    
    $
    24,333
    
    
    $
    (19,231
    )
    
    $
    392,902Financing fees on credit facility
    
    
    
    
    
    
    
    
    
    
    100,451Negotiation fee for early repayment of debt
    
    
    
    
    
    
    
    
    
    
    435,000Cash interest paid on convertible debentures
and amortization of debenture issue costs
    
    
    
    
    
    
    
    
    
    
    105,36924,333
    
    
    
    (19,231
    )
    
    
    1,033,722Accreted interest imputed on warrants
and debentures
    
    
    
    
    
    
    
    
    
    
    2,552,991Total interest expense and
financing (income) costs
    
    $
    24,333
    
    
    $
    (19,231
    )
    
    $
    3,586,713
 Envoy assigned a value to the bank warrants using the Black-Scholes option pricing model,
based on an analysis of the warrant exercise price, time to expiry and the volatility of the
price of Envoys common shares. The Black-Scholes option pricing model indicated that the
value of the bank warrants was $2,426,719. The loans made by the holders of the secured
debentures and the unsecured term notes were repaid during the second quarter of fiscal 2004
and, as a result, the remaining unamortized value assigned to the bank warrants was charged
to interest expense in the second quarter of fiscal 2004.10.
    
    Share capital
 (a)
    
    Authorized:40,000,000 common shares without par value (2006  40,000,000; 2005  40,000,000)At a special meeting of shareholders held on January 8, 2004, the shareholders approved
an amendment to the articles of the Company to increase its authorized share capital from
10,000,000 common shares to 40,000,000 common shares.
 21




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 
 10.
    
    Share capital (continued)
 Issued:
 2006
    
    
    2005
    
    
    2004Number
    
    
    
    
    
    
    Number
    
    
    
    
    
    
    Numberof shares
    
    
    Amount
    
    
    of shares
    
    
    Amount
    
    
    of shares
    
    
    AmountBalance, beginning of year
    
    
    21,007,517
    
    
    $
    105,204,765
    
    
    
    23,416,600
    
    
    $
    117,447,261
    
    
    
    6,209,406
    
    
    $
    55,988,817Common shares issued pursuant to:Conversion of convertible
debentures (Note 10)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,853,333
    
    
    
    4,841,439Stock options exercised
    
    
    20,000
    
    
    
    25,000
    
    
    
    38,334
    
    
    
    47,917
    
    
    
    115,667
    
    
    
    224,852Conversion of warrants
(Note 9)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    460,000
    
    
    
    2,771,719Public Offering (b)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,052,634
    
    
    
    55,016,831Repurchase of shares pursuant
to share issuer bid (c)
    
    
    (1,606,102
    )
    
    
    (8,043,423
    )
    
    
    (2,447,417
    )
    
    
    (12,290,413
    )
    
    
    (274,440
    )
    
    
    (1,396,397
    )Balance, end of year
    
    
    19,421,415
    
    
    $
    97,186,342
    
    
    
    21,007,517
    
    
    $
    105,204,765
    
    
    
    23,416,600
    
    
    $
    117,447,261
 On January 15, 2005, the Companys board of directors approved the consolidation of
the common shares (a reverse stock split) on the basis of 1 for 5. On January 21, 2005
the Company filed Articles of Amendment consolidating its common shares on the basis of 1
new common share for every 5 common shares outstanding. The effective date for post
consolidation trading of the shares was February 10, 2005. Amounts shown for shares and
earnings per share figures for all periods presented have been adjusted to give effect to
the share consolidation.(b)
    
    Public OfferingThrough a public offering, on February 20, 2004, Envoy issued 5,263,160 units (the First
Units) at $6.65 per First Unit, each First Unit consisting of one common share and
one-half of one transferable common share purchase warrant. Each whole warrant
entitles the holder to purchase one common share at a price of $9.00 per common
share for a period ending February 20, 2009.On March 3, 2004, pursuant to the exercise of the over-allotment option issued in
connection with Envoys offering of the First Units, Envoy issued an additional 789,474
First Units. The total number of First Units issued by Envoy to the public was
6,052,634, with total gross proceeds of $40,250,016. Part of the proceeds were used to
retire substantially all outstanding loan indebtedness. The balance of the funds will be
used for general corporate purposes and potential acquisition and investment
opportunities.
 22




---



##### 



F-6Envoy
Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 10.
    
    Share capital (continued)
     (c)
    
    Repurchase of shares
  23




---



##### 



F-6Envoy
Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 10.
    
    Share capital (continued)
   (d)
    
    Stock option plan
      24




---



##### 



F-6Envoy
Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 10.
    
    Share capital (continued)
 (e)
    
    Stock option details
  2006
    
    
    2005
    
    
    2004Risk-free interest rate
    
    
    n/a
    
    
    
    n/a
    
    
    
    3.1% - 4.0
    %Volatility factor of the future expected
market price of the Companys
common shares
    
    
    n/a
    
    
    
    n/a
    
    
    
    54
    %Weighted average expected life of the
options
    
    
    n/a
    
    
    
    n/a
    
    
    1.85 yearsExpected dividends
    
    
    n/a
    
    
    
    n/a
    
    
    Nil
 25




---



##### 



F-6Envoy
Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 10.
    
    Share capital (continued)
  WeightedaverageexerciseNumber
    
    
    price perof options
    
    
    shareOptions outstanding, September 30, 2003
    
    
    348,283
    
    
    $
    6.35Options granted
    
    
    375,000
    
    
    
    4.00Options exercised
    
    
    (115,667
    )
    
    
    1.75Options cancelled
    
    
    (21,666
    )
    
    
    15.10Options outstanding, September 30, 2004
    
    
    585,950
    
    
    
    5.45Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (38,334
    )
    
    
    1.25Options cancelled
    
    
    (145,666
    )
    
    
    10.26Options outstanding, September 30, 2005
    
    
    401,950
    
    
    
    4.10Options granted
    
    
    
    
    
    
    Options exercised
    
    
    (20,000
    )
    
    
    1.25Options cancelled
    
    
    (88,400
    )
    
    
    5.71Options outstanding, September 30, 2006
    
    
    293,550
    
    
    $
    3.81Number of options exercisableOptions exercisable, September 30, 2006
    
    
    211,883
    
    
    $
    3.72Options exercisable, September 30, 2005
    
    
    295,283
    
    
    $
    4.29Options exercisable, September 30, 2004
    
    
    132,617
    
    
    $
    12.00
 26




---



##### 



F-6Envoy
Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 10. Share capital (continued)
  Number
    
    Weighted Average
    
    NumberExercise Price

    
    
    Outstanding
    
    Contractual Life
    
    Exercisable$  1.25
    
    
    
    
    30,000
    
    
    1.07
    
    
    
    30,000$  3.05
    
    
    
    
    15,000
    
    
    0.66
    
    
    
    15,000$  4.00
    
    
    
    
    245,000
    
    
    2.65
    
    
    
    163,333$15.25
    
    
    
    
    3,550
    
    
    0.84
    
    
    
    3,550293,550
    
    
    
    
    
    
    211,883
 11. 
Contributed Surplus
    27




---



##### 



F-6Envoy
Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 12.
    
    Earnings per Share
  2006
    
    
    2005
    
    
    2004Numerator for basic EPS calculation:Net earnings (loss)
    
    $
    2,136,186
    
    
    $
    5,941,690
    
    
    $
    (3,106,804
    )Denominator:Denominator for basic net
earnings (loss) per share -
weighted average shares
outstanding (as adjusted for share
consolidation (Note 10(a))
    
    
    20,450,230
    
    
    
    22,137,757
    
    
    
    17,062,152Effect of dilutive potential
common shares issuable:- under stock options
    
    
    9,506
    
    
    
    27,997
    
    
    
    Denominator for diluted net
earnings (loss) per share
    
    
    20,459,736
    
    
    
    22,165,754
    
    
    
    17,062,152
   Anti-dilutive potential securities
    
    2006
    
    
    2005
    
    
    2004Common shares potentially issuable:- pursuant to warrants
    
    
    5,526,317
    
    
    
    5,131,850
    
    
    
    5,526,317- under stock options
    
    
    263,550
    
    
    
    351,950
    
    
    
    960,9505,789,867
    
    
    
    5,483,800
    
    
    
    6,487,267
 28




---



##### 



F-6Envoy Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 13.
    
    Income taxes
  2006
    
    
    2005
    
    
    2004Current
    
    $
    (1,026,696
    )
    
    $
    314,457
    
    
    $
    (57,440
    )Future
    
    
    906,303
    
    
    
    (618,188
    )
    
    
    (333,632
    )$
    (120,393
    )
    
    $
    (303,731
    )
    
    $
    (391,072
    )
  2006
    
    
    2005
    
    
    2004Income tax expense (recovery)
at statutory rates
    
    $
    (1,991,086
    )
    
    
    (36.1
    %)
    
    $
    1,000,503
    
    
    
    36.1
    %
    
    $
    (1,868,092
    )
    
    
    (36.1
    %)Increase (decrease) in
income taxes resulting from:Expenses (revenue)
deducted (included) in
the accounts that have no
corresponding deduction
(inclusion) for income taxes
    
    
    127,012
    
    
    
    2.3
    %
    
    
    139,889
    
    
    
    5.1
    %
    
    
    303,285
    
    
    
    5.9
    %Change in valuation
allowance
    
    
    1,820,581
    
    
    
    33.0
    %
    
    
    (2,042,816
    )
    
    
    (73.8
    %)
    
    
    1,044,524
    
    
    
    20.2
    %Other
    
    
    (76,900
    )
    
    
    (1.4
    %)
    
    
    598,693
    
    
    
    21.6
    %
    
    
    129,211
    
    
    
    2.4
    %$
    (120,393
    )
    
    
    (2.2
    %)
    
    $
    (303,731
    )
    
    
    (11.0
    %)
    
    $
    (391,072
    )
    
    
    (7.6
    %)
 29




---



##### 



F-6Envoy Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 13.
    
    Income taxes (continued)
  2006
    
    
    2005Future tax assets:Capital assets
    
    $
    980,566
    
    
    $
    1,024,064Share issuance costs
    
    
    886,462
    
    
    
    1,329,694Non-capital losses expiring by 2016
    
    
    7,018,783
    
    
    
    5,632,312Other
    
    
    10,705
    
    
    
    47,0318,896,516
    
    
    
    8,033,101Less valuation allowance
    
    
    4,193,346
    
    
    
    2,372,765Net future tax assets
    
    
    4,703,170
    
    
    
    5,660,336Future tax liabilities:Goodwill
    
    
    
    
    
    
    50,863Total net future tax assets
    
    
    4,703,170
    
    
    
    5,609,473Less current portion
    
    
    963,967
    
    
    
    301,384$
    3,739,203
    
    
    $
    5,308,089
  2008
    
    $
    1,900,0002009
    
    
    3,400,0002010
    
    
    6,100,0002014
    
    
    2,700,0002015
    
    
    1,600,0002016
    
    
    3,700,000$
    19,400,000
 30




---



##### 



F-6Envoy Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 13.
    
    Income taxes (continued)The Company has realized and unrealized net capital losses of approximately $1,671,000 and
$216,000, respectively, available for carry forward to be applied against future taxable
gains for Canadian tax purposes. The losses are available for carry forward indefinitely.The Company has capital losses of approximately $7,400,000 for United States income tax
purposes available for carry forward to be applied against future capital gains expiring in
2008.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.
 14.
    
    Restructuring costsIn response to a number of economic uncertainties, competitive challenges and business risks
that will impact client spending commitments of its operating subsidiaries, in November 2005,
the Company announced that its Board of Directors had approved the immediate implementation
of a restructuring plan. Management believes that, by implementing this restructuring plan,
Envoy will be better positioned to remain profitable, if its clients historical spending
patterns do not materilize in the short term. The restructuring involved the downsizing of
its subsidiaries workforce, and writing off redundant capital assets. Accordingly, the
Company recorded a restructuring provision of $1.9 million in the first quarter of fiscal
2006, which included $1.1 million for North American operations and $0.8 million for UK
operations. Termination costs related to 73 employees, of which 44 employee terminations were
in North America and 29 in the United Kingdom and Continental Europe.During the year restructuring plan was completed and in the fourth quarter approximately
$450,000 of the restructuring provision was reversed bringing the total North America
restructuring actual costs to $642,897. The restructuring costs relating to the UK operations
have been included in discontinued operations.During fiscal 2004, negotiations were held with the landlord in New York City due to
abandonment of leased office space resulted in the Company discharging the ongoing payments
to the landlord with a lump sum payment.
 31




---



##### 



F-6Envoy Communications Group Inc.Notes to Consolidated Financial StatementsFor the years ended September 30, 2006, 2005 and 2004
 14.
    
    Restructuring costs (continued)Total restructuring costs accrued at September 30 are classified as:
 2006
    
    
    2005
    
    
    2004Accounts payable and accrued liabilities
    
    $
    19,456
    
    
    $
    15,620
    
    
    $
    28,471
 15.
    
    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 four years to expiry are as
follows:
 2007
    
    $
    839,7822008
    
    
    824,0922009
    
    
    736,0082010
    
    
    223,176$
    2,623,058
 Rent expense under operating leases for the year ended September 30, 2006 amounted to
$663,013 (2005  $697,875; 2004  $626,490).(b)
    
    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.
 16.
    
    Financial instrumentsThe 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.
 32




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 16. Financial instruments (continued)
 (a)
    
    The carrying values and estimated fair values of the Companys financial
instruments are as follows:
 (i)
    
    The carrying amounts of cash, accounts receivable, accounts payable and
accrued liabilities and promissory notes approximate their fair values due to the
short-term nature of these instruments.As at September 30, 2006, the carrying value of the loans payable to landlords was
$252,035 (2005  $324,341) and related fair value was $231,082 (2005  $286,681).As at September 30, 2006, the carrying value of the loans receivable from John Street
Inc. approximates fair value of $1,850,625 (2005  $1,810,403).Unless otherwise noted, the carrying value of other financial instruments
approximates their fair value.(ii)
    
    The carrying amounts and fair value of short term investments and long
term investments are detailed in Note 3.
 (b)
    
    Risk management activities:
 (i)
    
    Currency risk:The Company is subject to currency risk through its activities in the United States.
Changes in the exchange rate 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 from time to time enter into
foreign currency contracts to mitigate the associated risks. As at September 30,
2006, there were no foreign currency contracts outstanding.(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, 2006, one customer represented 21% of accounts receivable (2005  one customer
represented 18% of accounts receivable).
 33




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 17.
    
    Segmented informationWith the sale of its UK assets, the Companys operations are restricted to one primary
geographical area, North America. During fiscal 2006 the Company derived 43% of its net
revenues from three customers. During fiscal 2005 the Company derived 67% of its net revenues
from three customers. During fiscal 2004 the Company derived 67% of its net revenues from two
customers. Net revenue by type of service and by customer location are as follows:
 2006
    
    
    2005
    
    
    2004Net revenue:Consumer and retail branding
    
    $
    9,671,504
    
    
    $
    19,567,045
    
    
    $
    15,837,776
 2006
    
    
    2005
    
    
    2004Net revenue:Canada
    
    $
    4,991,114
    
    
    $
    5,751,537
    
    
    $
    2,075,091USA/South America
    
    
    3,534,355
    
    
    
    13,483,041
    
    
    
    13,242,459Middle East/Asia
    
    
    1,146,035
    
    
    
    332,467
    
    
    
    520,226$
    9,671,504
    
    
    $
    19,567,045
    
    
    $
    15,837,776
 18.
    
    Subsequent eventsOn September 15, 2006 the Company announced its intention to repurchase up to eight million
common shares under a substantial issuer bid in the form of a modified Dutch Auction at a
cash price of not more than $2.50 and not less than $2.25 per share. Subsequent to the
announcement, the offer was modified to repurchase up to seven million shares at cash of not
more than $2.70 US and not less than $2.55 US per share. The information circular and related
documents to modify Dutch Auction tender offer was mailed to shareholders on November 20,
2006. On December 14, 2006, the Company announced that it would increase the offer to
purchase maximum number of common shares from seven million to eight and a half million. In
this last announcement, the expiry date of the tender offer was also extended from December
27, 2006 to December 29, 2006. Notice of variation and extension of offer to purchase for
cash was mailed to shareholders on December 14, 2006.
 34




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 19.
    
    Discontinued operationsThrough its wholly owned subsidiary ECG Holdings (UK) Limited the Company provides brand
strategy, package design, brand management, pre-press, film services in UK and Europe. During
the year, Envoys management decided to sell ECG (UK) in order to re-deploy the capital in
its Merchant Banking business.Effective September 15, 2006, Envoy completed the sale of shares of its wholly owned
subsidiary, ECG (UK) and related business and all the assets of Watt Gilchrist Limited and
Parker Williams Design Limited. The sale price was $27,000,000 paid in cash. Pursuant to the
terms and conditions of sale purchase agreement $2,700,000 is being held in escrow to secure
potential third party claims. The escrowed funds less the amount of any third party claim
will be released to Envoy on the first anniversary date of the transaction, September 15,
2007.
 ECG Holdings (UK) Limited and related companiesFiscal year:
    
    2006
    
    
    2005
    
    
    2004Net revenue
    
    $
    21,432,172
    
    
    $
    23,589,979
    
    
    $
    21,126,182Operating expenses
    
    
    17,460,973
    
    
    
    20,205,104
    
    
    
    17,262,084Interest income
    
    
    (60,327
    )
    
    
    (62,248
    )
    
    
    (40,358
    )Depreciation
    
    
    1,294,822
    
    
    
    1,720,920
    
    
    
    1,262,480Income tax expense
    
    
    582,122
    
    
    
    509,885
    
    
    
    541,496Earnings from discontinued operations
(excluding gain on sale)
    
    
    2,154,582
    
    
    
    1,216,318
    
    
    
    2,100,480Minority interest
    
    
    347,599
    
    
    
    149,808
    
    
    
    Gain on sale of discontinued operations
    
    
    5,721,229
    
    
    
    
    
    
    
    Earnings from discontinued operations
    
    $
    7,528,212
    
    
    $
    1,066,510
    
    
    $
    2,100,480
 Effective June 30, 2005, Envoy completed the sale of the shares of its John Street Inc.
subsidiary (John Street) and related assets to the management of John Street. The purchase
price for the shares was $1,200,000 and for the related capital assets was $300,000. John
Street was also indebted to Envoy in the amount of $675,000. These loans are payable over a
period of 5 years and, except for interest free periods totalling 12 months, carry interest
at the rate of 8% per annum. Prior to its sale, John Street was reported primarily as part of
Canadian net revenue in the marketing segment.
 35




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 19. Discontinued operations (continued)
 John Street Inc.Fiscal year:
    
    2006
    
    
    2005
    
    
    2004Net revenue
    
    $
    
    
    
    $
    3,151,083
    
    
    $
    3,838,833Operating expenses
    
    
    
    
    
    
    3,047,312
    
    
    
    3,757,571Interest expense
    
    
    
    
    
    
    50,625
    
    
    
    Depreciation
    
    
    
    
    
    
    49,132
    
    
    
    42,572Income tax expense
    
    
    
    
    
    
    2,138
    
    
    
    Earnings from discontinued operations
(excluding gain on sale)
    
    
    
    
    
    
    1,876
    
    
    
    38,690Gain on sale of discontinued operations
    
    
    
    
    
    
    1,799,631
    
    
    
    Earnings from discontinued operations
    
    $
    
    
    
    $
    1,801,507
    
    
    $
    38,690
 Effective January 1, 2004, Envoy sold all the shares of its corporate event and
corporate travel business, Communique Incentives Inc. (Communique), after conducting a
review of its ongoing viability, future prospects and cash requirements. This business was
sold for a nominal consideration. Prior to its sale, Communique was reported as part of
Canadian net revenue in the marketing segment.
 Communique Incentives Inc.Fiscal year:
    
    2006
    
    
    2005
    
    
    2004Net revenue
    
    $
    
    
    
    $
    
    
    
    $
    398,114Operating expenses
    
    
    
    
    
    
    
    
    
    
    389,394Depreciation
    
    
    
    
    
    
    
    
    
    
    2,237Amortization of intangible asset
    
    
    
    
    
    
    
    
    
    
    6,049Income tax expense
    
    
    
    
    
    
    
    
    
    
    Earnings from discontinued operations-
    
    
    
    
    
    
    
    
    
    
    434Loss on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (465,576
    )(Loss) from discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    (465,142
    )Total earnings from discontinued ops.
    
    $
    7,528,212
    
    
    $
    2,868,017
    
    
    $
    1,674,028
 36




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 20.
    
    Variable Interest EntitiesThe Canadian Institute of Chartered Accountants Accounting Guideline 15 requires Envoy to
identify Variable Interest Entities (VIEs) in which it has an interest, determine
whether it is the primary beneficiary of such entities and, if so, consolidate them. The
primary beneficiary is an entity that absorbs the majority of the VIEs expected losses or
receives a majority of the VIEs expected residual returns or both.The VIE in which Envoy held an interest was John Street Inc. John Street Inc. was a
subsidiary of Envoy since June 2002 but was sold to the management group of John Street
Inc. in June 2005. The historical and ongoing relationship with John Street as well as
certain financial information pertaining to John Street while owned by Envoy is described
in more detail in Notes 7 and 19. As at September 30, 2006 Envoy was not considered the
primary beneficiary of John Street and has no exposure to loss as a result of its
involvement in John Street in its capacity as a creditor. Accordingly, Envoy did not
consolidate John Street.
 37




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 21.
    
    Reconciliation to United States generally accepted accounting principlesThese 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, 2006, 2005 and
2004 required to conform to US GAAP.
 2006
    
    
    2005
    
    
    2004Net earnings (loss) based on
Canadian GAAP
    
    $
    2,136,186
    
    
    $
    5,941,690
    
    
    $
    (3,106,804
    )Stock-based compensation (a)
    
    
    
    
    
    
    344,151
    
    
    
    200,117Convertible debentures (b)
    
    
    
    
    
    
    
    
    
    
    (664,516
    )Cash held in escrow (c)
    
    
    (2,700,000
    )
    
    
    
    
    
    
    Net earnings (loss) based on
U.S. GAAP
    
    $
    (563,814
    )
    
    $
    6,285,841
    
    
    $
    (3,571,203
    )Net earnings (loss) from continuing
operations
    
    $
    (5,392,026
    )
    
    $
    3,417,824
    
    
    $
    (5,245,231
    )Net earnings (loss) from discontinued
operations (Notes 19 and 21(c))
    
    $
    4,828,212
    
    
    $
    2,868,017
    
    
    $
    1,674,028
 The following table sets forth the computation of basic and diluted earnings (loss) per
share:
 2006
    
    
    2005
    
    
    2004Net earnings (loss) per share:Basic
    
    $
    (0.03
    )
    
    $
    0.28
    
    
    $
    (0.21
    )Diluted
    
    
    (0.03
    )
    
    
    0.28
    
    
    
    (0.21
    )Net earnings (loss) per share from continuing
operations:Basic
    
    $
    (0.27
    )
    
    $
    0.15
    
    
    $
    (0.31
    )Diluted
    
    
    (0.27
    )
    
    
    0.15
    
    
    
    (0.31
    )Net earnings (loss) per share from discontinued
operations:Basic
    
    $
    0.24
    
    
    $
    0.13
    
    
    $
    0.10Diluted
    
    
    0.24
    
    
    
    0.13
    
    
    
    0.10
 38




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 21. 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. Since each of fiscal 2006 and 2004 experienced a loss from continuing
operations, all potential common shares outstanding from dilutive securities are considered
antidilutive and are excluded from the calculation of diluted loss per share for those years.The following adjustments are required in order to conform shareholders equity based on
Canadian GAAP to shareholders equity based on U.S. GAAP:
 2006
    
    
    2005Shareholders equity based on Canadian GAAP
    
    $
    75,046,589
    
    
    $
    73,555,483Accumulated other comprehensive income (loss) (d)
    
    
    242,378
    
    
    
    (5,859
    )Cash held in escrow (c)
    
    
    (2,700,000
    )
    
    
    Shareholders equity based on U.S. GAAP
    
    $
    72,588,967
    
    
    $
    73,549,624
 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 disclosures:For fiscal 2006, the Company adopted SFAS 123(R) which requires that all share-based
payments to employees, including grants of employee stock options, to be recognized in
the financial statements based on their fair value. The Company applied this using the
modified prospective method. For fiscal 2005 and prior years, the Company measured
compensation expense relating to employee stock option plans for U.S. GAAP purposes using
the intrinsic value method specified by APB Opinion No. 25.In the Companys circumstances APB No. 25 was not materially different from compensation
expense as determined under Canadian GAAP for fiscal 2003 and prior years. For fiscal
2005 and 2004, the Company adopted the new provisions of the CICA handbook as described
in Note 2(i) which requires a fair value method of accounting for stock-based
compensation. Under these provisions the expense for stock-based compensation under
Canadian GAAP for fiscal 2005 is $344,151 greater than under US GAAP and for fiscal 2004
is $200,117 greater than under US GAAP.
 39




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 21. Reconciliation to United States generally accepted accounting principles (continued)
 There were no options granted in fiscal 2006 and 2005. The weighted average estimated
fair value at the date of the grant for options granted in fiscal 2004 was $0.33 per
share. The fair value of each option granted was estimated at the date of the grant
using the Black-Scholes fair value option pricing model with the assumptions as indicated
in Note 10(e).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.(b)
    
    Convertible debentures:During 2006, 2005 or 2004 the Company did not issue any convertible debentures. The
debentures issued in fiscal 2003, were convertible at any time at the option of the
holder into common shares and common share purchase warrants of the Company and were
redeemable in cash at the option of the holder two years after the issue date. Under
Canadian GAAP, the debentures issued in fiscal 2003 were bifurcated into a debt component
and an equity component, based on relative fair values, which resulted in aggregate
proceeds in fiscal 2003 of $1,465,929, allocated to long-term debt, and $534,071, to
shareholders equity, respectively. Issue costs in 2003 were allocated between the debt
and equity components which resulted in $44,048 of the aggregate $314,955 issue costs
being applied to reduce the equity allocation. As a result of the conversion in 2004 an
additional $189,133 of issue costs were allocated to equity.Under Canadian GAAP the discount resulting from allocating proceeds to the equity
component must be recorded as additional interest expense, using the effective yield
method, over the minimum period to redemption. During fiscal 2004, all outstanding
convertible debentures were converted into common shares of the Company. In 2004, as a
result of the conversion and the accretion of the discount, accreted interest of $126,273
was charged as interest expense.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. Included in interest expense for 2004
under US GAAP is $532,960. The interest expense for
 40




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 21. Reconciliation to United States generally accepted accounting principles (continued)
 2004 includes a $420,758 charge for the write-off of the unamortized debt discount upon
the conversion of the debt.Under US GAAP, costs associated with issuance of the debentures cannot be apportioned
between the debt and equity components. During fiscal 2004, the remaining outstanding
convertible debentures were converted into common shares of the company, and as a result,
there were no unamortized deferred financing fees under US GAAP and Canadian GAAP at the
end of the year. In 2004, if the Company had recorded the issue costs in accordance with
US GAAP, additional amortization of $257,828 would have been charged to interest expense.(c)
    
    Cash held in escrow:Cash held in escrow represents funds held in common trust with the purchaser
of the UK operations, as per the terms of the purchase and sale agreement. The
amount is being held in joint trust as security for indemnities provided to the
purchaser at closing and will be released on the first anniversary date of the
transaction. Canadian GAAP allows the recognition of this amount in determining the
gain on sale. Under US GAAP these funds cannot be recognized until they are
released from escrow or otherwise under exclusive control of the Company.(d)
    
    Comprehensive income:The Companys comprehensive income represents U.S. GAAP net earnings plus the results of
certain changes in shareholders equity during a period from non-owner sources that are
not reflected in the consolidated statements of operations.
 2006
    
    
    2005
    
    
    2004Net earnings (loss) for the year in
accordance with U.S. GAAP
    
    $
    (563,814
    )
    
    $
    6,285,841
    
    
    $
    (3,571,203
    )Unrealized gain (loss) on available
for sale securities arising during
the year
    
    
    242,378
    
    
    
    (5,859
    )
    
    
    174,426Less: reclassification adjustment
for gains realized in net income
    
    
    5,859
    
    
    
    (174,426
    )
    
    
    
 41




---



##### 



F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 21. Reconciliation to United States generally accepted accounting principles (continued)
 2006
    
    
    2005
    
    
    2004Change in cumulative translation
adjustment account
    
    
    2,101,995
    
    
    
    (2,183,228
    )
    
    
    310,087$
    1,786,418
    
    
    $
    3,922,328
    
    
    $
    (3,086,690
    )
 (e)
    
    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, share capital would be increased by $9,886,961 and
deficit would be increased by $9,886,961 as at September 30, 2006 and 2005.(f)
    
    Restructuring charges:Under U.S. GAAP restructuring charges would be included as operating expenses in the
consolidated statement of operations.(g)
    
    Investments:The Company accounts for its investments in accordance with FAS 115, Accounting for
Certain Investments in Debt and Equity Securities under US GAAP. As of September 30,
2006 and 2005, all of the Companys investments have been classified as
available-for-sale and accordingly, recorded at market value. Unrealized gains and
losses on these investments are included in other comprehensive income, as a separate
component of shareholders equity. Any unrealized losses are recorded as a charge to
income when they are deemed to be other than temporary. Under US GAAP, the total of
short term and long term investments would have been higher than the amount reported in
our audited financial statements by $242,378 at September 30, 2006, lower by $5,859 at
September 30, 2005, and higher by $174,426 at September 30, 2004.
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F-6
Envoy Communications Group Inc.
 Notes to Consolidated Financial Statements
 For the years ended September 30, 2006, 2005 and 2004
 21. Reconciliation to United States generally accepted accounting principles (continued)
 (h)
    
    Recent accounting pronouncements:Accounting for Uncertainty in Income Taxes  an interpretation of FAS Statement No. 109
(FIN 48)FASB issued an interpretation under FIN 48 which prescribes a recognition and measurement
model for uncertain tax positions taken or expected to be taken in the Companys tax
returns. FIN 48 provides guidance on de-recognition, classification, interest and
penalties, accounting for interim periods and disclosure. FIN 48 is applicable for
fiscal years beginning on or after December 15, 2006. The Company is currently
considering the impact of the adoption of this interpretation.Fair Value Measurements (SFAS 157)FASB issued SFAS 157 which defines fair value, establishes a framework for measuring fair
value in U.S. GAAP and expands disclosures about fair values. This standard does not
require any new fair value measurements. The standard is applicable for fiscal years
beginning after November 15, 2007. The Company is currently considering the impact of
the adoption of this interpretation.Considering the Effects of Prior Years Misstatements when Quantifying Misstatements in
Current Year Financial Statements (SAB 108)The Security and Exchange Commission issued Staff Accounting Bulletin No. 108 that
provides interpretive guidance on the consideration of the effects of prior year
misstatements in quantifying current year misstatements for the purpose of materiality
assessment. The implication is that the assessment of the misstatements through the
greater of the current year earning or closing retained earnings adjustments. SAB 108 is
applicable for fiscal years ending after November 16, 2006. The Company is currently
considering the impact of the adoption of this interpretation.
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