##### 



(ENVOY COMMUNICATIONS GROUP INC. LOGO) 2nd Quarter Report 2004




---



##### 



Dear Shareholders, Envoys second quarter results have improved significantly over the previous
year, excluding non-recurring items and discontinued/sold operations. Envoy
recorded revenues of $10.6 million for the three months ending March 31, 2004,
compared to $8.7 million for the three months ending March 31, 2003. Net
revenue in the prior year included $0.7 million from subsidiaries disposed of
or shutdown during fiscal 2003. Net revenue from continuing business increased
33% in the three months ended March 31, 2004, compared to the same period of
fiscal 2003. Earnings before interest, taxes, depreciation and amortization (EBITDA) also
showed significant improvement, excluding discontinued/sold operations. EBITDA
for the three months ending March 31, 2004 was $0.6 million, compared to
earnings of $0.5 million for the three months ending March 31, 2003. EBITDA in
the prior year included a deferred foreign exchange gain of $0.8 million
relating to the shutdown of one of our subsididiares. Excluding the foreign
exchange gain, EBITDA increased $0.9 million in the three months ended March
31, 2004, compared to the same period of fiscal 2003. As a result of Envoys refinancing during the first quarter ended December 31,
2003 and the repayment of its long-term debt during the second quarter ended
March 31, 2004, Envoy incurred a non-cash, imputed interest charge of $2.6
million as well as a cash penalty interest expense of $0.4 million for the six
months ended March 31, 2004. Envoy will not only save millions of dollars in
interest expense over the next several years as a result of the debt repayment,
but also will generate interest income, due to the strong cash position on its
balance sheet. Envoy recorded a loss on disposal of $0.5 million, due to the sale of its
wholly-owned subsidiary, Communiqué Incentive Inc. Excluding the one-time
loss from the sale of Communiqué and the non-cash interest expense, Envoy
incurred a net loss of $.02 per share. Envoy has successfully completed two equity financings for gross proceeds of
approximately $67.8 million. Envoy raised gross proceeds of $40.2 million
during the second quarter and additional gross proceeds of $27.6 million
during the third quarter. The $27.6 million additional gross proceeds will be
reflected in our third quarter balance sheet. These two equity financings
significantly strengthened Envoys balance sheet and enabled Envoy to
eliminate substantially all of its debt. At this time, Envoy does not foresee
a need to raise any further capital. One of our important goals this year was to establish a strong foundation on
which to build for future growth. We now have this foundation in place, which
includes a strengthened balance sheet with over $51 million in cash available
for investment and acquisitions. Envoy has a strategic acquisition plan in
place. This plan includes acquiring companies that will be synergistic with
our current businesses, both in the United Kingdom and North America.
Consequently, we have recently initiated discussions with potential target
companies.




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##### 



In addition to our strategic acquisition plan, we have a strong management
team at our operations level. This team is focused on growing the businesses
of its clients as well as the Envoy Group of Companies. This is evidenced by
Envoys 33% organic growth from operations in this quarter. We are confident that we can turn the accomplishments of the past 12
months into continued growth and profitability in the coming quarters
and beyond. Geoffrey B. Genovese
President, Chairman & CEO




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##### 



Envoy Communications Group Inc.
Consolidated Balance Sheets
(Expressed In Canadian dollars)
(Unaudited - Prepared by Management) March 31
    
    September 30As at:
    
    
    
    
    
    2004
    
    2003AssetsCurrentCash
    
    
    
    
    
    $
    3,548,422
    
    
    $
    2,010,737Cash equivalents
    
    
    
    
    
    
    27,432,510
    
    
    
    Accounts receivable
    
    
    
    
    
    
    13,386,522
    
    
    
    13,623,131Future income taxes
    
    
    
    
    
    
    498,172
    
    
    
    498,172Prepaid expenses
    
    
    
    
    
    
    537,266
    
    
    
    842,605Discontinued operations
    
    note 7
    
    
    
    
    
    
    1,869,32045,402,892
    
    
    
    18,843,965Capital assets
    
    
    
    
    
    
    5,328,694
    
    
    
    5,815,227Goodwill
    
    
    
    
    
    
    10,667,893
    
    
    
    10,059,178Other assets
    
    
    
    
    
    
    
    
    
    
    39,271Future income taxes
    
    
    
    
    
    
    3,707,357
    
    
    
    2,668,224Discontinued operations
    
    note 7
    
    
    
    
    
    
    540,898$
    65,106,836
    
    
    $
    37,966,763Liabilities and Shareholders EquityCurrentAccounts payable and accrued liabilities
    
    
    
    
    
    $
    8,878,810
    
    
    $
    10,364,168Income taxes payable
    
    
    
    
    
    
    174,357
    
    
    
    322,244Deferred revenue
    
    
    
    
    
    
    1,666,146
    
    
    
    1,195,515Amounts collected in excess of pass-through costs incurred
    
    
    
    
    
    
    284,044
    
    
    
    Bank credit facility and current portion of long-term debt
    
    note 2
    
    
    512,101
    
    
    
    6,857,953Discontinued operations
    
    note 7
    
    
    
    
    
    
    1,964,01111,515,458
    
    
    
    20,703,891Long-term debt
    
    note 2
    
    
    636,412
    
    
    
    4,566,962Long-term portion of restructuring costs
    
    
    
    
    
    
    
    
    
    
    337,40712,151,870
    
    
    
    25,608,260Shareholders equity:Share capital
    
    
    
    
    
    
    101,460,394
    
    
    
    55,988,817Convertible debentures
    
    
    
    
    
    
    
    
    
    
    1,673,408Deficit
    
    
    
    
    
    
    (49,141,916
    )
    
    
    (45,090,767
    )Stock based compensation
    
    note 8
    
    
    51,683
    
    
    
    23,268Cumulative translation adjustment
    
    
    
    
    
    
    584,805
    
    
    
    (236,223
    )52,954,966
    
    
    
    12,358,503$
    65,106,836
    
    
    $
    37,966,763
 See accompanying notes to consolidated financial statements.




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##### 



Envoy Communications Group Inc.
Consolidated Statements of Operations and Deficit
(Expressed In Canadian dollars)
(Unaudited - Prepared by Management) March 31
    
    March 31For the six months ended:
    
    
    
    
    
    2004
    
    2003Net revenue
    
    
    
    
    
    $
    19,625,938
    
    
    $
    20,178,101Operating expenses:Salaries and benefits
    
    
    
    
    
    
    13,357,627
    
    
    
    14,510,880General and administrative
    
    
    
    
    
    
    3,571,930
    
    
    
    2,696,915Occupancy costs
    
    
    
    
    
    
    1,409,668
    
    
    
    1,874,76118,339,225
    
    
    
    19,082,556Depreciation
    
    
    
    
    
    
    1,162,973
    
    
    
    1,142,225Investment Earnings
    
    
    
    
    
    
    (49,465
    )
    
    
    Accreted interest imputed on warrants and debentures
    
    note 3
    
    
    2,552,991
    
    
    
    374,728Interest expense and financing costs
    
    note 3
    
    
    991,100
    
    
    
    1,119,38522,996,824
    
    
    
    21,718,894Loss before gain on disposal of subsidiary, income taxes and
discontinued operations
    
    
    
    
    
    
    (3,370,886
    )
    
    
    (1,540,793
    )Gain on disposal of subsidiary
    
    
    
    
    
    
    
    
    
    
    (2,271,811
    )(Loss) income before income taxes and discontinued operations
    
    
    
    
    
    
    (3,370,886
    )
    
    
    731,018Income taxes
    
    
    
    
    
    
    215,121
    
    
    
    (Loss) income before discontinued operations
    
    
    
    
    
    
    (3,586,007
    )
    
    
    731,018(Loss) income from discontinued operations, net of income taxes
    
    note 7
    
    
    (465,142
    )
    
    
    59,181Net (loss) income
    
    
    
    
    
    
    (4,051,149
    )
    
    
    790,199Deficit, beginning of period
    
    
    
    
    
    
    (45,090,767
    )
    
    
    (47,629,529
    )Deficit, end of period
    
    
    
    
    
    $
    (49,141,916
    )
    
    $
    (46,839,330
    )Earnings (loss) per share from continuing operationsBasic
    
    
    
    
    
    $
    (0.07
    )
    
    $
    0.03Diluted
    
    
    
    
    
    $
    (0.07
    )
    
    $
    0.03Earnings (loss) per share from discontinued operationsBasic
    
    
    
    
    
    $
    (0.01
    )
    
    $
    0.00Diluted
    
    
    
    
    
    $
    (0.01
    )
    
    $
    0.00Weighted average number of common shares outstanding
    
    
    
    
    
    
    50,155,953
    
    
    
    21,258,693
 See accompanying notes to consolidated financial statements.




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##### 



Envoy Communications Group Inc.
Consolidated Statements of Cash Flows
(Expressed In Canadian dollars)
(Unaudited - Prepared by Management) March 31
    
    March 31For the six months ended:
    
    2004
    
    2003Cash flows from operating activities:Net (loss) income
    
    $
    (4,051,149
    )
    
    $
    790,199Items not involving cash:Future income taxes recovery
    
    
    
    
    
    
    (263,504
    )Depreciation
    
    
    1,162,973
    
    
    
    1,142,225Amortization of deferred financing charges
    
    
    21,110
    
    
    
    12,098Convertible debentures accretion
    
    
    126,273
    
    
    
    374,728Debentures and term notes accretion
    
    
    2,426,719
    
    
    
    Other non-cash interest
    
    
    
    
    
    
    33,238Stock based compensation
    
    
    28,415
    
    
    
    23,268Write-down of capital assets
    
    
    
    
    
    
    332,306Gain on disposal of subsidiaries
    
    
    
    
    
    
    (2,271,811
    )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
    
    
    (379,168
    )
    
    
    2,419,508Prepaid expenses
    
    
    305,339
    
    
    
    81,759Accounts payable and accrued liabilities
    
    
    (1,485,358
    )
    
    
    1,096,590Income taxes payable/recoverable
    
    
    (147,887
    )
    
    
    2,434,528Deferred revenue
    
    
    470,631
    
    
    
    (642,762
    )Amounts collected in excess of pass-through costs incurred
    
    
    284,044
    
    
    
    450,040Long-term restructuring costs
    
    
    
    
    
    
    (39,012
    )Discontinued operations
    
    
    
    
    
    
    (119,626
    )Other
    
    
    655,048
    
    
    
    14,105Net cash (used in) provided by operating activities
    
    
    (117,434
    )
    
    
    5,026,796Cash flows from financing activities:Long-term debt borrowings
    
    
    4,650,000
    
    
    
    746,924Long-term debt repayments
    
    
    (5,579,390
    )
    
    
    (3,638,555
    )Short term bank facility repayment
    
    
    (6,115,746
    )
    
    
    Issuance of common shares, net of share issue costs
    
    
    36,885,386
    
    
    
    Long-term portion of restructuring costs
    
    
    (337,407
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    29,502,843
    
    
    
    (2,891,631
    )Cash flows from investing activities:Acquisition of subsidiaries
    
    
    
    
    
    
    (104,137
    )Disposal of subsidiaries
    
    
    
    
    
    
    (1,181,353
    )Purchase of capital assets
    
    
    (372,732
    )
    
    
    (417,882
    )Proceeds on sale of capital assets
    
    
    
    
    
    
    176,106Discontinued operations
    
    
    
    
    
    
    (10,409
    )Net cash used in investing activities
    
    
    (372,732
    )
    
    
    (1,537,675
    )Change in cash balance due to foreign exchange
    
    
    (42,481
    )
    
    
    (456,089
    )Increase in cash and cash equivalents
    
    
    28,970,195
    
    
    
    141,401Cash and cash equivalents, beginning of period
    
    
    2,010,737
    
    
    
    469,909Cash and cash equivalents, end of period
    
    $
    30,980,932
    
    
    
    611,310Supplemental cash flow information:Interest paid
    
    $
    969,990
    
    
    $
    800,658Income taxes paid
    
    
    433,350
    
    
    
    20,200Supplemental disclosure of non-cash transactions:Shares issued for non-cash consideration
    
    
    4,200,284
    
    
    
    Stock based compensation
    
    
    28,415
    
    
    
    




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##### 



Envoy Communications Group Inc.
Consolidated Statements of Operations and Deficit
(Expressed In Canadian dollars)
(Unaudited - Prepared by Management) March 31
    
    March 31For the three months ended:
    
    
    
    
    
    2004
    
    2003Net revenue
    
    
    
    
    
    $
    10,584,234
    
    
    $
    8,667,650Operating expenses:Salaries and benefits
    
    
    
    
    
    
    7,537,871
    
    
    
    6,656,165General and administrative
    
    
    
    
    
    
    1,764,766
    
    
    
    712,619Occupancy costs
    
    
    
    
    
    
    717,197
    
    
    
    777,80310,019,834
    
    
    
    8,146,587Depreciation
    
    
    
    
    
    
    585,771
    
    
    
    582,414Amortization of intangible asset
    
    
    
    
    
    
    
    
    
    
    6,049Investment Earnings
    
    
    
    
    
    
    (49,465
    )
    
    
    Accreted interest imputed on warrants and debentures
    
    note 3
    
    
    2,302,111
    
    
    
    195,239Interest expense and financing costs
    
    note 3
    
    
    603,971
    
    
    
    606,41513,462,222
    
    
    
    9,536,704Loss before gain on disposal of subsidiary, income taxes and
discontinued operations
    
    
    
    
    
    
    (2,877,988
    )
    
    
    (869,054
    )Gain on disposal of subsidiary
    
    
    
    
    
    
    
    
    
    
    (2,272,123
    )(Loss) income before income taxes and discontinued operations
    
    
    
    
    
    
    (2,877,988
    )
    
    
    1,403,069Income taxes
    
    
    
    
    
    
    215,121
    
    
    
    122,562(Loss) income before discontinued operations
    
    
    
    
    
    
    (3,093,109
    )
    
    
    1,280,507(Loss) income from discontinued operations, net of income taxes
    
    note 7
    
    
    (465,576
    )
    
    
    111,340Net (loss) income
    
    
    
    
    
    
    (3,558,685
    )
    
    
    1,391,847Deficit, beginning of period
    
    
    
    
    
    
    (45,583,231
    )
    
    
    (48,231,177
    )Deficit, end of period
    
    
    
    
    
    $
    (49,141,916
    )
    
    $
    (46,839,330
    )Earnings (loss) per share from continuing operationsBasic
    
    
    
    
    
    $
    (0.05
    )
    
    $
    0.06Diluted
    
    
    
    
    
    $
    (0.05
    )
    
    $
    0.06Earnings (loss) per share from discontinued operationsBasic
    
    
    
    
    
    $
    (0.01
    )
    
    $
    0.01Diluted
    
    
    
    
    
    $
    (0.01
    )
    
    $
    0.01Weighted average number of common shares outstanding
    
    
    
    
    
    
    58,979,808
    
    
    
    21,258,693
 See accompanying notes to consolidated financial statements.




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##### 



Envoy Communications Group Inc.
Consolidated Statements of Cash Flows
(Expressed In Canadian dollars)
(Unaudited - Prepared by Management) March 31
    
    March 31For the three months ended:
    
    2004
    
    2003Cash flows from operating activities:Net (loss) income
    
    $
    (3,558,685
    )
    
    $
    1,391,847Items not involving cash:Future income taxes recovery
    
    
    
    
    
    
    56,695Depreciation
    
    
    585,771
    
    
    
    582,414Amortization of intangible asset
    
    
    
    
    
    
    6,049Convertible debentures accretion
    
    
    
    
    
    
    195,239Debentures and term notes accretion
    
    
    2,302,111
    
    
    
    Other non-cash interest
    
    
    
    
    
    
    16,619Stock based compensation
    
    
    28,415
    
    
    
    Write-down of capital assets
    
    
    
    
    
    
    332,306Gain on disposal of subsidiaries
    
    
    
    
    
    
    (2,271,811
    )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
    
    
    (1,134,757
    )
    
    
    2,241,735Prepaid expenses
    
    
    205,119
    
    
    
    120,580Accounts payable and accrued liabilities
    
    
    (538,360
    )
    
    
    (2,853,546
    )Income taxes payable/recoverable
    
    
    26,699
    
    
    
    2,070,840Deferred revenue
    
    
    (390,161
    )
    
    
    (692,347
    )Amounts collected in excess of pass-through costs incurred
    
    
    106,275
    
    
    
    120,275Long-term restructuring costs
    
    
    
    
    
    
    294,550Discontinued operations
    
    
    
    
    
    
    91,703Other
    
    
    239,670
    
    
    
    (89,848
    )Net cash (used in) provided by operating activities
    
    
    (1,662,327
    )
    
    
    772,219Cash flows from financing activities:Long-term debt borrowings
    
    
    
    
    
    
    300,876Long-term debt repayments
    
    
    (5,291,930
    )
    
    
    (3,205,784
    )Short term bank facility repayment
    
    
    (300,000
    )
    
    
    Issuance of common shares, net of share issue costs
    
    
    36,804,552
    
    
    
    Long-term portion of restructuring costs
    
    
    (194,475
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    31,018,147
    
    
    
    (2,904,908
    )Cash flows from investing activities:Acquisition of subsidiaries
    
    
    
    
    
    
    (104,137
    )Disposal of subsidiaries
    
    
    
    
    
    
    (1,181,353
    )Purchase of capital assets
    
    
    (123,440
    )
    
    
    (328,566
    )Discontinued operations
    
    
    
    
    
    
    (5,859
    )Net cash used in investing activities
    
    
    (123,440
    )
    
    
    (1,619,915
    )Change in cash balance due to foreign exchange
    
    
    201,381
    
    
    
    (535,244
    )Increase (decrease) in cash
    
    
    29,433,761
    
    
    
    (4,287,848
    )Cash and cash equivalents, beginning of period
    
    
    1,547,171
    
    
    
    4,899,158Cash and cash equivalents, end of period
    
    $
    30,980,932
    
    
    
    611,310Supplemental cash flow information:Interest paid
    
    $
    366,019
    
    
    $
    800,658Income taxes paid
    
    
    433,350
    
    
    
    20,200Supplemental disclosure of non-cash transactions:Shares issued for non-cash consideration
    
    $
    1,569,736
    
    
    
    Stock based compensation
    
    
    28,415
    
    
    
    




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##### 



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 March 31
    
    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
    
    
    442,212
    
    
    
    481,297Loan payable to landlord, 10.0% per annum, due
March 1, 2010, repayable in monthly instalments of
$3,956 principal and interest
    
    
    214,709
    
    
    
    227,556Loan payable to landlord, 10.0% per annum, due
April 1, 2005, repayable in monthly instalments of
$742 principal and interest
    
    
    28,511
    
    
    
    31,479Loan payable to landlord, 8.0% per annum, due
April 1, 2010, repayable in monthly instalments of
$561 principal and interest
    
    
    32,448
    
    
    
    34,488Capital lease, 12.3% over the lease period, repayable in
quarterly instalments of £7,919 principal and interest,
due November 2004
    
    
    56,434
    
    
    
    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
    
    
    374,199
    
    
    
    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)
    
    
    
    
    
    
    1,148,513
    
    
    
    11,424,915Less current portion
    
    
    512,101
    
    
    
    6,857,953$
    636,412
    
    
    $
    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 fiscal 2004, the remaining convertible
debentures, with a face value of $1,970,000, 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.




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##### 



3. Interest and financing costs Interest and financing costs for the six months ending March 31, comprised
the following: For the six months ended:
    
    March 31, 2004
    
    March 31, 2003Cash interest paid on credit facility, landlord
loans and capital leases
    
    $
    350,280
    
    
    $
    694,667Financing fees on credit facility
    
    
    100,451
    
    
    
    381,385Negotiation fee for early repayment on debt
    
    
    435,000
    
    
    
    Cash interest paid on convertible debentures
and amortization of debenture issue costs
    
    
    105,369
    
    
    
    43,333991,100
    
    
    
    1,119,385Accreted interest imputed on warrants and
debentures (a)
    
    
    2,552,991
    
    
    
    374,728$
    3,544,091
    
    
    $
    1,494,113
 (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 has been charged
to interest expense in the quarter. 4. Segmented information The Company provides integrated marketing communication services to its
clients. While the Company has subsidiaries in Canada, the United States,
the United Kingdom and Continental Europe, it operates as an international
business and has no distinct reportable business segments. The tables below set out the following information: (a) The Companys external net revenue Net revenue by region in which the customer is located For the six months ended:
    
    March 31, 2004
    
    March 31, 2003Canada
    
    $
    3,275,364
    
    
    $
    2,679,949United States
    
    
    6,539,618
    
    
    
    9,316,819United Kingdom and Continental Europe
    
    
    9,810,956
    
    
    
    8,181,333$
    19,625,938
    
    
    $
    20,178,101
 Net revenue by type of service For the six months ended:
    
    March 31, 2004
    
    March 31, 2003Marketing
    
    $
    1,689,034
    
    
    $
    4,689,008Consumer and retail branding
    
    
    17,936,904
    
    
    
    15,197,239Technology
    
    
    
    
    
    
    291,854$
    19,625,938
    
    
    $
    20,178,101




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##### 



(b) The Companys identifiable assets for each geographic area in which it has
operations: Capital Assets As at:
    
    March 31, 2004
    
    March 31, 2003Canada
    
    $
    3,274,633
    
    
    $
    4,595,266United Kingdom and Continental Europe
    
    
    2,054,061
    
    
    
    1,956,143$
    5,328,694
    
    
    $
    6,551,409
 Goodwill As at:
    
    March 31, 2004
    
    March 31, 2003Canada
    
    $
    1,867,077
    
    
    $
    2,736,296United Kingdom and Continental Europe
    
    
    8,800,816
    
    
    
    7,609,409$
    10,667,893
    
    
    $
    10,345,705
 5. Public offering 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 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. 6. Subsequent event 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. Envoy has also granted its underwriter an over-allotment
option to purchase an additional 2,145,000 Second Units at $1.05 per unit
for a period of 60 days from the closing date of the offering. The net
proceeds of the Second Unit offering will be used for general corporate
purposes and potential acquisition and investment opportunities that the
Company determine have potential to create value for Envoy shareholders
and that either complement, or provide an opportunity to diversify the
current business of Envoy.




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##### 



7. Discontinued operations 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. Income Statementfor the six months ended:
    
    March 31, 2004
    
    March 31, 2003Net revenue
    
    $
    398,114
    
    
    $
    770,667Operating expenses
    
    
    389,394
    
    
    
    688,324Depreciation
    
    
    2,237
    
    
    
    11,064Amortization of intangible asset
    
    
    6,049
    
    
    
    12,098Earnings from discontinued operations
(excluding loss on sale)
    
    
    434
    
    
    
    59,181Loss on sale of discontinued operations
    
    
    (465,576
    )
    
    
    (Loss) earnings from discontinued
operations
    
    $
    (465,142
    )
    
    $
    59,181
 Income Statementfor the three months ended:
    
    March 31, 2004
    
    March 31, 2003Net revenue
    
    $
    
    
    
    $
    379,675Operating expenses
    
    
    
    
    
    
    266,614Depreciation
    
    
    
    
    
    
    1,721Amortization of intangible asset
    
    
    
    
    
    
    Earnings from discontinued operations
(excluding loss on sale)
    
    
    
    
    
    
    111,340Loss on sale of discontinued operations
    
    
    (465,576
    )
    
    
    (Loss) earnings from discontinued
operations
    
    $
    (465,576
    )
    
    $
    111,340
 8. Change in accounting policy Effective 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.




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##### 



9. Other items At a special meeting of shareholders held on January 8, 2004, the
shareholders approved an amendment to the articles of the Company to
increase its authorized share capital from 50,000,000 common shares to
200,000,000 common shares. At March 31, 2004, there were 93,455,200 common shares of Envoy issued
compared to 31,047,027 issued at September 30, 2003.




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##### 



Envoy Communications Group Inc.
Management Discussion and Analysis of Financial Condition and Results of Operations Second 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 six months ended
March 31, 2004 compared to the six months ended March 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 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 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. We also granted the
underwriter an over-allotment option to purchase an additional 2,145,000 Second
Units at $1.05 per unit for a period of 60 days from the closing of the
offering. 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. This reality, coupled with 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. We 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.




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##### 



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. The enhanced revenue and
profitability that they are expected to provide will be realized in our third
and fourth quarter of fiscal 2004. Over the past year, 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. 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. In the six months ending March 31,
2004, Watt represented 91% of our business. In the third quarter of fiscal
2003, Watt signed new clients contracts with anticipated revenues valued at
more then $12 million over a three to four year period. We will continue to
focus on our core strength, consumer and retail branding. A significant
client, from whom we anticipated net revenues of approximately $ 9.0 million
over 3 to 4 years, has been acquired by a larger retailer in the same industry.
It is unclear as to what extent this will impact our future revenues from this
client. The acquisition will result in lower revenues from this client in our
third and fourth quarters of fiscal 2004. 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. Net revenue for the six months ended March 31, 2004 was $19.6 million, compared
to $20.2 million for the six months ended March 31, 2003, a decrease of $0.6
million or 3%. Net revenue for the six months ended March 31, 2003, included
$3.4 million from subsidiaries disposed of or shut down during fiscal 2003. Net
revenue from continuing business increased $2.9 million in the six months ended
March 31, 2004 compared to the same period of fiscal 2003. We expect net
revenue to increase in the second half of fiscal 2004 compared to the first
half of the year. Salaries expense for the six months ended March 31, 2004, was $13.4 million,
compared to $14.5 million in the six months ended March 31, 2003, a decrease of
$1.1 million. Our labour to net revenue ratio for the six months ended March
31, 2004 was 68%, compared to 72% in the six months ended March 31, 2003. We
expect our labour to net revenue ratio for the full fiscal 2004 to be
approximately 64%. Occupancy costs decreased to $1.4 million for the six months ended March 31,
2004, from $1.9 million for the six months ended March 31, 2003, a decline of
$0.5 million. Our occupancy cost to net revenue ratio was 7.2% for the six
months ended March 31, 2004, compared to 9.3% for the




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##### 



six months ended March 31, 2003. We expect our occupancy to net revenue ratio
for the full fiscal 2004 to be approximately 6.3%. 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. Consistent with prior years, we expect the second
half of fiscal 2004 to be stronger than the first half of fiscal 2004. RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED
MARCH 31, 2004 WITH THE SIX MONTHS ENDED MARCH 31, 2003 Net revenue Net revenue for the six months ended March 31, 2004 was $19.6 million, compared
to $20.2 million for the six months ended March 31, 2003, a decrease of $0.6
million or 3%. Net revenue by type of service and by customer location: Net Revenue for the six months ended March 31
(in millions) By type of service
    
    2004
    
    % of total
    
    2003
    
    % of totalConsumer and retail branding
    
    $
    17.9
    
    
    
    91
    %
    
    $
    15.2
    
    
    
    76
    %Marketing
    
    
    1.7
    
    
    
    9
    %
    
    
    4.7
    
    
    
    23
    %Technology
    
    
    
    
    
    
    
    
    
    
    0.3
    
    
    
    1
    %$
    19.6
    
    
    
    100
    %
    
    $
    20.2
    
    
    
    100
    %
 By customer location
    
    2004
    
    % of total
    
    2003
    
    % of totalCanada
    
    $
    3.2
    
    
    
    17
    %
    
    $
    2.7
    
    
    
    13
    %United States
    
    
    7.1
    
    
    
    36
    %
    
    
    9.3
    
    
    
    46
    %Europe *
    
    
    9.3
    
    
    
    47
    %
    
    
    8.2
    
    
    
    41
    %$
    19.6
    
    
    
    100
    %
    
    $
    20.2
    
    
    
    100
    %
 * Europe includes the United Kingdom and Continental Europe Net revenue by type of service: Net revenue from consumer and retail branding services increased $2.7 million
in the six months ended March 31, 2004 compared to the six months ended March
31, 2003. We expect that net revenue will continue to improve in the second
half of fiscal 2004. Net revenue from marketing has decreased by $3.0 million for the six months
ended March 31, 2004, compared to the six months ended March 31, 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 $0.1 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 decreased $0.5 million, for the six months ended March
31, 2004 compared to the six months ended March 31, 2003. Part of the decline
was due to the shutdown




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##### 



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 $2.2 million for the six months ended
March 31, 2004 compared to the six months ended March 31, 2003. The $3.1
million decrease in net revenue from the closure of our New York Agency in
February 2003 was offset in part by growth of $0.9 million in other parts of
our business. Net revenue from Europe in our consumer retail branding increased $1.1 million
for the six months ended March 31, 2004, compared to the six months ended March
31, 2003. We expect continued growth and improvement from Europe in the
remaining quarters of fiscal 2004. Operating ExpensesOperating expenses decreased by 4% to $18.3 million for the
six months ended March 31, 2004 from $19.1 million for the six months ended
March 31, 2003. Changes in operating expenses are as follow: Salaries and benefits expenses for the six months ended March 31, 2004 were
$13.4 million, compared to $14.5 million for the six months ended March 31,
2003, a decrease of $1.1 million or 8%. Salaries and benefits for the six
months ended March 31, 2003, included $2.1 million from subsidiaries disposed
of, shut down or sold during fiscal 2003. Salaries and benefits from
continuing business increased $1.0 million in the first six 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 six months ended March 31, 2004
were $3.6 million, compared to $2.7 million for the six months ended March 31,
2003. This represents an increase of $0.9 million or 32%. Included in general
and administrative expenses is a foreign exchange loss of ($0.2) million in the
six months ending March 31, 2004, compared to a foreign exchange gain of $0.5
million in the six months ending March 31, 2003. The gain of $0.5 million was
made of up an exchange loss from operations of ($0.3) 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 increased by $0.1 million or 1%. Occupancy
costs for the six months ended March 31, 2004 were $1.4 million, compared to
$1.9 million for the six months ended March 31, 2003, a decrease of 25%. 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 six months ending March 31,
2004 was $1.2 million, which is consistent with the six months ending March 31,
2003. Interest expense and financing costsInterest expense and financing costs and
accreted interest imputed on warrants and debentures, for the six months ended
March 31, 2004 was $3.5 million, compared to $1.5 million for the six months
ended March 31, 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.




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##### 



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 six months ended March 31, 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. 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 offering, there were 93,455,200 common shares of Envoy outstanding at
March 31, 2004, compared to 31,047,027 common shares of Envoy outstanding at
September 30, 2003. Subsequent to the second quarter of fiscal 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. As a result of the above, we expect that our interest and financing cost for
the third and fourth quarters of the 2004 fiscal year will be $0.1 million.
There will be no further expense related to the accretion of interest imputed
on debentures. Investment earningsInvestment earnings for the six months ended March 31, 2004
was $0.05 million, compared to nil for the six months ended March 31, 2003.
Investment earnings are the income earned on the amounts invested in cash and
cash equivalents. We expect investment earnings of $ 0.5 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 six months ended March 31, 2004
reflects the loss realized as a result of the sale. The gain of $0.1 million
for the six months ended March 31, 2003, was the income earned by Communique
during that period. Net earnings (loss)We had a loss of ($4.1) million for the six months ending
March 31, 2004, compared to earnings of $0.8 million for the six months ending
March 31, 2003.




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##### 



Quarterly Information For the three months ended
    
    March 31, 2004
    
    December 31, 2003Net revenue
    
    $10.6 million
    
    $9.0 millionNet earnings (loss)
    
    $(3.6) million
    
    $(0.5) millionNet earnings (loss) per share:Continuing operationsBasic
    
    $
    (0.05
    )
    
    $
    (0.01
    )Diluted
    
    $
    (0.05
    )
    
    $
    (0.01
    )Discontinued operationsBasic
    
    $
    (0.01
    )
    
    $
    0.0Diluted
    
    $
    (0.01
    )
    
    $
    0.0
 For the three months ended
    
    March 31, 2003
    
    December 31, 2002Net revenue
    
    $8.7 million
    
    $11.5 millionNet earnings (loss)
    
    $1.4 million
    
    $(0.6) millionNet earnings (loss) per share:Continuing operationsBasic
    
    $
    0.06
    
    
    $
    (0.03
    )Diluted
    
    $
    0.06
    
    
    $
    (0.03
    )Discontinued operationsBasic
    
    $
    0.01
    
    
    $
    0.00Diluted
    
    $
    0.01
    
    
    $
    0.00
 CASH FLOWS Net cash provided by operating activities before any increase or decrease in
non-cash working capital was ($0.2) million for the six months ended March 31,
2004 compared to ($0.7) million for the six months ended March 31, 2003. Net cash provided by financing activities was $29.5 million for the six months
ended March 31, 2004 compared to ($2.9) million used in financing activities
for the six months ended March 31, 2003. The increase is due to the issuance of
share capital of $36.9 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 ($0.4) million for the six months
ended March 31, 2004, compared to net cash used in investing activities of
($1.5) million for the six months ended March 31, 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
March 31, 2004, compared to the three months ended March 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. COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED
MARCH 31, 2004 WITH THE THREE MONTHS ENDED MARCH 31, 2003 Net revenue Net revenue for the three months ended March 31, 2004 was $10.6 million,
compared to $8.7 million for the three months ended March 31, 2003, an increase
of $1.9 million or 22%. Net revenue by type of service and by customer location: Net Revenue for the three months ended March 31
(in millions) By type of service
    
    2004
    
    % of total
    
    2003
    
    % of totalConsumer and retail branding
    
    $
    9.7
    
    
    
    92
    %
    
    $
    7.2
    
    
    
    82
    %Marketing
    
    
    0.9
    
    
    
    8
    %
    
    
    1.5
    
    
    
    18
    %$
    10.6
    
    
    
    100
    %
    
    $
    8.7
    
    
    
    100
    %
 By customer location
    
    2004
    
    % of total
    
    2003
    
    % of totalCanada
    
    $
    1.5
    
    
    
    14
    %
    
    $
    1.4
    
    
    
    15
    %United States
    
    
    3.8
    
    
    
    36
    %
    
    
    3.6
    
    
    
    42
    %Europe *
    
    
    5.3
    
    
    
    50
    %
    
    
    3.7
    
    
    
    43
    %$
    10.6
    
    
    
    100
    %
    
    $
    8.7
    
    
    
    100
    %
 * Europe includes the United Kingdom and Continental Europe Net revenue by type of service: Net revenue from consumer and retail branding services increased $2.5 million
in the three months ended March 31, 2004, compared to the three months ended
March 31, 2003. We expect that net revenue will continue to improve in the
second half of fiscal 2004. Net revenue from marketing has decreased by $0.6 million for the three months
ended March 31, 2004, compared to the three months ended March 31, 2003. The
$0.7 million decrease in net revenue from the closure of our New York Agency in
February 2003 was offset, in part, by growth of $0.1 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 decreased $0.1 million for the three months ended March
31, 2004, compared to the three months ended March 31, 2003. The decline was
due to the shutdown of Sage and the sale of the assets of Devlin in 2003.




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Net revenue from the U.S. has decreased $0.2 million for the three months ended
March 31, 2004, compared to the three months ended March 31, 2003. The decline
was due to the closure of the New York Agency in 2003. Net revenue from Europe in our consumer retail branding increased $1.6 million
during the three months ended March 31, 2004. We expect continued growth and
improvement from Europe in the remaining quarters of fiscal 2004. Operating ExpensesOperating expenses increased by 23% to $10.0 million for
the three months ended March 31 2004 from $8.1 million for the three months
ended March 31, 2003.
Changes in operating expenses are as follow: Salaries and
benefits expenses for the three months ended March 31, 2004 were $7.5 million,
compared to $6.7 million for the three months ended March 31, 2003. This
represents an increase of $0.9 million or 13%. Salaries and benefits for the
three months ended March 31, 2003, included $2.1 million from subsidiaries
disposed of, shut down or sold during fiscal 2003. Salaries and benefits
continue to be closely monitored to match expected revenues with labour costs. General and administrative expenses for the three months ended March 31, 2004
were $1.8 million, compared to $0.7 million for the three months ended March
31, 2003. This represents an increase of $1.1 million. Included in general and
administrative expenses is a foreign exchange loss of ($0.2) million in the
three months ending March 31, 2004, compared to a foreign exchange gain of $0.5
million in the three months ending March 31, 2003. The gain of $0.5 million in
the three months ended March 31, 2003, was made of up an exchange loss from
operations of ($0.3) million and the recognition of a deferred foreign exchange
gain of $0.8 million from the closure of our New York Agency. Excluding the
foreign exchange gain relating to the sale of our New York Agency, general and
administrative expenses increased by $0.3 million or 14%. Occupancy costs for the three months ended March 31, 2004 were $0.7 million,
compared to $0.8 million for the three months ended March 31, 2003, a decrease
of 8%. This decrease is a result of the termination of office space obligations
in New York and Toronto during fiscal 2003. Depreciation expenseDepreciation expense for the three months ending March 31,
2004 was $0.6 million, which is consistent with the three months ended March
31, 2003. Interest expense and financing costsInterest expense and financing costs and
accreted interest imputed on warrants and debentures was $2.9 million, for the
three months ended March 31, 2004, compared to $0.8 million for the three
months ended March 31, 2003. 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
the $2.9 million is a charge of $0.4 million paid to the holders of the secured
debentures for the early repayment of their loans. Investment EarningsInvestment earnings for the three months ended March 31,
2004 was $0.050 million, compared to nil for the three months ended March 31,
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. The loss of $0.5 million for the three months ended March 31, 2004
reflects the loss realized as a result of the sale. The gain of $0.1 million
for the three months ended March 31, 2003, was the income earned by Communique
during that period.




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##### 



Net Earnings (loss)We had a loss of ($3.6) million for the three months
ending March 31, 2004, compared to earnings of $1.4 million for the three
months ending March 31, 2003. CASH FLOWS Net cash provided by operating activities before any increase or decrease in
non-cash working capital was ($0.2) million for the three months ended March
31, 2004, compared to ($0.6) million for the three months ended March 31, 2003. Net cash provided by financing activities was $31.1 million for the three
months ended March 31, 2004, compared to ($2.9) million used in financing
activities for the three months ended March 31, 2003. The increase is due to
the issuance of share capital of $36.8 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 ($0.1) million for the three months
ended March 31, 2004, compared to ($1.6) million for the three months ended
March 31, 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.




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##### 



At March 31, 2004, there were 93,455,200 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.




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##### 



Shareholder Information HEAD OFFICE
172 John Street
Toronto, Canada M5T 1X5 Telephone: (416) 593-7555
Facsimile: (416) 593-4434
www.envoy.to 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 LEGAL COUNSEL
Blake, Cassels & Graydon LLP
Box 25, Commerce Court West
Toronto, Canada M5L 1A9 AUDITORS
BDO Dunwoody LLP
60
Columbia Way, Suite 400
Markham, Canada L3R 0C9 BANKERS
TD Canada Trust
55 King Street West
TD Tower, 2nd Floor
Toronto, Canada M5K 1A2 Fleet Bank
1185 Avenue of the Americas
New York, U.S.A. 10036 INVESTOR RELATIONS
E-mail: info@envoy.to Additional information is
also available on our
Web site at www.envoy.to STOCK TRADING INFORMATION
Toronto Stock Exchange: ECG
NASDAQ Exchange: ECGI