EXHIBIT
2
 
 
 MANAGEMENT’S
REPORTS
 
 
 MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL STATEMENTS
 The
accompanying consolidated financial statements and management discussion and
analysis (“MD&A”) ofFirstService Corporation
(the “Company”) and all information in this annual report are the responsibility
of management and have been approved by the Board of Directors.
 
 The
consolidated financial statements have been prepared by management in accordance
with accounting principles generally accepted in the United States of America
using the best estimates and judgments of management, where
appropriate.  The most significant of these accounting principles are
set out in note 2 to the consolidated financial statements. Management has
prepared the financial information presented elsewhere in this annual report and
has ensured that it is consistent with the consolidated financial
statements.
 
 The MD&A
has been prepared in accordance with National Instrument 51-102 of the Canadian
Securities Administrators, taking into consideration other relevant guidance,
including Regulation S-K of the US Securities and Exchange
Commission.
 
 The Board of
Directors of the Company has an Audit Committee consisting of three independent
directors.  The Audit Committee meets regularly to review with
management and the independent auditors any significant accounting, internal
control, auditing and financial reporting matters.
 
 These
consolidated financial statements have been audited by PricewaterhouseCoopers
LLP, which have been appointed as the independent auditors of the Company by the
shareholders.  As auditors, PricewaterhouseCoopers LLP obtain an
understanding of the Company’s internal controls and procedures for financial
reporting to plan and conduct such audit procedures as they consider necessary
to express their opinion on the consolidated financial statements. As auditors,
PricewaterhouseCoopers LLP have full and independent access to the Audit
Committee to discuss their findings.
  MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 Management is
responsible for establishing and maintaining adequate internal control over
financial reporting for the Company.  Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
 
 Due to its
inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of its
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 Management
has excluded Field Asset Services, Inc. and 14 other individually insignificant
entities acquired by the Company during the last fiscal year from its assessment
of internal control over financial reporting as at March 31,
2008.   The total assets and total revenues of these
majority-owned entities of the Company represent 5.5%and 9.9%, respectively,
of the related consolidated financial statement amounts including discontinued
operations as at and for the fiscal year ended March 31, 2008.
 
 1
 Management
has assessed the effectiveness of the Company’s internal control over financial
reporting as at March 31, 2008, based on the criteria set forth in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, management has concluded that, as
at March 31, 2008, the Company’s internal control over financial reporting was
effective.
 
 The
effectiveness of the Company's internal control over financial reporting as at
March 31, 2008, has been audited by PricewaterhouseCoopers LLP, the Company’s
independent auditors.  The attestation report of
PricewaterhouseCoopers LLP is included in PricewaterhouseCoopers LLP’s report to
the shareholders of the Company dated May 20, 2008, which accompanies the
Company’s audited consolidated financial statements for the fiscal year ended
March 31, 2008.
 
 /s/
      Jay S. Hennick
              Chief
      Executive Officer
            /s/
      John B. Friedrichsen
              Chief
      Financial Officer
  May 21,
2008
 
 2
 INDEPENDENT
AUDITORS’ REPORT
 
 To the
Shareholders of FirstService Corporation
 
 We have
completed an integrated audit of FirstService Corporation’s 2008 consolidated
financial statements and of its internal control over financial reporting as at
March 31, 2008 and audits of its 2007 and 2006 consolidated financial
statements.  Our opinions, based on our audits, are presented
below.
 
 Consolidated
financial statements
 We have
audited the accompanying consolidated balance sheets of FirstService Corporation
as at March 31, 2008 and March 31, 2007, and the related consolidated statements
of earnings, shareholders’ equity and cash flows for each of the years in the
three-year period ended March 31, 2008.  These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
  We conducted
our audit of the Company’s financial statements as at March 31, 2008 and for the
year then ended in accordance with Canadian generally accepted auditing
standards and the standards of the Public Company Accounting Oversight Board
(United States).  We conducted our audits of the Company’s financial
statements as at March 31, 2007 and for each of the years in the two-year period
then ended in accordance with Canadian generally accepted auditing
standards.  Those standards require that we plan and perform an audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement.  An audit of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  A financial statement audit also includes
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis
for our opinion.
  In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as at March 31,
2008 and March 31, 2007 and the results of its operations and its cash flows for
each of the years in the three-year period ended March 31, 2008 in accordance
with generally accepted accounting principles in the United States of
America.
  Internal
control over financial reporting
 We have also
audited FirstService Corporation’s internal control over financial reporting as
at March 31, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”).  The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over
Financial Reporting.  Our responsibility is to express an opinion on
the effectiveness of the Company’s internal control over financial reporting
based on our audit.
 
 We conducted
our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United
States).  Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects.  An audit
of internal control over financial reporting includes obtaining an understanding
of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we consider necessary in the circumstances.  We believe
that our audit provides a reasonable basis for our opinion.
 
 3
 A company’s
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
 
 Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 As described
in Management’s Report on Internal Control over Financial Reporting, management
has excluded Field Asset Services, Inc. and 14 other individually insignificant
entities acquired by the Company from its assessment of internal control over
financial reporting as at March 31, 2008 because these entities were acquired by
the Company in purchase business combinations during the year ended March 31,
2008.  The total assets and total revenues of these majority owned
entities represent 5.5% and 9.9%, respectively, of the related consolidated
financial statement amounts including discontinued operations as at and for the
year ended March 31, 2008.
 
 In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as at March 31, 2008 based on criteria
established in Internal
Control — Integrated Framework issued by COSO.
 
 
 /s/
PricewaterhouseCoopers LLP
 Chartered
Accountants, Licensed Public Accountants
 
 Toronto,
Canada
 May 20,
2008
 
  Comments
by auditor for U.S. readers on Canada-U.S. reporting differences
 In the United
States, reporting standards for auditors require the addition of an explanatory
paragraph (following the opinion paragraph) when there is a change in accounting
principles that has a material effect on the comparability of the Company’s
consolidated financial statements, such as the change from the adoption of a new
accounting standard described in note 14 to the consolidated financial
statements. Our report to the shareholders dated May 20, 2008 is expressed in
accordance with Canadian reporting standards which do not require a reference to
such a change in accounting principles in the Auditors’ Report when the change
is properly accounted for and adequately disclosed in the consolidated financial
statements.
 
 
 /s/
PricewaterhouseCoopers LLP
 Chartered
Accountants, Licensed Public Accountants
 
 Toronto,
Canada
 May 20,
2008
 
 4
 FIRSTSERVICE
CORPORATION
 CONSOLIDATED
STATEMENTS OF EARNINGS
 (in thousands
of US dollars, except per share amounts)
 
 For the
      years ended March 31
            
            2008
            
            
            2007
            
            
            2006RevenuesServices
            
            $
            1,510,474
            
            
            $
            1,114,098
            
            
            $
            855,572Products
            
            
            62,741
            
            
            
            66,892
            
            
            
            63,096Total
      revenues
            
            
            1,573,215
            
            
            
            1,180,990
            
            
            
            918,668Cost of
      revenues (exclusive of depreciation shown below)Services
            
            
            906,403
            
            
            
            690,256
            
            
            
            539,855Products
            
            
            32,851
            
            
            
            40,913
            
            
            
            34,309Selling,
      general and administrative expenses
            
            
            521,906
            
            
            
            344,968
            
            
            
            262,496Depreciation
            
            
            20,056
            
            
            
            14,012
            
            
            
            9,873Amortization
      of intangible assets other than brokerage backlog
            
            
            13,207
            
            
            
            6,559
            
            
            
            3,494Amortization
      of brokerage backlog
            
            
            5,216
            
            
            
            8,164
            
            
            
            7,55473,576
            
            
            
            76,118
            
            
            
            61,087Interest
      expense
            
            
            17,828
            
            
            
            14,137
            
            
            
            11,272Interest
      income
            
            
            (4,326
            )
            
            
            (6,402
            )
            
            
            (1,038
            )Other
      income, net (note 5)
            
            
            (4,647
            )
            
            
            (4,848
            )
            
            
            (3,766
            )Impairment
      loss on available-for-sale securities (note 7)
            
            
            -
            
            
            
            3,139
            
            
            
            -Earnings
      before income taxes and minority interest
            
            
            64,721
            
            
            
            70,092
            
            
            
            54,619Income
      taxes (note 14)
            
            
            16,195
            
            
            
            20,261
            
            
            
            16,084Earnings
      before minority interest
            
            
            48,526
            
            
            
            49,831
            
            
            
            38,535Minority
      interest share of earnings
            
            
            15,461
            
            
            
            15,799
            
            
            
            11,778Net
      earnings from continuing operations
            
            
            33,065
            
            
            
            34,032
            
            
            
            26,757Net
      earnings from discontinued operations, net of income taxes (note
      4)
            
            
            1,334
            
            
            
            2,184
            
            
            
            42,740Net
      earnings before cumulative effect of change in accounting
      principle
            
            
            34,399
            
            
            
            36,216
            
            
            
            69,497Cumulative
      effect of change in accounting principle, net of income taxes (note
      2)
            
            
            -
            
            
            
            (1,353
            )
            
            
            -Net
      earnings
            
            $
            34,399
            
            
            $
            34,863
            
            
            $
            69,497Preferred
      share dividends
            
            
            6,952
            
            
            
            -
            
            
            
            -Net
      earnings available to common shareholders
            
            $
            27,447
            
            
            $
            34,863
            
            
            $
            69,497Net
      earnings per common share (note 15)BasicContinuing
      operations
            
            $
            0.87
            
            
            $
            1.14
            
            
            $
            0.89Discontinued
      operations
            
            
            0.05
            
            
            
            0.07
            
            
            
            1.41Cumulative
      effect of change in accounting principle
            
            
            -
            
            
            
            (0.04
            )
            
            
            -$
            0.92
            
            
            $
            1.17
            
            
            $
            2.30DilutedContinuing
      operations
            
            $
            0.81
            
            
            $
            1.05
            
            
            $
            0.83Discontinued
      operations
            
            
            0.04
            
            
            
            0.07
            
            
            
            1.38Cumulative
      effect of change in accounting principle
            
            
            -
            
            
            
            (0.04
            )
            
            
            -$
            0.85
            
            
            $
            1.08
            
            
            $
            2.21
 The
accompanying notes are an integral part of these consolidated financial
statements.
  5
 FIRSTSERVICE
CORPORATION
 CONSOLIDATED
BALANCE SHEETS
 (in thousands
of US dollars)
 
 As at
      March 31
            
            2008
            
            
            2007Assets
              Current
      assetsCash
      and cash equivalents
            
            $
            76,818
            
            
            $
            102,806Restricted
      cash
            
            
            8,858
            
            
            
            16,930Accounts
      receivable, net of an allowance of $10,716 (2007 - $7,543)
            
            
            177,048
            
            
            
            124,667Income
      taxes recoverable
            
            
            16,887
            
            
            
            9,968Inventories
      (note 6)
            
            
            20,519
            
            
            
            15,293Prepaid
      expenses and other current assets
            
            
            20,982
            
            
            
            15,764Deferred
      income taxes (note 14)
            
            
            19,540
            
            
            
            10,430Assets
      held for sale (note 4)
            
            
            88,163
            
            
            
            66,499428,815
            
            
            
            362,357Other
      receivables
            
            
            4,446
            
            
            
            6,599Fixed
      assets (note 8)
            
            
            80,991
            
            
            
            61,692Other
      assets (note 7)
            
            
            29,393
            
            
            
            28,952Deferred
      income taxes (note 14)
            
            
            14,082
            
            
            
            3,647Intangible
      assets (note 9)
            
            
            165,919
            
            
            
            95,241Goodwill
      (note 10)
            
            
            322,095
            
            
            
            220,346Assets
      held for sale (note 4)
            
            
            43,602
            
            
            
            38,164660,528
            
            
            
            454,641$
            1,089,343
            
            
            $
            816,998Liabilities
              Current
      liabilitiesAccounts
      payable
            
            $
            49,465
            
            
            $
            28,906Accrued
      liabilities (note 6)
            
            
            189,349
            
            
            
            154,354Income
      taxes payable
            
            
            36
            
            
            
            5,229Unearned
      revenues
            
            
            23,846
            
            
            
            17,281Long-term
      debt – current (note 11)
            
            
            24,777
            
            
            
            22,101Deferred
      income taxes (note 14)
            
            
            411
            
            
            
            3,318Liabilities
      held for sale (note 4)
            
            
            45,758
            
            
            
            25,638333,642
            
            
            
            256,827Long-term
      debt – non-current (note 11)
            
            
            331,253
            
            
            
            213,030Other
      liabilities
            
            
            18,236
            
            
            
            4,876Deferred
      income taxes (note 14)
            
            
            41,618
            
            
            
            29,084Liabilities
      held for sale (note 4)
            
            
            441
            
            
            
            -Minority
      interest
            
            
            58,468
            
            
            
            48,306450,016
            
            
            
            295,296Shareholders’
      equityPreferred
      shares (note 12)
            
            
            149,477
            
            
            
            -Common
      shares (note 12)
            
            
            88,919
            
            
            
            80,108Contributed
      surplus
            
            
            13,135
            
            
            
            6,557Receivables
      pursuant to share purchase plan (note 12)
            
            
            (765
            )
            
            
            (1,232
            )Retained
      earnings
            
            
            43,415
            
            
            
            175,346Cumulative
      other comprehensive earnings
            
            
            11,504
            
            
            
            4,096305,685
            
            
            
            264,875$
            1,089,343
            
            
            $
            816,998Commitments
      and contingencies (notes 12 and 18)
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 On
behalf of the Board of Directors,
 /s/ Bernard I.
Ghert                                           
/s/ Jay S. Hennick
 Director                                                             
Director
 
 6
 FIRSTSERVICE
CORPORATION
 CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
 (in thousands
of US dollars, except share amounts)
 
 Preferred
      shares
            Common
      sharesIssued
              and
      out
              -standing
              shares
              (note
      12)
            Amount
            Issued
      and
              outstanding
              shares
              (note
      12)
            Amount
            Contributed
              surplus
            Receivables
              pursuant
      to
              share
              purchase
              plan
            Retained
      earnings
            Cumulative
              other
              comprehensive
              earnings
              (loss)
            Total
              shareholders’
              equityBalance,
      March 31, 2005
            -
            -
            30,192,788
            $
      73,542
            $
      805
            $
      (2,148)
            $
      103,011
            $
      10,661
            $
      185,871Comprehensive
      earnings:Net
      earnings
            -
            -
            -
            -
            -
            -
            69,497
            -
            69,497Foreign
      currency
              translation
      adjustments
            -
            -
            -
            -
            -
            -
            -
            (7,988)
            (7,988)Unrealized
      loss on available for-sale equity securities, net of income taxes of
      $335
            -
            -
            -
            -
            -
            -
            -
            (1,528)
            (1,528)Comprehensive
      earnings
            
            
            
            
            
            
            
            
            59,981Subordinate
      Voting Shares:Stock
      option expense
            -
            -
            -
            -
            1,380
            -
            -
            -
            1,380Stock
      options exercised
            -
            -
            434,650
            3,740
            (22)
            -
            -
            -
            3,718Purchased
      for cancellation
            -
            -
            (571,650)
            (1,595)
            -
            -
            (12,116)
            -
            (13,711)Cash
      payments received
            -
            -
            -
            -
            -
            513
            -
            -
            513Balance,
      March 31, 2006
            -
            -
            30,055,788
            75,687
            2,163
            (1,635)
            160,392
            1,145
            237,752SAB 108
      adjustment (note 21)
            -
            -
            -
            -
            -
            -
            (5,377)
            -
            (5,377)Comprehensive
      earnings:Net
      earnings
            -
            -
            -
            -
            -
            -
            34,863
            -
            34,863Foreign
      currency
              translation
      adjustments
            -
            -
            -
            -
            -
            -
            -
            1,423
            1,423Reclass
      to earnings of unrealized loss on available-for-sale equity securities,
      net of income taxes of $335
            -
            -
            -
            -
            -
            -
            -
            1,528
            1,528Comprehensive
      earnings
            
            
            
            
            
            
            
            
            37,814Subsidiaries’
      equity transactions
            -
            -
            -
            -
            2,562
            -
            -
            -
            2,562Subordinate
      Voting Shares:Stock
      option expense
            -
            -
            -
            -
            1,879
            -
            -
            -
            1,879Stock
      options exercised
            -
            -
            564,800
            6,482
            (47)
            -
            -
            -
            6,435Purchased
      for cancellation
            -
            -
            (697,700)
            (2,061)
            -
            -
            (14,532)
            -
            (16,593)Cash
      payments received
            -
            -
            -
            -
            -
            403
            -
            -
            403Balance,
      March 31, 2007
            -
            -
            29,922,888
            80,108
            6,557
            (1,232)
            175,346
            4,096
            264,875FIN 48
      adjustment (note 14)
            -
            -
            -
            -
            -
            -
            (4,200)
            -
            (4,200)Comprehensive
      earnings:Net
      earnings
            -
            -
            -
            -
            -
            -
            34,399
            -
            34,399Foreign
      currency
              translation
      adjustments
            -
            -
            -
            -
            -
            -
            -
            7,497
            7,497Unrealized
      loss on available-for-sale equity securities, net of income taxes of
      $20
            -
            -
            -
            -
            -
            -
            -
            (89)
            (89)Comprehensive
      earnings
            
            
            
            
            
            
            
            
            41,807Subsidiaries’
      equity transactions
            -
            -
            -
            -
            1,634
            -
            -
            -
            1,634Subordinate
      Voting Shares:Issued
      for purchase of
              minority
      interest
            -
            -
            282,649
            5,868
            -
            -
            -
            -
            5,868Stock
      option expense
            -
            -
            -
            2,440
            3,498
            -
            -
            -
            5,938Stock
      options exercised
            -
            -
            159,550
            1,372
            (198)
            -
            -
            -
            1,174Purchased
      for cancellation
            -
            -
            (252,500)
            (869)
            -
            -
            (5,701)
            -
            (6,570)Cash
      payments received
            -
            -
            -
            -
            1,644
            467
            -
            -
            2,111Stock
      dividend (note 12)
            5,979,074
            149,477
            -
            -
            -
            -
            (149,477)
            -
            -Preferred
      Shares:
              Dividends
      (note 12)
            -
            -
            -
            -
            -
            -
            (6,952)
            -
            (6,952)Balance,
      March 31, 2008
            5,979,074
            $
      149,477
            30,112,587
            $
      88,919
            $
      13,135
            $
      (765)
            $
      43,415
            $
      11,504
            $
      305,685
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
  7
 FIRSTSERVICE
CORPORATION
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 (in thousands
of US dollars)
 
 For the
      years ended March 31
            
            2008
            
            
            2007
            
            
            2006Cash
      provided by (used in)Operating
      activitiesNet
      earnings from continuing operations
            
            $
            33,065
            
            
            $
            34,032
            
            
            $
            26,757Items
      not affecting cash:Depreciation
      and amortization
            
            
            38,479
            
            
            
            28,735
            
            
            
            20,921Deferred
      income taxes
            
            
            (20,785
            )
            
            
            (7,267
            )
            
            
            (3,970
            )Minority
      interest share of earnings
            
            
            15,461
            
            
            
            15,799
            
            
            
            11,778Stock
      option expense
            
            
            7,446
            
            
            
            3,707
            
            
            
            1,932Other
            
            
            2,455
            
            
            
            2,103
            
            
            
            716Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (18,787
            )
            
            
            (14,855
            )
            
            
            (12,664
            )Inventories
            
            
            (5,087
            )
            
            
            (3,022
            )
            
            
            (3,124
            )Prepaid
      expenses and other assets
            
            
            (3,409
            )
            
            
            (1,195
            )
            
            
            (2,658
            )Accounts
      payable
            
            
            1,058
            
            
            
            (10,376
            )
            
            
            7,425Accrued
      liabilities
            
            
            20,587
            
            
            
            27,216
            
            
            
            13,531Income
      taxes
            
            
            (22,094
            )
            
            
            (6,611
            )
            
            
            (5,047
            )Unearned
      revenues
            
            
            3,994
            
            
            
            293
            
            
            
            190Discontinued
      operations
            
            
            4,787
            
            
            
            (8,769
            )
            
            
            3,562Net
      cash provided by operating activities
            
            
            57,170
            
            
            
            59,790
            
            
            
            59,349Investing
      activitiesAcquisitions
      of businesses, net of cash acquired
            
            
            (152,529
            )
            
            
            (66,826
            )
            
            
            (14,105
            )Purchases
      of minority shareholders’ interests in subsidiaries
            
            
            (6,773
            )
            
            
            (6,437
            )
            
            
            (11,625
            )Sales
      of interests in subsidiaries to minority shareholders
            
            
            3,294
            
            
            
            3,167
            
            
            
            -Purchases
      of fixed assets
            
            
            (32,183
            )
            
            
            (25,145
            )
            
            
            (16,242
            )(Increase)
      decrease in other assets
            
            
            (1,139
            )
            
            
            (1,367
            )
            
            
            109Decrease
      (increase) in other receivables
            
            
            2,155
            
            
            
            2,350
            
            
            
            (492
            )Increase
      in other liabilities
            
            
            2,725
            
            
            
            -
            
            
            
            -Proceeds
      on sale of equity securities
            
            
            -
            
            
            
            4,875
            
            
            
            -Disposals
      of businesses
            
            
            -
            
            
            
            -
            
            
            
            110,476Changes
      in restricted cash
            
            
            8,071
            
            
            
            (9,797
            )
            
            
            -Discontinued
      operations
            
            
            (3,186
            )
            
            
            (2,965
            )
            
            
            (11,639
            )Net
      cash (used in) provided by investing activities
            
            
            (179,565
            )
            
            
            (102,145
            )
            
            
            56,482Financing
      activitiesIncrease
      in long-term debt
            
            
            206,924
            
            
            
            5,935
            
            
            
            102,614Repayment
      of long-term debt
            
            
            (87,386
            )
            
            
            (21,430
            )
            
            
            (74,100
            )Financing
      fees paid
            
            
            (544
            )
            
            
            (150
            )
            
            
            (1,396
            )Proceeds
      received on exercise of stock options
            
            
            1,174
            
            
            
            6,435
            
            
            
            3,740Repurchase
      of Subordinate Voting Shares
            
            
            (6,570
            )
            
            
            (16,593
            )
            
            
            (13,711
            )Collection
      of receivables pursuant to share purchase plan
            
            
            467
            
            
            
            403
            
            
            
            513Capital
      contributions
            
            
            1,644
            
            
            
            -
            
            
            
            -Dividends
      paid to preferred shareholders
            
            
            (6,952
            )
            
            
            -
            
            
            
            -Distributions
      paid to minority shareholders of subsidiaries
            
            
            (6,930
            )
            
            
            (3,524
            )
            
            
            (1,939
            )Discontinued
      operations
            
            
            (5,132
            )
            
            
            5,132
            
            
            
            -Net
      cash provided by (used in) financing activities
            
            
            96,695
            
            
            
            (23,792
            )
            
            
            15,721Effect
      of exchange rate changes on cash and cash equivalents
            
            
            2,196
            
            
            
            2,379
            
            
            
            (1,072
            )(Decrease)
      increase in cash and cash equivalents during the year
            
            
            (23,504
            )
            
            
            (63,768
            )
            
            
            130,480Cash
      and cash equivalents, beginning of year
            
            $
            102,806
            
            
            $
            164,407
            
            
            $
            30,511Amount
      held by discontinued operations, beginning of year
            
            
            1,364
            
            
            
            3,531
            
            
            
            6,947104,170
            
            
            
            167,938
            
            
            
            37,458Cash
      and cash equivalents, end of year
            
            $
            76,818
            
            
            $
            102,806
            
            
            $
            164,407Amount
      held by discontinued operations, end of year
            
            
            3,848
            
            
            
            1,364
            
            
            
            3,53180,666
            
            
            
            104,170
            
            
            
            167,938
 
 The
accompanying notes are an integral part of these consolidated financial
statements.
 
 8
 NOTES TO THE
CONSOLIDATED FINANCIAL STATEMENTS
 (in thousands
of US dollars, except share and per share amounts)
 
 1.
            Description
      of the business
 
 FirstService
Corporation (the “Company”) is a provider of real estate-related services to
commercial, institutional and residential customers in North America and various
other countries around the world.  The Company’s operations are
conducted through three segments: Commercial Real Estate Services, Residential
Property Management, and Property Services.  As described in note 4,
the Company reported two former segments in discontinued operations: (i) the
Business Services segment, which was disposed in March 2006 and (ii) the
Integrated Security Services segment, which was held for sale as of March 31,
2008.
 
 2.
            Summary
      of significant accounting policies
 
 The
preparation of consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period.  The most significant estimates
are related to the fair value determination of assets acquired and liabilities
assumed in business combinations, impairment testing of fair values of goodwill
and intangible assets, the collectibility of accounts receivable and income
taxes.  Actual results could be materially different from these
estimates.  Significant accounting policies are summarized as
follows:
 
 Basis
of consolidation
 The
consolidated financial statements include the accounts of the Company, its
majority-owned subsidiaries and those variable interest entities where the
Company is the primary beneficiary.  Where the Company does not have a
controlling interest but does exert significant influence, the equity method is
used.  Inter-company transactions and accounts are eliminated on
consolidation.
 
 Cash and cash equivalents
 Cash
equivalents consist of highly liquid investments, which are readily convertible
into cash and have original maturities of three months or less.
 
 Restricted
cash
 Restricted
cash consists of cash and cash equivalents over which the Company has legal
ownership but is restricted as to its availability or intended use, including
funds restricted by statutory deposit requirements and funds held on behalf of
clients.
 
 Inventories
 Inventories
are carried at the lower of cost and net realizable value.  Cost is
determined by the weighted average or first-in, first-out
methods.  The weighted average and the first-in, first-out methods
represent approximately 26% and 74% (2007 - 39% and 61%) of total inventories,
respectively.  Finished goods and work-in-progress include the cost of
materials, direct labor and manufacturing overhead costs.
 
 Fixed
assets
 Fixed assets
are stated at cost less accumulated depreciation.  The costs of
additions and improvements are capitalized, while maintenance and repairs are
expensed as incurred.  Fixed assets are depreciated over their
estimated useful lives as follows:
 
 9
 Buildings
                Vehicles
                Furniture and
      equipment
                Computer equipment and software
                Leasehold improvements
              20 to
      40 years straight-line
                3 to 5
      years straight-line
                3 to 10
      years straight-line
                3 to 5
      years straight-line
                term of
      the lease to a maximum of 10
years
 Investments in securities
 The Company
classifies investments in securities as a component of other
assets.  Investments in available-for-sale marketable equity
securities are carried at fair value with unrealized gains and losses included
in other comprehensive earnings on an after-tax
basis.  Other-than-temporary impairment losses are recorded in current
period earnings.  Investments in other equity securities are accounted
for using the equity method or cost method, as applicable, and are subject to
impairment testing.  Income from securities is recorded in other
income.
 
 Financing
fees
 Financing
fees related to the revolving credit facility and Senior Notes are amortized to
interest expense using the effective interest method.
 
 Goodwill
and intangible assets
 Goodwill
represents the excess of purchase price over the fair value of identifiable
assets acquired in a business combination and is not subject to
amortization.
 
 Intangible
assets are recorded at cost and, where lives are finite, are amortized over
their estimated useful lives as follows:
  Customer
      lists and relationships
              straight-line
      over 4 to 25 yearsFranchise
      rights
              by
      pattern of use, currently estimated at 2.5% to 15% per
  yearTrademarks
      and trade names:Indefinite
      life
              not
      amortizedFinite
      life
              straight-line
      over 15 to 35 yearsManagement
      contracts and other
              straight-line
      over life of contract ranging from 2 to 15 yearsBrokerage
      backlog
              as
      underlying brokerage transactions are
completed
 
 The Company
reviews the carrying value of finite life intangible assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable from the estimated future cash flows expected to
result from their use and eventual disposition.  If the sum of the
undiscounted expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized.  Measurement of the
impairment loss is based on the excess of the carrying amount of the asset over
the fair value calculated using discounted expected future cash
flows.
 
 Goodwill and
indefinite life intangible assets are tested for impairment annually or more
frequently if events or changes in circumstances indicate the asset might be
impaired, in which case the carrying amount of the asset is written down to fair
value.  Impairment of goodwill is tested at the reporting unit level
by comparing the reporting unit’s carrying amount, including goodwill, to the
fair value of the reporting unit.  The fair values of the reporting
units are estimated using a discounted cash flow approach.  If the
carrying amount of the reporting unit exceeds its fair value, then a second step
is performed to measure the amount of impairment loss, if
any.  Impairment of indefinite life intangible assets is tested by
comparing the carrying amount to fair value on an individual intangible asset
basis.
 
 Revenue
recognition and unearned revenue
 (a)
            Real
      estate brokerage operations
 Commission
revenues from sales brokerage transactions are recognized at the time the
service has been provided and the commission becomes legally due, except when
future contingencies exist.  In most cases, close of escrow or
transfer of title is a future contingency, and accordingly revenue recognition
is deferred until this contingency is satisfied.
 
 10
 Commission
revenues from real estate leasing are recognized once obligations under the
commission arrangement are satisfied.  Terms and conditions of a
commission arrangement generally include execution of the lease agreement and
satisfaction of future contingencies such as tenant occupancy.  In
most cases, a portion of the commission is earned upon execution of the lease
agreement, with the remaining portion contingent on a future event, typically
tenant occupancy; revenue recognition for the remaining portion is deferred
until all contingencies are satisfied.
 
 (b)
            Service
      operations other than real estate
brokerage
 Revenues are
recognized at the time the service is rendered or the product is
shipped.  Revenues from painting, restoration and closet installation
projects in process are recognized on the percentage of completion method,
generally in the ratio of actual costs to total estimated contract
costs.  In cases where anticipated costs to complete a project exceed
the revenue to be recognized, a provision for the additional estimated losses is
recorded in the period when the loss becomes apparent.Amounts received from
customers in advance of services being provided are recorded as unearned revenue
when received.
 
 (c)
            Franchise
      operations
 The Company
operates several franchise systems within its Property Services
segment.  Initial franchise fees are recognized when all material
services or conditions related to the sale of the franchise have been performed
or satisfied.  Royalty revenues are recognized based on a contracted
percentage of franchisee revenues, as reported by the
franchisees.  Revenues from administrative and other support services,
as applicable, are recognized as the services are provided.  In
addition, the Company operates 12 franchise locations of its California Closets
franchise system and these revenues are recognized as described in (b)
above.
 
 Stock
based compensation
 From April 1,
2003 until March 31, 2006, the Company recognized stock option compensation
expense in the statements of earnings using the fair value method of accounting
for stock-based compensation under Statement of Financial Accounting Standards
(“SFAS”) No. 123, Accounting
for Stock-Based Compensation (“SFAS 123”) as amended by SFAS No. 148,
Accounting for Stock-Based
Compensation – Transition and Disclosure, an amendment of SFAS 123(“SFAS
148”).  SFAS 148 provided alternative methods of transitioning to the
fair value based method of accounting for employee stock options as compensation
expense.  The Company used the “prospective method” of SFAS 148 and
expensed the fair value of new option grants awarded after March 31,
2003.  Compensation expense was allocated to reporting periods using
the graded attribution approach.  Forfeitures of stock options were
treated as a reduction of expense in the period of forfeiture.
 
 On April 1,
2006, the Company adopted SFAS No. 123R, Share Based Payment, (“SFAS
123R”) using the modified prospective approach.  Upon the 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 recorded as
liabilities at their fair value, as determined using a Black-Scholes option
pricing model.  Also, the Company previously accounted for stock
option forfeitures as a reduction to expenses in the period of forfeiture
whereas under SFAS 123R, forfeitures are estimated at the grant
date.  The aggregate cumulative effect of the change in accounting
principle, net of income taxes of nil, was $1,353.
 
 11
 Foreign
currency translation
 Assets,
liabilities and operations of foreign subsidiaries are recorded based on the
functional currency of each entity.  For certain foreign operations,
the functional currency is the local currency, in which case the assets,
liabilities and operations are translated at current exchange rates from the
local currency to the reporting currency, the US dollar.  The
resulting unrealized gains or losses are reported as a component of cumulative
other comprehensive earnings.  Realized and unrealized foreign
currency gains or losses related to any foreign dollar denominated monetary
assets and liabilities are included in net earnings.
 
 Income
taxes
 Income taxes
have been provided using the asset and liability method whereby deferred income
tax assets and liabilities are recognized for the expected future income tax
consequences of events that have been recognized in the consolidated financial
statements or income tax returns.  Deferred income tax assets and
liabilities are measured using enacted income tax rates expected to apply to
taxable income in the years in which temporary differences are expected to be
recovered or settled.  The effect on deferred income tax assets and
liabilities of a change in income tax rates is recognized in earnings in the
period in which the change occurs.  A valuation allowance is recorded
unless it is more likely than not that realization of a deferred income tax
asset will occur.
 
 Income taxes
are not provided on the unremitted earnings of US and foreign subsidiaries
because it has been the practice and is the intention of the Company to reinvest
these earnings indefinitely in these subsidiaries.
 
 On April 1,
2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of SFAS 109, (“FIN 48”) which clarifies the
accounting and reporting for uncertainties in income tax law (see note
14).  In accordance with FIN 48, the Company classifies interest and
penalties associated with income tax positions in income tax
expense.
 
 3.
            Acquisitions
 
 2008
acquisitions:
 On October 1,
2007, the Company acquired 80% of the shares of Field Asset Services, Inc., a
provider of property services to foreclosed residential properties on behalf of
its financial institution clients, headquartered in Austin,
Texas.  The Company also completed 14 individually insignificant
acquisitions in its Commercial Real Estate Services, Residential Property
Management and Property Services segments during the year ended March 31,
2008.  The Company acquired minority interests from shareholders in
all three operating segments.
 
 12
 Certain of
the purchase price allocations for the 2008 acquisitions are preliminary pending
finalization of analyses of the assets acquired and liabilities
assumed.  Details of the 2008 acquisitions are as
follows:
 2008Field
      Asset Services, Inc.
            
            Aggregate
      other acquisitions
            
            Purchases
      of minority shareholders’ interestsCurrent
      assets
            $
      9,012
            
            $
      26,894
            
            $
      92Long-term
      assets
            564
            
            9,052
            
            (695)Current
      liabilities
            (10,855)
            
            (41,135)
            
            (276)Long-term
      liabilities
            -
            
            (16,880)
            
            (2,321)Minority
      interest
            (89)
            
            (3,109)
            
            4,253(1,368)
            
            (25,178)
            
            1,053Stock
      consideration
            $
      -
            
            $
      -
            
            $
      5,868Cash
      consideration
            $
      43,337
            
            $
      102,226
            
            $
      6,773Acquired
      intangible assets
            22,080
            
            59,277
            
            6,069Goodwill
            22,625
            
            68,127
            
            5,519
  2007
acquisitions:
 On May 19,
2006, the Company acquired all of the shares of PRDnationwide Group, a
commercial real estate services business headquartered in Brisbane,
Australia.  The Company also completed 12 individually insignificant
acquisitions in its Commercial Real Estate Services, Residential Property
Management and Property Services segments during the year ended March 31,
2007.  The Company also acquired minority interests from shareholders
in all segments, but primarily in Commercial Real Estate Services.
 
 Details of
the 2007 acquisitions are as follows:
 2007PRDnationwide
      Group
            
            Aggregate
      other acquisitions
            
            Purchases
      of minority shareholders’ interestsCurrent
      assets
            $
      2,134
            
            $
      16,390
            
            $
      -Long-term
      assets
            2,627
            
            22,162
            
            (1,561)Current
      liabilities
            (4,796)
            
            (34,096)
            
            201Long-term
      liabilities
            (4,892)
            
            (7,074)
            
            (48)Minority
      interest
            (223)
            
            (6,200)
            
            645(5,150)
            
            (8,818)
            
            (763)Note
      consideration
            $
      -
            
            $
      2,522
            
            $
      1,044Cash
      consideration
            $
      21,475
            
            $
      43,604
            
            $
      6,603Acquired
      intangible assets
            9,519
            
            29,156
            
            2,376Goodwill
            17,106
            
            25,788
            
            6,034
  2006
acquisitions:
 During the
year ended March 31, 2006, the Company completed six individually insignificant
acquisitions in the Commercial Real Estate Services, Property Services and
Residential Property Management segments.  The Company also acquired
minority interests from shareholders in the Commercial Real Estate Services,
Residential Property Management and Integrated Security Services
segments.
 
 13
 Details of
the 2006 acquisitions are as follows:
 2006Acquisitions
            
            Purchases
      of minority shareholders’ interestsCurrent
      assets
            $
      5,915
            
            $
      -Long-term
      assets
            2,257
            
            -Current
      liabilities
            (11,931)
            
            -Long-term
      liabilities
            (5,899)
            
            (2,254)Minority
      interest
            (840)
            
            2,679(10,498)
            
            425Note
      consideration
            $
      3,050
            
            $
      -Cash
      consideration
            $
      11,346
            
            $
      11,998Acquired
      intangible assets
            14,854
            
            6,213Goodwill
            10,040
            
            5,360
  The purchase
prices of acquisitions resulted in the recognition of goodwill.  The
primary factors contributing to goodwill are assembled workforces, synergies
with existing operations and future growth prospects.  For
acquisitions completed during the year ended March 31, 2008, goodwill in the
amount of $49,410 is deductible for income tax purposes (2007 - $6,814; 2006 -
nil).
 
 Certain
vendors, at the time of acquisition, are entitled to receive contingent
consideration if the acquired businesses achieve specified earnings levels
during the two- to four-year periods following the dates of
acquisition.  Such contingent consideration is paid in cash at the
expiration of the contingency period.  As at March 31, 2008, there was
contingent consideration outstanding of up to $53,600 (2007 -
$14,800).  The contingencies will expire during the period extending
to February 2011.  The contingent consideration is recorded when the
contingencies are resolved and the consideration is paid or becomes payable, at
which time the Company records the fair value of the consideration paid or
payable, including interest, if any, as additional costs of the acquired
businesses.  Total contingent consideration recognized for the year
ended March 31, 2008 was $2,864 net of income tax of $1 (2007 - $5,732, net of
income tax of $342).  Contingent consideration paid during the year
ended March 31, 2008 was $6,848 (2007 - $1,747) and the amount payable as at
March 31, 2008 was nil (2007 - $4,306; see note 6).
 
 The
acquisitions referred to above were accounted for by the purchase method of
accounting for business combinations. Accordingly, the accompanying consolidated
statements of earnings do not include any revenues or expenses related to these
acquisitions prior to their respective closing dates.  The cash
portions of the consideration for the 2008 acquisitions were financed from cash
on hand and borrowings on the Company’s revolving credit facility.
 
 14
 Following are
the Company’s unaudited consolidated pro forma results assuming the acquisitions
occurred on the first day of the year of acquisition.  The year
immediately prior to the year of acquisition also includes the pro forma results
of the acquisitions.
 
 (unaudited)
            
            2008
            
            
            2007Pro
      forma revenues
            
            $
            1,689,527
            
            
            $
            1,504,243Pro
      forma net earnings from continuing operations
            
            
            35,723
            
            
            
            40,319Pro
      forma net earnings per share from continuing operationsBasic
            
            $
            1.19
            
            
            $
            1.35Diluted
            
            
            1.12
            
            
            
            1.25
 
 These
unaudited consolidated pro forma results have been prepared for illustrative
purposes only and do not purport to be indicative of results of operations that
would have actually resulted had the combinations been in effect at the
beginning of each year or of future results of operations.
 
 4.
            Dispositions
 
 On April 14,
2008, the Company entered into an agreement to sell the businesses comprising
its Integrated Security Services (“ISS”) segment, as part of the Company’s
strategy to sharpen its focus on global real estate-related
services.  As a condition to closing, the Company is required to
acquire the minority interests of its non-wholly owned ISS
subsidiaries.  The closing of the sale is conditional upon receipt of
regulatory approvals under competition legislation.  The ISS segment
has been reported as discontinued operations for all periods
presented.
 
 In January
2008, the Company decided to wind down its Canadian commercial mortgage
securitization operation (“CCMS”) due to adverse credit market
conditions.  CCMS was previously reported within the Commercial Real
Estate Services segment.  The wind down was complete as of March 31,
2008 except for the disposal of the remaining mortgage loans
receivable.  The mortgage assets are expected to be sold as soon as
practicable.  This operation has been reported as discontinued
operations for all periods presented.
 
 On March 17,
2006, the Company sold its 88.3% interest in Resolve Corporation (“Resolve”),
its Business Services segment, to a subsidiary of Resolve Business Outsourcing
Income Fund (“RBO Fund”) upon the initial public offering of RBO
Fund.  The Company received aggregate consideration of $137,393,
comprised of $116,972 in the form of cash ($110,476 net of cash sold) and
$20,421 in the form of equity securities of a subsidiary of RBO Fund, which are
exchangeable for publicly traded units of RBO Fund.  These securities
are classified as available-for-sale (note 7).  The pre-tax gain on
the disposal was $44,082, before current income taxes of $4,693 and deferred
income taxes of $3,570, resulting in a net gain of $35,819.  The net
gain on disposal included the realization of a gain of $5,487 related to
cumulative foreign currency translation on Canadian dollars.  Resolve
is reported as discontinued operations for all periods presented.
 
 During the
year ended March 31, 2008, a gain was recognized in connection with the
settlement of a liability related to the Resolve disposal.  The
settlement resulted in a cash payment to the purchaser of the disposed operation
in the amount of $1,036 and a gain on settlement in the amount of $2,265
(including an income tax benefit of $187).
 
 15
 The operating
results of the discontinued operations are as follows:
 
 Operating
      results - years ended March 31
            
            2008
            
            
            2007
            
            
            2006RevenuesISS
            
            $
            208,430
            
            
            $
            176,475
            
            
            $
            149,064CCMS
            
            
            (9,064
            )
            
            
            2,221
            
            
            
            402Resolve
            
            
            -
            
            
            
            -
            
            
            
            160,204199,366
            
            
            
            178,696
            
            
            
            309,670Operating
      earnings (loss) before income taxesISS
            
            
            10,174
            
            
            
            5,337
            
            
            
            3,217CCMS
            
            
            (11,413
            )
            
            
            (1,205
            )
            
            
            (816
            )Resolve
            
            
            2,078
            
            
            
            (728
            )
            
            
            7,429839
            
            
            
            3,404
            
            
            
            9,830(Recovery
      of) provision for income taxes
            
            
            (495
            )
            
            
            1,220
            
            
            
            2,909Net
      operating earnings from discontinued operations
            
            
            1,334
            
            
            
            2,184
            
            
            
            6,921Net
      gain on disposal of Resolve
            
            
            -
            
            
            
            -
            
            
            
            35,819Net
      earnings from discontinued operations
            
            $
            1,334
            
            
            $
            2,184
            
            
            $
            42,740Net
      earnings per share from discontinued operationsBasic
            
            $
            0.05
            
            
            $
            0.07
            
            
            $
            1.41Diluted
            
            
            0.04
            
            
            
            0.07
            
            
            
            1.38
  The assets
and liabilities of the ISS segment are classified as held for sale and are as
follows:
 
 Balance
      sheets as at March 31
            
            2008
            
            
            2007Assets
      held for saleCash
      and cash equivalents
            
            $
            3,834
            
            
            $
            1,210Accounts
      receivable, net
            
            
            46,937
            
            
            
            38,900Inventories
            
            
            15,164
            
            
            
            16,475Prepaid
      expenses and other current assets
            
            
            856
            
            
            
            1,158Fixed
      assets
            
            
            5,153
            
            
            
            4,500Goodwill
            
            
            30,630
            
            
            
            30,784Other
            
            
            2,671
            
            
            
            2,272Total
            
            $
            105,245
            
            
            $
            95,299Liabilities
      held for saleBank
      overdraft
            
            $
            -
            
            
            $
            5,132Accounts
      payable
            
            
            11,765
            
            
            
            6,516Accrued
      liabilities
            
            
            18,048
            
            
            
            15,139Unearned
      revenues
            
            
            3,585
            
            
            
            3,001Other
            
            
            472
            
            
            
            18Total
            
            $
            33,870
            
            
            $
            29,806
 
 16
 The assets
and liabilities of CCMS are classified as held for sale and are as
follows:
 
 Balance
      sheets as at March 31
            
            2008
            
            
            2007Assets
      held for saleCash
      and cash equivalents
            
            $
            14
            
            
            $
            154Mortgage
      loans receivable
            
            
            20,809
            
            
            
            13,716Deferred
      income taxes
            
            
            6,803
            
            
            
            503Other
            
            
            642
            
            
            
            124Total
            
            $
            28,268
            
            
            $
            14,497Liabilities
      held for saleInterest
      rate derivative contracts
            
            $
            11,724
            
            
            $
            368Other
            
            
            2,354
            
            
            
            595Total
            
            $
            14,078
            
            
            $
            963
 
 The Company
has fixed-rate and floating-rate commercial mortgage loans
receivable.  The mortgages were funded under co-lending agreements
whereby the Company advanced 20% or less of the principal amount.  The
co-lenders advanced 80% or more of the principal amount directly to the
borrowers.  The Company’s interest in the mortgages is subordinate to
the co-lenders’ interests.  The Company has the right to purchase the
co-lenders’ interest in any mortgage at any time at par value and the co-lenders
have the right to purchase the Company’s interest in the mortgages after six
months.  Mortgage loans receivable are carried on an individual basis
at the lower of cost and market, which is calculated based on contractually
established commitments from investors or current investor yield
requirements.
 
 The Company
sells mortgage loans through public securitization and whole loan
sales.  When the Company sells mortgage loans, the mortgage loans are
removed from the balance sheet and a gain or loss is recognized in current
period earnings immediately, based on the carrying values of the mortgage loans
transferred.  Servicing rights are sold with the mortgages and it is
the Company’s policy not to retain a residual interest in the mortgages
sold.
 
 The Company
enters into interest rate derivative contracts to cover the full value of the
mortgages written, including the portion funded by a co-lender which the Company
has the right and intention to call, while mortgages await sale.  The
contracts are recorded on the consolidated balance sheets as assets or
liabilities and carried at fair value.  Changes in the fair value of
contracts are recognized in current period earnings.  The contracts
convert the fixed-rate mortgage loans to floating rates.  Hedge
accounting has not been accorded to the portion of the contracts that match the
mortgages held for sale as the contracts do not meet the criteria for hedge
accounting.
 
 As at March
31, 2008, the Company had interest rate derivative contracts to convert $143,500
of fixed-rate mortgage loans receivable to floating rates (2007 - $167,807) with
a fair value loss of $11,724 (2007 - $368).  The contracts have
maturity dates ranging from June 2012 to June 2017.  The fair values
of contracts are determined based on the present value of the estimated future
net cash flows using implied rates in the applicable yield curve as of the
valuation date.
 
 For the year
ended March 31, 2008 a loss of $9,466 was recorded in revenues relating to these
derivative contracts, which was comprised of $11,278 unrealized losses (2007
-unrealized gains of $3,245) on outstanding contracts and $1,812 of realized
gains (2007 - realized losses of $3,613) on the settlement of the
contracts.
 
 17
 During the
year ended March 31, 2008, the Company recognized pre-tax gains (after realized
gains on derivatives contracts) of $2,516 (2007 - $2,120) on the securitization
of mortgage loans with unpaid principal balances of $195,903 (2007 -
$39,208).  In connection with the sale of mortgages, the Company is
obligated to cure or repurchase any mortgage sold that has a breach or defect
related to the origination and underwriting process.  As at March 31,
2008, the Company was unable to develop an estimate of the maximum potential of
future payments under this obligation because the Company is not aware of any
such breaches or defects.
 
 
 5.
            Other
      income
 
 2008
            
            
            2007
            
            
            2006Earnings
      from available-for-sale securities
            
            $
            2,292
            
            
            $
            2,078
            
            
            $
            -Earnings
      from equity method investments
            
            
            2,006
            
            
            
            1,625
            
            
            
            1,329Net
      gain on sale of equity securities
            
            
            -
            
            
            
            1,145
            
            
            
            2,211Gain on
      foreign exchange contracts
            
            
            -
            
            
            
            -
            
            
            
            121Dilution
      gain on sale of subsidiary shares
            
            
            -
            
            
            
            -
            
            
            
            105Other
            
            
            349
            
            
            
            -
            
            
            
            -$
            4,647
            
            
            $
            4,848
            
            
            $
            3,766
 
 6.
            Components
      of working capital accounts
 2008
                
                
                2007InventoriesWork-in-progress
                
                $
                12,871
                
                
                $
                8,464Finished
      goods
                
                
                4,251
                
                
                
                4,350Supplies
      and other
                
                
                3,397
                
                
                
                2,479$
                20,519
                
                
                $
                15,293Accrued
      liabilitiesAccrued
      payroll, commission and benefits
                
                $
                160,411
                
                
                $
                95,884Accrued
      interest
                
                
                3,871
                
                
                
                4,159Customer
      advances
                
                
                2,937
                
                
                
                9,713Contingent
      acquisition consideration payable
                
                
                -
                
                
                
                4,306Liabilities
      in connection with Resolve operation
                
                
                -
                
                
                
                2,912Other
                
                
                22,130
                
                
                
                37,380$
                189,349
                
                
                $
                154,354
 
 7.
            Other
      assets
 2008
            
            
            2007Available-for-sale
      equity securities
            
            $
            17,291
            
            
            $
            17,419Equity
      method investments
            
            
            5,086
            
            
            
            5,046Held-to-maturity
      debt securities
            
            
            2,280
            
            
            
            3,763Financing
      fees, net of accumulated amortization of $1,703 (2007 -
      $1,554)
            
            
            1,754
            
            
            
            1,690Other
            
            
            2,982
            
            
            
            1,034$
            29,393
            
            
            $
            28,952
 
 The Company’s
available-for-sale equity securities consist of securities of a subsidiary of
RBO Fund (see note 4).  As of March 31, 2007, the Company’s
available-for-sale securities were in a continuous loss position for more than
twelve months.  Accordingly, these securities were deemed to be
other-than-temporarily impaired and an unrealized, non-cash loss of $3,139
($2,574 net of income taxes) was recorded in the statement of earnings as of
March 31, 2007.
 
 18
 8.
            Fixed
      assets
 
 2008
            
            
            Accumulated
            
            NetCost
            
            depreciation
            
            2008Land
            $
      3,070
            
            $
      -
            
            $
      3,070Buildings
            11,683
            
            2,517
            
            9,166Vehicles
            21,217
            
            13,050
            
            8,167Furniture
      and equipment
            51,784
            
            26,265
            
            25,519Computer
      equipment and software
            40,462
            
            18,681
            
            21,781Leasehold
      improvements
            24,874
            
            11,586
            
            13,288$
      153,090
            
            $
      72,099
            
            $
      80,991
 
 2007
            
            
            Accumulated
            
            NetCost
            
            depreciation
            
            2007Land
            $
      3,070
            
            $
      -
            
            $
      3,070Buildings
            11,225
            
            2,093
            
            9,132Vehicles
            18,425
            
            10,742
            
            7,683Furniture
      and equipment
            36,387
            
            17,999
            
            18,388Computer
      equipment and software
            26,060
            
            11,452
            
            14,608Leasehold
      improvements
            16,138
            
            7,327
            
            8,811$
      111,305
            
            $
      49,613
            
            $
      61,692
 
 Included in
fixed assets are vehicles and computer equipment under capital lease at a cost
of $11,510 (2007 - $9,385) and net book value of $5,518 (2007 -
$4,937).
 
 9.
            Intangible
      assets
 2008
            Gross
      carrying amount
            
            Accumulated
      amortization
            
            Net
              2008Customer
      lists and relationships
            $
      101,649
            
            $
      15,917
            
            $
      85,732Franchise
      rights
            31,682
            
            7,941
            
            23,741Trademarks
      and trade names:Indefinite
      life
            18,559
            
            -
            
            18,559Finite
      life
            31,086
            
            3,918
            
            27,168Management
      contracts and other
            11,850
            
            3,518
            
            8,332Brokerage
      backlog
            30,595
            
            28,208
            
            2,387$
      225,421
            
            $
      59,502
            
            $
      165,919
 
 
 2007
            Gross
      carrying amount
            
            Accumulated
      amortization
            
            Net
              2007Customer
      lists and relationships
            $
      43,952
            
            $
      6,997
            
            $
      36,955Franchise
      rights
            26,862
            
            6,597
            
            20,265Trademarks
      and trade names:Indefinite
      life
            15,696
            
            -
            
            15,696Finite
      life
            18,931
            
            2,781
            
            16,150Management
      contracts and other
            6,502
            
            1,520
            
            4,982Brokerage
      backlog
            23,639
            
            22,446
            
            1,193$
      135,582
            
            $
      40,341
            
            $
      95,241
 
 19
 During the
year ended March 31, 2008, the Company acquired the following intangible
assets:
 Amount
            
            Estimated
      weighted average amortization period (years)Customer
      lists and relationships
            $
      56,624
            
            13.5Franchise
      rights
            4,498
            
            21.3Trademarks
      and trade names
            14,587
            
            24.1Management
      contracts and other
            4,329
            
            5.0Brokerage
      backlog
            6,861
            
            1.1$
      86,899
            
            13.4
 
 The following
is the estimated annual amortization expense for recorded intangible assets for
each of the next five years ending March 31:
 
 2009
            $
      16,4792010
            15,1352011
            12,9692012
            11,1462013
            10,075
 
 During the
year ended March 31, 2008, charges of $1,149 (2007 - $437; 2006 - nil) were
recognized in connection with impairments of intangible assets.  In
2008 and 2007, the impairments were attributable to faster than expected erosion
of customer relationships in the Commercial Real Estate and Residential Property
Management segments.  The charges were recorded in amortization
expense.  The fair value of the intangible assets was estimated using
discounted expected future cash flows.
 
 
 10.
            Goodwill
 Commercial
              Real
      Estate
              Services
            
            
            Residential
              Property
              Management
            
            
            Property
              Services
            
            
            ConsolidatedBalance,
      March 31, 2006
            
            $
            51,867
            
            
            $
            71,297
            
            
            $
            43,245
            
            
            $
            166,409Adjustments
      to goodwill resulting from adjustments to purchase price
      allocations
            
            
            363
            
            
            
            -
            
            
            
            (566
            )
            
            
            (203
            )Goodwill
      resulting from contingent acquisition payments
            
            
            -
            
            
            
            5,654
            
            
            
            -
            
            
            
            5,654Goodwill
      resulting from purchases of minority shareholders’
    interests
            
            
            4,985
            
            
            
            -
            
            
            
            883
            
            
            
            5,868Goodwill
      acquired during year
            
            
            40,389
            
            
            
            1,296
            
            
            
            1,209
            
            
            
            42,894Goodwill
      disposed during year
            
            
            -
            
            
            
            -
            
            
            
            (836
            )
            
            
            (836
            )Foreign
      exchange
            
            
            560
            
            
            
            -
            
            
            
            -
            
            
            
            560Balance,
      March 31, 2007
            
            
            98,164
            
            
            
            78,247
            
            
            
            43,935
            
            
            
            220,346Adjustments
      to goodwill resulting from adjustments to purchase price
      allocations
            
            
            15
            
            
            
            (594
            )
            
            
            71
            
            
            
            (508
            )Goodwill
      resulting from contingent acquisition payments
            
            
            2,757
            
            
            
            26
            
            
            
            81
            
            
            
            2,864Goodwill
      resulting from purchases of minority shareholders’
    interests
            
            
            2,228
            
            
            
            1,109
            
            
            
            2,212
            
            
            
            5,549Goodwill
      acquired during year
            
            
            39,103
            
            
            
            29,024
            
            
            
            22,625
            
            
            
            90,752Goodwill
      disposed during year
            
            
            (421
            )
            
            
            -
            
            
            
            -
            
            
            
            (421
            )Foreign
      exchange
            
            
            3,332
            
            
            
            11
            
            
            
            170
            
            
            
            3,513Balance,
      March 31, 2008
            
            $
            145,178
            
            
            $
            107,823
            
            
            $
            69,094
            
            
            $
            322,095
 
 20
 11.
            Long-term
      debt
 2008
            
            
            2007Revolving
      credit facility
            
            $
            132,500
            
            
            $
            -8.06%
      Senior Notes
            
            
            57,142
            
            
            
            71,4286.40%
      Senior Notes
            
            
            50,000
            
            
            
            50,0005.44%
      Senior Notes
            
            
            100,000
            
            
            
            100,000Capital
      leases bearing interest ranging from 5% to 10%, maturing at various dates
      through 2012
            
            
            5,589
            
            
            
            4,455Other
      long-term debt bearing interest at 4% to 10%, maturing at various dates
      through 2014
            
            
            10,799
            
            
            
            9,248356,030
            
            
            
            235,131Less:
      current portion
            
            
            24,777
            
            
            
            22,101$
            331,253
            
            
            $
            213,030
 
 On September
6, 2007, the Company terminated its existing $110,000 revolving credit facility
and entered into an amended and restated credit agreement with a syndicate of
banks to provide a $225,000 committed senior revolving credit facility with a
five-year term.  The amended revolving credit facility bears interest
at 0.75% to 1.30% over floating reference rates, depending on certain leverage
ratios.  The revolving credit facility had $70,700 of available
un-drawn credit as at March 31, 2008 (nil was drawn at March 31,
2007).  As of March 31, 2008, letters of credit in the amount of
$4,300 were outstanding ($4,900 as at March 31, 2007).  The revolving
credit facility requires a commitment fee of 0.25% to 0.50% of the unused
portion, depending on certain leverage ratios, and also includes an uncommitted
accordion provision providing an additional $50,000 of borrowing capacity under
certain circumstances.
 
 The Company
has outstanding $57,142 of 8.06% fixed-rate Senior Notes (the “8.06% Notes”)
(2007 - $71,428).  The 8.06% Notes have a final maturity of June 29,
2011, with seven equal annual principal repayments which began on June 29,
2005.  The Company also has outstanding $50,000 of 6.40% fixed-rate
Senior Notes (the “6.40% Notes”).  The 6.40% Notes have a final
maturity of September 30, 2015 with four equal annual principal repayments
commencing on September 30, 2012.  The Company also has outstanding
$100,000 of 5.44% fixed-rate Senior Notes (the “5.44% Notes”).  The
5.44% Notes have a final maturity of April 1, 2015 with five equal annual
principal repayments beginning on April 1, 2011.
 
 The Company
has indemnified the holders of the 8.06% Notes, 6.40% Notes and 5.44% Notes
(collectively, the “Notes”) from all withholding taxes that are or may become
applicable to any payments made by the Company on the Notes.  The
Company believes this exposure is not material as of March 31,
2008.
 
 The revolving
credit facility and the Notes rank equally in terms of seniority.  The
Company has granted these lenders collateral including the following: an
interest in all of the assets of the Company including the shares of the
Company’s subsidiaries; an assignment of material contracts; and an assignment
of the Company’s “call” rights with respect to shares of the subsidiaries held
by minority interests (note 18(b)).
 
 The covenants
and other limitations within the revolving credit facility and the Notes
agreements are substantially the same.  The covenants require the
Company to maintain certain ratios including leverage, fixed charge coverage,
interest coverage and net worth.  The Company is prohibited from
undertaking certain mergers, acquisitions and dispositions without prior
approval.
 
 21
 The estimated
aggregate amount of principal repayments on long-term debt required in each of
the next five fiscal years and thereafter to meet the retirement provisions are
as follows:
  2009
            $
      24,7772010
            17,4662011
            15,4412012
            14,7212013
            166,943Thereafter
            116,682
  12.
            Capital
      stock
 
 The
authorized capital stock of the Company is as follows:
 
 An unlimited
number of Preferred Shares, issuable in series;
 An unlimited
number of Subordinate Voting Shares having one vote per share; and
 An unlimited
number of Multiple Voting Shares having 20 votes per share, convertible at any
time into Subordinate Voting Shares at a rate of one Subordinate Voting Share
for each Multiple Voting Share outstanding.
 
 The following
table provides a summary of total capital stock issued and
outstanding:
 
 Preferred
      Shares
            Subordinate
      Voting Shares
            Multiple
      Voting Shares
            Total
      Common SharesNumber
            Amount
            Number
            Amount
            Number
            Amount
            Number
            amountBalance,
      March 31, 2006
            -
            $
      -
            28,730,094
            $
      75,314
            1,325,694
            $
      373
            30,055,788
            $
      75,687Balance,
      March 31, 2007
            -
            -
            28,597,194
            79,735
            1,325,694
            373
            29,922,888
            80,108Balance,
      March 31, 2008
            5,979,074
            149,477
            28,786,893
            88,546
            1,325,694
            373
            30,112,587
            88,919
 
 On
      August 1, 2007, the Company issued a stock dividend in the form of 7%
      Cumulative Preference Shares, Series 1 (the “Preferred Shares”) to holders
      of Subordinate Voting Shares and Multiple Voting Shares (together the
      “Common Shares”).  One Preferred Share was issued for every five
      outstanding Common Shares.  The stock dividend resulted in the
      issuance of 5,979,074 Preferred Shares, with an aggregate par value of
      $149,477.  Each Preferred Share has a stated amount of
      $25.00.  Preferred dividends are payable quarterly on or about
      the last day of each quarter.
 
 As at March
31, 2008, the Company may redeem each Preferred Share for $26.00 payable in
cash, or alternatively the Company may convert each Preferred Share into
Subordinate Voting Shares based on a price of $26.00.  The redemption
or conversion price is scheduled to decline in annual increments of $0.25 such
that the price will be fixed at $25.00 on and after August 1,
2011.  Holders of the Preferred Shares have no redemption or
conversion rights.
 
 The following
table provides the pro forma impact on diluted earnings per common share of the
preferred dividends on the comparative periods.
 
 2008
            
            2007
            
            2006Diluted
      earnings per common share from continuing operations:As
      reported
            $
      0.81
            
            $
      1.05
            
            $
      0.83Impact
      of preferred dividends on comparative periods
            -
            
            (0.23)
            
            (0.23)Pro
      forma
            $
      0.81
            
            $
      0.82
            
            $
      0.60
 
 22
 
 During
      the year ended March 31, 2008, the Company repurchased 252,500 (2007 -
      697,700; 2006 - 571,650) Subordinate Voting Shares for cancellation under
      a Normal Course Issuer Bid filed with the Toronto Stock Exchange, which
      allowed the Company to repurchase up to 5% of its outstanding shares on
      the open market during a twelve-month period. The repurchase cost is
      allocated to capital stock for the weighted average book value and to
      retained earnings for any excess.
 
 The
      Company has a $765 (2007 - $1,232) interest bearing loan receivable
      related to the purchase of 120,000 Subordinate Voting Shares (2007 -
      240,000 shares).  The loan, which is collateralized by the
      shares issued, has a ten-year term from the grant date; however, it is
      open for repayment at any time.  The final maturity of the loan
      is January 2009.
 
 Pursuant
      to an agreement approved in February 2004, the Company agreed that it will
      make payments to its Chief Executive Officer (“CEO”) that are contingent
      upon the arm’s length sale of control of the Company or upon a
      distribution of the Company’s assets to shareholders.  The
      payment amounts will be determined with reference to the price per
      Subordinate Voting Share received by shareholders upon an arm’s length
      sale or upon a distribution of assets.  The right to receive the
      payments may be transferred among members of the CEO’s family, their
      holding companies and trusts.  The agreement provides for the
      CEO to receive each of the following two payments.  The first
      payment is an amount equal to 5% of the product of: (i) the total number
      of Subordinate and Multiple Voting Shares outstanding on a fully diluted
      basis at the time of the sale and (ii) the per share consideration
      received by holders of Subordinate and Multiple Voting Shares minus a base
      price of C$5.675.  The second payment is an amount equal to 5%
      of the product of (i) the total number of shares outstanding on a fully
      diluted basis at the time of the sale and (ii) the per share consideration
      received by holders of Subordinate Voting Shares minus a base price of
      C$11.05.
 
 13.
            Stock-based
      compensation
 
 The following
table provides a summary of stock-based compensation expense:
 
 2008
            
            2007
            
            2006Stock
      option expense – Company plan
            $
      5,938
            
            $
      1,916
            
            $
      1,380Stock
      option expense – subsidiaries
            1,508
            
            1,791
            
            552Stock
      value appreciation plans
            373
            
            1,249
            
            379$
      7,819
            
            $
      4,956
            
            $
      2,311
 
 
 Company
stock option plan
 The Company
has a stock option plan for certain officers and key full-time employees of the
Company and its subsidiaries, other than its CEO.  Options are granted
at the market price for the underlying shares on the date of
grant.  Each option vests over a four-year term and expires five years
from the date granted and allows for the purchase of one Subordinate Voting
Share.  All Subordinate Voting Shares issued under the plan are new
shares.  As at March 31, 2008, there were 338,000 options available
for future grants (2007 - 506,000).
 
 23
 Grants under
the Company’s stock option plan are equity classified awards under SFAS
123R.  Stock option activity for the three years ended March 31, 2008
was as follows:
 
 Number
      of
              options
            
            Weighted
              average
              exercise
      price
            
            Weighted
              average
              remaining
              contractual
      life
              (years)
            
            Aggregate
              intrinsic
      valueShares
      issuable under options –
              March
      31, 2005
            
            1,844,000
            
            $
      9.72Granted
            
            328,000
            
            19.61Exercised
            
            (434,650)
            
            8.60Forfeited
            
            (21,000)
            
            9.38Shares
      issuable under options –
              March
      31, 2006
            
            1,716,350
            
            11.96Granted
            
            305,000
            
            20.65Exercised
            
            (564,800)
            
            11.40Forfeited
            
            (11,000)
            
            13.43Shares
      issuable under options –
              March
      31, 2007
            
            1,445,550
            
            14.12Granted
            
            175,500
            
            32.24Exercised
            
            (159,550)
            
            7.28Forfeited
            
            (7,500)
            
            27.81Shares
      issuable under options –
              March
      31, 2008
            
            1,454,000
            
            $
      16.94
            
            2.58
            
            $
      8,687Options
      exercisable –
              March
      31, 2008
            
            759,450
            
            $
      12.91
            
            1.92
            
            $
      6,832
 
 As at March
31, 2008, the range of option exercise prices was $2.39 to $33.25 per
share.  Also as at March 31, 2008, the aggregate intrinsic value and
weighted average remaining contractual life for options vested and expected to
vest were $8,687 and 2.36 years, respectively.
 
 The following
table summarizes information about option exercises during the three years ended
March 31, 2008:
 
 2008
            
            2007
            
            2006Number
      of options exercised
            159,550
            
            564,800
            
            434,650Aggregate
      fair value
            $
      4,885
            
            $
      13,266
            
            $
      10,784Intrinsic
      value
            3,711
            
            6,831
            
            7,044Amount
      of cash received
            $
      1,174
            
            $
      6,435
            
            $
      3,740Tax
      benefit recognized
            $
      -
            
            $
      -
            
            $
      -
 
 Stock option
compensation expense recorded in the consolidated statement of earnings is
allocated using the graded attribution method.  As at March 31, 2008,
there was $2,414 of unrecognized compensation cost related to non-vested awards
which is expected to be recognized over the next 3.30 years.  During
the year ended March 31, 2008, the fair value of options vested was $1,734 (2007
- $1,220; 2006 - $739).
 
 In October
2007, the Company received an inquiry from the Ontario Securities Commission
related to granting of Company stock options.  A comprehensive review
of historical stock option granting processes and the related accounting for the
13-year period from 1995 to 2007 was conducted by a Special Committee of the
Company’s Board of Directors comprised of independent directors.  As a
result of the review, the Special Committee found that the practice followed by
the Company in granting stock options was not accounted for correctly and
recommended the measurement dates of certain option grants be revised for
accounting purposes.  As a result, $3,278 of incremental compensation
expense was recorded in 2008 to correct the error and exercise prices of
outstanding unexercised options were revised.  In addition, cash
payments of $1,644 were received in 2008 on account of adjustments to exercise
prices of previously exercised options and recorded as contributed
surplus.
 
 24
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model, utilizing the following weighted average
assumptions:
 
 2008
            
            2007
            
            2006Risk-free
      interest rate
            4.8%
            
            4.3%
            
            4.7%Expected
      life in years
            3.75
            
            3.75
            
            4.40Expected
      volatility
            26.4%
            
            25.2%
            
            30.0%Dividend
      yield
            0%
            
            0%
            
            0%Weighted
      average fair value per option granted
            $
      9.31
            
            $
      6.70
            
            $
      7.65
 
 The risk-free
interest rate is based on the implied yield of a zero-coupon US Treasury bond
with a term equal to the option’s expected term.  The expected term
represents the estimated period of time until exercise and is based on
historical experience.  Prior to January 1, 2008, the expected term
was calculated using the simplified method under SAB 107.  The
expected volatility is based on the historical prices of the Company’s
shares.  The dividend yield assumption is based on the Company’s
present intention to retain all earnings in respect of the Common
Shares.
 
 Prior to
April 1, 2003, the Company had accounted for stock options under the intrinsic
value method under APB No. 25 Accounting for Stock Issued to
Employees.  Had compensation expense for stock options been
determined under the fair value method under SFAS 123 for all periods, pro forma
reported net earnings and earnings per share would reflect the
following:
 
 2006Net
      earnings as reported
            
            $
            69,497Deduct:
      Stock-based compensation expense
              determined
      under fair value method, net of income taxes
            
            
            (1,129)Pro
      forma net earnings
            
            $
            68,368Pro
      forma net earnings per share:Basic
            
            $
            2.27Diluted
            
            
            2.17Reported
      net earnings per share:Basic
            
            $
            2.30Diluted
            
            
            2.21
 
 Subsidiary stock option and
appreciation plans
 The Company
has stock option plans at certain of its subsidiaries.  The impact of
potential dilution from these plans is reflected in the Company’s diluted
earnings per share (note 15).
 
 The Company
also has stock value appreciation plans at certain of its subsidiaries that
provide for cash payments to be made to subsidiary employees based on the
long-term appreciation of the stock value of subsidiaries.  The
Company’s accounting policy is to record the intrinsic value of these awards as
accrued liabilities.  If an award is subject to a vesting condition,
then graded attribution is applied to the intrinsic value.  The
related compensation expense is recorded in the consolidated statement of
earnings.  Since these plans are settled in cash, no dilutive effect
has been reflected in the Company’s diluted earnings per share.
 
 25
 14.
            Income
      taxes
 
 Income taxes
differ from the amounts that would be obtained by applying the statutory rate to
the respective years’ earnings before taxes.  These differences result
from the following items:
 
 2008
            
            2007
            
            2006Income
      tax expense using combined statutory rate of approximately 35% (2007 -
      36%; 2006 – 36%)
            
            $
      22,956
            
            $
      25,317
            
            $
      19,728Permanent
      differences
            
            435
            
            1,270
            
            (917)Adjustments
      in tax liabilities of prior years
            
            522
            
            (1,788)
            
            -Effects
      of changes in enacted tax rates
            
            (420)
            
            (451)
            
            -Changes
      in provisions for uncertain tax positions
            
            1,733
            
            -
            
            -Stock-based
      compensation
            
            (1,290)
            
            1,353
            
            834Foreign
      tax rate reduction
            
            (9,019)
            
            (5,440)
            
            (3,561)Withholding
      taxes
            
            1,278
            
            -
            
            -Provision
      for income taxes as reported
            
            $
      16,195
            
            $
      20,261
            
            $
      16,084
 
 
 Earnings
before income taxes and minority interest by tax jurisdiction comprise the
following:
 
 2008
            
            2007
            
            2006Canada
            
            $
      15,515
            
            $
      3,340
            
            $
      1,075United
      States
            
            27,490
            
            45,372
            
            41,401Foreign
            
            21,716
            
            21,380
            
            12,143Total
            
            $
      64,721
            
            $
      70,092
            
            $
      54,619
 
 The provision
for income taxes comprises the following:
 
 2008
            
            2007
            
            2006CurrentCanada
            
            $
      8,839
            
            $
      (1,494)
            
            $
      328United
      States
            
            17,251
            
            20,260
            
            14,936Foreign
            
            12,743
            
            7,343
            
            4,48238,833
            
            26,109
            
            19,746DeferredCanada
            
            (10,829)
            
            (711)
            
            (1,235)United
      States
            
            (8,420)
            
            (3,550)
            
            (2,146)Foreign
            
            (3,389)
            
            (1,587)
            
            (281)(22,638)
            
            (5,848)
            
            (3,662)Total
            
            $
      16,195
            
            $
      20,261
            
            $
      16,084
  26
 The
significant components of deferred income taxes are as follows:
 
 2008
            
            2007Deferred
      income tax assetsLoss
      carry-forwards
            
            $
      24,106
            
            $
      4,819Expenses
      not currently deductible
            
            5,043
            
            8,568Stock-based
      compensation
            
            3,284
            
            -Provision
      for doubtful accounts
            
            1,092
            
            649Inventory
      and other reserves
            
            97
            
            4133,622
            
            14,077Deferred
      income tax liabilitiesDepreciation
      and amortization
            
            34,172
            
            28,365Unrealized
      foreign exchange gains
            
            4,582
            
            1,010Investments
            
            2,717
            
            2,397Prepaid
      and other expenses deducted for tax purposes
            
            448
            
            458Financing
      fees
            
            110
            
            17242,029
            
            32,402Net
      deferred income tax liability
            
            $
      (8,407)
            
            $
      (18,325)
 
 As at March
31, 2008, the Company had Canadian net operating loss carry-forward balances of
approximately $41,432 (2007 - $15,515) prior to a valuation allowance of $3,950
(2007 - $3,950).  These amounts are available to reduce future federal
and provincial income taxes.  Net operating loss carry-forward
balances attributable to Canada and the United States expire over the next 20
years.  The Company also had foreign net operating loss carry-forward
balances of approximately $43,582 (2007 - $17,619), prior to a valuation
allowance of $19,062 (2007 - $15,416).  Foreign capital loss
carry-forward balances amounted to $9,870 (2007 - $9,870) as at March 31, 2008
prior to a valuation allowance of $9,870 (2007 - $9,870).  Additional
net operating loss and capital loss carry-forward balances of $15,416 (2007 -
$15,416) and $9,870 (2007 - $9,870) respectively relate to losses acquired in
the 2004 CMN acquisition.  Any benefit realized with respect to these
losses would be recorded as a reduction in goodwill.
 
 Cumulative
unremitted earnings of US and foreign subsidiaries approximated $141,674 as at
March 31, 2008 (2007 - $109,928).
 
 The
cumulative effect of the adoption of FIN 48 was an increase in tax provisions of
$3,800, including $700 of accrued interest, which was accounted for as a
reduction to retained earnings as at April 1, 2007 of $4,200 and a reduction in
goodwill of $400.  The liability for income taxes associated with
uncertain tax positions was $4,735 as at April 1, 2007 and $10,671 as at March
31, 2008.
 
 A
reconciliation of the beginning and ending amounts of gross unrecognized tax
benefit is as follows:
 
 Balance,
      April 1, 2007
            
            $
      4,735Increases
      based on tax positions related to the current year
            
            445Increases
      for tax positions of prior years
            
            1,470Decreases
      for tax positions of prior years
            
            (490)Increases
      from acquisitions
            
            4,511Balance,
      March 31, 2008
            
            $
      10,671
 
 Of the
$10,671 in gross unrecognized tax benefits, $5,330 would affect the Company’s
effective tax rate if recognized.  Interest and penalties related to
provisions for income taxes are recorded in income tax expense.  As at
March 31, 2008 and April 1, 2007, the Company had accrued $777 and $700,
respectively for potential income-tax related interest and
penalties.
 
 27
 The number of
years with open tax audits varies depending on the tax
jurisdictions.  Generally, income tax returns filed with the Canada
Revenue Agency and related provinces are open for three to four years and income
tax returns filed with the U.S. Internal Revenue Service and related states are
open for three to five years.  Tax returns in Australia are generally
open for four years.  The Company’s significant tax jurisdictions
include the United States of America, Canada and Australia. The Company does not
currently expect any material impact on earnings to result from the resolution
of matters related to open taxation years; however, actual settlements may
differ from amounts accrued. Currently, it is not reasonably possible to
determine whether unrecognized tax benefits will increase or decrease within the
next twelve months with respect to settlements of tax audits. The Company has,
as part of its FIN 48 analysis, made its current estimates on facts and
circumstances known to date and cannot predict subsequent or changed facts and
circumstances that may affect its current estimates.
 
 
 15.
            Earnings
      per share
 
 The following
table reconciles the numerator used to calculate diluted earnings per
share:
 
 2008
            
            2007
            
            2006Net
      earnings from continuing operations
            
            $
      33,065
            
            $
      34,032
            
            $
      26,757Dilution
      of net earnings resulting from assumed exercise of stock options in
      subsidiaries
            
            (1,473)
            
            (2,228)
            
            (1,253)Net
      earnings from continuing operations for diluted earnings per share
      calculation purposes
            
            $
      31,592
            
            $
      31,804
            
            $
      25,504Net
      earnings
            
            $
      34,399
            
            $
      34,863
            
            $
      69,497Dilution
      of net earnings resulting from assumed exercise of stock options in
      subsidiaries
            
            (1,473)
            
            (2,228)
            
            (1,253)Net
      earnings for diluted earnings per share calculation
    purposes
            
            $
      32,926
            
            $
      32,635
            
            $
      68,244
 
 The Preferred
Shares are anti-dilutive and thus not included in the denominator for diluted
earnings per share calculations.  The following table reconciles the
denominator used to calculate earnings per share:
 
 2008
            
            2007
            
            2006Shares
      issued and outstanding at beginning of year
            
            29,922,888
            
            30,055,788
            
            30,192,788Weighted
      average number of shares:Issued
      during the year
            
            106,139
            
            210,843
            
            137,943Repurchased
      during the year
            
            (124,371)
            
            (364,101)
            
            (160,040)Weighted
      average number of shares used in computing basic earnings per
      share
            
            29,904,656
            
            29,902,530
            
            30,170,691Assumed
      exercise of stock options, net of shares assumed acquired under the
      Treasury Stock Method
            
            642,310
            
            451,774
            
            725,286Number
      of shares used in computing diluted earnings per share
            
            30,546,966
            
            30,354,304
            
            30,895,977
 
 28
 16.
            Other
      supplemental information
 2008
            
            2007
            
            2006Franchised
      operationsRevenues
            
            $
      99,351
            
            $
      95,354
            
            $
      88,531Operating
      earnings
            
            26,199
            
            21,163
            
            16,728Initial
      franchise fee revenues
            
            5,606
            
            5,571
            
            3,482Cash
      payments made during the yearIncome
      taxes
            
            $
      45,288
            
            $
      25,764
            
            $
      25,179Interest
            
            19,268
            
            16,276
            
            12,481Non-cash
      financing activitiesIncreases
      in capital lease obligations
            
            $
      4,115
            
            $
      1,502
            
            $
      3,284Other
      expensesRent
      expense
            
            $
      47,910
            
            $
      32,836
            
            $
      26,762
 
 17.
            Financial
      instruments
 
 Concentration
of credit risk
 The Company
is subject to credit risk with respect to its cash and cash equivalents,
accounts receivable and other receivables.  Concentrations of credit
risk with respect to the receivables are limited due to the large number of
entities comprising the Company’s customer base and their dispersion across many
different service lines in various countries.
 
 Interest
rate risk
 The Company
maintains an interest rate risk management strategy that uses interest rate
hedging contracts from time to time.  The Company’s specific goals are
to: (i) manage interest rate sensitivity by modifying the characteristics of its
debt and (ii) lower the long-term cost of its borrowed funds.Fluctuations in interest
rates affect the fair value of the hedging contracts as their value depends on
the prevailing market interest rate.  Hedging contracts are monitored
on a monthly basis.
 
 As at March
31, 2008 and 2007, except as disclosed in note 4, the Company had no interest
rate swaps.  In May 2005, the Company settled a swap on $20,000 of
principal on the 6.40% Notes for a net loss of $48.  In December 2005,
the Company settled swaps on $85,714 of principal on the 8.06% Notes for a net
gain of $120.
 
 Fair
values of financial instruments
 The carrying amounts for cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities
approximate fair values due to the short maturity of these instruments, unless
otherwise indicated.  The following are estimates of the fair values
for other financial instruments:
 
 2008
            
            2007Carrying
      amount
            
            Fair
      value
            
            Carrying
      amount
            
            Fair
      valueOther
      receivables
            $
      3,419
            
            $
      3,419
            
            $
      7,215
            
            $
      7,215Available-for-sale
      securities
            17,291
            
            17,291
            
            17,419
            
            17,419Long-term
      debt
            354,654
            
            392,429
            
            235,149
            
            261,009
 
 29
 18.
            Commitments
      and contingencies
 
 (a)
            Lease
      commitments
 Minimum
operating lease payments are as follows:
 
 Year
ending March 31
 2009
            $
      39,7632010
            33,2842011
            27,9192012
            23,1302013
            18,664Thereafter
            32,719
 
 
 (b)
            Minority
      shareholder agreements
 The Company
has shareholder agreements with the minority owners of its
subsidiaries.  These agreements allow the Company to “call” the
minority position at fair value determined with the use of a formula price,
which is usually equal to a multiple of average net earnings before
extraordinary items, minority interest share of earnings, income taxes,
interest, depreciation, and amortization for a defined period.  The
minority owners may also “put” their interest to the Company at the same price
subject to certain limitations.  The purchase price may, at the option
of the Company, be paid in cash or in Subordinate Voting
Shares.  Acquisitions of these minority interests, if any, would be
accounted for using the purchase method.  The total obligation if all
call or put options were exercised as at March 31, 2008 was approximately
$233,000 (2007 - $154,000).
 
 (c)
            Contingencies
 In the normal
course of operations, the Company is subject to routine claims and litigation
incidental to its business.  Litigation currently pending or
threatened against the Company includes disputes with former employees and
commercial liability claims related to services provided by the
Company.  The Company believes resolution of such proceedings,
combined with amounts recorded, will not have a material impact on the Company’s
financial condition or the results of operations.
 
 19.
            Related
      party transactions
 
 During the
year, the Company paid $2,579 (2007 - $826; 2006 - $775) in rent to entities
controlled by minority shareholders of subsidiaries.  In addition,
$1,168 (2007 - $388; 2006 - $335) of service revenues were earned from entities
controlled by minority shareholders of subsidiaries and $493 (2007 - $66; 2006 -
$62) of expenses were paid to entities controlled by minority shareholders of
subsidiaries.  The transactions were completed at market
rates.  During the year, the Company received $1,644 of cash payments
from officers and directors on account of adjustments to exercise prices of
previously exercised options.
 
 20.
            Segmented
      information
 
 Operating
segments
 The Company
has three reportable operating segments. The segments are grouped with reference
to the types of services provided and the types of clients that use those
services.  The Company assesses each segment’s performance based on
operating earnings or operating earnings before depreciation and
amortization.  Commercial Real Estate Services provides commercial
property brokerage and other advisory services to clients in North America and
in various other countries around the world.  Residential Property
Management provides property management and related property services to
residential communities in the United States.  Property Services
(previously referred to as Property Improvement Services) provides franchised
and Company-owned property services to customers in the United States and
Canada. Corporate includes the costs of operating the Company’s corporate head
office.
 
 30
 Included in
total assets of the Commercial Real Estate Services segment at March 31, 2008 is
$3,342 (2007 - $4,667; 2006 - $4,608) of investments in subsidiaries accounted
for under the equity method.
 
 2008
            Commercial
      Real Estate Services
            Residential
      Property Management
            Property
      Services
            Corporate
            ConsolidatedRevenues
            $
      810,969
            $
      544,926
            $
      216,972
            $
      348
            $
      1,573,215Depreciation
      and
              amortization
            22,025
            10,450
            5,654
            350
            38,479Operating
      earnings
            17,008
            39,790
            32,745
            (15,967)
            73,576Other
      income, net
            
            
            
            
            4,647Interest
      expense, net
            
            
            
            
            (13,502)Income
      taxes
            
            
            
            
            (16,195)Minority
      interest
            
            
            
            
            (15,461)Net
      earnings from continuing operations
            
            
            
            
            33,065Net
      earnings from discontinued operations
            
            
            
            
            1,334Net
      earnings
            
            
            
            
            $
      34,399Total
      assets
            $
      426,858
            $
      290,692
            $
      191,553
            $
      48,475
            $
      957,578Discontinued
      operations
            
            
            
            
            131,765$
      1,089,343Total
      additions to long-lived assets
            79,873
            64,471
            53,560
            364
            198,268
 
 
 2007
            Commercial
      Real Estate Services
            Residential
      Property Management
            Property
      Services
            Corporate
            ConsolidatedRevenues
            $
      605,845
            $
      423,797
            $
      150,794
            $
      554
            $
      1,180,990Depreciation
      and amortization
            16,215
            7,644
            4,653
            223
            28,735Operating
      earnings
            32,363
            32,622
            25,911
            (14,778)
            76,118Other
      income, net
            
            
            
            
            1,709Interest
      expense, net
            
            
            
            
            (7,735)Income
      taxes
            
            
            
            
            (20,261)Minority
      interest
            
            
            
            
            (15,799)Net
      earnings from continuing operations
            
            
            
            
            34,032Net
      earnings from  discontinued operations
            
            
            
            
            2,184Cumulative
      effect of change in accounting principle
            
            
            
            
            (1,353)Net
      earnings
            
            
            
            
            $
      34,863Total
      assets
            $
      315,503
            $
      206,977
            $
      123,832
            $
      66,023
            $
      712,335Discontinued
      operations
            
            
            
            
            104,663816,998Total
      additions to long-lived assets
            89,484
            27,917
            10,165
            331
            127,897
 
 31
 2006
            Commercial
      Real Estate Services
            Residential
      Property Management
            Property
      Services
            Corporate
            ConsolidatedRevenues
            $
      438,032
            $
      346,133
            $
      134,136
            $
      367
            $
      918,668Depreciation
      and amortization
            11,386
            5,618
            3,749
            168
            20,921Operating
      earnings
            25,940
            25,767
            22,016
            (12,636)
            61,087Other
      income, net
            
            
            
            
            3,766Interest
      expense, net
            
            
            
            
            (10,234)Income
      taxes
            
            
            
            
            (16,084)Minority
      interest
            
            
            
            
            (11,778)Net
      earnings from continuing operations
            
            
            
            
            26,757Net
      earnings from discontinued operations
            
            
            
            
            42,740Net
      earnings
            
            
            
            
            $
      69,497Total
      assets
            $
      204,042
            $
      150,641
            $
      114,188
            $
      149,375
            $
      618,246Discontinued
      operations
            
            
            
            
            92,758711,004Total
      additions to long-lived assets
            36,799
            10,400
            9,909
            546
            57,654
  Geographic
information
 Revenues in
each geographic segment are reported by customer location.  Amounts
reported in geographic regions other than the United States, Canada and
Australia are primarily denominated in US dollars.
 
 2008
            
            2007
            
            2006United
      StatesRevenues
            $
      1,002,370
            
            $
      788,535
            
            $
      621,548Total
      long-lived assets
            408,591
            
            267,760
            
            211,853CanadaRevenues
            $
      227,249
            
            $
      177,940
            
            $
      148,249Total
      long-lived assets
            75,181
            
            67,268
            
            37,130AustraliaRevenues
            $
      156,812
            
            $
      117,794
            
            $
      78,011Total
      long-lived assets
            32,629
            
            29,514
            
            15,273OtherRevenues
            $
      186,784
            
            $
      96,721
            
            $
      70,860Total
      long-lived assets
            52,604
            
            12,737
            
            13,874ConsolidatedRevenues
            $
      1,573,215
            
            $
      1,180,990
            
            $
      918,668Total
      long-lived assets
            $
      569,005
            
            $
      377,279
            
            $
      278,130
 
 32
 21.
            Application
      of Staff Accounting Bulletin No.
108
 
 In September
2006, the SEC staff issued Staff Accounting Bulletin No. 108 Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”).  SAB 108 was issued in order to
eliminate the diversity of practice surrounding how public companies quantify
financial statement misstatements.  Traditionally, the impacts of
misstatements were evaluated under either an earnings-based (“rollover”)
approach or a balance sheet-based (“iron curtain”) approach.  The
rollover approach focuses on the impact of misstatements on the statement of
earnings, including the reversing impact of prior year misstatements, but its
use can lead to the accumulation of misstatements on the balance
sheet.  The iron curtain approach focuses on the effect of correcting
the period-end balance sheet with less emphasis on the reversing effects of
prior years’ errors on the statement of earnings.  Prior to the
application of SAB 108, the Company used the rollover approach for quantifying
financial statement misstatements.
 
 In SAB 108,
the SEC staff established an approach that requires quantification of financial
statement misstatements based on the effects of the misstatements on each of the
Company’s financial statements and the related financial statement
disclosures.  This model is commonly referred to as a “dual approach”
because it requires quantification of errors under both the rollover and iron
curtain approaches.
 
 The Company
adopted the provisions of SAB 108 in connection with the annual consolidated
financial statements for the year ended March 31, 2007.  The
provisions of SAB 108 may be applied by either (i) restating prior financial
statements as if the dual approach had always been applied, or (ii) recording
the cumulative effect of initially applying the dual approach as adjustments to
the carrying values of assets and liabilities as of April 1, 2006 with an
offsetting adjustment recorded to the opening balance of retained
earnings.  The Company elected to record the effects of applying SAB
108 using the cumulative effect transition method (method (ii)).  The
following summarizes the effects of applying SAB 108 to errors previously
considered immaterial under the rollover approach:
 
 (a)
            In the
      Company’s Commercial Real Estates Services operations, broker and
      management compensation vary during the calendar year based on exceeding
      pre-determined production or earnings thresholds.  Since the
      time this segment was acquired in November 2004, the Company recorded
      compensation expense incrementally as thresholds were exceeded, but should
      have recorded compensation expense systematically on a basis approximating
      the expected average commission rate for the calendar year.  As
      a result, the accrued compensation liability as of April 1, 2006 was
      understated by $7,951.  The Company recorded a $7,951 increase
      in the liability as of April 1, 2006 with a corresponding reduction in
      retained earnings to correct this
misstatement.
 (b)
            In the
      Company’s Residential Property Management operations, certain subsidiaries
      did not accrue vacation pay since the time they were acquired in 1996 and
      1997.  As a result, accrued vacation pay liability as of April
      1, 2006 was understated by $1,607.  The Company recorded a
      $1,607 increase in the liability as of April 1, 2006 with a corresponding
      reduction in retained earnings to correct this
    misstatement.
 (c)
            In the
      Company’s Residential Property Management operations, certain prepaid
      insurance expenses were not eliminated on consolidation.  As a
      result, prepaid insurance as of April 1, 2006 was overstated by
      $467.  The Company recorded a $467 decrease in the prepaid
      insurance as of April 1, 2006 with a corresponding reduction in retained
      earnings to correct this
misstatement.
 
 33
 As a result
of the misstatements described above, the provision for income taxes was
cumulatively overstated by $3,599 as at April 1, 2006.  The Company
recorded an increase in deferred income tax asset in the amount of $3,599 with a
corresponding increase in retained earnings to correct this
misstatement.  The Company also recorded a reduction in minority
interest in the amount of $1,049 with a corresponding increase to retained
earnings.  Accordingly, the net reduction to retained earnings
recorded as of April 1, 2006 to record the initial application of SAB 108 was
$5,377.
 
 22.
            Impact
      of recently issued accounting
standards
 
 In September
2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”).  SFAS 157 defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value measurements
and is effective for the Company’s fiscal year commencing on April 1,
2008.  FASB Staff Position FAS 157-2, Effective Date of SFAS 157,
permits for the deferred effective date of SFAS 157 for non-financial assets and
liabilities to fiscal year beginning after November 15, 2008.  The
Company elected this deferral option for its non-financial assets and
liabilities.  The Company has evaluated the impact of the adoption of
SFAS 157 and does not expect a material effect on results of operations or
financial position.
 
 In February
2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities Including an Amendment of SFAS No. 115
(“SFAS 159”).  SFAS 159 permits the Company to measure certain
financial instruments, assets and liabilities at fair value on an
instrument-by-instrument basis under a fair value option.   The
standard is effective for the Company as of April 1, 2008.  The
Company has evaluated the impact of the adoption of SFAS 159 and does not expect
to make use of the fair value option.
 
 In December
2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”).  SFAS 141R changes the method of accounting for business
acquisitions at the acquisition date and in subsequent periods.  This
standard is effective prospectively for business combinations for which the
acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. The Company is in the process of
evaluating the impact of the adoption of SFAS 141R. The following changes in
practice will be required for acquisitions completed under SFAS 141R: (i)
transaction costs will be expensed, resulting in increases to selling, general
and administrative expenses; (ii) contingent consideration will be recognized at
the acquisition date, resulting in increases to goodwill and accrued
liabilities; and (iii) the fair value of contingent consideration will be
re-measured quarterly, resulting in increased volatility in
earnings.
 
 In December
2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS
160”).  SFAS 160 changes the accounting and reporting for minority
interests.  This standard is effective for fiscal years beginning on
or after December 15, 2008.  The Company is in the process of
evaluating the impact of the adoption of SFAS 160.  The following
change in practice will be required under SFAS 160: non-controlling interest
will be presented within shareholders’ equity rather than the “mezzanine”
section of the balance sheet.
 
 23.
            Subsequent
      event
 
 The Company
agreed to sell its Integrated Security Services segment on April 14, 2008 for
gross proceeds of $187,500, subject to working capital adjustments (see note
4).  The closing of the sale is conditional upon receipt of regulatory
approvals.
  34