##### 



Managements Responsibility for the Financial Statements

The consolidated financial statements and managements financial analysis and
review contained in this annual report are the responsibility of the management
of the company. To fulfill this responsibility, the company maintains a system
of internal controls to ensure that its reporting practices and accounting and
administrative procedures are appropriate, and provide assurance that relevant
and reliable financial information is produced. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles and, where appropriate, reflect estimates based on managements best
judgment in the circumstances. The financial information presented throughout
this annual report is consistent with the information contained in the
consolidated financial statements.

Deloitte & Touche LLP, the independent auditors appointed by the shareholders,
have audited the consolidated financial statements in accordance with Canadian
generally accepted auditing standards to enable them to express to the
shareholders their opinion on the consolidated financial statements. Their
report as auditors is set out below.

The consolidated financial statements have been further examined by the Board
of Directors and by its Audit Committee which meets regularly with the auditors
and management to review the activities of each. The Audit Committee, which is
comprised of four directors who are not officers of the company, reports to the
Board of Directors.

|                                                                       |  |                                                                      
|---------------------------------------------------------------------- |  | ---------------------------------------------------------------------
|[-s- Richard B. Clark]                                                 |  | [-s- Steven J. Douglas]                                              
|Richard B. ClarkPresident and Chief Executive Officer
February 4, 2003 |  | Steven J. DouglasExecutive Vice President and Chief Financial Officer

Auditors Report

To the Shareholders,
We have audited the consolidated balance sheets of Brookfield Properties
Corporation as at December 31, 2002, 2001 and 2000 and the consolidated
statements of income, retained earnings and cashflow for the years then ended.
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 audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31,
2002, 2001 and 2000 and the results of its operations and its cashflows for the
years then ended in accordance with Canadian generally accepted accounting
principles.

|                                 |  |                            
|-------------------------------- |  | ---------------------------
|                                 |  | [-s- Deloitte & Touche LLP]
|Toronto, Canada
February 4, 2003 |  | Chartered Accountants      

36



---



##### 



Consolidated Balance Sheet

|                                              |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|--------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|December 31 (US Millions)                     |  | note |       | 2002 |  | 2001 |       | 2000
|                                              |  |      |       |      |  |      |       |     
|Assets                                        |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|Commercial properties                         |  |      | 2     |      |  | $    | 5,661 |      |  | $ | 5,802 |  |  | $ | 6,368 | 
|Development properties                        |  |      | 3     |      |  |      | 944   |      |  |   | 575   |  |  |   | 537   | 
|Receivables and other                         |  |      | 4     |      |  |      | 769   |      |  |   | 847   |  |  |   | 1,017 | 
|Cash and cash equivalents                     |  |      | 1     |      |  |      | 76    |      |  |   | 195   |  |  |   | 201   | 
|Assets of Brookfield Homes Corporation        |  |      | 5     |      |  |      | 879   |      |  |   | 872   |  |  |   | 762   | 
|                                              |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|                                              |  |      |       |      |  | $    | 8,329 |      |  | $ | 8,291 |  |  | $ | 8,885 | 
|                                              |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|Liabilities                                   |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|Commercial property debt                      |  |      | 7     |      |  | $    | 4,038 |      |  | $ | 4,376 |  |  | $ | 4,542 | 
|Commercial development property debt          |  |      | 7     |      |  |      | 550   |      |  |   | 230   |  |  |   | 160   | 
|Accounts payable and other liabilities        |  |      | 8     |      |  |      | 429   |      |  |   | 460   |  |  |   | 1,031 | 
|Liabilities of Brookfield Homes Corporation   |  |      | 5     |      |  |      | 556   |      |  |   | 583   |  |  |   | 549   | 
|Shareholders interests                       |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|Interests of others in properties             |  |      | 9, 14 |      |  |      | 84    |      |  |   | 113   |  |  |   | 159   | 
|Preferred shares  subsidiaries and corporate |  |      | 10    |      |  |      | 579   |      |  |   | 585   |  |  |   | 607   | 
|Convertible debentures                        |  |      | 11    |      |  |      |      |      |  |   |      |  |  |   | 50    | 
|Common shares                                 |  |      | 12    |      |  |      | 2,093 |      |  |   | 1,944 |  |  |   | 1,787 | 
|                                              |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 
|                                              |  |      |       |      |  | $    | 8,329 |      |  | $ | 8,291 |  |  | $ | 8,885 | 
|                                              |  |      |       |      |  |      |       |      |  |   |       |  |  |   |       | 

See accompanying notes to the consolidated financial statements.

On behalf of the Board,

|                         |  |                                                      
|------------------------ |  | -----------------------------------------------------
|[-s- Gorden E. Arnell]   |  | [-s- Richard B. Clark]                               
|Gordon E. ArnellChairman |  | Richard B. ClarkPresident and Chief Executive Officer

37





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##### 



Consolidated Statement of Income

|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |     | 
|--------------------------------------------------- | ---------------------------------------- | ---- | -- | ---- |  | ---- | ----- | ---- |  | - | ----- | --- |  | - | ----- | --- | 
|December 31 (US Millions, except per share amounts) |                                          | note |    | 2002 |  | 2001 |       | 2000
|                                                    |                                          |      |    |      |  |      |       |     
|Total revenues                                      |                                          |      |    |      |  | $    | 1,372 |      |  | $ | 1,428 |     |  | $ | 1,369 |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Net operating income                                |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Commercial property operations                      |                                          |      | 13 |      |  |      |       |      |  |   |       |     |  |   |       |    
|                                                    | Operating income from current properties |      |    |      |  |      | $     | 585  |  |   | $     | 555 |  |   | $     | 506 | 
|                                                    | Operating income from properties sold    |      |    |      |  |      |       | 15   |  |   |       | 62  |  |   |       | 86  | 
|                                                    | Lease termination income and gains       |      |    |      |  |      |       | 60   |  |   |       | 55  |  |   |       | 19  | 
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Total commercial property operations                |                                          |      |    |      |  |      | 660   |      |  |   | 672   |     |  |   | 611   |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Development and residential operations              |                                          |      | 13 |      |  |      | 22    |      |  |   | 20    |     |  |   | 27    |    
|Interest and other                                  |                                          |      |    |      |  |      | 48    |      |  |   | 42    |     |  |   | 45    |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|                                                    |                                          |      |    |      |  |      | 730   |      |  |   | 734   |     |  |   | 683   |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Expenses                                            |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Interest                                            |                                          |      |    |      |  |      | 284   |      |  |   | 328   |     |  |   | 324   |    
|Administrative and development                      |                                          |      |    |      |  |      | 42    |      |  |   | 44    |     |  |   | 44    |    
|Interest of others in properties                    |                                          |      |    |      |  |      | 30    |      |  |   | 28    |     |  |   | 47    |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Income before undernoted                            |                                          |      |    |      |  |      | 374   |      |  |   | 334   |     |  |   | 268   |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Depreciation and amortization                       |                                          |      |    |      |  |      | 80    |      |  |   | 76    |     |  |   | 66    |    
|Taxes and other non-cash items                      |                                          |      | 6  |      |  |      | 58    |      |  |   | 56    |     |  |   | 62    |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Net income from continuing operations               |                                          |      |    |      |  |      | 236   |      |  |   | 202   |     |  |   | 140   |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Income from discontinued operations                 |                                          |      | 5  |      |  |      | 44    |      |  |   | 39    |     |  |   | 30    |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Net income                                          |                                          |      |    |      |  | $    | 280   |      |  | $ | 241   |     |  | $ | 170   |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Net income per share  basic                        |                                          |      | 1  |      |  |      |       |      |  |   |       |     |  |   |       |    
|Continuing operations                               |                                          |      |    |      |  | $    | 1.35  |      |  | $ | 1.12  |     |  | $ | 0.77  |    
|Discontinued operations                             |                                          |      |    |      |  |      | 0.27  |      |  |   | 0.25  |     |  |   | 0.21  |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|                                                    |                                          |      |    |      |  | $    | 1.62  |      |  | $ | 1.37  |     |  | $ | 0.98  |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|Net income per share  diluted                      |                                          |      | 1  |      |  |      |       |      |  |   |       |     |  |   |       |    
|Continuing operations                               |                                          |      |    |      |  | $    | 1.34  |      |  | $ | 1.12  |     |  | $ | 0.76  |    
|Discontinued operations                             |                                          |      |    |      |  |      | 0.27  |      |  |   | 0.24  |     |  |   | 0.19  |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    
|                                                    |                                          |      |    |      |  | $    | 1.61  |      |  | $ | 1.36  |     |  | $ | 0.95  |    
|                                                    |                                          |      |    |      |  |      |       |      |  |   |       |     |  |   |       |    

See accompanying notes to the consolidated financial statements.

Consolidated Statement of Retained Earnings

|                                                       |                                              |      |    |      |  |      |     |      |   |   |     |     |   |   |     |     |  
|------------------------------------------------------ | -------------------------------------------- | ---- | -- | ---- |  | ---- | --- | ---- | - | - | --- | --- | - | - | --- | --- | -
|December 31 (US Millions, except per share amounts)    |                                              | note |    | 2002 |  | 2001 |     | 2000
|                                                       |                                              |      |    |      |  |      |     |     
|Retained earnings  beginning of year                  |                                              |      | 12 |      |  | $    | 441 |      |   | $ | 274 |     |   | $ | 170 |    
|Change in accounting policy  stock-based compensation |                                              |      | 1  |      |  |      | (8  | )    |   |   |    |     |   |   |    |    
|Net income                                             |                                              |      |    |      |  |      | 280 |      |   |   | 241 |     |   |   | 170 |    
|Shareholder distributions                              |                                              |      |    |      |  |      |     |      |   |   |     |     |   |   |     |    
|                                                       | Dividends paid on corporate preferred shares |      |    |      |  |      |     | (19  | ) |   |     | (19 | ) |   |     | (20 | )
|                                                       | Dividends paid on common shares              |      |    |      |  |      |     | (64  | ) |   |     | (53 | ) |   |     | (37 | )
|                                                       | Convertible debenture interest               |      |    |      |  |      |     |     |   |   |     | (2  | ) |   |     | (9  | )
|                                                       |                                              |      |    |      |  |      |     |      |   |   |     |     |   |   |     |    
|Retained earnings  end of year                        |                                              |      | 12 |      |  | $    | 630 |      |   | $ | 441 |     |   | $ | 274 |    
|                                                       |                                              |      |    |      |  |      |     |      |   |   |     |     |   |   |     |    

See accompanying notes to the consolidated financial statements.

38





---



##### 



Consolidated Statement of Cashflow

|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|--------------------------------------------------------------- |  | ---- | -- | ---- |  | ---- | ---- | ---- |  | - | ------ | - |  | - | ---- | -
|December 31 (US Millions)                                       |  | note |    | 2002 |  | 2001 |      | 2000
|                                                                |  |      |    |      |  |      |      |     
|Operating activities                                            |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Net income                                                      |  |      |    |      |  | $    | 280  |      |  | $ | 241    |   |  | $ | 170  |  
|Depreciation and amortization                                   |  |      |    |      |  |      | 80   |      |  |   | 76     |   |  |   | 66   |  
|Taxes and other non-cash items                                  |  |      |    |      |  |      | 87   |      |  |   | 82     |   |  |   | 82   |  
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Funds from operations and gains                                 |  |      |    |      |  |      | 447  |      |  |   | 399    |   |  |   | 318  |  
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Gains                                                           |  |      |    |      |  |      | (60  | )    |  |   | (54    | ) |  |   |     |  
|Income from discontinued operations, before tax                 |  |      |    |      |  |      | (73  | )    |  |   | (65    | ) |  |   | (50  | )
|Commercial property tenant improvements                         |  |      |    |      |  |      | (49  | )    |  |   | (50    | ) |  |   | (97  | )
|Other                                                           |  |      |    |      |  |      | 40   |      |  |   | 168    |   |  |   | 34   |  
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Cashflow from operating activities                              |  |      |    |      |  |      | 305  |      |  |   | 398    |   |  |   | 205  |  
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Financing activities and capital distributions                  |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Commercial property debt arranged                               |  |      |    |      |  |      | 557  |      |  |   | 1,341  |   |  |   | 183  |  
|Commercial property debt repayments                             |  |      |    |      |  |      | (632 | )    |  |   | (1,050 | ) |  |   | (74  | )
|Other advances                                                  |  |      | 19 |      |  |      | (59  | )    |  |   | (530   | ) |  |   | (16  | )
|Common shares of Brookfield and subsidiaries acquired           |  |      |    |      |  |      | (26  | )    |  |   | (102   | ) |  |   | (67  | )
|Common shares issued                                            |  |      |    |      |  |      | 1    |      |  |   | 25     |   |  |   | 4    |  
|Preferred shares issued, net                                    |  |      |    |      |  |      | 123  |      |  |   |       |   |  |   |     |  
|Preferred shares redeemed                                       |  |      |    |      |  |      | (126 | )    |  |   |       |   |  |   |     |  
|Cashflow retained from (distributed to) other shareholders      |  |      |    |      |  |      | (30  | )    |  |   | 14     |   |  |   | 24   |  
|Preferred share dividends and convertible debenture interest    |  |      |    |      |  |      | (19  | )    |  |   | (21    | ) |  |   | (29  | )
|Common share dividends                                          |  |      |    |      |  |      | (64  | )    |  |   | (53    | ) |  |   | (37  | )
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Cashflow used in financing activities and capital distributions |  |      |    |      |  |      | (275 | )    |  |   | (376   | ) |  |   | (12  | )
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Investing activities                                            |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Dispositions and (acquisitions) of real estate, net             |  |      | 19 |      |  |      | 114  |      |  |   | 137    |   |  |   | (162 | )
|Development and redevelopment investments                       |  |      |    |      |  |      | (206 | )    |  |   | (101   | ) |  |   | (47  | )
|Capital expenditures                                            |  |      |    |      |  |      | (16  | )    |  |   | (14    | ) |  |   | (12  | )
|Other investments and liabilities                               |  |      |    |      |  |      | (55  | )    |  |   | (80    | ) |  |   | (10  | )
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Cashflow used in investing activities                           |  |      |    |      |  |      | (163 | )    |  |   | (58    | ) |  |   | (231 | )
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Discontinued operations                                         |  |      | 5  |      |  |      | 14   |      |  |   | 30     |   |  |   | 25   |  
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Decrease in cash resources                                      |  |      |    |      |  |      | (119 | )    |  |   | (6     | ) |  |   | (13  | )
|Opening cash and cash equivalents                               |  |      |    |      |  |      | 195  |      |  |   | 201    |   |  |   | 214  |  
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  
|Closing cash and cash equivalents                               |  |      |    |      |  | $    | 76   |      |  | $ | 195    |   |  | $ | 201  |  
|                                                                |  |      |    |      |  |      |      |      |  |   |        |   |  |   |      |  

See accompanying notes to the consolidated financial statements.

39





---



##### 



Notes to the Consolidated Financial Statements

NOTE 1: SIGNIFICANT ACCOUNTING POLICIES

(a) General

The consolidated financial statements are prepared in accordance with generally
accepted accounting principles as prescribed by the Canadian Institute of
Chartered Accountants (CICA). The companys accounting policies and its
financial disclosure are substantially in accordance with the recommendations
of the Canadian Institute of Public and Private Real Estate Companies
(CIPPREC).

(b) Principles of consolidation

The consolidated financial statements include:



| | (i)  |  | the accounts of all subsidiaries of Brookfield Properties Corporation
(the company) including its wholly-owned operations, as well as
BPO Properties Ltd. (BPO Properties) and Brookfield Financial Properties
Inc. (Brookfield Financial Properties); and
| | ---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | the accounts of all subsidiaries incorporated and unincorporated joint
ventures and partnerships to the extent of the companys proportionate
interest in their respective assets, liabilities, revenue and expenses.                                          

The companys ownership interests in operating entities which are not wholly
owned are as follows:



| | (i)  |  | Brookfield Financial Properties: The company owns a 98.5% (2001  94.7%
and 2000  89.5%) limited partnership equity and general partnership
interest in Brookfield Financial Properties.
| | ---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | BPO Properties: The company owns 87% (2001 and 2000  87%) on an equity
basis and 47% (2001 and 2000  47%) on a voting basis of the common shares
of BPO Properties.                    

(c) Properties



| | (i)   |  | Commercial properties
Commercial properties held for investment are carried at the lower of
cost less accumulated depreciation and net recoverable amount. For
operating properties and properties held for long-term investment, a
write-down to estimated net recoverable amount is recognized when a
propertys undiscounted future cashflow is less than its carried value.
Projections of future cashflow take into account the specific business
plan for each property and managements best estimate of the most
probable set of economic conditions anticipated to prevail in the market.
| | ----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |       |  | Depreciation on buildings is provided on the sinking-fund basis over the
useful lives of the properties to a maximum of 60 years. The sinking-fund
method provides for a depreciation charge of an annual amount increasing
on a compounded basis of 5% per annum. Depreciation is determined with
reference to each rental propertys carried value, remaining estimated
useful life and residual value. Tenant improvements and re-leasing costs
are deferred and amortized over the lives of the leases to which they
relate.                                                                  
|
| | (ii)  |  | Development properties 
commercial
Commercial properties under development consist of properties for which a
major repositioning program is being conducted and for properties which
are under construction. These properties are recorded at the lower of
cost, including pre-development expenditures, and the net recoverable
amount.                                                                                                                                                                                                                                                         
|
| | (iii) |  | Development properties 
residential
Development land is held for residential development and is recorded at
the lower of cost and estimated net realizable value. Costs are allocated
to the saleable acreage of each project or subdivision in proportion to
the anticipated revenue.                                                                                                                                                                                                                                                                                                           
|
| | (iv)  |  | Properties held for
sale
Properties held for sale are recorded at the lower of cost and net
realizable value. Income received relating to properties held for sale is
applied against the carried value of these properties.                                                                                                                                                                                                                                                                                                                                                                      

(d) Capitalized costs

Costs are capitalized on commercial and residential properties which are under
development, home building properties and other properties held for sale,
including all expenditures incurred in connection with the acquisition,
development, construction and initial predetermined leasing period. These
expenditures consist of all direct costs, interest on debt that is related to
these assets and certain administrative expenses. Ancillary income relating
specifically to such properties during the development period is treated as a
reduction of costs.

(e) Revenue recognition

Revenue from a commercial property is recognized upon the earlier of attaining
a break-even point in cashflow after debt servicing, or the expiration of a
reasonable period of time following substantial completion, subject to the time
limitation

40



---



##### 



determined when the project is approved. Prior to this, the property is
categorized as a rental property under development, and related revenue is
applied to reduce development costs.

The company has retained substantially all of the risks and benefits of
ownership of its rental properties and therefore accounts for leases with its
tenants as operating leases. Rental revenue includes percentage participating
rents and recoveries of operating expenses, including property, capital and
large corporation taxes. Percentage participating rents are recognized when
tenants specified sales targets have been met. Operating expense recoveries
are recognized in the period that recoverable costs are chargeable to tenants.

Income from the sale of land and other properties is recorded when the
collection of the sale proceeds is reasonably assured and all other significant
conditions are met. Properties which have been sold, but for which these
criteria have not been satisfied, are included in development property or
residential inventory assets.

(f) Income taxes

The company accounts for income taxes under the liability method. Under this
method, future income tax assets and liabilities are calculated based on: (i)
the temporary differences between the carrying values and the tax bases of
assets and liabilities, and (ii) unused income tax losses, measured using
substantively enacted income tax rates and laws that are expected to apply in
the future as temporary differences reverse and income tax losses are used. See
Note 6 for additional information on the composition of the income tax assets
and expense.

(g) Reporting currency and foreign currency translation

Effective December 31, 2000, the US dollar was adopted as the reporting
currency of the company.

The consolidated financial statements have been presented in US dollars as the
companys principal investments and cashflow are influenced primarily by the US
dollar. Assets and liabilities denominated in foreign currencies are translated
into US dollars at the rate in effect at the balance sheet date. Revenues and
expenses are translated at the weighted average rate in effect for the period
presented. The companys operations in Canada are self-sustaining in nature and
as such, cumulative gains and losses arising from the consolidation of the
assets and liabilities of these operations are recorded as a separate component
of shareholders equity.

Historical financial statements and related notes for December 31, 2000 have
been restated into US dollars using the prevailing rate at that date of C$1.49
per US$1.00. All amounts expressed in the financial statements are in US
dollars unless otherwise noted.

(h) Per share calculations

Effective January 1, 2001, the company adopted the treasury method of
accounting for earnings per share. All earnings per share numbers have been
retroactively restated and the changes are not material.

Net income per common share has been calculated after providing for preferred
share dividends using the weighted average number of basic common shares
outstanding of 161.1 million (2001  159.9 million, 2000  144.0 million) and
diluted common shares outstanding of 162.3 million (2001  163.5 million, 2000
 158.5 million).

(i) Cash and cash equivalents

Cash and cash equivalents include $69 million (2001  $156 million, 2000  $147
million) which is designated for property-specific taxes, operating costs and
tenant improvement expenditures, unless otherwise approved by the respective
property mortgage holder.

(j) Use of estimates

The preparation of financial statements, in conformity with Canadian generally
accepted accounting principles, requires estimates and assumptions that affect
the carried amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from estimates.

(k) Funds from operations

Funds from operations (FFO) is a measurement defined by CIPPREC as net income
before certain items including non-cash tax charges, depreciation and
amortization. As a result, this amount has been included as a separate line on
the consolidated statement of cashflow.

(l) Stock-based compensation

Effective January 1, 2002, the company adopted the new accounting standard
issued by the CICA on stock-based compensation and other stock-based payments.
The new standard was applied retroactively without restatement of prior year
results. The company accounts for stock options using the fair value method,
under which compensation expense is measured at the grant date using an option
pricing model and recognized over the vesting period. The cumulative effect on
opening retained earnings is $8 million.

41





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##### 



NOTE 2: COMMERCIAL PROPERTIES

|                               |  |      |       |      |  |      |       |   |  |   |       |  
|------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|(Millions)                     |  | 2002 |       | 2001 |  | 2000
|                               |  |      |       |      |  |     
|Commercial properties          |  | $    | 6,029 |      |  | $    | 6,117 |   |  | $ | 6,642 |  
|Less: accumulated depreciation |  |      | (368  | )    |  |      | (315  | ) |  |   | (274  | )
|                               |  |      |       |      |  |      |       |   |  |   |       |  
|Total                          |  | $    | 5,661 |      |  | $    | 5,802 |   |  | $ | 6,368 |  
|                               |  |      |       |      |  |      |       |   |  |   |       |  

(a)Commercial properties, carried at a net book value of approximately $2,362
million, are situated on land held under leases or other agreements largely
expiring after the year 2069. Minimum rental payments on land leases are
approximately $22 million annually for the next five years and $1,015 million
in total on an undiscounted basis.

(b)Construction costs of $9 million (2001  $17 million, 2000  $31 million),
interest costs of nil (2001  nil, 2000  $3 million) and general and
administrative expenses of nil (2001 and 2000  $1 million) were capitalized to
the commercial property portfolio for properties undergoing redevelopment in
2002.

(c)The following amounts represent the companys proportionate interest in
incorporated and unincorporated joint ventures and partnerships, reflected in
the companys commercial and development properties:

|                                   |  |      |       |      |  |      |       |   |  |   |     |  
|---------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | --- | -
|(Millions)                         |  | 2002 |       | 2001 |  | 2000
|                                   |  |      |       |      |  |     
|Assets                             |  | $    | 1,705 |      |  | $    | 1,362 |   |  | $ | 898 |  
|Liabilities                        |  |      | 965   |      |  |      | 758   |   |  |   | 534 |  
|Operating revenues                 |  |      | 231   |      |  |      | 174   |   |  |   | 129 |  
|Operating expenses                 |  |      | 91    |      |  |      | 61    |   |  |   | 46  |  
|Net income                         |  |      | 70    |      |  |      | 59    |   |  |   | 48  |  
|Cashflow from operating activities |  |      | 81    |      |  |      | 76    |   |  |   | 51  |  
|Cashflow from financing activities |  |      | 4     |      |  |      | 4     |   |  |   | (3  | )
|Cashflow from investing activities |  |      | (31   | )    |  |      | (73   | ) |  |   | (30 | )

NOTE 3: DEVELOPMENT PROPERTIES

Development properties include commercial developments, primarily for office
development and residential land under and held for development.

|                             |  |      |     |      |  |      |     |  |  |   |     | 
|---------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|(Millions)                   |  | 2002 |     | 2001 |  | 2000
|                             |  |      |     |      |  |     
|Commercial developments      |  | $    | 720 |      |  | $    | 344 |  |  | $ | 193 | 
|Residential development land |  |      | 224 |      |  |      | 231 |  |  |   | 344 | 
|                             |  |      |     |      |  |      |     |  |  |   |     | 
|Total                        |  | $    | 944 |      |  | $    | 575 |  |  | $ | 537 | 
|                             |  |      |     |      |  |      |     |  |  |   |     | 

Commercial developments include commercial land, and rights and options which
represent developable land and construction costs. Residential development land
includes fully entitled lots and land in processing. The company capitalizes
interest and administrative and development costs to both commercial and
residential development properties. During 2002, the company capitalized
construction and related costs of $189 million (2001  $61 million, 2000  $16
million) and $28 million (2001   $17 million, 2000  nil) of interest to its
commercial development sites. During 2002, after interest recoveries of $20
million (2001  $35 million, 2000  $12 million), the company capitalized to
its residential land operations a net $9 million (2001   recovered net $11
million, 2000  recovered net $4 million) of interest and capitalized a net nil
(2001  nil, 2000  $1 million) of administrative and development costs. In
connection with residential land development operations, these costs are
expensed as land is sold. The company, through its subsidiaries, is
contingently liable for obligations of its associates in its residential
development land joint ventures. In each case, all of the assets of the joint
venture are available first for the purpose of satisfying
these obligations with the balance shared among the participants in accordance
with predetermined joint-venture arrangements.

42





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##### 



NOTE 4: RECEIVABLES AND OTHER

A description of these assets is as follows:

|                                                |  |      |     |      |  |      |     |  |  |   |       | 
|----------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | ----- | 
|(Millions)                                      |  | 2002 |     | 2001 |  | 2000
|                                                |  |      |     |      |  |     
|Real estate operating receivables and mortgages |  | $    | 465 |      |  | $    | 506 |  |  | $ | 606   | 
|Non-core real estate assets held for sale       |  |      | 51  |      |  |      | 41  |  |  |   | 35    | 
|Future income tax assets (Note 6)               |  |      | 43  |      |  |      | 90  |  |  |   | 171   | 
|Prepaid expenses and other assets               |  |      | 210 |      |  |      | 210 |  |  |   | 205   | 
|                                                |  |      |     |      |  |      |     |  |  |   |       | 
|Total                                           |  | $    | 769 |      |  | $    | 847 |  |  | $ | 1,017 | 
|                                                |  |      |     |      |  |      |     |  |  |   |       | 

Included in real estate operating receivables and mortgages is a $98 million
(2001  $215 million, 2000  $261 million) subordinated note receivable from
Brookfield Homes Corporation. The note bears interest at 10% and is due on
December 31, 2005.

NOTE 5: DISCONTINUED OPERATIONS

On October 29, 2002, the Board of Directors approved the special distribution
of the companys U.S. residential home building business, Brookfield Homes
Corporation (Brookfield Homes).

On January 6, 2003, the distribution date, the companys common shareholders of
record on January 2, 2003 received a special distribution equivalent to
one-fifth of a Brookfield Homes share for each common share of the company that
they owned. The value of the special distribution, based on a book value of
$323 million of equity, was $2.00 per Brookfield common share. The distribution
was in the form of a return of capital, as approved by the companys
shareholders on December 16, 2002, totaling $323 million and resulted in a
reduction of the common equity of the company of $323 million. Summarized
financial information for Brookfield Homes is as follows:

|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|----------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | 
|December 31 (Millions)                                |  | 2002 |     | 2001 |  | 2000
|                                                      |  |      |     |      |  |     
|Residential housing inventory                         |  | $    | 734 |      |  | $    | 749 |   |  | $ | 632 | 
|Development properties                                |  |      | 40  |      |  |      | 18  |   |  |   | 27  | 
|Other assets                                          |  |      | 105 |      |  |      | 105 |   |  |   | 103 | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|Total assets                                          |  |      | 879 |      |  |      | 872 |   |  |   | 762 | 
|Residential construction financing                    |  |      | 345 |      |  |      | 318 |   |  |   | 219 | 
|Accounts payable and other                            |  |      | 113 |      |  |      | 50  |   |  |   | 69  | 
|Subordinated debt                                     |  |      | 98  |      |  |      | 215 |   |  |   | 261 | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|Net assets of discontinued operations                 |  | $    | 323 |      |  | $    | 289 |   |  | $ | 213 | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|Revenue                                               |  | $    | 897 |      |  | $    | 852 |   |  | $ | 731 | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|Net income from discontinued operations, before taxes |  | $    | 73  |      |  | $    | 65  |   |  | $ | 50  | 
|Income taxes                                          |  |      | 29  |      |  |      | 26  |   |  |   | 20  | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|Results of discontinued operations                    |  | $    | 44  |      |  | $    | 39  |   |  | $ | 30  | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|Cashflow (used in) provided by operating activities   |  | $    | (13 | )    |  | $    | (69 | ) |  | $ | 25  | 
|Cashflow provided by financing activities             |  |      | 27  |      |  |      | 99  |   |  |   |    | 
|Cashflow used in investing activities                 |  |      |    |      |  |      |    |   |  |   |    | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 
|Cashflow provided by discontinued operations          |  | $    | 14  |      |  | $    | 30  |   |  | $ | 25  | 
|                                                      |  |      |     |      |  |      |     |   |  |   |     | 

During 2002, after interest recoveries of $39 million (2001  $40 million, 2000
 $30 million), the company recovered from its residential development
operations a net $9 million (2001  $4 million, 2000  capitalized net $12
million) of interest. In connection with residential development operations,
these costs are expensed as building lots and homes are sold.

Residential construction financing totaled $345 million (2001  $318 million,
2000  $219 million). Residential construction financing relates to
construction and development loans which are repaid out of
the proceeds from the sale of building lots, single-family and condominium
homes. As new homes are constructed, further loan facilities are arranged on a
rolling basis. The weighted average interest rate on these facilities as at
December 31, 2002 was 4.7% (2001  5.1%, 2000  9.8%). $215 million is due by
the end of 2003, and the remaining balances are due prior to 2006.

Subordinated debt represents advances to Brookfield Homes from the company
pursuant to various facilities which are drawn and repaid on a revolving basis.
The facilities bear interest at the US prime rate, have no fixed terms of
repayment and matured on December 31, 2002. Pursuant to the distribution of
Brookfield Homes, these facilities have been replaced, in part, by an unsecured
subordinated note bearing interest at 10% and maturing on December 31, 2005.

43





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##### 



NOTE 6: INCOME TAXES

Future income tax assets consist of the following:

|                                                                                |  |      |      |      |  |      |      |   |  |   |      |  
|------------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|(Millions)                                                                      |  | 2002 |      | 2001 |  | 2000
|                                                                                |  |      |      |      |  |     
|Future income tax assets related to non-capital and capital losses              |  | $    | 385  |      |  | $    | 421  |   |  | $ | 461  |  
|Future income tax liabilities related to differences in tax and book basis, net |  |      | (342 | )    |  |      | (331 | ) |  |   | (290 | )
|                                                                                |  |      |      |      |  |      |      |   |  |   |      |  
|Total                                                                           |  | $    | 43   |      |  | $    | 90   |   |  | $ | 171  |  
|                                                                                |  |      |      |      |  |      |      |   |  |   |      |  

The future income tax assets relate primarily to non-capital losses available
to reduce taxable income which may arise in the future. The company and its
Canadian subsidiaries have future income tax assets of $154 million that relate
to non-capital losses which expire over the next seven years, and $30 million
that relate to capital losses which have no expiry. The companys U.S.
subsidiaries have future income tax assets of $201 million that relate to net
operating losses which expire over the next 18 years. The amount of non-capital
losses and deductible temporary differences, for which no future income tax
assets have been recognized, is approximately $443 million.

Future income tax expense consists of the following:

|                                                                                                                |                                                     |      |     |      |   |      |     |     |   |   |    |     |  
|--------------------------------------------------------------------------------------------------------------- | --------------------------------------------------- | ---- | --- | ---- | - | ---- | --- | --- | - | - | -- | --- | -
|(Millions)                                                                                                      |                                                     | 2002 |     | 2001 |   | 2000
|                                                                                                                |                                                     |      |     |      |   |     
|Income tax expense at the Canadian federal and provincial income
tax rate of 37.5% (2001  40.6%, 2000  42.8%) |                                                     | $    | 118 |      |   | $    | 114 |     |   | $ | 87 |    
|Increase (decrease) in income tax expense due to the following:                                                 |                                                     |      |     |      |   |      |     |     |   |   |    |    
|                                                                                                                | Lower income taxes in other jurisdictions           |      |     | 4    |   |      |     | (2  | ) |   |    | (7  | )
|                                                                                                                | Other shareholders interests in income tax expense |      |     | (5   | ) |      |     | (5  | ) |   |    | (7  | )
|                                                                                                                | Changes in Canadian tax rates                       |      |     |     |   |      |     | 34  |   |   |    | 42  |  
|                                                                                                                | Tax assets previously not recognized                |      |     | (54  | ) |      |     | (45 | ) |   |    | (64 | )
|                                                                                                                | Non-taxable portion of capital gains                |      |     | (13  | ) |      |     | (15 | ) |   |    | (4  | )
|                                                                                                                | Other                                               |      |     | 8    |   |      |     | (25 | ) |   |    | 15  |  
|                                                                                                                |                                                     |      |     |      |   |      |     |     |   |   |    |    
|Future income tax expense and other non-cash items                                                              |                                                     | $    | 58  |      |   | $    | 56  |     |   | $ | 62 |    
|                                                                                                                |                                                     |      |     |      |   |      |     |     |   |   |    |    

NOTE 7: COMMERCIAL PROPERTY AND COMMERCIAL DEVELOPMENT PROPERTY DEBT

The companys commercial property debt outstanding and principal repayments at
December 31, 2002 are as follows:

|                         |  |                  |     |      |  |      |     |      |  |      |     |      |  |        |     |       |  |       |     |       |  |   |     |        |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|------------------------ |  | ---------------- | --- | ---- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ------ | --- | ----- |  | ----- | --- | ----- |  | - | --- | ------ |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                         |  | Weighted Average |     |      |  |      |     |      |  |      |     |      |  |        |     |       |  |       |     |       |  |   |     |        |  |      |       |      |  |      |       |  |  |   |       |  |  |  
|                         |  | Interest Rate at |     |      |  |      |     |      |  |      |     |      |  |        |     |       |  |       |     |       |  |   |     | 2008 & |  | 2002 |       | 2001 |  | 2000
|(Millions)               |  | Dec. 31, 2002    |     | 2003 |  | 2004 |     | 2005 |  | 2006 |     | 2007 |  | Beyond |     | Total |  | Total |     | Total
|                         |  |                  |     |      |  |      |     |      |  |      |     |      |  |        |     |       |  |       |     |      
|Commercial
property debt |  |                  | 7.0 | %    |  | $    | 579 |      |  | $    | 138 |      |  | $      | 250 |       |  | $     | 308 |       |  | $ | 279 |        |  | $    | 2,484 |      |  | $    | 4,038 |  |  | $ | 4,376 |  |  | $ | 4,542 | 

Commercial property debt includes
$798 million (2001  $964 million, 2000 
$1,153 million) repayable in Canadian dollars of
C$1,260 million (2001 
C$1,532 million, 2000  C$1,718 million). The weighted average interest rate at
December 31, 2001 was 7.0%, and 7.3% at December 31, 2000.

Commercial development property debt consists of $550 million (2001  $230
million, 2000  $160 million) of financing provided for two of the companys
development projects. The weighted average maturity of this debt is 2024. The
weighted average interest rate at December 31, 2002 was 6.6%
(2001  8%, 2000 
8%).

NOTE 8: ACCOUNTS PAYABLE AND OTHER LIABILITIES

Accounts payable and other liabilities consist of the following:

|                 |                                     |      |     |      |  |      |     |     |  |   |       |     | 
|---------------- | ----------------------------------- | ---- | --- | ---- |  | ---- | --- | --- |  | - | ----- | --- | 
|(Millions)       |                                     | 2002 |     | 2001 |  | 2000
|                 |                                     |      |     |      |  |     
|Accounts payable |                                     | $    | 246 |      |  | $    | 219 |     |  | $ | 299   |    
|Advances         |                                     |      |     |      |  |      |     |     |  |   |       |    
|                 | Revolving five-year term facilities |      |     | 98   |  |      |     | 115 |  |   |       | 151 | 
|                 | Other                               |      |     | 85   |  |      |     | 126 |  |   |       | 581 | 
|                 |                                     |      |     |      |  |      |     |     |  |   |       |    
|Total            |                                     | $    | 429 |      |  | $    | 460 |     |  | $ | 1,031 |    
|                 |                                     |      |     |      |  |      |     |     |  |   |       |    

44





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##### 



Advances represent credit facilities which are primarily recourse in nature to
subsidiaries of the company.

The revolving five-year term facilities are borrowed from a shareholder and
bear interest based on the prime rate. Up to $150 million of this revolving
facility is convertible at either partys option into a fixed-rate financing at
9.75% repayable in 2015. Interest expense includes $2 million (2001  $4
million, 2000  $5 million) of interest relating to these advances.

Other advances are comprised mainly of debt attributable to the land
development business of $85 million (2001  $126 million, 2000  $134 million).
The weighted average interest rate on these advances as at December 31, 2002
was 4.8% (2001  4.2%, 2000  8.2%). $53 million is due by the end of 2003, and
the remaining balances are due prior to 2007.

NOTE 9: INTERESTS OF OTHERS IN PROPERTIES

Interests of others in properties includes the amounts of common equity related
to other shareholders interests in property ownership entities which are
consolidated in the companys accounts. The balances are as follows:

|                                                           |                                                              |           |        |      |   |      |    |      |  |   |     |    |  |   |     |     | 
|---------------------------------------------------------- | ------------------------------------------------------------ | --------- | ------ | ---- | - | ---- | -- | ---- |  | - | --- | -- |  | - | --- | --- | 
|                                                           |                                                              |           | Equity |      |   |      |    |      |  |   |     |    |  |   |    
|(Millions)                                                 |                                                              | Ownership |        | 2002 |   | 2001 |    | 2000
|                                                           |                                                              |           |        |      |   |      |    |     
|Participation by other shareholders in properties through: |                                                              |           |        |      |   |      |    |      |  |   |     |    |  |   |     |    
|                                                           | Common shares of BPO Properties                              |           |        | 13.0 | % |      | $  | 64   |  |   | $   | 52 |  |   | $   | 49  | 
|                                                           | Limited partnership units of Brookfield Financial Properties |           |        | 1.5  | % |      |    | 20   |  |   |     | 61 |  |   |     | 110 | 
|                                                           |                                                              |           |        |      |   |      |    |      |  |   |     |    |  |   |     |     | 
|Total                                                      |                                                              |           |        |      |   | $    | 84 |      |  | $ | 113 |    |  | $ | 159 |    
|                                                           |                                                              |           |        |      |   |      |    |      |  |   |     |    |  |   |     |     | 

On December 31, 2002 the company increased its interest in Brookfield Financial
Properties to 98.5% for cash consideration of $56 million. In June 2001, the
companys equity interest in Brookfield Financial Properties was increased to
94.7%. During 2000, the companys public residential subsidiary was privatized

and the companys equity interest in BPO Properties was increased to 87%.

NOTE 10: PREFERRED SHARES  SUBSIDIARIES AND CORPORATE

Subsidiaries and corporate preferred shares outstanding total $579 million
(2001  $585 million, 2000  $607 million) as follows:

(a)Subsidiaries of the company have issued the following preferred shares:

|                                                             |                         |      |     |      |  |      |     |     |  |   |     |     | 
|------------------------------------------------------------ | ----------------------- | ---- | --- | ---- |  | ---- | --- | --- |  | - | --- | --- | 
|(Millions)                                                   |                         | 2002 |     | 2001 |  | 2000
|                                                             |                         |      |     |      |  |     
|Preferred shares of subsidiaries owned by other shareholders |                         |      |     |      |  |      |     |     |  |   |     |    
|                                                             | BPO Properties          |      | $   | 241  |  |      | $   | 240 |  |   | $   | 256 | 
|                                                             | 100%-owned subsidiaries |      |     | 100  |  |      |     | 99  |  |   |     | 105 | 
|                                                             |                         |      |     |      |  |      |     |     |  |   |     |     | 
|Total subsidiary preferred shares                            |                         | $    | 341 |      |  | $    | 339 |     |  | $ | 361 |    
|                                                             |                         |      |     |      |  |      |     |     |  |   |     |     | 

(b)The company has the following preferred shares authorized and outstanding:

|                                     |  |             |           |      |  |                                                 |  |   |     |   |     |   |     |   |     |   |     |   |     | 
|------------------------------------ |  | ----------- | --------- | ---- |  | ----------------------------------------------- |  | - | --- | - | --- | - | --- | - | --- | - | --- | - | --- | 
|(Millions, except share information) |  | 2002        |           | 2001 |  | 2000                                           
|                                     |  |             |           |      |  |                                                
|Authorized                           |  | Outstanding |           |      |  |                                                 |  |   |     |   |     |   |     |   |     |   |     |  
|6,312,000                            |  |             | 6,312,000 |      |  | Class A redeemable voting preferred shares      |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | bearing a cumulative
dividend rate of 7 1/2%    |  | $ | 11  |   |     | $ | 11  |   |     | $ | 11  |  
|6,000,000                            |  |             | 2,000,000 |      |  | Class AA Series E preferred shares bearing a    |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | cumulative dividend rate of 70% of bank prime   |  |   | 34  |   |     |   | 34  |   |     |   | 34  |  
|Unlimited                            |  |             |          |      |  | Class AAA Series A preferred shares bearing a   |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | cumulative dividend rate of 9%                  |  |   |    |   |     |   | 50  |   |     |   | 50  |  
|Unlimited                            |  |             |          |      |  | Class AAA Series B preferred shares bearing a   |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | cumulative dividend rate of 9% and exchangeable |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | into common shares of the company on a public   |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | offering at the prevailing price of the issue   |  |   |    |   |     |   | 50  |   |     |   | 50  |  
|Unlimited                            |  |             | 4,000,000 |      |  | Class AAA Series C and D preferred shares       |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | bearing a cumulative dividend rate of 8% and    |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | exchangeable into common shares of the company  |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | on a public offering at the prevailing price of |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | the issue                                       |  |   | 67  |   |     |   | 101 |   |     |   | 101 |  
|Unlimited                            |  |             | 8,000,000 |      |  | Class AAA Series F redeemable preferred shares  |  |   |     |   |     |   |     |   |     |   |     |  
|                                     |  |             |           |      |  | bearing a cumulative dividend rate of 6%        |  |   | 126 |   |     |   |    |   |     |   |    |  
|                                     |  |             |           |      |  |                                                 |  |   |     |   |     |   |     |   |     |   |     |  
|Total                                |  |             |           |      |  |                                                 |  |   |     | $ | 238 |   |     | $ | 246 |   |     | $ | 246 | 
|                                     |  |             |           |      |  |                                                 |  |   |     |   |     |   |     |   |     |   |     |  

45





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##### 



The holders of Class A preferred shares are entitled to receive notice of and
to attend all shareholders meetings, and for all purposes are entitled to one
vote for each Class A preferred share held, except in respect of the election
of directors, where cumulative voting will apply in the same manner as for the
common shares.

Upon giving at least 30 days notice prior to the date set for redemption, the
company may redeem all, or from time to time any part, of the outstanding Class
A preferred shares on payment to the holders thereof, for each share to be
redeemed of an amount equal to $2.50 per share denomination in Canadian
dollars, together with all accrued and unpaid cumulative dividends thereon.

In September 2002, the company issued eight million Class AAA, Series F
preferred shares for proceeds of $126 million, bearing a fixed dividend rate of
6% per annum. Proceeds of the issue were utilized to redeem 3,000,000 Class
AAA, Series A preferred shares, 3,000,000 Class AAA, Series B preferred shares
and 2,000,000 Class AAA, Series C preferred shares for total cash of $126
million.

The Series F preferred shares are not redeemable before September 30, 2009. On
and after that date, the Series F preferred shares are redeemable by the
company on at least 30 and not more than 60 days prior notice, at $25.75 per
share if redeemed before September 30, 2010, at $25.50 per share if redeemed on
or after September 30, 2010 but before September 30, 2011, at $25.25 per share
if redeemed on or after September 30, 2011 but before September 30, 2012, and
at $25.00 per share thereafter, plus, in each case, all accrued and unpaid
dividends up to but excluding the date fixed for redemption.

On and after September 30, 2009, the Series F preferred shares are convertible
at the option of the company on at least 30 days and not more than 60 days
prior notice into that number of freely tradeable common shares determined by
dividing the then applicable redemption price, together with all accrued and
unpaid dividends up to but excluding the date fixed for conversion, by the
greater of $2.00 and 95% of the weighted average trading price of the common
shares on the Toronto Stock Exchange for a period of 20 consecutive trading
days ending on the fourth day prior to the date specified for conversion, or,
if that fourth day is not a trading day, on the immediately preceding trading
day.

On and after March 31, 2013, the Series F preferred shares are convertible at
the option of the holder on at least 30 days notice on the last day of March,
June, September and December of each year into that number of freely tradeable
common shares determined by dividing $25.00, together with all accrued and
unpaid dividends up to but excluding the date fixed for conversion, by the
greater of $2.00 and 95% of the then Current Market Price. If a holder of
Series F preferred shares elects to convert any of such shares in common
shares, the company may, on not less than 20 days notice prior to the
conversion date, elect to redeem such Series F preferred shares for cash or
arrange for the sale of those shares to substitute purchasers.

NOTE 11: CONVERTIBLE DEBENTURES

The company has no convertible debentures outstanding at December 31, 2002. In
August 2001, the June 2008 debentures, in the amount of $50 million, were
converted into 2,622,100 common shares of the company by the holders according
to their terms after the company announced its intention to redeem the issue
for cash as permitted by the conditions of the trust indenture. In June 2000,
the February 2007 debentures, in the amount of $201 million, were converted by
the holders into 19,986,682 common shares in accordance with the conversion
right associated with the February 2007 debentures.

NOTE 12: COMMON SHARES

The authorized common share capital consists of an unlimited number of common
voting shares. The issued and outstanding common share capital consists of:

|                                                                              |  |      |       |      |  |      |       |  |  |   |       | 
|----------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|(Millions)                                                                    |  | 2002 |       | 2001 |  | 2000
|                                                                              |  |      |       |      |  |     
|Common shares                                                                 |  | $    | 1,448 |      |  | $    | 1,459 |  |  | $ | 1,404 | 
|Retained earnings, contributed surplus, and cumulative
translation adjustment |  |      | 645   |      |  |      | 485   |  |  |   | 383   | 
|                                                                              |  |      |       |      |  |      |       |  |  |   |       | 
|Total                                                                         |  | $    | 2,093 |      |  | $    | 1,944 |  |  | $ | 1,787 | 
|                                                                              |  |      |       |      |  |      |       |  |  |   |       | 

On October 29, 2002, the Board of Directors approved the special distribution
of the companys U.S. residential home building business, Brookfield Homes. The
distribution was in the form of a return of capital, representing the shares of
Brookfield Homes and was approved by the companys shareholders on December 16,
2002. This special distribution totaled $323 million and was completed on
January 6, 2003 to shareholders of record on January 2, 2003, as discussed in
Note 5.

46





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##### 



The company has a management share option plan in which options vest
proportionately over five years and expire 10 years after the grant date. The
exercise price is equal to the market price at the time they are granted.
Members of the share option plan can elect to purchase shares at the exercise
price or, receive shares with a value equal to the difference between the
exercise price and the current market price. During 2002, the company granted
965,339 stock options with an exercise price of $17.82. Compensation expense
was calculated using the Black-Scholes model of valuation, assuming a 10-year
term, 14.4% volatility and an interest rate of 5.3%. Pursuant to the
distribution of Brookfield Homes on January 6, 2003, the Board of Directors
approved a methodology for adjusting downward the exercise price of all
outstanding stock options at that date, to give effect to this distribution.
This methodology, developed in consultation with the Toronto Stock Exchange,
resulted in the exercise price of all outstanding stock options being reduced
by $1.00 effective February 4, 2003. The following table sets out the number of
common shares which the company may issue under the management share option
plan:

|                  |  |       |      |        |  |           |      |                  |  |      |           |  |  |   |       | 
|----------------- |  | ----- | ---- | ------ |  | --------- | ---- | ---------------- |  | ---- | --------- |  |  | - | ----- | 
|                  |  |       |      |        |  |           |      |                  |  | 2002
|                  |  |       |      |        |  |           |      |                  |  |     
|                  |  | Issue |      | Expiry |  | Number    |      | Weighted Average
|                  |  | Date  |      | Date   |  | of Shares |      | Exercise Price  
|                  |  |       |      |        |  |           |      |                 
|Share option plan |  |       | 1997 |        |  |           | 2008 |                  |  |      | 49,200    |  |  | $ | 6.33  | 
|                  |  |       | 1998 |        |  |           | 2009 |                  |  |      | 601,500   |  |  |   | 10.74 | 
|                  |  |       | 1999 |        |  |           | 2009 |                  |  |      | 29,300    |  |  |   | 8.21  | 
|                  |  |       | 2000 |        |  |           | 2010 |                  |  |      | 1,010,097 |  |  |   | 9.32  | 
|                  |  |       | 2001 |        |  |           | 2011 |                  |  |      | 849,355   |  |  |   | 15.13 | 
|                  |  |       | 2002 |        |  |           | 2012 |                  |  |      | 965,339   |  |  |   | 16.82 | 
|                  |  |       |      |        |  |           |      |                  |  |      |           |  |  |   |       | 
|                  |  |       |      |        |  |           |      |                  |  |      | 3,504,791 |  |  | $ | 12.99 | 
|                  |  |       |      |        |  |           |      |                  |  |      |           |  |  |   |       | 

During the years 2002, 2001 and 2000, common shares issued and outstanding
changed as follows:

|                                                    |                            |                     |             |        |   |      |             |           |        |  |             |            |           | 
|--------------------------------------------------- | -------------------------- | ------------------- | ----------- | ------ | - | ---- | ----------- | --------- | ------ |  | ----------- | ---------- | --------- | 
|                                                    |                            |                     |             | 2002   |   | 2001 |             | 2000     
|                                                    |                            |                     |             |        |   |      |             |          
|Common shares outstanding, beginning of period      |                            |                     | 161,678,406 |        |   |      | 158,746,008 |           |        |  | 132,692,936 |           
|Add shares issued on:                               |                            |                     |             |        |   |      |             |           |        |  |             |           
|                                                    | Conversion of debentures   |                     |             |       |   |      |             | 2,622,100 |        |  |             | 19,986,702 |          
|                                                    | Exercise of warrants       |                     |             | 57,997 |   |      |             | 2,500,000 |        |  |             | 278,003    |          
|                                                    | Exercise of options        |                     |             | 13,913 |   |      |             | 195,329   |        |  |             | 196,700    |          
|                                                    | In exchange for shares of: |                     |             |        |   |      |             |           |        |  |             |            |          
|                                                    |                            | 
BPO Properties    |             |        |  |      |             |           | 17,669 |  |             |            | 5,314,044 | 
|                                                    |                            | 
Carma Corporation |             |        |  |      |             |           |       |  |             |            | 1,863,923 | 
|Deduction of shares as a result of repurchases made |                            |                     | (1,385,900  | )      |   |      | (2,402,700  | )         |        |  | (1,586,300  | )         
|                                                    |                            |                     |             |        |   |      |             |           |        |  |             |           
|Common shares outstanding, end of period            |                            |                     | 160,364,416 |        |   |      | 161,678,406 |           |        |  | 158,746,008 |           
|                                                    |                            |                     |             |        |   |      |             |           |        |  |             |           

During 2002, the exercise of options issued under the companys management
share option plan generated cash proceeds of $0.2 million (2001  $1.4 million,
2000  $0.8 million). In 2000, common shares were issued on the privatization
of the companys subsidiary, Carma Corporation, at a price of $15.94 per share.
Upon the acquisition of an additional 33% of BPO Properties, 5,314,044 shares
were issued at a price of $15.97 per share plus a further 17,669 shares in 2001
in conjunction with deficient tenders. Warrants to acquire common shares of the
company that were exercised during the year generated proceeds of $0.5 million
(2001  $24.2 million, 2000  $2.8 million). During 2002, common shares of the
company were acquired for cancellation pursuant to the normal course issuer bid
at an average price of $18.49 per share (2001  $17.30, 2000  $12.50). In
addition, there are 64,000 outstanding warrants as at December 31, 2002 to
purchase common shares of the company for $8.51 per share, which expire May
2003. As a result of the distribution of Brookfield Homes, the exercise price
of the outstanding warrants were adjusted downward by C$1.56 in accordance with
their terms.

Retained earnings, contributed surplus and cumulative translation adjustment
include a foreign currency cumulative translation adjustment of $(36) million
(2001  $(27) million, 2000  $12 million) and contributed surplus of $51
million (2001   $71 million, 2000   $97 million). During the year, contributed
surplus decreased $14 million (2001  $21 million) from the repurchase of the
companys common shares, $3 million from preferred share issue costs, $3
million from transaction costs related to the distribution of Brookfield Homes,
and nil (2001  $5 million) pursuant to the exercise of options under the
market growth feature.

47



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##### 



NOTE 13: COMMERCIAL PROPERTY AND RESIDENTIAL DEVELOPMENT OPERATIONS

(a) Commercial property operations

The results of the companys commercial property operations are as follows:

|                                   |  |      |      |      |  |      |       |   |  |   |      |  
|---------------------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  | - | ---- | -
|(Millions)                         |  | 2002 |      | 2001 |  | 2000
|                                   |  |      |      |      |  |     
|Commercial property operations     |  | $    | 943  |      |  | $    | 1,007 |   |  | $ | 989  |  
|Expenses                           |  |      | (343 | )    |  |      | (390  | ) |  |   | (397 | )
|Lease termination income and gains |  |      | 60   |      |  |      | 55    |   |  |   | 19   |  
|                                   |  |      |      |      |  |      |       |   |  |   |      |  
|Total                              |  | $    | 660  |      |  | $    | 672   |   |  | $ | 611  |  
|                                   |  |      |      |      |  |      |       |   |  |   |      |  

Due to the events of September 11, 2001 and the impact on the companys
properties in Lower Manhattan, commercial property income includes $49 million
(2001  $49 million) of business interruption insurance claims as a result of
loss of revenue.

(b) Development and residential operations

Development and residential operations results for the year are as follows:

|           |  |      |      |      |  |      |      |   |  |   |      |  
|---------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|(Millions) |  | 2002 |      | 2001 |  | 2000
|           |  |      |      |      |  |     
|Revenue    |  | $    | 321  |      |  | $    | 324  |   |  | $ | 316  |  
|Expenses   |  |      | (299 | )    |  |      | (304 | ) |  |   | (289 | )
|           |  |      |      |      |  |      |      |   |  |   |      |  
|Total      |  | $    | 22   |      |  | $    | 20   |   |  | $ | 27   |  
|           |  |      |      |      |  |      |      |   |  |   |      |  

NOTE 14: CORPORATE ACQUISITIONS

On December 31, 2002, Brookfield Financial Properties completed a redemption of
certain of its outstanding Partnership Units for cash consideration of $56
million. As a result of the redemption, each remaining partners percentage
interest increased on a pro rata basis. The company currently holds 98.5% of
the outstanding Partnership Units of Brookfield Financial Properties. In June
2001, the company increased its interest in Brookfield Financial Properties to
94.7% for cash consideration of $60 million. During 2000, the company launched
two tender bids, one for the shares of BPO Properties, and one for the shares
of Carma Corporation. As a result of these transactions, the companys interest
in BPO Properties increased to 85% on an equity basis and increased to 100% in
Carma Corporation. The consideration paid for these increased interests are as
follows:

|                   |               |                |                |                |                   |   |    |    | 
|------------------ | ------------- | -------------- | -------------- | -------------- | ----------------- | - | -- | -- | 
|                   |               |                | BPO Properties |                | Carma Corporation
|(Millions)         |               | September 2001 |                | September 2001
|                   |               |                |                |               
|Consideration paid |               |                |                |                |                   |   |    |   
|                   | Cash          |                | $              | 5              |                   |   | $  | 1  | 
|                   | Common shares |                |                | 85             |                   |   |    | 30 | 
|                   |               |                |                |                |                   |   |    |    | 
|Total              |               | $              | 90             |                |                   | $ | 31 |   
|                   |               |                |                |                |                   |   |    |    | 

The net effect of these acquisitions on the companys consolidated balance
sheet was a decrease in other shareholders interests of $56 million (2000 -
$119 million), increase in other assets of nil (2000  $14 million), and an
increase in commercial properties of $4 million (2000  $12 million decrease).

NOTE 15: SEGMENTED INFORMATION

The company and its subsidiaries operate in the United States and Canada within
the commercial property business and the residential land development business.
The following summary presents segmented financial information for the
companys principal areas of business by industry and geographic location:

|           |                            |      |               |       |        |      |       |       |  |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |       |       |  |   |       |       | 
|---------- | -------------------------- | ---- | ------------- | ----- | ------ | ---- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|           |                            |      | United States |       | Canada |      | Total
|           |                            |      |               |       |        |      |      
|(Millions) |                            | 2002 |               | 2001  |        | 2000 |       | 2002  |  | 2001 |       | 2000  |  | 2002 |       | 2001  |  | 2000
|           |                            |      |               |       |        |      |       |       |  |      |       |       |  |      |       |       |  |     
|Assets     |                            |      |               |       |        |      |       |       |  |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |       |       |  |   |      
|           | Commercial properties      |      | $             | 4,430 |        |      | $     | 4,392 |  |      | $     | 4,526 |  |      | $     | 1,231 |  |      | $     | 1,410 |  |   | $     | 1,842 |  |   | $     | 5,661 |  |   | $     | 5,802 |  |   | $     | 6,368 | 
|           | Development properties     |      |               | 711   |        |      |       | 374   |  |      |       | 325   |  |      |       | 233   |  |      |       | 201   |  |   |       | 212   |  |   |       | 944   |  |   |       | 575   |  |   |       | 537   | 
|           | Receivables and other      |      |               | 301   |        |      |       | 428   |  |      |       | 669   |  |      |       | 468   |  |      |       | 419   |  |   |       | 348   |  |   |       | 769   |  |   |       | 847   |  |   |       | 1,017 | 
|           | Cash and cash equivalents  |      |               | 72    |        |      |       | 195   |  |      |       | 184   |  |      |       | 4     |  |      |       |      |  |   |       | 17    |  |   |       | 76    |  |   |       | 195   |  |   |       | 201   | 
|           | Assets of Brookfield Homes |      |               | 879   |        |      |       | 872   |  |      |       | 762   |  |      |       |      |  |      |       |      |  |   |       |      |  |   |       | 879   |  |   |       | 872   |  |   |       | 762   | 
|           |                            |      |               |       |        |      |       |       |  |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |       |       |  |   |       |      
|           |                            | $    | 6,393         |       |        | $    | 6,261 |       |  | $    | 6,466 |       |  | $    | 1,936 |       |  | $    | 2,030 |       |  | $ | 2,419 |       |  | $ | 8,329 |       |  | $ | 8,291 |       |  | $ | 8,885 |      
|           |                            |      |               |       |        |      |       |       |  |      |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |       |       |  |   |       |       |  |   |       |      

48



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##### 



|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|----------------------------------------------- | ---------------------------------- | ---- | ------------- | ---- | ------ | ---- | ----- | ---- |  | ---- | --- | ---- |  | ---- | ---- | ---- |  | ---- | --- | --- |  | - | --- | --- |  | - | ---- | --- |  | - | ---- | ----- |  | - | --- | --- | 
|                                                |                                    |      | United States |      | Canada |      | Total
|                                                |                                    |      |               |      |        |      |      
|(Millions)                                      |                                    | 2002 |               | 2001 |        | 2000 |       | 2002 |  | 2001 |     | 2000 |  | 2002 |      | 2001 |  | 2000
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |     
|Commercial property operations                  |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |    
|                                                | Rental revenues*                   |      | $             | 687  |        |      | $     | 688  |  |      | $   | 701  |  |      | $    | 256  |  |      | $   | 319 |  |   | $   | 288 |  |   | $    | 943 |  |   | $    | 1,007 |  |   | $   | 989 | 
|                                                | Lease termination income
and gains |      |               |     |        |      |       | 25   |  |      |     | 19   |  |      |      | 60   |  |      |     | 30  |  |   |     |    |  |   |      | 60  |  |   |      | 55    |  |   |     | 19  | 
|                                                | Expenses                           |      |               | 240  |        |      |       | 254  |  |      |     | 260  |  |      |      | 103  |  |      |     | 136 |  |   |     | 137 |  |   |      | 343 |  |   |      | 390   |  |   |     | 397 | 
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|                                                |                                    |      | 447           |      |        |      | 459   |      |  |      | 460 |      |  |      | 213  |      |  |      | 213 |     |  |   | 151 |     |  |   | 660  |     |  |   | 672  |       |  |   | 611 |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Land and housing                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |    
|                                                | Revenues                           |      |               | 157  |        |      |       | 181  |  |      |     | 147  |  |      |      | 164  |  |      |     | 143 |  |   |     | 169 |  |   |      | 321 |  |   |      | 324   |  |   |     | 316 | 
|                                                | Expenses                           |      |               | 156  |        |      |       | 180  |  |      |     | 144  |  |      |      | 143  |  |      |     | 124 |  |   |     | 145 |  |   |      | 299 |  |   |      | 304   |  |   |     | 289 | 
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|                                                |                                    |      | 1             |      |        |      | 1     |      |  |      | 3   |      |  |      | 21   |      |  |      | 19  |     |  |   | 24  |     |  |   | 22   |     |  |   | 20   |       |  |   | 27  |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Other revenues                                  |                                    |      | 9             |      |        |      | 17    |      |  |      | 13  |      |  |      | 39   |      |  |      | 25  |     |  |   | 32  |     |  |   | 48   |     |  |   | 42   |       |  |   | 45  |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Net operating income                            |                                    |      | 457           |      |        |      | 477   |      |  |      | 476 |      |  |      | 273  |      |  |      | 257 |     |  |   | 207 |     |  |   | 730  |     |  |   | 734  |       |  |   | 683 |    
|                                                | Interest expense                   |      |               | 235  |        |      |       | 250  |  |      |     | 255  |  |      |      | 49   |  |      |     | 78  |  |   |     | 69  |  |   |      | 284 |  |   |      | 328   |  |   |     | 324 | 
|                                                | Administrative and development     |      |               | 18   |        |      |       | 22   |  |      |     | 17   |  |      |      | 24   |  |      |     | 22  |  |   |     | 27  |  |   |      | 42  |  |   |      | 44    |  |   |     | 44  | 
|                                                | Interests of others in properties  |      |               | 7    |        |      |       | 5    |  |      |     | 16   |  |      |      | 23   |  |      |     | 23  |  |   |     | 31  |  |   |      | 30  |  |   |      | 28    |  |   |     | 47  | 
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Income before undernoted                        |                                    |      | 197           |      |        |      | 200   |      |  |      | 188 |      |  |      | 177  |      |  |      | 134 |     |  |   | 80  |     |  |   | 374  |     |  |   | 334  |       |  |   | 268 |    
|Depreciation and amortization                   |                                    |      | 52            |      |        |      | 48    |      |  |      | 44  |      |  |      | 28   |      |  |      | 28  |     |  |   | 22  |     |  |   | 80   |     |  |   | 76   |       |  |   | 66  |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Income before unallocated costs                 |                                    |      | 145           |      |        |      | 152   |      |  |      | 144 |      |  |      | 149  |      |  |      | 106 |     |  |   | 58  |     |  |   | 294  |     |  |   | 258  |       |  |   | 202 |    
|Taxes and other non-cash items                  |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   | 58   |     |  |   | 56   |       |  |   | 62  |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Net income from continuing operations           |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   | 236  |     |  |   | 202  |       |  |   | 140 |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Income from discontinued operations             |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   | 44   |     |  |   | 39   |       |  |   | 30  |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Net income                                      |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  | $ | 280  |     |  | $ | 241  |       |  | $ | 170 |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 
|Acquisitions (dispositions)
of real estate, net |                                    | $    | 2             |      |        | $    | (97   | )    |  | $    | 42  |      |  | $    | (116 | )    |  | $    | (40 | )   |  | $ | 120 |     |  | $ | (114 | )   |  | $ | (137 | )     |  | $ | 162 |    
|Commercial property
tenant improvements         |                                    |      | 36            |      |        |      | 24    |      |  |      | 74  |      |  |      | 13   |      |  |      | 26  |     |  |   | 23  |     |  |   | 49   |     |  |   | 50   |       |  |   | 97  |    
|Development and redevelopment
investments       |                                    |      | 195           |      |        |      | 75    |      |  |      | 17  |      |  |      | 11   |      |  |      | 26  |     |  |   | 30  |     |  |   | 206  |     |  |   | 101  |       |  |   | 47  |    
|Capital expenditures                            |                                    |      | 7             |      |        |      | 6     |      |  |      | 4   |      |  |      | 9    |      |  |      | 8   |     |  |   | 8   |     |  |   | 16   |     |  |   | 14   |       |  |   | 12  |    
|                                                |                                    |      |               |      |        |      |       |      |  |      |     |      |  |      |      |      |  |      |     |     |  |   |     |     |  |   |      |     |  |   |      |       |  |   |     |     | 



|* |  | During 2002, rental revenues from Merrill Lynch & Company Inc. accounted for
14% (2001  14%, 2000  15%) of consolidated revenue.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------

OTHER INFORMATION

NOTE 16: FUNDS FROM OPERATIONS DIFFERENCES

Funds from operations, as reported, recognizes rental revenue over the term of
a lease as it becomes contractually due. Applying the straight-line method of
rental revenue recognition on a pro forma basis would increase funds from
operations and gains for diluted common shareholders to $387 million (2001 
$347 million, 2000  $284 million) from the reported level of $374 million
(2001  $334 million, 2000  $268 million).

|                                                                 |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|Years ended December 31 (Millions, except per share information) |  | 2002 |      | 2001 |  | 2000
|                                                                 |  |      |      |      |  |     
|Funds from continuing operations and gains  as reported         |  | $    | 374  |      |  | $    | 334  |   |  | $ | 268  |  
|Adjustment to reflect straight-line rental revenue               |  |      | 14   |      |  |      | 14   |   |  |   | 19   |  
|Other shareholders interests                                    |  |      | (1   | )    |  |      | (1   | ) |  |   | (3   | )
|                                                                 |  |      |      |      |  |      |      |   |  |   |      |  
|Funds from continuing operations and gains  pro forma           |  | $    | 387  |      |  | $    | 347  |   |  | $ | 284  |  
|                                                                 |  |      |      |      |  |      |      |   |  |   |      |  
|Funds from continuing operations per share  diluted  pro forma |  | $    | 2.26 |      |  | $    | 2.00 |   |  | $ | 1.66 |  
|                                                                 |  |      |      |      |  |      |      |   |  |   |      |  

49





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##### 



NOTE 17: DIFFERENCES FROM UNITED STATES ACCOUNTING PRINCIPLES

Canadian generally accepted accounting principles (Canadian GAAP) differ in
some respects from the principles that the company would follow if its
consolidated financial statements were prepared in accordance with accounting
principles generally accepted in the United States (US GAAP). The effects of
significant accounting differences on the companys balance sheet and
statements of income, retained earnings and cashflow are quantified and
described in the accompanying notes.

Under Canadian GAAP, companies are permitted to provide supplementary measures
of earnings, earnings per share and FFO per share in the notes to the
consolidated financial statements, provided that these measures are not given
the same prominence as reported earnings per share. For the purpose of
reporting under US GAAP, supplementary measures of net earnings, earnings per
share, funds from operations, and FFO per share are generally not included in
the financial statements and notes attached thereto.

(a) Income statement differences

The incorporation of the significant differences in accounting principles in
the companys income statements for the years ended December 31, 2002, 2001 and
2000 under US GAAP would result in net income under US GAAP of $251 million (2001 
$173 million, 2000  $178 million). The main differences between Canadian GAAP
and US GAAP are summarized in the following table:

| |                                                                  |       |                                             |      |      |     |      |      |  |     |   |      |  |     |  
| | ---------------------------------------------------------------- | ----- | ------------------------------------------- | ---- | ---- | --- | ---- | ---- |  | --- | - | ---- |  | --- | -
| | Years ended December 31 (Millions, except per share information) |       | 2002                                        |      | 2001 |     | 2000
| |                                                                  |       |                                             |      |      |     |     
| | Net income as reported under Canadian GAAP                       |       | $                                           | 280  |      |     | $    | 241  |  |     | $ | 170  | 
| | Adjustments:                                                     |       |                                             |      |      |     |      |      |  |     |   |      | 
| |                                                                  | (i)   | Increased commercial property income        |      |      | 14  |      |      |  | 14  |   |      |  | 19  |  
| |                                                                  | (ii)  | Increased commercial property depreciation  |      |      | (64 | )    |      |  | (69 | ) |      |  | (65 | )
| |                                                                  | (iii) | Increased commercial property gains         |      |      |    |      |      |  | 16  |   |      |  |    |  
| |                                                                  | (iv)  | (Increased) decreased deferred income taxes |      |      | 19  |      |      |  | (25 | ) |      |  | 63  |  
| |                                                                  | (v)   | Subordinated convertible debenture interest |      |      |    |      |      |  | (2  | ) |      |  | (9  | )
| |                                                                  | (vi)  | Stock option expense                        |      |      |    |      |      |  | (4  | ) |      |  | (6  | )
| |                                                                  | (vii) | Decreased other shareholders interests     |      |      | 2   |      |      |  | 2   |   |      |  | 6   |  
| |                                                                  |       |                                             |      |      |     |      |      |  |     |   |     
| | Net income under US GAAP*                                        |       | $                                           | 251  |      |     | $    | 173  |  |     | $ | 178  | 
| |                                                                  |       |                                             |      |      |     |      |      |  |     |   |     
| | Net income per share                                             |       |                                             |      |      |     |      |      |  |     |   |      | 
| | Basic                                                            |       | $                                           | 1.44 |      |     | $    | 0.96 |  |     | $ | 1.10 | 
| | Diluted                                                          |       | $                                           | 1.43 |      |     | $    | 0.95 |  |     | $ | 1.07 | 
| |                                                                  |       |                                             |      |      |     |      |      |  |     |   |     



|* |  | There are no extraordinary items included in these results.
|- |  | -----------------------------------------------------------

For Canadian GAAP purposes, net income includes income from discontinued
operations of $44 million (2001  $39 million, 2000  $30 million) as described
in Note 5. Under US GAAP, discontinued operations presentation is not effective
until the date of distribution. Brookfield Homes was distributed to common
shareholders of the company on January 6, 2003. Accordingly, revenue, expenses
and income from discontinued operations have been included as part of
continuing operations for US GAAP purposes.

Effective December 31, 2000, the company adopted the US dollar as its reporting
currency. Prior to this change, the Canadian dollar had been used as the
companys reporting currency. Under Canadian GAAP applicable at that time, the
companys financial statements for December 31, 2000 have been translated from
Canadian dollars to US dollars using the exchange rate in effect at December
31, 2000. Under US GAAP, the financial statements for the periods prior to the
change in reporting currency must be translated to US dollars using the current
rate method, which uses specific year end and specific annual average exchange
rates as appropriate. The application of the current rate method to the periods
presented has a significant differential effect on reported comprehensive
income, and certain other components of shareholders equity as described
throughout this note.

Other significant differences are outlined in each category between Canadian
GAAP and US GAAP as follows:



| | (i)  |  | Increased commercial property income                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |      |  | Under Canadian GAAP, rental revenue is recognized over the term of the
lease as it becomes due where increases in rent are intended to offset
the estimated effects of inflation. Under US GAAP, rental revenue is

recognized on a straight-line basis over the term of the lease. The net
impact of using the straight-line method on the income of the company
would be to increase the commercial property revenue by $14 million (2001
 $14 million, 2000  $19 million).
|
| | (ii) |  | Increased commercial property
depreciation
Under Canadian GAAP, commercial properties have been depreciated using
the sinking-fund method. Under US GAAP, commercial properties are
depreciated on a straight-line basis. In recalculating depreciation on a
straight-line basis, the additional depreciation expense would be $64
million (2001  $69 million, 2000  $65 million).                                                                                           

50



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##### 





| | (iii) |  | Increased commercial property
gains
Under US GAAP, the book values of commercial property assets differ from
Canadian GAAP as a result of rental revenue recognition and commercial
property depreciation methods, as explained in (i) and (ii). The net
impact of these amounts would be an increase in commercial property gains
of nil (2001  $16 million, 2000  nil).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (iv)  |  | (Increased) decreased deferred
income taxes
Income taxes are accounted for using the liability method under Canadian
and US GAAP. For the year ended December 31, 2002, a reduction of deferred
income tax expense of $19 million (2001  $31 million, 2000  $21
million) would be recorded under US GAAP due to the tax effect of the
stated differences between Canadian and US GAAP described above.                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |       |  | Under Canadian and US GAAP, the impact of changes in income tax rates to
the tax asset or liability account is reflected in the current years
statement of income. Under Canadian GAAP, the impact of the change is
reflected when the legislation affecting the tax rate change is
substantively enacted, whereas the impact under US GAAP is reflected when
legislation is enacted. In 2000, legislation implementing a decrease in
certain Canadian income tax rates was proposed but not enacted. This
legislation was enacted in 2001. Accordingly, in 2001 an additional tax
expense of $56 million (2000  $42 million reduction) is recorded under
US GAAP.                                                                                                                                                                                        
|
| | (v)   |  | Subordinated convertible debenture interest
Under Canadian GAAP, the companys subordinated convertible debentures,
which were redeemed in 2001, are recorded as a component of the companys
capital base and the related interest paid recorded as a distribution
from retained earnings, as a result of the companys option of repaying
these debentures by delivering its common shares to the holders and
meeting interest obligations by issuing common shares. Under US GAAP, nil
(2001  nil, 2000  $50 million) of subordinated convertible debentures
would be recorded as indebtedness. The corresponding interest charge of
nil (2001  $2 million, 2000  $9 million) is recorded as a charge to
income compared with a distribution from retained earnings under Canadian
GAAP. There is no effect on basic or diluted net income per share.
|
| | (vi)  |  | Stock option expense
Under Canadian GAAP, a new accounting standard on stock-based
compensation was issued in 2001 and was adopted by the company effective
January 1, 2002 which substantially harmonizes Canadian GAAP with US
GAAP. The new standard was applied retroactively without restatement;
therefore, no expense adjustment from Canadian to US GAAP is required for
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |       |  | Under US GAAP, the company has adopted the recommendations of the
Statement of Financial Accounting Standards No. 123 (SFAS 123) entitled
Accounting for Stock-Based Compensation which establishes financial
accounting and reporting standards for stock-based employee compensation

plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |       |  | Under SFAS 123, the company accounts for stock options or similar equity
instruments under a fair value methodology. Under this method, options
are valued using an acceptable valuation method and the charge on an
annual basis is reflected in the income statement. In 2001, using the
Black-Scholes model of valuation, assuming a 10-year term, 18% volatility
(2000  27%) and an interest rate of 5.5% (2000  6%), the cost of stock
compensation would be $4 million (2000  $6 million). This amount has
been recorded as an expense under US GAAP.                                                                                                                                                                                                                                                                                              
|
| | (vii) |  | Decreased other shareholders interests
Under US GAAP, other shareholders interests are adjusted for the
differences from Canadian GAAP. The total adjustment results in a
decrease in other shareholders interests of $2 million (2001  $2
million, 2000  $6 million), which relate to a recovery of $3 million
(2001  $4 million, 2000  $9 million) from increased commercial property
depreciation, offset by $1 million (2001  $1 million, 2000  $3 million)
relating to the other shareholders interests in straight-line rental
income, and nil (2001  $1 million, 2000  nil) from increased commercial
property gains.                                                                                                                                                                                                                    

(b) Comprehensive income

Under US GAAP, the Financial Accounting Standards Board (FASB) issued SFAS
130 entitled Reporting Comprehensive Income. Comprehensive income, which
incorporates net income, includes all changes in equity during the year, and
accordingly, the change in the companys cumulative translation
adjustment is reflected in the companys calculation of comprehensive income
for fiscal 2002, 2001 and 2000:

51





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##### 



|                                                            |  |      |     |      |  |      |     |   |  |   |     | 
|----------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | 
|Years ended December 31 (Millions)                          |  | 2002 |     | 2001 |  | 2000
|                                                            |  |      |     |      |  |     
|Net income under Canadian GAAP                              |  | $    | 280 |      |  | $    | 241 |   |  | $ | 170 | 
|Foreign currency translation adjustment under Canadian GAAP |  |      | (9  | )    |  |      | (39 | ) |  |   |    | 
|                                                            |  |      |     |      |  |      |     |   |  |   |     | 
|Comprehensive income using Canadian GAAP amounts            |  | $    | 271 |      |  | $    | 202 |   |  | $ | 170 | 
|                                                            |  |      |     |      |  |      |     |   |  |   |     | 

Comprehensive income using US GAAP
amounts is $257 million (2001 and 2000 
$134 million). Differences arise from the application of the current rate
method of currency translation under US GAAP to all periods presented pursuant
to the adoption of the US dollar as the companys reporting currency, and from
other differences between Canadian and US GAAP as described above under Income
statement differences.

(c) Balance sheet differences

There are differences in the treatment of balance sheet items between Canadian
GAAP and US GAAP. The incorporation of the significant differences in
accounting principles in the companys financial statements as at December 31,
2002, 2001 and 2000, would result in the following balance sheet presentation
under US GAAP:

|                                           |              |      |       |      |  |      |       |     |  |   |       |     | 
|------------------------------------------ | ------------ | ---- | ----- | ---- |  | ---- | ----- | --- |  | - | ----- | --- | 
|As at December 31 (Millions)               |              | 2002 |       | 2001 |  | 2000
|                                           |              |      |       |      |  |     
|Assets                                     |              |      |       |      |  |      |       |     |  |   |       |    
|Commercial properties                      |              | $    | 5,281 |      |  | $    | 5,476 |     |  | $ | 6,069 |    
|Development properties                     |              |      | 984   |      |  |      | 593   |     |  |   | 564   |    
|Residential housing inventory              |              |      | 734   |      |  |      | 749   |     |  |   | 632   |    
|Receivables and other                      |              |      | 771   |      |  |      | 690   |     |  |   | 732   |    
|Deferred income taxes                      |              |      | 195   |      |  |      | 244   |     |  |   | 343   |    
|Cash and cash equivalents                  |              |      | 112   |      |  |      | 196   |     |  |   | 209   |    
|                                           |              |      |       |      |  |      |       |     |  |   |       |    
|Total assets under US GAAP                 |              | $    | 8,077 |      |  | $    | 7,948 |     |  | $ | 8,549 |    
|                                           |              |      |       |      |  |      |       |     |  |   |       |    
|Liabilities and shareholders equity       |              |      |       |      |  |      |       |     |  |   |       |    
|Commercial property debt                   |              | $    | 4,038 |      |  | $    | 4,376 |     |  | $ | 4,542 |    
|Commercial development property debt       |              |      | 550   |      |  |      | 230   |     |  |   | 160   |    
|Residential construction financing         |              |      | 345   |      |  |      | 318   |     |  |   | 219   |    
|Notes and shareholders advances           |              |      | 98    |      |  |      | 115   |     |  |   | 165   |    
|Accounts payable                           |              |      | 444   |      |  |      | 403   |     |  |   | 944   |    
|Interests of others in properties          |              |      | 77    |      |  |      | 103   |     |  |   | 140   |    
|Subordinated convertible debentures        |              |      |      |      |  |      |      |     |  |   | 50    |    
|Preferred shares                           |              |      |       |      |  |      |       |     |  |   |       |    
|                                           | Subsidiaries |      |       | 341  |  |      |       | 339 |  |   |       | 361 | 
|                                           | Corporate    |      |       | 250  |  |      |       | 273 |  |   |       | 273 | 
|Common shares                              |              |      | 1,934 |      |  |      | 1,791 |     |  |   | 1,695 |    
|                                           |              |      |       |      |  |      |       |     |  |   |       |    
|Total liabilities and equity under US GAAP |              | $    | 8,077 |      |  | $    | 7,948 |     |  | $ | 8,549 |    
|                                           |              |      |       |      |  |      |       |     |  |   |       |    

The balance sheet under US GAAP presents the assets and liabilities of
Brookfield Homes within the accounts of the company, whereas for Canadian GAAP
these amounts have been presented separately as a discontinued operation as
described in Note 5. Additional significant differences between Canadian GAAP
and US GAAP are as follows:

Commercial properties

|                                                  |  |      |       |      |  |      |       |   |  |   |       |  
|------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|As at December 31 (Millions)                      |  | 2002 |       | 2001 |  | 2000
|                                                  |  |      |       |      |  |     
|Commercial properties under Canadian GAAP         |  | $    | 5,661 |      |  | $    | 5,802 |   |  | $ | 6,368 |  
|Additional accumulated depreciation under US GAAP |  |      | (380  | )    |  |      | (326  | ) |  |   | (299  | )
|                                                  |  |      |       |      |  |      |       |   |  |   |       |  
|Commercial properties under US GAAP               |  | $    | 5,281 |      |  | $    | 5,476 |   |  | $ | 6,069 |  
|                                                  |  |      |       |      |  |      |       |   |  |   |       |  

There are two principal differences between Canadian GAAP and US GAAP affecting
the carrying value of commercial properties. The first difference relates to US
GAAP requiring straight-line depreciation to be applied to depreciable assets
rather than the sinking-fund method of depreciation. At December 31, 2002, this
would result in a cumulative adjustment of $380 million (2001  $326 million,
2000  $299 million). The second difference relates to the method of accounting
for joint ventures and partnerships. Under Canadian GAAP, the accounts of all
incorporated and unincorporated joint ventures and partnerships are
proportionately consolidated according to the companys ownership interest.
Under US GAAP, the equity method of accounting is applied. In circumstances
where a joint venture is an operating entity and the significant financial and
operating policies are, by contractual arrangement, jointly controlled by all
parties having an equity interest in the entity, US regulations do not require

52



---



##### 



adjustment to equity account the joint ventures. The presentation of the
companys joint ventures does not require adjustment to the equity method.

Under Canadian GAAP, commercial properties held for investment purposes are
carried at the lower of cost and net recoverable amount as disclosed in Note
1(c). Under US GAAP, these assets, on an identifiable unit basis, are required
to be reviewed for impairment in accordance with the requirements under SFAS
144 entitled, Accounting for the Impairment or Disposal of Long-Lived Assets.
There is no material impact as a result of this standard as at December 31,
2002, 2001 and 2000.

Receivables and other

The principal differences in the accounting for receivables and other under US
GAAP are the inclusion of a straight-line rent receivable of $109 million (2001
 $100 million, 2000  $99 million) which would result under US GAAP if the
company straight-lined its revenue, the reclassification of deferred income
taxes and the reclassification of receivables and other assets relating to
Brookfield Homes.

|                                                                   |  |      |     |      |  |      |      |   |  |   |       |  
|------------------------------------------------------------------ |  | ---- | --- | ---- |  | ---- | ---- | - |  | - | ----- | -
|December 31 (Millions)                                             |  | 2002 |     | 2001 |  | 2000
|                                                                   |  |      |     |      |  |     
|Receivables and other under Canadian GAAP                          |  | $    | 769 |      |  | $    | 847  |   |  | $ | 1,017 |  
|Straight-line rent receivable                                      |  |      | 109 |      |  |      | 100  |   |  |   | 99    |  
|Reclassification of deferred income taxes                          |  |      | (43 | )    |  |      | (90  | ) |  |   | (171  | )
|Brookfield Homes  Receivables and other, net of subordinated debt |  |      | (64 | )    |  |      | (167 | ) |  |   | (213  | )
|                                                                   |  |      |     |      |  |      |      |   |  |   |       |  
|Receivables and other under US GAAP                                |  | $    | 771 |      |  | $    | 690  |   |  | $ | 732   |  
|                                                                   |  |      |     |      |  |      |      |   |  |   |       |  

Deferred income taxes

Under US GAAP, the company has a deferred tax asset of $195 million (2001 
$244 million, 2000  $343 million). The offsetting balance created by this
adjustment decreases receivables and other by $43 million (2001
 $90 million,
2000  $171 million), decreases cumulative translation adjustment by $5 million
(2001  $5 million, 2000  nil), increases shareholders equity by $122 million
(2001  $103 million, 2000  $125 million) and reclassifies the tax assets of
Brookfield Homes by $35 million (2001  $56 million,
2000  $47 million).

The deferred income tax asset under US GAAP is as follows:

|                                                             |  |      |      |      |  |      |      |   |  |   |      |  
|------------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|December 31 (Millions)                                       |  | 2002 |      | 2001 |  | 2000
|                                                             |  |      |      |      |  |     
|Tax assets related to net operating and capital losses       |  | $    | 587  |      |  | $    | 653  |   |  | $ | 725  |  
|Tax liabilities related to differences in tax and book basis |  |      | (192 | )    |  |      | (181 | ) |  |   | (158 | )
|Valuation allowance                                          |  |      | (200 | )    |  |      | (228 | ) |  |   | (224 | )
|                                                             |  |      |      |      |  |      |      |   |  |   |      |  
|Deferred income tax asset under US GAAP                      |  | $    | 195  |      |  | $    | 244  |   |  | $ | 343  |  
|                                                             |  |      |      |      |  |      |      |   |  |   |      |  

Common shareholders equity

The cumulative impact of US GAAP adjustments to common shareholders equity is
as follows:

|                                                      |  |      |       |      |  |      |       |   |  |   |       |  
|----------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|December 31 (Millions)                                |  | 2002 |       | 2001 |  | 2000
|                                                      |  |      |       |      |  |     
|Common shareholders equity under Canadian GAAP       |  | $    | 2,093 |      |  | $    | 1,944 |   |  | $ | 1,787 |  
|Adjustment to accumulated depreciation under US GAAP  |  |      | (380  | )    |  |      | (326  | ) |  |   | (299  | )
|Adjustment to deferred income tax asset under US GAAP |  |      | 117   |      |  |      | 98    |   |  |   | 125   |  
|Rental revenue adjustments under US GAAP              |  |      | 109   |      |  |      | 100   |   |  |   | 99    |  
|Stock option expense adjustments under US GAAP        |  |      |      |      |  |      | (8    | ) |  |   | (9    | )
|Other shareholders interests                         |  |      | 6     |      |  |      | 10    |   |  |   | 19    |  
|Foreign currency translation adjustments, net         |  |      | (11   | )    |  |      | (27   | ) |  |   | (27   | )
|                                                      |  |      |       |      |  |      |       |   |  |   |       |  
|Common shareholders equity under US GAAP             |  | $    | 1,934 |      |  | $    | 1,791 |   |  | $ | 1,695 |  
|                                                      |  |      |       |      |  |      |       |   |  |   |       |  

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The components of common shareholders equity under US GAAP, after the
adjustments in the previous table, are as follows:

|                                                           |  |      |       |      |  |      |       |   |  |   |       |  
|---------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|December 31 (Millions)                                     |  | 2002 |       | 2001 |  | 2000
|                                                           |  |      |       |      |  |     
|Common shares                                              |  | $    | 1,541 |      |  | $    | 1,551 |   |  | $ | 1,496 |  
|Additional paid-in capital, net*                           |  |      | 695   |      |  |      | 526   |   |  |   | 385   |  
|Cumulative translation adjustment                          |  |      | (154  | )    |  |      | (160  | ) |  |   | (121  | )
|Cumulative adjustments to net income and retained earnings |  |      | (148  | )    |  |      | (126  | ) |  |   | (65   | )
|                                                           |  |      |       |      |  |      |       |   |  |   |       |  
|Common shareholders equity under US GAAP                  |  | $    | 1,934 |      |  | $    | 1,791 |   |  | $ | 1,695 |  
|                                                           |  |      |       |      |  |      |       |   |  |   |       |  



|* |  | Net of retained earnings of $332 million (2001  $113 million, 2000  $28
million deficit)
|- |  | ------------------------------------------------------------------------------------------

Joint ventures

The following amounts represent the companys proportionate interest in
incorporated and unincorporated joint ventures reflected in the companys
balance sheet for US GAAP purposes:

|                                                       |  |      |       |      |  |      |       |   |  |   |     |  
|------------------------------------------------------ |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | --- | -
|As at December 31 (Millions)                           |  | 2002 |       | 2001 |  | 2000
|                                                       |  |      |       |      |  |      |      
|Assets                                                 |  | $    | 1,441 |      |  | $    | 1,115 |   |  | $ | 683 |  
|Liabilities                                            |  |      | 750   |      |  |      | 539   |   |  |   | 315 |  
|Operating revenue                                      |  |      | 191   |      |  |      | 133   |   |  |   | 88  |  
|Operating expenses                                     |  |      | 81    |      |  |      | 50    |   |  |   | 36  |  
|Net income                                             |  |      | 50    |      |  |      | 39    |   |  |   | 29  |  
|Cashflows from operating activities                    |  |      | 65    |      |  |      | 61    |   |  |   | 36  |  
|Cashflows provided from (used in) investing activities |  |      | 4     |      |  |      | 4     |   |  |   | (3  | )
|Cashflows used in financing activities                 |  |      | (31   | )    |  |      | (73   | ) |  |   | (30 | )
|                                                       |  |      |       |      |  |      |       |   |  |   |     |  

(d) Cashflow statement differences

The statement of cashflow prepared under US GAAP differs from Canadian GAAP
because US GAAP requires reclassification of interest on convertible debentures
from a financing item to an operating item. In addition, the cashflow from
discontinued operations would be reclassified under US GAAP to each of the
activities as described in Note 5. As a result of the differences in accounting
for these items described, the summarized cashflow statement under US GAAP is
as follows:

|                                                           |           |      |     |      |   |      |     |      |   |   |     |      |  
|---------------------------------------------------------- | --------- | ---- | --- | ---- | - | ---- | --- | ---- | - | - | --- | ---- | -
|Years ended December 31 (Millions)                         |           | 2002 |     | 2001 |   | 2000
|                                                           |           |      |     |      |   |     
|Cashflows provided from (used in) the following activities |           |      |     |      |   |      |     |      |   |   |     |     
|                                                           | Operating |      | $   | 327  |   |      | $   | 320  |   |   | $   | 226  |  
|                                                           | Financing |      |     | (248 | ) |      |     | (275 | ) |   |     | (3   | )
|                                                           | Investing |      |     | (163 | ) |      |     | (58  | ) |   |     | (234 | )
|                                                           |           |      |     |      |   |      |     |      |   |   |     |      |  
|Net decrease in cash and cash equivalents                  |           | $    | (84 | )    |   | $    | (13 | )    |   | $ | (11 | )   
|                                                           |           |      |     |      |   |      |     |      |   |   |     |      |  

(e) Recent accounting pronouncements

In July 2001, FASB issued SFAS 142, Goodwill and Other Intangible Assets.
SFAS 142 specifies that, among other things, intangible assets with an
indefinite useful life and goodwill will no longer be amortized. The standard
requires goodwill to be periodically tested for impairment and written down to
fair value if considered impaired. The company adopted SFAS 142 effective
January 1, 2002 and completed the required transitional impairment test and
found there to be no related impairments. The company has no significant
goodwill or indefinite-lived assets.

In August 2001, FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, which is effective for financial statements issued for fiscal
years beginning after June 15, 2002. SFAS 143 addresses the recognition and
remeasurement of obligations associated with the retirement of a tangible
long-lived
asset. The company has not yet determined the impact, if any, of adopting SFAS
143. In October 2001, FASB issued SFAS 144, Accounting for the Impairment of
Disposal of Long-Lived Assets, which is effective for financial statements
issued for fiscal years beginning after December 15, 2001. SFAS 144 applies to
all long-lived assets, including discontinued operations, and it develops one
accounting model for long-lived assets that are to be disposed of by sale. The
company adopted SFAS 144 effective January 1, 2002.

In April 2002, FASB issued SFAS 145, Rescission of FASB Statements 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections. First, SFAS
145 rescinds SFAS 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that statement, SFAS 64, Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements. Because of

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the rescission of SFAS 4 and SFAS 64, the gains and losses from the
extinguishment of debt are no longer required to be classified as extraordinary
items. Second, SFAS 145 rescinds SFAS 44, Accounting for Intangible Assets of
Motor Carriers. Third, SFAS 145 amends SFAS 13, Accounting for Leases, to
require sale-leaseback accounting for certain lease modifications that have
economic effects that are similar to sale-leaseback transactions. The amendment
of SFAS 13 is effective for transactions occurring after May 15, 2002. There
has been no impact to the company due to the amendment of SFAS 13. Lastly, SFAS
145 makes various technical corrections to existing pronouncements that are not
substantive in nature. The company has not yet evaluated the impact on our
financial position or results of operations of the rescission of SFAS 4, 44 and
64 and the other technical corrections prescribed by this statement, all of
which become effective in fiscal 2003.

In June 2002, the FASB issued SFAS 146, Accounting for Costs Associated with
Exit or Disposal Activities. This statement requires a liability to be
recognized for costs associated with exit or disposal activities when they are
incurred rather than at the date upon which a company commits to an exit plan.
SFAS 146 is effective for exit or disposal activities that are initiated after
December 31, 2002.

On November 25, 2002, the FASB issued Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others, which elaborates on the disclosure to be
made by a guarantor about its obligations under certain guarantees issued.
There is also a new requirement that a guarantor must recognize, at the
inception of a guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The interpretation does identify several
situations where the recognition of a liability at inception for a guarantors
obligation is not required. The disclosure requirements are effective for
interim and annual periods ending after December 15, 2002. The initial
recognition and measurement provisions of Interpretation No. 45 apply on a
prospective basis to guarantees issued or modified after December 31, 2002,
regardless of the guarantors fiscal year end. The company has not determined
the impact of the initial recognition and measurement provisions of the
interpretation on its financial position or results of operations.

In January 2003, the FASB issued Interpretations No. 46, Consolidation of
Variable Interest Entities, an interpretation of Accounting Research Bulletin
No. 51, Consolidated Financial Statements. This interpretation applies
immediately to variable interest entities created after January 31, 2003, and
to variable interest entities in which an enterprise obtains an interest after
that date. It applies in the first fiscal year or interim period beginning
after June 15, 2003, to variable interest entities in which an enterprise holds
a variable interest that it acquired before February 1, 2003. This
interpretation may be applied prospectively with a cumulative-effect adjustment
as of the date on which it is first applied or by restating previously-issued
financial statements for one or more years with a cumulative-effect adjustment
as of the beginning of the first year restated. The company has not yet
evaluated the impact of adopting this interpretation.

NOTE 18: CONTINGENCIES AND OTHER
(a)The company and its operating subsidiaries are contingently liable with
respect to litigation and claims that arise from time to time in the normal
course of business. In the opinion of management, any liability which may arise
from such contingencies would not have a material adverse effect on the
consolidated financial statements of the company.

Brookfield does not conduct its operations, other than equity-accounted
investments, through entities that are not fully or proportionately
consolidated in its consolidated financial statements, and has not guaranteed
or otherwise contractually committed to support any material financial
obligations not reflected in its consolidated financial statements.

Generally accepted accounting principles require that, where practical,
estimates be made with respect to the fair value of both on and off balance
sheet financial instruments. The financial assets of the company are generally
short-term floating rate loans receivable of a trade nature. At December 31,
2002, the fair value of loans receivable exceeded their book value by $4
million (2001 and 2000 - $1 million). The fair value of mortgages and loans
payable is determined by references to current market rates for debt with
similar terms and risks. As at December 31, 2002, the fair value of mortgages
and loans payable exceeds the book value of these obligations by $149 million
(2001  below the book value by $86 million, 2000  exceeded the book value by
$27 million).

Included in commercial property and commercial development property debt is
$185 million (2001  $267 million, 2000  $197 million) of mortgage financing
contracts held by related parties.

The company uses interest rate swaps to manage risk. Management evaluates and
monitors the credit risks of its derivative financial instruments and endeavors
to minimize credit risk through offset arrangements, collateral, and other
credit risk mitigation techniques. The credit risk of derivative financial
instruments is limited to the replacement value of the instrument, and takes
into account any replacement cost and future credit exposure. The replacement
value or cost of interest rate swap contracts which form part of financing
arrangements is calculated by way of discounted cashflows using market rates
adjusted for credit spreads.

55



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##### 



The company held interest rate swap contracts as at December 31, 2002, with a
total notional amount of $250 million. These interest rate swap contracts were
comprised of contracts with a replacement cost in excess of that recorded in
the companys accounts of $5 million. The interest rate swap transactions
include both fixed and variable rate instruments which mature in five years.

(b)  Impact of September 11, 2001
On September 11, 2001, Brookfield owned eight million square feet of space in
four office towers surrounding the World Trade Center site  One Liberty Plaza
and One, Two and Four World Financial Center. The physical damage sustained by
these properties was mainly cosmetic as a result of the attack on and
subsequent collapse of the World Trade Center and consisted primarily of
replacement of broken windows and some repair to the granite façade on the
World Financial Center. While there was no structural damage to these four
office towers, the glass-enclosed Winter Garden atrium at the center of the
World Financial Center suffered more significant damage from falling debris
than other areas of the complex. This component of the World Financial Center
was fully restored and opened in September 2002.

To date, approximately $182 million has been received for property and business
interruption claims relating to One Liberty Plaza, One World Financial Center,
the Winter Garden and common areas of the World Financial Center. Two and Four
World Financial Center are covered by insurance in place under the tenant
triple-net leases with Merrill Lynch. Brookfields insurance claim adjustment
process is ongoing due to the complexity of the issues involved. However,
Brookfield anticipates recovery of all material amounts relating to the
restoration and business interruption costs of its properties.

One Liberty Plaza and Four World Financial Center reopened in October 2001 and
One and Two World Financial Center reopened in the first quarter of 2002. No
material lease cancellations in the New York portfolio occurred as a result of
the events of September 11.

Brookfield has insurance covering certain acts of terrorism for up to $300
million of damage and business interruption costs. Brookfield continues to seek
additional coverage equal to the full replacement cost of its assets; however,
until this type of coverage becomes commercially available on an economically
reasonable basis, any damage or business interruption costs as a result of
uninsured acts of terrorism could result in a material cost to the company.
Brookfield believes it is in compliance with all of its loan covenants, despite
not being able to acquire terrorism coverage for the full replacement cost of
the companys properties.

(c)  Comparative figures
Certain comparative figures have been reclassified to conform with the current
years presentation. Comparative figures have been restated in US dollars as
discussed in Note 1(g).

NOTE 19: SUPPLEMENTAL CASHFLOW INFORMATION

|                                   |                                  |      |     |      |   |      |      |      |   |   |      |      |  
|---------------------------------- | -------------------------------- | ---- | --- | ---- | - | ---- | ---- | ---- | - | - | ---- | ---- | -
|Years ended December 31 (Millions) |                                  | 2002 |     | 2001 |   | 2000
|                                   |                                  |      |     |      |   |     
|Other advances                     |                                  |      |     |      |   |      |      |      |   |   |      |     
|                                   | Debt arranged                    |      | $   |     |   |      | $    |     |   |   | $    | 309  |  
|                                   | Debt repayments                  |      |     | (59  | ) |      |      | (530 | ) |   |      | (325 | )
|                                   |                                  |      |     |      |   |      |      |      |   |   |      |      |  
|                                   |                                  | $    | (59 | )    |   | $    | (530 | )    |   | $ | (16  | )   
|                                   |                                  |      |     |      |   |      |      |      |   |   |      |      |  
|Investing activities               |                                  |      |     |      |   |      |      |      |   |   |      |     
|                                   | Dispositions of real estate, net |      | $   | 193  |   |      | $    | 249  |   |   | $    | 25   |  
|                                   | Acquisitions of real estate, net |      |     | (79  | ) |      |      | (112 | ) |   |      | (187 | )
|                                   |                                  |      |     |      |   |      |      |      |   |   |      |      |  
|                                   |                                  | $    | 114 |      |   | $    | 137  |      |   | $ | (162 | )   
|                                   |                                  |      |     |      |   |      |      |      |   |   |      |      |  

56