Unless otherwise indicated, references to the "Company" mean MDC Partners Inc. and its subsidiaries, and references to a fiscal year means the Company's year commencing on January 1 of that year and ending December 31 of that year (e.g., fiscal 2008 means the period beginning January 1, 2008, and ending December 31, 2008).

The Company reports its financial results in accordance with generally accepted accounting principles ("GAAP") of the United States of America ("US GAAP"). However, the Company has included certain non-US GAAP financial measures and ratios, which it believes provide useful information to both management and readers of this report in measuring the financial performance and financial condition of the Company. One such term is "organic revenue", which means growth in revenues from sources other than acquisitions or foreign exchange impacts. These measures do not have a standardized meaning prescribed by US GAAP and, therefore, may not be comparable to similarly titled measures presented by other publicly traded companies, nor should they be construed as an alternative to other titled measures determined in accordance with US GAAP.

The Company's objective is to create shareholder value by building market-leading subsidiaries and affiliates that deliver innovative, value-added marketing communications and strategic consulting to their clients. Management believes that shareholder value is maximized with an operating philosophy of "Perpetual Partnership" with proven committed industry leaders in marketing communications.

MDC manages the business by monitoring several financial and non-financial performance indicators. The key indicators that we review focus on the areas of revenues and operating expenses and capital expenditures. Revenue growth is analyzed by reviewing the components and mix of the growth, including: growth by major geographic location; existing growth by major reportable segment (organic); growth from currency changes; and growth from acquisitions.

MDC conducts its businesses through the Marketing Communications Group. Within the Marketing Communications Group, there are three reportable operating segments: Strategic Marketing Services ("SMS"), Customer Relationship Management ("CRM") and Specialized Communication Services ("SCS"). In addition, MDC has a "Corporate Group" which provides certain administrative, accounting, financial and legal functions.

Marketing Communications Businesses

Through its operating "partners", MDC provides advertising, consulting, customer relationship management, and specialized communication services to clients throughout the United States, Canada, Europe, Jamaica and the Philippines.

The operating companies earn revenue from agency arrangements in the form of retainer fees or commissions; from short-term project arrangements in the form of fixed fees or per diem fees for services; and from incentives or bonuses. Additional information about revenue recognition appears in Note 2 of the notes to the consolidated financial statements.

MDC measures operating expenses in two distinct cost categories: cost of services sold, and office and general expenses. Cost of services sold is primarily comprised of employee compensation related costs and direct costs related primarily to providing services. Office and general expenses are primarily comprised of rent and occupancy costs and administrative service costs including related employee compensation costs. Also included in operating expenses is depreciation and amortization.

Because we are a service business, we monitor these costs on a percentage of revenue basis. Cost of services sold tend to fluctuate in conjunction with changes in revenues, whereas office and general expenses and depreciation and amortization, which are not directly related to servicing clients, tend to decrease as a percentage of revenue as revenues increase because a significant portion of these expenses are relatively fixed in nature.

We measure capital expenditures as either maintenance or investment related. Maintenance capital expenditures are primarily composed of general upkeep of our office facilities and equipment that are required to continue to operate our businesses. Investment capital expenditures include expansion costs, the build out of new capabilities, technology or call centers, or other growth initiatives not related to the day to day upkeep of the existing operations. Growth capital expenditures are measured and approved based on the expected return of the invested capital.

Certain Factors Affecting Our Business

Acquisitions and Dispositions. Our strategy includes acquiring ownership stakes in well-managed businesses with strong reputations in the industry. We engaged in a number of acquisition and disposal transactions during the 2006 to 2008 period, which affected revenues, expenses, operating income and net income. Additional information regarding material acquisitions is provided in Note 4 "Acquisitions" and information on dispositions is provided in Note 10 "Discontinued Operations" in the notes to the consolidated financial statements.

Foreign Exchange Fluctuations. Our financial results and competitive position are affected by fluctuations in the exchange rate between the US dollar and non-US dollars, primarily the Canadian dollar. See also "Quantitative and Qualitative Disclosures About Market Risk - Foreign Exchange."

Seasonality. Historically, with some exceptions, we generate the highest quarterly revenues during the fourth quarter in each year. The fourth quarter has historically been the period in the year in which the highest volumes of media placements and retail related consumer marketing occur.

Fourth Quarter Results and Current Economic Conditions. The Company's results of operations during the fourth quarter of 2008 were negatively impacted due to the current economic recession. Revenues for the fourth quarter of 2008 decreased to $144.7 million, compared to 2007 fourth quarter revenues of $152.1 million. This decrease of $7.4 million was a result of foreign currency fluctuations of $5.4 million and a decrease in revenue of $2.0 million. The decrease in revenue occurred in the SCS segment and the CRM segment. The decrease in the revenue in these segments is directly related to clients' canceling, cutting back and not spending on projects and other activities that they have traditionally engaged the Company to perform for them. However, the SMS segment, which is retainer fee-based, had revenue growth of approximately $3.0 million as clients continued to spend on annual programs. Operating profit for the fourth quarter of 2008 decreased to $1.4 million from $10.9 million in 2007, primarily as a result of the decrease in revenue and an increase in non-cash stock based compensation charges of $3.9 million. This amount was offset in part by a decrease in administrative expenses. Non-cash stock based compensation charges increased due primarily to amounts being allocated to compensation expense relating to step-acquisitions of additional equity interests in Accent Marketing Services, Source Marketing and Allard Johnson Communications. Fourth quarter income before income taxes decreased to $5.6 million in 2008, from $8.3 million in 2007, as a result of the above factors and was offset in part by an unrealized gain from the strengthening of the US dollar primarily against the Canadian dollar in 2008 of $7.7 million as compared to an unrealized loss in 2007 of $0.1 million.

The current stock market turmoil has, in part, led to a decline in the market value of the Company's stock. As a result of its lower stock price, the Company determined to pay certain acquisition related payments in the form of cash instead of with the Company's Class A shares, in order to minimize dilution to the current shareholder base. If the current market turmoil continues, it may require the Company to adjust its acquisition strategy.

The severe tightening of the credit markets in 2008 has impacted the Company by virtue of its impact on client spending. In evaluating the 2009 fiscal year, the Company is revisiting 2009 client budgets and assessing the impact of a reduction of those anticipated client spends, including the potential impact that it could have on the Company's results of operations. The Company is currently taking steps to manage its costs to ensure that if client spending is reduced, the Company is in a position to cut the appropriate costs accordingly.

The Company performs its annual goodwill impairment test as of October 1st. In performing this test in October 2008, the Company used multiple valuation techniques to value its reporting units. Since the Company used multiple valuation techniques to measure fair value, the results (respective indications of fair value) were evaluated and weighted, as appropriate, considering the reasonableness of the range indicated by those results. A fair value measurement is the point within that range that is most representative of fair value in the circumstances. Accordingly the Company used both a multiple of earnings and revenues, and discounted cash flow model, to perform the test. The discounted cash flow model was used primarily to confirm the multiples used in the market value method. The Company uses multiples as provided by an industry survey of projected 2009 multiples and with data of actual 2008 transaction multiples. This industry survey was issued in January 2009. The Company used both 2008 actual and 2009 estimated results to determine fair value. In light of the current economic conditions, the Company used multiples, discount rates and updated/revised 2009 budgets as a basis to test for impairment based on the most current information available, in January 2009. The Company also reconciled the aggregate fair value of the reporting units to the market capitalization of the Company. This reconciliation was done as of October 1, 2008 as well as on December 31, 2008. After taking into consideration outstanding indebtedness and considering a deduction for Corporate expenses, there was no difference in the aggregate fair value of the reporting units as compared to the market capitalization. The Company also considered a control premium discount; however, the Company determined that a control premium would have little impact on the reconciliation. Accordingly, a control premium discount was not used in the reconciliation. Based on the tests performed, the Company determined that none of its goodwill was impaired in 2008.

On November 10, 2008, the Company acquired an additional 17% equity interest in CPB from certain minority holders. The purchase price consisted of a cash payment equal to $6.4 million plus the issuance of 105,000 newly-issued Class A shares of the Company, plus an additional contingent purchase price payment due in April 2010 based on 2007, 2008 and 2009 performance. Following the closing of this transaction, the Company's ownership in CPB is 94%.

On December 31, 2008, the Company acquired the remaining 6.3% of Accent Marketing Services ("Accent"). The aggregate purchase price was equal to $4.8 million and was satisfied as follows: on closing, the extinguishment of $1.8 million of outstanding loans, and payment of $1.0 million in cash; in July 2009, $0.6 million payable in cash and in December 2009, $1.4 million payable in cash. The sellers may also earn additional contingent payments based on 2009 performance.

Discontinued Operations

Effective December 3, 2008, Colle & McVoy, LLC completed the sale of certain assets of its Mobium division. The purchase price consisted of minimal cash received at closing plus additional potential payments to be received through 2010. As of December 31, 2008, Mobium is treated as a discontinued operation.

In December 2008, the Company entered into negotiations with the management of Clifford/Bratskeir Public Relations LLC ("Bratskeir") to sell certain remaining assets to management. This transaction is expected to be completed in March 2009, although there can be no assurance that this transaction will be completed. As of December 31, 2008, Bratskeir has been treated as a discontinued operation.

Year Ended December 31, 2007
Financing Agreement

On June 18, 2007, MDC and its material subsidiaries entered into a $185 million senior secured financing agreement (the "Financing Agreement") with Fortress Credit, an affiliate of Fortress Investment Group, as collateral agent and Wells Fargo Bank, as administrative agent, and a syndicate of lenders. Proceeds from the Financing Agreement were used to repay in full the outstanding balances on the Company's prior credit facility, which was terminated.

The Financing Agreement consists of a $55 million revolving credit facility, a $60 million term loan and a $70 million delayed draw term loan. Borrowings under the Financing Agreement bear interest as follows: (a) LIBOR Rate Loans bear interest at applicable interbank rates and Reference Rate Loans bear interest at the rate of interest publicly announced by the Reference Bank in New York, New York, plus (b) a percentage spread ranging from 0% to a maximum of 4.75% depending on the type of loan and the Company's Senior Leverage Ratio. In addition, the Company is required to pay a facility fee of 50 basis points.

Step-Up Acquisitions in Key Partners

On November 1, 2007, the Company acquired an additional 28% of CPB from certain minority holders. The purchase price consisted of a payment of approximately $22.6 million in cash and the issuance of 514,025 newly-issued shares of the Company's Class A stock valued at approximately $5.5 million. Following this transaction, the Company's ownership in CPB was 77%.

On October 18, 2007, the Company acquired the remaining 40% equity interest in kirshenbaum bond & partners LLC ("KBP"). The purchase price consisted of an initial payment of approximately $12.3 million in cash and the issuance of 269,389 newly-issued shares of the Company's Class A stock valued at approximately $2.9 million. In addition, the Company expects to pay contingent amounts to the selling minority holder in 2009 and 2010, based on KBP's financial performance in 2007, 2008 and 2009. Based on 2008 results, an additional payment of $16 million was paid as follows: $14.1 million in November 2008 and $1.9 million is due in 2009.

Management Services Agreement

On April 27, 2007, the Company entered into a new Management Services Agreement (the "Services Agreement") with Miles Nadal and with Nadal Management, Inc. to set forth the terms and conditions on which Mr. Nadal will continue to provide services to the Company as its Chief Executive Officer. Mr. Nadal's prior services agreement with the Company was scheduled to expire on October 31, 2007, subject to two-year annual renewals. If the Company were not going to enter into a new agreement with Mr. Nadal and did not intend to allow the prior agreement to renew, it would have been required to give Mr. Nadal notice of such non-renewal by April 30, 2007.

As an incentive to enter into the Services Agreement, the Company paid a one-time non-renewal fee of $3.5 million upon execution of the Services Agreement, which was expensed during the second quarter of 2007. Mr. Nadal used a portion of the proceeds to repay to the Company the $2.7 million (C$3.0 million) note receivable due on November 1, 2007 from Nadal Management, Inc. The Company had previously reserved the principal amount of this note receivable; the collection of this receivable resulted in a one-time recovery of $2.7 million, which was included in operating income for the year ended December 31, 2007. In addition, during 2007, Mr. Nadal repaid an additional $0.5 million of other previously reserved notes receivable. As a result of these transactions above, operating income was adversely impacted by $0.4 million during the year ended December 31, 2007.

Separation Agreement

On July 23, 2007, the Company entered into a separation agreement and release with its former President and Chief Financial Officer. In connection with this agreement and related matters, the Company incurred charges of approximately $1.9 million during the year ended December 31, 2007. This charge represents all costs and expenses incurred as a consequence of this separation.

Year Ended December 31, 2006
Sale of Secure Products International

On November 14, 2006, MDC completed the sale of its Secure Products International Group for consideration equal to approximately $27 million. Consideration was received in the form of cash of $20 million and additional $1 million annual payments over the next five years. In addition, MDC received a 7.5% equity interest in the newly formed entity acquiring the Secure Products International Group. As of December 31, 2008, MDC has received $3.5 million of these annual payments and a dividend distribution equal to $0.8 million. During 2006, the Company recorded an impairment loss of $19.5 million and a gain on a sale of $1.8 million. The results of operations of the Secure Products International Group have been included in discontinued operations.

Results of Operations for the Years Ended December 31, 2008, 2007 and 2006 are presented below:

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                                                          For the Year Ended December 31, 2008
                         Strategic               Customer             Specialized
                         Marketing             Relationship          Communication            Corporate                Total
                          Services              Management              Services
                                                          (Thousands of United States Dollars)
Revenue             $       333,370        $       133,970        $       117,308        $             -        $       584,648
Cost of services            207,529                101,012                 83,604                      -                392,145
sold
Office and                   76,534                 22,864                 20,735                 17,622                137,755
general expenses
Depreciation and             24,055                  7,350                  2,598                    401                 34,404
amortization
Operating Profit    $        25,252        $         2,744        $        10,371        $       (18,023 )               20,344
(Loss)
Other Income
(Expense):
Other income, net                                                                                                           (14 )
Foreign exchange                                                                                                         13,257
gain
Interest expense,                                                                                                       (13,255 )
net
Income from
continuing
operations before
income taxes,                                                                                                            20,332
equity in
affiliates and
minority interest
Income tax                                                                                                               (2,397 )
expense
Income from
continuing
operations before
equity in                                                                                                                17,935
affiliates and
minority
interests
Equity in
earnings of                                                                                                                 349
affiliates
Minority
interests in
income of           $        (4,402 )      $          (266 )      $        (3,468 )      $             -                 (8,136 )
consolidated
subsidiaries
Income from
continuing                                                                                                               10,148
operations
Loss from
discontinued                                                                                                            (10,015 )
operations
Net income                                                                                                      $           133
Stock-based         $         6,162        $         2,416        $         1,281        $         4,578        $        14,437
compensation

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                                                          For the Year Ended December 31, 2007
                                                          Restated for Discontinued Operations
                         Strategic               Customer             Specialized
                         Marketing             Relationship          Communication            Corporate                Total
                          Services              Management              Services
                                                          (Thousands of United States Dollars)
Revenue             $       307,236        $       112,958        $       113,689                      -        $       533,883
Cost of services            182,417                 81,826                 79,054                      -                343,297
sold
Office and                   75,256                 21,306                 19,524        $        22,148                138,234
general expenses
Depreciation and             20,275                  6,488                  1,954                    258                 28,975
amortization
Operating Profit    $        29,288        $         3,338        $        13,157        $       (22,406 )               23,377
(Loss)
Other Income
(Expense):
Other income, net                                                                                                         3,165
Foreign exchange                                                                                                         (7,192 )
loss
Interest expense,                                                                                                       (11,099 )
net
Income from
continuing
operations before
income taxes,                                                                                                             8,251
equity in
affiliates and
minority interest
Income tax                                                                                                               (6,081 )
expense
Income from
continuing
operations before
equity in                                                                                                                 2,170
affiliates and
minority
interests
Equity in
earnings of                                                                                                                 165
affiliates
Minority
interests in
income of           $       (15,653 )      $          (122 )      $        (4,742 )      $             -                (20,517 )
consolidated
subsidiaries
Loss from
continuing                                                                                                              (18,182 )
operations
Loss from
discontinued                                                                                                             (8,173 )
operations
Net loss                                                                                                        $       (26,355 )
Stock-based         $         5,194        $            91        $           489        $         4,443        $        10,217
compensation

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                                                            For the Year Ended December 31, 2006
                                                            Restated for Discontinued Operations
                         Strategic               Customer               Specialized
                         Marketing             Relationship        Communication Services         Corporate                Total
                          Services              Management
                                                            (Thousands of United States Dollars)
Revenue             $       236,201        $        84,917        $            81,968        $             -        $       403,086
Cost of services            114,758                 61,419                     55,277                                       231,454
sold
Office and                   70,410                 16,531                     13,160                 24,063                124,164
general expenses
Depreciation and             17,525                  5,003                      1,233                    284                 24,045
amortization
Operating Profit    $        33,508        $         1,964        $            12,298        $       (24,347 )               23,423
(Loss)
Other Income
(Expense):
Other income, net                                                                                                             1,351
Foreign exchange                                                                                                                614
gain
Interest expense,                                                                                                            (9,821 )
net
Income from
continuing
operations before
income taxes,                                                                                                                15,567
equity in
affiliates and
minority interest
Income tax                                                                                                                   (7,332 )
expense
Income from
continuing
operations before
equity in                                                                                                                     8,235
affiliates and
minority
interests
Equity in
earnings of                                                                                                                     168
affiliates
Minority
interests in
income of           $       (13,077 )      $           (73 )      $            (3,565 )      $             -                (16,715 )
consolidated
subsidiaries
Loss from
continuing                                                                                                                   (8,312 )
operations
Loss from
discontinued                                                                                                                (25,227 )
operations
Net loss                                                                                                            $       (33,539 )
Stock-based         $         1,010        $            24        $             2,339        $         4,988        $         8,361
compensation

. . .