Merus Labs International (MSLI) 6-K Current report (foreign)

Envoy Capital Group Inc.

First Quarter Report 2009

Dear Shareholders

The recessionary economic conditions and volatile global stock markets that existed throughout most of last year continued through Envoy’s first quarter of fiscal 2009. Governments around the world have either announced, or are contemplating, massive intervention programs to support financial institutions, ease access to credit, stimulate economic activity and create jobs.

Despite such large scale government intervention, unemployment in North America continued to increase and the major stock markets responded with one of the worst performing quarters over the past twelve months.

For the quarter ended December 31, 2008, Envoy incurred a net loss of ($1.0) million or ($0.12) per share compared with a net profit of $350,000 or $0.04 per share for the same period last year. The per share calculations are based on fully diluted weighted average shares outstanding of approximately 8.6 million for the current quarter and 9.5 million for the same period last year.

The Consumer and Retail Branding Division, Watt International Inc., earned a pre-tax profit of $327,000 in the first quarter compared with a pre-tax profit of $485,000 during the same quarter last year. Although quarterly revenue increased by approximately $0.2 million this year, from $3.7 million to $3.9 million, higher operating costs resulted in a decline in operating profit. These operating costs will be monitored in the coming months and changes will be implemented if necessary to ensure that there is a proper balance between expected revenues and expenses.

The Merchant Banking Division incurred a pre-tax loss of ($726,000) during the first quarter compared to a pre-tax profit of $522,000 during the same quarter last year. The change from year to year is attributable to a decline in investment income as a result of a significant deterioration of the global equity markets compared to the same three month period last year. Despite incurring a loss in this quarter, Envoy’s investment portfolio significantly outperformed the major North American markets during this three month period. For the three month period ending December 31, 2008, the Merchant Banking division experienced a negative return on its invested assets of (1%) compared to negative returns of (19%) on the DJIA, (22%) on the S&P 500 and (24%) on the TSX.

Looking forward, the global capital markets remain very volatile in the wake of concerns over major financial institutions, deteriorating commodity markets and the recessionary environments that currently exist for major world economies. As we entered the first quarter of fiscal 2009, our Merchant Banking investment portfolio was defensively positioned with a large portion of capital invested in short term liquid investments. We have maintained a defensive investment philosophy during the current quarter and continue to invest our assets cautiously in these volatile market conditions where short term rallies are followed by sudden and sharp declines.

Thank you for your continued support.

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Envoy Capital Group Inc.

NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS

Under National Instrument 51-102, Part 4, subsection 4.3(3)(a), if an auditor has not performed a review of the interim financial statements; they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.

The accompanying unaudited interim financial statements of the Company have been prepared by and are the responsibility of the Company’s management.

The Company’s independent auditor has not performed a review of these financial statements in accordance with standards established by the Canadian Institute of Chartered Accountants for a review of interim financial statements by an entity’s auditor.

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Envoy Capital Group Inc.
Consolidated Balance Sheets
Unaudited — Prepared by Management
(Expressed In Canadian dollars)

		December 31			September 30
As at:		2008			2008
Assets
Current
Cash		$	742,961		$	1,279,269
Investments held for trading	note 3		19,912,308			17,750,970
Accounts receivable			7,028,954			8,387,477
Future income taxes			650,791			650,791
Prepaid expenses			525,738			388,736
Loans receivable	note 4		243,750			365,625
			29,104,502			28,822,868
Investments	note 3		224,250			224,250
Real estate	note 5		1,539,592			1,539,592
Property, plant and equipment			975,882			1,150,465
Goodwill			4,407,434			4,407,434
Future income taxes			337,435			337,435
		$	36,589,095		$	36,482,044
Liabilities and Shareholders’ Equity
Current
Bank indebtedness	note 7	$	265,000		$	—
Accounts payable and accrued liabilities			3,806,989			3,521,264
Derivatives	note 8		787,431			—
Deferred revenue			604,961			731,860
Current portion of long-term debt	note 9		47,143			69,599
			5,511,524			4,322,723
Minority interest	note 10		15,558			—
Shareholders’ equity
Share capital	note 11		9,340,990			9,370,741
Contributed surplus			22,415,875			22,445,601
Warrants			6,542,456			6,542,456
Stock based compensation			864,533			864,533
Deficit			(8,101,841	)		(7,064,010	)
			31,062,013			32,159,321
		$	36,589,095		$	36,482,044

On behalf of the Board:
	(signed) Geoffrey B. Genovese, Director	(signed) John H. Bailey, Director

The accompanying notes are an integral part of these statements

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Envoy Capital Group Inc.
Consolidated Statements of Operations
Unaudited — Prepared by Management
(Expressed In Canadian dollars)

		December 31			December 31
For the three months ended:		2008			2007
Net revenue from consumer branding business		$	3,941,774		$	3,668,929
Net investment (losses) gains	note 3		(350,928	)		734,152
Interest and dividend income	note 3		137,720			287,809
			3,728,566			4,690,890
Operating expenses:
Salaries and benefits			3,465,620			3,216,524
General and administrative			890,362			787,320
Occupancy costs			219,933			157,107
			4,575,915			4,160,951
Depreciation			187,475			187,546
Interest expense and financing costs			4,495			9,963
			4,767,885			4,358,460
(Loss) earnings before income taxes and minority interest			(1,039,319	)		332,430
Income tax recovery			—			(25,780	)
(Loss) earnings before minority interest			(1,039,319	)		358,210
Minority interest			(1,488	)		—
Net (loss) earnings		$	(1,037,831	)	$	358,210
(Loss) earnings per share
Basic		$	(0.12	)	$	0.04
Diluted		$	(0.12	)	$	0.04
Weighted average number of common shares outstanding — basic			8,558,730			9,504,467
Weighted average number of common shares outstanding — fully diluted			8,558,730			9,504,467

The accompanying notes are an integral part of these statements

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Envoy Capital Group Inc.
Consolidated Statements of Comprehensive Income (Loss)
Unaudited — Prepared by Management
(Expressed In Canadian dollars)

	December 31			December 31
For the three months ended:	2008			2007
Net (loss) earnings	$	(1,037,831	)	$	358,210
Other comprehensive income:
Gain on foreign currency translation		—			1,528
Comprehensive (loss) income	$	(1,037,831	)	$	359,738

The accompanying notes are an integral part of these statements

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Envoy Capital Group Inc.
Consolidated Statements of Retained Earnings (Deficit)
Unaudited — Prepared by Management
(Expressed In Canadian dollars)

	December 31			December 31
For the three months ended:	2008			2007
(Deficit) retained earnings, beginning of period	$	(7,064,010	)	$	3,094,135
Net (loss) earnings		(1,037,831	)		358,210
(Deficit) retained earnings, end of period	$	(8,101,841	)	$	3,452,345

The accompanying notes are an integral part of these statements

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Envoy Capital Group Inc.
Consolidated Statements of Cash Flows
Unaudited — Prepared by Management
(Expressed In Canadian dollars)

	December 31			December 31
For the three months ended:	2008			2007
Cash flows from operating activities:
Net (loss) earnings	$	(1,037,831	)	$	358,210
Items not involving cash:
Depreciation		187,475			187,546
Minority interest		15,558			—
Change in fair value of held for trading investments		350,928			6,187
Net change in non-cash working capital balances:
Accounts receivable		1,358,523			(568,782	)
Prepaid expenses		(137,002	)		15,448
Investments held for trading		(2,512,266	)		1,608,833
Accounts payable and accrued liabilities		285,725			267,958
Derivatives		787,431			—
Deferred revenue		(126,899	)		153,516
Cash held in escrow		—			(27,696	)
Net cash provided by (used in) operating activities		(828,358	)		2,001,220
Cash flows from financing activities:
Operating line of credit		265,000			(665,000	)
Long-term debt repayments		(22,456	)		(21,683	)
Issuance of common shares		—			16,666
Share buy back under normal course issuer bid		(59,477	)		(572,943	)
Net cash provided by (used in) financing activities		183,067			(1,242,960	)
Cash flows from investing activities:
Loans receivable		121,875			123,437
Purchase of capital assets		(12,892	)		(42,204	)
Investments		—			(4,974	)
Net cash provided by (used in) investing activities		108,983			76,259
Net change in cash		(536,308	)		834,519
Cash,beginning of period		1,279,269			759,475
Cash,end of period	$	742,961		$	1,593,994
Supplemental cash flow information:
Interest paid	$	4,495		$	19,668
Income taxes (received) paid		—			(25,780	)

The accompanying notes are an integral part of these statements

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Envoy Capital Group Inc.
Consolidated Statement of Shareholders Equity
Unaudited — Prepared by Management
(Expressed In Canadian dollars)

														Total
				Contributed					Stock based		Retained			shareholders’
	Share capital			surplus			Warrants		compensation		earnings			equity
Balance, October 1, 2008	$	9,370,741		$	22,445,601		$	6,542,456	$	864,533	$	(7,064,010	)	$	32,159,321
Share repurchases pursuant to normal course issuer bid		(29,751	)		(29,726	)									(59,477	)
Net loss for the period												(1,037,831	)		(1,037,831	)
Balance, December 31, 2008	$	9,340,990		$	22,415,875		$	6,542,456	$	864,533	$	(8,101,841	)	$	31,062,013

The accompanying notes are an integral part of these statements

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1.	Basis of presentation
	These unaudited interim consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in Canada. 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, 2008.
	In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results for the interim periods presented are not necessarily indicative of the results that may be expected for any future period.
	Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for 2009.
2.	Significant accounting policies
	Accounting policies followed in the preparation of the December 31, 2008 interim consolidated financial statements are consistent with those used in the preparation of the annual consolidated financial statements, except for the following:
	Effective October 1, 2008, the Company adopted Canadian Institute of Chartered Accountants’ Handbook Section 3064, Goodwill and Intangible Assets, which clarifies that costs can be deferred only when they relate to an item that meets the definition of an asset. As a result, start-up costs must be expensed as incurred. Section 1000, Financial Statement Concepts, was also amended to provide consistency with this new standard. The Company has determined that the impact of these standards on its consolidated financial statements is immaterial.
3.	Investments

	December 31		September 30
	2008		2008
Investments held for trading
Cash and equivalents	$	14,874,730	$	5,997,502
Publicly-traded investments
Fixed income		—		99,434
Equities		4,974,855		7,051,786
Derivatives		242,723		—
Discount securities		—		4,602,248
		5,037,578		11,753,468
Total investments held for trading	$	19,912,308	$	17,750,970

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3. Investments (continued)

	December 31		September 30
	2008		2008
Investments
Investment in Capital Pool Company	$	200,000	$	200,000
Available for sale investments in private equity		24,250		24,250
Total investments	$	224,250	$	224,250

	As at December 31, 2008 the portfolio of investments held for trading was invested in marketable securities, including common shares, as well as common shares in privately held companies. The specific investments within the portfolio will vary depending on market conditions.
	At December 31, 2008, cash and equivalents included cash of $1,701,452 and interest-bearing term deposits of $13,173,278. Derivative investments consisted of market index put options expiring in December, 2009.
	In April 2007, Envoy founded Sereno Capital Corporation (“Sereno”), a Capital Pool Company, under the specific provisions of the TSX-V program. During fiscal 2007, the Company invested $200,000 in Sereno and at December 31, 2008 Envoy owned an approximate 30% interest. Members of Envoy’s management group are also officers and directors of Sereno and exercise significant influence. The investment in Sereno has been accounted for using the equity method. Sereno is currently in the process of evaluating opportunities and has not yet completed a qualifying transaction.
4.	Loans receivable
	Effective June 30, 2005, the Company completed the sale of its John Street, Inc. subsidiary and related assets to the management of John Street. The Company financed a portion of the sale through loans receivable, secured by a general security agreement and collateralized by the underlying shares. Loans details are as follows:

	December 31		September 30
	2008		2008
Loan receivable, 8.0% per annum, due June 30, 2009, repayable in monthly instalments of $28,125, plus interest	$	168,750	$	253,125
Loan receivable, 8.0% per annum, due June 30, 2009, repayable in monthly instalments of $12,500, plus interest		75,000		112,500
	$	243,750	$	365,625

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5.	Real estate
	The Company currently owns two investment properties on Queen St. in Toronto, which it plans to develop for resale. The properties have been valued at cost, representing the cost of acquisition plus related development costs.
6.	Related party transactions
	During the first three months of fiscal 2009, one of the Company’s directors charged the Company $7,500 for legal services.
	In November, 2008, the company established a new subsidiary in the principality of Monaco, Envoy Capital Group Monaco, S.A.M. (“ECGM”). As part of the local requirements of incorporation, each of the two directors of ECGM, who are residents of Monaco, acquired a 0.1% share interest in ECGM (total of 0.2%) at a cost 5,000 Euros (see note 10 minority interest).
	Related party transactions are recorded at the exchange amount, being the amount agreed to by the related parties.
7.	Bank indebtedness
	The Company has access to a revolving demand credit facility of $1 million in order to manage day-to-day operating requirements. Amounts borrowed under the facility bear interest at the bank prime rate. Drawings under the credit facility are secured by the Company’s investment portfolio. Borrowings under the facility were $265,000 at December 31, 2008. The credit facility has no set maturity date.
8.	Derivatives
	During the first quarter of fiscal 2009, the Company established an investment position in derivative instruments by writing a number of put options on large cap U.S. publicly-traded companies. The put options have an expiry date of January 2010 and an underlying share purchase price of approximately USD $2,960,000.
	The put option contracts are publicly traded and transacted on the Chicago Board Options Exchange. The options have been recorded at their fair value at December 31, 2008. Changes in fair value of the options have been recorded in investment income for the period.

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9. Loan payable

	December 31		September 30
	2008		2008
Loan payable to landlord, 3.5% per annum, due July 1, 2009, repayable in blended monthly instalments of $7,666.	$	47,143	$	69,599

10.	Minority interest
	On November 25, 2008, the Company established a new foreign subsidiary, Envoy Capital Group Monaco, S.A.M (“ECGM”). The mandate for ECGM is mainly to attract new investment opportunities and promote the services of the Company in the European market.
	As part of the requirements of incorporation, a small interest in the Company is owned by two directors of ECGM who are residents of Monaco. The ownership of 0.2% has been reflected in the financial statements as minority interest

11.	Share capital
	Authorized: Unlimited common shares without par value
	Issued:

	Three months ended						Fiscal year ended
	December 31, 2008						September 30, 2008
	Number						Number
	of shares			Amount			of shares			Amount
Balance, beginning of period		8,585,636		$	9,370,741			9,637,233		$	10,516,344
Common shares issued (cancelled) pursuant to:
Stock options exercised		—			—			13,333			16,666
Repurchase of shares under normal course issuer bid		(27,259	)		(29,751	)		(1,064,930	)		(1,162,269	)
Balance, end of period		8,558,377		$	9,340,990			8,585,636		$	9,370,741

Pursuant to the normal course issuer bid which began on February 7, 2008 and ends on February 6, 2009, the Company is authorized to repurchase and cancel up to 10% of the public float of the shares. In fiscal 2009, under this normal course issuer bid, the Company has repurchased and cancelled 27,259 common shares for cash consideration of $59,477, including related costs.

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11.	Share capital (continued)
	During fiscal 2008, the Company repurchased and cancelled 1,064,930 common shares for cash consideration of $2,932,720. The Company repurchased 188,309 shares for cash consideration of $572,942 pursuant to the terms of a normal course issuer bid which began on February 7, 2007 and ended on February 6, 2008. In addition, the Company repurchased 876,621 shares for cash consideration of $2,359,778 pursuant to the terms of the normal course issuer bid which began on February 7, 2008 and ends on February 6, 2009.
12.	Management of capital
	The Company includes the following in its definition of capital:

	December 31			September 30
	2008			2008
Bank indebtedness	$	265,000		$	—
Long-term debt		47,143			69,599
Shareholders’ equity comprised of Share capital		9,340,990			9,370,741
Contributed surplus		22,415,875			22,445,601
Warrants		6,542,456			6,542,456
Stock based compensation		864,533			864,533
(Deficit) Retained earnings		(8,101,841	)		(7,064,010	)
	$	31,374,156		$	32,228,920

The Company’s objectives when managing capital are:

(a)	to allow the Company to respond to changes in economic and/or marketplace conditions by maintaining the Company’s ability to purchase new investments;
(b)	to give shareholders sustained growth in shareholder value by increasing shareholders’ equity;
(c)	to ensure that the Company maintains the level of capital necessary to meet the requirements of its bank; and
(d)	to maintain a flexible capital structure which optimizes the cost of capital at acceptable levels of risk.

The Company manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its underlying assets. The Company maintains or adjusts its capital level to enable it to meet its objectives by:

(a) realizing proceeds from the disposition of its investments;

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12. Management of capital (continued)

(b)	utilizing leverage in the form of third party debt and the Company’s bank credit line (bank indebtedness);
(c)	raising capital through equity financings; and
(d)	purchasing the Company’s own shares for cancellation pursuant to its normal course issuer bid.

The Company is not subject to any capital requirements imposed by a regulator. There were no changes in the Company’s approach to capital management during the period. To date, the Company has not declared any cash dividends to its shareholders as part of its capital management program. The Company’s management is responsible for the management of capital and monitors the Company’s use of various forms of leverage on a daily basis. The Company’s current capital resources are sufficient to discharge its liabilities as at December 31, 2008.

13.

Financial instruments

The investment operations of the Company’s business involve the purchase and sale of securities and, accordingly, the majority of the Company’s assets are currently comprised of financial instruments. The use of financial instruments can expose the Company to several risks, including market, credit and liquidity risks. A discussion of the Company’s use of financial instruments and its risk management is provided below.

(i)	Liquidity risk
	Liquidity risk is the risk that the Company will have sufficient cash resources to meet its financial obligations as they come due. The Company’s liquidity and operating results may be adversely affected if the Company’s access to the capital markets is hindered, whether as a result of a downturn in stock market conditions generally or related to matters specific to the Company, or if the value of the Company’s investments declines, resulting in losses upon disposition.
	The Company generates cash flow primarily from its financing activities and proceeds from the disposition of its investments, in addition to interest and dividend income earned on its investments. From time to time, the Company will invest in private equities which have no immediate market and would be illiquid until one is created. Investments in private equities tend to be relative small, comprising less than 5% of available capital and the Company has sufficient marketable securities which are freely tradable and relatively liquid to fund its obligations as they become due under normal operating conditions.

15

13. Financial instruments (continued)

(ii)	Market risk:
	Market risk is the risk that the fair value of, or future cash flows from, the Company’s financial instruments, including derivatives, will significantly fluctuate because of changes in market prices. The value of the financial instruments can be affected by changes in interest rates, foreign exchange rates, and equity and commodity prices. Derivative instruments will obtain value, positive or negative, as relevant interest rates, foreign exchange rates, equity, commodity or credit prices or indices change, such that the previously contracted terms of the derivative transactions have become more or less favourable than what can be negotiated under current market conditions for contracts with the same terms and the same remaining period to expiry.
	The Company manages market risk by having a portfolio which is not singularly exposed to any one issuer or class of issuers. The Company also has set thresholds on purchases of investments over which the approval of the board of directors is required.
	The following table shows the estimated sensitivity of the Company’s after-tax net income (loss) for the quarter ended December 31, 2008 from a change in the closing price of the Company’s investments with all other variables held constant as at December 31, 2008:

	Change in net after-tax		Change in net after-tax
	income (loss) from %		income (loss) from %
Percentage change in closing price	increase in closing price		decrease in closing price
2%	$	85,006	$	(85,006	)
4%		170,013		(170,013	)
6%		255,020		(255,020	)
8%		340,026		(340,026	)
10%		425,033		(425,033	)

(iii)

Currency risk:

The Company is subject to currency risk through its activities in Europe, the Middle East and the United States. The Company invoices a substantial portion of its consumer branding customers in foreign currency and, as such, changes in the exchange rate affect the operating results of the Company. The Company does not actively use derivative instruments to reduce its exposure to foreign currency risk. However, dependent on the nature, amount and timing of foreign currency receipts and payments, the Company may from time to time enter into foreign currency contracts to mitigate the associated risks. The net liability of approximately $552,000 arising from these contracts has been included in accounts payable and accrued liabilities. The gains and losses from these contracts have been included in investment income for the period.

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13.	Financial instruments (continued)
	The following assets and liabilities were denominated in foreign currencies at December 31, 2008:

	December 31			September 30
	2008			2008
Denominated in U.S. dollars
Cash	$	40,489		$	951,929
Investments held for trading		3,092,119			1,486,504
Accounts receivable		2,448,529			2,052,966
Accounts payable		131,600			(136,945	)
Deferred revenue		(148,041	)		—
Net assets denominated in U.S. dollars	$	5,564,696		$	4,354,454
Denominated in U.A.E dirham
Cash	$	120,761		$	41,338
Accounts receivable		2,162,059			2,723,905
Accounts payable		(914,686	)		(872,975	)
Net assets denominated in U.A.E dirham	$	1,368,134		$	1,892,268
Denominated in British pounds
Accounts receivable	$	90,027		$	143,254
Accounts payable		(89,085	)		(104,493	)
Net assets denominated in British pounds	$	942		$	38,761
Denominated in Euro dollars
Cash	$	768,960		$	—
Investments held for trading		7,822,409			—
Accounts payable		(1,296,683	)		(83,600	)
Net assets denominated in Euro dollars	$	7,294,686		$	(83,600	)

The following table shows the estimated sensitivity of the Company’s after-tax net income (loss) for the quarter ended December 31, 2008 from a change in all foreign currencies (U.S. dollars, U.A.E. dirham, British pounds and Euro dollars) with all other variables held constant as at December 31, 2008:

	Change in net after-tax		Change in net after-tax
	income (loss) from %		income (loss) from %
Percentage change in foreign currencies	increase in foreign currency		decrease in foreign currency
2%	$	27,717	$	(27,717	)
4%		55,434		(55,434	)
6%		83,152		(83,152	)
8%		110,869		(110,869	)
10%		138,586		(138,586	)

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13. Financial instruments (continued)

(iv)	Credit risk:
	The Company manages its credit risk with respect to accounts receivable by dealing primarily with large creditworthy customers and by billing whenever possible in advance of rendering services. The Company’s loans receivable are secured by both a general security agreement on the assets in the investee company as well as collateralized by the underlying shares.
	Certain of the Company’s financial assets, including cash and cash equivalents are exposed to the risk of financial loss occurring as a result of default of a counterparty on its obligations to the Company. The Company may, from time to time, invest in debt obligations. The Company may also be exposed, in the normal course of business, to credit risk from advances to investee companies.
	Credit risk on derivative financial instruments is the risk of a financial loss occurring as a result of a default of a counterparty on its obligation to the Company. Derivative-related credit risks are subject to the same credit approval, limit and monitoring standards that are used for managing other transactions that create credit exposure. This includes evaluation of counterparties as to creditworthiness, and managing the size, diversification and maturity structure of the portfolio.
(v)	Interest rate risk:
	Interest risk is the impact that changes in interest rates could have on the Company’s earnings and liabilities. All of the Company’s interest-bearing investments are at fixed rates, hence there is no exposure to interest rate fluctuations while investments are held. The Company has a credit facility which bears interest at the bank prime rate and can be repaid by the Company at any time, without notice or penalty. It is management’s opinion that the Company is not exposed to significant interest rate risk.

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14.	Segmented information
	Summary of financial information concerning the Company’s operating segments is shown in the following tables:

(a) Three months operating results

	For the three months ended
	December 31, 2008
	Consumer and		Merchant
	Retail Branding		Banking			Corporate			Total
Net revenue	$	3,941,774		($213,208	)	$	—		$	3,728,566
Operating expenses:
Salaries and benefits		2,825,251		337,203			303,166			3,465,620
General and administrative		469,780		97,360			323,222			890,362
Occupancy costs		215,130		76,278			(71,475	)		219,933
Depreciation		104,611		1,545			81,319			187,475
Interest expense		—		—			4,495			4,495
Earnings (loss) before income taxes and minority interest		327,002		(725,594	)		(640,727	)		(1,039,319	)
Income tax expense										—
Loss before minority interest										(1,039,319	)
Minority interest										(1,488	)
Net loss										($1,037,831	)

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14. Segmented information (continued)

	For the three months ended
	December 31, 2007
	Consumer and			Merchant
	Retail Branding			Banking		Corporate			Total
Net revenue	$	3,668,929		$	1,021,961	$	—		$	4,690,890
Operating expenses:
Salaries and benefits		2,491,937			372,509		352,078			3,216,524
General and administrative		381,202			104,951		301,167			787,320
Occupancy costs		217,252			18,798		(78,943	)		157,107
Depreciation		97,865			4,017		85,664			187,546
Interest (income) expense		(4,999	)		—		14,962			9,963
Earnings (loss) before income taxes		485,671			521,687		(674,929	)		332,430
Income tax recovery										(25,780	)
Net earnings									$	358,210

(b) Summary of total assets

	Consumer and		Merchant
	Retail Branding		Banking		Corporate		Total
December 31, 2008	$	12,878,655	$	23,029,295	$	681,145	$	36,589,095
September 30, 2008	$	14,252,978	$	21,476,157	$	752,909	$	36,482,044

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Envoy Capital Group Inc.
Management Discussion and Analysis
First Quarter of Fiscal 2009
February 12, 2009

This section of our interim report sets forth Management’s Discussion and Analysis (“MD&A”) of the financial performance of Envoy Capital Group Inc. (“Envoy”, “the Company”,“we” or “us”) for the three month period ended December 31, 2008 compared to the three month period ended December 31, 2007.

The analysis should be read in conjunction with the unaudited interim consolidated financial statements (the “Financial Statements”) for the period ended December 31, 2008, including the accompanying notes, which are presented elsewhere in this report as well as the annual audited consolidated financial statements and the MD&A presented in the Annual Report to Shareholders for the year ended September 30, 2008

The consolidated financial statements have been prepared by management in accordance with generally accepted accounting principles in Canada, which vary in certain significant respects from generally accepted accounting principles in the United States. A description of the significant differences, as applicable to the Company, is included in Note 22 to the September 30, 2008 year end audited financial statements.

The discussion, analysis and financial review are presented in the following sections:

1. Executive Summary
2. Results of Operations
3. Summary of Quarterly Results
4. Commitments and Contractual Obligations
5. Liquidity and Capital Resources
6. Related Party Transactions
7. Critical Accounting Policies
8. Risks and Uncertainties
9. Evaluation of Disclosure Controls and Procedures
10. Updated Share Information
11. Other Information
12. Forward Looking Statements

1. EXECUTIVE SUMMARY

Envoy conducts its business through two reportable operating segments: the Consumer and Retail Branding Group and the Merchant Banking Group. In addition, Envoy has a “Corporate Group” which provides certain administrative, accounting, financial, regulatory reporting and legal functions.

Corporate Overview

At the Company’s annual general meeting held on March 30, 2007 the shareholders voted to amend the Company’s articles of incorporation by changing its name to Envoy Capital

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Group Inc. and removing the maximum number of common shares that the Company is authorized to issue. In addition, the shareholders also voted to reduce the stated capital of the Company’s common shares by $40.3 million for the purpose of eliminating the deficit on the consolidated balance sheet of the Company as at September 30, 2006.

On November 25, 2008, the Company established a new foreign subsidiary, Envoy Capital Group Monaco, S.A.M (“ECGM”). The mandate for ECGM is mainly to attract new investment opportunities and promote the services of the Company in the European market.

On February 5, 2007 the Company announced that the Toronto Stock Exchange had accepted its notice of intention to purchase from time to time, if considered advisable, up to an aggregate of 1,001,818 common shares over the next twelve month period. Purchases were approved to commence on February 7, 2007 and conclude on the earlier of the date on which purchases under the bid had been completed and February 7, 2008. During the reporting year ending September 30, 2007 Envoy repurchased and cancelled 813,466 common shares for cash consideration of $2.8 million. The average price of the shares repurchased during this period was $3.47 per share. In fiscal 2008, the Company completed the purchases under this normal course issuer bid, repurchasing and cancelling 188,309 shares for cash consideration of $572,942, or an average price of $3.04 per share.

On February 6, 2008 the Company initiated a new normal course issuer bid whereby the Company was authorized to purchase from time to time, if considered advisable, up to an aggregate of 903,880 common shares over the ensuing twelve month period. As of December 31, 2008, the Company had repurchased and cancelled all 903,880 common shares for cash consideration of $2,419,396, an average of $2.59 per share.

On September 15, 2006, the Company announced its intention to repurchase its common shares under a substantial issuer bid in the form of a modified “Dutch Auction” tender offer. On January 25, 2007, pursuant to this Dutch Auction tender offer, the Company announced that it would take up and pay for the shares at a purchase price of US$2.70 (CDN$3.19) per share for a total purchase price of US$24.4 million (CDN$28.7 million). Costs relating to the offering totaled approximately $1.5 million. On January 30, 2007, the Company took up and paid for 9,002,383 shares. Payment for the shares was made from available cash on hand.

Based on the 2008 year-end financial statements, the Company confirms that it will be characterized as a passive foreign investment company (“PFIC”) under the U.S. Internal Revenue Code for the fiscal year ended September 30, 2008, and may be a PFIC for subsequent fiscal years.

The application of the PFIC rules is complex. U.S. shareholders are urged to consult their own tax advisors about the U.S. federal income tax consequences of owning and disposing of stock in a PFIC, and about the advisability, procedure and timing of their making any of the available tax elections, including a “qualified electing fund” or “mark-to-market” elections. U.S. shareholders who choose to make a QEF election should refer to the Envoy website at www.envoy.to following Envoy’s fiscal year end in order to receive the necessary financial information.

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Consumer and Retail Branding Overview

The operations of the Branding segment are carried out through Envoy’s wholly owned Canadian subsidiary, Watt International Inc. (“Watt”). Watt’s services, including brand strategy and design, retail consulting and package design, are provided to a broad range of customers in various segments of the market. Watt recently transformed its business model to become a more strategically driven agency better positioned to retain and service existing clients by providing innovative solutions in domestic and international markets.

Operating costs for the Branding business are comprised of salaries and benefits, general and administrative expenses and occupancy costs. 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.

Because the Branding business operates in a service business, management monitors these operating costs on a percentage of revenue basis. Salaries and benefits tend to fluctuate in conjunction with revenues. To avoid adding permanent overhead, management uses contract labour whenever possible to manage the business through short term periods of heavy workflow. Occupancy costs and general and administrative expenses are not directly related to servicing clients and therefore tend not to increase or decrease in direct proportion to revenue fluctuations because a significant portion of these expenses are relatively fixed.

Merchant Banking Overview

Envoy’s merchant banking operations focus on providing financial services as well as equity and debt capital to small and mid-cap companies. Envoy believes that there is a need for merchant banking services in this segment of the market and Envoy is uniquely positioned to satisfy this need. Envoy has made several successful equity investments in recent years and has demonstrated an ability to identify and to add value to small and mid-cap companies in need of capital.

The Merchant Banking segment investments currently consist of a blend of professionally managed market diversified funds and direct investments in growth stage public companies. The Merchant Bank business earnings consist of both realized and unrealized gains in the fair value of its investments, plus dividends and interest income.

Operating costs for the Merchant Banking segment are comprised of salaries and benefits, general and administrative expenses and occupancy costs. 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 gains and losses. Occupancy costs represent the costs of leasing and maintaining company premises.

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2. RESULTS OF OPERATIONS

Three Months Ended December 31, 2008 Compared To Three Months Ended December 31, 2007

On a consolidated basis, the net loss for the first quarter of fiscal 2009 was ($1.0) million compared with net income of $0.4 million for the first quarter of fiscal 2008.

On a fully diluted per share basis the net loss for this year’s first quarter was ($0.12) per share compared to net income of $0.04 per share last year.

Consumer and Retail Branding Segment

Net revenue for the Branding Segment represents compensation for services rendered, net of any pass-through costs such as production costs incurred on behalf of clients in acting as agent for them.

The breakdown of net revenue is as follows:

		Net revenue for the three months ended December 31
		(in millions)
By type of service:	2008		% of total			2007		% of total
Consumer and retail branding	$	3.9		100	%	$	3.7		100	%
By customer location:	2008		% of total			2007		% of total
USA and South America	$	1.8		45	%	$	1.4		37	%
Canada		1.3		34	%		1.3		35	%
Middle East and Asia		0.8		21	%		1.0		28	%
	$	3.9		100	%	$	3.7		100	%

Net revenue for the three months ended December 31, 2008 was $3.9 million, compared to $3.7 million for the three months ended December 31, 2007, an increase of $0.2 million or 5%. The reason for the increase in net revenue from last year to this year was mainly growth in existing client revenue. The Consumer Brands component has focused on finding ways to create value-added services in order to continue to build its revenue base during the current economic slowdown. The emphasis over the last two years on developing a more diverse portfolio of clients has allowed the business to position itself well in the current climate. The Retail Branding component has also sustained its business despite the difficult environment. The slight reduction in revenues from the Middle East and Asia in the first quarter compared to the same period last year is mainly related to the timing of project completion rather than a loss of clients.

Net revenue from U.S. and South American based customers increased by approximately $0.4 million for the first quarter of fiscal 2009 as compared to the same period last year, while net revenue from Canadian customers was approximately the same in both periods. Net revenue from the Middle East and Asian region decreased $0.2 million in the first quarter of 2009 compared to the same quarter of 2008. As client spending patterns vary

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by region and by season the Company’s geographic revenue will also shift from quarter to quarter.

Operating expenses, excluding depreciation, for the first quarter of 2009 were $3.5 million, compared with $3.1 million for the first quarter of fiscal 2008, primarily as a result of increased labour costs. Expressed as a percentage of revenue, operating expenses for the first quarter of fiscal 2009 and 2008 were 89.0% and 84.2%, respectively.

Salaries and benefits expenses for the current quarter were $2.8 million compared to $2.5 million for the first quarter last year, an increase of $0.3 million. Salaries and benefits expense as a percent of net revenue was 71.7% for this year’s first quarter compared to 67.9% for the same period last year. Salaries and benefits expenses in the both periods are within acceptable levels and management continues to actively manage the labour pool to achieve maximum efficiency.

General and administrative expenses were $0.5 million in the first quarter of fiscal 2009 compared to $0.4 million for the same period last year. The branding segment continues to invest in new business initiatives in order to sustain the revenue base as economic conditions become more difficult.

Occupancy costs for both the current quarter and the same period last year were $0.2 million. Occupancy costs as a percent of net revenue were 5.5% this year compared to 5.9% last year.

Depreciation expense for the three months ended December 31, 2008 and three months ended December 31, 2007 was $0.1 million.

Interest expense was nil for the three months ended December 31, 2008 and negligible for the same period last year.

Merchant Banking Segment

Investment income from merchant banking activities includes realized and unrealized gains and losses from the Company’s investments plus interest and dividend income earned during the period.

Net investment losses for the merchant banking division were ($0.2) million for the three month period ended December 31, 2008, compared to net investment revenue of $1.0 million for the same period last year. Envoy entered fiscal 2009 with a substantial portion of its investment capital in the form of cash or cash equivalents. As a result, the Company was able to minimize the impact of a most turbulent period for the capital markets. During the first quarter of fiscal 2009, the focus of the merchant banking segment was to preserve capital and assess potential opportunities that may arise once the market showed signs of stabilizing. In that respect, the first quarter was relatively successful, as the Company was able to significantly outperform the major indexes by limiting investment losses to approximately (1.0%) of investment assets. Comparatively,

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the major indexes sustained losses of approximately (19.1%) for the Dow Jones Industrial Average, (22.4%) for the S&P 500 Index and (23.5%) for the TSX Composite.

During the first quarter, the Company employed an effective foreign exchange strategy to take advantage of the strengthening U.S. currency. As a result, losses on price movements in securities were offset by gains on currency conversion. Nearing the end of the first quarter, with the market experiencing record volatility levels, Envoy began to take positions in stock option derivatives. The Company anticipates the premiums received from writing put options on a number of large cap U.S. stocks will augment the returns on the portfolio as well as being an effective way to deploy capital on a re-entry into the market.

Going forward, investment gains will be a function of general market and economic conditions as well as the success of individual securities selected for investment. Accordingly, the income generated from such investment activity is unlikely to be consistent from period to period.

Operating expenses, excluding depreciation, were $0.5 million for both the current quarter and the same period last year. Much of the operating expenses are fixed in nature, thus profitability is typically a function of revenue generated.

Salaries and benefits expenses for the current quarter were $0.3 million, compared to $0.4 million for the first quarter last year, due to lower incentive compensation. General and administrative expenses were $0.1 million in both the current quarter and the same quarter last year.

Occupancy costs were slightly higher in the first quarter of fiscal 2009 compared to the same period last year due to one-time set up fees for the new office in Monaco. Depreciation expense was minimal for both the current quarter and the same period last year.

Corporate

Corporate expenses include salaries and benefits for the accounting, financial and administrative functions of Envoy. In addition, the corporate expenses include the costs of regulatory compliance such as audit and legal expenses, board fees, listing fees and shareholder relations. Costs incurred by the corporate component during the quarter totaled approximately $0.6 million, compared to $0.7 million for the first quarter last year.

Income Taxes

There was no income tax expense or recovery for the current period. The reason for the disparity from the substantially enacted tax rate of 33% was an adjustment to the future value of the tax asset based on the Company’s results for the first quarter. The current value of the tax asset reflects management’s assessment of those timing differences and loss carryforwards which are more likely than not to be used in future periods.

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Net earnings (loss)

Net loss for the three months ended December 31, 2008 was ($1.0) million, compared to earnings of $0.4 million for the three months ended December 31, 2007. On a per share basis the net loss in the current quarter were ($0.12) per share compared to earnings of $0.04 per share last year.

The earnings per share calculations are based on fully diluted weighted average shares outstanding of 8,558,730 for the current quarter compared to 9,504,467 in the same period last year.

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3. SUMMARY OF QUARTERLY RESULTS

	Q1 2009			Q4 2008			Q3 2008			Q2 2008
Net revenue		$3.7	million		($0.3	) million		$3.5	million		$3.3	million
Net loss:
From continuing operations		($1.04	) million		($8.25	) million		($1.28	) million		($0.98	) million
Including discontinued operations		($1.04	) million		($8.25	) million		($1.28	) million		($0.98	) million
Net loss per share
From continuing operations
Basic		($0.12	)		($0.95	)		($0.14	)		($0.10	)
Diluted		($0.12	)		($0.95	)		($0.14	)		($0.10	)
Including discontinued operations
Basic		($0.12	)		($0.95	)		($0.14	)		($0.10	)
Diluted		($0.12	)		($0.95	)		($0.14	)		($0.10	)

	Q1 2008			Q4 2007			Q3 2007			Q2 2007
Net revenue	$	4.7	million	$	4.5	million	$	4.3	million	$	3.8	million
Net earnings (loss):
From continuing operations	$	0.36	million	($	0.01	) million	$	0.20	million	$	0.86	million
Including discontinued operations	$	0.36	million	$	0.36	million	$	0.20	million	$	0.86	million
Net earnings (loss) per share
From continuing operations
Basic	$	0.04		$	0.00		$	0.02		$	0.07
Diluted	$	0.04		$	0.00		$	0.02		$	0.07
Including discontinued operations
Basic	$	0.04		$	0.04		$	0.02		$	0.07
Diluted	$	0.04		$	0.04		$	0.02		$	0.07

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4. COMMITMENTS AND CONTRACTUAL OBLIGATIONS

Set out below is a summary of the amounts due and committed under contractual obligations at December 31, 2008:

	Total		Due in year 1		Due in year 2		Due in year 3
Operating leases	$	750,805	$	569,517	$	179,768	$	1,520
Long term debt		47,143		47,143		—		—
Total contractual cash obligations	$	797,948	$	616,660	$	179,768	$	1,520

5. LIQUIDITY AND CAPITAL RESOURCES

As at December 31, 2008, Envoy had working capital of $23.6 million, compared to approximately $24.5 million as at September 30, 2008. Included in working capital is an investment portfolio of marketable securities, the current portion of which was $19.9 million at December 31, 2008 and $17.7 million at September 30, 2008. The principal reason for the decrease was the use of cash receipts to fund the operating loss for the quarter.

Approximately $0.8 million in cash was used by operations during the three months ended December 31, 2008, compared to approximately $2.0 million generated by operations for the three months ended December 31, 2007. The main use of funds in the current period was an increase in investments held for trading. The funds used to increase the portfolio were provided by collections of accounts receivable, an extension of accounts payable and premiums received from writing put options.

The Company used proceeds from loans receivable to continue to purchase shares under its normal course issuer bid, which is now complete.

The Company’s investment portfolio is highly liquid and currently includes a large cash component. The Company also maintains an operating line of credit. The revolving credit facility is available up to a maximum of $1.0 million, of which $265,000 was utilized at December 31, 2008. The Company uses the operating line for day-to-day requirements only and has no current or expected future requirements for access to additional credit.

6. TRANSACTIONS WITH RELATED PARTIES

In November, 2008, the company established a new subsidiary in the principality of Monaco, Envoy Capital Group Monaco, S.A.M (“ECGM”). As part of the local requirements of incorporation, each of the two directors of ECGM, who are residents of Monaco, acquired a 0.1% share interest in ECGM (total of 0.2%) at a cost of 5,000 Euros. Related party transactions are recorded at the exchange amount, being the amount agreed to by the related parties.

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7. CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The significant accounting policies used by Envoy in preparing its Financial Statements are described in Note 2 to the Financial Statements and should be read to ensure a proper understanding and evaluation of the estimates and judgments made by management in preparing those Financial Statements. Envoy’s Financial Statements are prepared in accordance with Canadian generally accepted accounting principles. Envoy also prepared a reconciliation to United States generally accepted accounting principles, which is included in Note 22 to the annual consolidated financial statements.

Inherent in the application of some of these policies is the judgment 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 take appropriate estimates at the time the Financial Statements are prepared.

Although all of the policies identified in Note 2 to the Financial Statements are important in understanding the Financial Statements, the policies discussed below are considered by management to be central to understanding the Financial Statements, because of the higher level of measurement uncertainties involved in their application.

Goodwill

Goodwill represents the price paid for acquisitions in excess of the fair market value of net tangible and intangible assets acquired. Goodwill is carried at cost, less impairment losses if any.

The Company uses a two-step impairment test on an annual basis, or when significant business changes have occurred that may have had an adverse impact on the fair value of the goodwill. To determine whether impairment has occurred, the fair value of the reporting unit is compared to its carrying amounts, including goodwill. When the fair value is in excess of its carrying amount, the goodwill is not considered to be impaired, and the second step of the impairment test is not necessary.

When the carrying amount of the reporting unit as determined in the first step exceeds the fair value, then the fair value of the goodwill is determined in the same manner as followed on a business combination. An impairment loss is recognized when the carrying amount of the goodwill of a reporting unit exceeds its fair value. It is not reversed in the event that the fair value subsequently increases.

Income Taxes

Envoy accounts for income taxes using the asset and liability method. Under this method, future income taxes are recognized at the enacted or substantially enacted tax rate expected to be applicable at the anticipated date of the reversal for all significant temporary differences between the tax and accounting bases of assets and liabilities and for certain tax carryforward items. Future income tax assets and liabilities are recognized only to the extent that, in the opinion of management, it is more likely than not that the future income tax assets will be realized. Future operating results and future tax rates

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could vary materially, and accordingly the value of income tax assets and liabilities could change by material amounts.

Revenue Recognition — Branding segment

The Company presents as net revenue its net commission and fee income earned as compensation for its services. Further, the balance sheet reflects the following:

(i)	deferred revenue representing fees billed and collected in advance of such fees being earned;
(ii)	unbilled accounts receivable representing fees earned but not yet billed as well as well as reimbursable pass-through costs; and
(iii)	work in process represents costs incurred on projects for which revenue has not yet been recognized for accounting purposes.

Included in work in process are charges for staff time at standard cost and third party charges. The standard cost rate provides for the recovery of actual labour and overhead costs incurred. The third party charges are for actual costs related to outsourced goods and services for specific projects.

The Company recognizes net revenue and profits for Consumer and Retail Branding on the completed contract basis, and accordingly revenue and profit are recognized only when the contract or contract milestone is substantially complete. Anticipated losses are provided for when the estimate of total costs on a contract indicates a loss.

Net revenue for the Consumer and Retail Branding segment represents compensation for services rendered, net of any pass-through costs such as production costs incurred on behalf of clients in acting as agent for them. In circumstances where the Company retains subcontractors, such as architects or engineers, to perform services as an agent to the Company, the revenue for such services is included in net revenue and the cost of the subcontractor’s services is included in salaries and benefits expense or general and administrative expenses, as appropriate.

Revenue Recognition — Merchant banking segment

Securities transactions are recorded on a trade-date basis. Changes in fair value of held-for-trading investments are reflected in the consolidated statements of operations. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis.

Financial Instruments

Financial assets and financial liabilities are initially recognized at fair value and their subsequent measurement is dependent on their classification as described below. Their classification depends on the purpose for which the financial instruments were acquired or issued, their characteristics and the Company’s designation of such instruments. The standards require that all financial assets be classified either as held-for-trading (“HFT”), available-for-sale (“AFS”), held-to-maturity (“HTM”), or loans and receivables. The standards require that all financial assets, including all derivatives, be measured at fair

31

value with the exception of loans and receivables, debt securities classified as HTM, and AFS financial assets that do not have quoted market prices in an active market.

HFT financial assets are financial assets typically acquired for resale prior to maturity. They are measured at fair value at the balance sheet date. Interest and dividends earned, gains and losses realized on disposal and unrealized gains and losses from market fluctuations are included in net revenue for the period.

HTM financial assets are those non-derivative financial assets with fixed or determinable payments and a fixed maturity, other than loans and receivables that an entity has the positive intention and ability to hold to maturity. These financial assets are measured at amortized cost.

AFS financial assets are those non-derivative financial assets that are designated as AFS, or that are not classified as loans and receivables, HTM investments or HFT. AFS financial assets are carried at fair value with unrealized gains and losses included in Other Comprehensive Income until realized when the cumulative gain or loss is recognized in net income.

Loans and receivables are accounted for at amortized cost using the effective interest method.

At each financial reporting period, the Company’s management estimates the fair value of investments based on the criteria below and reflects such valuations in the consolidated financial statements.

(i) Publicly-traded investments:

Securities which are traded on a recognized securities exchange and for which no sales restrictions apply are recorded at fair values based on quoted market prices at the consolidated balance sheet dates or the closing price on the last day the security traded if there were no trades at the consolidated balance sheet dates.

Securities which are traded on a recognized securities exchange but which are escrowed or otherwise restricted as to sale or transfer may be recorded at amounts discounted from market value. In determining whether a discount is appropriate for such investments, the Company considers the nature and length of the restriction, the business risk of the investee company, its stage of development, market potential, relative trading volume and price volatility and any other factors that may be relevant to the ongoing and realizable value of the investments.

(ii) Privately-held investments:

Securities in privately-held companies are recorded at fair value based on objective evidence including recent arm’s length transactions between knowledgeable, willing parties, such as significant subsequent equity financing by an unrelated, professional investor, discounted cash flow analysis, operational results, forecasts and other developments since acquisition.

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8. 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. Envoy is subject to these risks and uncertainties and actively manages them as follows:

General economic conditions

The marketing and communication industry is cyclical and as a result it is subject to downturns in general economic conditions and changes in client business and marketing budgets. These fluctuations may affect the ability of the branding segment to generate consistent returns. However, a significant portion of our business is with large multinational businesses, including large packaged goods companies and large food retailers who are less impacted by downturns in the economy. In an effort to offer our clients services on an international scale, and to manage our exposure to broad economic conditions, Envoy has diversified geographically, operating in over 30 countries around the world.

The merchant banking industry is subject to general market conditions and investment returns may vary significantly from period to period. Envoy attempts to manage its business with a focus on wealth protection while maintaining steady growth. Investments are usually very liquid and investment horizons consistently monitored.

Client concentration

The Company receives a significant portion of its revenues from a limited number of large clients. The loss of any such clients could adversely impact the Company’s prospects, business, financial condition and results of operations. For the three months ended December 31, 2008, the Company’s top three clients accounted for 53% of its consolidated net revenue, compared to 36% concentration in the top three clients for the first three months of fiscal 2008. The Company expects reliance on a limited number of its clients to continue into the future. The failure to achieve continued design wins from one or more of these significant clients, without adding new sources of net revenue, could have an adverse effect on the Company’s financial results.

Market risk

Market risk is the risk of loss of value in Envoy’s portfolios resulting from changes in interest rates, foreign exchange rates, credit spreads, and equity prices. The Company mitigates this risk by employing a professional investment manager and by ensuring that the portfolio is well diversified.

Foreign currency risk

Envoy is subject to currency risk through its activities in Europe, the Middle East and the United States. Unfavorable changes in the exchange rate may adversely affect the

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operating results of Envoy. Envoy may, at times, use derivative instruments and foreign currency contracts to reduce its exposure to foreign currency risk, although the use of these instruments may not eliminate all risk of foreign currency fluctuations.

International exposure

The Company’s international operations are subject to a number of risks inherent in operating in different countries. These include, but are not limited to risks regarding restrictions on repatriation of earnings and changes in the political or economic conditions of a specific country or region, particularly in emerging markets. The occurrence of any of these events or conditions could adversely affect the Company’s ability to increase or maintain its operations in various countries.

Key personnel

Envoy’s success depends in part upon its ability to hire and retain key senior management and skilled technical, client service and creative personnel able to create and maintain solid relationships with clients. An inability to hire or retain qualified personnel could have a material adverse effect on Envoy. To reduce the risk of losing valued employees, Envoy strives to maintain a positive work environment that values the contributions of its employees.

Credit risk

Envoy manages its credit risk with respect to accounts receivable by acting as an agent for its customers, by dealing primarily with large creditworthy customers and by billing whenever possible in advance of rendering services or making commitments. Management believes that Envoy is not subject to significant concentration of credit risk. As at December 31, 2008, Envoy had one customer, who represented 31% of accounts receivable and one customer who represented 32% of accounts receivable as at September 30, 2008.

Future investments

The Company identifies, assesses and reviews potential investment opportunities on an ongoing basis. As part of the review, the Company conducts business, legal and financial due diligence with the goal of identifying and evaluating material risks involved in any particular transaction. Despite the Company’s efforts, it may be unsuccessful in ascertaining or evaluating all such risks. As a result, it might not realize the intended advantages of any given investment and may not identify all of the risks relating to the investment which could adversely impact the Company’s business, operating results and financial condition.

9. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

The Company has established, and is maintaining, disclosure controls and procedures to provide reasonable assurance that material information relating to the Company is disclosed in annual filings, interim filings or other reports and recorded, processed,

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summarized and reported within the time periods specified as required by securities regulations. Management has evaluated the effectiveness of the Company’s disclosure controls and procedures as at December 31, 2008 and, given the size of the Company and the involvement at all levels of the Chief Executive Officer, Chief Financial Officer and other senior officers, believes that they are sufficient to provide reasonable assurance that the Company’s disclosures are compliant with securities regulations.

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. Management has designed such internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with Canadian GAAP, and reconciled to US GAAP, as applicable.

Because of its inherent limitations, the Company’s internal control over financial reporting may not prevent or detect all possible misstatements or frauds. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Management has assessed the effectiveness of the Company’s internal control over financial reporting and concluded that such internal control over financial reporting is effective as of December 31, 2008.

10. UPDATED SHARE INFORMATION

As at December 31, 2008, there were 8,558,377 common shares of Envoy issued and outstanding, compared to 8,585,636 issued and outstanding at September 30, 2008.

11. OTHER INFORMATION

Additional information relating to Envoy, including our Annual Information Form is available on SEDAR at www.sedar.com.

12. 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.

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Securities and Exchange Commission, or Envoy’s Annual Information Form filed with the Canadian securities authorities. The words “believe”, “estimate”, “expect”, “intend”, “anticipate”, “foresee”, “plan”, and similar expressions identify certain of such forward looking statements, which are valid only as of the date on which they are made. In particular, statements relating to future growth are forward looking statements. Envoy disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to place undue reliance on these forward-looking statements

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Shareholder Information

HEAD OFFICE	OFFICERS	AUDITORS
172 John Street	Joseph Leeder	BDO Dunwoody LLP
Toronto, Canada M5T 1X5	President and Chief Executive Officer	60 Columbia Way, Suite 400
Telephone: (416) 593-1212		Markham, Canada L3R 0C9
Facsimile: (416) 593-4434	Andrew Patient
	Chief Financial Officer
		BANKERS
DIRECTORS	Darlene Soper	RBC Royal Bank
Hugh Aird	Secretary	200 Bay Street
Vice-Chairman North America		Toronto, Canada M5J 2J5
Edelman
	AUDIT COMMITTEE	LEGAL COUNSEL (CANADIAN)
John H. Bailey	David Parkes (Chair)	Blake, Cassels & Graydon LLP
B.Comm, J.D., LL.M	Hugh Aird	Box 25, Commerce Court West
Director, Envoy Capital Group	David I. Hull	Toronto, Canada M5L 1A9
Monaco S.A.M.
	COMPENSATION COMMITTEE	LEGAL COUNSEL (USA)
Geoffrey B. Genovese	David I. Hull (Chair)	Skadden, Arps, Slate, Meagher &
President and Director,	Hugh Aird	Flom LLP
Envoy Capital Group Monaco	David Parkes	PO Box 258, Suite 1750
S.A.M.		Toronto, Canada M5K 1J5
David I. Hull (Chairman of the	NOMINATING AND CORPORATE	INVESTOR RELATIONS
Board)	GOVERNANCE COMMITTEE
President	Hugh Aird (Chair)	E-mail: info@envoy.to
Hull Life Insurance Agencies Inc.	David I. Hull
	David Parkes	Additional information is
David Parkes		available on our
President	TRANSFER AGENT	Web site at www.envoy.to
David Parkes and Associates Inc.	Computershare Trust
	Company of Canada	STOCK TRADING INFORMATION
	100 University Avenue, 9th Floor	Toronto Stock Exchange: ECG
	Toronto, Canada M5J 2Y1	NASDAQ Exchange: ECGI