##### 



(ENVOY LOGO) 3rd Quarter Report 2004




---



##### 



Dear Shareholders, Envoys management is pleased with our improved results. The company has made
good progress this quarter. These achievements include:  
    
    Reporting net income of $1.2 million dollars
    
    Net income growth for the quarter of 29% over Q3 2003
    
    Year to date revenue growth for continuing operations of 12 %
    
    Q3 2003 compared to Q3 2004 revenue growth of 7%
    
    Further strengthened our balance sheet  cash and cash equivalents
of $52 million dollars, of which a large portion is slated for our
acquisition/investment program
    
    Gained further traction for our proprietary software (ODIN)  we
now have over 2,000 registered users in 4 countries
    
    Watt International ranked number one in Design Weeks top 100
    
    Awarded GlobalShop 2004 retail design award for best grocery design Our management team is energized by the momentum we see in our industry and our
business. We believe we are just at the beginning of a new and exciting chapter
in our journey to become the world authority in retail and consumer branding.
Envoy is now in an enviable position. Envoy has the right management team in
place, at the right time, in a very exciting economic cycle. The strength of
our balance sheet gives us the ability to fund both our organic growth as well
as our acquisition plan. Envoy intends to leverage these opportunities as we
move closer to the high-growth stage of our business. New business In our 3rd quarter, we have added new contracts with six major North American
retailers from various industries, including hardware, three major North
American food retailers, a major U.S. account in the beverage/alcohol category
and a fashion account. The committed project revenues from these new contracts
total approximately $2.6 million, of which less than 10% is reflected in our
3rd quarter results. We have continued to grow our marketing and sales teams in
the U.K. and North America. This new group is building momentum and has a
backlog of new business proposals that we anticipate will translate into new
client contracts. At the same time, our management team and employees remain
focused on building and maintaining our current client relationships. Profitability Although our Q3 results have improved compared to last year, Envoys
management believes we can achieve stronger results from our current
operations. These areas include stronger organic growth from the efforts of
our expanded sales and marketing team, significant savings of interest expense
and investment earnings from our significant cash position, improved results
from Gilchrist North America and significant improvements through acquisitions
and acquisition synergies. Strength Envoy is now in a position of strength, no debt, $52 million in cash, growing
revenues, profitability, a competitive advantage with our powerful
proprietary software and a well




---



##### 



defined and developed strategic acquisitions program. We can now move forward
from strength to further strength. Financial Highlights Envoys third quarter results have improved significantly over the previous
year, excluding non-recurring items and discontinued/sold operations. Envoy
recorded revenues of $11.1 million for the three months ending June 30, 2004,
compared to $10.4 million for the three months ending June 30, 2003. Net income
improved from $1.0 million in the third quarter of fiscal 2003 to $1.2 million
in the third quarter of fiscal 2004, an improvement of 29%. Geoffrey B. Genovese
President, Chairman & CEO




---



##### 



Envoy Communications Group
Inc.
Consolidated Balance Sheets
(Expressed In Canadian dollars)
(Unaudited  Prepared by Management) June 30
    
    September 30As at:
    
    
    
    
    
    2004
    
    2003AssetsCurrentCash and cash equivalents
    
    
    
    
    
    $
    52,057,656
    
    
    $
    2,010,737Accounts receivable
    
    
    
    
    
    
    14,433,117
    
    
    
    13,623,131Future income taxes
    
    
    
    
    
    
    498,172
    
    
    
    498,172Prepaid expenses
    
    
    
    
    
    
    1,450,257
    
    
    
    842,605Discontinued operations
    
    note 6
    
    
    
    
    
    
    1,869,32068,439,202
    
    
    
    18,843,965Capital assets
    
    
    
    
    
    
    5,070,563
    
    
    
    5,815,227Goodwill
    
    
    
    
    
    
    10,733,946
    
    
    
    10,059,178Other assets
    
    
    
    
    
    
    
    
    
    
    39,271Future income taxes
    
    
    
    
    
    
    4,004,957
    
    
    
    2,668,224Discontinued operations
    
    note 6
    
    
    
    
    
    
    540,898$
    88,248,668
    
    
    $
    37,966,763Liabilities and Shareholders EquityCurrentAccounts payable and accrued liabilities
    
    
    
    
    
    $
    7,135,690
    
    
    $
    10,364,168Income taxes payable
    
    
    
    
    
    
    259,768
    
    
    
    322,244Deferred revenue
    
    
    
    
    
    
    1,471,399
    
    
    
    1,195,515Amounts collected in excess of pass-through costs incurred
    
    
    
    
    
    
    251,667
    
    
    
    Bank credit facility and current portion of long-term debt
    
    note 2
    
    
    388,635
    
    
    
    6,857,953Discontinued operations
    
    note 6
    
    
    
    
    
    
    1,964,0119,507,159
    
    
    
    20,703,891Long-term debt
    
    note 2
    
    
    370,636
    
    
    
    4,566,962Long-term portion of restructuring costs
    
    
    
    
    
    
    
    
    
    
    337,4079,877,795
    
    
    
    25,608,260Shareholders equity:Share capital
    
    
    
    
    
    
    125,289,369
    
    
    
    55,988,817Convertible debentures
    
    
    
    
    
    
    
    
    
    
    1,673,408Deficit
    
    
    
    
    
    
    (47,897,920
    )
    
    
    (45,090,767
    )Stock based compensation
    
    note 7,8
    
    
    78,697
    
    
    
    23,268Cumulative translation adjustment
    
    
    
    
    
    
    900,727
    
    
    
    (236,223
    )78,370,873
    
    
    
    12,358,503$
    88,248,668
    
    
    $
    37,966,763
 See accompanying notes to consolidated financial statements.




---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Operations and Deficit
(Expressed In Canadian dollars)
(Unaudited  Prepared by Management) June 30
    
    June 30For the nine months ended:
    
    
    
    
    
    2004
    
    2003Net revenue
    
    
    
    
    
    $
    30,685,905
    
    
    $
    30,551,401Operating expenses:Salaries and benefits
    
    note 8
    
    
    20,332,698
    
    
    
    20,547,318General and administrative
    
    
    
    
    
    
    5,042,161
    
    
    
    4,327,154Occupancy costs
    
    
    
    
    
    
    2,133,284
    
    
    
    2,512,78527,508,143
    
    
    
    27,387,257Depreciation
    
    
    
    
    
    
    1,758,042
    
    
    
    1,735,425Amortization of intangible assets
    
    
    
    
    
    
    
    
    
    
    18,148Investment Earnings
    
    
    
    
    
    
    (137,313
    )
    
    
    Accreted interest imputed on warrants and debentures
    
    note 3
    
    
    2,552,991
    
    
    
    567,445Interest expense and financing costs
    
    note 3
    
    
    1,002,124
    
    
    
    1,545,08532,683,987
    
    
    
    31,253,360Loss before restructuring costs recovery, gain on disposal of
subsidiary, income taxes and discontinued operations
    
    
    
    
    
    
    (1,998,082
    )
    
    
    (701,959
    )Restructuring costs recovery
    
    
    
    
    
    
    
    
    
    
    191,605Gain on disposal of subsidiary
    
    
    
    
    
    
    
    
    
    
    2,271,811(Loss) income before income taxes and discontinued operations
    
    
    
    
    
    
    (1,998,082
    )
    
    
    1,761,457Income taxes
    
    
    
    
    
    
    343,929
    
    
    
    66,100(Loss) income before discontinued operations
    
    
    
    
    
    
    (2,342,011
    )
    
    
    1,695,357(Loss) income from discontinued operations, net of income
taxes
    
    note 6
    
    
    (465,142
    )
    
    
    62,000Net (loss) income
    
    
    
    
    
    
    (2,807,153
    )
    
    
    1,757,357Deficit, beginning of period
    
    
    
    
    
    
    (45,090,767
    )
    
    
    (47,629,529
    )Deficit, end of period
    
    
    
    
    
    $
    (47,897,920
    )
    
    $
    (45,872,172
    )Earnings (loss) per share from continuing operations
    
    
    
    
    
    $
    (0.04
    )
    
    $
    0.08Basic
    
    
    
    
    
    $
    (0.04
    )
    
    $
    0.07DilutedEarnings (loss) per share from discontinued operationsBasic
    
    
    
    
    
    $
    (0.01
    )
    
    $
    0.00Diluted
    
    
    
    
    
    $
    (0.01
    )
    
    $
    0.00Weighted average number of common shares outstanding
    
    
    
    
    
    
    74,316,274
    
    
    
    21,259,471
 See accompanying notes to consolidated financial statements.




---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Cash Flows
(Expressed In Canadian dollars)
(Unaudited  Prepared by Management) June 30
    
    June 30For the nine months ended:
    
    2004
    
    2003Cash flows from operating activities:Net (loss) income
    
    $
    (2,807,153
    )
    
    $
    1,757,357Items not involving cash:Future income taxes recovery
    
    
    
    
    
    
    (271,978
    )Depreciation
    
    
    1,758,042
    
    
    
    1,735,425Amortization of intangible asset
    
    
    
    
    
    
    18,148Amortization of deferred financing charges
    
    
    21,110
    
    
    
    Convertible debentures accretion
    
    
    126,273
    
    
    
    567,445Debentures and term notes accretion
    
    
    2,426,719
    
    
    
    Other non-cash interest
    
    
    
    
    
    
    59,335Stock based compensation
    
    
    55,430
    
    
    
    23,268Write-down of capital assets
    
    
    
    
    
    
    352,273Gain on disposal of subsidiaries
    
    
    
    
    
    
    (2,271,810
    )Loss on sale of discontinued operations
    
    
    465,576
    
    
    
    Recognition of cumulative translation adjustment on closure of Hampel Stefanides
    
    
    
    
    
    
    (841,081
    )Net change in non-cash working capital balances:Accounts receivable
    
    
    (1,425,763
    )
    
    
    (380,299
    )Prepaid expenses
    
    
    (607,652
    )
    
    
    (273,128
    )Accounts payable and accrued liabilities
    
    
    (3,228,912
    )
    
    
    2,046,234Income taxes payable/recoverable
    
    
    (62,476
    )
    
    
    2,506,529Deferred revenue
    
    
    275,884
    
    
    
    (577,743
    )Amounts collected in excess of pass-through costs incurred
    
    
    251,667
    
    
    
    570,745Long-term restructuring costs
    
    
    (337,407
    )
    
    
    (382,262
    )Discontinued operations
    
    
    
    
    
    
    (333,007
    )Other
    
    
    655,048
    
    
    
    61,515Net cash (used in) provided by operating activities
    
    
    (2,433,614
    )
    
    
    4,366,967Cash flows from financing activities:Long-term debt borrowings
    
    
    4,650,000
    
    
    
    861,138Long-term debt repayments
    
    
    (6,008,780
    )
    
    
    (3,735,434
    )Short term bank facility repayment
    
    
    (6,115,746
    )
    
    
    Issuance of convertible debentures
    
    
    
    
    
    
    2,000,000Issuance of common shares, net of share issue costs
    
    
    60,714,361
    
    
    
    2,059Long-term portion of restructuring costs
    
    
    (337,407
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    52,902,428
    
    
    
    (872,237
    )Cash flows from investing activities:Acquisition of subsidiaries
    
    
    
    
    
    
    (104,137
    )Disposal of subsidiaries
    
    
    
    
    
    
    (1,181,353
    )Purchase of capital assets
    
    
    (851,495
    )
    
    
    (843,175
    )Proceeds on sale of capital assets
    
    
    
    
    
    
    176,106Discontinued operations
    
    
    
    
    
    
    6,473Net cash used in investing activities
    
    
    (851,495
    )
    
    
    (1,946,086
    )Change in cash balance due to foreign exchange
    
    
    429,600
    
    
    
    (567,898
    )Increase in cash and cash equivalents
    
    
    50,046,919
    
    
    
    980,746Cash and cash equivalents, beginning of period
    
    
    2,010,737
    
    
    
    469,909Cash and cash equivalents, end of period
    
    $
    52,057,656
    
    
    
    1,450,655Supplemental cash flow information:Interest paid
    
    $
    981,014
    
    
    $
    1,297,041Income taxes paid
    
    
    601,763
    
    
    
    20,200Supplemental disclosure of non-cash transactions:Shares issued for non-cash consideration
    
    
    4,200,284
    
    
    
    Stock based compensation
    
    
    55,429
    
    
    
    




---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Operations and Deficit
(Expressed In Canadian dollars)
(Unaudited  Prepared by Management) June 30
    
    June 30For the three months ended:
    
    
    
    
    
    2004
    
    2003Net revenue
    
    
    
    
    
    $
    11,059,966
    
    
    $
    10,373,300Operating expenses:Salaries and benefits
    
    note 8
    
    
    6,975,071
    
    
    
    6,036,439General and administrative
    
    
    
    
    
    
    1,470,232
    
    
    
    1,629,926Occupancy costs
    
    
    
    
    
    
    723,615
    
    
    
    638,0249,168,918
    
    
    
    8,304,389Depreciation
    
    
    
    
    
    
    595,069
    
    
    
    593,200Amortization of intangible asset
    
    
    
    
    
    
    
    
    
    
    6,049Investment Earnings
    
    
    
    
    
    
    (87,848
    )
    
    
    Accreted interest imputed on warrants and debentures
    
    note 3
    
    
    
    
    
    
    192,717Interest expense and financing costs
    
    note 3
    
    
    11,024
    
    
    
    425,7009,687,163
    
    
    
    9,522,056Income before restructuring costs recovery, gain on disposal of
subsidiary, income taxes and discontinued operations
    
    
    
    
    
    
    1,372,803
    
    
    
    851,244Restructuring costs recovery
    
    
    
    
    
    
    
    
    
    
    191,293Income before income taxes and discontinued operations
    
    
    
    
    
    
    1,372,803
    
    
    
    1,042,537Income taxes
    
    
    
    
    
    
    128,808
    
    
    
    72,000Income before discontinued operations
    
    
    
    
    
    
    1,243,996
    
    
    
    970,537Loss from discontinued operations, net of income taxes
    
    note 6
    
    
    
    
    
    
    3,380Net income
    
    
    
    
    
    
    1,243,996
    
    
    
    967,157Deficit, beginning of period
    
    
    
    
    
    
    (49,141,916
    )
    
    
    (46,839,329
    )Deficit, end of period
    
    
    
    
    
    $
    (47,897,920
    )
    
    $
    (45,872,172
    )Earnings per share from continuing operationsBasic
    
    
    
    
    
    $
    0.01
    
    
    $
    0.05Diluted
    
    
    
    
    
    $
    0.01
    
    
    $
    0.03Earnings per share from discontinued operationsBasic
    
    
    
    
    
    $
    
    
    
    $
    Diluted
    
    
    
    
    
    $
    
    
    
    $
    Weighted average number of common shares outstanding
    
    
    
    
    
    
    106,916,738
    
    
    
    21,260,250
 See accompanying notes to consolidated financial statements.




---



##### 



Envoy Communications Group Inc.
Consolidated Statements of Cash Flows
(Expressed In Canadian dollars)
(Unaudited  Prepared by Management) June 30
    
    June 30For the three months ended:
    
    2004
    
    2003Cash flows from operating activities:Net income
    
    $
    1,243,996
    
    
    $
    967,157Items not involving cash:Future income taxes recovery
    
    
    
    
    
    
    (8,474
    )Depreciation
    
    
    595,069
    
    
    
    593,200Amortization of intangible asset
    
    
    
    
    
    
    6,050Convertible debentures accretion
    
    
    
    
    
    
    192,717Other non-cash interest
    
    
    
    
    
    
    26,098Stock based compensation
    
    
    27,015
    
    
    
    Write-down of capital assets
    
    
    
    
    
    
    19,967Net change in non-cash working capital balances:Accounts receivable
    
    
    (1,046,595
    )
    
    
    (2,799,806
    )Prepaid expenses
    
    
    (912,991
    )
    
    
    (354,885
    )Accounts payable and accrued liabilities
    
    
    (1,743,554
    )
    
    
    998,285Income taxes payable/recoverable
    
    
    85,411
    
    
    
    72,000Deferred revenue
    
    
    (194,747
    )
    
    
    65,019Amounts collected in excess of pass-through costs incurred
    
    
    (32,377
    )
    
    
    120,705Long-term restructuring costs
    
    
    
    
    
    
    (343,250
    )Discontinued operations
    
    
    
    
    
    
    (215,773
    )Other
    
    
    
    
    
    
    1,161Net cash used in operating activities
    
    
    (1,978,773
    )
    
    
    (659,829
    )Cash flows from financing activities:Long-term debt borrowings
    
    
    
    
    
    
    108,078Long-term debt repayments
    
    
    (389,242
    )
    
    
    (90,744
    )Issuance of convertible debentures
    
    
    
    
    
    
    2,000,000Issuance of common shares, net of share issue costs
    
    
    23,828,975
    
    
    
    2,059Net cash provided by financing activities
    
    
    23,439,733
    
    
    
    2,019,393Cash flows from investing activities:Purchase of capital assets
    
    
    (319,040
    )
    
    
    (408,411
    )Net cash used in investing activities
    
    
    (319,040
    )
    
    
    (408,411
    )Change in cash balance due to foreign exchange
    
    
    (65,196
    )
    
    
    (111,808
    )Increase in cash
    
    
    21,076,724
    
    
    
    839,345Cash and cash equivalents, beginning of period
    
    
    30,980,932
    
    
    
    611,310Cash and cash equivalents, end of period
    
    $
    52,057,656
    
    
    
    1,450,655Supplemental cash flow information:Interest paid
    
    $
    11,024
    
    
    $
    496,384Income taxes paid
    
    
    155,563
    
    
    
    Supplemental disclosure of non-cash transactions:Stock based compensation
    
    
    28,415
    
    
    
    




---



##### 



1.
    
    Basis of Presentation  (a)
    
    The consolidated financial statements 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, 2003. The
significant accounting policies follow that of the most recently
reported annual financial statements except as detailed in Note 8.(b)
    
    Certain comparative figures have been reclassified to conform to the
financial statement presentation adopted for 2004.  2.
    
    Bank credit facility and other debt June 30
    
    September 302004
    
    2003Bank credit facility (a)
    
    $
    
    
    
    $
    6,115,746Loan payable to landlord, 3.5% per annum, due July 1,
2009, repayable in monthly instalments of $7,665
principal and interest
    
    
    423,026
    
    
    
    481,297Loan payable to landlord, 10.0% per annum, due
March 1, 2010, repayable in monthly instalments of
$3,956 principal and interest
    
    
    
    
    
    
    227,556Loan payable to landlord, 10.0% per annum, due
April 1, 2005, repayable in monthly instalments of
$742 principal and interest
    
    
    26,970
    
    
    
    31,479Loan payable to landlord, 8.0% per annum, due
April 1, 2010, repayable in monthly instalments of
$561 principal and interest
    
    
    
    
    
    
    34,488Capital lease, 12.3% over the lease period, repayable in
quarterly instalments of £7,919 principal and interest,
due November 2004
    
    
    35,510
    
    
    
    86,295Capital 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
    
    
    273,765
    
    
    
    566,788Promissory note, 10% per annum, due on demand
    
    
    
    
    
    
    150,000Promissory note, 10% per annum, due on September 30,
2006 (b)
    
    
    
    
    
    
    500,000Convertible debentures (c)
    
    
    
    
    
    
    3,231,266Debentures and term notes (d)
    
    
    
    
    
    
    759,271
    
    
    
    11,424,915Less current portion
    
    
    388,635
    
    
    
    6,857,953$
    370,636
    
    
    $
    4,566,962




---



##### 



2.
    
    Bank credit facility and other debt(continued)  (a)
    
    In the first quarter of fiscal 2004, the Company reduced its demand
operating facility from $7,000,000 to $ 3,000,000, using $3,800,000 of the
proceeds from debentures that were issued on October 31, 2003, and another
$200,000 drawn from working capital. In the second quarter of fiscal 2004,
with the proceeds raised in a public offering, the Company paid off the
remaining balance outstanding and cancelled the demand operating facility.
See note 5 for details of the public offering.(b)
    
    In September 2003, the holder of the $500,000 promissory note agreed
to postpone the maturity date of the promissory note from June 30, 2003 to
September 30, 2006 and to reduce the rate of interest from 15% to 10% per
annum. In consideration of the foregoing, in the first quarter of fiscal
2004, share purchase warrants to purchase, on or before April 24, 2008,
50,000 of the Companys common shares at an exercise price of $0.15 per
share were transferred to the holder of the promissory note. These
warrants were part of the 2,300,000 warrants (the Bank Warrants)
previously issued to Envoys bankers and which were released by the
bankers upon the condition that Envoy raise additional funds to further
reduce its bank indebtedness. During the second quarter of fiscal 2004,
the promissory note was repaid from the proceeds raised in the public
offering.(c)
    
    In the first quarter of fiscal 2004, convertible debentures with
a face value of $2,420,000 were converted into 16,133,333 common shares.
During the second quarter of fiscal 2004, the remaining convertible
debentures, with a face value of $1,970,000, were converted into an
additional 13,133,333 common shares.(d)
    
    On October 31, 2003, the Company borrowed the amount of $4,500,000, of
which $4,000,000 was raised by way of secured debentures and $500,000 by
way of unsecured term notes. These loans carried interest at the rate of
10% per annum and had a maturity date of October 31, 2006.As a condition to the making of these loans, share purchase warrants to
purchase 2,250,000 of the Companys common shares were transferred to the
holders of the secured debentures and the unsecured term notes. These
warrants were part of the Bank Warrants and were released by the bankers
upon the condition that Envoy raise additional funds to further reduce its
bank indebtedness.As a result of the additional cash raised from the public offering in the
second quarter of fiscal 2004, the Company reached an agreement with the
holders of the secured debentures and unsecured term notes, resulting in
the early repayment thereof during the second quarter of fiscal 2004.All of the Bank Warrants were exercised in the second quarter of fiscal
2004.




---



##### 



3.
    
    Interest and financing costsInterest and financing costs for the nine months ending June 30, comprised
the following: For the nine months ended:
    
    June 30, 2004
    
    June 30, 2003Cash interest paid on credit facility, landlord
loans and capital leases
    
    $
    361,304
    
    
    $
    999,560Financing fees on credit facility
    
    
    100,451
    
    
    
    436,775Negotiation fee for early repayment on debt
    
    
    435,000
    
    
    
    Cash interest paid on convertible debentures
and amortization of debenture issue costs
    
    
    105,369
    
    
    
    108,7501,002,124
    
    
    
    1,545,085Accreted interest imputed on warrants and
debentures (a)
    
    
    2,552,991
    
    
    
    567,445$
    3,555,115
    
    
    $
    2,112,530
  (a)
    
    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. As indicated in Note 2(d), 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.  4.
    
    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 For the nine months ended:
    
    June 30, 2004
    
    June 30, 2003Canada
    
    $
    7,531,536
    
    
    $
    3,821,893United States
    
    
    8,442,660
    
    
    
    13,946,658United Kingdom and Continental Europe
    
    
    14,711,709
    
    
    
    12,782,850$
    30,685,905
    
    
    $
    30,551,401
  Net revenue by type of service For the nine months ended:
    
    June 30, 2004
    
    June 30, 2003Marketing
    
    $
    2,795,140
    
    
    $
    5,399,023Consumer and retail branding
    
    
    27,890,765
    
    
    
    24,860,524Technology
    
    
    
    
    
    
    291,854$
    30,685,905
    
    
    $
    30,551,401




---



##### 



(b)
    
    The Companys identifiable assets for each geographic area in which it has
operations:  Capital Assets As at:
    
    June 30, 2004
    
    June 30, 2003Canada
    
    $
    3,131,655
    
    
    $
    4,328,804United Kingdom and Continental Europe
    
    
    1,938,908
    
    
    
    1,734,435$
    5,070,563
    
    
    $
    6,063,239
  Goodwill As at:
    
    June 30, 2004
    
    June 30, 2003Canada
    
    $
    1,867,077
    
    
    $
    2,736,296United Kingdom and Continental Europe
    
    
    8,866,869
    
    
    
    7,317,095$
    10,733,946
    
    
    $
    10,053,391
  5
    
    Public offeringThrough a public offering, on February 20, 2004, Envoy issued 26,315,800
units (the First Units) at $1.33 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 $1.80 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 3,947,370 First Units. The total
number of First Units issued by Envoy to the public was 30,263,170, with
total gross proceeds of $40,250,016. As previously stated, 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.Through a second public offering, on May 12, 2004, Envoy issued 25,000,000
units (the Second Units) at $1.05 per Second Unit, each Second 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 $1.80 per common share for a period ending
February 20, 2009. The total gross proceeds from the offering was
$26,250,000. The net proceeds of the Second Unit offering will be used for
general corporate purposes and potential acquisition and investment
opportunities that the Company determines have potential to create value
for Envoy shareholders that either complement, or provide an opportunity
to diversify the current business of Envoy.At a meeting held on June 25, 2004, the holders of the warrants (the
First Warrantholders) issued pursuant to the warrant indenture (the
First Warrant Indenture) between Envoy and Computershare Trust Company
of Canada (Computershare) dated February 20, 2004, the First
Warrantholders approved the replacement of the warrant indenture (the
Second Warrant Indenture) between Envoy and Computershare dated May 12,
2004 by the First Warrant Indenture as the instrument governing the terms
of the warrants issued pursuant to the Second Warrant Indenture.




---



##### 



6
    
    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 for the nine months ended:
    
    June 30, 2004
    
    June 30, 2003Net revenue
    
    $
    398,114
    
    
    $
    1,106,793Operating expenses
    
    
    389,394
    
    
    
    994,921Depreciation
    
    
    2,237
    
    
    
    13,972Amortization of intangible asset
    
    
    6,049
    
    
    
    0Income tax expense
    
    
    
    
    
    
    35,900Earnings from discontinued operations
(excluding loss on sale)
    
    
    434
    
    
    
    62,000Loss on sale of discontinued operations
    
    
    (465,576
    )
    
    
    (Loss) earnings from discontinued
operations
    
    $
    (465,142
    )
    
    $
    62,000
 Income Statement for the three months ended:
    
    June 30, 2004
    
    June 30, 2003Net revenue
    
    $
    
    
    
    $
    336,126Operating expenses
    
    
    
    
    
    
    306,597Depreciation
    
    
    
    
    
    
    2,909Income tax expense
    
    
    
    
    
    
    30,000Loss from discontinued operations
    
    $
    
    
    
    $
    (3,380
    )




---



##### 



7
    
    Change in accounting policyEffective October 1, 2003 the Company prospectively adopted the new
provisions of The Canadian Institute of Chartered Accountants (CICA) handbook
section 3870, Stock-Based Compensation and Other Stock-Based Payments. The new
section requires that stock-based payments to non-employees and direct awards
of stock to employees be accounted for using a fair value-based method of
accounting. The section also requires enterprises to account for Stock Appreciation Rights (SARS) and similar awards settled in cash, by
measuring, on an ongoing basis, the amount by which the quoted market
price exceeds the option price. The new section applies to awards granted
on or after the date of adoption.8
    
    Stock based compensationOn May 25th, 2004, the company granted 1,850,000 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 (See Note 7). In the quarter ended
June 30th, 2004, an expense of $27,015 reflecting the option amortization
for the period has been included in salaries expense.10
    
    Other itemsAt 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 50,000,000 common shares to
200,000,000 common shares.At June 30, 2004, there were 118,455,200 common shares of Envoy issued
compared to 31,047,027 issued at September 30, 2003.




---



##### 



Envoy Communications Group Inc.
Management Discussion and Analysis of Financial Condition and Results of Operations
Third quarter of fiscal 2004 The following section of our interim report sets forth Managements Discussion
and Analysis of the financial performance of Envoy for the nine months ended
June 30, 2004 compared to the nine months ended June 30, 2003. The analysis is
based on our unaudited consolidated financial statements, including the
accompanying notes, which are presented elsewhere in this report. OVERVIEW Through a public offering, on February 20, 2004, Envoy issued 26,315,800 units
(the First Units) at $1.33 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 $1.80 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 our offering of units, we issued an additional 3,947,370 First
Units. The total number of First Units issued to the public was 30,263,170,
with total gross proceeds of approximately $40.2 million. During the second
quarter, we successfully negotiated with our 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. Through a public offering, on May 12, 2004, we issued 25,000,000 units (the
Second Units) at $1.05 per Second Unit, each Second 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 $1.80 per common share for a period ending February 20, 2009. The total
gross proceeds from the offering was $26.2 million. The net proceeds of the
Second Unit offering will be used for general corporate purposes and potential
acquisition and investment opportunities that we determine have potential to
create value for our shareholders and that either complement, or provide an
opportunity to diversify our current 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. The Watt group of companies (Watt), our consumer and retail branding
business, has proven successful at creating and executing private label
programs and landmark store design, making Watt 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 us 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 nine months ending June 30,
2004, Watt represented 91% of our business. In fiscal 2003, we divested our technology services. Effective 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. We will continue to focus on our core strength, consumer and retail branding
and have made a series of announcements in fiscal 2004 that highlight the
significant opportunities we are pursuing. In November 2003, we announced our intention to embark on a strategic M&A
expansion plan to further enhance our leadership position in both North America
and Europe.




---



##### 



In the same month, Watt announced the launch of Gilchrist North America
(GNA), a state-of-the-art reprographics and brand management business, with
locations in Toronto, Bentonville and Boston. GNA will leverage the highly
experienced work force and sophisticated equipment of Gilchrist UK, Watts UK
based brand management company, to provide its clients with a superior product.
GNA has quickly become an integral part of our new client acquisition strategy. Also in November 2003, Watt announced the launch of Studio Watt, a
niche-focused agency devoted to serving the distinct needs of style-based
specialty and boutique labels throughout North America. In January 2004, Watt announced the launch of ODIN, a web based software
system that manages every stage of the design process in real-time, from
concept development and package design to printing, packaging and getting the
product to market. With anytime, anywhere access, ODIN provides Watt clients
the ability to efficiently track and manage their projects, and know instantly
if there are any project deviations, timeline extensions, or delays from
suppliers. The efficiency gained through ODIN offers a significant competitive
advantage for Watt and its clients, and ensures at least a 20 percent increase
in speed-to-market. The costs associated with these initiatives were absorbed as part of our
expenses in the first and second quarter of fiscal 2004. The enhanced revenue
and profitability that they are expected to provide will be realized in our
fourth quarter of fiscal 2004 and in fiscal 2005. In May 2004, Watt announced a strategic alliance with Zeidler Partnerships
Architects, an international architectural practice with headquarters in
Toronto, and offices in Western Canada, Europe, Asia, and the United States.
The alliance reinforces the two companies commitment to provide a full range
of services, from business analysis and brand strategy through to architecture,
planning, environmental design, communications, merchandising and execution. In our 3rd quarter we have added new contracts with six major North American
Retailers from various industries including: hardware, three major North
American food retailers, a major U.S. account in the beverage/alcohol category
and a fashion account. The committed project revenues from these new contracts
total approximately $2.6 million of which less than 10% is reflected in our 3rd
quarter results. We have continued to grow our marketing and sales teams in the
U.K. and North America. This new group is building momentum and has a backlog
of new business proposals that we anticipate will translate into new client
contracts. At the same time our management team and employees remain extremely
focused on building and maintaining our current client relationships. Net revenue for the nine months ended June 30, 2004 was $30.7 million, compared
to $30.6 million for the nine months ended June 30, 2003, an increase of $0.1
million. Net revenue for the nine months ended June 30, 2003, included $3.4
million from subsidiaries disposed of or shut down during fiscal 2003. Net
revenue from continuing business increased $3.6 million in the nine months
ended June 30, 2004 compared to the same period of fiscal 2003. We expect net
revenue in the fourth quarter of fiscal 2004 to be consistent with the same
period last year. Salaries expense for the nine months ended June 30, 2004, was $20.3 million,
compared to $20.5 million in the nine months ended June 30, 2003, a decrease of
$0.2 million. Our labour to net revenue ratio for the nine months ended June
30, 2004 was 66%, compared to 67% in the nine months ended June 30, 2003. We
expect our labour to net revenue ratio for the full fiscal 2004 to be
approximately 66%. Occupancy costs decreased to $2.1 million for the nine months ended June 30,
2004, from $2.5 million for the nine months ended June 30, 2003, a decline of
$0.4 million. Our occupancy cost to net revenue ratio was 7.0% for the nine
months ended June 30, 2004, compared to 8.2% for the nine months ended June 30,
2003. We expect our occupancy to net revenue ratio for the full fiscal 2004 to
be approximately 6.8%.




---



##### 



As a result of the operational changes and financial changes discussed above,
we believe the business will continue to show improved earnings and a
strengthened balance sheet. RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED
JUNE 30, 2004 WITH THE NINE MONTHS ENDED JUNE 30, 2003 Net revenue Net revenue for the nine months ended June 30, 2004 was $30.7 million, compared
to $30.6 million for the nine months ended June 30, 2003, an increase of $0.1
million. Net revenue by type of service and by customer location: Net Revenue for the nine months ended June 30(in millions)2004
    
    % of total
    
    2003
    
    % of totalBy type of serviceConsumer and retail branding
    
    $
    27.9
    
    
    
    91
    %
    
    $
    24.9
    
    
    
    81
    %Marketing
    
    
    2.8
    
    
    
    9
    %
    
    
    5.4
    
    
    
    18
    %Technology
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    1
    %$
    30.7
    
    
    
    100
    %
    
    $
    30.6
    
    
    
    100
    %2004
    
    % of total
    
    2003
    
    % of totalBy customer locationCanada
    
    $
    7.5
    
    
    
    25
    %
    
    $
    3.8
    
    
    
    12
    %United States
    
    
    8.5
    
    
    
    27
    %
    
    
    14.0
    
    
    
    46
    %Europe*
    
    
    14.7
    
    
    
    48
    %
    
    
    12.8
    
    
    
    42
    %$
    30.7
    
    
    
    100
    %
    
    $
    30.6
    
    
    
    100
    %
 *
    
    Europe includes the United Kingdom and Continental Europe
 Net revenue by type of service: Net revenue from consumer and retail branding services increased $3.0 million
in the nine months ended June 30, 2004 compared to the nine months ended June
30, 2003 an increase of 12%. We expect that net revenue will continue to
improve in the fourth quarter of fiscal 2004. Net revenue from marketing has
decreased by $2.6 million for the nine months ended June 30, 2004, compared to
the nine months ended June 30, 2003. The $3.1 million decrease in net revenue
from the closure of our New York advertising agency, Hampel Stefanides Inc.
(Hampel, or the New York Agency) in February 2003, was offset in part by
growth of $0.5 million in other parts of our business. During fiscal 2003 we sold and shutdown all of our technology businesses. Net revenue by customer location: Net revenue from Canada increased $3.7 million, for the nine months ended June
30, 2004 compared to the nine months ended June 30, 2003. Stronger sales from
our continuing companies more than offset the decline due to the shutdown of
Sage Information Consultants Inc. (Sage) and the sale of the assets of Devlin
Multimedia Inc. (Devlin) in 2003.




---



##### 



Net revenue from the U.S. has decreased $5.5 million for the nine months ended
June 30, 2004 compared to the nine months ended June 30, 2003. Of this
decrease, $3.1 million was from the closure of our New York Agency in February
2003. Net revenue from Europe in our consumer retail branding increased $1.9 million
for the nine months ended June 30, 2004, compared to the nine months ended June
30, 2003. We expect continued growth and improvement from Europe in the
remaining quarter of fiscal 2004. Operating ExpensesOperating expenses increased by 1% to $27.5 million for the
nine months ended June 30, 2004 from $27.4 million for the nine months ended
June 30, 2003. Changes in operating expenses are as follow: Salaries and benefits expenses for the nine months ended June 30, 2004 were
$20.3 million, compared to $20.5 million for the nine months ended June 30,
2003, a decrease of $0.2 million or 1%. Salaries and benefits for the nine
months ended June 30, 2003, included $2.1 million from subsidiaries disposed
of, shut down or sold during fiscal 2003. Salaries and benefits from
continuing business increased $1.9 million in the first nine months of fiscal
2004 compared to the same period of fiscal 2003. Salaries and benefits
continue to be closely monitored to match expected revenues with labour costs. General and administrative expenses for the nine months ended June 30, 2004
were $5.0 million, compared to $4.3 million for the nine months ended June 30,
2003. This represents an increase of $0.7 million or 17%. Included in general
and administrative expenses is a foreign exchange loss of ($0.2) million in the
nine months ending June 30, 2004, compared to a foreign exchange gain of $0.2
million in the nine months ending June 30, 2003. The gain of $0.2 million was
made up of an exchange loss from operations of ($0.6) million and the
recognition of a deferred foreign exchange gain of $0.8 million from the
closure of our New York Agency. Excluding the deferred foreign exchange gain,
general and administrative expenses decreased by $0.1 million or 2%. Occupancy
costs for the nine months ended June 30, 2004 were $2.1 million, compared to
$2.5 million for the nine months ended June 30, 2003, a decrease of 15%. This
decrease is a result of the termination of office space obligations in both New
York and Toronto in fiscal 2003. Depreciation expenseDepreciation expense for the nine months ending June 30,
2004 was $1.8 million, compared to $1.7 million for the nine months ended June
30, 2003. Interest expense and financing costsInterest expense and financing costs and
accreted interest imputed on warrants and debentures, for the nine months ended
June 30, 2004 was $3.6 million, compared to $2.1 million for the nine months
ended June 30, 2003. During the first quarter of fiscal 2004, we borrowed the amount of $4.5
million, of which $4.0 million was raised by way of secured debentures and $0.5
million by way of unsecured term notes. As a condition of these loans, share
purchase warrants to purchase 2,250,000 of our common shares were transferred
to the holders of the secured debentures and the unsecured term notes. In
addition, 50,000 warrants were transferred to the holder of the $0.5 million
promissory note in exchange for the renegotiation of the terms of the note.
These 2,300,000 warrants were previously issued to our bankers and were
released by the bankers upon the condition that we raise additional funds to
further reduce our bank indebtedness. We used the Black-Scholes option pricing model to arrive at a value for the
warrants based on an analysis of the warrant exercise price, time to expiry and
the volatility of our common share price. The value assigned to the warrants is
amortized over the life of the loan and a corresponding periodic charge is made
to interest expense. During the second quarter of fiscal 2004, the loans made
by the holders of the warrants were repaid by Envoy and the remaining
unamortized value of $2.3 million assigned to the warrants, has been charged to
accreted interest imputed on




---



##### 



warrants and debentures. Included in interest expense and financing costs is a
charge of $0.4 million paid to the holders of the secured debentures for the
early repayment of their loans. In the first quarter of fiscal 2004, convertible debentures with a face value
of $2.4 million were converted into common shares of Envoy. In the second
quarter, the remaining convertible debentures with a face value of $2.0 million
were converted. As a result, there will be no further interest expense related
to the convertible debentures. At a special meeting of shareholders of Envoy held on January 8, 2004, the
shareholders approved an amendment to the articles of Envoy to increase its
authorized share capital from 50 million common shares to 200 million common
shares. During the nine months ended June 30, 2004, 29,266,667 common shares of Envoy
were issued as a result of the conversion of all outstanding convertible
debentures with a face value of $4.4 million. All of the outstanding warrants
were exercised, resulting in the issuance of 2,300,000 common shares. Share
options exercised resulted in the issuance of 578,336 common shares. The public
share offering resulted in the issuance of 30,263,170 common shares. On May 12th 2004, through a public equity offering, we issued 25,000,000 units,
each unit consisting of one common share and a one-half of one common share
purchase warrant. The gross proceeds of $26.2 million, less costs, will be used
for general corporate purposes and potential acquisition and investment
opportunities that we determine have potential to create value for our
shareholders. After the exercise of the warrants and the options, the conversion of the
convertible debentures and the issuance of common shares through the public
equity offerings, there were 118,455,200 common shares of Envoy outstanding at
June 30, 2004, compared to 31,047,027 common shares of Envoy outstanding at
September 30, 2003. As a result of the above, we expect that our interest and financing cost for
the fourth quarter of the 2004 fiscal year will be less than $0.1 million.
There will be no further expense related to the accretion of interest imputed
on debentures. On May 25th, 2004, the company granted 1,850,000 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 June 30th, 2004, an
expense of $27,015, reflecting the option amortization for the period, has been
included in salaries expense. Investment earningsInvestment earnings for the nine months ended June 30, 2004
was $0.1 million, compared to nil for the nine months ended June 30, 2003.
Investment earnings are the income earned on the amounts invested in cash and
cash equivalents. We expect investment earnings of $ 0.4 million for fiscal
2004. Loss from discontinued operationsAs detailed in Note 7 of the consolidated
financial statements, Envoy sold its shares of Communique effective January
1st, 2004. The loss of $0.5 million for the nine months ended June 30, 2004
reflects the loss realized as a result of the sale. The gain of $0.1 million
for the nine months ended June 30, 2003, was the income earned by Communique
during that period. Net earnings (loss)We had a loss of ($2.8) million for the nine months ending
June 30, 2004, compared to earnings of $1.8 million for the nine months ending
June 30, 2003.




---



##### 



Quarterly Information For the three months ended
    
    June 30, 2004
    
    March 31, 2004
    
    December 31, 2003Net revenue
    
    $11.1 million
    
    
    $10.6 million
    
    
    $9.0 millionNet earnings (loss)
    
    $1.2 million
    
    
    ($3.6) million
    
    
    ($0.5) millionNet earnings (loss) per share:Continuing operationsBasic
    
    
    $0.01
    
    
    
    ($0.05
    )
    
    
    ($0.01
    )Diluted
    
    
    $0.01
    
    
    
    ($0.05
    )
    
    
    ($0.01
    )Discontinued operationsBasic
    
    
    $0.00
    
    
    
    ($0.01
    )
    
    
    $0.0Diluted
    
    
    $0.00
    
    
    
    ($0.01
    )
    
    
    $0.0For the three months ended
    
    June 30, 2003
    
    March 31, 2003
    
    December 31, 2002Net revenue
    
    $10.4 million
    
    
    $8.7 million
    
    
    $11.5 millionNet earnings (loss)
    
    $1.0 million
    
    
    $1.4 million
    
    
    ($0.6) millionNet earnings (loss) per share:Continuing operationsBasic
    
    
    $0.05
    
    
    
    $0.06
    
    
    
    ($0.03
    )Diluted
    
    
    $0.03
    
    
    
    $0.06
    
    
    
    ($0.03
    )Discontinued operationsBasic
    
    
    $0.01
    
    
    
    $0.01
    
    
    
    $0.00Diluted
    
    
    $0.01
    
    
    
    $0.01
    
    
    
    $0.00
 CASH FLOWS Net cash provided by operating activities before any increase or decrease in
non-cash working capital was $2.0 million for the nine months ended June 30,
2004 compared to $1.2 million for the nine months ended June 30, 2003. Net cash provided by financing activities was $52.9 million for the nine months
ended June 30, 2004 compared to ($0.9) million used in financing activities for
the nine months ended June 30, 2003. The increase is due to the issuance of
share capital of $60.7 million, offset by repayments of bank and other debt.
Further details on the public offering are provided in Note 5 of the
consolidated financial statements. Net cash used in investing activities was ($0.8) million for the nine months
ended June 30, 2004, compared to net cash used in investing activities of
($1.9) million for the nine months ended June 30, 2003.




---



##### 



RESULTS OF OPERATIONS The following section of our interim report sets forth Managements Discussion
and Analysis of the financial performance of Envoy for the three months ended
June 30, 2004, compared to the three months ended June 30, 2003. The analysis
is based on our unaudited consolidated financial statements, including the
accompanying notes, which are presented elsewhere in this report. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
JUNE 30, 2004 WITH THE THREE MONTHS ENDED JUNE 30, 2003 Net revenue Net revenue for the three months ended June 30, 2004 was $11.1 million,
compared to $10.4 million for the three months ended June 30, 2003, an increase
of $0.7 million or 7%. Net revenue by type of service and by customer location: Net Revenue for the three months ended June 30(in millions)2004
    
    % of total
    
    2003
    
    % of totalBy type of serviceConsumer and retail branding
    
    $
    10.0
    
    
    
    90
    %
    
    $
    9.7
    
    
    
    93
    %Marketing
    
    
    1.1
    
    
    
    10
    %
    
    
    0.7
    
    
    
    7
    %$
    11.1
    
    
    
    100
    %
    
    $
    10.4
    
    
    
    100
    %
 2004
    
    % of total
    
    2003
    
    % of totalBy customer locationCanada
    
    $
    1.3
    
    
    
    12
    %
    
    $
    1.2
    
    
    
    15
    %United States
    
    
    4.4
    
    
    
    39
    %
    
    
    4.6
    
    
    
    42
    %Europe*
    
    
    5.4
    
    
    
    49
    %
    
    
    4.6
    
    
    
    43
    %$
    11.1
    
    
    
    100
    %
    
    $
    10.4
    
    
    
    100
    %
 *
    
    Europe includes the United Kingdom and Continental Europe
 Net revenue by type of service: Net revenue from consumer and retail branding services increased $0.3 million
in the three months ended June 30, 2004, compared to the three months ended
June 30, 2003. We expect that net revenue will continue to improve in the
fourth quarter of fiscal 2004. Net revenue from marketing has increased by $0.4 million for the three months
ended June 30, 2004, compared to the three months ended June 30, 2003. Net revenue by customer location: Net revenue from Canada increased $0.1 million for the three months ended June
30, 2004, compared to the three months ended June 30, 2003. Net revenue from the U.S. has decreased $0.2 million for the three months ended
June 30, 2004, compared to the three months ended June 30, 2003. Net revenue from Europe in our consumer retail branding increased $0.8 million
during the three months ended June 30, 2004. We expect continued growth and
improvement from Europe in the remaining quarter of fiscal 2004.




---



##### 



Operating ExpensesOperating expenses increased by 10% to $9.2 million for
the three months ended June 30 2004 from $8.3 million for the three months
ended June 30, 2003. Changes in operating expenses are as follow: Salaries and benefits expenses for the three months ended June 30, 2004 were
$7.0 million, compared to $6.0 million for the three months ended June 30,
2003. This represents an increase of $1.0 million or 16%. Salaries and benefits
continue to be closely monitored to match expected revenues with labour costs. General and administrative expenses for the three months ended June 30, 2004
were $1.5 million, compared to $1.6 million for the three months ended June 30,
2003, a decrease of $0.1 million. Included in general and administrative
expenses is a foreign exchange loss of ($0.1) million in the three months
ending June 30, 2004, compared to a foreign exchange loss of ($0.3) million in
the three months ending June 30, 2003. Occupancy costs for the three months ended June 30, 2004 were $0.7 million,
compared to $0.6 million for the three months ended June 30, 2003, an increase
of $0.1 million, or 13%. Depreciation expenseDepreciation expense for the three months ending June 30,
2004 was $0.6 million, which is consistent with the three months ended June 30,
2003. Interest expense and financing costsInterest expense and financing costs and
accreted interest imputed on warrants and debentures was less than $0.1
million, for the three months ended June 30, 2004, compared to $0.6 million for
the three months ended June 30, 2003. The convertible debentures, bank credit
facility and promissory notes that were outstanding during fiscal 2003 were
repaid or converted in the first and second quarters of fiscal 2004. Investment EarningsInvestment earnings for the three months ended June 30,
2004 was $0.1 million, compared to nil for the three months ended June 30,
2003. Investment earnings are from the net proceeds of the public equity
financing. Loss from discontinued operationsAs detailed in Note 7 of the consolidated
financial statements, Envoy sold its shares of Communique effective January
1st, 2004. For the three months ended June 30, 2003, the income earned by
Communique was less than $0.1 million. Net EarningsWe had earnings of $1.2 million for the three months ending June
30, 2004, compared to earnings of $1.0 million for the three months ending June
30, 2003, an improvement of 29%. CASH FLOWS Net cash provided by operating activities before any increase or decrease in
non-cash working capital was $1.9 million for the three months ended June 30,
2004, compared to $1.8 million for the three months ended June 30, 2003. Net cash provided by financing activities was $23.4 million for the three
months ended June 30, 2004, compared to $2.0 million provided by financing
activities for the three months ended June 30, 2003. The increase is due to the
issuance of share capital of $23.8 million, offset by repayments of other debt.
Further details on the public offering are provided in Note 5 of the
consolidated financial statements. Net cash used in investing activities was ($0.3) million for the three months
ended June 30, 2004, compared to ($0.4) million for the three months ended June
30, 2003.




---



##### 



COMMITMENTS AND CONTRACTUAL COMMITMENTS Material changes to contractual commitments During fiscal 2004, $4.4 million of convertible debentures were converted into
common shares of Envoy, thereby reducing our contractual commitments. OTHER INFORMATION On April 1, 2004, we received written notification from The Nasdaq SmallCap
Market (NASDAQ) that our common shares had closed below the minimum US$1.00
per share requirement for continued listing under NASDAQ Marketplace Rule
4310(c)(4) (the Rule). Consequently, we were provided 180 calendar days, or
until September 28, 2004, to regain compliance. If, at anytime before
September 28, 2004, the bid price of our common shares closes at $1.00 per
share or more for a minimum of 10 consecutive business days, NASDAQ will
provide written notification that we comply with the Rule. If we do not regain
compliance with the Rule by September 28, 2004, but otherwise meet NASDAQs
initial listing criteria, NASDAQ will notify us that we have been granted an
additional 180 calendar day compliance period. If we have not regained
compliance within the second 180 day compliance period, but otherwise satisfy
the initial listing criteria, we may be afforded an additional compliance
period, up to our next shareholder meeting, provided we commit to NASDAQ to
seek shareholder approval for a consolidation (reverse split) of our common
shares at or before our next shareholder meeting and promptly thereafter effect
the consolidation (reverse split). If we do not regain compliance with the Rule
and are not eligible for an additional compliance period, NASDAQ will provide
notification that our common shares will be delisted. At a special meeting held on August 14, 2003, our shareholders passed a special
resolution authorizing a consolidation (reverse split) of the common shares on
a basis to be determined by our Board of Directors, such consolidation not to
exceed one new common share for each ten common shares issued and outstanding.
The passage of the special resolution gives our Board of Directors the
flexibility to consolidate our common shares at the appropriate rate in order
to regain compliance with the Rule. Therefore, any future decision of the Board
of Directors to implement the consolidation of Envoys common shares will
depend on the ability of Envoy to meet the minimum US$1.00 bid requirement for
continued listing on NASDAQ. At a meeting held on June 25, 2004, the holders of the warrants (the First
Warrantholders) issued pursuant to the warrant indenture (the First Warrant
Indenture) between Envoy and Computershare Trust Company of Canada
(Computershare) dated February 20, 2004, the First Warrantholders approved
the replacement of the warrant indenture (the Second Warrant Indenture)
between Envoy and Computershare dated May 12, 2004 by the First Warrant
Indenture as the instrument governing the terms of the warrants issued
pursuant to the Second Warrant Indenture. At June 30, 2004, there were 118,455,200 common shares of Envoy issued,
compared to 31,047,027 issued at September 30, 2003. Additional information relating to Envoy, including our Annual Information Form
is available on SEDAR at www.sedar.com. 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.




---



##### 



Shareholder Information HEAD OFFICE
172 John Street
Toronto, Canada M5T 1X5 
Telephone:
(416) 593-7555
Facsimile: (416) 593-4434  
DIRECTORS
John
H. Bailey
B.Comm, J.D., LL.M
Barrister & Solicitor 
David
Parkes
President and CEO,
David Parkes & Associates 
Geoffrey B. Genovese
President, Chairman and
     Chief Executive Officer
Envoy Communications Group Inc. 
David
I. Hull
President
Hull Life Insurance Agencies Inc. 
Hugh
Aird
Senior Relationship Manager
Morgan Stanley Canada
    
    OFFICERS
Geoffrey B. Genovese
President, Chairman
     and Chief Executive Officer 
 

Linda Gilbert
Chief Financial Officer 
John
H. Bailey
Executive Vice President
     and Corporate Secretary  
AUDIT COMMITTEE
Hugh Aird
David I. Hull
David Parkes 
COMPENSATION
COMMITTEE
Hugh Aird
David I. Hull
David Parkes  
TRANSFER
AGENT
Computershare Trust
     Company of Canada
100 University Avenue, 9th Floor
Toronto, Canada M5J 2Y1
    
    AUDITORS
BDO Dunwoody LLP
60 Columbia Way, Suite 400
Markham, Canada L3R 0C9  
BANKERS
HSBC
Bank Canada
70 York Street
Toronto, Canada M5J 1S9  
LEGAL
COUNSEL
Blake, Cassels & Graydon LLP
Box 25, Commerce Court West
Toronto, Canada M5L 1A9 
INVESTOR
RELATIONS
E-mail: info@envoy.to 
Additional
information is
available on our
Web site at www.envoy.to  
STOCK
TRADING INFORMATION
Toronto Stock Exchange: ECG
NASDAQ Exchange: ECGI