EXHIBIT
3
 
 
 Management’s
Discussion and Analysis of Results of Operations and Financial
Condition
 (in US
dollars)
 May 21,
2008
 
 The
following discussion should be read in conjunction with the audited consolidated
financial statements and notes thereto for the fiscal year ended March 31, 2008
prepared in accordance with accounting principles generally accepted in the
United States of America.
 
 Consolidated
review
 Fiscal 2008 was a year of growth, opportunity
and change for FirstService Corporation (the “Company” or “FirstService”),
marked by the highest level of business acquisition activity in our history and
the disposal of our Integrated Security Services segment, announced just after
year-end.  Revenue growth, primarily from acquisitions, was
33%.  Challenging economic conditions in the second half of our fiscal
year contributed to a decline in adjusted diluted earnings per share from
continuing operations1 of 3%.
 
 We completed fifteen business acquisitions
during the year.  The aggregate purchase price for these acquisitions
was $145.6 million, funded from cash on hand and borrowings on our revolving
credit facility.  The most significant acquisition occurred on October
1, 2007 in our Property Services segment, where we acquired an 80% stake in
Field Asset Services, Inc., a Texas-based provider of property services to
foreclosed residential properties on behalf of its financial institution
clients.  We added a total of eight Commercial Real Estate Services
businesses in the United States, Eastern Europe and Australia providing real
estate brokerage, valuation, consulting and advisory services.  Five
acquisitions were completed in the Residential Property Management segment,
including regional platforms in California and Texas. In Property Services, one
California Closets “branchise”, located in Berkeley, California, was also
acquired.
 
 1
Adjusted diluted earnings per share from continuing operations is defined as
diluted net earnings per share from continuing operations plus the effect, after
income taxes, of: (i) amortization of short-lived intangible assets acquired in
connection with recent Commercial Real Estate Services acquisitions; (ii) the
impairment loss on available-for-sale securities and (iii) incremental stock
option expense from the stock option review recorded in December
2007.  The Company believes this measure is useful because (i) it
isolates the impact of non-recurring acquisition-related amortization expense;
(ii) it eliminates the effect of a non-cash impairment of securities obtained in
connection with the disposal of a business and (iii) it eliminates the effect of
a non-cash adjustment to historical stock option expense.  This is not
a recognized measure of financial performance under generally accepted
accounting principles (“GAAP”) in the United States of America, and should not
be considered as a substitute for diluted net earnings per share from continuing
operations, as determined in accordance with GAAP.  The Company’s
method of calculating this measure may differ from other issuers and,
accordingly, this measure may not be comparable to measures used by other
issuers.  A reconciliation appears below.
 
 (in
      US$)
              
              Year
      ended March 312008
              
              
              2007
              
              
              2006Diluted
      net earnings per common share from continuing operations
              
              $
              0.81
              
              
              $
              1.05
              
              
              $
              0.83Pro
      forma impact of dividends on preferred shares
              
              
              -
              
              
              
              (0.23
              )
              
              
              (0.23
              )Amortization
      of brokerage backlog, net of taxes
              
              
              0.10
              
              
              
              0.15
              
              
              
              0.14Impairment
      loss on available-for-sale securities, net of taxes
              
              
              -
              
              
              
              0.08
              
              
              
              -Incremental
      stock option expense from stock option review
              
              
              0.11
              
              
              
              -
              
              
              
              -Adjusted
      diluted net earnings per common share from continuing
      operations
              
              $
              1.02
              
              
              $
              1.05
              
              
              $
              0.74
  1
  On April 14, 2008, we
announced the divesture of our Integrated Security Services
segment.  This divestiture intensifies our strategic focus on real
estate services and provides us with proceeds to fund our growth.  The
gross sale proceeds are expected to be $187 million.  The transaction
is expected to close upon receipt of regulatory approvals.  These
operations have been classified as discontinued operations for all periods
presented.
 
 On January
29, 2008, we announced the wind down of our Canadian commercial mortgage
securitization operation (“CCMS”), which is complete as of the current date
except for the disposal of remaining mortgage loans receivable.  The
mortgage assets are expected to be sold as soon as practicable.  This
operation has been classified as a discontinued operation for all periods
presented.
 
 On August 1,
2007, we 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 $149.5 million.  The annual preferred dividend
obligation is $10.5 million, payable quarterly on or about the last day of each
quarter.
 
 On March 17,
2006, we completed the divestiture of Resolve Corporation (“Resolve”), our
Business Services operation, through the initial public offering of trust units
by Resolve Business Outsourcing Income Fund (the “RBO
Fund”).  Proceeds from the sale were $110.5 million of cash and a 7.3%
retained interest in RBO Fund initially valued at $20.4
million.  Resolve is classified as a discontinued operation for all
periods presented.  As at March 31, 2008 and the current date, we
continue to hold our retained interest in RBO Fund.  The market value
of the retained interest was $17.3 million as at March 31, 2008.
 
 
 Results
of operations – year ended March 31, 2008
 FirstService reported revenues from continuing
operations of $1.57 billion for the year ended March 31, 2008, an increase of
33% relative to the prior year.  The increase was comprised of
internal growth of 9%, acquisitions of 21% and the impact of foreign exchange of
3%.
 
 Operating earnings decreased 3% relative to the
prior year, to $73.6 million.  EBITDA2 increased 9% to $119.9
million.  The gap between the operating earnings decline relative to
revenue and EBITDA growth is primarily the result of: (i) an increase in
stock-based compensation expense and (ii) the rapid amortization of brokerage
backlog intangibles related to
 
 
 2EBITDA
is defined as net earnings before extraordinary items, discontinued operations,
minority interest share of earnings, income taxes, interest, other income,
depreciation and amortization, and stock-based compensation
expense.  The Company uses EBITDA to evaluate operating
performance.  EBITDA is an integral part of the Company’s planning and
reporting systems.  Additionally, the Company uses multiples of
current and projected EBITDA in conjunction with discounted cash flow models to
determine its overall enterprise valuation and to evaluate acquisition
targets.  The Company believes EBITDA is a reasonable measure of
operating performance because of the low capital intensity of its especially in
the services industry, on the basis of operating results and the ability to
incur and service debt.  EBITDA is not a recognized measure of
financial performance under GAAP, and should not be considered as a substitute
for operating earnings, net earnings or cash flows from operating activities, as
determined in accordance with GAAP.  The Company’s method of
calculating EBITDA may differ from other issuers and, accordingly, EBITDA may
not be comparable to measures used by other issuers.  A reconciliation
appears below.
 
 (in
      thousands of US$)
              
              Year
      ended March 312008
              
              
              2007
              
              
              2006Operating
      earnings
              
              $
              73,576
              
              
              $
              76,118
              
              
              $
              61,087Depreciation
      and amortization
              
              
              38,479
              
              
              
              28,735
              
              
              
              20,921112,055
              
              
              
              104,853
              
              
              
              82,008Stock-based
      compensation expense
              
              
              7,819
              
              
              
              4,956
              
              
              
              2,311EBITDA
              
              $
              119,874
              
              
              $
              109,809
              
              
              $
              84,319
  2
 recent
acquisitions in Commercial Real Estate Services, which has a significant impact
on the first year after acquisition.
 Depreciation and amortization expense was $38.5
million relative to $28.7 million in the prior year.  With regard to
the recent Commercial Real Estate Services acquisitions, we recorded a
short-lived intangible asset relating to the backlog of pending brokerage
transactions that existed at the acquisition dates.  The intangible is
being amortized to coincide with the expected completion dates of the underlying
brokerage transactions.  As of March 31, 2008, the net book value of
unamortized backlog was $2.4 million.  The balance of the increase in
depreciation and amortization is the result of: (i) intangible assets recognized
upon acquisitions during the past two years and (ii) increases in fixed assets
resulting from capital expenditures and acquisitions.
 
 Interest expense increased to $17.8 million
from $14.1 million in the prior year.  Our weighted average interest
rate increased slightly to 7.1% from 6.9% in the prior year.  The $4.3
million of interest income earned during the year was attributable to cash on
hand.
 
 Other income for fiscal 2008 includes
distributions received on our investment in RBO Fund and earnings from
investments accounted for under the equity method in Commercial Real Estate
Services.
 
 Our consolidated income tax rate for fiscal
2008 was 25% versus 29% in the prior year. The current year’s tax rate reflected
the continuing benefit of cross-border financing structures first implemented in
fiscal 2000.  The Canadian government has enacted measures to curtail
the tax benefits of cross-border financing structures in future years, after a
transition period ending in 2010.  Our income tax expense after the
transition period could rise materially.  On January 1, 2008 we
recognized a $2.3 million deferred tax asset relating to the deductibility, for
tax purposes, of stock option expense.  We had previously not
recognized this tax benefit.
 
 Net earnings from continuing operations were
$33.1 million, a decrease of 3% relative to fiscal 2007.  Increases in
our Property Services and Residential Property Management segments were offset
by declines in our Commercial Real Estate Services segment coupled with
increased costs at Corporate, resulting in the decrease in net
earnings.
 
 The Commercial Real Estate Services segment
reported revenues of $811.0 million during fiscal 2008, up 34% relative to
$605.8 million in the prior year.  Internal growth was 8%, foreign
exchange contributed 5% and the balance was attributable to acquisitions in
several markets including Eastern Europe, Boston and Hawaii.  EBITDA
was $39.0 million, at a margin of 4.8%, versus the prior year’s EBITDA of $48.6
million at a margin of 8.0%.  The margin decline was primarily a
result of the following factors: (i) operating losses at our US capital markets
operations during the second half of the fiscal year due to sharply reduced
mortgage brokerage transaction volumes resulting from credit market conditions;
(ii) operating losses at certain US brokerage offices due to declines in
investment and sales brokerage volumes; and (iii) lower margins at our
Australian operations relative to the prior year.  Margins in Canada,
Eastern Europe, Asia and Latin America were generally consistent with those
experienced in the prior year.
 
 In
Residential Property Management, revenues increased 29% to $545.0
million.  Internal growth, resulting from property management contract
wins, was 9%, while acquisitions in California, Texas and the Northeast
accounted for the balance of the growth.  Residential Property
Management reported EBITDA of $50.2 million or 9.2% of revenues, up from $40.3
million or 9.5% of revenues in the prior year.  The decrease in margin
was primarily the result of a decrease in higher margin ancillary
services.
 
 The Property
Services operations reported revenues of $217.0 million, an increase of 44%
versus the prior year.  Of the increase, 34% was attributable to
acquisitions, particularly Field Asset Services, while internal growth was 9%
and foreign exchange had an impact of 1%.
  3
  Internal
growth was led by increases in royalty revenues primarily at our CertaPro
system.  EBITDA for the year was $38.4 million, 26% higher than the
prior year, and the EBITDA margin decreased from 20.3% to 17.7%.  The
margin decrease was attributable to: (i) the impact of Field Asset Services,
which operates at a lower margin than the rest of the segment and (ii) unusually
low expenses in the comparative year, due to bad debt recoveries and the
deferral of a franchisees’ conference.
 
 Corporate
costs rose to $15.6 million from $14.6 million in fiscal
2007.  Included in the current year is a charge of $3.3 million
related to additional stock-based compensation expense as a result of the stock
option review completed in the third quarter.  No senior management
bonuses were accrued in fiscal 2008 under our performance-based incentive
compensation plan.
 
 Discontinued operations included: (i) the
Integrated Security Services segment; (ii) CCMS, formerly included in the
Commercial Real Estate Services segment; and (iii) the former Business Services
segment, disposed in March 2006.  Revenues from discontinued
operations were $199.4 million and EBITDA was $3.9
million.  Integrated Security Services revenues were $208.4 million,
an increase of 18% relative to the prior year, which was attributable to
internal growth of 12% in US and Canadian systems installation revenues and
foreign exchange of 6%.  Integrated Security Services EBITDA was $15.0
million, or 7.2% of revenues, a 120 basis point improvement relative to the
prior year.  The margin increase was attributable to significant
improvements in realized gross margins on US systems projects.  CCMS
revenues were $(9.1) million, primarily comprised of the mark-to-market loss on
hedging instruments, versus $2.2 million in the prior year.  CCMS
EBITDA was a loss of $12.9 million, primarily comprised of a mark-to-market loss
on hedging instruments.  The Company realized a gain of $2.3 million
in August 2007 on the settlement of a liability in connection with the March
2006 disposal of our Business Services operations.  Net earnings from
discontinued operations were $1.3 million.
 
 Results
of operations – year ended March 31, 2007
 FirstService reported revenues from continuing
operations of $1.18 billion for the year ended March 31, 2007, an increase of
29% relative to the prior year.  The increase was comprised of
internal growth of 12%, acquisitions of 16% and the impact of foreign exchange
of 1%.
 
 Operating earnings increased 25% relative to
the prior year, to $76.1 million.  EBITDA increased 30% to $109.8
million.  The gap between operating earnings growth relative to
revenue and EBITDA growth is primarily the result of: (i) an increase in
stock-based compensation expense and (ii) the rapid amortization of brokerage
backlog intangibles related to recent acquisitions in Commercial Real Estate
Services, which has a significant impact on the first year after
acquisition.
 
 Depreciation and amortization expense was $28.7
million relative to $20.9 million in the prior year.  With regard to
the recent commercial real estate services acquisitions, we recorded a
short-lived intangible asset relating to the backlog of pending brokerage
transactions that existed at the acquisition dates.  The intangible is
being amortized to coincide with the expected completion dates of the underlying
brokerage transactions.  The balance of the increase in depreciation
and amortization is the result of: (i) intangible assets recognized upon
acquisitions during the past two years and (ii) increases in fixed assets
resulting from capital expenditures and acquisitions.
 
 the $110.5 million received
upon the sale of Resolve.
  4
 
 Other income for fiscal 2007 primarily includes
distributions received on our investment in RBO Fund and earnings from
investments accounted for under the equity method in commercial real estate
services.
 
 Our consolidated income tax rate for fiscal
2007 was 29% versus 29% in the prior year. The current and prior year’s tax rate
reflected the continuing benefit of cross-border financing structures first
implemented in fiscal 2000.  We also realized the benefit of a $1.8
million reduction in tax liability during the year related to resolution of tax
matters from prior years.
 
 Net earnings from continuing operations were
$34.0 million, an increase of 27% relative to fiscal 2006.  All of the
Company’s continuing operations contributed to the increase in net
earnings.
 
 The Commercial Real Estate Services segment
reported revenues of $605.8 million during fiscal 2007, up 38% relative to
$438.0 million in the prior year.  Internal growth was 11%, foreign
exchange contributed 1% and the balance of growth was the result of acquisitions
completed during the past two years.  EBITDA was $48.6 million, at a
margin of 8.0%, versus the prior year’s EBITDA of $37.3 million at a margin of
8.5%.
 
 In
Residential Property Management, revenues increased 22% to $423.8
million.  After considering the 6% impact of acquisitions, internal
growth was 16% and was attributable to significant property management contract
wins and an increase in ancillary service revenues.  Residential
Property Management reported EBITDA of $40.3 million or 9.5% of revenues, up
from $31.4 million or 9.1% of revenues in the prior year.  The
increase in margin was primarily the result of operating leverage.
 
 The Property
Services operations reported revenues of $150.8 million, an increase of 12%
versus the prior year.  Of the increase, 9% was attributable to
internal growth, 2% to acquisitions and 1% to foreign
exchange.  Internal growth was led by increases in royalty revenues at
our major franchise systems.  EBITDA for the year was $30.6 million,
19% higher than the prior year, and the EBITDA margin increased 110 basis points
to 20.3%.  The margin increase was attributable to California Closets
and Paul Davis Restoration, where revenue growth was coupled with reduced
expenses, including the recovery of bad debts and the deferral of a franchisees’
conference.
 
 Corporate
costs rose to $14.6 million from $12.5 million in fiscal
2006.  Professional fees and performance-based incentive compensation
were higher than the previous year. Also included in Corporate is $1.9 million
in non-cash stock option expense, an increase of $0.5 million relative to the
prior year.
 
 Discontinued
operations included: (i) the Integrated Security Services segment: (ii) CCMS,
formerly included in the Commercial Real Estate Services segment; and (iii) the
former Business Services segment, disposed in March 2006.  Revenues
from discontinued operations were $178.7 million and EBITDA was $9.7
million.  Integrated Security Services revenues were $176.5 million,
an increase of 18% relative to the prior year, which was attributable to
internal growth of 15% in US and Canadian systems installation revenues and
foreign exchange of 3%.  Segment EBITDA was $10.6 million, or 6.0% of
revenues, a 90 basis point improvement relative to the prior
year.  The margin increase was attributable to significant
improvements in realized gross margins on US systems projects.  CCMS
revenues were $2.2 million, primarily comprised of the three securitizations
closed in the year, versus $0.4 million in the prior year.  CCMS
EBITDA was a loss of $0.9 million, primarily comprised of startup operating
losses.  The Company also recorded a loss of $0.7 million related to
indemnity and warranty costs in connection with the March 2006 disposal of our
Business Services operations.  Net earnings from discontinued
operations were $2.2 million.
  5
 Change
in year-end
 The Company
historically had a March 31 year-end primarily due to weather-related
seasonality in its operations.  Over the years, the Company’s
operations have changed such that weather-related seasonality is no longer
material.  In addition, two of the Company’s three remaining segments
currently operate on a calendar year basis.  As a result, on May 14,
2008, the Company’s Board of Directors approved a change in the year-end of the
Company to December 31, effective December 31, 2008, pending receipt of consents
from relevant tax authorities.
 
 The proposed
change in year-end will not cause any change in quarter-ends, will bring the
Company’s year-end into alignment with its peers in the market, and is expected
to generate cost savings due to the elimination of duplication of audits at the
two segments that already have calendar year-ends.
 
 Canadian
commercial mortgage securitization operations
 We entered
the CCMS business in fiscal 2006 and enjoyed early success generating
considerable transaction flow from the Colliers real estate broker channel as
well as other borrowers requiring mortgage financing.  The nature of
this business was to underwrite pools of conventional first mortgages, using
capital provided primarily by co-lenders, and then securitize and sell them to
investors in the form of mortgage-backed securities.  Due to credit
market conditions, there was very limited liquidity for commercial
mortgage-backed securities during the second half of fiscal
2008.  After the end of the third quarter, we decided to wind down
these operations; the wind down was complete as of March 31, 2008 except for the
disposal of remaining mortgage loans receivable.
 
 These
operations, including the earnings impacts of interest rate hedges, are
classified as discontinued operations for all periods presented.  We
expect to dispose the mortgage loans receivable, along with the related hedging
contracts, as soon as practicable.  The mortgage assets are carried at
the lower of cost and fair value less cost to sell and the hedging contracts are
carried at fair value.
 
 As of March
31, 2008, we had $20.8 million (2007 - $13.7 million) of mortgage loans
receivable and a right to purchase $151.9 million (2007 - $189.4 million) of
mortgages from our co-lenders.  As at March 31, 2008, we had interest
rate hedges to convert $143.5 million of fixed-rate mortgage loans receivable to
floating rates (2007 - $167.8 million) with a fair value loss of $11.7 million
(2007 - gain of $0.4 million).  The hedging contracts have maturity
dates ranging from June 2012 to June 2017.  Because the contracts do
not qualify as accounting hedges, changes in fair value are recognized in
earnings from discontinued operations.
 
 Review
of historical stock option grants
 Following
receipt of an inquiry from our primary securities regulator, our senior
management and Board of Directors (the “Board”) conducted a comprehensive review
of historical stock option granting processes and the related accounting for the
13-year period from 1995 to 2007.  In this regard, the Board
established a Special Committee of independent directors to complete the review
and make recommendations to the Board.  The Special Committee was
assisted in its review by independent legal and accounting advisors in both
Canada and the United States.
 
 Our stock
option plans require that the exercise price of stock option grants to be no
less than the closing market price of our shares on the Toronto Stock Exchange
(“TSX”) on the effective date of the grant, and also contain a self-amending
mechanism should any term of a stock option grant be found not to be in
compliance.  Management’s historical practice was to grant stock
options using as the effective date the date which was the lowest monthly
trading price on either the TSX or the NASDAQ in the month immediately preceding
the date of the grant.  The Special Committee determined that this
practice was the result of a misapprehension by management as to the scope of
permissible grant dates
  6
 under our
stock option plans and that the practice did not meet the requirements of the
TSX Company Manual.  The Special Committee concluded that this
practice was applied consistently throughout the relevant period and was not
used selectively to benefit any one group or individual.  The Special
Committee also concluded that it did not find any intentional or other
wrongdoing on the part of any of our directors, senior officers or
employees.
 
 The Special
Committee found that the practice followed by us was not accounted for correctly
and recommended that we revise the measurement dates of certain option grants
for accounting purposes.   With regard to options granted from
1995 to 2006, we revised the measurement dates and recorded a one-time,
non-material and non-cash incremental compensation expense in the amount of $3.3
million during the third quarter.  Since the amount was not material
to the current year or any prior year, we determined that restatement of prior
year financial statements was not required.  In August 2006, in
connection with our documentation and testing of internal controls, we changed
our process with regard to stock option grants. The Special Committee did not
identify any practices of the nature described above occurring after that
date.
 
 The following
table shows the impact of the errors on prior periods:
 
 (in
      thousands of US$)
              
              Total
              
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              1995
      to 2004Intrinsic
      value of options issued prior to April 1, 2003
              
              $
              2,340
              
              
              $
              -
              
              
              $
              5
              
              
              $
              25
              
              
              $
              186
              
              
              $
              2,124Incremental
      Black-Scholes compensation cost for options issued after
                March
      31, 2003
              
              
              938
              
              
              
              69
              
              
              
              240
              
              
              
              366
              
              
              
              206
              
              
              
              57Increase
      to compensation expense
              
              
              3,278
              
              
              
              69
              
              
              
              245
              
              
              
              391
              
              
              
              392
              
              
              
              2,181Income
      tax
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Decrease
      to net earnings
              
              $
              3,278
              
              
              $
              69
              
              
              $
              245
              
              
              $
              391
              
              
              $
              392
              
              
              $
              2,181
 
 
 As a result
of the review, the Special Committee recommended, and the Board subsequently
approved, the following remedial actions, among others:
 ·
            A total
      of $3.0 million to be obtained by adjustments to: (i) exercised options
      ($1.6 million was received during the quarter ended March 31, 2008 and
      recorded as contributed surplus) and (ii) unexercised options ($1.4
      million assuming all such options are ultimately exercised) in accordance
      with our option plans;
 ·
            A
      revised grant process ensuring that the Board approve all option grants,
      and option plan amendments to expressly incorporate the process
      changes;
 ·
            Improvements
      to governance and processes at both the Board and management levels;
      and
 ·
            Oversight
      by the Board’s Audit Committee for a period of two years to ensure that
      the governance and process changes are
  implemented.
 
 We have
responded to the information requests of our primary securities regulator, the
Ontario Securities Commission, and the TSX with respect to the Special
Committee’s review and the measures taken in response.  We will
continue to cooperate with the Ontario Securities Commission and the TSX, and
any further information requests in connection with the
inquiry.  Until further notified by the TSX, all grants of stock
options by us require the prior consent of the TSX.
 
 Stock-based
compensation expense
 One of our
key operating principles is for senior management to have a significant
long-term equity stake in the businesses they operate.  The equity
owned by senior management takes the form of stock, stock options or stock value
appreciation plans, the latter two of which require the recognition of
compensation expense under GAAP.  The amount of expense recognized
with respect to Company stock options is
  7
 determined by
allocating the grant-date fair value of each option over the expected term of
the option.  The amount of expense recognized with respect to
subsidiary stock options and subsidiary stock value appreciation plans is
re-measured quarterly and is directly related to the fair value of the
respective subsidiaries’ shares.  The following table sets out the
annual expense related to stock-based compensation:
 
 (in
      thousands of US$)
              Year
      ended March 31
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Stock
      option expense – Company
            
            $
            5,938
            
            
            $
            1,916
            
            
            $
            1,380
            
            
            $
            622
            
            
            $
            322Stock
      option expense – subsidiaries
            
            
            1,508
            
            
            
            1,791
            
            
            
            552
            
            
            
            177
            
            
            
            -Stock
      value appreciation plans
            
            
            373
            
            
            
            1,249
            
            
            
            379
            
            
            
            889
            
            
            
            -Total
      stock-based compensation expense
            
            $
            7,819
            
            
            $
            4,956
            
            
            $
            2,311
            
            
            $
            1,688
            
            
            $
            322
 
 
 Selected
annual information - last five fiscal years
 (in
thousands of US$, except per share amounts)
 
 Year
      ended March 31
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004OPERATIONSRevenues
            
            $
            1,573,215
            
            
            $
            1,180,990
            
            
            $
            918,668
            
            
            $
            508,115
            
            
            $
            318,585Operating
      earnings
            
            
            73,576
            
            
            
            76,118
            
            
            
            61,087
            
            
            
            27,838
            
            
            
            21,392Net
      earnings from continuing operations
            
            
            33,065
            
            
            
            34,032
            
            
            
            26,757
            
            
            
            12,172
            
            
            
            11,776Net
      earnings from discontinued operations
            
            
            1,334
            
            
            
            2,184
            
            
            
            42,740
            
            
            
            11,035
            
            
            
            7,248Net
      earnings
            
            
            34,399
            
            
            
            34,863
            
            
            
            69,497
            
            
            
            23,207
            
            
            
            19,024FINANCIAL
      POSITIONTotal
      assets
            
            $
            1,089,343
            
            
            $
            816,998
            
            
            $
            711,004
            
            
            $
            626,728
            
            
            $
            437,553Long-term
      debt
            
            
            356,030
            
            
            
            235,131
            
            
            
            248,686
            
            
            
            220,015
            
            
            
            163,888Shareholders’
      equity
            
            
            305,685
            
            
            
            264,875
            
            
            
            237,752
            
            
            
            185,871
            
            
            
            155,101Book
      value per common share
            
            
            5.19
            
            
            
            8.85
            
            
            
            7.91
            
            
            
            6.15
            
            
            
            5.26COMMON
      SHARE DATANet
      earnings per common share:BasicContinuing
      operations
            
            $
            0.87
            
            
            $
            1.14
            
            
            $
            0.89
            
            
            $
            0.41
            
            
            $
            0.41Discontinued
      operations
            
            
            0.05
            
            
            
            0.07
            
            
            
            1.41
            
            
            
            0.37
            
            
            
            0.26Cumulative
      effect adjustment
            
            
            -
            
            
            
            (0.04
            )
            
            
            -
            
            
            
            -
            
            
            
            -0.92
            
            
            
            1.17
            
            
            
            2.30
            
            
            
            0.78
            
            
            
            0.67DilutedContinuing
      operations
            
            
            0.81
            
            
            
            1.05
            
            
            
            0.83
            
            
            
            0.38
            
            
            
            0.40Discontinued
      operations
            
            
            0.04
            
            
            
            0.07
            
            
            
            1.38
            
            
            
            0.36
            
            
            
            0.25Cumulative
      effect adjustment
            
            
            -
            
            
            
            (0.04
            )
            
            
            -
            
            
            
            -
            
            
            
            -0.85
            
            
            
            1.08
            
            
            
            2.21
            
            
            
            0.74
            
            
            
            0.65Weighted
      average common shares (thousands)Basic
            
            
            29,905
            
            
            
            29,903
            
            
            
            30,171
            
            
            
            29,777
            
            
            
            28,570Diluted
            
            
            30,547
            
            
            
            30,354
            
            
            
            30,896
            
            
            
            30,467
            
            
            
            29,192Cash
      dividends per common share
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -PREFERRED
      SHARE DATANumber
      outstanding (thousands)
            
            
            5,979
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Cash
      dividends per preferred share
            
            $
            1.16
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -OTHER
      DATAEBITDA
      (see reconciliation)
            
            $
            119,874
            
            
            $
            109,809
            
            
            $
            84,319
            
            
            $
            47,814
            
            
            $
            28,352Adjusted
      diluted earnings per share from continuing operations
            
            
            1.02
            
            
            
            1.05
            
            
            
            0.74
            
            
            
            0.34
            
            
            
            0.18
 
 
 8
  Seasonality
and quarterly fluctuations
 Certain
segments of the Company’s operations are subject to seasonal
variations.  The demand for exterior painting (Property Services
segment) and swimming pool management in the northern United States and Canada
(Residential Property Management segment) is highest during late spring, summer
and early fall and very low during winter.  These operations generate
most of their annual revenues and earnings between April and September and
comprise approximately 5% of consolidated revenues.
 
 The
Commercial Real Estate Services segment generates peak revenues and earnings in
the month of December followed by a low in January to March as a result of the
timing of closings on commercial real estate brokerage
transactions.  Revenues and earnings during the balance of the year
are relatively even.  These brokerage operations comprise
approximately 36% of consolidated revenues.
 
 The
seasonality of these service lines results in variations in quarterly revenues
and operating margins.  Variations can also be caused by acquisitions
or dispositions, which alter the consolidated service mix.
 
 Quarterly
results – fiscal years ended March 31, 2008 and 2007
 (in
thousands of US$, except per share amounts)
 Period
            
            
            Q1
            
            
            
            Q2
            
            
            
            Q3
            
            
            
            Q4
            
            
            YearFISCAL
      2008Revenues
            
            $
            370,494
            
            
            $
            379,935
            
            
            $
            451,100
            
            
            $
            371,686
            
            
            $
            1,573,215Operating
      earnings (loss)
            
            
            34,483
            
            
            
            31,770
            
            
            
            21,162
            
            
            
            (13,839
            )
            
            
            73,576Net
      earnings (loss) from continuing operations
            
            
            15,685
            
            
            
            15,859
            
            
            
            9,683
            
            
            
            (8,162
            )
            
            
            33,065Net
      earnings (loss) from discontinued operations
            
            
            2,397
            
            
            
            1,834
            
            
            
            (1,698
            )
            
            
            (1,199
            )
            
            
            1,334Net
      earnings (loss)
            
            
            18,082
            
            
            
            17,693
            
            
            
            7,985
            
            
            
            (9,361
            )
            
            
            34,399Net
      earnings (loss) per common share:Basic
            
            
            0.61
            
            
            
            0.53
            
            
            
            0.18
            
            
            
            (0.40
            )
            
            
            0.92Diluted
            
            
            0.56
            
            
            
            0.50
            
            
            
            0.15
            
            
            
            (0.40
            )
            
            
            0.85FISCAL
      2007Revenues
            
            $
            281,780
            
            
            $
            296,908
            
            
            $
            326,611
            
            
            $
            275,691
            
            
            $
            1,180,990Operating
      earnings
            
            
            27,701
            
            
            
            23,957
            
            
            
            14,577
            
            
            
            9,883
            
            
            
            76,118Net
      earnings from continuing operations
            
            
            12,925
            
            
            
            11,848
            
            
            
            6,673
            
            
            
            2,586
            
            
            
            34,032Net
      earnings (loss) from discontinued operations
            
            
            1,208
            
            
            
            125
            
            
            
            1,084
            
            
            
            (233
            )
            
            
            2,184Net
      earnings
            
            
            12,780
            
            
            
            11,973
            
            
            
            7,757
            
            
            
            2,353
            
            
            
            34,863Net
      earnings per common share:Basic
            
            
            0.43
            
            
            
            0.40
            
            
            
            0.26
            
            
            
            0.08
            
            
            
            1.17Diluted
            
            
            0.39
            
            
            
            0.38
            
            
            
            0.25
            
            
            
            0.06
            
            
            
            1.08OTHER
      DATAEBITDA
      - fiscal 2008
            
            $
            42,739
            
            
            $
            41,894
            
            
            $
            36,684
            
            
            $
            (1,443
            )
            
            $
            119,874EBITDA
      - fiscal 2007
            
            
            34,787
            
            
            
            31,103
            
            
            
            23,837
            
            
            
            20,082
            
            
            
            109,809
 
 Discussion
of fourth quarter results
 We reported
an operating loss and a net loss in the fourth quarter ended March 31, 2008
relative to a profitable fourth quarter in the previous year.  Our
Commercial Real Estate Services segment experienced sharply reduced transaction
volumes in the US and Asia Pacific regions during the fourth quarter relative to
the prior year quarter.  As a result, significant operating losses
were incurred in our US commercial mortgage brokerage operations and certain US
brokerage offices.  In addition, the Commercial Real Estate operation
in Russia, acquired in November 2007, negatively impacted profitability due to
investment spending and seasonal factors impacting transaction
volumes.
 
 Financial
outlook
 Our Company’s
Board of Directors carefully considered a number of factors concerning financial
outlooks, including the volatility in the markets in which the Commercial Real
Estate Services business operates, the volatility in foreign exchange rates, and
the practices of the
  9
 Company’s
publicly-traded peers, who do not provide annual financial
outlooks.  As a result, we have decided not to provide an annual
financial outlook.
 
 We are
committed to a long-term growth strategy that includes average internal revenue
growth in the 8-10% range combined with acquisitions to build each of its
service platforms, resulting in average percentage growth in revenues, EBITDA
and earnings per share in the mid- to upper-teens or better.
 
 Liquidity
and capital resources
 The Company
generated cash flow from operating activities, including discontinued
operations, of $57.2 million for fiscal 2008.  Operating cash flow
excluding the effect of discontinued operations, was $52.3 million, down 24%
versus the prior year.  The decrease in operating cash flow relative
to earnings growth was attributable to investments in working capital,
particularly accounts receivable and income taxes.  The increased
investment in accounts receivable reflects revenue growth, both internal and
acquired, experienced during the year.  The increased investment in
income taxes reflects installment payments made in excess of taxes ultimately
determined payable and the expected utilization of loss carry-backs, both of
which are expected to result in cash tax refunds.  We believe that
cash from operations and other existing resources will continue to be adequate
to satisfy the ongoing working capital needs of the Company.
 
 Net
indebtedness as at March 31, 2008 was $279.2 million, versus $132.3 million at
March 31, 2007.  Net indebtedness is calculated as the current and
non-current portions of long-term debt less cash and cash
equivalents.  During the year ended March 31, 2008, we invested $152.5
million in business acquisitions, which drove the increase in net
indebtedness.
 
 We are in
compliance with the covenants required of our financing agreements as at March
31, 2008 and we expect to remain in compliance with such covenants going
forward.  We had $70.7 million of available revolving credit as of
March 31, 2008.
 
 On September 6, 2007, we entered into an
amended and restated credit agreement with a syndicate of banks to provide a
$225 million committed senior revolving credit facility with a five year term to
replace the existing $110 million facility.  The amended facility has
an accordion feature allows for an additional $50 million of
borrowings.  The amended facility bears interest at 0.75% to 1.30%
over floating reference rates, depending on the ratio of our net debt to
adjusted EBITDA.  The covenants remained substantially unchanged
relative to the prior credit agreement.
 
 During fiscal 2008, we repurchased 252,500
Subordinate Voting Shares for cancellation under our stock repurchase program at
a cost of $6.6 million.
 
 Capital
expenditures for the year were $32.2 million.  The most significant
expenditures were in the Commercial Real Estate Services segment, with additions
to leaseholds, computer software, computer hardware and furniture totaling $21.8
million.
 
 During the year, we paid $7.0 million of
dividends on the Preferred Shares reflecting the eight month period from
issuance to March 31, 2008.  The annual Preferred Share dividend
obligation is $10.5 million.  We also distributed $6.9 million to
minority shareholders of subsidiaries during the year (2007 - $3.5 million),
primarily to facilitate the payment of income taxes on account those
subsidiaries organized as flow-through entities.
 
 When making acquisitions, we generally purchase
executive life insurance policies on the principal managers of the acquired
businesses.  We believe this practice mitigates risk on
acquisitions.  At March 31, 2008, the Company had 20 such life
insurance policies in force.
 10
 
 In relation
to acquisitions completed during the past three years, we have outstanding
contingent consideration totaling $53.6 million as at March 31, 2008 (2007 -
$14.8 million).  The amount of the contingent consideration is not
recorded as a liability unless the outcome of the contingency is resolved and
additional consideration is paid or payable.  The contingent
consideration is based on achieving specified earnings levels, and is paid or
payable at the end of the contingency period.  When the contingencies
are resolved and additional consideration is payable, we will record the fair
value of the additional consideration as additional costs of the acquired
businesses.
 
 In certain
cases, our subsidiaries have issued options to purchase shares of subsidiaries
to operating managers.  The subsidiary stock options are accounted for
in a similar manner as stock options of the Company.  In addition, the
numerators for our diluted earnings per share calculations are adjusted to
account for potential dilution from stock options in
subsidiaries.  When stock options are exercised, the minority
shareholders become party to shareholders’ agreements as described
below.
 
 All minority
shareholders of our subsidiaries are party to shareholders’
agreements.  These agreements allow us to “call” the minority position
at fair value determined with the use of a formula price, which is usually equal
to a multiple of trailing two-year average earnings.  Minority owners
may also “put” their interest to the Company at the same price, with certain
limitations.  The total value of the minority shareholders’ interests,
as calculated in accordance with the shareholders’ agreements, was approximately
$233 million at March 31, 2008 (2007 - $154 million).  Of the
increase, $67 million related to the value of shares held by minority
shareholders of entities acquired during fiscal 2008.  The purchase
price of minority interests may, at our option, be paid in Subordinate Voting
Shares of FirstService.  While it is not our intention to acquire
outstanding minority interests, this step could materially increase net
earnings.  On an annual basis, we estimate the impact of the
acquisition of all minority interests with cash would increase interest expense
by $12 million, increase amortization expense by $7 million, reduce income taxes
by $7 million and reduce minority interest share of earnings by $15.5 million,
resulting in an approximate increase to net earnings of $3.5 million, all
relative to the amounts reported for the year ended March 31, 2008.
 
 The following
table summarizes our contractual obligations as at March 31, 2008:
 
 Contractual
      obligations
            
            Payments
      due by period(in
      thousands of US$)
            
            Total
            
            
            Less
      than 1year
            
            
            1-3
      years
            
            
            4-5
      years
            
            
            After
      5 yearsLong-term
      debt
            
            $
            350,441
            
            
            $
            22,386
            
            
            $
            29,892
            
            
            $
            181,481
            
            
            $
            116,682Capital
      lease obligations
            
            
            5,589
            
            
            
            2,391
            
            
            
            3,015
            
            
            
            183
            
            
            
            -Operating
      leases
            
            
            175,479
            
            
            
            39,763
            
            
            
            61,203
            
            
            
            41,794
            
            
            
            32,719Unconditional
      purchase obligations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Other
      long-term obligations
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Total
      contractual obligations
            
            $
            531,509
            
            
            $
            64,540
            
            
            $
            94,110
            
            
            $
            223,458
            
            
            $
            149,401
 
 At March 31,
2008, we had commercial commitments totaling $4.3 million comprised of letters
of credit outstanding due to expire within one year.  We are required
to make semi-annual payments of interest on our long-term debt at a weighted
average interest rate of 6.4%.
 
 To manage our insurance costs, we take on risk
in the form of high deductibles on many of our coverages.  We believe
this step reduces overall insurance costs in the long term, but may cause
fluctuations in the short term depending on the frequency and severity of
insurance incidents.
 
 Discussion
of critical accounting estimates
 Critical
accounting estimates are those that management deems to be most important to the
portrayal of our financial condition and results of operations, and that require
management’s most difficult, subjective or complex judgments, due to the need to
make estimates about the
  11
 effects of
matters that are inherently uncertain.  We have identified five
critical accounting estimates: goodwill impairment testing, acquisition purchase
price allocations, amortization of intangible assets, accounts receivable
allowances and accounting for income taxes.
 
 Annual goodwill impairment testing requires
judgment on the part of management.  Goodwill impairment testing
involves making estimates concerning the fair value of reporting units and then
comparing the fair value to the carrying amount of each unit.  The
determination of what constitutes a reporting unit requires significant
management judgment.  Estimates of fair value can be impacted by
sudden changes in the business environment or prolonged economic downturns, and
therefore require significant management judgment in their
determination.  A 10% decline in the fair value of each reporting unit
would not result in an indication of impairment.
 
 Acquisition purchase price allocations require
use of estimates and judgment on the part of management, especially in the
determination of intangible assets acquired.  For example, if
different assumptions were used regarding the profitability and expected lives
of acquired customer contracts and relationships, different amounts of
intangible assets and related amortization could be reported.  A 10%
increase in the amount allocated to intangible assets during fiscal 2008 would
result in an increase to annual amortization expense of $0.7
million.
 
 Amortization of intangible assets requires
management to make estimates of useful lives and to select methods of
amortization.  Useful lives and methods of amortization are determined
at the time assets are initially acquired, and then are reevaluated each
reporting period.  Significant judgment is required to determine
whether events and circumstances warrant a revision to remaining periods of
amortization.  Changes to estimated useful lives and methods of
amortization could result in increases or decreases in amortization
expense.  A 10% reduction to the weighted average useful life of
intangible assets, other than short-lived brokerage backlog, would result in an
increase to annual amortization expense of $1.3 million.
 
 Accounts receivable allowances are determined
using a combination of historical experience, current information, and
management judgment.  Actual collections may differ from our
estimates.  A 10% increase in the accounts receivable allowance would
increase bad debt expense by $1.1 million.
 
 Income taxes are calculated based on the
expected treatment of transactions recorded in the consolidated financial
statements.  The benefits of certain net operating loss
carry-forwards, which have been recognized in the financial statements, require
significant management judgment regarding future realization.  In
determining current and deferred components of income taxes, we interpret tax
legislation and make assumptions about the timing of the reversal of deferred
tax assets and liabilities.  If our interpretations differ from those
of tax authorities or if the timing of reversals is not as anticipated, the
provision for income taxes could increase or decrease in future
periods.
 
 Transactions
with related parties
 Please refer to note 19 to the consolidated
financial statements for information regarding transactions with related
parties.
 
 Recently
adopted accounting standards
 On April 1,
2006, the Company recorded a $1.4 million after-tax charge to recognize the
cumulative effect of a change in accounting principle with respect to the
adoption of SFAS No. 123(R), Share Based Payment (“SFAS
123R”).  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 classified as liability-classed awards with the fair value of
the option, as determined using the Black-Scholes stock option valuation method,
recorded as liabilities.  Also upon the adoption of SFAS 123R, the
Company changed its method of measuring and
  12
 recognizing
compensation expense on share-based awards from recognizing forfeitures as
incurred to estimating forfeitures at the date of grant.
 
 In September
2006, the U.S. Securities and Exchange Commission (“SEC”) staff issued SEC Staff
Accounting Bulletin No. 108 (“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.  We initially applied the provisions of SAB 108 in
connection with our annual consolidated financial statements for the year ended
March 31, 2007.  The net reduction to retained earnings recorded as of
April 1, 2006 to record the initial application of SAB 108 was $5.4
million.
 
 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.   In accordance with FIN 48, the Company classifies interest
and penalties associated with income tax positions in income tax
expense.  As a result of adopting FIN 48, the cumulative effect was an
increase in tax reserves of $3.8 million, including $0.7 million of accrued
interest, and was accounted for as a reduction to retained earnings as at April
1, 2007 of $4.2 million and a reduction in goodwill of $0.4
million.  Upon adoption, the liability for income taxes associated
with uncertain tax positions was $4.7 million.
 
 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
  13
 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.
 
 Outstanding
share data
 The authorized capital of the Company consists
of an unlimited number of preference shares, issuable in series, of which are
authorized an unlimited number of Preferred Shares, an unlimited number of
Subordinate Voting Shares and an unlimited number of Multiple Voting
Shares.  The holders of Subordinate Voting Shares are entitled to one
vote in respect of each Subordinate Voting Share held at all meetings of the
shareholders of the Company.  The holders of Multiple Voting Shares
are entitled to twenty votes in respect of each Multiple Voting Share held at
all meetings of the shareholders of the Company.  The holders of the
Preferred Shares are not entitled, except as otherwise provided by law or in the
conditions attaching to the Preferred Shares as a class, to receive notice of,
attend or vote at any meeting of the shareholders of the Company.
 
 As of the date hereof, the Company has
outstanding 28,786,893 Subordinate Voting Shares, 1,325,694 Multiple Voting
Shares and 5,979,074 Preferred Shares.  In addition, as at the date
hereof, 1,454,000 Subordinate Voting Shares are issuable upon exercise of
options granted under the Company’s stock option plans.
 
 Canadian
tax treatment of preferred dividends
 For the
purposes of the enhanced dividend tax credit rules contained in the Income Tax Act (Canada) and
any corresponding provincial and territorial tax legislation, all dividends (and
deemed dividends) paid by us to Canadian residents on our Preferred Shares are
designated as “eligible dividends”.  Unless stated otherwise, all
dividends (and deemed dividends) paid by us hereafter are designated as
“eligible dividends” for the purposes of such rules.
 
 Disclosure
controls and procedures
 Our
disclosure controls and procedures are designed to provide reasonable assurance
that information is accumulated and communicated to management, including the
Company’s Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.  Management of the Company,
including the Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company’s disclosure controls and procedures (as defined in
the rules of the Canadian Securities Administrators (“CSA”) and the SEC) as of
March 31, 2008 and concluded that such disclosure controls and procedures were
effective as at March 31, 2008 and ensure that information is recorded,
processed, summarized and reported with the time periods specified under
Canadian and US securities laws.
 
 Management’s
annual report on internal control over financial reporting
 The following
report is provided by management in respect of FirstService’s internal controls
over financial reporting (as defined in the rules of the CSA and
SEC):
 1
              Management
      is responsible for establishing and maintaining adequate internal controls
      over financial reporting for the Company.  Internal controls
      over financial reporting are processes designed to provide reasonable
      assurance regarding the reliability of financial reporting and the
      preparation of consolidated financial statements for external purposes in
      accordance with GAAP.
 
 14
 2.
            Management
      has used the criteria set forth in Internal Control – Integrated
      Framework issued by the Committee of Sponsoring Organizations of
      the Treadway Commission (“COSO”) to assess the effectiveness of the
      Company’s internal controls over financial
      reporting.  Management believes that the COSO framework is a
      suitable framework for its assessment of the Company’s internal controls
      over financial reporting because it is free from bias, permits reasonable
      consistent qualitative and quantitative measurements of FirstService’s
      internal controls, is sufficiently complete so that those relevant factors
      that would alter a conclusion about the effectiveness of the Company’s
      internal controls are not omitted, and is relevant to an evaluation of
      internal controls over financial
reporting.
 3.
            Management
      has assessed the effectiveness of the Company’s internal controls over
      financial reporting as at March 31, 2008, and has concluded that such
      internal controls over financial reporting are effective.  There
      are no material weaknesses in FirstService’s internal controls over
      financial reporting that have been identified by
    management.
 
 Changes
in internal controls over financial reporting
 There have
been no changes in FirstService’s internal controls over financial reporting
during the year ended March 31, 2008, that have materially affected or are
reasonably likely to materially affect the Company’s internal controls over
financial reporting.
 
 Additional
information
 Copies of publicly filed documents of the
Company, including our Annual Information Form, can be found through the SEDAR
website at www.sedar.com.
 
 Forward-looking
statements
 This
management discussion and analysis report contains certain forward-looking
statements.  We intend that such forward-looking statements be subject
to the safe harbors created by such legislation.  Such forward-looking
statements involve known and unknown risks and uncertainties and include, but
are not limited to, statements regarding future events and our plans, goals and
objectives.  Such statements are generally accompanied by words such
as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “project”,
“will” or similar words and phrases.  Our actual results may differ
materially from such statements.  Factors that could result in such
differences, among others, are:
 
 ·
            Economic
      conditions, especially as they relate to consumer
  spending.
 ·
            Commercial
      real estate property values, vacancy rates and general conditions of
      financial liquidity for real estate
  transactions.
 ·
            Extreme
      weather conditions impacting demand for our services or our ability to
      perform those services.
 ·
            Political
      conditions, including any outbreak or escalation of terrorism or
      hostilities and the impact thereof on our
  business.
 ·
            Competition
      in the markets served by the
Company.
 ·
            Labor
      shortages or increases in wage and benefit
  costs.
 ·
            The
      effects of changes in interest rates on our cost of
    borrowing.
 ·
            Unexpected
      increases in operating costs, such as insurance, workers’ compensation,
      health care and fuel prices.
 ·
            Changes
      in the frequency or severity of insurance incidents relative to our
      historical experience.
 ·
            The
      effects of changes in foreign exchange rates in relation to the US dollar
      on the Company’s Canadian dollar, Australian dollar and Euro denominated
      revenues and expenses.
  15
 ·
            Our
      ability to make acquisitions at reasonable prices and successfully
      integrate acquired operations.
 ·
            Changes
      in government policies at the federal, state/provincial or local level
      that may adversely impact our
businesses.
 
 Although we
believe that the assumptions underlying our forward-looking statements are
reasonable, any of the assumptions could prove inaccurate and, therefore, there
can be no assurance that the results contemplated in such forward-looking
statements will be realized.  The inclusion of such forward-looking
statements should not be regarded as a representation by the Company or any
other person that the future events, plans or expectations contemplated by the
Company will be achieved.  We note that past performance in operations
and share price are not necessarily predictive of future
performance.  We disclaim any intention and assume no obligation to
update or revise any forward-looking statement even if new information becomes
available, as a result of future events or for any other reason.
  16