##### 



(ENVOY LOGO) Envoy Communications Group Inc. 1st Quarter Report 2005




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##### 



Dear Shareholders, Envoys first quarter results for fiscal 2005 improved significantly, exceeding expectations and
budget. Revenues increased to $10.0 million, an increase of 10.5% over the same period a year ago.
Envoy earned $0.03 per share fully diluted (after giving effect to the reverse stock split). Envoys North American operations had good results for the quarter, well above budget. The results
in the United Kingdom were slightly below expectations. Envoy anticipates the UK operations to pick
up significantly for the balance of the year. Envoy entered into an agreement to acquire a majority stake in Parker Williams, a leading brand
development and packaging design company in the United Kingdom. Parker Williams is anticipated to
close and begin to positively impact Envoys results in the second quarter. Envoy was awarded $13 million of new business contracts during the first quarter of fiscal 2005.
We expect this new business to result in an increase in revenue of an estimated $4.5 million in
fiscal 2005, compared to fiscal 2004. It has been an excellent start to fiscal 2005. Traditionally Envoys results are stronger in the
later quarters. Envoys management is holding the previously announced guidance of $0.20 per share
(after giving effect to the reverse stock split) for the year. Envoys priority is to build shareholder value in fiscal 2005 through solid operational results and
executing its acquisition and investment plan. Envoys management team is excited and confident
about the future. Geoffrey B. Genovese
President, Chairman & CEO




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Envoy Communications Group Inc.Consolidated Balance SheetsUnaudited  Prepared by Management(Expressed In Canadian dollars)
 As at:
    
    
    
    
    
    December 31
    
    
    September 302004
    
    
    2004AssetsCurrentCash
    
    
    
    
    
    $
    4,508,032
    
    
    $
    4,643,263Investments
    
    note 2
    
    
    33,324,677
    
    
    
    36,260,796Accounts receivable
    
    
    
    
    
    
    16,181,866
    
    
    
    15,793,735Future income taxes
    
    
    
    
    
    
    1,266,598
    
    
    
    1,500,000Prepaid expenses
    
    
    
    
    
    
    934,766
    
    
    
    1,060,97056,215,939
    
    
    
    59,258,764Investments
    
    note 2
    
    
    10,656,206
    
    
    
    10,459,255Capital assets
    
    note 5
    
    
    5,567,539
    
    
    
    5,229,232Goodwill
    
    note 5
    
    
    10,337,990
    
    
    
    10,216,101Other assets
    
    
    
    
    
    
    1,000
    
    
    
    34,377Future income taxes
    
    
    
    
    
    
    3,567,257
    
    
    
    3,681,798$
    86,345,931
    
    
    $
    88,879,527Liabilities and Shareholders EquityCurrentAccounts payable and accrued liabilities
    
    
    
    
    
    $
    8,419,855
    
    
    $
    8,682,417Income taxes payable
    
    
    
    
    
    
    268,128
    
    
    
    485,217Deferred revenue
    
    
    
    
    
    
    1,664,236
    
    
    
    2,051,197Amounts collected in excess of pass-through costs incurred
    
    
    
    
    
    
    167,988
    
    
    
    110,673Current portion of long-term debt
    
    note 3
    
    
    179,277
    
    
    
    297,29410,699,484
    

    
    
    11,626,798Long-term debt
    
    
    
    
    
    
    330,215
    
    
    
    361,23011,029,699
    
    
    
    11,988,028Shareholders equityShare capital
    
    note 6
    
    
    113,666,220
    
    
    
    117,447,261Contributed surplus
    
    note 7
    
    
    2,129,193
    
    
    
    726,554Warrants
    
    
    
    
    
    
    6,542,456
    
    
    
    6,542,456Deficit
    
    
    
    
    
    
    (47,697,647
    )
    
    
    (48,344,277
    )Stock based compensation
    
    note 9
    
    
    569,049
    
    
    
    445,641Cumulative translation adjustment
    
    
    
    
    
    
    106,961
    
    
    
    73,86475,316,232
    
    
    
    76,891,499$
    86,345,931
    
    
    $
    88,879,527
 See accompanying notes to consolidated financial statements.




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Envoy Communications Group Inc.Consolidated Statements of OperationsUnaudited  Prepared by Management(Expressed In Canadian dollars)
 For the three months ended:
    
    
    
    
    
    December 31
    
    
    December 312004
    
    
    2003Net revenue
    
    note 5
    
    $
    9,988,634
    
    
    $
    9,041,704Operating expenses:Salaries and benefits
    
    note 9
    
    
    6,771,400
    
    
    
    5,819,756General and administrative
    
    
    
    
    
    
    1,819,916
    
    
    
    1,807,164Occupancy costs
    
    
    
    
    
    
    941,267
    
    
    
    692,4719,532,583
    
    
    
    8,319,391Depreciation
    
    
    
    
    
    
    583,437
    
    
    
    577,202Investment earnings
    
    note 2
    
    
    (1,015,517
    )
    
    
    Accreted interest imputed on warrants and debentures
    
    note 4
    
    
    
    
    
    
    250,881Interest expense and financing costs
    
    note 4
    
    
    8,099
    
    
    
    387,1289,108,602
    
    
    
    9,534,602Income (loss) before income taxes and discontinued operations
    
    
    
    
    
    
    880,032
    
    
    
    (492,898
    )Income tax expense
    
    
    
    
    
    
    233,402
    
    
    
    Income (loss) from continuing operations
    
    
    
    
    
    
    646,630
    
    
    
    (492,898
    )Income from discontinued operations, net of income taxes
    
    note 8
    
    
    
    
    
    
    434Net earnings (loss)
    
    
    
    
    
    
    646,630
    
    
    
    (492,464
    )Earnings (loss) per share (after giving effect to the reverse stock split)Basic
    
    
    
    
    
    $
    0.03
    
    
    $
    (0.06
    )Diluted
    
    
    
    
    
    $
    0.03
    
    
    $
    (0.06
    )Weighted average number of common shares outstandingBefore giving effect to the reverse stock split
    
    
    
    
    
    
    115,363,377
    
    
    
    40,242,880After giving effect to the reverse stock split
    
    note 10
    
    
    23,072,675
    
    
    
    8,048,576
 Envoy Communications Group Inc.Consolidated Statements of DeficitUnaudited  Prepared by Management(Expressed In Canadian dollars)
 For the three months ended:
    
    December 31
    
    
    December 312004
    
    
    2003Deficit, beginning of period
    
    
    (48,344,277
    )
    
    
    (45,237,473
    )Net earnings (loss)
    
    
    646,630
    
    
    
    (492,464
    )Deficit, end of period
    
    $
    (47,697,647
    )
    
    $
    (45,729,937
    )
 See accompanying notes to consolidated financial statements.




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Envoy Communications Group Inc.Consolidated Statements of Cash Flows(Unaudited  Prepared by Management)(Expressed In Canadian dollars)
 For the three months ended:
    
    December 31
    
    
    December 312004
    
    
    2003Cash flows from operating activities:Income (loss) from continuing operations
    
    $
    646,630
    
    
    $
    (492,898
    )Items not involving cash:Future income taxes
    
    
    347,943
    
    
    
    9,676Depreciation
    
    
    583,437
    
    
    
    577,202Amortization of deferred financing charges
    
    
    
    
    
    
    21,110Convertible debentures accretion
    
    
    
    
    
    
    126,273Stock based compensation
    
    
    123,408
    
    
    
    124,608Net change in non-cash working capital balances:Accounts receivable
    
    
    (388,131
    )
    
    
    755,589Investments
    
    
    (813,881
    )
    
    
    Prepaid expenses
    
    
    126,204
    
    
    
    138,959Accounts payable and accrued liabilities
    
    
    (262,562
    )
    
    
    (331,220
    )Income taxes payable/recoverable
    
    
    (217,089
    )
    
    
    (174,586
    )Deferred revenue
    
    
    (386,961
    )
    
    
    860,792Amounts collected in excess of pass-through costs incurred
    
    
    57,315
    
    
    
    177,769Other
    
    
    33,378
    
    
    
    381,316Net cash (used in) provided by operating activities
    
    
    (150,309
    )
    
    
    2,174,590Cash flows from financing activities:Long-term debt borrowings
    
    
    
    
    
    
    4,405,767Long-term debt repayments
    
    
    (149,032
    )
    
    
    (287,460
    )Short term bank facility repayment
    
    
    
    
    
    
    (5,815,746
    )Redemption of common shares
    
    
    (2,378,402
    )
    
    
    Issuance of convertible debentures
    
    
    
    
    
    
    80,834Issuance of common shares, net of share issue costs
    
    
    
    
    
    
    (142,932
    )Net cash used in financing activities
    
    
    (2,527,434
    )
    
    
    (1,759,538
    )Cash flows from investing activities:Investments
    
    
    3,750,000
    
    
    
    Purchase of capital assets
    
    
    (1,033,801
    )
    
    
    (249,292
    )Net cash provided by (used in) investing activities
    
    
    2,716,199
    
    
    
    (249,292
    )Change in cash balance due to foreign exchange
    
    
    (173,687
    )
    
    
    (291,953
    )Cash flows from continuing operations
    
    
    (135,231
    )
    
    
    (126,192
    )Cash flows from discontinued operations
    
    
    
    
    
    
    (337,374
    )Net change in cash
    
    
    (135,231
    )
    
    
    (463,566
    )Cash,beginning of period
    
    
    4,643,263
    
    
    
    2,010,737Cash,end of period
    
    $
    4,508,032
    
    
    
    1,547,171Supplemental cash flow information:Interest paid
    
    $
    8,099
    
    
    
    577,654Income taxes paid
    
    
    174,090
    
    
    $
    433,350




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1.
    Basis of Presentation  (a)
    These interim consolidated financial statements have not been audited or reviewed
by our external auditors. They have been prepared by management in accordance with
generally accepted accounting principles in Canada for interim financial statements.
These interim financial statements do not include all the note disclosure required for
annual financial statements and therefore should be read in conjunction with Envoys
annual consolidated financial statements for the year ended September 30, 2004. The
significant accounting policies follow that of the most recently reported annual
financial statements.(b)
    Certain comparative figures have been reclassified to conform to the financial
statement presentation adopted for 2005.    2.
    Investments December 31
    
    
    September 302004
    
    
    2004Short termCost
    
    $
    33,171,803
    
    
    $
    36,144,879Accrued interest and amortized discount
    
    
    152,874
    
    
    
    115,91733,324,677
    
    
    
    36,260,796Long termCost
    
    
    10,555,466
    
    
    
    10,285,563Accrued interest
    
    
    100,740
    
    
    
    173,69210,656,206
    
    
    
    10,459,255$
    43,980,883
    
    
    $
    46,720,051
  The net proceeds from the public offering in fiscal 2004 have been placed in a portfolio
managed by an external adviser, and will be drawn to fund acquisitions and business operations
as required. The portfolio is invested in marketable securities, including discount notes,
fixed income securities 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 December 31, 2004 of the individual financial
instruments.The fair value of the short term and long term investments at December 31, 2004 was
$33,498,687 and $10,584,420, (at September 30, 2004, $36,183,729 and $10,421,139),
respectively. The investment portfolio earned $1,015,517 in the first quarter of fiscal 2005,
(first quarter of fiscal 2004  $nil), after deducting portfolio management and custody fees.




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3.
    Long term debt December 31
    
    
    September 302004
    
    
    2004Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in monthly instalments
of $7,665 principal and interest
    
    $
    380,681
    
    
    $
    403,676Loan payable to landlord, 10.0% per annum, due
April 1, 2005, repayable in monthly instalments
of
$742 principal and interest. The loan was repaid
early
    
    
    
    
    
    
    25,389Capital lease, 12.3% over the lease period,
repayable in quarterly instalments of £7,919
principal and interest, due November 2004
    
    
    
    
    
    
    18,101Capital leases, 8.6% to 14% over the lease
period, repayable in monthly instalments of
$36,273 principal and interest, due between
January 2005 and January 2006
    
    
    128,811
    
    
    
    211,358509,492
    
    
    
    658,524Less current portion
    
    
    179,277
    
    
    
    297,294$
    330,215
    
    
    $
    361,230
  4.
    Interest and financing costsInterest and financing costs for the three months ending December 31, comprised the following: December 31
    
    
    December 31For the three months ended:
    
    2004
    
    
    2003Cash interest paid on credit facility, landlord
loans and capital leases
    
    $
    8,099
    
    
    $
    210,907Financing fees on credit facility
    
    
    
    
    
    
    79,152Cash interest paid on convertible debentures and
amortization of debenture issue costs
    
    
    
    
    
    
    97,0698,099
    
    
    
    387,128Accreted interest imputed on warrants and
debentures
    
    
    
    
    
    
    250,881$
    8,099
    
    
    $
    638,009




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5.
    Segmented informationThe 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 Net revenue by region in which the customer is located December 31
    
    
    December 31For the three months ended:
    
    2004
    
    
    2003Canada
    
    $
    2,408,871
    
    
    $
    1,053,180United States
    
    
    2,445,274
    
    
    
    3,442,766United Kingdom and Continental
Europe
    
    
    5,134,489
    
    
    
    4,545,758$
    9,988,634
    
    
    $
    9,041,704
 Net revenue by type of service December 31
    
    
    December 31For the three months ended:
    
    2004
    
    
    2003Marketing
    
    $
    886,741
    
    
    $
    791,211Consumer and retail
branding
    
    
    9,101,893
    
    
    
    8,250,493$
    9,988,634
    
    
    $
    9,041,704
  (b)   The Companys identifiable assets for each geographic area in which it has operations: Capital Assets December 31
    
    
    September 30As at:
    
    2004
    
    
    2004Canada
    
    $
    3,266,324
    
    
    $
    3,061,671United Kingdom and Continental
Europe
    
    
    2,301,215
    
    
    
    2,167,561$
    5,567,539
    
    
    $
    5,229,232
 Goodwill December 31
    
    
    September 30As at:
    
    2004
    
    
    2004Canada
    
    $
    2,725,296
    
    
    $
    2,725,296United Kingdom and Continental
Europe
    
    
    7,612,694
    
    
    
    7,490,805$
    10,337,990
    
    
    $
    10,216,101




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6.
    Share capital Authorized (after giving effect to the reverse stock split)40,000,000 common shares without par value
 Issued: December 31, 2004
    
    
    September 30, 2004Number
    
    
    
    
    
    
    Numberof shares
    
    
    Amount
    
    
    of shares
    
    
    AmountBalance, beginning of period
before reverse stock split
    
    
    117,083,000
    
    
    $
    117,447,261
    
    
    
    31,047,027
    
    
    $
    55,988,817Common shares issued pursuant to:Conversion of convertible
Debentures
    
    
    
    
    
    
    
    
    
    
    29,266,666
    
    
    
    4,841,439Stock options exercised
    
    
    
    
    
    
    
    
    
    
    578,337
    
    
    
    224,852Warrants on new debentures
    
    
    
    
    
    
    
    
    
    
    2,300,000
    
    
    
    2,771,719Public Offering
    
    
    
    
    
    
    
    
    
    
    55,263,170
    
    
    
    55,016,831Repurchase of shares pursuant
to share issuer bid
    
    
    (3,768,682
    )
    
    
    (3,781,041
    )
    
    
    (1,372,200
    )
    
    
    (1,396,397
    )Balance, before reverse split
    
    
    113,314,318
    
    
    $
    113,666,220
    
    
    
    117,083,000
    
    
    $
    117,447,261Reverse stock split
    
    
    (90,651,454
    )
    
    
    
    
    
    
    (93,666,400
    )
    
    
    Balance, end of period
    
    
    22,662,864
    
    
    $
    113,666,220
    
    
    
    23,416,600
    
    
    $
    117,447,261
  As described in Note 10(b), the Company is undertaking a 5 for 1 reverse stock split. As
a result, the 113,314,318 common shares that were outstanding at December 31, 2004, are being
consolidated into 22,662,864 common shares of the Company.During the first quarter of fiscal 2005, pursuant to a normal course issuer bid, the Company
repurchased and cancelled 3,768,682 common shares. Under the terms of the normal course
issuer bid, the Company may repurchase and cancel up to 10% of the public float of the shares
over the 12 month period commencing August 26, 2004.7.
    Contributed SurplusDuring the first quarter of fiscal 2005, pursuant to the normal course issuer bid described in
Note 6, the Company repurchased and cancelled 3,768,682 common shares at an average price of
$0.63 per common share for total cash consideration of $2,378,402. As the average price paid
was less than the average per share value of the outstanding common shares, $1,402,639 was
recorded in contributed surplus as a gain on redemption of shares.




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8.
    Discontinued operationsEffective January 1, 2004, Envoy decided to sell 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. Income Statement
    
    December 31
    
    
    December 31For the three months ended:
    
    2004
    
    
    2003Net revenue
    
    $
    
    
    
    $
    398,114Operating expenses
    
    
    
    
    
    
    389,394Depreciation
    
    
    
    
    
    
    2,237Amortization of intangible asset
    
    
    
    
    
    
    6,049Income tax expense
    
    
    
    
    
    
    Earnings from discontinued operations
    
    $
    
    
    
    $
    434
  9.
    Stock based compensationOn May 25th, 2004, the company granted 1,875,000 options to senior employees and directors.
The options vest over a periods varying from one year to three years, have an expiry date of
May 24th, 2009 and an exercise price of $0.80 per share. The value of the options granted has
been calculated using the Black-Scholes Option pricing model and the option value will be
expensed over the vesting period of the options. In the quarter ended December 31, 2004, an
expense of $123,408 reflecting the option amortization for the period has been included in
salaries and benefits expense.10.
    Subsequent events  (a)
    On November 10, 2004, the Company, through its subsidiary ECG Holdings UK Limited
(ECGH), agreed to acquire 65% of the outstanding shares of Parker Williams Design Limited
(PW), a London, UK based packaging design and brand specialist company. The purchase
price of £1,818,000 is payable in cash on completion. The remaining 35% of the PW shares
(Management Shares) will continue to be held by senior management of PW (Management
Shareholders), subject to certain options described below.ECGH will have the option to acquire from the Management Shareholders and the Management
Shareholders will have 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 PW for certain defined periods following
completion.The transaction is expected to be completed by February 21, 2005. The acquisition will
be accounted for using the purchase method of accounting.




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##### 



10.
    Subsequent events  Continued  (b)
    At a meeting held on August 14, 2003, the Companys shareholders approved the
consolidation of the Companys common shares on the basis to be determined by its board
of directors (not to exceed a ratio of 1 for 10). On January 15, 2005, the Companys
board of directors approved the consolidation of the common shares 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 currently
outstanding. The effective date for post consolidation trading of its shares is Thursday
February 10, 2005. Updated for repurchases and cancellations in January the number of
Envoy common shares outstanding prior to consolidation is 112,539,318 and post
consolidation is expected to be approximately 22,507,864. The earnings per share figures
presented are after giving effect to the reverse stock split.




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##### 



Envoy Communications Group Inc.
Management Discussion and Analysis
First quarter of fiscal 2005 The following section of our interim report sets forth Managements Discussion and Analysis of the
financial performance of Envoy Communications Group Inc. (Envoy) for the three months ended
December 31, 2004 compared to the three months ended December 31, 2003. The analysis is based on
our unaudited consolidated financial statements (the Financial Statements), including the
accompanying notes, which are presented elsewhere in this report. OVERVIEW During fiscal 2004 through two public offerings, Envoy raised gross proceeds of $66.5 million and
net proceeds of $60.1 million. During fiscal 2004, Envoy successfully negotiated with its lenders
and retired substantially all outstanding loan indebtedness. The balance of the funds will be used
for general corporate purposes and potential acquisition and investment opportunities that Envoy
determines have potential to create value for its shareholders and that either complements, or
provides an opportunity to diversify its current business. During fiscal 2004 and the first quarter of fiscal 2005, pursuant to a normal course issuer bid,
Envoy repurchased and cancelled 5,140,882 common shares for cash consideration of $3,181,328.
Under the terms of the normal course issuer bid, Envoy may repurchase and cancel up to 10% of the
public float of the common shares over the 12 month period commencing August 26, 2004. Subsequent
to the quarter, Envoy has purchased for cancellation an additional 775,000 of its common shares,
which is equivalent to 155,000 common shares after giving effect to the share consolidation
(reverse stock split) described below. At a meeting held on August 14, 2003, Envoys shareholders approved the consolidation of the common
shares on the basis to be determined by Envoys board of directors (not to exceed a ratio of 1 for
10). On January 15, 2005, Envoys board of directors approved the consolidation of the common
shares on the basis of 1 for 5. On January 21, 2005 Envoy filed Articles of Amendment consolidating
its common shares on the basis of 1 new common share for every 5 common shares currently
outstanding. The number of common shares outstanding prior to consolidation was 112,539,318 and
post-consolidation was approximately 22,507,864. Outstanding common shares and earnings per share
figures for all periods presented have been adjusted to give effect to the share consolidation.
The effective date for the post-consolidation trading of the common shares on the Toronto Stock
Exchange and the NASDAQ Stock Market was February 10, 2005. On November 10, 2004, Envoy, through its subsidiary ECG Holdings (UK) Limited (ECGH), agreed to
acquire 65% of the outstanding shares of Parker Williams Design Limited (PW), a London, UK based
packaging design and brand specialist company. The purchase price of £1,818,000 is payable in cash
on closing. The remaining 35% of the PW shares (Management Shares) will continue to be held by
senior management of PW (Management Shareholders), subject to certain options described below.
ECGH will have the option to acquire from the Management Shareholders and the Management
Shareholders will have 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 PW for certain defined periods following closing. The transaction is expected to
be completed by February 21, 2005. The acquisition will be accounted for using the purchase method
of accounting. PW, whose clients include Sainsburys Supermarkets and Coop Norden, is a specialist
in the retail area. PW was formed in 1990 by designers Tamara Williams and Tony Parker. With over
25 years design experience in Europe, America and the Far East, PW has revenues of approximately
$5.0 million annually. Both companies believe the combined expertise and focus within the retail
arena will provide new opportunities across both Europe and North America.




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##### 



In fiscal 2003, Envoy divested its technology services to remain focused on the expansion and
prosperity of its core business of consumer and retail branding. The Watt group of companies
(Watt), Envoys 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. Watts lengthy history of success and innovation in the retail industry presents
it 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. In the three months ending December 31, 2004, Watt represented 91% of
Envoys business. 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. In December 2004, Envoy announced that it has been selected by Carulla Vivero S.A. to re-define its
private label program. Carulla Vivero is the second largest retailer in Colombia, operating a chain
of 154 supermarkets, hypermarkets and discount stores throughout the country.The two companies
partnered in 2003 to re-position and design Vivero, the retailers hypermarket banner, and Watt
continues to help roll out the new concept in various locations. In August 2004, Watt and Carulla
Vivero broadened their relationship re-designing the latters supermarket chain, Carulla. This
latest initiative will ensure continuity of the Carulla Vivero brand across all banners: Carulla,
Vivero, Frescampo, Surtimax and Merquefacil. Envoy will continue to focus on its core strength, consumer and retail branding and has made a
series of announcements in fiscal 2005 that highlight the significant opportunities Envoy is
pursuing. Net revenue for the three months ended December 31, 2004 was $10.0 million, compared to $9.0
million for the three months ended December 31, 2003, an increase of $1.0 million. Envoy expects
net revenue to improve 16% in fiscal 2005 over 2004. Salaries expense for the three months ended December 31, 2004, was $6.8 million, compared to $5.8
million in the three months ended December 31, 2003, an increase of $1.0 million. Labour to net
revenue ratio for the three months ended December 31, 2004 was 68%, compared to 64% in the three
months ended December 31, 2003. Envoy expects its labour to net revenue ratio for the full fiscal
2005 to be approximately 70%. Occupancy costs increased to $0.9 million for the three months ended December 31, 2004, from $0.7
million for the three months ended December 31, 2003, an increase of $0.2 million. Occupancy cost
to net revenue ratio was 9.0% for the three months ended December 31, 2004, compared to 7.8% for
the three months ended December 31, 2003. Envoy expects its occupancy to net revenue ratio for the
full fiscal 2005 to be approximately 8.0%. As a result of the early repayment in fiscal 2004 of the outstanding debentures and the conversion
of the remaining convertible debentures, Envoy was required to expense the unamortized value of the
warrants and the conversion value of the convertible debentures. Envoy has no expected future
requirement for debt financing and, therefore, there is no expected accreted interest in fiscal
2005. As a result of the operational changes and financial changes discussed above, Envoy believes the
business will continue to show improved earnings and a strengthened balance sheet.




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##### 



RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDEDDECEMBER 31, 2004 WITH THE THREE MONTHS ENDED DECEMBER 31, 2003 Net revenueOur net revenue represents our compensation for services. A portion of our
compensation from agency or advertising and marketing services is generated from non-refundable
monthly agency fees and the balance is from commissions. Our compensation from non-agency or
project related services is primarily generated from project fees and hourly charges. Net
revenue is net of any pass-through costs such as media and production costs incurred on behalf of
clients in acting as agent for them. Net revenue for the three months ended December 31, 2004 was $10.0 million, compared to $9.0
million for the three months ended December 31, 2003, an increase of $1.0 million, or 10.5%. Net revenue by type of service and by customer location: Net Revenue for the three months ended December 31(in millions)By type of service
    
    
    2004
    
    
    % of total
    
    
    
    2003
    
    
    % of totalConsumer and retail branding
    
    $
    9.1
    
    
    
    91
    %
    
    $
    8.2
    
    
    
    91
    %Marketing
    
    
    0.9
    
    
    
    9
    %
    
    
    0.8
    
    
    
    9
    %$
    10.0
    
    
    
    100
    %
    
    $
    9.0
    
    
    
    100
    %By customer location
    
    
    2004
    
    
    % of total
    
    
    
    2003
    
    
    % of totalCanada
    
    $
    2.4
    
    
    
    24
    %
    
    $
    1.1
    
    
    
    12
    %United States
    
    
    2.4
    
    
    
    24
    %
    
    
    3.4
    
    
    
    38
    %Europe *
    
    
    5.2
    
    
    
    52
    %
    
    
    4.5
    
    
    
    50
    %$
    10.0
    
    
    
    100
    %
    
    $
    9.0
    
    
    
    100
    %
   * Europe includes the United Kingdom and Continental Europe Net revenue by type of service: Net revenue from consumer and retail branding services increased $0.9 million in the three months
ended December 31, 2004 compared to the three months ended December 31, 2003 an increase of 10.3%.
We expect that net revenue will continue to improve in the second quarter of fiscal 2005. Net revenue from marketing has increased by $0.1 million for the three months ended December 31,
2004, compared to the three months ended December 31, 2003 an increase of 12.1%. Net revenue by customer location: Net revenue from Canada increased $1.3 million, for the three months ended December 31, 2004
compared to the three months ended December 31, 2003, an increase of 128.7%. Net revenue from the U.S. has decreased ($1.0) million for the three months ended December 31, 2004
compared to the three months ended December 31, 2003, a decrease of 29.0%. Net revenue from Europe in our consumer retail branding increased $0.7 million for the three months
ended December 31, 2004, compared to the three months ended December 31, 2003, an increase of
13.0%. We expect continued growth and improvement from Europe in the second quarter of fiscal
2005.




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##### 



Operating ExpensesSalaries 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. Operating expenses increased by 14.9% to $9.5 million for the three months ended December 31, 2004
from $8.3 million for the three months ended December 31, 2003. Changes in operating expenses are
as follow: Salaries and benefits expenses for the three months ended December 31, 2004 were $6.8 million,
compared to $5.8 million for the three months ended December 31, 2003, an increase of $1.0 million
or 16.4%. Salaries and benefits continue to be closely monitored to match expected revenues with
labour costs. Included in salaries and benefits is stock based compensation for the three months
ended December 31, 2004 of $0.1 million, compared to $nil in the three months ending December 31,
2003. General and administrative expenses for the three months ended December 31, 2004 and the three
months ended December 31, 2004 were $1.8 million. Occupancy costs for the three months ended December 31, 2004 were $0.9 million, compared to $0.7
million for the three months ended December 31, 2003, an increase of 36.0%. Depreciation expenseDepreciation expense for the three months ending December 31, 2004 was $0.6
million, compared to $0.6 million for the three months ended December 31, 2003. Interest expense and financing costsInterest expense and financing costs for the three months
ended December 31, 2004 was $nil, compared to $0.6 million for the three months ended December 31,
2003. During fiscal 2004, all of the outstanding bank indebtedness was repaid from the proceeds of
the public offering. Therefore, in fiscal 2005 there will not be any interest expense or finance
costs relating to bank indebtedness. In addition, in fiscal 2004 all of the debentures were repaid
and, therefore, there will not be any interest relating to debentures in fiscal 2005. Investment earningsInvestment earnings for the three months ended December 31, 2004 was $1.0
million, compared to $nil for the three months ended December 31, 2003. Investment earnings
represent the income earned on the cash and marketable securities held in the investment portfolio. Net earnings (loss)We had net earnings of $0.6 million for the three months ended December 31,
2004, compared to a loss of ($0.5) million for the three months ended December 31, 2003, an
increase of $1.1 million.




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##### 



SUMMARY OF QUARTERLY RESULTS Q1 2005
    
    Q4 2004
    
    Q3 2004
    
    Q2 2004Net revenue
    
    $
    10.0
    million
    
    $
    10.1
    million
    
    $
    11.1
    million
    
    $
    10.6
    millionNet earnings (loss):From continuing operations
    
    $
    0.6
    million
    
    ($
    0.2
    ) million
    
    $
    1.2
    million
    
    ($
    3.1
    ) millionIncluding discontinued operations
    
    $
    0.6
    million
    
    ($
    0.2
    ) million
    
    $
    1.2
    million
    
    ($
    3.6
    ) millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06
    
    
    ($
    0.26
    )Diluted
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06
    
    
    ($
    0.26
    )Including discontinued operationsBasic
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06
    
    
    ($
    0.30
    )Diluted
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06
    
    
    ($
    0.30
    )
 Q1 2004
    
    Q4 2003
    
    Q3 2003
    
    Q2 2003Net revenue
    
    $
    9.0
    million
    
    $
    10.3
    million
    
    $
    10.4
    million
    
    $
    8.7
    millionNet earnings (loss):From continuing operations
    
    ($
    0.5
    ) million
    
    $
    0.8
    million
    
    $
    1.0
    million
    
    $
    1.3
    millionIncluding discontinued operations
    
    ($
    0.5
    ) million
    
    $
    0.8
    million
    
    $
    1.0
    million
    
    $
    1.4
    millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    ($
    0.06
    )
    
    $
    0.17
    
    
    $
    0.23
    
    
    $
    0.30Diluted
    
    ($
    0.06
    )
    
    $
    0.09
    
    
    $
    0.16
    
    
    $
    0.29Including discontinued operationsBasic
    
    ($
    0.06
    )
    
    $
    0.15
    
    
    $
    0.25
    
    
    $
    0.35Diluted
    
    ($
    0.06
    )
    
    $
    0.10
    
    
    $
    0.15
    
    
    $
    0.30
 LIQUIDITY AND CAPITAL RESOURCES Through public offerings in the second and third quarters of fiscal 2004, Envoy raised gross
proceeds of $66.5 million, which gave net proceeds of $60.7 million after deducting issue expenses.
Part of the net proceeds was used to reduce the outstanding debt, when this could be negotiated on
reasonable terms. The balance of the funds is being used for general corporate purposes and to
fund future acquisitions and investments as they are identified. As at December 31, 2004, Envoy had working capital of $45.5 million and a cash balance of $4.5
million, compared to September 30, 2004, when it had a working capital of $47.6 million and a cash
balance of $4.6 million. Included in working capital is an investment portfolio of $33.3 at
December 31, 2004, $36.3 million at September 30, 2004 invested in marketable securities. The
decrease in working capital relates primarily to the repurchase of 3,768,682 shares for cash
consideration of $2.4 million pursuant to the normal course issuer bid.




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##### 



Net cash used in operating activities was ($0.2) million for the three months ended December 31,
2004, compared to $2.2 million provided by operating activities for the three months ended December
31, 2003. Net cash used in financing activities was ($2.5) million for the three months ended December 31,
2004, compared to ($1.8) million used in financing activities for the three months ended December
31, 2003. Net cash provided by investing activities was $2.7 million for the three months ended December 31,
2004, compared to net cash used in investing activities of ($0.2) million for the three months
ended December 31, 2003. TRANSACTIONS WITH RELATED PARTIES There were no material related party transactions during the first quarter of fiscal 2005. COMMITMENTS AND CONTRACTUAL OBLIGATIONS Set out below is a summary of the amounts due and committed under contractual cash obligations at
December 31, 2004:  Due in 1
    
    
    Due between
    
    
    Due between
    
    
    Due afterTotal
    
    
    year or less
    
    
    years 2 and 3
    
    
    years 4 and 5
    
    
    5 yearsOperating leases
and other debt
    
    $
    3,017,980
    
    
    $
    973,263
    
    
    $
    1,216,158
    
    
    $
    737,057
    
    
    $
    91,502Total contractual
cash obligations
    
    $
    3,017,980
    
    
    $
    973,263
    
    
    $
    1,216,158
    
    
    $
    737,057
    
    
    $
    91,502
 CRITICAL ACCOUNTING ESTIMATES The significant accounting policies used by Envoy in preparing its consolidated financial
statements are described in Note 2 to the September 30, 2004 year end Financial Statements and they
should be read to ensure a proper understanding and evaluation of the estimates and judgements made
by management in preparing these Financial Statements. Envoys Financial Statements are prepared
in accordance with Canadian generally accepted accounting principles. Envoy also prepares
reconciliation to United States generally accepted accounting principles, which is included in Note
24 to the September 30, 2004 year end 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 make appropriate estimates at the time the
financial statements are prepared. These estimates are described in the September 30, 2004 year end
Financial Statements.




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##### 



Although all of the policies identified in Note 2 to the September 30, 2004 year end Financial
Statements are important in understanding the Financial Statements, the policies discussed in the
September 30, 2004 year end Management Discussion and Analysis are considered by management to be
central to understanding the Financial Statements, because of the higher level of measurement
uncertainties involved in their application. IMPACT OF RECENTLY ISSUED CANADIAN ACCOUNTING STANDARDS The recently issued Canadian Accounting Standards has had no impact on the first quarter of fiscal
2005. The impact of the Canadian Accounting Standards was described in Envoys September 30, 2004
year end Financial Statements and Management Discussion and Analysis. RISKS AND UNCERTAINTIES Envoy management monitors, understands and manages the risks associated with its business
transactions and the general economic environment in which it operates. Risks reflect uncertainty
regarding potential outcomes from changes in political, economic and capital market conditions.
The risks and uncertainties that impact Envoy were described in its September 30, 2004 year end
Management Discussion and Analysis. There have been no changes to the types of risks and
uncertainties in the first quarter of fiscal 2005. OTHER INFORMATION On January 21, 2005 Envoy announced that its board of directors had approved the filing of Articles
of Amendment to consolidate its common shares on the basis of one new common share for every five
common shares currently outstanding. At a meeting held on August 14, 2003, Envoy shareholders
approved the consolidation (reverse stock split) of Envoys common shares on the basis to be
determined by its board of directors (not to exceed a ratio of one for ten). The share consolidation (reverse stock split) affected all common shares, warrants and stock
options of Envoy that were currently outstanding. Any fractional shares resulting from this
consolidation (reverse stock split) will be adjusted to the nearest full common share. The
effective date for the post-consolidation trading of its common shares was Thursday February 10,
2005. Updated for repurchases and cancellations in January, the number of Envoy common shares
outstanding prior to consolidation was 112,539,318 and post-consolidation is expected to be
approximately 22,507,864. The earnings per share figures presented are after giving effect to the
share consolidation (reverse stock split). Envoy has until March 28, 2005 to regain compliance with the minimum US$1.00 per share requirement
for continued listing under NASDAQ Marketplace Rule 4310(c)(4). Therefore, Envoys board of
directors made the decision to effect the share consolidation (reverse stock split) immediately in
order to allow Envoy sufficient time to comply with Marketplace Rule 4310(c)(4). At December 31, 2004, there were 113,314,318 common shares of Envoy issued, compared to 117,083,200
issued at September 30, 2004. Giving effect to the share consolidation (reverse stock split)
detailed above, the common shares issued at December 31, 2004 and at September 30, 2004 would be
approximately 22,662,864 and 23,416,600 respectively. Additional information relating to Envoy, including our Annual Information Form is available on
SEDAR at www.sedar.com.




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##### 



Forward Looking Statements All statements in this MD&A that do not directly and exclusively relate to historical facts
constitute forward-looking statements within the meaning of that term in Section 27A of the
United States Securities Act of 1933, as amended, and Section 21E of the United States Securities
Exchange Act of 1934, as amended. These
statements represent Envoys intentions, plans, expectations and beliefs, and are subject to risks,
uncertainties and other factors, many of which are beyond the control of Envoy. These factors could
cause actual results to differ materially from such forward-looking statements. These factors
include but are not restricted to the timing and size of contracts, acquisitions and other
corporate developments; the ability to attract and retain qualified employees; market competition
in our industry; general economic and business conditions, foreign exchange and other risks
identified in the MD&A, in Envoys Annual Report or Form 20-F filed with the U.S. Securities and
Exchange Commission, or Envoys Annual Information Form filed with the Canadian securities
authorities. The words believe, estimate, expect, intend, anticipate, foresee, plan,
and similar expressions identify certain of such forward looking statements, which are valid only
as of the date on which they are made. In particular, statements relating to future growth are
forward looking statements. Envoy disclaims any intention or obligation to publicly update or
revise any forward-looking statements, whether as a result of new information, future events or
otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements.




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##### 



Shareholder Information 
 HEAD OFFICE
    
    OFFICERS
    
    AUDITORS172 John Street
    
    Geoffrey B. Genovese
    
    BDO Dunwoody LLPToronto, Canada M5T 1X5
    
    President, Chairman

and Chief Executive Officer
    
    60 Columbia Way, Suite 400

Markham, Canada L3R 0C9Telephone: (416) 593-1212Facsimile: (416) 593-4434
    
    Linda GilbertChief Financial OfficerBANKERSDIRECTORS
    
    John H. Bailey
    
    HSBC Bank CanadaJohn H. Bailey
    
    Executive Vice President
    
    70 York StreetB.Comm,
J.D., LL.M

Barrister & Solicitor
    
    and Corporate Secretary
    
    Toronto, Canada M5J 1S9David Parkes
    
    AUDIT COMMITTEE
    
    LEGAL COUNSELPresident and CEO,
    
    David Parkes (Chair)
    
    Blake, Cassels & Graydon LLPFreefone Inc.
    
    Hugh Aird
    
    Box 25, Commerce Court WestDavid I. Hull
    
    Toronto, Canada M5L 1A9Geoffrey B. GenovesePresident, Chairman and
    
    COMPENSATION COMMITTEE
    
    INVESTOR RELATIONSChief Executive Officer
    
    David I. Hull (Chair)
    
    E-mail: info@envoy.toEnvoy Communications Group Inc.
    
    Hugh AirdDavid Parkes
    
    Additional information isDavid I. Hull
    
    
    
    available on ourPresident
    
    
    
    Web site at www.envoy.toHull Life Insurance Agencies Inc.NOMINATING AND CORPORATE
    
    STOCK TRADING INFORMATIONGOVERNANCE COMMITTEEHugh Aird (Lead Director)
    
    David I. Hull (Chair)
    
    Toronto Stock Exchange: ECGDirector of Business Development
    
    Hugh Aird
    
    NASDAQ Exchange: ECGIFirst Associates Inc.
    
    David ParkesTRANSFER AGENTComputershare TrustCompany of Canada100 University Avenue, 9th FloorToronto, Canada M5J 2Y1