**EXHIBIT
      3**





**Management’s
      Discussion and Analysis of Results of Operations and Financial
      Condition**


(in
      US
      dollars)


May
      24,
      2006





*The
      following discussion should be read in conjunction with the consolidated
      financial statements and notes thereto for the year ended March 31,
      2006.*




**Consolidated
        review**
 FirstService
        Corporation (the “Company” or “FirstService”) generated strong operating results
        in fiscal 2006, with revenue and adjusted diluted earnings per share from
        continuing operations 1 growth in excess of 50%.
  On
        March 17, 2006, we
        completed the divestiture of Resolve Corporation (“Resolve”), our Business
        Services operation, through the initial public offering of trust units by
        Resolve Business Outsourcing Income Fund (the “RBO Fund”). Proceeds from the
        sale were $117.0 million of cash and a 7.3% retained interest in RBO Fund
        valued
        at $20.4 million. Resolve has been classified as a discontinued operation
        for
        all periods presented. Resolve’s revenues for the 11.5 month period it was owned
        during fiscal 2006 were $160.2 million.
  On
        May 24, 2006, the
        Company updated its financial outlook for fiscal 2007 as a result of a newly
        completed commercial real estate services acquisition. The updated outlook
        is
        for revenues of $1.145 to $1.22 billion, EBITDA 2 of
        $100 to $109 million, and adjusted diluted earnings per share of $1.15 to
        $1.25.
  1 Adjusted diluted net earnings per share from continuing operations is
            defined as
            diluted net earnings per share from continuing operations plus the effect,
            after
            income taxes, of the amortization of short-lived intangible assets acquired
            in
            connection with recent commercial real estate services acquisitions.
            The Company
            believes this measure is useful because it isolates the impact of material
            non-recurring acquisition-related amortization expense. This is not a
            recognized
            measure of financial performance under generally accepted accounting
            principles
            (“GAAP”) in the United States, and should not be considered as a substitute
            for
            diluted net earnings per share from continuing operations, as determined
            in
            accordance with GAAP. The Company’s method of calculating this measure may
            differ from other issuers and accordingly, this measure may not be comparable
            to
            measures used by other issuers. A reconciliation appears
            below.
 (in
                    US$)
                
                
                
                
                
                Year
                    ended March 31**2006**
                
                
                2005
                
                
                2004Adjusted
                      diluted net earnings per share fromcontinuing
                      operations
                
                **$**
                **1.01**
                
                $
                0.67
                
                $
                0.50Amortization
                      of brokerage backlog, net of incometaxes
                
                
                **(0.14**
                **)**
                
                (0.18
                )
                
                -Diluted
                      net earnings per share from continuingoperations
                
                **$**
                **0.87**
                
                $
                0.49
                
                $
                0.50
 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 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**2006**
              
              
              2005
              
              
              2004EBITDA
              
              **$**
              **88,804**
              
              $
              56,413
              
              $
              36,219Depreciation
                  and amortization
              
              
              **(23,578**
              **)**
              
              (21,107
              )
              
              (8,586
              )Operating
                  earnings
              
              **$**
              **65,226**
              
              $
              35,306
              
              $
              27,633











**Results
      of operations - year ended March 31, 2006**


FirstService
      reported revenues from continuing operations of $1.068 billion for the year,
      an
      increase of 64% relative to the prior year. The increase was comprised of
      internal growth of 18%, acquisitions of 44% and the impact of foreign exchange
      of 2%.





Operating
      earnings increased 85% relative to the prior year, to $65.2 million. EBITDA
      increased 57% to $88.8 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 recent acquisitions
      in
      commercial real estate services, which have a significant impact on the first
      year after acquisition.





Depreciation
      and amortization expense was $23.6 million relative to $21.1 million in the
      prior year. With regard to the recent commercial real estate services
      acquisitions, we recorded a short-lived intangible asset relating to the backlog
      of pending brokerage transactions that existed at the acquisition dates. The
      intangible is being amortized to coincide with the expected completion dates
      of
      the underlying brokerage transactions. 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 $13.1 million from $7.2 million in the prior year. Our
      weighted average interest rate increased to approximately 6.6% versus 6.2%
      in
      the prior year as we modified our predominately floating rate structure to
      fixed
      interest rates during the year. The issuance of $100 million of 5.44% Senior
      Notes at the beginning of the fiscal year had a downward impact on the weighted
      average interest rate, but increased the average debt outstanding. The $1.2
      million of interest income earned during the year was attributable to surplus
      cash on hand, including the $117.0 million received in March 2006 upon the
      closing of the Resolve disposal.





Other
      income for fiscal 2006 includes a $2.2 million pre-tax gain on the sale of
      two
      non-strategic subsidiaries. These operations generated revenues of approximately
      $4.5 million during the twelve months prior to sale. Also in other income was
      $1.3 million of earnings from investments accounted for under the equity method,
      primarily in commercial real estate services.





Our
      consolidated income tax rate for fiscal 2006 was 30%. The prior year’s tax rate
      was 25%, and reflected the benefit of a $1.1 million reduction in tax liability
      related to resolution of tax matters from prior years. We continue to benefit
      from the cross-border tax structures first implemented in fiscal
      2000.





Net
      earnings from continuing operations was $28.0 million, an increase of 82%
      relative to fiscal 2005. Adjusting for the after-tax impact of the short-term
      brokerage backlog amortization related to the recent commercial real estate
      services acquisitions, net earnings from continuing operations would have been
      $32.3 million, for an increase of 54%. All of the Company’s continuing
      operations contributed to the increase in net earnings.





Discontinued
      operations reported after-tax net earnings of $5.6 million, representing the
      earnings of Resolve for the 11.5 month period it was owned by us during fiscal
      2006. The earnings for fiscal 2005 were $6.6 million and included a gain on
      the
      settlement of a long term




-
          2 -




contract
      by Resolve during the fourth quarter of that fiscal year. We received proceeds
      of $137.4 million on the sale of Resolve, comprised of $117.0 million of cash
      and a 7.3% retained interest in the RBO Fund valued at $20.4 million, resulting
      in a $35.8 million net gain on disposal, after taxes of $8.3 million. As at
      March 31, 2006, we had an unrealized loss, net of income taxes, of $1.5 million
      with regard to our investment in RBO Fund which was recorded in cumulative
      other
      comprehensive earnings.





The
      Property Improvement Services operations reported revenues of $134.1 million,
      an
      increase of 20% versus the prior year. Of the increase, 14% was attributable
      to
      internal growth, 5% to acquisitions and 1% to foreign exchange. EBITDA for
      the
      year was $25.8 million, 30% higher than the prior year, and the EBITDA margin
      increased 140 basis points to 19.2%. Solid results were generated at all of
      our
      major franchise systems, including California Closets, Paul Davis Restoration,
      Pillar to Post Home Inspections, CertaPro Painters, and College Pro
      Painters.





The
      Commercial Real Estate Services segment reported revenues of $438.4 million
      during fiscal 2006, relative to $120.5 million in the prior year. Internal
      growth was 24%, foreign exchange contributed 2% and the balance of growth was
      the result of acquisitions completed during the past two years. EBITDA was
      $36.5
      million, at a margin of 8.3%, versus the prior year’s EBITDA of $11.1 million at
      a margin of 9.2%. The higher margin in the prior year period reflected four
      months of operations which included the seasonal peak month of December, while
      the fiscal 2006 results reflect a full year of operations.





In
      Residential Property Management, revenues increased 26% to $346.1 million.
      After
      considering the 3% impact of acquisitions, internal growth was 23% and was
      attributable to significant property management contract wins, particularly
      in
      South Florida, and an increase in ancillary service revenues.





Residential
      Property Management reported EBITDA of $31.4 million or 9.1% of revenues, up
      from $24.1 million or 8.8% of revenues in the prior year. The increase in margin
      is the result of an increase in higher margin ancillary services and operating
      leverage. The margins of both years were favorably impacted by productivity
      gains resulting from grounds maintenance and cleanup work in the aftermath
      of
      hurricanes in August through October of each year.





Integrated
      Security Services revenues were $149.1 million, an increase of 4% relative
      to
      the prior year, which was attributable to foreign exchange on Canadian
      operations. Segment EBITDA was $7.7 million, or 5.1% of revenues, a 190 basis
      point decline relative to the prior year. The change in margin was the result
      of
      lower gross margins on systems installations in certain markets as a result
      of
      competitive pricing pressure, delays in the startup of several large projects
      and costs incurred to open new branch offices.





Corporate
      costs rose to $12.5 million from $9.0 million in fiscal 2005. Professional
      fees
      (legal, audit and Sarbanes-Oxley consulting) were significantly higher than
      the
      previous year. In addition, the Company recorded $1.4 million of stock option
      expense during the year, an increase of $0.8 million relative to the prior
      year.





**Results
      of operations - year ended March 31, 2005**


FirstService
      reported revenues from continuing operations of $651.4 million for the year,
      an
      increase of 48% relative to the prior year. The increase was comprised of
      internal growth of 10%, acquisitions of 37% and the impact of foreign exchange
      of 1%.





Operating
      earnings increased 28% relative to the prior year, to $35.3 million. EBITDA
      increased 56% to $56.4 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 International
      Inc. (“CMN”) acquisition, which had a significant impact on the first year after
      acquisition.





-
          3 -


Depreciation
      and amortization expense was $21.1 million relative to $8.6 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. 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 $7.2 million from $4.1 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.





Our
      consolidated income tax rate for fiscal 2005 was 25%, 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 29%. We continue to benefit from
      the cross-border tax structures first implemented in fiscal 2000.





Net
      earnings from continuing operations was $15.4 million, an increase of 5%
      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 $21.0 million,
      for
      an increase of 44%. All of the Company’s continuing operations contributed
      strongly to the increase in net earnings.





We
      reported a $1.2 million net gain on the sale of three discontinued operations.
      Discontinued operations, other than the gain on sale, reported net earnings
      of
      $6.6 million, comprised of Resolve net earnings of $7.2 million and a net loss
      of $0.6 million at three other smaller operations. Prior year discontinued
      operations net earnings were $4.4 million, comprised of Resolve net earnings
      of
      $5.0 million and a net loss of $0.6 million at the three other operations.
      The
      increase in Resolve’s net earnings was attributable to a gain on the settlement
      of a long term contract during the fourth quarter of fiscal 2005.





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 Davis
      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%.





-
          4 -


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 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.





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.





**Selected
      annual information - last five fiscal years**


**(in
      thousands of US$, except per share amounts)**





**Year
                ended March 31**
            
            
            **2006**
            
            
            **2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002****OPERATIONS**Revenues
            
            $
            1,068,134
            
            $
            651,376
            
            $
            441,333
            
            $
            382,302
            
            $
            356,995Operating
                earnings
            
            
            65,226
            
            
            35,306
            
            
            27,633
            
            
            23,278
            
            
            25,859Net
                earnings from continuing operations
            
            
            28,034
            
            
            15,390
            
            
            14,649
            
            
            11,446
            
            
            11,066Net
                earnings from discontinued operations,net
                of income taxes
            
            
            41,463
            
            
            7,817
            
            
            4,375
            
            
            6,994
            
            
            5,963Net
                earnings
            
            
            69,497
            
            
            23,207
            
            
            19,024
            
            
            18,440
            
            
            17,029**FINANCIAL
                POSITION**Total
                assets
            
            $
            711,004
            
            $
            626,728
            
            $
            437,553
            
            $
            389,031
            
            $
            365,929Long-term
                debt
            
            
            248,686
            
            
            220,015
            
            
            163,888
            
            
            164,919
            
            
            165,611Shareholders’
                equity
            
            
            237,752
            
            
            185,871
            
            
            155,101
            
            
            123,406
            
            
            99,221Book
                value per share
            
            
            7.91
            
            
            6.15
            
            
            5.26
            
            
            4.36
            
            
            3.60**OTHER
                DATA**EBITDA
            
            $
            88,804
            
            $
            56,413
            
            $
            36,219
            
            
            30,815
            
            
            32,727Diluted
                earnings per share from continuingoperations
                adjusted for brokeragebacklog
                amortization
            
            
            1.01
            
            
            0.67
            
            
            0.50
            
            
            0.40
            
            
            0.38**SHARE
                DATA**Net
                earnings per shareBasicContinuing
                operations
            
            $
            0.93
            
            $
            0.52
            
            $
            0.51
            
            $
            0.41
            
            $
            0.41Discontinued
                operations
            
            
            1.37
            
            
            0.26
            
            
            0.16
            
            
            0.25
            
            
            0.222.30
            
            
            0.78
            
            
            0.67
            
            
            0.66
            
            
            0.63DilutedContinuing
                operations
            
            
            0.87
            
            
            0.49
            
            
            0.50
            
            
            0.40
            
            
            0.38Discontinued
                operations
            
            
            1.34
            
            
            0.25
            
            
            0.15
            
            
            0.24
            
            
            0.202.21
            
            
            0.74
            
            
            0.65
            
            
            0.64
            
            
            0.58Weighted
                average shares (thousands)Basic
            
            
            30,171
            
            
            29,777
            
            
            28,570
            
            
            27,842
            
            
            27,130Diluted
            
            
            30,896
            
            
            30,467
            
            
            29,192
            
            
            28,995
            
            
            29,200Cash
                dividends per share
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -


-
          5 -





**Quarterly
      results - fiscal years ended March 31, 2006 and 2005**


**(in
      thousands of US$, except per share amounts)**




**Period**
            
            **Q1**
            
            **Q2**
            
            **Q3**
            
            **Q4**
            
            **Year****FISCAL
                2006**Revenues
            
            $
            251,216
            
            $
            272,320
            
            $
            296,651
            
            $
            247,947
            
            $
            1,068,134Operating
                earnings
            
            
            24,903
            
            
            24,430
            
            
            12,930
            
            
            2,963
            
            
            65,226Net
                earnings from continuing operations
            
            
            10,964
            
            
            11,228
            
            
            5,371
            
            
            471
            
            
            28,034Net
                earnings from discontinued operations
            
            
            156
            
            
            2,564
            
            
            2,782
            
            
            35,961
            
            
            41,463Net
                earnings
            
            
            11,120
            
            
            13,792
            
            
            8,153
            
            
            36,432
            
            
            69,497Net
                earnings per share:Basic
            
            
            0.37
            
            
            0.46
            
            
            0.27
            
            
            1.21
            
            
            2.30Diluted
            
            
            0.35
            
            
            0.44
            
            
            0.26
            
            
            1.18
            
            
            2.21**FISCAL
                2005**Revenues
            
            $
            131,623
            
            $
            142,717
            
            $
            176,926
            
            $
            200,110
            
            $
            651,376Operating
                earnings (loss)
            
            
            12,416
            
            
            15,384
            
            
            10,344
            
            
            (2,838
            )
            
            35,306Net
                earnings (loss) from continuing operations
            
            
            6,536
            
            
            8,462
            
            
            3,266
            
            
            (2,874
            )
            
            15,390Net
                earnings from discontinued operations
            
            
            2,856
            
            
            1,066
            
            
            1,676
            
            
            2,219
            
            
            7,817Net
                earnings (loss)
            
            
            9,392
            
            
            9,528
            
            
            4,942
            
            
            (655
            )
            
            23,207Net
                earnings (loss) per share:Basic
            
            
            0.32
            
            
            0.32
            
            
            0.17
            
            
            (0.02
            )
            
            0.78Diluted
            
            
            0.31
            
            
            0.32
            
            
            0.16
            
            
            (0.04
            )
            
            0.74**OTHER
                DATA**EBITDA
                - Fiscal 2006
            
            
            29,343
            
            
            28,679
            
            
            20,663
            
            
            10,119
            
            
            88,804EBITDA
                - Fiscal 2005
            
            
            14,757
            
            
            17,955
            
            
            18,364
            
            
            5,337
            
            
            56,413








**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. These operations generate most of their annual
      revenues and earnings between April and September and comprise approximately
      9%
      of consolidated revenues.





The
      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
      brokerage operations comprise approximately 30% 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.





**Liquidity
      and capital resources**


The
      Company generated cash flow from operating activities totaling $59.3 million
      for
      fiscal 2006, an increase of 63% relative to the prior year, similar to the
      increase in earnings. 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, 2006 was $80.7 million, down from $182.3 million
      at
      March 31, 2005. 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 disposal of Resolve was the primary driver for the decrease
      in
      net indebtedness.





-
          6 -




We
      are
      in compliance with the covenants required of our financing agreements as at
      March 31, 2006 and, based on our outlook for fiscal 2007, we expect to remain
      in
      compliance with such covenants. We had $104.8 million of available revolving
      credit as of March 31, 2006.





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.





Also
      on
      April 1, 2005, we completed a private placement of $100 million of 5.44% Senior
      Notes with a group of US institutional investors. These Senior 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.





During
      fiscal 2006, we cancelled interest rate swaps on $105.7 million of principal
      of
      Senior Notes for a net gain of $0.1 million. As of March 31 2006, substantially
      all of our debt is at a weighted average fixed interest rate of
      6.6%.




During
      the second half of fiscal 2006, we founded Colliers International Mortgage
      Corp., a commercial mortgage backed securities conduit business (“Colliers
      Mortgage”) within our Commercial Real Estate Services operations. Colliers
      Mortgage intends to originate commercial mortgage loans in the $0.5 to $25
      million range and then promptly sell pools of these loans to third parties.
      Under its financing agreements, the Company is permitted to have outstanding
      a
      maximum of $20 million of mortgage loans receivable. To facilitate higher loan
      volumes, we have arranged for a third party financing provider to fund a
      significant portion of each loan. Immediately before selling pools of mortgages,
      Colliers Mortgage has the option to acquire the financing provider’s portion of
      the loans. As of March 31, 2006, we had C$8.0 million (US$6.9 million) of
      mortgage loans receivable and a right to purchase C$32.1 million (US$27.5
      million) of mortgages from our financing provider.





Capital
      expenditures for the year were $18.8 million. Significant purchases included
      production equipment at several California Closets branchises and leasehold
      improvements at several locations in our Commercial Real Estate and Residential
      Property Management segments.





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, 2006, 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 $8.6 million as at March 31,
      2006
      ($14.2 million as at March 31, 2005). 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.




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          7 -




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 $79 million at March 31, 2006 (March 31, 2005 - $70 million).
      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 $5.3 million,
      increase amortization expense by $7.5 million, reduce income taxes by $4.9
      million and reduce minority interest share of earnings by $11.9 million,
      resulting in an approximate increase to net earnings of $4.0 million, all
      relative to the amounts reported for the year ended March 31, 2006.





The
      following table summarizes our contractual obligations as at March 31,
      2006:





**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
            
            $
            243,362
            
            $
            16,802
            
            $
            32,496
            
            $
            29,627
            
            $
            164,437Capital
                lease obligations
            
            
            5,324
            
            
            1,844
            
            
            2,691
            
            
            789
            
            
            -Operating
                leases
            
            
            110,010
            
            
            24,228
            
            
            37,319
            
            
            24,446
            
            
            24,017Unconditional
                purchase obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                long-term obligations
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            -Total
                contractual obligations
            
            $
            358,696
            
            $
            42,874
            
            $
            72,506
            
            $
            54,862
            
            $
            188,454





At
      March 31, 2006, we had commercial commitments totaling $5.2 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




-
          8 -




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 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 18 to the consolidated financial statements for information
      regarding transactions with related parties.





**Impact
      of recently issued accounting standards**


SFAS
      No. 123 (revised 2004), *Share-Based
      Payment* (“SFAS
      123R”) was issued in December 2004. The standard eliminates the ability to
      account for share-based compensation transactions under APB 25 and requires
      that
      share-based compensation transactions, including grants of employee stock
      options, be accounted for using a fair value based method with the resulting
      compensation cost recognized over the period that the employee is required
      to
      provide service in order to receive the compensation.





The
      Company adopted the fair value based method of accounting for stock based
      employee compensation effective April 1, 2003. The Company adopted SFAS 123R
      on
      April 1, 2006 under the modified prospective application. Upon adoption of
      SFAS
      123R, the Company changed its approach to accounting for stock options issued
      by
      subsidiaries of the Company to subsidiary employees, where the employees have
      the ability to elect to receive cash payments upon exercise. Previously, these
      options were recorded as liabilities at their intrinsic value. Under SFAS 123R,
      these options are classified as liability-classed awards with the fair value
      of
      the option, as determined using generally accepted stock option valuation
      methods, recorded as liabilities. This change resulted in the recognition of
      a
      cumulative effect of an accounting policy charge of $1,010 on April 1,
      2006.





SFAS
      No. 154, *Accounting
      for Changes and Error Corrections a replacement of APB Opinion No. 20 and SFAS
      No. 3* (“SFAS
      154”) was issued in May 2005 and is effective for the Company’s fiscal year
      beginning April 1, 2006. SFAS 154 changes the requirements for the accounting
      and reporting of a change in accounting principle, and applies to all voluntary
      changes in accounting principles.





- 9
          -




SFAS
      No. 156, *Accounting
      for Servicing of Financial Assets, an amendment of SFAS No. 140* (“SFAS
      156”) was issued in March 2006. The standard amends SFAS No. 140, *Accounting
      for Transfers and Servicing of Financial Assets and Extinguishments of
      Liabilities* ,
      with
      respect to the accounting for separately recognized servicing assets and
      servicing liabilities. The standard is effective for the Company’s fiscal year
      beginning April 1, 2007. The Company is currently evaluating the effect of
      SFAS
      156 on the Company’s results of operations and financial condition.





**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 28,790,094 Subordinate Voting
      Shares, 1,325,694 Multiple Voting Shares and no preference shares. In addition,
      as at the date hereof, 1,656,350 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, 2006, 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, 2006, 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.





**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.


•
            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.








-
          10 -




•
            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
                businesses.





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.




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      11 -