##### 



(ENVOY LOGO) Envoy Communications Group Inc. 2nd Quarter Report 2005




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##### 



Dear Shareholders, Revenue for the quarter increased 6% to $11.2 million compared to $10.6 million for the second
quarter of 2004. Revenue this quarter compared to last quarter increased by 12%. Net earnings for
this quarter was $0.8 million, or $0.04 per common share, compared to a net loss of ($3.6) million,
or ($0.30) per common share for the same period last year. Envoy completed the acquisition of Parker Williams Design Limited in the United Kingdom at the
beginning of March and was, therefore, only included in our results for one month. For the six months ended March 31, 2005, revenues increased 8% to $21.2 million, versus revenues of
$19.6 million for the same period last year. Net earnings were $1.5 million or $0.06 per common
share, compared to a net loss of ($4.1) million or ($0.40) per common share for the same period
last year. Our investment income for the six months ended March 31, 2005 was $1.5 million. Envoys subsidiaries, Watt International and Watt Gilchrist continue to acquire new accounts. In
our second quarter, they were awarded $3.0 million in new business contracts in the following
sectors: food and beverage, shopping center, packaged goods, fashion, jewelry, department store,
publishing and foodservice. These new business wins span six countries including China, England, the United Arab Emirates,
Chile, Canada and the United States. The results of these new accounts will begin to positively
impact our third and fourth quarters. We are on track with our guidance of $0.20 per share for the current fiscal year. Our earnings
have traditionally been heavily weighted to the last half of the year; in particular our earnings
will be strongest in the last quarter of this year. In the first six months of this fiscal year, Envoy repurchased 1,457,336 shares under its normal
course issuer bid program. This resulted in a total of 21,959,264 shares outstanding as of March
31, 2005. Geoffrey B. Genovese
President, Chairman & CEO




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##### 



Envoy Communications Group Inc.Consolidated Balance SheetsUnaudited  Prepared by Management(Expressed In Canadian dollars)
 March 31
    
    
    September 30As at:
    
    
    
    
    
    2005
    
    
    2004AssetsCurrentCash
    
    
    
    
    
    $
    2,733,991
    
    
    $
    4,643,263Investments
    
    note 2
    
    
    13,480,749
    
    
    
    36,260,796Accounts receivable
    
    
    
    
    
    
    18,873,599
    
    
    
    15,793,735Future income taxes
    
    
    
    
    
    
    1,500,000
    
    
    
    1,500,000Prepaid expenses
    
    
    
    
    
    
    945,119
    
    
    
    1,060,97037,533,458
    
    
    
    59,258,764Investments
    
    note 2
    
    
    24,982,948
    
    
    
    10,459,255Capital assets
    
    note 6
    
    
    5,596,608
    
    
    
    5,229,232Goodwill
    
    note 6
    
    
    14,500,745
    
    
    
    10,216,101Other assets
    
    
    
    
    
    
    9,111
    
    
    
    34,377Future income taxes
    
    
    
    
    
    
    4,027,541
    
    
    
    3,681,798$
    86,650,411
    
    
    $
    88,879,527Liabilities and Shareholders EquityCurrentAccounts payable and accrued liabilities
    
    
    
    
    
    $
    9,958,052
    
    
    $
    8,682,417Income taxes payable
    
    
    
    
    
    
    293,836
    
    
    
    485,217Deferred revenue
    
    
    
    
    
    
    1,404,807
    
    
    
    2,051,197Amounts collected in excess of pass-through costs incurred
    
    
    
    
    
    
    471,445
    
    
    
    110,673Current portion of long-term debt
    
    note 4
    
    
    149,605
    
    
    
    297,29412,277,745
    
    
    
    11,626,798Long-term debt
    
    
    
    
    
    
    297,831
    
    
    
    361,23012,575,576
    
    
    
    11,988,028Minority interest
    
    
    
    
    
    
    175,339
    
    
    
    Shareholders equityShare capital
    
    note 7
    
    
    110,144,277
    
    
    
    117,447,261Contributed surplus
    
    note 8
    
    
    3,520,030
    
    
    
    726,554Warrants
    
    
    
    
    
    
    6,542,456
    
    
    
    6,542,456Deficit
    
    
    
    
    
    
    (46,885,528
    )
    
    
    (48,344,277
    )Stock based compensation
    
    note 10
    
    
    752,282
    
    
    
    445,641Cumulative translation adjustment
    
    
    
    
    
    
    (174,021
    )
    
    
    73,86473,899,496
    
    
    
    76,891,499$
    86,650,411
    
    
    $
    88,879,527
 See accompanying notes to consolidated financial statements.




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##### 



Envoy Communications Group Inc.Consolidated Statements of OperationsUnaudited  Prepared by Management(Expressed In Canadian dollars)
 March 31
    
    
    March 31For the six months ended:
    
    
    
    
    
    2005
    
    
    2004Net revenue
    
    note 6
    
    $
    21,216,530
    
    
    $
    19,625,938Operating expenses:Salaries and benefits
    
    note 10
    
    
    14,113,614
    
    
    
    13,357,627General and administrative
    
    
    
    
    
    
    4,006,262
    
    
    
    3,571,930Occupancy costs
    
    
    
    
    
    
    1,950,252
    
    
    
    1,409,66820,070,128
    
    
    
    18,339,225Depreciation
    
    
    
    
    
    
    1,204,042
    
    
    
    1,162,973Investment earnings
    
    note 2
    
    
    (1,502,555
    )
    
    
    (49,465
    )Accreted interest imputed on warrants and debentures
    
    note 5
    
    
    
    
    
    
    2,552,991Interest expense (income) and financing costs
    
    note 5
    
    
    (21,846
    )
    
    
    991,10019,749,769
    
    
    
    22,996,824Earnings (loss) before income taxes, minority interest
and discontinued operations
    
    
    
    
    
    
    1,466,761
    
    
    
    (3,370,886
    )Income tax expense
    
    
    
    
    
    
    
    
    
    
    215,121Earnings (loss) before minority interest and
discontinued operations
    
    
    
    
    
    
    1,466,761
    
    
    
    (3,586,007
    )Minority interest
    
    note 3
    
    
    8,012
    
    
    
    Earnings (loss) from continuing operations
    
    
    
    
    
    
    1,458,749
    
    
    
    (3,586,007
    )Income from discontinued operations, net of income taxes
    
    note 9
    
    
    
    
    
    
    (465,142
    )Net earnings (loss)
    
    
    
    
    
    $
    1,458,749
    
    
    $
    (4,051,149
    )Earnings (loss) per shareBasic
    
    
    
    
    
    $
    0.06
    
    
    $
    (0.40
    )Diluted
    
    
    
    
    
    
    0.06
    
    
    
    (0.40
    )Weighted average number of common shares outstanding
    
    
    
    
    
    
    22,705,236
    
    
    
    10,031,191
 Envoy Communications Group Inc.Consolidated Statements of DeficitUnaudited  Prepared by Management(Expressed In Canadian dollars)
 March 31
    
    
    March 31For the six months ended:
    
    2005
    
    
    2004Deficit, beginning of period
    
    $
    (48,344,277
    )
    
    $
    (45,237,473
    )Net earnings (loss)
    
    
    1,458,749
    
    
    
    (4,051,149
    )Deficit, end of period
    
    $
    (46,885,528
    )
    
    $
    (49,288,622
    )
 See accompanying notes to consolidated financial statements.




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##### 



Envoy Communications Group Inc.Consolidated Statements of Cash FlowsUnaudited  Prepared by Management(Expressed In Canadian dollars)
 March 31
    
    
    March 31For the six months ended:
    
    2005
    
    
    2004Cash flows from operating activities:Earnings (loss) from continuing operations
    
    $
    1,458,749
    
    
    $
    (3,586,007
    )Items not involving cash:Future income taxes
    
    
    (345,743
    )
    
    
    Depreciation
    
    
    1,204,042
    
    
    
    1,162,973Amortization of deferred financing charges
    
    
    
    
    
    
    21,110Debentures and term notes accretion
    
    
    
    
    
    
    2,552,992Minority interest
    
    
    8,012
    
    
    
    Stock based compensation
    
    
    306,641
    
    
    
    28,415Net change in non-cash working capital balances:Accounts receivable
    
    
    (3,079,864
    )
    
    
    (379,168
    )Prepaid expenses
    
    
    115,851
    
    
    
    305,339Accounts payable and accrued liabilities
    
    
    1,275,634
    
    
    
    (1,485,358
    )Income taxes payable/recoverable
    
    
    (191,381
    )
    
    
    (147,887
    )Deferred revenue
    
    
    (646,390
    )
    
    
    470,631Amounts collected in excess of pass-through costs incurred
    
    
    360,772
    
    
    
    284,044Other
    
    
    25,266
    
    
    
    674,416Discontinued operations
    
    
    
    
    
    
    (18,935
    )Net cash provided by (used in) operating activities
    
    
    491,589
    
    
    
    (117,435
    )Cash flows from financing activities:Long-term debt borrowings
    
    
    
    
    
    
    4,650,000Long-term debt repayments
    
    
    (211,088
    )
    
    
    (5,579,390
    )Short term bank facility repayment
    
    
    
    
    
    
    (6,115,746
    )Redemption of common shares
    
    
    (4,517,102
    )
    
    
    Long term portion of restructuring costs
    
    
    
    
    
    
    (337,407
    )Issuance of common shares, net of share issue costs
    
    
    
    
    
    
    36,885,386Net cash (used in) provided by financing activities
    
    
    (4,728,190
    )
    
    
    29,502,843Cash flows from investing activities:Acquisition of subsidiaries, net of cash acquired of $730,496 (2004 - $nil)
    
    
    (4,050,024
    )
    
    
    Investments
    
    
    8,256,354
    
    
    
    (27,432,510
    )Purchase of capital assets
    
    
    (1,568,748
    )
    
    
    (372,732
    )Net cash provided by (used in) investing activities
    
    
    2,637,582
    
    
    
    (27,805,242
    )Change in cash balance due to foreign exchange
    
    
    (310,253
    )
    
    
    (42,481
    )Net (decrease) increase in cash
    
    
    (1,909,272
    )
    
    
    1,537,685Cash,beginning of period
    
    
    4,643,263
    
    
    
    2,010,737Cash,end of period
    
    $
    2,733,991
    
    
    $
    3,548,422Supplemental cash flow information:Interest paid
    
    $
    36,959
    
    
    $
    969,990Income taxes paid
    
    
    365,968
    
    
    
    433,350
 See accompanying notes to consolidated financial statements.




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##### 



Envoy Communications Group Inc.Consolidated Statements of Operations and DeficitUnaudited  Prepared by Management(Expressed In Canadian dollars)
 March 31
    
    
    March 31For the three months ended:
    
    
    
    
    
    2005
    
    
    2004Net revenue
    
    
    
    
    
    $
    11,227,895
    
    
    $
    10,584,234Operating expenses:Salaries and benefits
    
    note 10
    
    
    7,342,214
    
    
    
    7,537,871General and administrative
    
    
    
    
    
    
    2,186,345
    
    
    
    1,764,766Occupancy costs
    
    
    
    
    
    
    1,008,985
    
    
    
    717,19710,537,544
    
    
    
    10,019,834Depreciation
    
    
    
    
    
    
    620,605
    
    
    
    585,771Investment Earnings
    
    
    
    
    
    
    (487,038
    )
    
    
    (49,465
    )Accreted interest imputed on warrants and debentures
    
    
    
    
    
    
    
    
    
    
    2,302,111Interest expense (income) and financing costs
    
    
    
    
    
    
    (29,945
    )
    
    
    603,97110,641,166
    
    
    
    13,462,222Earnings (loss) before income taxes, minority
interest and discontinued operations
    
    
    
    
    
    
    586,729
    
    
    
    (2,877,988
    )Income taxes
    
    
    
    
    
    
    (233,402
    )
    
    
    215,121Earnings (loss) before minority interest and discontinued operations
    
    
    
    
    
    
    820,131
    
    
    
    (3,093,109
    )Minority interest
    
    note 3
    
    
    8,012
    
    
    
    Earnings (loss) before discontinued operations
    
    
    
    
    
    
    812,119
    
    
    
    (3,093,109
    )Loss from discontinued operations, net of income taxes
    
    note 9
    
    
    
    
    
    
    (465,576
    )Net earnings (loss)
    
    
    
    
    
    $
    812,119
    
    
    $
    (3,558,685
    )Earnings per shareBasic
    
    
    
    
    
    $
    0.04
    
    
    $
    (0.30
    )Diluted
    
    
    
    
    
    
    0.04
    
    
    
    (0.30
    )Weighted average number of common shares outstanding
    
    
    
    
    
    
    22,329,631
    
    
    
    11,795,962
 Envoy Communications Group Inc.Consolidated Statements of DeficitUnaudited  Prepared by Management(Expressed In Canadian dollars)
 March 31
    
    
    March 31For the three months ended:
    
    2005
    
    
    2004Deficit, beginning of period
    
    $
    (47,697,647
    )
    
    $
    (46,309,785
    )Net earnings (loss)
    
    
    812,119
    
    
    
    (3,558,685
    )Deficit, end of period
    
    $
    (46,885,528
    )
    
    $
    (49,868,470
    )
 See accompanying notes to consolidated financial statements.




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##### 



Envoy Communications Group Inc.Consolidated Statements of Cash FlowsUnaudited  Prepared by Management(Expressed In Canadian dollars)
 March 31
    
    
    March 31For the three months ended:
    
    2005
    
    
    2004Cash flows from operating activities:Earnings (loss) from continuing operations
    
    $
    812,119
    
    
    $
    (3,093,109
    )Items not involving cash:Future income taxes
    
    
    (693,686
    )
    
    
    Depreciation
    
    
    620,605
    
    
    
    585,771Debentures and term notes accretion
    
    
    
    
    
    
    2,302,111Minority interest
    
    
    8,012
    
    
    
    Stock based compensation
    
    
    183,233
    
    
    
    28,415Net change in non-cash working capital balances:Accounts receivable
    
    
    (2,691,733
    )
    
    
    (1,134,757
    )Investments
    
    
    (482,814
    )
    
    
    (650,008
    )Prepaid expenses
    
    
    (10,353
    )
    
    
    205,119Accounts payable and accrued liabilities
    
    
    1,538,199
    
    
    
    (538,360
    )Income taxes payable/recoverable
    
    
    25,708
    
    
    
    26,699Deferred revenue
    
    
    (259,429
    )
    
    
    (390,161
    )Amounts collected in excess of pass-through costs incurred
    
    
    303,457
    
    
    
    106,275Other
    
    
    (8,110
    )
    
    
    258,605Discontinued operations
    
    
    
    
    
    
    (18,935
    )Net cash used in operating activities
    
    
    (654,792
    )
    
    
    (2,312,335
    )Cash flows from financing activities:Long-term debt repayments
    
    
    (62,056
    )
    
    
    (5,291,930
    )Short term bank facility repayment
    
    
    
    
    
    
    (300,000
    )Redemption of common shares
    
    
    (2,138,700
    )
    
    
    Long term portion of restructuring costs
    
    
    
    
    
    
    (194,475
    )Issuance of common shares, net of share issue costs
    
    
    
    
    
    
    36,804,552Net cash (used in) provided by financing activities
    
    
    (2,200,756
    )
    
    
    31,018,147Cash flows from investing activities:Acquisition of subsidiaries, net of cash acquired of $730,496 (2004 - $nil)
    
    
    (4,050,024
    )
    
    
    Investments
    
    
    6,000,000
    
    
    
    (26,782,502
    )Purchase of capital assets
    
    
    (534,947
    )
    
    
    (123,440
    )Net cash provided by (used in) investing activities
    
    
    1,415,029
    
    
    
    (26,905,942
    )Change in cash balance due to foreign exchange
    
    
    (333,522
    )
    
    
    201,381Net (decrease) increase in cash
    
    
    (1,774,041
    )
    
    
    2,001,251Cash,beginning of period
    
    
    4,508,032
    
    
    
    1,547,171Cash,end of period
    
    $
    2,733,991
    
    
    $
    3,548,422Supplemental cash flow information:Interest paid
    
    $
    28,860
    
    
    $
    366,019Income taxes paid
    
    
    191,878
    
    
    
    433,350
 See accompanying notes to consolidated financial statements.




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##### 



1.
    Basis of Presentation  (a)
    These interim consolidated financial statements have not been audited or reviewed
by our external auditors. They have been prepared by management in accordance with
generally accepted accounting principles in Canada for interim financial statements.
These interim financial statements do not include all the note disclosure required for
annual financial statements and therefore should be read in conjunction with Envoys
annual consolidated financial statements for the year ended September 30, 2004. The
significant accounting policies follow that of the most recently reported annual
financial statements.(b)
    Certain comparative figures have been reclassified to conform to the financial
statement presentation adopted for 2005.  2.
    Investments March 31
    
    
    September 302005
    
    
    2004Short termCost
    
    $
    13,441,106
    
    
    $
    36,144,879Accrued interest and amortized discount
    
    
    39,643
    
    
    
    115,91713,480,749
    
    
    
    36,260,796Long termCost
    
    
    24,721,703
    
    
    
    10,285,563Accrued interest
    
    
    261,245
    
    
    
    173,69224,982,948
    
    
    
    10,459,255$
    38,463,697
    
    
    $
    46,720,051
 The net proceeds from the public offering in fiscal 2004 have been placed in a portfolio
managed by an external adviser, and will be drawn to fund acquisitions and business
operations as required. The portfolio is invested in marketable securities, including
discount notes, fixed income securities and common shares. All financial instruments held in
the portfolio are traded in active and liquid markets, and the fair market value of the
portfolio was determined by using the closing market prices at March 31, 2005 of the
individual financial instruments. The fair value of the short term and long term investments at March 31, 2005 was $13,441,106
and $24,700,007, (at September 30, 2004, $36,183,729 and $10,421,139), respectively. The
investment portfolio earned $1,502,555 in the first two quarters of fiscal 2005, (Fiscal 2004
  $49,465), after deducting portfolio management and custody fees.




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##### 



3.
    Acquisition of subsidiary On February 28, 2005, the Company through its subsidiary ECG Holdings (UK) Limited (ECGH),
acquired 65% of the outstanding shares of Parker Williams Design Limited (Parker Williams),
a London, UK based packaging design and brand specialist company. The purchase price of
£1,818,000 was paid in cash on completion. The remaining 35% of the Parker Williams shares
(Management Shares) will continue to be held by senior management of Parker Williams
(Management Shareholders), subject to certain options described below. ECGH will have the option to acquire from the Management Shareholders and the Management
Shareholders will have the option to require ECGH to purchase from them, at various stages
over a period of 4 years following completion, the Management Shares for a purchase price
based on the profitability of Parker Williams for certain defined periods following
completion. The acquisition has been accounted for using the purchase method of accounting. The fair
value of the net assets acquired was GBP 135,858 consisting of working capital and capital
assets. The resulting excess purchase price, including acquisition expenses, over the fair
value of the net assets acquired of GBP 1,874,030 was allocated to goodwill. This allocation
to goodwill will be reviewed in the coming quarter. Parker Williams acquisition CanadianAssets acquired and liabilities assumed:
    
    DollarsTotal assets
    
    $
    1,829,131Total liabilities
    
    
    (1,331,993
    )Minority interest
    
    
    (173,998
    )Net Assets acquired
    
    
    323,140Goodwill
    
    
    4,457,380Purchase price including costs
    
    $
    4,780,520




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##### 



4.
    Long term debt March 31
    
    
    September 302005
    
    
    2004Loan payable to landlord, 3.5% per annum, due
July 1, 2009, repayable in monthly instalments
of $7,665 principal and interest
    
    $
    364,295
    
    
    $
    403,676Loan payable to landlord, 10.0% per annum, due
April 1, 2005, repayable in monthly instalments
of
$742 principal and interest. The loan was repaid
early
    
    
    
    
    
    
    25,389Capital lease, 12.3% over the lease period,
repayable in quarterly instalments of £7,919
principal and interest, due November 2004
    
    
    
    
    
    
    18,101Capital leases, 8.6% to 14% over the lease
period, repayable in monthly instalments of
$36,273 principal and interest, due between
January 2005 and January 2006
    
    
    83,141
    
    
    
    211,358447,436
    
    
    
    658,524Less current portion
    
    
    149,605
    
    
    
    297,294$
    297,831
    
    
    $
    361,230
  5.
    Interest and financing costs Interest and financing costs for the six months ending March 31, comprised the following: March 31
    
    
    March 31For the six months ended:
    
    2005
    
    
    2004Cash interest paid (earned) on credit facility,
landlord loans and capital leases and bank
balances
    
    $
    (21,846
    )
    
    $
    350,280Financing fees on credit facility
    
    
    
    
    
    
    100,451Negotiation fee for early repayment of debt
    
    
    
    
    
    
    435,000Cash interest paid on convertible debentures and
amortization of debenture issue costs
    
    
    
    
    
    
    105,369(21,846
    )
    
    
    991,100Accreted interest imputed on warrants and
debentures
    
    
    
    
    
    
    2,552,991$
    (21,846
    )
    
    $
    3,554,091




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##### 



6.
    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 March 31
    
    
    March 31For the six months ended:
    
    2005
    
    
    2004Canada
    
    $
    5,096,805
    
    
    $
    3,275,364United States
    
    
    5,178,715
    
    
    
    6,539,618United Kingdom and Continental
Europe
    
    
    10,941,010
    
    
    
    9,810,956$
    21,216,530
    
    
    $
    19,625,938
 Net revenue by type of service March 31
    
    
    March 31For the six months ended:
    
    2005
    
    
    2004Marketing
    
    $
    1,957,766
    
    
    $
    1,689,034Consumer and retail
branding
    
    
    19,258,764
    
    
    
    17,936,904$
    21,216,530
    
    
    $
    19,625,938
  (b)
    The Companys identifiable assets for each geographic area in which it has operations: Capital Assets March 31
    
    
    September 30As at:
    
    2005
    
    
    2004Canada
    
    $
    3,397,153
    
    
    $
    3,061,671United Kingdom and Continental
Europe
    
    
    2,199,455
    
    
    
    2,167,561$
    5,596,608
    
    
    $
    5,229,232
 Goodwill March 31
    
    
    September 30As at:
    
    2005
    
    
    2004Canada
    
    $
    2,725,296
    
    
    $
    2,725,296United Kingdom and Continental
Europe
    
    
    11,775,449
    
    
    
    7,490,805$
    14,500,745
    
    
    $
    10,216,101




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##### 



7.
    Share capital Authorized (after giving effect to the share consolidation)
     40,000,000 common shares without par value Issued: March 31, 2005
    
    
    September 30, 2004Number
    
    
    
    
    
    
    Numberof shares
    
    
    Amount
    
    
    of shares
    
    
    AmountBalance, beginning of period
before share consolidation
    
    
    117,083,000
    
    
    $
    117,447,261
    
    
    
    31,047,027
    
    
    $
    55,988,817Common shares issued before
share consolidation pursuant to:Conversion of convertible
Debentures
    
    
    
    
    
    
    
    
    
    
    29,266,666
    
    
    
    4,841,439Stock options exercised
    
    
    
    
    
    
    
    
    
    
    578,337
    
    
    
    224,852Warrants on new debentures
    
    
    
    
    
    
    
    
    
    
    2,300,000
    
    
    
    2,771,719Public Offering
    
    
    
    
    
    
    
    
    
    
    55,263,170
    
    
    
    55,016,831Repurchase of shares pursuant to
share issuer bid pre consolidation
    
    
    (4,543,682
    )
    
    
    (5,029,729
    )
    
    
    (1,372,200
    )
    
    
    (1,396,397
    )Balance, before reverse split
    
    
    112,539,318
    
    
    $
    112,417,532
    
    
    
    117,083,000
    
    
    $
    117,447,261Reverse stock split
    
    
    (90,031,454
    )
    
    
    
    
    
    
    (93,666,400
    )
    
    
    Balance, after reverse split
    
    
    22,507,864
    
    
    $
    112,417,532
    
    
    
    23,416,600
    
    
    $
    117,447,261Repurchase of shares pursuant to
share issuer bid post consolidation
    
    
    (548,600
    )
    
    
    (2,280,849
    )
    
    
    
    
    
    
    Refund of broker fees
    
    
    
    
    
    
    7,594
    
    
    
    
    
    
    
    Balance, end of period
    
    
    21,959,264
    
    
    $
    110,144,277
    
    
    
    23,416,600
    
    
    $
    117,447,261
 As described in Note 11, on February 10, 2005, the Company executed a 5 for 1 share
consolidation.
Under the terms of the normal course issuer bid, the Company may repurchase and cancel up to
10% of the public float of the shares over the 12 month period commencing August 26, 2004.  8.
    Contributed Surplus During the first two quarters of fiscal 2005, pursuant to the normal course issuer bid
described in Note 7, the Company repurchased and cancelled 1,457,336 common shares at an
average price of $3.10 per common share, on a post-consolidation basis, for total cash
consideration of $4,517,102. As the average price paid was less than the average per share
assigned value of the outstanding common shares, $2,793,476 was recorded in contributed
surplus as a gain on redemption of shares.




---



##### 



9.
    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 Statement
    
    March 31
    
    
    March 31For the six months ended:
    
    2005
    
    
    2004Net revenue
    
    $
    
    
    
    $
    398,114Operating expenses
    
    
    
    
    
    
    389,394Depreciation
    
    
    
    
    
    
    2,237Amortization of intangible asset
    
    
    
    
    
    
    6,049Loss on sale discontinued operations
    
    
    
    
    
    
    (465,576
    )Earnings from discontinued operations
    
    $
    
    
    
    $
    (465,142
    )
  10.
    Stock based compensation On May 25th, 2004, the company granted 1,875,000 options to senior employees and directors.
The options vest over a periods varying from one year to three years, have an expiry date of
May 24th, 2009 and an exercise price of $4.00 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. For the six months ended March 31, 2005, an
expense of $306,641, reflecting the option amortization for the period, has been included in
salaries and benefits expense.    11.
    Share consolidation At a meeting held on August 14, 2003, the Companys shareholders approved the consolidation
of the Companys common shares on the basis to be determined by its board of directors (not
to exceed a ratio of 1 for 10). On January 15, 2005, the Companys board of directors
approved the consolidation of the common shares on the basis of 1 for 5. On January 21, 2005
the Company filed Articles of Amendment consolidating its common shares on the basis of 1 new
common share for every 5 common shares currently outstanding. The effective date for post
consolidation trading of its shares was February 10, 2005. The number of Envoy common shares
outstanding prior to consolidation was 112,539,318 and post consolidation was 22,507,864.
The earnings per share figures presented are after giving effect to the share consolidation.    12.
    Subsequent events Under the terms of the normal course issuer bid, during April 2005 the Company bought an
additional 286,400 common shares for cancellation.




---



##### 



Envoy Communications Group Inc.
Management Discussion and Analysis
Second quarter of fiscal 2005
May 9, 2005 The following section of our interim report sets forth Managements Discussion and Analysis of the
financial performance of Envoy Communications Group Inc. (Envoy) for the six months ended March 31,
2005 compared to the six months ended March 31, 2004. The analysis is based on our unaudited
consolidated financial statements (the Financial Statements), including the accompanying notes,
which are presented elsewhere in this report. OVERVIEW During fiscal 2004 through two public offerings, Envoy raised gross proceeds of $66.5 million
and net proceeds of $60.1 million. During fiscal 2004, Envoy successfully negotiated with its
lenders and retired substantially all outstanding loan indebtedness. The balance of the funds
raised in the public offerings will be used for general corporate purposes and potential
acquisition and investment opportunities that Envoy determines have potential to create value for
its shareholders and that either complements, or provides an opportunity to diversify its current
business. At a meeting held on August 14, 2003, Envoys shareholders approved the consolidation of the common
shares on the basis to be determined by Envoys board of directors (not to exceed a ratio of 1 for
10). On January 15, 2005, Envoys board of directors approved the consolidation of the common
shares on the basis of 1 for 5. On January 21, 2005 Envoy filed Articles of Amendment consolidating
its common shares on the basis of 1 new common share for every 5 common shares outstanding. The
number of common shares outstanding prior to consolidation was 112,539,318 and post-consolidation
was 22,507,864. Outstanding common shares and earnings per share figures for all periods presented
have been adjusted to give effect to the share consolidation. The effective date for the
post-consolidation trading of the common shares on the Toronto Stock Exchange and the NASDAQ Stock
Market was February 10, 2005. During the first two quarters of fiscal 2005, pursuant to a normal course issuer bid, Envoy
repurchased and cancelled 1,457,336 common shares, stated on a post-consolidation basis, for cash
consideration of $4,517,102. Under the terms of the normal course issuer bid, Envoy may repurchase
and cancel up to 10% of the public float of the common shares over the 12 month period that
commenced August 26, 2004. Subsequent to the second quarter, Envoy has purchased for cancellation
an additional 286,400 of its common shares. The Watt group of companies (Watt), Envoys branding business, has proven successful at creating
and executing private label programs and landmark store design, making Envoy a world authority in
brand strategy and design for the retail sector. Watts lengthy history of success and innovation
in the retail industry presents it with a spectrum of opportunities  from overall brand strategy
to store design to private label program development  with key customers like grocers, mass
merchants, pharmacies and home improvement companies. In the six months ending March 31, 2005,
Watt represented 91% of Envoys business. Retail is the second largest industry in the U.S. and one of the largest industries worldwide.
Unlike other, more volatile sectors, the retail industry continues to grow at a steady rate,
particularly as developing countries achieve greater economic stability. Envoy continues to focus
on its core strength, consumer and retail branding and has made a series of announcements in fiscal
2005 that highlight the significant opportunities Envoy is pursuing. On November 10, 2004, Envoy, through its subsidiary ECG Holdings (UK) Limited (ECGH), agreed to
acquire 65% of the outstanding shares of Parker Williams Design Limited (PW, or Parker
Williams), a London, UK based packaging design and brand specialist company. The purchase price of
£1,818,000 was paid in cash on closing. The remaining 35% of the Parker




---



##### 



Williams shares (Management Shares) will continue to be held by senior management of PW
(Management Shareholders), subject to certain options described below. ECGH will have the option
to acquire from the Management Shareholders and the Management Shareholders will have the option to
require ECGH to purchase from them, at various stages over a period of 4 years following
completion, the Management Shares for a purchase price based on the profitability of PW for certain
defined periods following closing. The transaction was completed on February 28, 2005, and was
accounted for using the purchase method of accounting. PW, whose clients include Sainsburys
Supermarkets and Coop Norden, is a specialist in the retail area and has revenues of approximately
$5.0 million annually. PW was formed in 1990 by designers Tamara Williams and Tony Parker who
together have over 25 years design experience in Europe, America and the Far East. Both companies
believe the combined expertise and focus within the retail arena will provide new opportunities
across both Europe and North America. In April 2005, Home Hardware Stores Limited, in conjunction with Watt International announced the
launch of its New Build a Better Home Store program. The program provides new store design
concepts for its Home Hardware, Home Building Centre and Home Hardware Building Centre banners.
The New Build a Better Home Store program was unveiled at the Companys biannual Dealer Market, a
forum for product purchasing, professional development and networking. Home Hardware worked with
Watt International to enhance various formats and layouts of its retail environment to create a
more captivating, informative, convenient and service-oriented shopping experience for customers. In December 2004, Envoy announced that it has been selected by Carulla Vivero S.A. to re-define its
private label program. Carulla Vivero is the second largest retailer in Colombia, operating a chain
of 154 supermarkets, hypermarkets and discount stores throughout the country.The two companies
partnered in 2003 to re-position and design Vivero, the retailers hypermarket banner, and Watt
continues to help roll out the new concept in various locations. In August 2004, Watt and Carulla
Vivero broadened their relationship re-designing the latters supermarket chain, Carulla. This
latest initiative will ensure continuity of the Carulla Vivero brand across all banners: Carulla,
Vivero, Frescampo, Surtimax and Merquefacil. Watt continues to acquire new accounts, and in our second quarter Watt was awarded $3.0 million in
new business contracts in the following sectors: food and beverage, shopping center, packaged
goods, fashion, jewelry, department store, publishing and foodservice. The results of this new
business will begin to positively impact our 3rd and 4th quarters. Net revenue for the six months ended March 31, 2005 was $21.2 million, compared to $19.6 million
for the six months ended March 31, 2004, an increase of $1.6 million. For the full year, Envoy
expects net revenue to improve by 18% in fiscal 2005 over 2004. We had originally expected to
complete the acquisition of PW, and include their results from January 2005, but this was delayed
until March 2005. Salaries expense for the six months ended March 31, 2005, was $14.1 million, compared to $13.4
million in the six months ended March 31, 2004, an increase of $0.7 million. Labour to net revenue
ratio for the six months ended March 31, 2005 was 66.5%, compared to 68.1% in the six months ended
March 31, 2004. Envoy expects its labour to net revenue ratio for the full fiscal 2005 to be
approximately 65%. Occupancy costs increased to $2.0 million for the six months ended March 31, 2005, from $1.4
million for the six months ended March 31, 2004, an increase of $0.6 million. Occupancy cost to
net revenue ratio was 9.2% for the six months ended March 31, 2005, compared to 7.2% for the six
months ended March 31, 2004. Envoy expects its occupancy to net revenue ratio for the full fiscal
2005 to be approximately 8%. As a result of the early repayment in fiscal 2004 of the outstanding debentures and the conversion
of the remaining convertible debentures, Envoy was required to expense the




---



##### 



unamortized value of the warrants and the conversion value of the convertible debentures in fiscal
2004. Envoy has no expected future requirement for debt financing and, therefore, there is no
expected accreted interest in fiscal 2005. As a result of the operational changes and financial changes discussed above, Envoy believes the
business will continue to show improved earnings and a strengthened balance sheet. We are on track
with our guidance of $0.20 per share for the current fiscal year. Our earnings have traditionally
been heavily weighted to the last half of the year; in particular our earnings will be strongest in
the last quarter of this year.




---



##### 



RESULTS OF OPERATIONS COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDEDMARCH 31, 2005 WITH THE SIX MONTHS ENDED MARCH 31, 2004 Net revenueOur net revenue represents our compensation for services. A portion of our
compensation from agency or advertising and marketing services is generated from non-refundable
monthly agency fees and the balance is from commissions. Our compensation from non-agency or
project related services is primarily generated from project fees and hourly charges. Net
revenue is net of any pass-through costs such as media and production costs incurred on behalf of
clients in acting as agent for them. Net revenue for the six months ended March 31, 2005 was $21.2 million, compared to $19.6 million
for the six months ended March 31, 2004, an increase of $1.6 million, or 8.1%. 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
    
    2005
    
    
    % of total
    
    
    2004
    
    
    % of totalConsumer and retail branding
    
    $
    19.3
    
    
    
    91
    %
    
    $
    17.9
    
    
    
    91
    %Marketing
    
    
    1.9
    
    
    
    9
    %
    
    
    1.7
    
    
    
    9
    %$
    21.2
    
    
    
    100
    %
    
    $
    19.6
    
    
    
    100
    %
 By customer location
    
    2005
    
    
    % of total
    
    
    2004
    
    
    % of totalCanada
    
    $
    5.1
    
    
    
    24
    %
    
    $
    3.3
    
    
    
    17
    %United States
    
    
    5.2
    
    
    
    24
    %
    
    
    6.5
    
    
    
    33
    %Europe *
    
    
    10.9
    
    
    
    52
    %
    
    
    9.8
    
    
    
    50
    %$
    21.2
    
    
    
    100
    %
    
    $
    19.6
    
    
    
    100
    %
   * Europe includes the United Kingdom and Continental Europe
 Net revenue by type of
service:

Net revenue from consumer and retail branding services increased $1.4 million in the six months
ended March 31, 2005 compared to the six months ended March 31, 2004 an increase of 7.4%. We
expect that net revenue will continue to improve in the second half of fiscal 2005 with growth
expected from our previous businesses and from the inclusion of the results of PW for the rest of
our fiscal year. Net revenue from marketing has increased by $0.2 million for the six months ended March 31, 2005,
compared to the six months ended March 31, 2004 an increase of 15.9%. Net revenue by customer
location:

Net revenue from Canada increased $1.8 million, for the six months ended March 31, 2005 compared to
the six months ended March 31, 2004, an increase of 55.6%. Net revenue from the U.S. has decreased ($1.3) million for the six months ended March 31, 2005
compared to the six months ended March 31, 2004, a decrease of 20.8%. Net revenue from Europe in our consumer retail branding increased $1.1 million for the six months
ended March 31, 2005, compared to the six months ended March 31, 2004, an increase of 11.5%. We
expect continued growth and improvement from Europe in the second half of fiscal 2005.




---



##### 



Operating ExpensesSalaries and benefits, general and administrative expenses and occupancy
costs represent our operating expenses. Salaries and benefits expenses include salaries, employee
benefits, incentive compensation, contract labour and other payroll related costs, which are
expensed as incurred. General and administrative costs include business development, office costs,
technology, professional services and foreign exchange. Occupancy costs represent the costs of
leasing and maintaining company premises. Operating expenses increased by 9.4% to $20.1 million for the six months ended March 31, 2005 from
$18.3 million for the six months ended March 31, 2004. Changes in operating expenses are as
follow: Salaries and benefits expenses for the six months ended March 31, 2005 were $14.1 million, compared
to $13.4 million for the six months ended March 31, 2004, an increase of $0.7 million or 5.7%.
Salaries and benefits continue to be closely monitored to match expected revenues with labour
costs. Included in salaries and benefits is stock based compensation for the six months ended
March 31, 2005 of $0.3 million, compared to $nil in the six months ending March 31, 2004. General and administrative expenses for the six months ended March 31, 2005 were $4.0 million,
compared to $3.6 million for the six months ended March 31, 2004, an increase of 12.2%. Occupancy costs for the six months ended March 31, 2005 were $2.0 million, compared to $1.4 million
for the six months ended March 31, 2004, an increase of 38.3%. Depreciation expenseDepreciation expense for the six months ending March 31, 2005 was $1.2
million, compared to $1.2 million for the six months ended March 31, 2004. Interest expense and financing costs and accreted interestInterest expense and financing costs
and accreted interest for the six months ended March 31, 2005 was less than $0.1 million, compared
to $3.5 million for the six months ended March 31, 2004. During fiscal 2004, all of the
outstanding bank indebtedness and debentures were repaid from the proceeds of the public offering.
Therefore, in fiscal 2005 there will not be any interest expense or finance costs relating to these
items. Investment earningsInvestment earnings for the six months ended March 31, 2005 was $1.5 million,
compared to less than $0.1 for the six months ended March 31, 2004. Investment earnings represent
the income earned on the cash and marketable securities held in the investment portfolio. Net earnings (loss)We had net earnings of $1.5 million for the six months ended March 31, 2005,
compared to a loss of ($4.1) million for the six months ended March 31, 2004, an increase of $5.5
million. Liquidity and Capital Resources Through public offerings in the second and third quarters of fiscal 2004, Envoy raised gross
proceeds of $66.5 million, which gave net proceeds of $60.7 million after deducting issue expenses.
Part of the net proceeds was used to reduce the outstanding debt, when this could be negotiated on
reasonable terms. The balance of the funds is being used for general corporate purposes and to
fund future acquisitions and investments as they are identified. As at March 31, 2005, Envoy had working capital of $25.3 million and a cash balance of $2.7
million, compared to September 30, 2004, when it had a working capital of $47.6 million and a cash
balance of $4.6 million. Included in working capital is an investment portfolio of marketable
securities, the current portion of which was $13.5 at March 31, 2005 and $36.3 million at
September 30, 2004. The decrease in working capital relates partly to the repurchase of 1,457,336
shares (on post-consolation basis) for cash consideration of $4.5 million pursuant to




---



##### 



the normal
course issuer bid, and partly to a reallocation within the investment portfolio to securities with
maturities in excess of one year. Net cash provided by operating activities was $0.5 million for the six months ended March 31, 2005
compared to ($0.1) million used in operating activities for the six months ended March 31, 2004. Net cash used in financing activities was ($4.7) million for the six months ended March 31, 2005,
compared to $29.5 million provided by financing activities for the six months ended March 31, 2004.
During the six months ended March 31, 2004, Envoy raised $36.9 million from a public share
offering and also raised $4.7 million from an issue of term loans and from debentures. During the
same period, Envoy used the proceeds to repay all significant outstanding borrowings, including the
repayment of the debentures issued in the period. Net cash provided by investing activities was $2.6 million for the six months ended March 31, 2005,
compared to net cash used in investing activities of ($27.8) million for the six months ended March
31, 2004. During the six months ended March 31, 2004, Envoy invested $27.4 million of the
proceeds of the public share offering in an investment portfolio managed by an external adviser.
All financial instruments held in the portfolio are traded in active and liquid markets and the
fair market value of the portfolio was determined by using the closing market prices at March 31,
2005 of the individual financial instruments.




---



##### 



COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDEDMARCH 31, 2005 WITH THE THREE MONTHS ENDED MARCH 31, 2004 Net revenueOur net revenue represents our compensation for services. A portion of our
compensation from agency or advertising and marketing services is generated from non-refundable
monthly agency fees and the balance is from commissions. Our compensation from non-agency or
project related services is primarily generated from project fees and hourly charges. Net
revenue is net of any pass-through costs such as media and production costs incurred on behalf of
clients in acting as agent for them. Net revenue for the three months ended March 31, 2005 was $11.2 million, compared to $10.6 million
for the three months ended March 31, 2004, an increase of $0.6 million, or 6.1%. 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
    
    2005
    
    
    % of total
    
    2004
    
    
    % of totalConsumer and retail branding
    
    $
    10.1
    
    
    
    90
    %
    
    $
    9.7
    
    
    
    92
    %Marketing
    
    
    1.1
    
    
    
    10
    %
    
    
    0.9
    
    
    
    8
    %$
    11.2
    
    
    
    100
    %
    
    $
    10.6
    
    
    
    100
    %
 By
customer location
    
    2005
    
    
    % of total
    
    2004
    
    
    % of totalCanada
    
    $
    2.7
    
    
    
    24
    %
    
    $
    2.2
    
    
    
    21
    %United States
    
    
    2.7
    
    
    
    24
    %
    
    
    3.1
    
    
    
    29
    %Europe *
    
    
    5.8
    
    
    
    52
    %
    
    
    5.3
    
    
    
    50
    %$
    11.2
    
    
    
    100
    %
    
    $
    10.6
    
    
    
    100
    %
   * Europe includes the
United Kingdom and Continental Europe
 Net revenue by type of
service:
Net revenue from consumer and retail branding services increased $0.4 million in the three months
ended March 31, 2005 compared to the three months ended March 31, 2004 an increase of 4.9%. We
expect that net revenue will continue to improve in the third quarter of fiscal 2005. Net revenue from marketing has increased by $0.2 million for the three months ended March 31, 2005,
compared to the three months ended March 31, 2004 an increase of 19.3%. Net revenue by customer
location:

Net revenue from Canada increased $0.5 million, for the three months ended March 31, 2005 compared
to the three months ended March 31, 2004, an increase of 21.0%. Net revenue from the U.S. has decreased ($0.4) million for the three months ended March 31, 2005
compared to the three months ended March 31, 2004, a decrease of 11.7%. Net revenue from Europe in our consumer retail branding increased $0.5 million for the three months
ended March 31, 2005, compared to the three months ended March 31, 2004, an increase of 10.3%. We
expect continued growth and improvement from Europe in the third quarter of fiscal 2005 with the
results of our acquisition of PW being included for the full quarter. Operating ExpensesSalaries and benefits, general and administrative expenses and occupancy costs
represent our operating expenses. Salaries and benefits expenses include salaries, employee
benefits, incentive compensation, contract labour and other payroll related




---



##### 



costs, which are expensed as incurred. General and administrative costs include business
development, office costs, technology, professional services and foreign exchange. Occupancy costs
represent the costs of leasing and maintaining company premises. Operating expenses increased by 5.2% to $10.5 million for the three months ended March 31, 2005
from $10.0 million for the three months ended March 31, 2004. Changes in operating expenses are as
follow: Salaries and benefits expenses for the three months ended March 31, 2005 were $7.3 million,
compared to $7.5 million for the three months ended March 31, 2004, a decrease of $0.2 million or
2.6%. Salaries and benefits continue to be closely monitored to match expected revenues with
labour costs. Included in salaries and benefits is stock based compensation for the three months
ended March 31, 2005 of $0.2 million, compared to $nil in the three months ending March 31, 2004. General and administrative expenses for the three months ended March 31, 2005 were $2.2 million, an
increase of $0.4 million or 23.9% from the three months ended March 31, 2005. Occupancy costs for the three months ended March 31, 2005 were $1.0 million, compared to $0.7
million for the three months ended March 31, 2004, an increase of 40.7%. Depreciation expenseDepreciation expense for the three months ending March 31, 2005 was $0.6
million, compared to $0.6 million for the three months ended March 31, 2004. Interest expense and financing costs and accreted interestInterest expense and financing costs
for the three months ended March 31, 2005 was $nil, compared to $0.6 million for the three months
ended March 31, 2004. Accreted interest on the warrants and debentures was $nil for the three
months ended March 31, 2005, compared to $2.3 million for the three months ended March 31, 2004.
During fiscal 2004, all of the outstanding bank indebtedness, and debentures were repaid from the
proceeds of the public offering. Therefore, in fiscal 2005 there will not be any significant
interest expense or finance costs. Investment earningsInvestment earnings for the three months ended March 31, 2005 was $0.5
million, compared to less than $0.1 million for the three months ended March 31, 2004. Investment
earnings represent the income earned on the cash and marketable securities held in the investment
portfolio. Loss from discontinued operationsOn January 1, 2004, after a review of the ongoing viability,
future prospects and cash requirements of our corporate event and travel business, we sold the
business for a nominal consideration. The loss from discontinued operations reflects the
operations of this business during the periods presented, and the write-off of our investment in
the business in the second quarter of fiscal 2004. The loss from discontinued operations was $nil
for the three months ended March 31, 2004, and $0.5 million for the three months ended March 31,
2005. Net earnings (loss)We had net earnings of $0.8 million for the three months ended March 31,
2005, compared to a loss of ($3.6) million for the three months ended March 31, 2004, an increase
of $4.4 million.




---



##### 



SUMMARY OF QUARTERLY RESULTS Q2 2005
    
    
    Q1 2005
    
    
    Q4 2004
    
    
    Q3 2004Net revenue
    
    $
    11.2 million
    
    $
    10.0 million
    
    $
    10.1 million
    
    $
    11.1 millionNet earnings (loss):From continuing operations
    
    $
    0.8 million
    
    $
    0.6 million
    
    ($
    0.2) million
    
    $
    1.2 millionIncluding discontinued operations
    
    $
    0.8 million
    
    $
    0.6 million
    
    ($
    0.2) million
    
    $
    1.2 millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    $
    0.04
    
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06Diluted
    
    $
    0.04
    
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06Including discontinued operationsBasic
    
    $
    0.04
    
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06Diluted
    
    $
    0.04
    
    
    $
    0.03
    
    
    ($
    0.01
    )
    
    $
    0.06
 Q2 2004
    
    
    Q1 2004
    
    
    Q4 2003
    
    
    Q3 2003Net revenue
    
    $
    10.6 million
    
    $
    9.0 million
    
    $
    10.3 million
    
    $
    10.4 millionNet earnings (loss):From continuing operations
    
    ($
    3.1) million
    
    ($
    0.5) million
    
    $
    0.8 million
    
    $
    1.0 millionIncluding discontinued operations
    
    ($
    3.6) million
    
    ($
    0.5) million
    
    $
    0.8 million
    
    $
    1.0 millionNet earnings (loss) per shareFrom continuing operationsBasic
    
    
    ($0.26
    )
    
    
    ($0.06
    )
    
    $
    0.17
    
    
    $
    0.23Diluted
    
    
    ($0.26
    )
    
    
    ($0.06
    )
    
    $
    0.09
    
    
    $
    0.16Including discontinued operationsBasic
    
    
    ($0.30
    )
    
    
    ($0.06
    )
    
    $
    0.15
    
    
    $
    0.25Diluted
    
    
    ($0.30
    )
    
    
    ($0.06
    )
    
    $
    0.10
    
    
    $
    0.15
 Liquidity and Capital Resources As at March 31, 2005, Envoy had working capital of $25.3 million and a cash balance of $2.7
million, compared to December 31, 2004, when it had a working capital of $45.5 million and a cash
balance of $4.6 million. Included in working capital is an investment portfolio of marketable
securities, the current portion of which was $13.5 at March 31, 2005 and $33.3 million at December
31, 2004. The decrease in working capital relates partly to the repurchase of 703,599 shares (on
post-consolation basis) for cash consideration of $2.1 million pursuant to the normal course issuer
bid, and partly to a reallocation within the investment portfolio to securities with maturities in
excess of one year. Net cash used in operating activities was ($0.6) million for the three months ended March 31, 2005,
compared to ($2.3) million used in operating activities for the three months ended March 31, 2004. Net cash used in financing activities was ($2.2) million for the three months ended March 31, 2005,
compared to $31.0 million provided by financing activities for the three months ended




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##### 



March 31, 2004. During the six months ended March 31, 2004, Envoy raised $36.8 million from a
public share offering. During the same period, Envoy used the proceeds to repay $5.6 million of
outstanding borrowings. Net cash provided by investing activities was $1.4 million for the three months ended March 31,
2005, compared to net cash used in investing activities of ($26.9) million for the three months
ended March 31, 2004. During the three months ended March 31, 2004, Envoy invested $26.8 million
of the proceeds of the public share offering in an investment portfolio managed by an external
adviser. TRANSACTIONS WITH RELATED PARTIES There were no material related party transactions during the first two quarters of fiscal 2005. COMMITMENTS AND CONTRACTUAL OBLIGATIONS Set out below is a summary of the amounts due and committed under contractual cash obligations at
March 31, 2005:  Due in 1
    
    
    Due between
    
    
    Due between
    
    
    Due afterTotal
    
    
    year or less
    
    
    years 2 and 3
    
    
    years 4 and 5
    
    
    5 yearsOperating leases
    
    $
    4,205,276
    
    
    $
    996,673
    
    
    $
    1,500,816
    
    
    $
    1,302,551
    
    
    $
    405,236Long term debt
    
    
    447,436
    
    
    
    149,605
    
    
    
    184,017
    
    
    
    113,814
    
    
    
    Total contractual
cash obligations
    
    $
    4,652,712
    
    
    $
    1,146,278
    
    
    $
    1,684,833
    
    
    $
    1,416,365
    
    
    $
    405,236
 CRITICAL ACCOUNTING ESTIMATES The significant accounting policies used by Envoy in preparing its consolidated financial
statements are described in Note 2 to the September 30, 2004 year end Financial Statements and they
should be read to ensure a proper understanding and evaluation of the estimates and judgements made
by management in preparing these Financial Statements. Envoys Financial Statements are prepared
in accordance with Canadian generally accepted accounting principles. Envoy also prepares
reconciliation to United States generally accepted accounting principles, which is included in Note
24 to the September 30, 2004 year end Financial Statements. Inherent in the application of some of those policies is the judgement by management as to which of
the various methods allowed under generally accepted accounting principles is the most appropriate
to apply in the case of Envoy. As well, management must make appropriate estimates at the time the
financial statements are prepared. These estimates are described in the September 30, 2004 year end
Financial Statements.




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##### 



Although all of the policies identified in Note 2 to the September 30, 2004 year end Financial
Statements are important in understanding the Financial Statements, the policies discussed in the
September 30, 2004 year end Management Discussion and Analysis are considered by management to be
central to understanding the Financial Statements, because of the higher level of measurement
uncertainties involved in their application. IMPACT OF RECENTLY ISSUED CANADIAN ACCOUNTING STANDARDS There has been no significant impact on fiscal 2005 results as a result of any recently issued
Canadian Accounting Standards, other than as described in Envoys September 30, 2004 year end
Financial Statements and Management Discussion and Analysis. RISKS AND UNCERTAINTIES Envoy management monitors, understands and manages the risks associated with its business
transactions and the general economic environment in which it operates. Risks reflect uncertainty
regarding potential outcomes from changes in political, economic and capital market conditions.
The risks and uncertainties that impact Envoy were described in its September 30, 2004 year end
Management Discussion and Analysis. There have been no changes to the types of risks and
uncertainties in the first quarter of fiscal 2005. OTHER INFORMATION On January 21, 2005 Envoy announced that its board of directors had approved the filing of Articles
of Amendment to consolidate its common shares on the basis of one new common share for every five
common shares currently outstanding. At a meeting held on August 14, 2003, Envoy shareholders
approved the consolidation (reverse stock split) of Envoys common shares on the basis to be
determined by its board of directors (not to exceed a ratio of one for ten). The share consolidation affected all common shares, warrants and stock options of Envoy that were
currently outstanding. Any fractional shares resulting from this consolidation were adjusted to the
nearest full common share. The effective date for the post-consolidation trading of its common
shares was February 10, 2005. The number of Envoy common shares outstanding prior to consolidation
was 112,539,318 and post-consolidation was 22,507,864. The earnings per share figures presented
are after giving effect to the share consolidation. Envoy had until March 28, 2005 to regain compliance with the minimum US$1.00 per share requirement
for continued listing under NASDAQ Marketplace Rule 4310(c)(4). Therefore, Envoys board of
directors made the decision to effect the share consolidation immediately in order to allow Envoy
sufficient time to comply with Marketplace Rule 4310(c)(4). On March 3, 2005, Envoy received
notification from The Nasdaq SmallCap Market (Nasdaq) that the closing bid price of the Companys
common stock has been at $1.00 per share or greater for at least 10 consecutive business days.
Accordingly, the Company has regained compliance with the Marketplace Rule 4310(c)(4) and this
matter is now closed. At March 31, 2005, there were 21,959,264 common shares of Envoy issued, compared to 23,416,600
issued at September 30, 2004, after giving effect to the share consolidation. Additional information relating to Envoy, including our Annual Information Form is available
on SEDAR at www.sedar.com.




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##### 



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




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##### 



Shareholder InformationHEAD OFFICE
    
    OFFICERS
    
    AUDITORS172 John Street
    
    Geoffrey B. Genovese
    
    BDO Dunwoody LLPToronto, Canada M5T 1X5
    
    President, Chairman
    
    60 Columbia Way, Suite 400and Chief Executive Officer
    
    Markham, Canada L3R 0C9Telephone: (416) 593-1212Facsimile: (416) 593-4434
    
    Linda GilbertChief Financial OfficerBANKERSDIRECTORS
    
    John H. Bailey
    
    RBC Royal BankJohn H. Bailey
    
    Executive Vice President
    
    200 Bay StreetB.Comm, J.D., LL.M
    
    and Corporate Secretary
    
    Toronto, Canada M5J 2J5Barrister & SolicitorDavid Parkes
    
    AUDIT COMMITTEE
    
    LEGAL COUNSELPresident and CEO,
    
    David Parkes (Chair)
    
    Blake, Cassels & Graydon LLPFreefone Inc.
    
    Hugh Aird
    
    Box 25, Commerce Court WestDavid I. Hull
    
    Toronto, Canada M5L 1A9Geoffrey B. GenovesePresident, Chairman and
    
    COMPENSATION COMMITTEE
    
    INVESTOR RELATIONSChief Executive Officer
    
    David I. Hull (Chair)
    
    E-mail: info@envoy.toEnvoy Communications Group Inc.
    
    Hugh AirdDavid Parkes
    
    Additional information isDavid I. Hull
    
    
    
    available on ourPresident
    
    
    
    Web site at www.envoy.toHull Life Insurance Agencies Inc.NOMINATING AND CORPORATE
    
    STOCK TRADING INFORMATIONGOVERNANCE COMMITTEEHugh Aird (Lead Director)
    
    David I. Hull (Chair)
    
    Toronto Stock Exchange: ECGDirector of Business Development
    
    Hugh Aird
    
    NASDAQ Exchange: ECGIFirst Associates Inc.
    
    David ParkesTRANSFER AGENTComputershare TrustCompany of Canada100 University Avenue, 9th FloorToronto, Canada M5J 2Y1