**EXHIBIT
3**
 
 
 **Management's
Discussion and Analysis of Results of Operations and Financial
Condition**
 (in US
dollars)
 May 20,
2005
 
 *The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended March 31,
2005.*
 
 **Consolidated
review**
 FirstService
Corporation (the "Company" or "FirstService") generated strong operating results
in fiscal 2005, with revenue and adjusted diluted earnings per share1
growth in excess of 34%.
 
 We
completed the acquisition of a 71.8% interest in CMN International Inc. ("CMN")
on November 30, 2004. CMN is the largest member of the Colliers International
commercial real estate services network, with operations in the United States,
Canada, Australia and 20 other countries. CMN generated revenues of
approximately $285 million during the year prior to acquisition. The net
purchase price of $40 million was financed through our revolving credit
facility.
 
 We
completed several acquisitions in the Residential Property Management area, most
notably establishing new platforms in Chicago and Las Vegas. In Property
Improvement Services, we also acquired the Dallas franchise of our California
Closets franchise system.
 
 On
December 15, 2004 we completed a 2 for 1 stock split effected in the form of a
dividend. Share information for all periods has been updated to reflect the
split.
 
 During
the year, we sold three small operations that displayed limited growth prospects
and weak returns on investment. The businesses have been reclassified to
discontinued operations for all periods presented. They contributed aggregate
revenues of $39 million in fiscal 2004, the last full year of ownership, to the
Property Improvement Services and Residential Property Management segments and
collectively generated net operating losses in each of the past three years. In
aggregate, a net gain of $1.2 million was realized upon the
disposals.




1 Adjusted diluted
net earnings per share from continuing operations is defined as diluted net
earnings per share from continuing operations plus the effect, after income
taxes, of the amortization of the short-lived brokerage backlog intangible asset
acquired in connection with the CMN acquisition. The Company believes this
measure is useful because it isolates the impact of material non-recurring
acquisition-related amortization expense. This is not a recognized measure of
financial performance under generally accepted accounting principles ("GAAP") in
the United States and Canada, and should not be considered as a substitute for
diluted net earnings per share from continuing operations, as determined in
accordance with GAAP. The Company's method of calculating this measure may
differ from other issuers and accordingly, this measure may not be comparable to
measures used by other issuers. A reconciliation appears below.


(in
      US$)
    
    Year
      ended March 31**2005**
    
    2004
    
    2003Adjusted
      diluted net earnings per share from continuing operations
    
    **$**
    **0.90**
    
    $
    0.67
    
    $
    0.64Amortization
      of brokerage backlog, net of deferred income taxes
    
    
    **(0.18**
    **)**
    
    -
    
    
    -Diluted
      net earnings per share from continuing operations
    
    **$**
    **0.72**
    
    $
    0.67
    
    $
    0.64
 
 
 
 
  ****
 On May
18, 2005, the Company updated its outlook for fiscal 2006. Internal revenue
growth, margin improvements, and the impact of previously completed acquisitions
during the last twelve months will contribute positively to results in fiscal
2006. The updated outlook is for revenues of $1.05 to $1.10 billion,
EBITDA2 of $92.0 to $99.0 million, and adjusted diluted earnings per
share of $0.97 to $1.07. The updated outlook retained the same revenue range as
outlined in the Company's preliminary outlook for Fiscal 2006 issued on January
26, 2005, while EBITDA was increased from a range of $90.0 to $95.0 million and
the upper end of the range for adjusted earnings per share was increased from
$1.05. ****
 ****
 **Results of
operations****- year ended March 31, 2005**
 FirstService reported revenues of $812.3
million for the year, an increase of 37% relative to the prior year. The
increase was comprised of internal growth of 10%, acquisitions of 25% and the
impact of foreign exchange of 2%.
 
 Operating
earnings increased 31% relative to the prior year, to $51.6 million. EBITDA
increased 44% to $78.8 million. The gap between operating earnings growth
relative to revenue and EBITDA growth is primarily the result of rapid
amortization of brokerage backlog intangibles related to the CMN acquisition,
which has a significant impact on the first year after acquisition.
 
 Depreciation
and amortization expense was $27.2 million relative to $15.0 million in the
prior year. With regard to the CMN acquisition, we recorded a short-lived
intangible asset relating to the backlog of pending brokerage transactions that
existed at the acquisition date. The intangible is being amortized to coincide
with the expected completion dates of the underlying brokerage transactions.
Brokerage backlog amortization expense recorded during the four month period
from the acquisition date to March 31, 2005 was $8.7 million. An additional $1.9
million of brokerage backlog amortization expense is expected to be recorded
during the first two quarters of fiscal 2006, upon which the intangible asset
will be substantially amortized. The balance of the increase in depreciation and
amortization is the result of amortization of other intangible assets recognized
upon acquisitions during the past two years, as well as increases in fixed
assets resulting from capital expenditures and acquisitions.
 
 Interest
expense increased to $11.0 million from $7.9 million in the prior year. Our
weighted average interest rate increased to approximately 6.2% versus 5.2% in
the prior year as our predominately floating rate structure was impacted by an
increase in market-based interest rates during the year. Our indebtedness also
increased substantially during the year due to the financing of the CMN
acquisition. In December 2004, we cancelled an interest rate swap on a notional
principal of $30 million of our 6.40% Notes at a cost of nil. The balance of our
debt was at floating rates as of March 31, 2005.
  2 EBITDA
is defined as net earnings before extraordinary items, discontinued operations,
minority interest share of earnings, income taxes, interest, other income,
depreciation and amortization. The Company uses EBITDA to evaluate operating
performance and as a measure for debt covenants with its lenders. EBITDA is an
integral part of the Company's planning and reporting systems. Additionally, the
Company uses multiples of current and projected EBITDA in conjunction with
discounted cash flow models to determine its overall enterprise valuation and to
evaluate acquisition targets. The Company believes EBITDA is a reasonable
measure of operating performance because of the low capital intensity of its
service operations. The Company believes EBITDA is a financial metric used by
many investors to compare companies, especially in the services industry, on the
basis of operating results and the ability to incur and service debt. EBITDA is
not a recognized measure of financial performance under GAAP in the United
States and Canada, and should not be considered as a substitute for operating
earnings, net earnings or cash flows from operating activities, as determined in
accordance with GAAP. The Company's method of calculating EBITDA may differ from
other issuers and accordingly, EBITDA may not be comparable to measures used by
other issuers. A reconciliation appears below.


(in
      thousands of US$)
    
    Year
      ended March 31**2005**
    
    2004
    
    2003EBITDA
    
    **$**
    **78,763**
    
    $
    54,521
    
    $
    50,588Depreciation
      and amortization
    
    
    **(27,195**
    **)**
    
    (15,036
    )
    
    (13,156
    )Operating
      earnings
    
    **$**
    **51,568**
    
    $
    39,485
    
    $
    37,432



-2- 
   Our
consolidated income tax rate for fiscal 2005 was 27.8%, reflecting the benefit
of a $1.1 million reduction in tax liability related to completion of tax
reviews for other years. The prior year's tax rate was 30%. We continue to
benefit from the cross-border tax structures first implemented in fiscal 2000.
We expect our fiscal 2006 tax rate to be approximately 31% due to the impact of
the acquisition of CMN.
 
 Net
earnings from continuing operations was $22.6 million, an increase of 15%
relative to fiscal 2004. Adjusting for the after-tax impact of the short-term
brokerage backlog amortization related to the CMN acquisition, net earnings from
continuing operations would have been $5.6 million higher, or $28.2 million, for
an increase of 44%. All of the Company's continuing operations contributed
strongly to the increase in net earnings.
 
 Discontinued
operations reported an operating loss of $0.6 million attributable to costs to
transition operations to the new owner and collect outstanding receivables at
the South Florida restoration business. The net operating loss of $0.6 million
in the prior year was also primarily attributable to the same
business.
 
 We
reported a $1.2 million net gain on the sale of the three discontinued
operations. A net gain on sale of $3.5 million after income taxes of $0.9
million was recorded on the lawn care operation (Property Improvement Services).
The disposal of the South Florida restoration business (Residential Property
Management) resulted in a net loss of $1.1 million, after deferred income taxes
of $0.6 million. The proceeds receivable on the sale resulted in deferred income
taxes because the tax basis of the assets sold was nominal. The sale of the
decorative glass treatment operation (Property Improvement Services) resulted in
a net loss of $1.2 million, with no tax impact.
 
 The
Property Improvement Services operations reported revenues of $111.8 million, an
increase of 25% versus the prior year, excluding discontinued operations. Of the
increase, 14% was attributable to internal growth and 11% to acquisitions.
EBITDA for the year was $19.9 million, 33% higher than the prior year, and the
EBITDA margin increased 110 basis points to 17.8%. Solid results were generated
at all of our major franchise systems, including California Closets, Paul David
Restoration, Pillar to Post Home Inspections, CertaPro Painters, and College Pro
Painters.
 
 The
Commercial Real Estate Services segment, comprised of CMN, reported revenues of
$120.5 million during the four months it was owned by us in fiscal 2005. CMN has
benefited from strong market conditions in the regions in which it operates and
has performed beyond our expectations to date. However, due to the nature of
economic cycles and the relatively lower proportion of recurring revenues in
this segment relative to our other segments, we believe this operation will
experience greater volatility in earnings than our four other service lines.
EBITDA was $11.1 million for the four month period, at a margin of 9.2%, which
reflected the positive impact of December peak period brokerage volumes. The
fourth quarter was impacted by the January to March seasonal low for brokerage
activity, resulting in a margin for the quarter of 0.6%. We expect annualized
margins of approximately 6.0% for 2006. Stock option expense of $0.2 million was
recorded to account for stock options granted to key senior management and
brokers.
 
 In
Residential Property Management, excluding discontinued operations, revenues
increased 20% to $275.2 million. After considering the 10% impact of
acquisitions, internal growth was 10% and was attributable to core management
contract wins and an increase in ancillary service revenues.
 
 Residential
Property Management reported EBITDA of $24.1 million or 8.8% of revenues, up
from $19.7 million or 8.6% of revenues in the prior year. The increase in margin
was attributed primarily to higher productivity, in part due to increased
service requirements arising from the
 
 
 -3-
 
 severe
weather conditions in South Florida experienced in August and September 2004, an
increase in higher margin ancillary services, and the favorable impact of
acquisitions.
 
 Integrated
Security Services revenues were $143.2 million, an increase of 17% relative to
the prior year. Seven percent of the increase was attributable to internal
growth while 6% was from an acquisition completed in February 2004 and 4% was
attributable to foreign exchange on Canadian operations. Segment EBITDA was
$10.3 million, or 7.2% of revenues, a 30 basis point improvement relative to the
prior year and due primarily to a greater mix of higher margin systems
integration services revenues.
 
 Business
Services generated annual revenues of $160.9 million, an increase of 6% relative
to the prior year. Four percent of the growth was attributable to changes in
foreign exchange rates and the balance was internal growth. In the fourth
quarter of the current year, the Company reached a settlement upon the
completion of a long-term contract. The prior year's fourth quarter benefited
from a significant short-term contract to provide services for the "GM Hot
Button" promotion. Other revenue sources were flat for the year. Based on the
pipeline as of May 2005, we expect increased volumes from existing clients and
prospects for fiscal 2006. Approximately $0.9 million annualized fixed costs
will end in June 2005 when a facilities lease expires, and this will reduce
excess capacity in our marketing support services operations. There is customer
concentration in this segment, as the largest customer represents approximately
10% of segment revenues.
 
 Business
Services EBITDA was $22.4 million or 13.9% of revenues, versus $18.3 million or
12.0% in the prior year. The increase in margin was attributable primarily to
the settlement of the long-term contract during the fourth quarter. The net
impact of foreign exchange on the year's EBITDA was insignificant.
 
 Corporate
costs rose to $9.0 million from $6.9 million in fiscal 2004. Performance based
executive compensation expense increased $1.3 million relative to the prior
year. Professional fees (legal, audit and Sarbanes-Oxley consulting) were higher
than the previous year. In addition, the Company recorded $0.6 million of stock
option expense during the year, an increase of $0.3 million relative to the
prior year.
 
 **Results of
operations****- year ended March 31, 2004**
 FirstService reported revenues of $593.8
million for the year, an increase of 17% relative to the prior year. The
increase was comprised of internal growth of 8%, acquisitions of 5% and the
impact of foreign exchange of 4%.
 
 Changes in foreign
exchange rates were dramatic during the year, with the average value of the
Canadian dollar rising 14.5% relative to the value of the US dollar. The
Company's Canadian dollar denominated revenues and earnings benefit from a
stronger Canadian dollar upon conversion to US dollars. This is offset by
exchange losses incurred by certain Business Services operations based in Canada
that sell services to US clients in US dollars. If exchange rates had remained
constant year-over-year, the current year's revenues would have been $22.1
million lower and EBITDA would have been $0.9 million higher.
 
 Operating
earnings increased 5% relative to the prior year, to $39.5 million. EBITDA
increased 8% to $54.5 million. In fiscal 2003, operating earnings and EBITDA
included $4.2 million of executive life insurance proceeds, partially offset by
$1.9 million in severance and transition costs in the Business Services segment.
In fiscal 2004, no such amounts were included in earnings.
 
 Depreciation
and amortization expense was $15.0 million relative to $13.2 million in the
prior year. Depreciation expense increased by $1.5 million, approximately half
attributable to acquisitions and half attributable to investments in fixed
assets to support the growth of our operations. Amortization of intangibles
accounted for $0.4 million of the increase and was driven
 
 
 -4-
 
 
 by
intangibles acquired during the last two years, especially franchise rights
related to Consumer Services acquisitions completed during fiscal
2004.
 
 Interest
expense decreased to $7.9 million from $8.9 million in the prior year. Our
weighted average interest rate decreased to approximately 5.2%, down from 5.5%
in the prior year, and average indebtedness also decreased as cash flow was
utilized to repay borrowings. Substantially all of our debt was at floating
interest rates as at March 31, 2004. Our 6.40% Notes and 8.06% Notes have been
swapped to variable rates. The 6.40% Notes, which were issued on October 1,
2003, were swapped to a variable rate of LIBOR + 170 basis points.
 
 Our
consolidated income tax rate for fiscal 2004 was 30%. The prior year's rate of
27% was impacted by the $4.2 million of tax-free executive life insurance
proceeds received during that year. We continue to benefit from the cross-border
tax structures first implemented in fiscal 2000.
 
 Net
earnings from continuing operations was $19.7 million, an increase of 7%
relative to fiscal 2003. The net loss from discontinued operations was $0.6
million. The discontinued South Florida concrete restoration operations suffered
from intense price competition and cost overruns on certain projects. The
discontinued lawn care operations faced a difficult operating environment during
the year in terms of adverse weather conditions, negative consumer sentiment
towards pesticides and increasing insurance costs. In addition, a fleet renewal
program to replace aging lawn care production vehicles resulted in an increase
to depreciation expense of $0.2 million.
 
 The
Consumer Services operations, excluding the discontinued lawn care and
decorative glass treatment operations, reported revenues of $89.4 million, an
increase of 26% versus the prior year. Of the increase, 14% was attributable to
internal growth, 10% to the four tuck-under acquisitions completed in October
2003, and 2% to changes in foreign exchange rates. Internal growth was strong at
our California Closets and Paul Davis Restoration franchise systems. EBITDA for
the year was $14.9 million, $1.8 million higher than the prior year, while the
EBITDA margin declined 180 basis points to 16.7%. The decline in margin is
attributable to several factors including service mix change with the addition
of the fifth and sixth Company-owned California Closets "branchise" stores
during the year and costs to relocate and reorganize the Toronto-based Cleanol
operations.
 
 In
Residential Property Management, excluding the discontinued South Florida
concrete restoration operations, revenues increased 12% to $228.8 million.
Excluding the 5% impact of acquisitions, internal growth was 7% and was
primarily attributable to core management contract wins.
 
 Residential
Property Management reported EBITDA of $19.7 million or 8.6% of revenues, up
from $15.2 million or 7.5% of revenues in the prior year. The prior year's
results were negatively impacted by increases to insurance costs that could not
be passed on to clients, but were positively impacted by $1.0 million of
executive life insurance proceeds. The core management business generated
improved margins year over year and was responsible in large part for the margin
improvement.
 
 Integrated
Security Services revenues were $122.7 million, an increase of 14% relative to
the prior year. Eight percent of the increase was attributable to foreign
exchange on Canadian operations, while 5% was attributable to internal growth
and 1% was from an acquisition completed in February 2004. The January 2004
disposal of the Chicago security officer assets had a nominal impact on fiscal
2004 revenues. On an annual basis, the security officer assets generated
approximately $3 million of revenues. A loss on disposal of $0.2 million was
recorded as other income in the fourth quarter.
  
 -5-
 Segment
EBITDA was $8.4 million, or 6.9% of revenues, a margin equivalent to the fiscal
2003 results. The EBITDA margin is expected to improve in fiscal 2005 because of
strong backlogs of systems installation work. The segment suffered from weak
systems installation revenues in the fourth quarter, causing the quarter's
margin to be 4.4%.
 
 Business
Services generated annual revenues of $152.4 million, an increase of 21%
relative to the prior year. Growth was comprised of 9% foreign exchange on
Canadian operations, internal growth of 8% and acquisitions of 4%. A significant
portion of the internal growth was due to a contract to provide services for the
"GM Hot Button" OnStar promotion during the fourth quarter; the quarter's
internal growth was 41%. Work on the promotion ended in April 2004.
 
 Business
Services EBITDA was $18.3 million or 12.0% of revenues, down from $19.8 million
or 15.6% of revenues in fiscal 2003. In fiscal 2003, $3.2 million of executive
life insurance proceeds were received, and $1.9 million of severance and related
costs were recorded. After adjusting for these costs, fiscal 2003's margin would
have been 14.6%. The current year's decline in margin is attributable to excess
fulfillment storage capacity and foreign exchange on Canadian operations that
sell services in US dollars. The net impact of foreign exchange on the segment's
results is a reduction in EBITDA of $0.7 million relative to exchange rates in
effect during the prior year.
 
 Corporate
costs rose to $6.9 million from $4.8 million in fiscal 2003. Fiscal 2004's costs
include a performance-based executive bonus accrual of $1.7 million versus an
accrual of nil in the prior year. The Company began expensing stock options on a
prospective basis effective April 1, 2003 and as a result, the Company recorded
$0.3 million of stock option expense during the year. In addition, professional
fees (legal, audit and Sarbanes-Oxley consulting) were higher than the previous
year. Expenses totaling $0.5 million relating to acquisitions that were
ultimately not completed were included in the prior year's figures.
 
 **Seasonality
and quarterly fluctuations**
 Certain
segments of the Company's operations are subject to seasonal variations. The
demand for exterior painting (Property Improvement Services segment) and
swimming pool management in the northern United States and Canada (Residential
Property Management segment) is highest during late spring, summer and early
fall and very low during winter. In addition, the majority of textbook
fulfillment activity (Business Services segment) occurs in the months of June to
August. These operations generate most of their annual revenues and earnings
between April and September and comprise approximately 7% of consolidated
revenues.
 
 The
newly acquired Commercial Real Estate Services operation generates peak revenues
and earnings in the month of December followed by a low in January and February
as a result of the timing of closings on commercial real estate brokerage
transactions. Revenues and earnings during the balance of the year are
relatively even. These operations comprise approximately 20% of consolidated
revenues.
 
 The
seasonality of these service lines results in variations in quarterly revenues
and operating margins. Variations can also be caused by acquisitions, which
alter the consolidated service mix.
  -6-
  
 **Selected
annual information** **- last five fiscal years**
 **(in
thousands of US$, except per share amounts)**
 
 **Year
      ended March 31**
    
    **2005**
    
    **2004**
    
    **2003**
    
    **2002**
    
    **2001****OPERATIONS**Revenues
    
    $
    812,290
    
    $
    593,782
    
    $
    508,675
    
    $
    493,551
    
    $
    404,233Operating
      earnings
    
    
    51,568
    
    
    39,485
    
    
    37,432
    
    
    43,287
    
    
    34,033Net
      earnings from continuing operations
    
    
    22,645
    
    
    19,662
    
    
    18,453
    
    
    16,482
    
    
    12,056Net
      earnings from discontinued operations, net of income taxes
    
    
    562
    
    
    (638
    )
    
    (13
    )
    
    547
    
    
    575Net
      earnings
    
    
    23,207
    
    
    19,024
    
    
    18,440
    
    
    17,029
    
    
    12,631**FINANCIAL
      POSITION**Total
      assets
    
    $
    626,728
    
    $
    437,553
    
    $
    389,031
    
    $
    365,929
    
    $
    305,137Long-term
      debt
    
    
    220,015
    
    
    163,888
    
    
    164,919
    
    
    165,611
    
    
    152,424Shareholders'
      equity
    
    
    185,871
    
    
    155,101
    
    
    123,406
    
    
    99,221
    
    
    79,220Book
      value per share
    
    
    6.15
    
    
    5.26
    
    
    4.36
    
    
    3.60
    
    
    3.01**OTHER
      DATA**EBITDA
    
    $
    78,763
    
    $
    54,521
    
    $
    50,588
    
    $
    55,240
    
    $
    45,310Diluted
      earnings per share from continuing operations adjusted for brokerage
      backlog amortization
    
    
    0.90
    
    
    0.67
    
    
    0.64
    
    
    0.56
    
    
    0.44**SHARE
      DATA**Net
      earnings per shareBasicContinuing operations
    
    $
    0.76
    
    $
    0.69
    
    $
    0.66
    
    $
    0.61
    
    $
    0.46Discontinued operations
    
    
    0.02
    
    
    (0.02
    )
    
    -
    
    
    0.02
    
    
    0.020.78
    
    
    0.67
    
    
    0.66
    
    
    0.63
    
    
    0.48DilutedContinuing operations
    
    
    0.72
    
    
    0.67
    
    
    0.64
    
    
    0.56
    
    
    0.44Discontinued operations
    
    
    0.02
    
    
    (0.02
    )
    
    -
    
    
    0.02
    
    
    0.020.74
    
    
    0.65
    
    
    0.64
    
    
    0.58
    
    
    0.46Weighted
      average shares (thousands)Basic
    
    
    29,777
    
    
    28,570
    
    
    27,842
    
    
    27,130
    
    
    26,148Diluted
    
    
    30,467
    
    
    29,192
    
    
    28,995
    
    
    29,200
    
    
    27,682Cash
      dividends per share
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -
 
  -7-
  
 **Quarterly
results - years ended March 31, 2005 and 2004**
 **(in
thousands of US$, except per share amounts)**
 
 **Q1**
    
    **Q2**
    
    **Q3**
    
    **Q4**
    
    **Year****FISCAL
      2005**Revenues
    
    $
    167,044
    
    $
    180,700
    
    $
    218,184
    
    $
    246,362
    
    $
    812,290Operating
      earnings
    
    
    14,403
    
    
    18,707
    
    
    15,069
    
    
    3,389
    
    
    51,568Net
      earnings from continuing operations
    
    
    7,249
    
    
    9,681
    
    
    5,305
    
    
    410
    
    
    22,645Net
      earnings from discontinued operations
    
    
    2,143
    
    
    (153
    )
    
    (363
    )
    
    (1,065
    )
    
    562Net
      earnings
    
    
    9,392
    
    
    9,528
    
    
    4,942
    
    
    (655
    )
    
    23,207Net
      earnings per share:Basic
    
    
    0.32
    
    
    0.32
    
    
    0.17
    
    
    (0.02
    )
    
    0.78Diluted
    
    
    0.31
    
    
    0.31
    
    
    0.16
    
    
    (0.04
    )
    
    0.74**FISCAL
      2004**Revenues
    
    $
    144,337
    
    $
    152,974
    
    $
    144,661
    
    $
    151,810
    
    $
    593,782Operating
      earnings
    
    
    11,662
    
    
    15,530
    
    
    6,758
    
    
    5,535
    
    
    39,485Net
      earnings from continuing operations
    
    
    5,274
    
    
    7,364
    
    
    3,043
    
    
    3,981
    
    
    19,662Net
      earnings from discontinued operations
    
    
    1,137
    
    
    1,605
    
    
    (1,033
    )
    
    (2,347
    )
    
    (638
    )Net
      earnings
    
    
    6,411
    
    
    8,969
    
    
    2,010
    
    
    1,634
    
    
    19,024Net
      earnings per share:Basic
    
    
    0.23
    
    
    0.32
    
    
    0.07
    
    
    0.06
    
    
    0.67Diluted
    
    
    0.23
    
    
    0.31
    
    
    0.07
    
    
    0.05
    
    
    0.65**OTHER
      DATA**Diluted
      earnings per share from continuing operations adjusted for brokerage
      backlog amortization - Fiscal 2005
    
    $
    0.24
    
    $
    0.32
    
    $
    0.27
    
    $
    0.07
    
    $
    0.90Diluted
      earnings per share from continuing operations - Fiscal
2004
    
    
    0.19
    
    
    0.25
    
    
    0.10
    
    
    0.13
    
    
    0.67EBITDA
      - Fiscal 2005
    
    
    18,273
    
    
    22,797
    
    
    24,646
    
    
    13,047
    
    
    78,763EBITDA
      - Fiscal 2004
    
    
    15,322
    
    
    19,114
    
    
    10,573
    
    
    9,512
    
    
    54,521
 
 
 **Liquidity
and capital resources**
 The
Company generated cash flow from operating activities totaling $37.0 million for
fiscal 2005, an increase of 3% relative to the prior year. Working capital
deployment increased at a faster pace than net earnings. Two significant
accounts receivable totaling $9.0 million were received shortly after yearend.
Had these funds been received prior to yearend, the year's cash flow would have
been correspondingly higher. We believe that cash from operations and other
existing resources will continue to be adequate to satisfy the ongoing working
capital needs of the Company.
 
 Net
indebtedness as at March 31, 2005 was $182.3 million, up from $141.4 million at
March 31, 2004. Net indebtedness is calculated as the current and non-current
portion of long-term debt adjusted for interest rate swaps less cash and cash
equivalents. The acquisition of CMN and capital expenditures drove the increase
in debt.
 
 We are
in compliance with the covenants required of our financing agreements as at
March 31, 2005 and, based on our outlook for fiscal 2006, we expect to remain in
compliance with such covenants. We had $20.0 million of available credit as of
March 31, 2005.
 
 On
April 1, 2005, we entered into an amended and restated credit agreement with a
syndicate of banks to provide a $110 million committed senior revolving credit
facility with a three year term to replace the existing $90 million facility.
The amended revolving credit facility bears interest at 1.00% to 2.25% over
floating reference rates, depending on the ratio of our net debt to adjusted
EBITDA. The covenants remained substantially unchanged relative to the prior
credit agreement.
  -8-
  
 Also on
April 1, 2005, we completed a private placement of $100 million of 5.44% Senior
Secured Notes with a group of US institutional investors. The 5.44% Notes have a
final maturity of April 1, 2015 with five equal annual principal repayments
beginning on April 1, 2011. The proceeds of the private placement were used to
fully repay outstanding balances on the revolving credit facility.
 
 In May
2005, we cancelled an interest rate swap on a notional principal of $20 million
of our 6.40% Notes at a cost of $0.05 million. As of May 2005, approximately 60%
of our debt is at a weighted average fixed interest rate of 5.7%.
 
 During
fiscal 2005, we had several foreign exchange contracts to fix the conversion of
a portion of the US dollar revenues into Canadian dollars to match our Canadian
dollar costs in our Business Services segment. At March 31, 2005, we had eight
such contracts outstanding. In aggregate, the contracts require us to sell $8.0
million in exchange for Canadian dollars at a weighted average exchange rate of
1.2356 during the period extending to March 30, 2006. A gain of $0.2 million
relating to these contracts was included in fiscal 2005 earnings.
 
 Capital
expenditures for the year were $17.0 million. Significant purchases included
production equipment at several California Closets branchises, leasehold
improvements at several locations in our Residential Property Management and
Commercial Real Estate segments, and voice communications technology upgrades in
Business Services.
 
 When
making acquisitions, we generally purchase executive life insurance policies on
the principal managers of the acquired businesses. We believe this practice
mitigates risk on acquisitions. At March 31, 2005, the Company had twenty such
life insurance policies in force.
 
 In
relation to acquisitions completed during the past three years, we have
outstanding contingent consideration totaling $14.2 million as at March 31, 2005
($16.2 million as at March 31, 2004). The amount of the contingent consideration
is not recorded as a liability unless the outcome of the contingency is
determined to be beyond a reasonable doubt. The contingent consideration is
based on achieving specified earnings levels, and is issued or issuable at the
end of the contingency period. When the contingencies are resolved and
additional consideration is distributable, we will record the fair value of the
additional consideration as additional costs of the acquired
businesses.
 
 In
certain cases, our subsidiaries have issued options to purchase shares of
subsidiaries to operating managers. The subsidiary stock options are accounted
for in the same manner as stock options of the Company. In addition, the
numerators for our diluted earnings per share calculations are adjusted to
account for potential dilution from stock options in subsidiaries. When stock
options are exercised, the minority shareholders become party to shareholders'
agreements as described below.
 
 All
minority shareholders of our subsidiaries are party to shareholders' agreements.
These agreements allow us to "call" the minority position for a formula price,
which is usually equal to a multiple of trailing two-year average earnings.
Minority owners may also "put" their interest to the Company at the same price,
with certain limitations. The total value of the minority shareholders'
interests, as calculated in accordance with the shareholders' agreements, was
approximately $70.0 million at March 31, 2005 (March 31, 2004 - $30.0 million).
Approximately $25.0 million of the increase was attributable to fiscal 2005
acquisitions. The purchase price of minority interests may, at our option, be
paid primarily in Subordinate Voting Shares of FirstService. While it is not our
intention to acquire outstanding minority interests, this step may materially
increase net earnings. On an annual basis, we estimate the impact of the
acquisition of all minority interests with cash would increase interest expense
by $3.5 million, increase amortization expense by $2.5 million, reduce income
taxes by $1.8 million and reduce minority interest share of earnings by $9.0
million, resulting in an approximate increase to net earnings of
   -9-
   $4.8
million or $0.15 per diluted share, all relative to the amounts reported for the
year ended March 31, 2005.
 
 The following table
summarizes our contractual obligations as at March 31, 2005:
 
 **Contractual
      obligations**
    
    **Payments
      due by period**(In
      thousands of US$)
    
    **Total**
    
    **Less
      than 1 year**
    
    **1-3
      years**
    
    **4-5
      years**
    
    **After
      5 years**Long-term
      debt
    
    $
    215,784
    
    $
    16,782
    
    $
    30,717
    
    $
    30,196
    
    $
    138,089Capital
      lease obligations
    
    
    3,948
    
    
    1,424
    
    
    2,524
    
    
    -
    
    
    -Operating
      leases
    
    
    163,523
    
    
    31,503
    
    
    48,885
    
    
    32,419
    
    
    50,716Unconditional
      purchase obligations
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Other
      long-term obligations
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      contractual obligations
    
    $
    383,255
    
    $
    49,709
    
    $
    82,126
    
    $
    62,615
    
    $
    188,805
 
 At
March 31, 2005, we had commercial commitments totaling $10.6 million comprised
of letters of credit outstanding due to expire within one year.
 
 To
manage our insurance costs, we take on risk in the form of high deductibles on
many of our coverages. We believe this step reduces overall insurance costs in
the long term, but may cause fluctuations in the short term depending on the
frequency and severity of insurance incidents.
 
 **Discussion
of critical accounting estimates**
 Critical
accounting estimates are those that management deems to be most important to the
portrayal of our financial condition and results of operations, and that require
management's most difficult, subjective or complex judgments, due to the need to
make estimates about the effects of matters that are inherently uncertain. We
have identified five critical accounting estimates: goodwill impairment testing,
acquisition purchase price allocations, amortization of intangible assets,
accounts receivable allowances and accounting for income taxes.
 
 Annual
goodwill impairment testing requires judgment on the part of management.
Goodwill impairment testing involves making estimates concerning the fair value
of reporting units and then comparing the fair value to the carrying amount of
each unit. The determination of what constitutes a reporting unit requires
significant management judgment. Estimates of fair value can be impacted by
sudden changes in the business environment or prolonged economic downturns, and
therefore require significant management judgment in their
determination.
 
 Acquisition
purchase price allocations require use of estimates and judgment on the part of
management, especially in the determination of intangible assets acquired
relative to the amount that is classified as goodwill. For example, if different
assumptions were used regarding the profitability and expected lives of acquired
customer contracts and relationships, different amounts of intangible assets and
related amortization could be reported.
 
 Amortization
of intangible assets requires management to make estimates of useful lives and
to select methods of amortization. Useful lives and methods of amortization are
determined at the time assets are initially acquired, and then are reevaluated
each reporting period. Significant judgment is required to determine whether
events and circumstances warrant a revision to remaining periods of
amortization. Changes to estimated useful lives and methods of amortization
could result in increases or decreases in amortization expense. A 10% reduction
to the weighted average useful life of intangible assets, other than short-lived
brokerage backlog amortization, would result in an increase to annual
amortization expense of $0.4 million.
 
 Accounts
receivable allowances are determined using a combination of historical
experience, current information, and management judgment. Actual collections may
differ from
 
 
 -10-
 
 our
estimates. A 10% increase in the accounts receivable allowance would increase
bad debt expense by $0.8 million.
 
 Income
taxes are calculated based on the expected treatment of transactions recorded in
the consolidated financial statements. The benefits of certain net operating
loss carry-forwards, which have been recognized in the financial statements,
require significant management judgment regarding future realization. In
determining current and deferred components of income taxes, we interpret tax
legislation and make assumptions about the timing of the reversal of deferred
tax assets and liabilities. If our interpretations differ from those of tax
authorities or if the timing of reversals is not as anticipated, the provision
for income taxes could increase or decrease in future periods.
 
 **Transactions
with related parties**
 Please
refer to note 19 to the consolidated financial statements for information
regarding transactions with related parties.
 
 **Impact
of recently issued accounting standards**
 Please
refer to note 21 to the consolidated financial statements for a discussion of
recently issued accounting standards.
 
 **Reconciliation
to generally accepted accounting principles in Canada**
 The
consolidated financial statements were prepared in accordance with generally
accepted accounting principles in the United States. Please refer to note 22 to
the consolidated financial statements for a discussion of the adjustments
required to reconcile the consolidated financial statements to generally
accepted accounting principles in Canada. There are no material differences
between the consolidated financial statements under generally accepted
accounting principles in Canada or the United States.
 
 **Outstanding
share data**
 The
authorized capital of the Company consists of an unlimited number of preference
shares, issuable in series, an unlimited number of Subordinate Voting Shares and
an unlimited number of Multiple Voting Shares. The holders of Subordinate Voting
Shares are entitled to one vote in respect of each Subordinate Voting Share held
at all meetings of the shareholders of the Company. The holders of Multiple
Voting Shares are entitled to twenty votes in respect of each Multiple Voting
Share held at all meetings of the shareholders of the Company.
 
 As of
the date hereof, the Company has outstanding 28,879,094 Subordinate Voting
Shares, 1,325,694 Multiple Voting Shares and no preference shares. In addition,
as at the date hereof, 1,832,000 Subordinate Voting Shares are issuable upon
exercise of options granted under the Company's stock option plan.
 
 **Disclosure
controls and procedures**
 As of
March 31, 2005, we carried out an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the
possibility of human error and the circumvention or overriding of the controls
and procedures. Accordingly, even effective disclosure controls and procedures
can only provide reasonable assurance of achieving their control objectives.
Based upon that evaluation and as of March 31, 2005, the Chief Executive Officer
and Chief Financial Officer concluded that the disclosure controls and
procedures were effective to provide reasonable assurance that information
required to be disclosed in the reports the company files and submits under
applicable Canadian and US securities laws is recorded, processed, summarized
and reported as and when required.
   -11-
 
 **Additional
information**
 Copies
of publicly filed documents of the Company, including our Annual Information
Form, can be found through the SEDAR web site at www.sedar.com.
 
 **Forward-looking
statements**
 This
management discussion and analysis report contains or incorporates by reference
certain forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We intend that such forward-looking statements be
subject to the safe harbors created by such legislation. Such forward-looking
statements involve risks and uncertainties and include, but are not limited to,
statements regarding future events and the Company's plans, goals and
objectives. Such statements are generally accompanied by words such as "intend",
"anticipate", "believe", "estimate", "expect" or similar statements. Our actual
results may differ materially from such statements. Factors that could result in
such differences, among others, are:
 
 §
    Economic
      conditions, especially as they relate to consumer spending and business
      spending on customer relations and promotion.§
    Commercial
      real estate property values, vacancy rates and general conditions of
      financial liquidity for real estate transactions.§
    Extreme
      weather conditions impacting demand for our services or our ability to
      perform those services.§
    Political
      conditions, including any outbreak or escalation of terrorism or
      hostilities and the impact thereof on our business.§
    Competition
      in the markets served by the Company.§
    Labor
      shortages or increases in wage and benefit costs.§
    The
      effects of changes in interest rates on our cost of
    borrowing.§
    Unexpected
      increases in operating costs, such as insurance, workers' compensation,
      health care and fuel prices.§
    Changes
      in the frequency or severity of insurance incidents relative to our
      historical experience.§
    The
      effects of changes in the Canadian dollar foreign exchange rate in
      relation to the US dollar on the Company's Canadian dollar denominated
      revenues and expenses.§
    Our
      ability to make acquisitions at reasonable prices and successfully
      integrate acquired operations.§
    Changes
      in government policies at the federal, state/provincial or local level
      that may adversely impact our student loans processing or textbook
      fulfillment activities.
  Although
we believe that the assumptions underlying our forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the results contemplated in such forward-looking
statements will be realized. The inclusion of such forward-looking statements
should not be regarded as a representation by the Company or any other person
that the future events, plans or expectations contemplated by the Company will
be achieved. We note that past performance in operations and share price are not
necessarily predictive of future performance.
 
   -12-